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, 2018March 31, 2019           

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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)

(314) 506-5500
(Registrant’s telephone number, including area code)
_________________

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, 2018:April 25, 2019: Common stock, par value $.50 per share – 12,289,37714,526,274 shares outstanding.

-1-

TABLE OF CONTENTS

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 PartinPart I, Item 1A, “Risk Factors” of the Company’s 2017Company’s2018 Annual Report on Form 10-K, filed withfiledwith the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our futureourfuture 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.

-2-

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

-3-

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

-4-

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements.

-5-

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements.

-6-

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in Thousands)

See accompanying notes to unaudited consolidated financial statements.

-7-

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 in the unaudited consolidated financial statements and accompanying notes have been restated to give effect to the 10%20% stock dividend issuedpaid on December 15, 2017.14, 2018. Certain amounts in prior-period financial statements have been reclassified to conform to the currentthecurrent period’s presentation. Forpresentation.For further information, refer to the audited consolidated financial statements and related footnotes included in Cass InformationCassInformation System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2017.2018.

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 – 2–Intangible Assets

The Company accounts for intangible assets in accordance with FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Details of the Company’s intangible assets are as follows:

¹Amortization through December 31, 2001 prior to adoption of FASB ASC 350.

-7-

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 15 years. Amortization of intangible assets amounted to $331,000$107,000 and $317,000$110,000 for the nine-monththree-month periods ended September 30,March 31, 2019 and 2018, and 2017, respectively. Estimated annual amortization of intangibles is as follows: $442,000 in 2018, $412,000 in 2019, $406,000 in each of 2020 and 2021, and $88,000 in 2022.each of 2022 and 2023.

Note 3 – 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-dilutiveantidilutive shares in the three and nine months ended September 30, 2018March 31, 2019 and 2017.2018. The calculations of basic and diluted earnings per share are as follows:

-8-

Note 4 – 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 commonCompany’scommon stock. As restored by the Board of Directors on October 24, 2017,January 29, 2019, 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 0 and 41,846107,815 shares during the three-month periodsperiod ended March 31, 2019 and 15,547 and 41,84611,456 shares during the nine-month periodsthree-month period ended September 30, 2018 and 2017, respectively.March 31, 2018. As of September 30, 2018, 484,453March 31, 2019, 497,000 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.

Note 5 – 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 and processing requirements.

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 faith-based ministries as well as supporting the banking needs of the Information Services segment.

The Company’s accounting policies for segments are the same as those described in the summary of significant accountingsummaryof significantaccounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. Management evaluates segment performance based on tax-equivalized (as defined in the footnote to the chart on the following table)tax-equivalized* pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value.

-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.

Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Segment interest income is a function of the relative share of average funding sources generated by each segment multiplied by the following rates:

Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other.

-9-

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--9-

Note 6 – 6–Loans by Type

A summary of loan categories is as follows:

-10-

The following table presents the aging of loans by loan categories at September 30, 2018March 31, 2019 and December 31, 2017:2018:

-11-

The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of September 30, 2018March 31, 2019 and December 31, 2017:2018:

-11-

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,ASC310, “Allowance for Credit Losses.” The fair value of the collateral is basedupon an observable market price or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 3. There were no impairednon-accrual loans, loans delinquent 90 days or more and still accruing interest, or loans classified as troubled debt restructuring at September 30, 2018 andMarch 31, 2019 or December 31, 2017.2018.

There were no foreclosed loans recorded as other real estate owned (included in other assets) as of September 30, 2018 andMarch 31, 2019 or December 31, 2017.2018.

A summary of the activity in the allowance for loan losses from December 31, 2018 to March 31, 2019 is as follows:

A summary of the activity in the allowance for loan losses from December 31, 2017 to September 30,March 31, 2018 is as follows:

-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 – 7–Commitments and Contingencies

In the normal course of business, the Company is party to activities that contain credit, market and operational risks thatrisksthat are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditionalincludetraditional 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.ofcredit. 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, 2018March 31, 2019 and December 31, 2017,2018, no amounts have been accrued for any estimated losses for these instruments.

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. At September 30, 2018,March 31, 2019, the balance of unused loan commitments, standby and commercial letters of credit were $73,830,000, $12,917,000,$145,100,000, $11,029,000, and $3,740,000,$3,791,000, 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’sonmanagement’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.

-12-

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at September 30, 2018:March 31, 2019:

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 legaltheselegal actions and proceedings will not have a material effect upon the Company’s consolidated financial position or resultsorresults of operations.

-13-

Note 8 – 8–Stock-Based Compensation

The Amended and Restated Omnibus Stock and Performance Compensation PlanCompensationPlan (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 mayCompanymay issue shares out of treasury stock for these awards. During the ninethree months ended September 30, 2018, 28,527March 31, 2019, 25,124 restricted shares, 29,27836,403 performance-based restricted shares, and 0 SARs were granted under the Omnibus Plan.

Restricted Stock

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, 2018,March 31, 2019, the total unrecognized compensation expense related to non-vested restricted shares was $1,750,000,$2,150,000, and the related weighted-average period over which it is expected to be recognized is approximately 0.921.15 years.

Following is a summary of the activity of the restricted stock: