UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OFACTOF 1934
For the transition period from _____________ to _____________
Commission File No. 000-20827
________________
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Missouri | 43-1265338 | |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
| organization) | ||
| 12444 Powerscourt Drive, Suite 550 | ||
| St. Louis, Missouri | 63131 | |
| (Address of principal executive offices) | (Zip Code) |
(314) 506-5500
(Registrant’s telephone number, including area code)_________________________________
Yes X No _____
| Yes | X | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____ The number of shares outstanding of the registrant's only class of common stock as of October 30, -1- TABLE OF CONTENTS PART I – Financial Information Forward-looking Statements - Factors That May Affect Future Results This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are discussed in Part I, Item 1A, “Risk Factors” of the Company’s -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES See accompanying notes to unaudited consolidated financial statements. -3- CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES See accompanying notes to unaudited consolidated financial statements. -4- CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES See accompanying notes to unaudited consolidated financial statements. -5- CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES See accompanying notes to unaudited consolidated financial statements. -6- CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2017. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“FASB ASC 606”), and selected the modified retrospective transition method. The adoption of this new standard did not impact the Company’s results of operations or balance sheet and there was no cumulative effect of initially applying this new revenue standard to the opening balance of retained earnings. Since interest income on loans and securities are both excluded from this topic, a significant portion of the Company’s revenues are not subject to the new guidance. The services that fall within the scope of FASB ASC 606 are presented within fee revenue and other income in the Consolidated Statements of Income and are recognized as revenue as the obligation to the customer is satisfied. Services within the scope of FASB ASC 606 include transportation and facility payment and processing fees, bank service fees, and other real estate owned (“OREO”). Invoice processing and payment fees– The Company earns fees on a per-item basis for the services rendered on behalf of customers. Fees are earned over the course of a month, representing the period over with the performance obligation is satisfied. Bank service fees– Revenue from service fees consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts are primarily all charges that are recognized on a monthly basis representing the period over which the performance obligation is satisfied. OREO– The Company currently does not have any OREO and has not in recent years. Net gains or losses would be recorded when other real estate is sold to a third party and substantially all of the consideration for the transfer of property is received. Note 2 – Intangible Assets The Company accounts for intangible assets in accordance with Details of the Company’s intangible assets are as follows: 1Amortization through December 31, 2001 prior to adoption of FASB ASC 350. -7- Gross Carrying Accumulated Gross Carrying Accumulated The customer lists are amortized over seven and ten years; the patents over 18 years; the non-compete agreements over two and five years; software over three years; and other intangible assets over Note 3 – Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding. There were no anti-dilutive shares in the three and nine months ended September 30, Note 4 – Stock Repurchases The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the repurchase of up to 500,000 shares of the Company’s common stock. As restored by the Board of Directors on October Note 5 – Industry Segment Information The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations. The Banking Services segment provides banking services primarily to privately held businesses and The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, -8- Substantially all revenue originates from, and all long-lived assets are located within the United States, and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue. Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets. Any difference between total segment interest Summarized information about the Company’s operations in each industry segment is as follows: *Presented on a tax-equivalent basis assuming a tax rate of 21% for 2018 and 35% for 2017. The tax-equivalent adjustment was approximately $564,000 and $1,419,000 for the Three Months Ended 2018 and 2017, respectively, and $1,875,000 and $4,290,000 for the Nine Months Ended 2018 and 2017, respectively. -10- Note 6 – Loans by Type A summary of loan categories is as follows: The following table presents the aging of loans by loan categories at September 30, The following table presents the credit exposure of the loan portfolio as of September 30, Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled debt restructurings, both performing and nonperforming. Troubled debt restructuring involves the granting of a concession to a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment schedule or interest rate. Management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses.” There were no foreclosed loans recorded as other real estate owned -12- A summary of the activity in the allowance for loan losses from December 31, 2016 to September 30, 2017 is as follows: Note 7 – Commitments and Contingencies In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. At September 30, Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at September 30, The Company and its subsidiaries are involved in various pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate resolution of these legal actions and proceedings will not have a material effect upon the Company’s consolidated financial position or results of operations. -13- Note 8 – Stock-Based Compensation The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) permits the issuance of up to 1,500,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and performance awards. The Company Restricted Stock Following is a summary of the activity of the restricted stock: Performance-Based Restricted Stock In February and July of 2018, the Company granted three-year PBRS awards which are contingent upon the Company’s achievement of pre-established financial goals over the period from January 1, 2018 through December 31, 2020. The PBRS awards cliff vest on the three year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS shares granted was 29,278 with an average grant date fair value of $58.70 per share. The 2018 expense related to these grants is currently estimated to be $741,000 and is based on the grant date fair value of the awards and the Company’s achievement of 144% of the target financial goals. The estimated expense for 2018 and each future period through the vesting date is subject to prospective adjustment based upon changes in the expected achievement of the financial goals. -14- SARs There were no SARs There were no non-vested SARs at June 30, 2018. Note 9 – Defined Pension Plans The Company has a noncontributory defined-benefit pension plan, which covers most of its employees. Effective December 31, 2016, the Plan was closed to all new participants. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs: Pension costs recorded to expense were In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan. The following table represents the components of the net periodic pension costs for Pension costs recorded to expense were -15- Note 10 – Income Taxes As of September 30, The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company had The Company is subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions. U.S. federal income tax returns for tax years 2014 through On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21% beginning January 1, 2018; (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year; (iii) limits the deduction for net interest expense incurred by U.S. corporations; (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets; (v) eliminates or reduces certain deductions related to meals and entertainment expenses; (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee; and (vii) limits the deductibility of deposit insurance premiums. The TCJA also significantly changes U.S. tax law related to foreign operations, though, such changes do not currently impact the Company on a significant level. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), providing guidance on accounting for the Tax Act. The Company Note 11 – Investment in Securities Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore fall into the Level 2 category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows: The fair values of securities with unrealized losses are as follows: There were The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. There were no sales of investment securities classified as available for sale for the three months ended September 30, Note 12 – Fair Value of Financial Instruments Following is a summary of the carrying amounts and fair values of the Company’s financial instruments: -17- The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents –The carrying amount approximates fair value. Investment in Securities –The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 11, “Investment in Securities,” for fair value and unrealized gains and losses by investment type. Loans –The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses result in a fair valuation. The estimated fair values of loans disclosed above as of September 30, 2018 follow the guidance in Accounting Standards Update 2016-01 which prescribes an exit price approach in estimating and disclosing fair value. Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or a current appraised value and therefore, the fair value is a nonrecurring Level 3 valuation. Accrued Interest Receivable –The carrying amount approximates fair value. Deposits –The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits. Accounts and Drafts Payable –The carrying amount approximates fair value. Accrued Interest –The carrying amount approximates fair value. There were no transfers between Levels 1 and 2 of the fair value hierarchy for the nine months ended September 30, Note 13 – Subsequent Events On October Additionally, on October -18- Overview Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, Breda, Netherlands, Basingstoke, United Kingdom, and The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services. Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in the Company’s Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry. Critical Accounting Policies The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below. Allowance for Loan Results of Operations The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended September 30, Net Income The following table summarizes the Company’s operating results: Fee Revenue and Other Income The Company’s fee revenue is derived mainly from transportation and facility payment and processing fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income. Processing volumes, fee revenue, and other income were as *Includes energy, telecom and waste Third Quarter of There were no gains on sales of securities in either the Third Quarter of -20- Nine Months Ended Transportation invoice and dollar volumes, as well as expense management transaction and dollar volumes, increased for the same reasons as the Third Quarter. Net Interest Income Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors: Third Quarter of Third Quarter of Total average interest-bearing liabilities for the Third Quarter of 2018 decreased $33,469,000, or 8.5%, compared to the Third Quarter of 2017 for a variety of reasons, including some customers that shifted excess balances to higher yielding investments. Average accounts and drafts payable increased $16,404,000, or 2.2%, in the Third Quarter of 2018 compared to the Third Quarter of 2017. Third Quarter of 2018 tax-equivalized net interest income increased $236,000, or 2.0%, compared to the same period in the prior year as The changes to the interest rate environment also led to an increase in Nine Months Ended 2018 compared to Nine Months Ended 2017: Nine Months Ended 2018 average earning assets increased $37,235,000, or (§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes X No _____Yes X No Large Accelerated Filer _____ X Accelerated Filer Non-Accelerated Filer Smaller Reporting Company Accelerated Filer X Emerging Growth Company Non-Accelerated Filer _____Smaller Reporting Company _____Emerging Growth Company _____(Do not check if a smaller reporting company) Yes _____ No X Yes No X 2017:2018: Common stock, par value $.50 per share –11,166,349– 12,289,377 shares outstanding. Item 1. FINANCIAL STATEMENTS Consolidated Balance SheetsConsolidated Balance Sheets
September 30, 20172018 (unaudited) and December 31, 201620173 Consolidated Statements of Income
Three and nine months ended September 30, 2018 and 2017 and 2016 (unaudited)4 Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2018 and 2017 and 2016 (unaudited)5 Consolidated Statements of Cash Flows
Nine months ended September 30, 2018 and 2017 and 2016 (unaudited)6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS18 Item 2. Item 3.QUANTITATIVEMANAGEMENT’S DISCUSSION AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS2919 Item 3. Item 4.CONTROLSQUANTITATIVE AND PROCEDURESQUALITATIVE DISCLOSURES ABOUT MARKET RISK2930 Item 4. CONTROLS AND PROCEDURES 30 PART II – Other Information– Items 1. – 6. 3031 SIGNATURES SIGNATURES32 20162017 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.time.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)September 30, September 30, 2017 December 31, 2018 December 31, (Unaudited) 2016 (Unaudited) 2017 Assets Cash and due from banks $ 13,961 $ 11,814 $ 11,835 $ 17,422 Interest-bearing deposits in other financial institutions 90,789 136,852 145,803 152,056 Federal funds sold and other short-term investments 137,348 118,077 22,409 58,632 Cash and cash equivalents 242,098 266,743 180,047 228,110 Securities available-for-sale, at fair value 457,068 390,552 446,440 470,523 Loans 658,090 664,866 726,239 686,231 Less: Allowance for loan losses 10,202 10,175 10,220 10,205 Loans, net 647,888 654,691 716,019 676,026 Premises and equipment, net 21,168 21,086 22,615 21,586 Investment in bank-owned life insurance 16,812 16,445 17,270 16,927 Payments in excess of funding 119,802 105,347 161,080 139,103 Goodwill 12,569 11,590 12,569 12,569 Other intangible assets, net 2,106 1,997 1,664 1,996 Other assets 37,239 36,388 120,543 90,369 Total assets $ 1,556,750 $ 1,504,839 $ 1,678,247 $ 1,657,209 Liabilities and Shareholders’ Equity Liabilities: Deposits: Noninterest-bearing $ 211,413 $ 214,656 $ 270,395 $ 281,541 Interest-bearing 397,817 407,305 364,329 396,547 Total deposits 609,230 621,961 634,724 678,088 Accounts and drafts payable 687,233 642,287 769,638 715,888 Other liabilities 36,332 32,556 44,543 38,145 Total liabilities 1,332,795 1,296,804 1,448,905 1,432,121 Shareholders’ Equity: Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued — — – – Common stock, par value $.50 per share; 40,000,000 shares authorized and 11,931,147 shares issued at September 30, 2017 and December 31, 2016 5,966 5,966 Common stock, par value $.50 per share; 40,000,000 shares authorized and 13,047,997 shares issued at September 30, 2018 and December 31, 2017 6,524 6,524 Additional paid-in capital 129,052 128,455 204,971 204,631 Retained earnings 130,321 118,363 73,183 59,314 Common shares in treasury, at cost (764,798 shares at September 30, 2017 and 742,681 shares at December 31, 2016) (32,167 ) (30,206 ) Common shares in treasury, at cost (746,260 shares at September 30, 2018 and 760,962 shares at December 31, 2017) (32,029) (32,061) Accumulated other comprehensive loss (9,217 ) (14,543 ) (23,307) (13,320) Total shareholders’ equity 223,955 208,035 229,342 225,088 Total liabilities and shareholders’ equity $ 1,556,750 $ 1,504,839 $ 1,678,247 $ 1,657,209
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data) �� Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 2018 2017 2018 2017 Fee Revenue and Other Income: Information services payment and processing revenue $ 23,761 $ 21,737 $ 69,332 $ 62,162 $ 26,020 $ 23,761 $ 76,068 $ 69,332 Bank service fees 327 284 998 931 300 327 994 998 Gains on sales of securities — — — 387 Losses on sales of securities — — (42) — Other 119 127 448 630 115 119 429 448 Total fee revenue and other income 24,207 22,148 70,778 64,110 26,435 24,207 77,449 70,778 Interest Income: Interest and fees on loans 7,209 7,264 21,266 21,711 8,367 7,209 23,832 21,266 Interest and dividends on securities: Taxable 107 36 268 69 618 107 1,428 268 Exempt from federal income taxes 2,605 2,386 7,865 7,217 2,111 2,605 7,008 7,865 Interest on federal funds sold and other short-term investments 744 299 1,597 775 1,119 744 2,748 1,597 Total interest income 10,665 9,985 30,996 29,772 12,215 10,665 35,016 30,996 Interest Expense: Interest on deposits 571 505 1,521 1,522 1,029 571 2,502 1,521 Net interest income 10,094 9,480 29,475 28,250 11,186 10,094 32,514 29,475 Provision for loan losses — — — (1,000 ) — — — — Net interest income after provision for loan losses 10,094 9,480 29,475 29,250 11,186 10,094 32,514 29,475 Total net revenue 34,301 31,628 100,253 93,360 37,621 34,301 109,963 100,253 Operating Expense: Personnel 19,423 18,319 57,384 54,267 21,747 19,423 63,718 57,384 Occupancy 903 860 2,634 2,560 975 903 2,754 2,634 Equipment 1,242 1,124 3,746 3,289 1,434 1,242 4,150 3,746 Amortization of intangible assets 110 101 317 305 110 110 331 317 Other operating expense 3,364 3,147 10,180 9,105 4,264 3,364 11,222 10,180 Total operating expense 25,042 23,551 74,261 69,526 28,530 25,042 82,175 74,261 Income before income tax expense 9,259 8,077 25,992 23,834 9,091 9,259 27,788 25,992 Income tax expense 2,396 1,855 6,309 5,910 1,481 2,396 4,577 6,309 Net income $ 6,863 $ 6,222 $ 19,683 $ 17,924 $ 7,610 $ 6,863 $ 23,211 $ 19,683 Basic earnings per share $ .62 $ .56 $ 1.77 $ 1.61 $ .62 $ .56 $ 1.90 $ 1.61 Diluted earnings per share .61 .55 1.74 1.58 .61 .55 1.87 1.58
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands) Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 2018 2017 2018 2017 Comprehensive income: Net income $ 6,863 $ 6,222 $ 19,683 $ 17,924 $ 7,610 $ 6,863 $ 23,211 $ 19,683 Other comprehensive income: Net unrealized (loss) gain on securities available-for-sale (99 ) (3,176 ) 8,246 5,036 (2,835) (99) (13,029) 8,246 Tax effect 37 1,180 (3,063 ) (1,871 ) 675 37 3,101 (3,063) Reclassification adjustments for gains included in net income — — — (387 ) Reclassification adjustments for losses included in net income — — 42 — Tax effect — — — 143 — — (10) — Foreign currency translation adjustments 41 9 143 20 (21) 41 (91) 143 Total comprehensive income $ 6,842 $ 4,235 $ 25,009 $ 20,865 $ 5,429 $ 6,842 $ 13,224 $ 25,009
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands) Nine Months Ended Nine Months Ended September 30, September 30, 2017 2016 2018 2017 Cash Flows From Operating Activities: Net income $ 19,683 $ 17,924 $ 23,211 $ 19,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,361 6,964 8,524 8,361 Net gains on sales of securities — (387 ) Net losses on sales of securities 42 — Stock-based compensation expense 1,658 1,471 2,238 1,658 Provision for loan losses — (1,000 ) Increase in income tax benefit — (121 ) Increase in income tax liability 551 973 773 551 Increase in pension liability 3,476 3,102 3,688 3,476 Increase in accounts receivable (3,637 ) (3,742 ) Decrease (increase) in accounts receivable 4,027 (3,637) Other operating activities, net (2,156 ) 431 (3,707) (2,156) Net cash provided by operating activities 27,936 25,615 38,796 27,936 Cash Flows From Investing Activities: Proceeds from sales of securities available-for-sale — 21,491 58,520 — Proceeds from maturities of securities available-for-sale 33,856 29,970 26,041 33,856 Purchase of securities available-for-sale (97,473 ) (57,637 ) (78,772) (97,473) Net decrease (increase) in loans 6,803 (25,781 ) Net (increase) decrease in loans (39,993) 6,803 Net increase in payments in excess of funding (14,455 ) (5,808 ) (21,977) (14,455) Purchases of premises and equipment, net (2,780 ) (3,549 ) (3,956) (2,780) Net cash used in investing activities (74,049 ) (41,314 ) (60,137) (74,049) Cash Flows From Financing Activities: Net (decrease) increase in noninterest-bearing demand deposits (3,243 ) 20,561 Net decrease in noninterest-bearing demand deposits (11,146) (3,243) Net decrease in interest-bearing demand and savings deposits (6,504 ) (37,855 ) (35,988) (6,504) Net decrease in time deposits (2,984 ) (5,177 ) Net increase (decrease) in time deposits 3,771 (2,984) Net increase in accounts and drafts payable 44,946 105,503 27,849 44,946 Cash dividends paid (7,725 ) (7,406 ) (9,342) (7,725) Purchase of common shares for treasury (2,270 ) (9,217 ) (1,409) (2,270) Other financing activities, net (752 ) (779 ) (457) (752) Net cash provided by financing activities 21,468 65,630 Net (decrease) increase in cash and cash equivalents (24,645 ) 49,931 Net cash (used in) provided by financing activities (26,722) 21,468 Net decrease in cash and cash equivalents (48,063) (24,645) Cash and cash equivalents at beginning of period 266,743 253,172 228,110 266,743 Cash and cash equivalents at end of period $ 242,098 $ 303,103 $ 180,047 $ 242,098 Supplemental information: Cash paid for interest $ 1,520 $ 1,517 $ 2,459 $ 1,520 Cash paid for income taxes 5,758 5,128 3,776 5,758
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)20162017.Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)FASB ASC 350, “Goodwill and Other Intangible Assets,” (“FASB ASC 350”), which requires that intangibles with indefinite useful lives be tested annually for impairment and those with finite useful lives be amortized over their useful lives.In March 2017, the Company completed an acquisition and recorded intangible assets of $1,406,000. Those intangible assets were valued as $980,000 for goodwill, $355,000 for the customer list and $71,000 for non-compete agreements.September 30, 2018 December 31, 2017 Gross Carrying Accumulated Gross Carrying Accumulated (In thousands) Amount Amortization Amount Amortization Assets eligible for amortization: Customer lists $ 4,288 $ (2,979) $ 4,288 $ (2,702) Patents 72 (15) 72 (12) Non-compete agreements 332 (317) 332 (291) Software 234 (234) 234 (234) Other 500 (217) 500 (191) Unamortized intangible assets: Goodwill1 12,796 (227) 12,796 (227) Total intangible assets $ 18,222 $ (3,989) $ 18,222 $ (3,657) September 30, 2017 December 31, 2016 (In thousands) Amount Amortization Amount Amortization Assets eligible for amortization: Customer lists $ 4,288 $ (2,610 ) $ 3,933 $ (2,342 ) Patents 72 (11 ) 72 (8 ) Non-compete agreements 332 (282 ) 261 (261 ) Software 234 (234 ) 234 (234 ) Other 500 (183 ) 500 (158 ) Unamortized intangible assets: Goodwill1 12,796 (227 ) 11,817 (227 ) Total intangible assets $ 18,222 $ (3,547 ) $ 16,817 $ (3,230 ) 1Amortization through December 31, 2001 prior to adoption of FASB ASC 350. fifteen15 years. Amortization of intangible assets amounted to $317,000$331,000 and $305,000$317,000 for the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. Estimated annual amortization of intangibles is as follows: $427,000 in 2017, $442,000 in 2018, $412,000 in 2019, and $406,000 in each of 2020 and 2021.2021, and $88,000 in 2022.20172018 and 2016.2017. The calculations of basic and diluted earnings per share are as follows:-7- Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, (In thousands except share and per share data) 2017 2016 2017 2016 2018 2017 2018 2017 Basic Basic: Net income $ 6,863 $ 6,222 $ 19,683 $ 17,924 $ 7,610 $ 6,863 $ 23,211 $ 19,683 Weighted-average common shares outstanding 11,137,451 11,110,824 11,143,116 11,159,469 12,245,975 12,251,084 12,239,678 12,257,337 Basic earnings per share $ .62 $ .56 $ 1.77 $ 1.61 $ .62 $ .56 $ 1.90 $ 1.61 Diluted Diluted: Net income $ 6,863 $ 6,222 $ 19,683 $ 17,924 $ 7,610 $ 6,863 $ 23,211 $ 19,683 Weighted-average common shares outstanding 11,137,451 11,110,824 11,143,116 11,159,469 12,245,975 12,251,084 12,239,678 12,257,337 Effect of dilutive restricted stock and stock appreciation rights 164,439 158,541 166,442 155,112 206,388 176,767 200,315 179,029 Weighted-average common shares outstanding assuming dilution assuming dilution 11,301,890 11,269,365 11,309,558 11,314,581 12,452,363 12,427,851 12,439,993 12,436,366 Diluted earnings per share $ .61 $ .55 $ 1.74 $ 1.58 $ .61 $ .55 $ 1.87 $ 1.58 17, 2016,24, 2017, the program provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date. The Company repurchased 38,0420 and 041,846 shares during the three-month periods and 38,04215,547 and 187,12341,846 during the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. As of September 30, 2017, 461,9582018, 484,453 shares remained available for repurchase under the program. Repurchases may be made in the open market or through negotiated transactions from time to time depending on market conditions. On October 24, 2017, the Company’s Board of Directors restored the repurchase program to 500,000 shares.processing and capitalprocessing requirements.churches.faith-based ministries as well as supporting the banking needs of the Information Services segment.2016.2017. Management evaluates segment performance based on nettax-equivalized (as defined in the footnote to the chart on the following table) pre-tax income after allocations for corporate expenses and income taxes.expenses. Transactions between segments are accounted for at what management believes to be fair value.AssetsFunding sources represent actual assets ownedaverage balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Segment interest from customersincome is a function of the actualrelative share of average funding sources generated by each segment multiplied by the following rates:● ● earned on the loans owned by Information Servicesincome and Banking Services, respectively.overall total Company interest income is included in Corporate, Eliminations, and Other.-8--9-Corporate, Information Banking Eliminations (In thousands) Services Services and Other Total Three Months Ended September 30, 2018 Fee income from customers $ 26,263 $ 253 $ (81) $ 26,435 Interest income* 5,703 5,856 1,219 12,778 Interest expense — 1,029 — 1,029 Intersegment income (expense) — 467 (467) — Tax-equivalized pre-tax income* 6,525 2,538 591 9,654 Goodwill 12,433 136 — 12,569 Other intangible assets, net 1,664 — — 1,664 Total Assets 903,055 847,673 (72,481) 1,678,247 Funding Sources 650,267 550,594 — 1,200,861 Three Months Ended September 30, 2017 Fee income from customers $ 23,809 $ 279 $ 119 $ 24,207 Interest income* 5,465 5,894 725 12,084 Interest expense — 571 — 571 Intersegment income (expense) — 339 (339) — Tax-equivalized pre-tax income* 7,130 3,179 369 10,678 Goodwill 12,433 136 — 12,569 Other intangible assets, net 2,106 — — 2,106 Total Assets 820,596 738,478 (2,324) 1,556,750 Funding Sources 631,539 601,355 — 1,232,894 Nine Months Ended September 30, 2018 Fee income from customers $ 76,397 $ 947 $ 105 $ 77,449 Interest income* 16,553 17,342 2,996 36,891 Interest expense — 2,502 — 2,502 Intersegment income (expense) — 1,415 (1,415) — Tax-equivalized pre-tax income* 19,326 8,814 1,523 29,663 Goodwill 12,433 136 — 12,569 Other intangible assets, net 1,664 — — 1,664 Total Assets 903,055 847,673 (72,481) 1,678,247 Funding Sources 637,508 566,390 — 1,203,898 Nine Months Ended September 30, 2017 Fee income from customers $ 69,453 $ 958 $ 367 $ 70,778 Interest income* 15,237 17,602 2,447 35,286 Interest expense — 1,521 — 1,521 Intersegment income (expense) — 962 (962) — Tax-equivalized pre-tax income* 18,946 9,922 1,414 30,282 Goodwill 12,433 136 — 12,569 Other intangible assets, net 2,106 — — 2,106 Total Assets 820,596 738,478 (2,324) 1,556,750 Funding Sources 596,919 593,709 — 1,190,628 Corporate, Information Banking Eliminations (In thousands) Services Services and Other Total Three Months Ended September 30, 2017 Fee revenue and other income: Income from customers $ 27,276 $ 7,025 $ — $ 34,301 Intersegment income (expense) 3,078 377 (3,455 ) — Net income 4,237 2,626 — 6,863 Goodwill 12,433 136 — 12,569 Other intangible assets, net 2,106 — — 2,106 Total assets 820,596 738,478 (2,324 ) 1,556,750 Three Months Ended September 30, 2016 Fee revenue and other income: Income from customers $ 25,090 $ 6,538 $ — $ 31,628 Intersegment income (expense) 2,797 416 (3,213 ) — Net income 3,806 2,416 — 6,222 Goodwill 11,454 136 — 11,590 Other intangible assets, net 2,099 — — 2,099 Total assets 808,568 742,933 (3,848 ) 1,547,653 Nine Months Ended September 30, 2017 Fee revenue and other income: Income from customers $ 79,671 $ 20,582 $ — $ 100,253 Intersegment income (expense) 9,090 1,122 (10,212 ) — Net income 11,992 7,691 — 19,683 Goodwill 12,433 136 — 12,569 Other intangible assets, net 2,106 — — 2,106 Total assets 820,596 738,478 (2,324 ) 1,556,750 Nine Months Ended September 30, 2016 Fee revenue and other income: Income from customers $ 73,084 $ 20,276 $ — $ 93,360 Intersegment income (expense) 8,870 1,195 (10,065 ) — Net income 10,231 7,693 — 17,924 Goodwill 11,454 136 — 11,590 Other intangible assets, net 2,099 — — 2,099 Total assets 808,568 742,933 (3,848 ) 1,547,653 (In thousands) September 30,
2017 December 31,
2016Commercial and industrial $ 213,942 $ 214,767 Real estate Commercial: Mortgage 94,485 104,779 Construction 14,919 6,325 Church, church-related: Mortgage 322,614 321,168 Construction 7,907 11,152 Industrial Revenue Bonds 4,191 6,639 Other 32 36 Total loans $ 658,090 $ 664,866 -9-September 30, December 31, (In thousands) 2018 2017 Commercial and industrial $ 270,854 $ 236,394 Real estate: Commercial: Mortgage 92,972 94,675 Construction 22,883 9,359 Faith-based: Mortgage 307,679 316,073 Construction 30,838 25,948 Industrial Revenue Bonds 921 3,374 Other 92 408 Total loans $ 726,239 $ 686,231 20172018 and December 31, 2016:2017: Performing Nonperforming Performing Nonperforming 90 Days 90 Days 30-59 60-89 and Non- Total 30-59 60-89 and Non- Total (In thousands) Current Days Days Over accrual Loans Current Days Days Over accrual Loans September 30, 2017 September 30, 2018 Commercial and industrial $ 213,942 $ — $ — $ — $ — $ 213,942 $ 270,854 $ — $ — $ — $ — $ 270,854 Real estate Real estate: Commercial: Mortgage 94,270 — — — 215 94,485 92,972 — — — — 92,972 Construction 14,919 — — — — 14,919 22,883 — — — — 22,883 Church, church-related: Mortgage 322,614 — — — — 322,614 Construction 7,907 — — — — 7,907 Industrial Revenue Bonds 4,191 — — — — 4,191 Other 32 — — — — 32 Total $ 657,875 $ — $ — $ — $ 215 $ 658,090 December 31, 2016 Commercial and industrial $ 214,767 $ — $ — $ — $ — $ 214,767 Real estate Commercial: Mortgage 104,534 — — — 245 104,779 Construction 6,325 — — — — 6,325 Church, church-related: Faith-based: Mortgage 321,168 — — — — 321,168 307,679 — — — — 307,679 Construction 11,152 — — — — 11,152 30,838 — — — — 30,838 Industrial revenue bonds 6,639 — — — — 6,639 921 — — — — 921 Other 24 12 — — — 36 92 — — — — 92 Total $ 664,609 $ 12 $ — $ — $ 245 $ 664,866 $ 726,239 $ — $ — $ — $ — $ 726,239 December 31, 2017 Commercial and industrial $ 236,394 $ — $ — $ — $ — $ 236,394 Real estate: Commercial: Mortgage 94,675 — — — — 94,675 Construction 9,359 — — — — 9,359 Faith-based: Mortgage 316,073 — — — — 316,073 Construction 25,948 — — — — 25,948 Industrial revenue bonds 3,374 — — — — 3,374 Other 408 — — — — 408 Total $ 686,231 $ — $ — $ — $ — $ 686,231 -10--11-20172018 and December 31, 2016:2017: Loans Performing Nonperforming Loans Performing Nonperforming Subject to Loans Subject to Loans Subject Subject to Loans Subject to Loans Subject Normal Special to Special Normal Special to Special (In thousands) Monitoring1 Monitoring2 Monitoring2 Total Loans Monitoring1 Monitoring2 Monitoring2 Total Loans September 30, 2017 September 30, 2018 Commercial and industrial $ 211,820 $ 2,122 $ — $ 213,942 $ 267,696 $ 3,158 $ — $ 270,854 Real estate Real estate: Commercial: Mortgage 93,560 710 215 94,485 91,998 974 — 92,972 Construction 14,919 — — 14,919 22,883 — — 22,883 Church, church-related: Faith-based: Mortgage 322,561 53 — 322,614 307,596 83 — 307,679 Construction 7,907 — — 7,907 30,838 — — 30,838 Industrial Revenue Bonds 4,191 — — 4,191 921 — — 921 Other 32 — — 32 92 — — 92 Total $ 654,990 $ 2,885 $ 215 $ 658,090 $ 722,024 $ 4,215 $ — $ 726,239 December 31, 2016 December 31, 2017 Commercial and industrial $ 213,024 $ 1,743 $ — $ 214,767 $ 234,271 $ 2,123 $ — $ 236,394 Real estate Real estate: Commercial: Mortgage 103,778 756 245 104,779 93,788 887 — 94,675 Construction 6,325 — — 6,325 9,359 — — 9,359 Church, church-related: Faith-based: Mortgage 318,030 3,138 — 321,168 316,042 31 — 316,073 Construction 11,152 — — 11,152 25,948 — — 25,948 Industrial revenue bonds 6,639 — — 6,639 3,374 — — 3,374 Other 36 — — 36 408 — — 408 Total $ 658,984 $ 5,637 $ 245 $ 664,866 $ 683,190 $ 3,041 $ — $ 686,231 1Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfytheir loan obligations. 2Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention. 1 Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligations. 2 Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention. At September 30, 2017 and December 31, 2016, impaired loans were evaluated using the expected cash flow method. There were no impaired loans, loans delinquent 90 days or more and still accruing, interest at September 30, 2017 or December 31, 2016. There were no loans classified as troubled debt restructuring at September 30, 2017 or2018 and December 31, 2016.2017.(included in other assets) as of September 30, 20172018 and December 31, 2016.2017.-11-The following table presentsA summary of the recorded investment and unpaid principal balanceactivity in the allowance for impaired loans atloan losses from December 31, 2017 to September 30, 2017 and December 31, 2016:2018 is as follows:December 31, Charge- September 30, (In thousands) 2017 Offs Recoveries Provision 2018 Commercial and industrial $ 3,652 $ — $ 15 $ 535 $ 4,202 Real estate: Commercial: Mortgage 1,394 — — (9) 1,385 Construction 70 — — 100 170 Faith-based: Mortgage 3,962 — — (105) 3,857 Construction 196 — — 34 230 Industrial Revenue Bonds 52 — — (38) 14 Other 879 — — (517) 362 Total $ 10,205 $ — $ 15 $ — $ 10,220 Unpaid Related Recorded Principal Allowance for (In thousands) Investment Balance Loan Losses September 30, 2017 Commercial and industrial: Nonaccrual $ — $ — $ — Real estate Commercial – Mortgage: Nonaccrual 215 215 — Church – Mortgage: Nonaccrual — — — Total impaired loans $ 215 $ 215 $ — December 31, 2016 Commercial and industrial: Nonaccrual $ — $ — $ — Real estate Commercial – Mortgage: Nonaccrual 245 245 — Church – Mortgage: Nonaccrual — — — Total impaired loans $ 245 $ 245 $ — December 31, Charge- September 30, (In thousands) 2016 Offs Recoveries Provision 2017 Commercial and industrial $ 3,261 $ — $ 27 $ (61 ) $ 3,227 Real estate Commercial: Mortgage 1,662 — — (160 ) 1,502 Construction 47 — — 54 101 Church, church-related: Mortgage 4,027 — — 20 4,047 Construction 85 — — (26 ) 59 Industrial Revenue Bonds 101 — — (37 ) 64 Other 992 — — 210 1,202 Total $ 10,175 $ — $ 27 $ — $ 10,202 A summary of the activity in the allowance for loan losses from December 31, 2015 to September 30, 2016 is as follows: December 31, Charge- September 30, (In thousands) 2015 Offs Recoveries Provision 2016 Commercial and industrial $ 3,083 $ — $ 38 $ 217 $ 3,338 Real estate Commercial: Mortgage 2,803 — — (1,179 ) 1,624 Construction 9 — — 93 102 Church, church-related: Mortgage 4,082 — — 48 4,130 Construction 217 — — (102 ) 115 Industrial Revenue Bonds 320 — — (47 ) 273 Other 1,121 — — (30 ) 1,091 Total $ 11,635 $ — $ 38 $ (1,000 ) $ 10,673 -12-December 31, Charge- September 30, (In thousands) 2016 Offs Recoveries Provision 2017 Commercial and industrial $ 3,261 $ — $ 27 $ (61) $ 3,227 Real estate: Commercial: Mortgage 1,662 — — (160) 1,502 Construction 47 — — 54 101 Faith-based: Mortgage 4,027 — — 20 4,047 Construction 85 — — (26) 59 Industrial Revenue Bonds 101 — — (37) 64 Other 992 — — 210 1,202 Total $ 10,175 $ — $ 27 $ — $ 10,202 20172018 and December 31, 2016,2017, no amounts have been accrued for any estimated losses for these instruments.TheAt September 30, 2018, the balance of unused loan commitments, standby and commercial letters of credit were $91,117,000, $13,841,000,$73,830,000, $12,917,000, and $3,184,000 at September 30, 2017.$3,740,000, respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under guarantees on these financial instruments.2017:2018: Amount of Commitment Expiration per Period Less than 1-3 3-5 Over 5 (In thousands) Total 1 Year Years Years Years Operating lease commitments $ 6,798 $ 1,498 $ 2,562 $ 2,240 $ 498 Time deposits 52,800 48,161 3,034 1,605 — Total $ 59,598 $ 49,659 $ 5,596 $ 3,845 $ 498 Amount of Commitment Expiration per Period Less than 1-3 3-5 Over 5 (In thousands) Total 1 Year Years Years Years Operating lease commitments $ 10,075 $ 1,614 $ 3,570 $ 2,431 $ 2,460 Time deposits 56,269 43,033 10,769 2,467 — Total $ 66,344 $ 44,647 $ 14,339 $ 4,898 $ 2,460 issuesmay issue shares out of treasury stock for these awards. During the nine months ended September 30, 2017, 23,1352018, 28,527 restricted shares, 29,278 performance-based restricted shares, and 0 SARs were granted under the Omnibus Plan.Restricted shares granted prior to April 16, 2013 are amortized to expense over a three-year vesting period. Beginning on April 16, 2013, restricted shares granted to Company employees are amortized to expense over a three-year vesting period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned. Beginning on February 2, 2017, restricted shares granted to Company employees are amortized to expense over the three-year cliff vesting period. As of September 30, 2017,2018, the total unrecognized compensation expense related to non-vested restricted shares was $1,781,000,$1,750,000, and the related weighted-average period over which it is expected to be recognized is approximately 0.80.92 years.-13- Nine Months Ended September 30, 2017 Shares Fair Value Balance at December 31, 2016 73,840 $ 51.03 Granted 23,135 65.36 Vested (26,545 ) 52.34 Balance at September 30, 2017 70,430 $ 55.24 Nine Months Ended September 30, 2018 Shares Fair Value Balance at December 31, 2017 78,166 $ 50.30 Granted 28,527 59.69 Vested (23,758) 46.83 Balance at September 30, 2018 82,935 $ 54.52 OnIn February 2,of 2017, the Company granted three-year performance based restricted stock (“PBRS”) awards which are contingent upon the Company’s achievement of pre-established financial goals over the period from January 1, 2017 through December 31, 2019. The PBRS awards cliff vest on the three-yearthree year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS shares granted was 23,03825,342 with aan average grant date fair value of $65.12$59.20 per share. The 20172018 expense related to this grantthese grants is currently estimated to be $458,000$690,000 and is based on the grant date fair value of the awards and the Company’s achievement of 100%132% of the target financial goals. The estimated expense for 20172018 and each future period through the vesting date is subject to prospective adjustment based upon changes in the expected achievement of the financial goals.vest over a three-year period, with one-third ofgranted and no expense recognized during the shares vesting and becoming exercisable each year on the anniversary date of the grant, and they expire 10 years from the original grant date. As ofnine months ended September 30, 2017, all compensation expense has been recognized and all granted SARs are vested.2018. Following is a summary of the activity of the Company’s SARs program for the nine-month period ended September 30, 2017:2018: Weighted- Average Aggregate Average Remaining Intrinsic Exercise Contractual Value Shares Price Term Years (In thousands) Outstanding at December 31, 2016 237,468 $ 38.22 5.73 $ 3,201 Exercised (15,547 ) 40.60 Outstanding at September 30, 2017 221,921 $ 38.05 4.45 $ 5,634 Exercisable at September 30, 2017 221,921 $ 38.05 4.45 $ 5,634 Weighted- Average Aggregate Average Remaining Intrinsic Exercise Contractual Value Shares Price Term Years (In thousands) Outstanding at December 31, 2017 234,236 $ 34.97 5.03 $ 7,291 Exercised (36,624) 30.31 Outstanding at September 30, 2018 197,612 35.84 3.75 5,787 Exercisable at September 30, 2018 197,612 $ 35.84 3.75 $ 5,787 Estimated Actual (In thousands) 2017 2016 Service cost – benefits earned during the year $ 3,733 $ 3,559 Interest cost on projected benefit obligations 3,621 3,505 Expected return on plan assets (4,681 ) (4,734 ) Net amortization and deferral 1,382 1,259 Net periodic pension cost $ 4,055 $ 3,589 Estimated Actual (In thousands) 2018 2017 Service cost – benefits earned during the year $ 4,294 $ 3,733 Interest cost on projected benefit obligations 3,655 3,621 Expected return on plan assets (5,206) (4,681) Net amortization and deferral 1,409 1,382 Net periodic pension cost $ 4,152 $ 4,055 $1,033,000$1,049,000 and $965,000$1,033,000 for the three-month periods ended September 30, 20172018 and 2016,2017, respectively, and totaled $3,070,000$3,147,000 and $2,724,000$3,070,000 for the nine-month periods ended September 30, 20172018 and 2016,2017, respectively. Pension costs increased in 20172018 primarily due to a decrease in the discount rate and expected return on plan assets assumptions and the use of the updated mortality tables.rate. The Company made no contribution to the plan during the nine-month period ended September 30, 20172018 and is evaluating the amount of additional contributions, if any, in the remainder of 2017.2018.-14-20162017 and an estimate for 2017:2018: Estimated Actual (In thousands) 2017 2016 Service cost – benefits earned during the year $ 143 $ 133 Interest cost on projected benefit obligation 361 367 Net amortization 323 295 Net periodic pension cost $ 827 $ 795 Estimated Actual (In thousands) 2018 2017 Service cost – benefits earned during the year $ 92 $ 143 Interest cost on projected benefit obligation 348 360 Net amortization 581 324 Net periodic pension cost $ 1,021 $ 827 $210,000$255,000 and $201,000$210,000 for the three-month periods ended September 30, 20172018 and 2016,2017, respectively, and were $628,000$766,000 and $604,000$628,000 for the nine-month periods ended September 30, 2018 and 2017, and 2016, respectively.2017,2018, the Company’s unrecognized tax benefits were approximately $1,840,000,$1,822,000, of which $1,409,000$1,652,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2016,2017, the Company’s unrecognized tax benefits were approximately $1,623,000,$1,632,000, of which $1,225,000$1,464,000 would, if recognized, affect the Company’s effective tax rate. During the next 12 months, the Company may realize a reduction of its unrecognized tax benefits of approximately $226,000$315,000 due to the lapse of federal and state statutes of limitations.$159,000$191,000 and $108,000$139,000 of gross interest accrued as of September 30, 20172018 and December 31, 2016,2017, respectively. There were no penalties for unrecognized tax benefits accrued at September 30, 20172018 and December 31, 2016.2017.20162017 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2013 through 2016.2017.adopted Accounting Standards Update (“ASU”) No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The adoption of this newhas not completed the accounting pronouncement resulted in a $0 and $278,000 reduction infor the income tax expense foreffects of the three-month and nine-month periods ending September 30,Tax Act. In accordance with SAB 118, a provisional charge was recorded in December 2017 respectively.based on reasonable estimates of certain effects of the Tax Act. The Company expects to finalize its provisional amounts by the fourth quarter of 2018. September 30, 2017 September 30, 2018 Gross Gross Gross Gross Amortized Unrealized Unrealized Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value State and political subdivisions $ 406,833 $ 11,086 $ 924 $ 416,995 $ 337,378 $ 2,187 $ 4,691 $ 334,874 U.S. government agencies 32,241 — 409 31,832 108,158 — 2,337 105,821 Certificates of deposit 8,241 — — 8,241 5,745 — — 5,745 Total $ 447,315 $ 11,086 $ 1,333 $ 457,068 $ 451,281 $ 2,187 $ 7,028 $ 446,440 December 31, 2017 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value State and political subdivisions $ 408,165 $ 9,528 $ 661 $ 417,032 U.S. government agencies 46,222 — 722 45,500 Certificates of deposit 7,991 — — 7,991 Total $ 462,378 $ 9,528 $ 1,383 $ 470,523 -15--16- December 31, 2016 Gross Gross Amortized Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value State and political subdivisions $ 368,223 $ 5,239 $ 3,328 $ 370,134 U.S. government agencies 13,075 — 403 12,672 Certificates of deposit 7,746 — — 7,746 Total $ 389,044 $ 5,239 $ 3,731 $ 390,552 September 30, 2017 Less than 12 months 12 months or more Total Estimated Unrealized Estimated Unrealized Estimated Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses State and political subdivisions $ 33,567 $ 336 $ 16,288 $ 588 $ 49,855 $ 924 U.S. government agencies 29,162 338 2,670 71 31,832 409 Certificates of deposit — — — — — — Total $ 62,729 $ 674 $ 18,958 $ 659 $ 81,687 $ 1,333 December 31, 2016 Less than 12 months 12 months or more Total Estimated Unrealized Estimated Unrealized Estimated Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses State and political subdivisions $ 140,384 $ 3,328 $ — $ — $ 140,384 $ 3,328 U.S. government agencies 12,672 403 — — 12,672 403 Certificates of deposit — — — — — — Total $ 153,056 $ 3,731 $ — $ — $ 153,056 $ 3,731 September 30, 2018 Less than 12 months 12 months or more Total Estimated Unrealized Estimated Unrealized Estimated Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses State and political subdivisions $ 178,137 $ 2,905 $ 36,804 $ 1,786 $ 214,941 $ 4,691 U.S. government agencies 79,513 974 26,308 1,363 105,821 2,337 Total $ 257,650 $ 3,879 $ 63,112 $ 3,149 $ 320,762 $ 7,028 December 31, 2017 Less than 12 months 12 months or more Total Estimated Unrealized Estimated Unrealized Estimated Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses State and political subdivisions $ 34,755 $ 123 $ 31,251 $ 538 $ 66,006 $ 661 U.S. government agencies 34,183 376 11,317 346 45,500 722 Total $ 68,938 $ 499 $ 42,568 $ 884 $ 111,506 $ 1,383 44197 securities, or 12%61% of the total (13(35 greater than 12 months), in an unrealized loss position as of September 30, 2017.2018. There were 10864 securities, or 31%17% of the total (none(24 greater than 12 months), in an unrealized loss position as of December 31, 2016.2017. All unrealized losses were reviewed to determine whether the losses were other than temporary. Management believes that all unrealized losses are temporary since they were market driven, and it is more likely than not that the Company will not be required to sell prior to recovery of the amortized basis. September 30, 2017 (In thousands) Amortized Cost Fair Value Due in 1 year or less $ 22,366 $ 22,562 Due after 1 year through 5 years 56,315 57,476 Due after 5 years through 10 years 237,366 245,720 Due after 10 years 131,268 131,310 Total $ 447,315 $ 457,068 September 30, 2018 (In thousands) Amortized Cost Fair Value Due in 1 year or less $ 13,741 $ 13,782 Due after 1 year through 5 years 121,838 121,626 Due after 5 years through 10 years 232,821 231,333 Due after 10 years 82,881 79,699 Total $ 451,281 $ 446,440 20172018 or 2016.2017. Proceeds from sales of investment securities classified as available for sale were $0$58,520,000 and $21,491,000$0 for the nine months ended September 30, 20172018 and 2016,2017, respectively. There were no gross realized gains for the three months ended September 30, 20172018 or 2016.2017. Gross gains realized losses were $0$42,000 and $387,000$0 for the nine months ended September 30, 20172018 and 2016,2017, respectively. There was one security totaling $3,750,000 pledged to secure public deposits and for other purposes at September 30, 2017.2018.-16- September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017 Carrying Carrying Carrying Carrying (In thousands) Amount Fair Value Amount Fair Value Amount Fair Value Amount Fair Value Balance sheet assets: Cash and cash equivalents $ 242,098 $ 242,098 $ 266,743 $ 266,743 $ 180,047 $ 180,047 $ 228,110 $ 228,110 Investment securities 457,068 457,068 390,552 390,552 446,440 446,440 470,523 470,523 Loans, net 647,888 650,593 654,691 652,028 716,019 709,807 676,026 675,020 Accrued interest receivable 6,267 6,267 6,543 6,543 6,323 6,323 7,413 7,413 Total $ 1,353,321 $ 1,356,026 $ 1,318,529 $ 1,315,866 $ 1,348,829 $ 1,342,617 $ 1,382,072 $ 1,381,066 Balance sheet liabilities: Deposits $ 609,230 $ 609,199 $ 621,961 $ 622,173 $ 634,724 $ 632,162 $ 678,088 $ 678,346 Accounts and drafts payable 687,233 687,233 642,287 642,287 769,638 769,638 661,888 661,888 Accrued interest payable 47 47 46 46 99 99 55 55 Total $ 1,296,510 $ 1,296,479 $ 1,264,294 $ 1,264,506 $ 1,404,461 $ 1,401,899 $ 1,340,031 $ 1,340,289 20172018 and 2016.2017. No financial instruments are measured using Level 3 inputs for the nine months ended September 30, 20172018 and 2016.2017.24, 2017,23, 2018, the Company’s boardBoard of directorsDirectors declared a 10%20% common stock dividend payable on December 15, 201714, 2018 to shareholders of record on December 5, 2017.4, 2018. Shareholders will receive one additional share of Cass common stock for each 10five shares of common stock owned. No fractional shares will be issued. Shareholders will receive cash for any fractional shares owned based on the share price reported by the Nasdaq Stock Market at the close of trading on December 5, 2017.4, 2018.24, 2017,23, 2018, the Company’s boardBoard of directorsDirectors declared a fourth quarter cash dividend of $0.24$0.26 per share payable on December 15, 201714, 2018 to shareholders of record on December 5, 2017.4, 2018. The cash dividend will apply to all shares of common stock held after the 10%20% common stock dividend is completed.-17-The Board of Directors voted to restore the capacity of the Company’s stock repurchase program to 500,000 shares.ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Breda, Netherlands.Singapore. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy invoices, which include electricity and gas as well as environmentalwaste and telecommunications expenseexpenses and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from transportation, energy, telecommunication and environmental invoices, assisting its customers’ transportation, energy, environmental and information technology managers in making decisions that will enable them to improve operating performance. The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers. It then provides the data in a central repository for access and archiving. The data is finally transformed into information through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical processing. The Company also, through Cass Commercial Bank, its St. Louis, Missouri-based bank subsidiary provides banking services in the St. Louis metropolitan area, Orange County, California, Colorado Springs, Colorado, and other selected cities in the United States. In addition to supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-relatedfaith-based ministries.20162017 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income and conversely, a rise in the general level of interest rates can have a positive impact on net interest income. The cost of fuel is another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.-18--19-LossesLosses.. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly, the Company expects to continue to utilize the present processes.Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns such as the realization of deferred tax assets or changes in tax laws or interpretations thereof. In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other taxing authorities. In accordance with FASB ASC 740, “Income Taxes,” the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 10 to the unaudited consolidated financial statements contained herein.Pension Plans.The amounts recognized in the unaudited consolidated financial statements related to pension plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2016, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Item 8, Note 10 to the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Pursuant to FASB ASC 715, “Compensation – Retirement Benefits,” the Company has recognized the funded status of its defined benefit postretirement plan in its balance sheet and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.20172018 (“Third Quarter of 2017”2018”) compared to the three-month period ended September 30, 20162017 (“Third Quarter of 2016”2017”) and the nine-month period ended September 30, 2018 (“Nine Months Ended 2018”) compared to the nine-month period ended September 30, 2017 (“Nine Months Ended 2017”) compared to the nine-month period ended September 30, 2016 (“Nine Months Ended 2016”). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 20162017 Annual Report on Form 10-K. Results of operations for the Third Quarter of 20172018 are not necessarily indicative of the results to be attained for any other period.Third Quarter of Nine Months Ended % % (In thousands except per share data) 2017 2016 Change 2017 2016 Change Net income $ 6,863 $ 6,222 10.3 $ 19,683 $ 17,924 9.8 Diluted earnings per share $ .61 $ .55 10.9 $ 1.74 $ 1.58 10.1 Return on average assets 1.70 % 1.59 % — 1.70 % 1.60 % — Return on average equity 12.34 % 11.84 % — 12.27 % 11.56 % — -19-Third Quarter of Nine Months Ended % % (In thousands except per share data) 2018 2017 Change 2018 2017 Change Net income $ 7,610 $ 6,863 10.9 $ 23,211 $ 19,683 17.9 Diluted earnings per share $ .61 $ .55 10.9 $ 1.87 $ 1.58 18.4 Return on average assets 1.84 % 1.70 % — 1.92 % 1.70 % — Return on average equity 13.31 % 12.34 % — 13.96 % 12.27 % — follows:follows: Third Quarter of Nine Months Ended Third Quarter of Nine Months Ended % % % % (In thousands) 2017 2016 Change 2017 2016 Change 2018 2017 Change 2018 2017 Change Transportation invoice volume 8,962 8,898 0.7 % 26,585 25,786 3.1 % 9,530 8,962 6.3 % 28,349 26,585 6.6 % Transportation invoice dollar volume $ 6,162,957 $ 5,864,716 5.1 % $ 18,271,178 $ 17,107,723 6.8 % $ 7,264,898 $ 6,162,957 17.9 % $ 21,227,816 $ 18,271,178 16.2 % Expense management transaction volume* 6,935 6,034 14.9 % 20,477 16,989 20.5 % Expense management dollar volume* $ 3,391,672 $ 3,301,049 2.7 % $ 9,647,573 $ 8,882,181 8.6 % Expense management transaction volume* 7,124 6,935 2.7 % 21,414 20,477 4.6 % Expense management dollar volume* $ 3,667,007 $ 3,391,672 8.1 % $ 10,338,979 $ 9,647,573 7.2 % Payment and processing revenue $ 23,761 $ 21,737 9.3 % $ 69,332 $ 62,162 11.5 % $ 26,020 $ 23,761 9.5 % $ 76,068 $ 69,332 9.7 % *Includes energy, telecom and waste 20172018 compared to Third Quarter of 2016:2017:InPayment and processing fee revenue increased 10%. Highlighting third quarter performance was an 18% increase in transportation dollar volume. Higher carrier and fuel prices, in concert with higher volume from current accounts, produced the transportation sector,positive result. Transportation invoice volume for the period was up 6%. Facility-related (electricity, gas, waste and telecom expense management) dollar volume was up 0.7% while dollar3% with facility related expense transaction volume rose 5.1%up 8%. The expense management group had 14.9% growth in transaction volume. New customer wins combined withplus increased volume from current accounts fueledgenerated the increase. Expense management dollar volume was also up 2.7% for the quarter.The increase in payment and processing revenue of 9.3% was primarily attributable to two factors: continued growth in the customer base of each market and the development, deployment, and expansion of new revenue-generating services.favorable outcome.20172018 or 2016.2017.20172018 compared to Nine Months Ended 2016:2017:The increase in payment and processing revenueLosses of 11.5% was primarily attributable to two factors: continued growth in$42,000 on the customer base of each market and the development, deployment, and expansion of new revenue-generating services.There were no gains on sales of securities were recognized in the Nine Months Ended 2017,2018, compared to $387,000$0 in the Nine Months Ended 2016.2017. These sales were part of an effort to right size the investment security portfolio given recent changes in both interest rates, which have increased, and tax rates, which have declined. Third Quarter of Nine Months Ended % % (In thousands) 2017 2016 Change 2017 2016 Change Average earnings assets $ 1,395,025 $ 1,351,638 3.2 % $ 1,348,253 $ 1,301,280 3.6 % Average interest-bearing liabilities 393,262 428,786 (8.3 %) 388,693 426,825 (8.9 %) Net interest income* 11,513 10,842 6.2 % 33,765 32,370 4.3 % Net interest margin* 3.27 % 3.19 % 3.35 % 3.32 % Yield on earning assets* 3.44 % 3.34 % 3.50 % 3.48 % Rate on interest-bearing liabilities .58 % .47 % .52 % .48 % *Presented on a tax-equivalent basis assuming a tax rate of 35%. -20-Third Quarter of Nine Months Ended % % (In thousands) 2018 2017 Change 2018 2017 Change Average earnings assets $ 1,397,477 $ 1,395,025 0.2 % $ 1,385,488 $ 1,348,253 2.8 % Average interest-bearing liabilities 359,793 393,262 (8.5 %) 369,016 388,693 (5.1 %) Net interest income* 11,749 11,513 2.0 % 34,389 33,765 1.8 % Net interest margin* 3.34 % 3.27 % 3.32 % 3.35 % Yield on earning assets* 3.63 % 3.44 % 3.56 % 3.50 % Rate on interest-bearing liabilities 1.13 % .58 % .91 % .52 % *Presented on a tax-equivalent basis assuming a tax rate of 21% for 2018 and 35% for 2017. The TCJA reduced the net interest margin and yield on earning assets by approximately 20 basis points in 2018. 20172018 compared to Third Quarter of 2016:2017:20172018 average earning assets increased $43,387,000,$2,452,000, or 3.2%0.2%, compared to the same period in the prior year. Interest-bearing deposits in other financial institutions increased $60,831,000, or 59.5%, loans increased $57,857,000, or 8.8%, and average investment securities increased $14,454,000, or 3.4%. These were partially offset by a decrease in average federal funds sold and other short-term investments of $130,634,000, or 65.3%, in the Third Quarter of 2018 compared to the Third Quarter of 2017.thea result of growththe increase in funding sources. Componentsaverage earning assets and the improving rate environment. However, the lower tax-equivalent adjustment as a result of these variances are as follows:Earning Assets.Average investment securities increased $77,815,000, or 22.4%,the federal tax rate decrease in 2018 from the enactment of TCJA in December 2017 negatively impacted the comparison to the Third Quarter of 2017. The federal tax rate decrease also negatively impacted net interest margin and average federal funds sold and other short-term investments increased $14,478,000, or 7.8%,yield on earning assets for the Third Quarter of 2017 as2018 compared to the Third Quarter of 2016. Interest-bearing deposits2017.other financial institutions decreased $25,111,000,the rate on interest-bearing liabilities in the Third Quarter of 2018 compared to the Third Quarter of 2017.19.7%, and loans decreased $22,219,000, or 3.3%2.8%, compared to the same period in the prior year.
Funding Sources.-21-
Average accounts and drafts payable balances for the Third Quarter of 2017Nine Months Ended 2018 increased $46,748,000,$33,171,000, or 6.8%4.7%, and non-interest bearing demand depositsliabilities increased $15,244,000,$39,704,000, or 7.9%19.3%, as compared to the Third QuarterNine Months Ended 2017. These were partially offset by a decrease in average total interest bearing deposits of 2016. Total average interest-bearing liabilities$19,677,000, or 5.1%. This decreased for the Third Quartera variety of 2017 decreased by $35,524,000, or 8.3%, comparedreasons, including some customers that shifted excess balances to the Third Quarter of 2016.
Net interest margin and yield on earning assets both increased in the Third Quarter of 2017 compared to the Third Quarter of 2016 as a result of Federal Reserve actions which increased yield on short-term investments and led to an increase in the Cass prime rate.higher yielding investments.
Nine Months Ended 2017 compared to Nine Months Ended 2016:
Nine Months Ended 2017 average earning assets2018 tax-equivalized net interest income increased $46,973,000,$624,000, or 3.6%1.8%, compared to the same period in the prior year as thea result of growththe increase in funding sources. Componentsaverage earning assets and the improving rate environment. However, the lower tax-equivalent adjustment as a result of these variances are as follows:
Earning Assets.Average investment securities increased $72,045,000, or 20.8%, and other short-term investments increased $24,577,000, or 17.7%, for the Nine Months Endedfederal tax rate decrease in 2018 from the enactment of TCJA in December 2017 as comparednegatively impacted the comparison to the Nine Months Ended 2016. Interest-bearing deposits in other financial institutions decreased $30,251,000, or 23.4%, and loans decreased $18,364,000, or 2.7%, compared to the same period in the prior year.
Funding Sources.Average accounts and drafts payable balances for the Nine Months Ended 2017 increased $55,231,000, or 8.5%, and non-interest bearing demand deposits increased $17,959,000, or 9.6%, as compared to the Nine Months Ended 2016. Total average interest-bearing liabilities for the Nine Months Ended 2017 decreased by $38,132,000, or 8.9%, compared to the Nine Months Ended 2016.
Net2017. The federal tax rate decrease also negatively impacted net interest margin and yield on earning assets both increased infor the Nine Months Ended 20172018 compared to the Nine Months Ended 20162017.
The changes to the interest rate environment increased for the same reasons as a result of Federal Reserve actions which increased yield on short-term investments and led to an increase in the Cass prime rate.Third Quarter.
For more information on the changes in net interest income, please refer to the tables that follow.
-22-
Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential
The following tables show the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.
-21-
| Third Quarter of 2017 | Third Quarter of 2016 | |||||||||||||||||||
| Interest | Interest | |||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||
| (In thousands) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||
| Assets1 | ||||||||||||||||||||
| Earning assets | ||||||||||||||||||||
| Loans2, 3: | ||||||||||||||||||||
| Taxable | $ | 655,723 | $ | 7,178 | 4.34 | % | $ | 664,705 | $ | 7,121 | 4.26 | % | ||||||||
| Tax-exempt4 | 4,466 | 47 | 4.18 | 17,703 | 219 | 4.92 | ||||||||||||||
| Investment securities5: | ||||||||||||||||||||
| Taxable | 19,703 | 94 | 1.89 | 5,714 | 22 | 1.53 | ||||||||||||||
| Tax-exempt4 | 406,131 | 4,007 | 3.91 | 342,305 | 3,672 | 4.27 | ||||||||||||||
| Certificates of deposit | 6,763 | 14 | .82 | 8,339 | 14 | .67 | ||||||||||||||
| Interest-bearing deposits in other financial institutions | 102,203 | 300 | 1.16 | 127,314 | 162 | .51 | ||||||||||||||
| Federal funds sold and other short-term investments | 200,036 | 444 | .88 | 185,558 | 137 | .29 | ||||||||||||||
| Total earning assets | 1,395,025 | 12,084 | 3.44 | 1,351,638 | 11,347 | 3.34 | ||||||||||||||
| Non-earning assets | ||||||||||||||||||||
| Cash and due from banks | 12,704 | 12,097 | ||||||||||||||||||
| Premises and equipment, net | 21,256 | 20,773 | ||||||||||||||||||
| Bank-owned life insurance | 16,738 | 16,238 | ||||||||||||||||||
| Goodwill and other intangibles | 14,742 | 13,749 | ||||||||||||||||||
| Other assets | 149,266 | 148,734 | ||||||||||||||||||
| Allowance for loan losses | (10,199 | ) | (10,673 | ) | ||||||||||||||||
| Total assets | $ | 1,599,532 | $ | 1,552,556 | ||||||||||||||||
| Liabilities and Shareholders’ Equity1 | ||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 327,997 | $ | 434 | .52 | % | $ | 351,971 | $ | 347 | .39 | % | ||||||||
| Savings deposits | 12,493 | 17 | .54 | 19,679 | 24 | .49 | ||||||||||||||
| Time deposits >= $100 | 23,486 | 68 | 1.15 | 22,237 | 69 | 1.23 | ||||||||||||||
| Other time deposits | 29,286 | 52 | .70 | 34,899 | 65 | .74 | ||||||||||||||
| Total interest-bearing liabilities | 393,262 | 571 | .58 | 428,786 | 505 | .47 | ||||||||||||||
| Non-interest bearing liabilities | ||||||||||||||||||||
| Demand deposits | 208,932 | 193,688 | ||||||||||||||||||
| Accounts and drafts payable | 739,293 | 692,545 | ||||||||||||||||||
| Other liabilities | 37,317 | 28,467 | ||||||||||||||||||
| Total liabilities | 1,378,804 | 1,343,486 | ||||||||||||||||||
| Shareholders’ equity | 220,728 | 209,070 | ||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,599,532 | $ | 1,552,556 | ||||||||||||||||
| Net interest income | $ | 11,513 | $ | 10,842 | ||||||||||||||||
| Net interest margin | 3.27 | % | 3.19 | % | ||||||||||||||||
| Interest spread | 2.86 | 2.87 | ||||||||||||||||||
| Third Quarter of 2018 | Third Quarter of 2017 | |||||||||||||||||
| Interest | Interest | |||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||
| (In thousands) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||
| Assets1 | ||||||||||||||||||
| Earning assets | ||||||||||||||||||
| Loans2, 3: | ||||||||||||||||||
| Taxable | $ | 716,849 | $ | 8,356 | 4.62 | % | $ | 655,723 | $ | 7,178 | 4.34 | % | ||||||
| Tax-exempt4 | 1,197 | 13 | 4.31 | 4,466 | 47 | 4.18 | ||||||||||||
| Investment securities5: | ||||||||||||||||||
| Taxable | 100,530 | 593 | 2.34 | 19,703 | 94 | 1.89 | ||||||||||||
| Tax-exempt4 | 339,758 | 2,671 | 3.12 | 406,131 | 4,007 | 3.91 | ||||||||||||
| Certificates of deposit | 6,707 | 26 | 1.54 | 6,763 | 14 | .82 | ||||||||||||
| Interest-bearing deposits in other financial institutions | 163,034 | 794 | 1.93 | 102,203 | 300 | 1.16 | ||||||||||||
| Federal funds sold and other short-term investments | 69,402 | 325 | 1.86 | 200,036 | 444 | .88 | ||||||||||||
| Total earning assets | 1,397,477 | 12,778 | 3.63 | 1,395,025 | 12,084 | 3.44 | ||||||||||||
| Non-earning assets: | ||||||||||||||||||
| Cash and due from banks | 13,398 | 12,704 | ||||||||||||||||
| Premises and equipment, net | 22,583 | 21,256 | ||||||||||||||||
| Bank-owned life insurance | 17,197 | 16,738 | ||||||||||||||||
| Goodwill and other intangibles | 14,300 | 14,742 | ||||||||||||||||
| Other assets | 182,565 | 149,266 | ||||||||||||||||
| Allowance for loan losses | (10,218) | (10,199) | ||||||||||||||||
| Total assets | $ | 1,637,302 | $ | 1,599,532 | ||||||||||||||
| Liabilities and Shareholders’ Equity1 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||
| Interest-bearing demand deposits | $ | 292,038 | $ | 802 | 1.09 | % | $ | 327,997 | $ | 434 | .52 | % | ||||||
| Savings deposits | 11,129 | 30 | 1.07 | 12,493 | 17 | .54 | ||||||||||||
| Time deposits >= $100 | 24,718 | 95 | 1.52 | 23,486 | 68 | 1.15 | ||||||||||||
| Other time deposits | 31,908 | 102 | 1.27 | 29,286 | 52 | .70 | ||||||||||||
| Total interest-bearing liabilities | 359,793 | 1,029 | 1.13 | 393,262 | 571 | .58 | ||||||||||||
| Non-interest bearing liabilities: | ||||||||||||||||||
| Demand deposits | 250,389 | 208,932 | ||||||||||||||||
| Accounts and drafts payable | 755,697 | 739,293 | ||||||||||||||||
| Other liabilities | 44,652 | 37,317 | ||||||||||||||||
| Total liabilities | 1,410,531 | 1,378,804 | ||||||||||||||||
| Shareholders’ equity | 226,771 | 220,728 | ||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,637,302 | $ | 1,599,532 | ||||||||||||||
| Net interest income | $ | 11,749 | $ | 11,513 | ||||||||||||||
| Net interest margin | 3.34 | % | 3.27 | % | ||||||||||||||
| Interest spread | 2.50 | 2.86 | ||||||||||||||||
| 1. | Balances shown are daily averages. |
| 2. | For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s |
| 3. | Interest income on loans includes net loan fees of |
| 4. | Interest income is presented on a tax-equivalent |
| 5. | For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments. |
-22--23-
| Nine Months Ended 2017 | Nine Months Ended 2016 | |||||||||||||||||||
| Interest | Interest | |||||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||
| (In thousands) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||
| Assets1 | ||||||||||||||||||||
| Earning assets | ||||||||||||||||||||
| Loans2, 3: | ||||||||||||||||||||
| Taxable | $ | 656,314 | $ | 21,164 | 4.31 | % | $ | 661,435 | $ | 21,278 | 4.30 | % | ||||||||
| Tax-exempt4 | 5,274 | 157 | 3.98 | 18,517 | 666 | 4.80 | ||||||||||||||
| Investment securities5: | ||||||||||||||||||||
| Taxable | 15,905 | 232 | 1.95 | 2,711 | 33 | 1.63 | ||||||||||||||
| Tax-exempt4 | 401,903 | 12,100 | 4.03 | 343,052 | 11,104 | 4.32 | ||||||||||||||
| Certificates of deposit | 6,592 | 36 | .73 | 7,626 | 36 | .63 | ||||||||||||||
| Interest-bearing deposits in other financial institutions | 99,206 | 703 | .95 | 129,457 | 484 | .50 | ||||||||||||||
| Federal funds sold and other short-term investments | 163,059 | 894 | .73 | 138,482 | 291 | .28 | ||||||||||||||
| Total earning assets | 1,348,253 | 35,286 | 3.50 | 1,301,280 | 33,892 | 3.48 | ||||||||||||||
| Non-earning assets | ||||||||||||||||||||
| Cash and due from banks | 12,729 | 11,716 | ||||||||||||||||||
| Premises and equipment, net | 21,225 | 20,371 | ||||||||||||||||||
| Bank-owned life insurance | 16,615 | 16,110 | ||||||||||||||||||
| Goodwill and other intangibles | 14,408 | 13,851 | ||||||||||||||||||
| Other assets | 144,086 | 144,129 | ||||||||||||||||||
| Allowance for loan losses | (10,190 | ) | (10,981 | ) | ||||||||||||||||
| Total assets | $ | 1,547,126 | $ | 1,496,476 | ||||||||||||||||
| Liabilities and Shareholders’ Equity1 | ||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 317,046 | $ | 1,090 | .46 | % | $ | 348,221 | $ | 1,043 | .40 | % | ||||||||
| Savings deposits | 17,007 | 62 | .49 | 18,756 | 68 | .48 | ||||||||||||||
| Time deposits >= $100 | 23,238 | 195 | 1.12 | 22,425 | 201 | 1.20 | ||||||||||||||
| Other time deposits | 31,402 | 174 | .74 | 37,423 | 210 | .75 | ||||||||||||||
| Total interest-bearing liabilities | 388,693 | 1,521 | .52 | 426,825 | 1,522 | .48 | ||||||||||||||
| Non-interest bearing liabilities | ||||||||||||||||||||
| Demand deposits | 205,298 | 187,339 | ||||||||||||||||||
| Accounts and drafts payable | 703,912 | 648,681 | ||||||||||||||||||
| Other liabilities | 34,821 | 26,475 | ||||||||||||||||||
| Total liabilities | 1,332,724 | 1,289,320 | ||||||||||||||||||
| Shareholders’ equity | 214,402 | 207,156 | ||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,547,126 | $ | 1,496,476 | ||||||||||||||||
| Net interest income | $ | 33,765 | $ | 32,370 | ||||||||||||||||
| Net interest margin | 3.35 | % | 3.32 | % | ||||||||||||||||
| Interest spread | 2.98 | 3.00 | ||||||||||||||||||
| Nine Months Ended 2018 | Nine Months Ended 2017 | |||||||||||||||||
| Interest | Interest | |||||||||||||||||
| Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||
| (In thousands) | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||
| Assets1 | ||||||||||||||||||
| Earning assets | ||||||||||||||||||
| Loans2, 3: | ||||||||||||||||||
| Taxable | $ | 703,535 | $ | 23,786 | 4.52 | % | $ | 656,314 | $ | 21,164 | 4.31 | % | ||||||
| Tax-exempt4 | 2,006 | 57 | 3.80 | 5,274 | 157 | 3.98 | ||||||||||||
| Investment securities5: | ||||||||||||||||||
| Taxable | 78,609 | 1,348 | 2.29 | 15,905 | 232 | 1.95 | ||||||||||||
| Tax-exempt4 | 372,039 | 8,872 | 3.19 | 401,903 | 12,100 | 4.03 | ||||||||||||
| Certificates of deposit | 7,134 | 80 | 1.50 | 6,592 | 36 | .73 | ||||||||||||
| Interest-bearing deposits in other financial institutions | 116,808 | 1,539 | 1.76 | 99,206 | 703 | .95 | ||||||||||||
| Federal funds sold and other short-term investments | 105,357 | 1,209 | 1.53 | 163,059 | 894 | .73 | ||||||||||||
| Total earning assets | 1,385,488 | 36,891 | 3.56 | 1,348,253 | 35,286 | 3.50 | ||||||||||||
| Non-earning assets: | ||||||||||||||||||
| Cash and due from banks | 13,472 | 12,729 | ||||||||||||||||
| Premises and equipment, net | 22,322 | 21,225 | ||||||||||||||||
| Bank-owned life insurance | 17,084 | 16,615 | ||||||||||||||||
| Goodwill and other intangibles | 14,409 | 14,408 | ||||||||||||||||
| Other assets | 173,833 | 144,086 | ||||||||||||||||
| Allowance for loan losses | (10,213) | (10,190) | ||||||||||||||||
| Total assets | $ | 1,616,395 | $ | 1,547,126 | ||||||||||||||
| Liabilities and Shareholders’ Equity1 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||
| Interest-bearing demand deposits | $ | 303,976 | $ | 1,932 | .85 | % | $ | 317,046 | $ | 1,090 | .46 | % | ||||||
| Savings deposits | 11,230 | 76 | .90 | 17,007 | 62 | .49 | ||||||||||||
| Time deposits >= $100 | 23,764 | 257 | 1.45 | 23,238 | 195 | 1.12 | ||||||||||||
| Other time deposits | 30,046 | 237 | 1.05 | 31,402 | 174 | .74 | ||||||||||||
| Total interest-bearing liabilities | 369,016 | 2,502 | .91 | 388,693 | 1,521 | .52 | ||||||||||||
| Non-interest bearing liabilities: | ||||||||||||||||||
| Demand deposits | 245,002 | 205,298 | ||||||||||||||||
| Accounts and drafts payable | 737,083 | 703,912 | ||||||||||||||||
| Other liabilities | 42,955 | 34,821 | ||||||||||||||||
| Total liabilities | 1,394,056 | 1,332,724 | ||||||||||||||||
| Shareholders’ equity | 222,339 | 214,402 | ||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,616,395 | $ | 1,547,126 | ||||||||||||||
| Net interest income | $ | 34,389 | $ | 33,765 | ||||||||||||||
| Net interest margin | 3.32 | % | 3.35 | % | ||||||||||||||
| Interest spread | 2.65 | 2.98 | ||||||||||||||||
| 1. | Balances shown are daily averages. |
| 2. | For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s |
| 3. | Interest income on loans includes net loan fees of |
| 4. | Interest income is presented on a tax-equivalent |
| 5. | For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments. |
-23--24-
Analysis of Net Interest Income Changes
The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.
| Third Quarter of 2017 Over | |||||||||||||
| Third Quarter of 2016 | |||||||||||||
| (In thousands) | Volume | Rate | Total | ||||||||||
| Increase (decrease) in interest income: | |||||||||||||
| Loans1, 2: | |||||||||||||
| Taxable | $ | (89 | ) | $ | 146 | $ | 57 | ||||||
| Tax-exempt3 | (143 | ) | (29 | ) | (172 | ) | |||||||
| Investment securities: | |||||||||||||
| Taxable | 66 | 6 | 72 | ||||||||||
| Tax-exempt3 | 653 | (318 | ) | 335 | |||||||||
| Certificates of deposit | (4 | ) | 4 | — | |||||||||
| Interest-bearing deposits in other financial institutions | (37 | ) | 175 | 138 | |||||||||
| Federal funds sold and other short-term investments | 12 | 295 | 307 | ||||||||||
| Total interest income | 458 | 279 | 737 | ||||||||||
| Interest expense on: | |||||||||||||
| Interest-bearing demand deposits | (25 | ) | 112 | 87 | |||||||||
| Savings deposits | (9 | ) | 2 | (7 | ) | ||||||||
| Time deposits >=$100 | 3 | (4 | ) | (1 | ) | ||||||||
| Other time deposits | (10 | ) | (3 | ) | (13 | ) | |||||||
| Total interest expense | (41 | ) | 107 | 66 | |||||||||
| Net interest income | $ | 499 | $ | 172 | $ | 671 | |||||||
| 1. | Average balances include nonaccrual loans. | ||||||||||||
| 2. | Interest income includes net loan fees. | ||||||||||||
| 3. | Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. | ||||||||||||
| Nine Months Ended 2017 Over | |||||||||||||
| Nine Months Ended 2016 | |||||||||||||
| (In thousands) | Volume | Rate | Total | ||||||||||
| Increase (decrease) in interest income: | |||||||||||||
| Loans1, 2: | |||||||||||||
| Taxable | $ | (178 | ) | $ | 64 | $ | (114 | ) | |||||
| Tax-exempt3 | (411 | ) | (98 | ) | (509 | ) | |||||||
| Investment securities: | |||||||||||||
| Taxable | 191 | 8 | 199 | ||||||||||
| Tax-exempt3 | 1,799 | (803 | ) | 996 | |||||||||
| Certificates of deposit | (4 | ) | 4 | — | |||||||||
| Interest-bearing deposits in other financial institutions | (134 | ) | 353 | 219 | |||||||||
| Federal funds sold and other short-term investments | 60 | 543 | 603 | ||||||||||
| Total interest income | 1,323 | 71 | 1,394 | ||||||||||
| Interest expense on: | |||||||||||||
| Interest-bearing demand deposits | (99 | ) | 146 | 47 | |||||||||
| Savings deposits | (6 | ) | — | (6 | ) | ||||||||
| Time deposits >=$100 | 7 | (13 | ) | (6 | ) | ||||||||
| Other time deposits | (33 | ) | (3 | ) | (36 | ) | |||||||
| Total interest expense | (131 | ) | 130 | (1 | ) | ||||||||
| Net interest income | $ | 1,454 | $ | (59 | ) | $ | 1,395 | ||||||
| Third Quarter of 2018 Over | |||||||||
| Third Quarter of 2017 | |||||||||
| (In thousands) | Volume | Rate | Total | ||||||
| Increase (decrease) in interest income: | |||||||||
| Loans1, 2: | |||||||||
| Taxable | $ | 695 | $ | 483 | $ | 1,178 | |||
| Tax-exempt3 | (35) | 1 | (34) | ||||||
| Investment securities: | |||||||||
| Taxable | 472 | 27 | 499 | ||||||
| Tax-exempt3 | (596) | (740) | (1,336) | ||||||
| Certificates of deposit | — | 12 | 12 | ||||||
| Interest-bearing deposits in other financial institutions | 234 | 260 | 494 | ||||||
| Federal funds sold and other short-term investments | (409) | 290 | (119) | ||||||
| Total interest income | 361 | 333 | 694 | ||||||
| Interest expense on: | |||||||||
| Interest-bearing demand deposits | (52) | 420 | 368 | ||||||
| Savings deposits | (2) | 15 | 13 | ||||||
| Time deposits >=$100 | 4 | 23 | 27 | ||||||
| Other time deposits | 5 | 45 | 50 | ||||||
| Total interest expense | (45) | 503 | 458 | ||||||
| Net interest income | $ | 406 | $ | (170) | $ | 236 | |||
| 1. | Average balances include nonaccrual loans. |
| 2. | Interest income includes net loan fees. |
| 3. | Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the Third Quarter of 2018 and a tax rate of 35% |
| Nine Months Ended 2018 Over | |||||||||
| Nine Months Ended 2017 | |||||||||
| (In thousands) | Volume | Rate | Total | ||||||
| Increase (decrease) in interest income: | |||||||||
| Loans1, 2: | |||||||||
| Taxable | $ | 1,567 | $ | 1,055 | $ | 2,622 | |||
| Tax-exempt3 | (93) | (7) | (100) | ||||||
| Investment securities: | |||||||||
| Taxable | 1,068 | 48 | 1,116 | ||||||
| Tax-exempt3 | (850) | (2,378) | (3,228) | ||||||
| Certificates of deposit | 3 | 41 | 44 | ||||||
| Interest-bearing deposits in other financial institutions | 143 | 693 | 836 | ||||||
| Federal funds sold and other short-term investments | (400) | 715 | 315 | ||||||
| Total interest income | 1,438 | 167 | 1,605 | ||||||
| Interest expense on: | |||||||||
| Interest-bearing demand deposits | (47) | 889 | 842 | ||||||
| Savings deposits | (26) | 40 | 14 | ||||||
| Time deposits >=$100 | 5 | 57 | 62 | ||||||
| Other time deposits | (8) | 71 | 63 | ||||||
| Total interest expense | (76) | 1,057 | 981 | ||||||
| Net interest income | $ | 1,514 | $ | (890) | $ | 624 | |||
| 1. | Average balances include nonaccrual loans. |
| 2. | Interest income includes net loan fees. |
| 3. | Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the Nine Months Ended 2018 and a tax rate of 35% for the Nine Months Ended 2017. |
Provision and Allowance for Loan Losses (“ALLL”)
A significant determinant of the Company’s operating results can be the provision for loan losses. There was no provision for loan lossesloss recorded during the Third Quarter of 20172018 or the Third Quarter of 2016.2017. There was no loan loss provision recorded during the Nine Months Ended 2017 and a negative loan loss provision of $1,000,000 was recorded during2018 or the Nine Months Ended 2016.2017. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. Net loan recoveries were $6,000 and $1,000 during$5,000 in the Third Quarter of 20172018 and $6,000 in the Third Quarter of 2016, respectively.2017. Net loan recoveries were $27,000$15,000 in the Nine Months Ended 20172018 and $38,000$27,000 during the Nine Months Ended 2016.2017.
-24--25-
The ALLL at September 30, 20172018 was $10,202,000$10,220,000 and at December 31, 20162017 was $10,175,000.$10,205,000. The ratio of ALLL to total loans outstanding at September 30, 20172018 was 1.55%1.41% compared to 1.53%1.49% at December 31, 2016. Nonperforming loans2017. There were $215,000, or .03% of totalno nonperforming loans at September 30, 2017 compared to $245,000,2018 or .04% of total loans, at December 31, 2016. This consists of one nonaccrual loan, which is also considered impaired, at September 30, 2017. Total nonaccrual loans decreased $30,000 from December 31, 2016 to September 30, 2017.
The ALLL has been established and is maintained to absorb reasonably estimated and probable losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense to cover any deficiency or reduce any excess, as required. The current methodology consists of two components: 1) estimated credit losses on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310 “Allowance for Credit Losses,” and 2) estimated credit losses inherent in the remainder of the loan portfolio in accordance with FASB ASC 450, “Contingencies.” Estimated credit losses is an estimate of the current amount of loans that is probable the Company will be unable to collect according to the original terms.
For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value. For the remainder of the portfolio, the Company groups loans with similar risk characteristics into eight segments and applies historical loss rates to each segment based on a five fiscal-year look-back period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losses in collateral value, trends in credit quality at the Company and in the banking industry and trends in risk-rating agencies are also considered.
The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required levels of regulatory capital. Federal and state agencies review the Company’s methodology for maintaining the ALLL. These agencies may require the Company to adjust the ALLL based on their judgments and interpretations about information available to them at the time of their examinations.
Summary of Asset Quality
The following table presents information on the Company’s provision for loan losses and analysis of the ALLL:
| Third Quarter of | Nine Months Ended | |||||||||||||||
| (In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Allowance at beginning of period | $ | 10,196 | $ | 10,672 | $ | 10,175 | $ | 11,635 | ||||||||
| Provision charged to expense | — | — | — | (1,000 | ) | |||||||||||
| Loans charged off | — | — | — | — | ||||||||||||
| Recoveries on loans previously charged off | 6 | 1 | 27 | 38 | ||||||||||||
| Net recoveries | 6 | 1 | 27 | 38 | ||||||||||||
| Allowance at end of period | $ | 10,202 | $ | 10,673 | $ | 10,202 | $ | 10,673 | ||||||||
| Loans outstanding: | ||||||||||||||||
| Average | $ | 660,189 | $ | 682,408 | $ | 661,588 | $ | 679,952 | ||||||||
| September 30 | 658,090 | 684,874 | 658,090 | 684,874 | ||||||||||||
| Ratio of ALLL to loans outstanding: | ||||||||||||||||
| Average | 1.55 | % | 1.56 | % | 1.54 | % | 1.57 | % | ||||||||
| September 30 | 1.55 | % | 1.56 | % | 1.55 | % | 1.56 | % | ||||||||
| Impaired loans: | ||||||||||||||||
| Nonaccrual loans | $ | 215 | $ | 340 | $ | 215 | $ | 340 | ||||||||
| Loans past due 90 days or more | — | 984 | — | 984 | ||||||||||||
| Troubled debt restructurings | — | — | — | — | ||||||||||||
| Total impaired loans | $ | 215 | $ | 1,324 | $ | 215 | $ | 1,324 | ||||||||
| Foreclosed assets | $ | — | — | $ | — | — | ||||||||||
| Impaired loans as percentage of average loans | .03 | % | .19 | % | .03 | % | .19 | % | ||||||||
| Third Quarter of | Nine Months Ended | |||||||||||||||
| (In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Allowance at beginning of period | $ | 10,215 | $ | 10,196 | $ | 10,205 | $ | 10,175 | ||||||||
| Provision charged to expense: | — | — | — | — | ||||||||||||
| Loans charged off | — | — | — | — | ||||||||||||
| Recoveries on loans previously charged off | 5 | 6 | 15 | 27 | ||||||||||||
| Net recoveries | 5 | 6 | 15 | 27 | ||||||||||||
| Allowance at end of period | $ | 10,220 | $ | 10,202 | $ | 10,220 | $ | 10,202 | ||||||||
| Loans outstanding: | ||||||||||||||||
| Average | $ | 778,046 | $ | 660,189 | $ | 705,541 | $ | 661,588 | ||||||||
| September 30 | 726,239 | 658,090 | 726,239 | 658,090 | ||||||||||||
| Ratio of ALLL to loans outstanding: | ||||||||||||||||
| Average | 1.42 | % | 1.55 | % | 1.45 | % | 1.54 | % | ||||||||
| September 30 | 1.41 | % | 1.55 | % | 1.41 | % | 1.55 | % | ||||||||
| Impaired loans: | ||||||||||||||||
| Nonaccrual loans | $ | — | $ | 215 | $ | — | $ | 215 | ||||||||
| Loans past due 90 days or more | — | — | — | — | ||||||||||||
| Troubled debt restructurings | — | — | — | — | ||||||||||||
| Total impaired loans | $ | — | $ | 215 | $ | — | $ | 215 | ||||||||
| Foreclosed assets | $ | — | — | $ | — | — | ||||||||||
| Impaired loans as percentage of average loans | — | .03 | % | — | .03 | % | ||||||||||
The Bank had no property carried as other real estate owned as of September 30, 20172018 or December 31, 2016.September 30, 2017.
-25--26-
Operating Expenses
Total operating expenses for the Third Quarter of 20172018 were up 6.3%13.9%, or $1,491,000,$3,488,000, compared to the Third Quarter of 20162017 and were up $4,735,00010.7%, or $7,914,000, for the Nine Months Ended 20172018 compared to the Nine Months Ended 2016.2017.
Personnel expense for the Third Quarter of 20172018 increased $1,104,000$2,324,000 compared to the Third Quarter of 20162017 and increased $3,117,000$6,334,000 to $57,384,000$63,718,000 for the Nine Months Ended 20172018 compared to the Nine Months Ended 20162017 due mainly to on-going strategic investment in technology and staff and technologyrequired to win new business and support new business,services growth with existing clients, address increasing cybersecurity risk, annual salary merit increases, and increased retirement plan costs.
Equipment expense for the Third Quarter of 20172018 increased $118,000,$192,000, or 10.5%15.5%, compared to the Third Quarter of 20162017 and increased $457,000,$404,000, or 13.9%10.8%, for the Nine Months Ended 20172018 from the Nine Months Ended 2016. This increase was2017. Outside service expense for the Third Quarter of 2018 increased $151,000, or 8.6%, compared to the Third Quarter of 2017 and $372,000, or 7.1%, for the Nine Months Ended 2018 from the Nine Months Ended 2017. These increases were the result of the continued strategic investment in technology.
Income tax expense for the Third Quarter of 2017 increased $541,000 compared to the Third Quarter of 2016 and increased $399,000 for the Nine Months Ended 2017 compared to the Nine Months Ended 2016. The effective tax rate was 25.9% and 23.0% for the Third Quarters of 2017 and 2016, respectively, and was 24.3% and 24.8% for the Nine Months Ended 2017 and 2016, respectively. The increase in Third Quarter of 2017 tax rate was the result of higher credits for investment in technology recorded last year. The decrease in the Nine Months Ended 2017 tax rate was the result of the adoption of ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
Financial Condition
Total assets at September 30, 20172018 were $1,556,750,000,$1,678,247,000, an increase of $51,911,000,$21,038,000, or 3.4%1.3%, from December 31, 2016.2017. The most significant changes in asset balances during this period were increases in loans of $66,516,000 in investment securities$40,008,000, other information services related assets of $25,901,000, and payments in excess of funding of $14,455,000.$21,977,000. This was partially offset by a decrease of $48,063,000 in cash and cash equivalents and a decrease of $24,645,000.$24,083,000 in investment securities. Changes in cash and cash equivalents reflect the Company’s daily liquidity position and are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.
Total liabilities at September 30, 20172018 were $1,332,795,000,$1,448,905,000, an increase of $35,991,000,$16,784,000, or 2.8%1.2%, from December 31, 2016.2017. Accounts and drafts payable at September 30, 20172018 were $687,233,000,$769,638,000, an increase of $44,946,000,$53,750,000, or 7.0%7.5%, from December 31, 2016.2017. Total deposits decreased $12,731,000,$43,364,000, or 2.0%6.4%, from December 31, 2016.2017. Total shareholders’ equity at September 30, 20172018 was $223,955,000,$229,342,000, a $15,920,000,$4,254,000, or 7.7%1.9%, increase from December 31, 2016.2017. Total shareholders’ equity increased as a result of net income of $23,211,000. This was offset by the change in accumulated other comprehensive loss of $9,987,000 and dividends paid of $9,342,000.
Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when payments clear and higher balances on days when payments are issued. For this reason, average balances are a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).
The increase in total shareholders’ equity of $15,920,000 resulted primarily from net income of $19,683,000 and a decrease of $5,326,000 in accumulated other comprehensive loss. These were offset by dividends paid of $7,725,000 and an increase in common shares in treasury of $1,961,000 resulting from treasury stock repurchases.
Liquidity and Capital Resources
The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments, was $242,098,000$180,047,000 at September 30, 2017,2018, a decrease of $24,645,000,$48,063,000, or 9.2%21.1%, from December 31, 2016.2017. At September 30, 2017,2018, these assets represented 15.6%10.7% of total assets. These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $457,068,000$446,440,000 at September 30, 2017, an increase2018, a decrease of $66,516,000$24,083,000 from December 31, 2016.2017. These assets represented 29.4%26.6% of total assets at September 30, 2017.2018. Of this total, 91%75% were state and political subdivision securities. Of the total portfolio, 4.9%3.1% mature in one year or less, 12.6%27.2% mature in one to five years, and 82.5%69.7% mature in five or more years.
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The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $68,000,000$83,000,000 at the following banks: US Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $5,000,000;$20,000,000; and JPM Chase Bank, $6,000,000. The Bank also has secured lines of credit with the Federal Home Loan Bank of $211,513,000$189,918,000 collateralized by commercial mortgage loans. The Company also has secured lines of credit with UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of September 30, 20172018 or December 31, 2016.2017.
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The deposits of the Company’s banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank. However, an increasingly competitive interest rate environment has resulted in deposit outflow. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $28,858,000$32,000,000 of CDARS deposits and interest-bearing demand deposits include $84,763,000$73,562,000 of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.
Net cash flows provided by operating activities were $38,796,000 for the Nine Months Ended 2018 compared with $27,936,000 for the Nine Months Endedended 2017, compared with $25,615,000 for the Nine Months ended 2016, an increase of $2,321,000.$10,860,000. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2017,2018, which are estimated to range from $5$6 million to $7$9 million.
The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”
There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business opportunities available to the Company.
As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in a low interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer-term relatively higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.
The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable.
The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income.
New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.
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The Basel III Capital Rules require FDIC insured depository institutions to meet and maintain several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets and, for non-advanced approaches institutions like Cass that have exercised ana one-time opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The calculation of all types of regulatory capital is subject to deductions and adjustments specified in applicable regulations.
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In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:
| September 30, 2017 | December 31, 2016 | |||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||
| Total capital (to risk-weighted assets) | ||||||||||||
| Cass Information Systems, Inc. | $ | 229,044 | 22.97 | % | $ | 219,747 | 22.75 | % | ||||
| Cass Commercial Bank | 118,295 | 17.13 | % | 110,576 | 16.72 | % | ||||||
| Common Equity Tier I Capital (to risk-weighted assets) | ||||||||||||
| Cass Information Systems, Inc. | $ | 218,842 | 21.95 | % | $ | 209,572 | 21.70 | % | ||||
| Cass Commercial Bank | 110,461 | 16.00 | % | 102,769 | 15.54 | % | ||||||
| Tier I capital (to risk-weighted assets) | ||||||||||||
| Cass Information Systems, Inc. | $ | 218,842 | 21.95 | % | $ | 209,572 | 21.70 | % | ||||
| Cass Commercial Bank | 110,461 | 16.00 | % | 102,769 | 15.54 | % | ||||||
| Tier I capital (to average assets) | ||||||||||||
| Cass Information Systems, Inc. | $ | 218,842 | 13.80 | % | $ | 209,572 | 13.83 | % | ||||
| Cass Commercial Bank | 110,461 | 14.90 | % | 102,769 | 13.98 | % | ||||||
On October 24, 2017, the Company’s board of directors declared a 10% common stock dividend payable on December 15, 2017 to shareholders of record on December 5, 2017. Shareholders will receive one additional share of Cass common stock for each 10 shares of common stock owned. No fractional shares will be issued. Shareholders will receive cash for any fractional shares owned based on the share price reported by the Nasdaq Stock Market at the close of trading on December 5, 2017.
Additionally, on October 24, 2017, the Company’s board of directors declared a fourth quarter cash dividend of $0.24 per share payable on December 15, 2017 to shareholders of record on December 5, 2017. The cash dividend will apply to all shares of common stock held after the 10% common stock dividend is completed.
| September 30, 2018 | December 31, 2017 | |||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||
| Total capital (to risk-weighted assets): | ||||||||||||
| Cass Information Systems, Inc. | $ | 248,488 | 21,42 | % | $ | 234,389 | 22.53 | % | ||||
| Cass Commercial Bank | 133,916 | 18.23 | % | 122,440 | 17.01 | % | ||||||
| Common Equity Tier I Capital (to risk-weighted assets): | ||||||||||||
| Cass Information Systems, Inc. | $ | 238,267 | 20.54 | % | $ | 224,184 | 21.55 | % | ||||
| Cass Commercial Bank | 126,063 | 17.16 | % | 114,603 | 15.93 | % | ||||||
| Tier I capital (to risk-weighted assets): | ||||||||||||
| Cass Information Systems, Inc. | $ | 238,267 | 20.54 | % | $ | 224,184 | 21.55 | % | ||||
| Cass Commercial Bank | 126,063 | 17.16 | % | 114,603 | 15.93 | % | ||||||
| Tier I capital (to average assets): | ||||||||||||
| Cass Information Systems, Inc. | $ | 238,267 | 14.55 | % | $ | 224,184 | 13.87 | % | ||||
| Cass Commercial Bank | 126,063 | 14.78 | % | 114,603 | 14.99 | % | ||||||
Inflation
The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company’s consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.
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Impact of New and Not Yet Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09 – Revenue from Contracts with Customers. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB ASC. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. Under the ASU, the amendments are effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.
In February 2016, the FASB issued ASUAccounting Standards Update (“ASU”) No. 2016-02 –Leases (ASC Topic 842). The ASU improves financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Consistent with current Generally Accepted Accounting Principlesgenerally accepted accounting principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. A third-party vendor solution has been selected to assist in the application of ASU 2016-02. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.
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In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments—Instruments –Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets held. Under this standard, itthe Company will be required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. The impact of the adoption of this ASU is currently being evaluated.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15.0% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company’s most recent evaluation, management does not believe the Company’s risk position at September 30, 20172018 has changed materially from that at December 31, 2016.2017.
ITEM 4. | CONTROLS AND PROCEDURES |
The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.
There were no changes in the Third Quarter of 20172018 in the Company’s internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).
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| PART II. | OTHER INFORMATION | |
| ITEM 1. | LEGAL PROCEEDINGS | |
| The Company is the subject of various pending or threatened legal actions and proceedings,including those that arise in the ordinary course of business. Management believes the outcome ofall such proceedings will not have a material effect on the businesses or financial conditions of theCompany or its subsidiaries. | ||
| ITEM 1A. | RISK FACTORS | |
| The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year endedDecember 31, | ||
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
| Total Number | Maximum | |||||||||
| of Shares | Number of | |||||||||
| Purchased as | Shares that | |||||||||
| Part of | May Yet Be | |||||||||
| Total | Publicly | Purchased | ||||||||
| Number of | Announced | Under the | ||||||||
| Shares | Average Price | Plans or | Plans or | |||||||
| Period | Purchased | Paid per Share | Programs1 | Programs | ||||||
| July 1, 2017 – | — | — | — | 500,000 | ||||||
| July 31, 2017 | ||||||||||
| August 1, 2017– | ||||||||||
| August 31, 2017 | 13,242 | $ | 59.80 | 13,242 | 486,758 | |||||
| September 1, 2017 – | ||||||||||
| September 30, 2017 | 24,800 | $ | 59.59 | 24,800 | 461,958 | |||||
| Total | 38,042 | $ | 59.67 | 38,042 | 461,958 | |||||
| |||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |
| None. | ||
| ITEM 4. | MINE SAFETY DISCLOSURES | |
| Not applicable. | ||
| ITEM 5. | OTHER INFORMATION | |
| (a) | None. | |
| (b) | There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the Third Quarter of |
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| ITEM 6. | EXHIBITS | |
| Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 101.INS XBRL Instance Document. | ||
| Exhibit 101.SCH XBRL Taxonomy Extension Schema Document. | ||
| Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. | ||
| Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document. | ||
| Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. | ||
| Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CASS INFORMATION SYSTEMS, INC. | |||
| DATE: November 7, | 2018 | By | /s/ Eric H. Brunngraber |
| Eric H. Brunngraber | |||
| Chairman, President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| DATE: November 7, | 2018 | By | /s/ P. Stephen Appelbaum |
| P. Stephen Appelbaum | |||
| Executive Vice President and Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||
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