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        June 30, 2018          2019         

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOFACT OF 1934

For the transition period from  to 

Commission File No. 000-20827

________________

CASSINFORMATIONSYSTEMS,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, Missouri63131
(Address of principal executive offices)(Zip Code)

(314) 506-5500

(Registrant’s telephone number, including area code)
_________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolsName of each exchange on which registered
Common stock, par value $.50CASSThe Nasdaq Global Select Market
________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes          XNo       No      

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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          XNo       No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large Accelerated Filer    XAccelerated Filer  

Accelerated Filer 

Non-Accelerated Filer Smaller Reporting Company Emerging Growth Company   
(Do not check if a smaller reporting company)

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. _____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No      No          X    X    

The number of shares outstanding of the registrant's only class of common stock as of October 30, 2018:July 26, 2019: Common stock, par value $.50 per share – 12,289,37714,489,374 shares outstanding.

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TABLE OF CONTENTS

PART I – Financial Information
      
Item 1. FINANCIAL STATEMENTS
Item 1.     FINANCIAL STATEMENTS
     
Consolidated Balance Sheets
September
June 30, 20182019 (unaudited) and December 31, 201720183
     
Consolidated Statements of Income
Three and ninesix months ended SeptemberJune 30, 2019 and 2018 and 2017 (unaudited)4
     
Consolidated Statements of Comprehensive Income
Three and ninesix months ended SeptemberJune 30, 2019 and 2018 and 2017 (unaudited)5
     
Consolidated Statements of Cash Flows
Nine
Six months ended SeptemberJune 30, 2019 and 2018 and 2017 (unaudited)6
     
Notes to Consolidated Financial Statements (unaudited)of Shareholders’ Equity
Three and six months ended June 30, 2019 and 2018 (unaudited)7
     
Notes to Consolidated Financial Statements (unaudited)8
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1920
     
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK3031
     
Item 4.CONTROLS AND PROCEDURES3031
     
PART II – Other Information– Items 1. – 6.31
  
SIGNATURESSIGNATURES3233

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 20172018 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.

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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)

     September 30, June 30, 
2018December 31, 2019 December 31,
(Unaudited)     2017     (Unaudited)     2018
Assets   
Cash and due from banks$11,835$17,422 $16,811 $15,042
Interest-bearing deposits in other financial institutions145,803152,056 73,335 179,281
Federal funds sold and other short-term investments22,40958,632 93,367 36,610
Cash and cash equivalents180,047228,110 183,513 230,933
Securities available-for-sale, at fair value446,440470,523 435,391 441,534
    
Loans726,239686,231 790,552 721,587
Less: Allowance for loan losses10,22010,205 10,506 10,225
Loans, net716,019676,026 780,046 711,362
Premises and equipment, net22,61521,586 21,156 22,031
Investment in bank-owned life insurance17,27016,927 17,571 17,384
Payments in excess of funding161,080139,103 174,348 160,777
Goodwill12,56912,569 12,569 12,569
Other intangible assets, net1,6641,996 1,345 1,554
Other assets120,54390,369 102,745 97,032
Total assets$1,678,247$1,657,209 $     1,728,684 $     1,695,176
 
Liabilities and Shareholders’ Equity 
Liabilities: 
Deposits: 
Noninterest-bearing$270,395$281,541 $259,082 $313,258
Interest-bearing364,329396,547 377,547 408,668
Total deposits634,724678,088 636,629 721,926
Accounts and drafts payable769,638715,888 794,871  694,360
Other liabilities44,54338,145 56,763  49,042
Total liabilities        1,448,905        1,432,121 1,488,263  1,465,328
   
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 13,047,997 shares issued at September 30, 2018 and December 31, 20176,5246,524
Common stock, par value $.50 per share; 40,000,000 shares authorized and 15,505,772 shares issued at June 30, 2019 and December 31, 2018 7,753  7,753
Additional paid-in capital204,971204,631 205,463  205,770
Retained earnings73,18359,314 83,470  75,171
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)
Common shares in treasury, at cost (1,016,398 shares at June 30, 2019 and 894,486 shares at December 31, 2018) (46,333)  (39,974)
Accumulated other comprehensive loss(23,307)(13,320) (9,932)  (18,872)
Total shareholders’ equity229,342225,088 240,421  229,848
Total liabilities and shareholders’ equity$1,678,247$1,657,209 $1,728,684 $1,695,176

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in Thousands except Per Share Data)

Three Months EndedNine Months EndedThree Months Ended  Six Months Ended
September 30,September 30,June 30,June 30,
     2018     2017     2018     2017     2019     2018     2019     2018
Fee Revenue and Other Income:
Information services payment and processing revenue$       26,020$       23,761$       76,068$       69,332$26,852$25,221$     53,309$50,048
Bank service fees300327994998301359677694
Losses on sales of securities——(42)—
Gains (losses) on sales of securities8(55)19(42)
Other115119429448211115380314
Total fee revenue and other income26,43524,20777,44970,77827,37225,64054,38551,014
Interest Income:
Interest and fees on loans8,3677,20923,83221,2669,3877,92318,01615,465
Interest and dividends on securities:
Taxable6181071,4282686394891,281810
Exempt from federal income taxes2,1112,6057,0087,8651,9942,3324,0314,897
Interest on federal funds sold and other short-term investments1,1197442,7481,5971,3077692,8961,629
Total interest income12,21510,66535,01630,99613,32711,51326,22422,801
Interest Expense:
Interest on deposits1,0295712,5021,5211,3057942,5951,473
Net interest income11,18610,09432,51429,47512,02210,71923,62921,328
Provision for loan losses——————250—
Net interest income after provision for loan losses11,18610,09432,51429,47512,02210,71923,37921,328
Total net revenue37,62134,301109,963100,25339,39436,35977,76472,342
Operating Expense:
Personnel21,74719,42363,71857,38422,80321,58945,08041,971
Occupancy9759032,7542,6349989251,9571,779
Equipment1,4341,2424,1503,7461,5521,4083,0212,716
Amortization of intangible assets110110331317102111209221
Other operating expense4,2643,36411,22210,1804,5163,4308,1666,958
Total operating expense28,53025,04282,17574,261     29,971     27,46358,433     53,645
Income before income tax expense9,0919,25927,78825,9929,4238,89619,33118,697
Income tax expense1,4812,3964,5776,3091,7391,3873,4843,096
Net income$7,610$6,863$23,211$19,683$7,684$7,509$15,847$15,601
Basic earnings per share$.62$.56$1.90$1.61$.53$.51$1.10$1.06
Diluted earnings per share.61.551.871.58.52.501.081.05

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in Thousands)

Three Months EndedNine Months Ended Three Months Ended Six Months Ended
September 30,September 30, June 30, June 30,
     2018     2017     2018     2017     2019     2018     2019     2018
Comprehensive income:
Comprehensive Income: 
Net income$       7,610$       6,863$      23,211$      19,683 $7,684 $7,509 $15,847 $15,601
Other comprehensive income: 
Net unrealized (loss) gain on securities available-for-sale(2,835)(99)(13,029)8,246
Net unrealized gain (loss) on securities available-for-sale 4,609 (420) 11,746      (10,194)
Tax effect675373,101(3,063)      (1,097) 100 (2,796) 2,426
Reclassification adjustments for losses included in net income——42—
Reclassification adjustments for (gains) losses included in net income (8) 55 (19) 42
Tax effect——(10)— 2 (13) 5 (10)
Foreign currency translation adjustments(21)41(91)143 18 (109) 4 (70)
Total comprehensive income$5,429$6,842$13,224$25,009 $11,208 $     7,122 $     24,787 $7,795

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

Nine Months Ended Six Months Ended
September 30, June 30,
     2018     2017     2019     2018
Cash Flows From Operating Activities:    
Net income$23,211$19,683 $15,847 $15,601
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization8,5248,361 5,366 5,822
Net losses on sales of securities42—
Net (gains) losses on sales of securities (19) 42
Stock-based compensation expense2,2381,658 1,417 1,477
Increase in income tax liability773551
Provision for loan losses 250 —
(Decrease) increase in income tax liability (1,054) 1,637
Increase in pension liability3,6883,476 2,590 2,463
Decrease (increase) in accounts receivable4,027(3,637)
(Increase) decrease in accounts receivable (1,351) 3,473
Other operating activities, net(3,707)(2,156) 3,327 (5,419)
Net cash provided by operating activities38,79627,936 26,373 25,096
        
Cash Flows From Investing Activities:    
Proceeds from sales of securities available-for-sale58,520— 4,648 58,520
Proceeds from maturities of securities available-for-sale26,04133,856 10,161 17,374
Purchase of securities available-for-sale(78,772)(97,473) — (60,108)
Net (increase) decrease in loans(39,993)6,803
Net increase in payments in excess of funding(21,977)(14,455)
Net increase in loans (68,934) (28,620)
Increase in payments in excess of funding (13,571) (14,733)
Purchases of premises and equipment, net(3,956)(2,780) (1,202) (2,800)
Net cash used in investing activities(60,137)(74,049)      (68,898) (30,367)
        
Cash Flows From Financing Activities:    
Net decrease in noninterest-bearing demand deposits(11,146)(3,243) (54,176) (16,185)
Net decrease in interest-bearing demand and savings deposits(35,988)(6,504) (32,058) (40,588)
Net increase (decrease) in time deposits3,771(2,984)
Net increase in accounts and drafts payable27,84944,946
Net increase in time deposits 937 4,422
Net increase (decrease) in accounts and drafts payable 96,033 (36,538)
Cash dividends paid(9,342)(7,725) (7,548) (6,144)
Purchase of common shares for treasury(1,409)(2,270) (7,799) (1,408)
Other financing activities, net(457)(752) (284) (195)
Net cash (used in) provided by financing activities(26,722)21,468
Net cash used in financing activities (4,895) (96,636)
Net decrease in cash and cash equivalents      (48,063)      (24,645) (47,420)      (101,907)
Cash and cash equivalents at beginning of period228,110266,743 230,933 228,110
Cash and cash equivalents at end of period$180,047$242,098 $183,513 $126,203
        
Supplemental information:    
Cash paid for interest$2,459$1,520 $2,496 $1,459
Cash paid for income taxes3,7765,758 4,545 1,445

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2019
(Unaudited)
(Dollars in Thousands except Per Share Data)

  Accumulated
  Additional  Other
  Common  Paid-in  Retained  Treasury  Comprehensive
      Stock      Capital      Earnings      Stock      (Loss) Income      Total
Balance, March 31, 2018$     6,524$     204,479$     64,458$     (32,301)$      (20,738)$     222,422
      
Net income7,5097,509
Cash dividends ($.20 per share)(3,196)(3,196)
Issuance of 8,972 common shares pursuant to stock-based compensation plan, net(277)29417
Exercise of SARs(354)118(236)
Stock-based compensation expense839839
Purchase of 720 common shares(354)(354)
Other comprehensive loss(388)(388)
Balance, June 30, 2018$6,524$204,687$68,771$(32,243)$(21,126)$226,613
      
Balance, March 31, 2019$7,753$205,310$79,558$(44,685)$(13,456)$234,480
      
Net income7,6847,684
Cash dividends ($.26 per share)(3,772)(3,772)
Issuance of 8,968 common shares pursuant to stock-based compensation plan, net(407)45043
Exercise of SARs—
Stock-based compensation expense560560
Purchase of 46,778 common shares(2,098)(2,098)
Other comprehensive income3,5243,524
Balance, June 30, 2019$7,753$205,463$83,470$(46,333)$(9,932)$240,421
      
  Accumulated
  Additional  Other
  Common  Paid-in  Retained  Treasury  Comprehensive
  Stock  Capital  Earnings  Stock  (Loss) Income  Total
Balance, December 31, 2017$6,524$204,631$59,314$(32,061)$(13,320)$225,088
      
Net income15,60115,601
Cash dividends ($.20 per share)(6,144)(6,144)
Issuance of 32,428 common shares pursuant to stock-based compensation plan, net(998)551(447)
Exercise of SARs(423)150(273)
Stock-based compensation expense1,4771,477
Purchase of 12,176 common shares(883)(883)
Other comprehensive loss(7,806)(7,806)
Balance, June 30, 2018$6,524$204,687$68,771$(32,243)$(21,126)$226,613
     
     
Balance, December 31, 2018$7,753$205,770$75,171$(39,974)$(18,872)$229,848
      
Net income15,84715,847
Cash dividends ($.26 per share)(7,548)(7,548)
Issuance of 34,092 common shares pursuant to stock-based compensation plan, net(1,421)1,276(145)
Exercise of SARs(303)164(139)
Stock-based compensation expense1,4171,417
Purchase of 154,593 common shares(7,799)(7,799)
Other comprehensive income8,9408,940
Balance, June 30, 2019$7,753$205,463$83,470$(46,333)$(9,932)$240,421

See accompanying notes to unaudited consolidated financial statements.

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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 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 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, 20172018.

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 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:

September 30, 2018December 31, 2017 June 30, 2019 December 31, 2018
Gross Carrying AccumulatedGross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands)     Amount     Amortization     Amount     Amortization     Amount     Amortization     Amount     Amortization
Assets eligible for amortization:        
Customer lists$4,288$(2,979)$4,288$(2,702) $4,288 $(3,256) $4,288 $(3,071)
Patents72(15)72(12) 72 (18) 72 (16)
Non-compete agreements332(317)332(291) 332 (332) 332 (326)
Software234(234)234(234) 234 (234) 234 (234)
Other500(217)500(191) 500 (241) 500 (225)
Unamortized intangible assets:        
Goodwill112,796(227)12,796(227) 12,796 (227) 12,796 (227)
Total intangible assets$18,222$(3,989)$18,222$(3,657) $18,222 $(4,308) $18,222 $(4,099)
1Amortization through December 31, 2001 prior to adoption of FASB ASC 350.

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

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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$209,000 and $317,000$221,000 for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, 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.

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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 ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. The calculations of basic and diluted earnings per share are as follows:

Three Months EndedNine Months EndedThree Months EndedSix Months Ended
September 30,September 30,June 30,June 30,
(In thousands except share and per share data)     2018     2017     2018     2017     2019     2018     2019     2018
Basic:
Basic
Net income$7,610$6,863$23,211$19,683$     7,684$     7,509$     15,847$     15,601
Weighted-average common shares outstanding     12,245,975     12,251,084     12,239,678     12,257,33714,434,23214,687,88214,444,82114,683,773
Basic earnings per share$.62$.56$1.90$1.61$.53$.51$1.10$1.06
        
Diluted:
Diluted
Net income$7,610$6,863$23,211$19,683$7,684$7,509$15,847$15,601
Weighted-average common shares outstanding12,245,97512,251,08412,239,67812,257,33714,434,23214,687,88214,444,82114,683,773
Effect of dilutive restricted stock and stock appreciation rights206,388176,767200,315179,029258,032246,330255,613236,666
Weighted-average common shares outstanding assuming dilution assuming dilution12,452,36312,427,85112,439,99312,436,366
Weighted-average common shares outstanding assuming dilution14,692,26414,934,21214,700,43414,920,439
Diluted earnings per share$.61$.55$1.87$1.58$.52$.50$1.08$1.05

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 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 046,778 and 41,8467,200 shares during the three-month periods ended June 30, 2019 and 15,5472018 and 41,846 during154,593 and 18,656 shares for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. As of SeptemberJune 30, 2018, 484,4532019, 450,222 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 – 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 accounting 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.

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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:

●

Information Services – onefixed or more fixedvariable 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’sBanking Services’ earning assets.

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:

Corporate,Corporate,
InformationBankingEliminationsInformationBankingEliminations
(In thousands)     Services     Services     and Other     Total     Services     Services     and Other     Total
Three Months Ended September 30, 2018
Three Months Ended June 30, 2019:
Fee income from customers$26,263$253$(81)$26,435$27,227$     392$(247)$     27,372
Interest income*5,7035,8561,21912,7786,3367,666(144)13,858
Interest expense—1,029—1,029—1,305—1,305
Intersegment income (expense)—467(467)——535(535)—
Tax-equivalized pre-tax income*6,5252,5385919,6546,7913,555(392)9,954
Goodwill12,433136—12,56912,433136—12,569
Other intangible assets, net1,664——1,6641,345——1,345
Total Assets       903,055     847,673        (72,481)     1,678,247
Funding Sources650,267550,594—1,200,861
Three Months Ended September 30, 2017
Total assets934,620816,661(22,597)1,728,684
Average funding sources650,231570,980—1,221,211
Three Months Ended June 30, 2018:
Fee income from customers$23,809$279$119$24,207$25,262$318$60$25,640
Interest income*5,4655,89472512,0846,0176,795(675)12,137
Interest expense—571—571—794—794
Intersegment income (expense)—339(339)——486(486)—
Tax-equivalized pre-tax income*7,1303,17936910,6786,7503,385(615)9,520
Goodwill12,433136—12,56912,433136—12,569
Other intangible assets, net2,106——2,1061,775——1,775
Total Assets820,596738,478(2,324)1,556,750
Funding Sources631,539601,355—1,232,894
Nine Months Ended September 30, 2018
Total assets807,571806,560(43,826)1,570,305
Average funding sources617,287553,237—1,170,524
Six Months Ended June 30, 2019:
Fee income from customers$76,397$947$105$77,449$54,023$783$(421)$54,385
Interest income*16,55317,3422,99636,89112,51315,152(369)27,296
Interest expense—2,502—2,502—2,595—2,595
Intersegment income (expense)—1,415(1,415)——1,054(1,054)—
Tax-equivalized pre-tax income*19,3268,8141,52329,66314,3786,815(790)20,403
Goodwill12,433136—12,56912,433136—12,569
Other intangible assets, net1,664——1,6641,345——1,345
Total Assets903,055847,673(72,481)1,678,247
Funding Sources637,508566,390—1,203,898
Nine Months Ended September 30, 2017
Total assets934,620816,661(22,597)1,728,684
Average funding sources648,918581,034—1,229,952
Six Months Ended June 30, 2018:
Fee income from customers$69,453$958$367$70,778$50,134$694$186$51,014
Interest income*15,23717,6022,44735,28612,17513,690(1,752)24,113
Interest expense—1,521—1,521—1,473—1,473
Intersegment income (expense)—962(962)——948(948)—
Tax-equivalized pre-tax income*18,9469,9221,41430,28214,1257,449(1,566)20,008
Goodwill12,433136—12,56912,433136—12,569
Other intangible assets, net2,106——2,1061,775——1,775
Total Assets820,596738,478(2,324)1,556,750
Funding Sources596,919593,709—1,190,628
Total assets807,571806,560(43,826)1,570,305
Average funding sources631,022574,419—1,205,441
*Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2019 and 2018. The tax-equivalent adjustment was approximately $531,000 and $624,000 for the Second Quarter of 2019 and 2018, respectively, and $1,072,000 and $1,311,000 for the First Half of 2019 and 2018, respectively.

*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:

September 30,December 31,     June 30,     December 31,
(In thousands)     2018     2017 2019 2018
Commercial and industrial$           270,854$          236,394 $     348,176 $     277,091
Real estate:      
Commercial:      
Mortgage92,97294,675  85,571  95,605
Construction22,8839,359  18,609  11,858
Faith-based:      
Mortgage307,679316,073  319,083  316,147
Construction30,83825,948  17,438  20,576
Industrial Revenue Bonds9213,374
Other92408  1,675  310
Total loans$726,239$686,231 $790,552 $721,587

The following table presents the aging of loans by loan categories at SeptemberJune 30, 20182019 and December 31, 2017:2018:

PerformingNonperforming
PerformingNonperforming                90        
90 DaysDays
30-5960-89andNon-Total30-5960-89andNon-Total
(In thousands)     Current     Days     Days     Over     accrual     LoansCurrentDaysDaysOveraccrualLoans
September 30, 2018
June 30, 2019
Commercial and industrial$     270,854$         —$         —$         —$         —$     270,854$    348,176$    —$    —$    —$    —$    348,176
Real estate:
Commercial:
Mortgage92,972————92,97285,571————85,571
Construction22,883————22,88318,609————18,609
Faith-based:
Mortgage307,679————307,679319,083————319,083
Construction30,838————30,83817,438————17,438
Industrial revenue bonds921————921
Other92————921,675————1,675
Total$726,239$—$—$—$—$726,239$790,552$—$—$—$—$790,552
December 31, 2017
December 31, 2018
Commercial and industrial$236,394$—$—$—$—$236,394$277,091$—$—$—$—$277,091
Real estate:
Commercial:
Mortgage94,675————94,67595,605————95,605
Construction9,359————9,35911,858————11,858
Faith-based:
Mortgage316,073————316,073316,147————316,147
Construction25,948————25,94820,576————20,576
Industrial revenue bonds3,374————3,374
Other408————408310————310
Total$686,231$—$—$—$—$686,231$721,587$—$—$—$—$721,587

-11-

The following table presents the credit exposure of the loan portfolio by internal credit grade as of SeptemberJune 30, 20182019 and December 31, 2017:2018:

LoansPerformingNonperformingLoansPerformingNonperforming
Subject toLoans Subject toLoans SubjectSubject toLoans Subject toLoans Subject
NormalSpecialto SpecialNormalSpecialto Special
(In thousands)     Monitoring1     Monitoring2     Monitoring2     Total LoansMonitoring1Monitoring2Monitoring2Total Loans
September 30, 2018
June 30, 2019                     
Commercial and industrial$     267,696$     3,158$     —$     270,854$    347,416$    760$    —$    348,176
Real estate:
Commercial:
Mortgage91,998974—92,97285,434137—85,571
Construction22,883——22,88318,609——18,609
Faith-based:
Mortgage307,59683—307,679317,9171,166—319,083
Construction30,838——30,83817,438——17,438
Industrial Revenue Bonds921——921
Other92——921,675——1,675
Total$722,024$4,215$—$726,239$788,489$2,063$—$790,552
December 31, 2017
December 31, 2018
Commercial and industrial$234,271$2,123$—$236,394$275,308$1,783$—$277,091
Real estate:
Commercial:
Mortgage93,788887—94,67595,447158—95,605
Construction9,359——9,35911,858——11,858
Faith-based:
Mortgage316,04231—316,073314,9401,207—316,147
Construction25,948——25,94820,576——20,576
Industrial revenue bonds3,374——3,374
Other408——408310——310
Total$683,190$3,041$—$686,231$718,439$3,148$—$721,587
1Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligations.
2Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention.

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 impaired loans, loans delinquent 90 days or more and still accruing, or loans classified as troubled debt restructuringrestructurings at SeptemberJune 30, 20182019 and December 31, 2017.2018.

There were no foreclosed loans recorded as other real estate owned as of SeptemberJune 30, 20182019 and December 31, 2017.2018.

A summary of the activity in the allowance for loan losses from December 31, 2018 to June 30, 2019 is as follows:

December 31,Charge-June 30,
(In thousands)2018OffsRecoveriesProvision2019
Commercial and industrial    $    4,179    $    —    $    31    $    1,058    $    5,268
Real estate:
Commercial:
Mortgage1,417——(148)1,269
Construction89——51140
Church, church-related:
Mortgage3,961——363,997
Construction155——(24)131
Other424——(723)(299)
Total$10,225$—$31$250$10,506

-12-

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

December 31,Charge-September 30,
(In thousands)     2017     Offs     Recoveries     Provision2018
Commercial and industrial$     3,652$     —$     15$     535     $     4,202
Real estate:
Commercial:
Mortgage1,394——(9)1,385
Construction70——100170
Faith-based:
Mortgage3,962——(105)3,857
Construction196——34230
Industrial Revenue Bonds52——(38)14
Other879——(517)362
Total$10,205$—$15$—$10,220

-12-

A summary of the activity in the allowance for loan losses from December 31, 2016 to September 30, 2017 is as follows:

December 31,Charge-September 30,    December 31,    Charge-            June 30,
(In thousands)     2016     Offs     Recoveries     Provision     20172017OffsRecoveriesProvision2018
Commercial and industrial$3,261$—$27$(61)$3,227$    3,652$    —$    10$    311$    3,973
Real estate:
Commercial:
Mortgage1,662——(160)1,5021,394——(80)1,314
Construction47——5410170——90160
Faith-based:
Church, church-related:
Mortgage4,027——204,0473,962——(71)3,891
Construction85——(26)59196——68264
Industrial Revenue Bonds101——(37)64
Industrial revenue bonds52——(25)27
Other992——2101,202879——(293)586
Total$10,175$—$27$—$10,202$10,205$—$10$—$10,215

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 SeptemberJune 30, 20182019 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 SeptemberJune 30, 2018,2019, the balancebalances of unused loan commitments, standby and commercial letters of credit were $73,830,000, $12,917,000,$145,871,000, $9,927,000, and $3,740,000,$2,908,000, 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.

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

Amount of Commitment Expiration per PeriodAmount of Commitment Expiration per Period
Less than1-33-5Over 5          Less than     1-3     3-5     Over 5
(In thousands)     Total     1 Year     Years     Years     YearsTotal1 Year YearsYearsYears
Operating lease commitments$     10,075$     1,614$     3,570$     2,431$     2,460
Time deposits56,26943,03310,7692,467—73,39449,16521,8122,417—
Total$66,344$44,647$14,339$4,898$2,460$     73,394$     49,165$     21,812$     2,417$     —

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 may issue shares out of treasury stock for these awards. During the ninesix months ended SeptemberJune 30, 2018, 28,5272019, 35,002 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 SeptemberJune 30, 2018,2019, the total unrecognized compensation expense related to non-vested restricted shares was $1,750,000,$2,204,000, and the related weighted-average period over which it is expected to be recognized is approximately 0.920.99 years.

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

Nine Months EndedSix Months Ended
September 30, 2018June 30, 2019
     Shares     Fair ValueShares Fair Value
Balance at December 31, 201778,166$     50.30
Balance at December 31, 201899,724     $    45.48
Granted28,52759.6935,002  49.02
Vested(23,758)46.83(13,264)  39.76
Balance at September 30, 201882,935$54.52
Balance at June 30, 2019121,462 $47.13

Performance-Based Restricted Stock

In February 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 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 grantedoutstanding at June 30, 2019 was 25,34230,057 with an averagea grant date fair value of $59.20$49.33 per share. The 20182019 expense related to these grants is currently estimated to be $690,000$595,000 and is based on the grant date fair value of the awards and the Company’s achievement of 132%120% of the target financial goals. The estimated expense for 20182019 and each future period through the vesting date is subject to prospective adjustment based upon changes in the expected achievement of the financial goals.

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 grantedoutstanding at June 30, 2019 was 29,27835,258 with an average grant date fair value of $58.70$49.04 per share. The 20182019 expense related to these grants is currently estimated to be $741,000$674,000 and is based on the grant date fair value of the awards and the Company’s achievement of 144%117% of the target financial goals. The estimated expense for 20182019 and each future period through the vesting date is subject to prospective adjustment based upon changes in the expected achievement of the financial goals.

In February of 2019, 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, 2019 through December 31, 2021. 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 outstanding at June 30, 2019 was 36,403 with an average grant date fair value of $49.10 per share. The 2019 expense related to these grants is currently estimated to be $590,000 and is based on the grant date fair value of the awards and the Company’s achievement of 108% of the target financial goals. The estimated expense for 2019 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 granted and no expense recognized during the ninesix months ended SeptemberJune 30, 2018.2019. Following is a summary of the activity of the Company’s SARs program for the nine-monthsix-month period ended SeptemberJune 30, 2018:2019:

Weighted-AverageAggregate
AverageRemainingIntrinsic
ExerciseContractualValue
     Shares     Price     Term Years     (In thousands)
Outstanding at December 31, 2017234,236$     34.975.03$     7,291
Exercised(36,624)30.31
Outstanding at September 30, 2018197,61235.843.755,787
Exercisable at September 30, 2018197,612$35.843.75$5,787
            Weighted-     Average     Aggregate
    Average Remaining Intrinsic
    Exercise Contractual Value
  Shares Price Term Years (In thousands)
Outstanding at December 31, 2018 237,121 $    29.86 3.50 $    5,468
Exercised (11,335)  21.95 —  —
Exercisable at June 30, 2019 225,786 $30.26 3.08 $4,114

There were no non-vested SARs at June 30, 2018.2019.

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:

EstimatedActual     Estimated     Actual
(In thousands)     2018     2017 2019 2018
Service cost – benefits earned during the year$     4,294$     3,733 $    3,708 $    4,017
Interest cost on projected benefit obligations3,6553,621  4,083 3,703
Expected return on plan assets(5,206)(4,681)  (4,754) (5,202)
Net amortization and deferral1,4091,382  1,634 1,522
Net periodic pension cost$4,152$4,055 $4,671 $4,040

Pension costs recorded to expense were $1,049,000$1,186,000 and $1,033,000$1,049,000 for the three-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively and totaled $3,147,000$2,365,000 and $3,070,000$2,098,000 for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Pension costs increased in 20182019 primarily due to a decrease in the discount rate. The Company made no contribution to the plan during the nine-monthsix-month period ended SeptemberJune 30, 20182019 and is evaluating the amount of additional contributions, if any, in the remainder of 2018.2019.

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 20172018 and an estimate for 2018:2019:

EstimatedActual     Estimated     Actual
(In thousands)     2018     2017 2019 2018
Service cost – benefits earned during the year$     92$     143 $    97 $    92
Interest cost on projected benefit obligation348360  408  348
Net amortization581324  276  581
Net periodic pension cost$1,021$827 $781 $1,021

Pension costs recorded to expense were $255,000$196,000 and $210,000$256,000 for the three-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and were $766,000$391,000 and $628,000$511,000 for the nine-monthsix-month periods ended SeptemberJune 30, 2019 and 2018, and 2017, respectively.

-15-

Note 10 – Income Taxes

As of SeptemberJune 30, 2018,2019, the Company’s unrecognized tax benefits were approximately $1,822,000,$1,499,000, of which $1,652,000$1,380,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2017,2018, the Company’s unrecognized tax benefits were approximately $1,632,000,$1,403,000, of which $1,464,000$1,272,000 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 $315,000$317,000 due to the lapse of federal and state statutes of limitations.

-15-

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company had $191,000$173,000 and $139,000$136,000 of gross interest accrued as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. There were no penalties for unrecognized tax benefits accrued at SeptemberJune 30, 20182019 and December 31, 2017.2018.

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 20142015 through 2017 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 20132014 through 2017.

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 has not completed the accounting for the income tax effects of the Tax Act. In accordance with SAB 118, a provisional charge was recorded in December 2017 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.

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 fallfalls into the Level 2 category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:

September 30, 2018June 30, 2019
          Gross     Gross     GrossGross 
AmortizedUnrealizedUnrealizedAmortized Unrealized    Unrealized
(In thousands)CostGainsLossesFair Value CostGainsLosses    Fair Value
State and political subdivisions$     337,378$         2,187$         4,691$     334,874    $    318,924    $    12,181$    7$    331,098
U.S. government agencies108,158—2,337105,821102,091554347102,298
Certificates of deposit5,745——5,7451,995——1,995
Total$451,281$2,187$7,028$446,440$423,010$12,735$354$435,391
 
December 31, 2017December 31, 2018  
GrossGrossGrossGross 
AmortizedUnrealizedUnrealizedAmortized UnrealizedUnrealized
(In thousands)CostGainsLossesFair Value CostGainsLosses Fair Value
State and political subdivisions$408,165$9,528$661$417,032$332,732$3,791$1,806$334,717
U.S. government agencies46,222—72245,500106,153861,417104,822
Certificates of deposit7,991——7,9911,995——1,995
Total$462,378$9,528$1,383$470,523$440,880$3,877$3,223$441,534

-16-

The fair values of securities with unrealized losses are as follows:

September 30, 2018June 30, 2019  
Less than 12 months12 months or moreTotal    

Less than 12 months

    12 months or more    Total
EstimatedUnrealizedEstimatedUnrealizedEstimatedUnrealized Estimated    UnrealizedEstimated    UnrealizedEstimated    Unrealized
(In thousands)     Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  Fair ValueLosses Fair ValueLosses  Fair ValueLosses
State and political subdivisions$178,137$2,905$36,804$1,786$214,941$4,691$    1,007$    —$    2,976$    7$    3,983$    7
U.S. government agencies79,51397426,3081,363105,8212,337——33,47234733,472347
Total$257,650$3,879$63,112$3,149$320,762$7,028$1,007$—$36,448$354$37,455$354
 
December 31, 2017December 31, 2018  
Less than 12 months12 months or moreTotalLess than 12 months  12 months or more  Total  
EstimatedUnrealized Estimated Unrealized Estimated Unrealized EstimatedUnrealizedEstimatedUnrealizedEstimatedUnrealized
(In thousands)Fair ValueLossesFair ValueLossesFair ValueLosses  Fair ValueLossesFair ValueLosses Fair ValueLosses
State and political subdivisions$34,755$123$31,251$538$66,006$661$91,248$556$60,546$1,250$151,794$1,806
U.S. government agencies34,18337611,31734645,50072230,40913038,0051,28768,4141,417
Total$68,938$499$42,568$884$111,506$1,383$121,657$686$98,551$2,537$220,208$3,223

There were 19717 securities, or 61%6% of the total (35(15 greater than 12 months), in an unrealized loss position as of SeptemberJune 30, 2018.2019. There were 64136 securities, or 17%43% of the total (24(61 greater than 12 months), in an unrealized loss position as of December 31, 2017.2018. 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.

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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.

September 30, 2018 June 30, 2019
(In thousands)     Amortized Cost     Fair Value Amortized Cost Fair Value
Due in 1 year or less$13,741$13,782    $    25,149    $    25,232
Due after 1 year through 5 years121,838121,626 114,928  116,965
Due after 5 years through 10 years232,821231,333 236,912  247,152
Due after 10 years82,88179,699 46,021  46,042
Total$451,281$        446,440 $423,010 $435,391

There were no sales of investment securities classified as available for sale for the three months ended September 30, 2018 or 2017. Proceeds from sales of investment securities classified as available for saleavailable-for-sale were $58,520,000$3,547,000 and $0 for the nine months ended September 30, 2018 and 2017, respectively. There were no gross realized gains$48,977,000 for the three months ended SeptemberJune 30, 2019 and 2018, or 2017.respectively, and were $4,648,000 and $58,520,000 for the six months ended June 30, 2019 and 2018, respectively. Gross realized lossesgains were $42,000 and $0$8,000 for the ninethree months ended SeptemberJune 30, 2018 and 2017, respectively.2019 compared to gross realized losses of $55,000 for the three months ended June 30, 2018. Gross realized gains were $19,000 for the six months ended June 30, 2019 compared to gross realized losses of $42,000 for the six months ended June 30, 2018. There was one security totaling $3,750,000were no securities pledged to secure public deposits and for other purposes at SeptemberJune 30, 2018.2019.

Note 12 – Fair Value of Financial Instruments

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:

September 30, 2018December 31, 2017 June 30, 2019 December 31, 2018
CarryingCarrying Carrying   Carrying  
(In thousands)     Amount     Fair Value     Amount     Fair Value Amount Fair Value Amount Fair Value
Balance sheet assets:                     
Cash and cash equivalents$180,047$180,047$228,110$228,110 $    183,513 $    183,513 $    230,933 $    230,933
Investment securities446,440446,440470,523470,523  435,391  435,391  441,534  441,534
Loans, net716,019709,807676,026675,020  780,046  782,301  711,362  711,090
Accrued interest receivable6,3236,3237,4137,413  7,180  7,180  7,069  7,069
Total$1,348,829$1,342,617$1,382,072$1,381,066 $1,406,130 $1,408,385 $1,390,898 $1,390,626
Balance sheet liabilities: 
Deposits$634,724$632,162$678,088$678,346 $636,629 $637,586 $721,926 $722,018
Accounts and drafts payable769,638769,638661,888661,888 794,871  794,871  694,360  694,360
Accrued interest payable99995555 191  191  91  91
Total$     1,404,461$     1,401,899$     1,340,031$     1,340,289 $1,431,691 $1,432,648 $1,416,377 $1,416,469

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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.

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Accrued Interest –The carrying amount approximates fair value.

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. No financial instruments are measured using Level 3 inputs for the ninesix months ended SeptemberJune 30, 2019 and 2018.

Note 13 – Revenue from Contracts with Customers

On January 1, 2018, the Company adopted FASB ASC 606, Revenue from Contracts with Customers (“FASB ASC 606”) and 2017.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 invoice processing and payment fees, bank service fees, and other real estate owned (“OREO”).

Invoice processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

Invoice payment fees – The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

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. Service charges on deposit accounts are transaction based fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.

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.

  For the Three Months For the Six Months
  Ended June 30, Ended June 30,
(In thousands) 2019 2018 2019 2018
Fee revenue and other income            
In-scope of FASB ASC 606            
Invoice processing fees    $20,447    $19,467    $40,989    $38,616
Invoice payment fees  6,405  5,754  12,320  11,432
Information services payment and processing revenue  26,852  25,221  53,309  50,048
Bank service fees  301  359  677  694
Fee revenue (in-scope of FASB ASC 606)  27,153  25,580  53,986  50,742
Other income (out-of-scope of FASB ASC 606)  219  60  399  272
Total fee revenue and other income  27,372  25,640  54,385  51,014
             
Net interest income after provision for loan losses (out-of-scope of FASB ASC 606)1  12,022  10,719  23,379  21,328
Total net revenue $     39,394 $     36,359 $     77,764 $     72,342
1The Company earns interest income from the balances generated during the invoice processing and payment cycle and on deposit accounts, which is an integral component of the Company’s compensation for services provided; but, is out-of-scope of FASB ASC 606.

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Note 14 – Leases

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 – Leases (ASC Topic 842). The Company leases certain premises under operating leases. As of June 30, 2019, the Company had lease liabilities of $7,290,000 and right-of-use assets of $6,570,000. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. Presented within occupancy expense on the Consolidated Statements of Income for the three months ended June 30, 2019, operating lease cost was $420,000, short-term lease cost was $38,000, and there was no variable lease cost. For the six months ended June 30, 2019, operating lease cost was $840,000, short-term lease cost was $74,000, and there was no variable lease cost. For the period ended June 30, 2019, the weighted average remaining lease term for the operating leases was 6.9 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.5%. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. There has been no significant change in the Company’s expected future minimum lease payments since December 31, 2018. See the Company’s 2018 Annual Report on Form 10-K for information regarding these commitments.

A maturity analysis of operating lease liabilities and undiscounted cash flows as of June 30, 2019 was as follows:

  June 30,
(In thousands) 2019
Lease payments due   
Less than 1 year    $    1,689
1-2 years  1,708
2-3 years  1,536
3-4 years  1,191
4-5 years  388
Over 5 years  2,169
Total undiscounted cash flows  8,681
Discount on cash flows  1,391
Total lease liability $7,290

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the six months ended June 30, 2019. At June 30, 2019, the Company had one lease that had not yet commenced, but is expected to create approximately $800,000 of additional lease liabilities and right-of-use assets for the Company. This lease is anticipated to commence in 2020.

Note 1315 – Subsequent Events

On October 23, 2018,In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events after the consolidated balance sheet date of June 30, 2019, and there were no events identified that would require additional disclosures to prevent the Company’s Board of Directors declared a 20% common stock dividend payable on December 14, 2018 to shareholders of record on December 4, 2018. Shareholders will receive one additional share of Cass common stock for each five 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 4, 2018.unaudited consolidated financial statements from being misleading.

Additionally, on October 23, 2018, the Company’s Board of Directors declared a fourth quarter cash dividend of $0.26 per share payable on December 14, 2018 to shareholders of record on December 4, 2018. The cash dividend will apply to all shares of common stock held after the 20% common stock dividend is completed.

The Board of Directors voted to restore the capacity of the Company’s stock repurchase program to 500,000 shares.

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ITEM 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 waste and telecommunications expenses and is a provider of telecom expense management solutions. Additionally, Cass provides a B2B payment platform for clients that require an agile fintech partner. 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 faith-based ministries.

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 20172018 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. Another negative impact of low fuel prices could be a drop in the number of invoices related to drilling supplies carried by domestic railroads and trucks that move pipes, sand and water for fracking operations.

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 PoliciesPolicy

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. CertainThe accounting policiespolicy that requirerequires significant management estimates and areis deemed critical to the Company’s results of operations or financial position havehas been discussed with the Audit Committee of the Board of Directors and areis described below.

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Allowance for Loan Losses.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.processes through 2019, after which current expected credit losses methodology will be adopted.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended SeptemberJune 30, 20182019 (“ThirdSecond Quarter of 2018”2019”) compared to the three-month period ended SeptemberJune 30, 20172018 (“ThirdSecond Quarter of 2017”2018”) and the nine-monthsix-month period ended SeptemberJune 30, 20182019 (“Nine Months Ended 2018”First Half of 2019”) compared to the nine-monthsix-month period ended SeptemberJune 30, 20172018 (“Nine Months Ended 2017”First Half of 2018”). 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 20172018 Annual Report on Form 10-K. Results of operations for the ThirdSecond Quarter and First Half of 20182019 are not necessarily indicative of the results to be attained for any other period.

Net Income

The following table summarizes the Company’s operating results:

Third Quarter ofNine Months Ended
               %               % Second Quarter of First Half of
(In thousands except per share data)20182017Change20182017Change 2019 2018 %
Change		 2019 2018 %
Change
Net income$     7,610$     6,86310.9$     23,211$     19,68317.9     $     7,684      $     7,509             2.3%     $     15,847      $     15,601             1.6%
Diluted earnings per share$.61$.5510.9$1.87$1.5818.4 $.52  $.50  4.0% $1.08  $1.05  2.9%
Return on average assets1.84%1.70%—1.92%1.70%—  1.81%  1.90% —   1.89%  1.96% — 
Return on average equity13.31%12.34%—13.96%12.27%—  13.21%  13.66% —   13.92%  14.29% — 

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 follows:

Third Quarter ofNine Months Ended Second Quarter of First Half of
            %            %       %       %
(In thousands)20182017Change20182017Change 2019 2018 Change 2019 2018 Change
Transportation invoice volume9,5308,9626.3%28,34926,5856.6%      9,222      9,628          (4.2)%      18,170      18,819          (3.4)%
Transportation invoice dollar volume$7,264,898$6,162,95717.9%$21,227,816$     18,271,17816.2% $     7,121,202 $     7,172,171 (0.7)% $     14,106,975 $     13,962,918 1.0%
Expense management transaction volume*7,1246,9352.7%21,41420,4774.6%
Expense management dollar volume*$     3,667,007$     3,391,672     8.1%$     10,338,979$9,647,573     7.2%
Facility Expense transaction volume*  6,892  7,169 (3.9)%  13,886  14,290 (2.8)%
Facility Expense dollar volume* $3,733,075 $3,233,769 15.4% $7,350,503 $6,671,972 10.2%
Payment and processing revenue$26,020$23,7619.5%$76,068$69,3329.7% $26,852 $25,221 6.5% $53,309 $50,048 6.5%
*Includes energy, telecom and waste.

*Includes energy, telecom and waste

ThirdSecond Quarter of 20182019 compared to ThirdSecond Quarter of 2017:2018:

Payment and processing fee revenue increased 10%7%. Highlighting thirdFactors continuing to influence performance were an expanding customer base and the development and deployment of new revenue-generating services. Transportation invoice volume declined 4% as a historically robust second quarter performance was an 18% increasein 2018 created a challenging comparison in 2019.

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Additionally, a softening carrier market contributed to a 1% decline in transportation dollar volume. Higher carrier and fuel prices, in concert with higher volume from current accounts, produced the positive result. Transportation invoice volume for the period was up 6%. Facility-related (electricity, gas, waste and telecom expense management) dollar volume was up 3% with facility relateda stout 15% due to significantly increased “spend” by several major clients plus contributions from new customers. Facility expense transactiontransactions volume up 8%. Newdecreased 4% as the mix of customers, particularly in telecom expense management, changed from a relatively high transaction/low dollar to relatively low transaction/high dollar average customer. Actual customer wins pluscounts increased volume from current accounts generatedfor the favorable outcome.quarter.

There were no gainsGains of $8,000 on the sales of securities were recognized in either the ThirdSecond Quarter of 2018 or 2017.

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Nine Months Ended 20182019, compared to Nine Months Ended 2017:losses of $55,000 in the Second Quarter of 2018.

First Half of 2019 compared to First Half of 2018:

Payment and processing revenue increased 7% for the same reasons as the Second Quarter. Transportation dollar volume increased 1% in the First Half of 2019 compared to the First Half of 2018. Transportation invoice and dollar volumes, as well as expense management transaction and dollar volumes, increasedfluctuated for the same reasons as the ThirdSecond Quarter.

LossesGains of $42,000$19,000 on the sales of securities were recognized in the Nine Months Ended 2018,First Half of 2019, compared to $0losses of $42,000 in the Nine Months Ended 2017. These sales were partFirst Half 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.2018.

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 ofNine Months Ended Second Quarter of First Half of
%%     %     %
(In thousands)   2018   2017   Change     2018   2017   Change 2019 2018 Change 2019 2018 Change
Average earnings assets$     1,397,477$     1,395,0250.2%$     1,385,488$     1,348,2532.8% $     1,430,983  $     1,348,188  6.1% $     1,434,777  $     1,379,393      4.0%
Average interest-bearing liabilities359,793393,262    (8.5%)369,016388,693   (5.1%)      379,397       365,569      3.8%      384,594       373,703  2.9%
Net interest income*11,74911,5132.0%34,38933,7651.8%  12,553   11,343       10.7%  24,701   22,640        9.1%
Net interest margin*3.34%3.27%3.32%3.35%  3.52%  3.37%    3.47%  3.31%  
Yield on earning assets*3.63%3.44%3.56%3.50%  3.88%  3.61%    3.84%  3.53%  
Rate on interest-bearing liabilities1.13%.58%.91%.52%  1.38%  .87%    1.36%  .79%  
*Presented on a tax-equivalent basis assuming a tax rate of 21% for 2018both 2019 and 35% for 2017. The TCJA reduced the net interest margin and yield on earning assets by approximately 20 basis points in 2018.

ThirdSecond Quarter of 20182019 compared to ThirdSecond Quarter of 2017:2018:

ThirdSecond Quarter of 20182019 average earning assets increased $2,452,000,$82,795,000, or 0.2%6.1%, compared to the same period in the prior year. Interest-bearing deposits in other financial institutionsLoans increased $60,831,000,$61,225,000, or 59.5%, loans increased $57,857,000, or 8.8%8.6%, and average investment securitiesfederal funds sold and short-term investments increased $14,454,000,$41,893,000, or 3.4%40.7%. These were partially offset by a decrease in average federal funds sold and other short-term investmentsinvestment securities of $130,634,000,$23,181,000, or 65.3%5.1%, in the ThirdSecond Quarter of 20182019 compared to the ThirdSecond Quarter of 2017.2018.

Average accounts and drafts payable increased $60,346,000, or 8.4%, and non-interest bearing demand deposits increased $22,669,000, or 9.6%, in the Second Quarter of 2019 compared to the Second Quarter of 2018. Total average interest-bearing liabilities for the ThirdSecond Quarter of 2018 decreased $33,469,000,2019 increased $13,828,000, or 8.5%3.8%, 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 ThirdSecond 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 yearprimarily as a result of the increase in average earning assets and the improving rate environment. However, the lower tax-equivalent adjustment as a result of 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 yield on earning assets for the Third Quarter of 2018 compared to the Third Quarter of 2017.higher time deposits.

The changes to the interest rate environment also led to an increase in the rate on interest-bearing liabilities in the ThirdSecond Quarter of 20182019 compared to the ThirdSecond Quarter of 2017.2018.

Nine Months Ended 2018First Half of 2019 compared to Nine Months Ended 2017:First Half of 2018:

Nine Months Ended 2018First Half of 2019 average earning assets increased $37,235,000,$55,384,000, or 2.8%4.0%, compared to the same period in the prior year. Loans increased $43,953,000,$46,407,000, or 6.6%, and average investment securitiesfederal funds sold and short-term investments increased $32,840,000,$17,166,000 or 7.9%, and interest-bearing deposits in other financial institutions increased $17,602,000, or 17.7%13.9%. These were partially offset by a decrease in average federal funds sold and other short-term investmentsinvestment securities of $57,702,000,$23,836,000, or 35.4%5.2%, for the Nine Months Ended 2018First Half of 2019 as compared to the Nine Months Ended 2017.First Half of 2018.

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Average accounts and drafts payable balances for the Nine Months Ended 2018First Half of 2019 increased $33,171,000,$34,794,000, or 4.7%4.8%, and non-interest bearing liabilitiesnon-interest-bearing demand deposits increased $39,704,000,$22,479,000, or 19.3%9.3%, as compared to the Nine Months Ended 2017. These were partially offset by a decrease inFirst Half of 2018. Total average total interest bearinginterest-bearing deposits of $19,677,000,increased $10,891,000, or 5.1%. This decreased for a variety of reasons, including some customers that shifted excess balances to higher yielding investments.

Nine Months Ended 2018 tax-equivalized net interest income increased $624,000, or 1.8%2.9%, compared to the same period in the prior yearFirst Half of 2018 primarily as a result of the increase in average earning assetshigher time deposits.

Net interest income and the improving rate environment. However, the lower tax-equivalent adjustment as a result of the federal tax rate decrease in 2018 from the enactment of TCJA in December 2017 negatively impacted the comparison to the Nine Months Ended 2017. The federal tax rate decrease also negatively impacted net interest margin and yield on earning assets for the Nine Months Ended 2018 compared to the Nine Months Ended 2017.

The changes to the interest rate environment increased forwere impacted by the same reasonsfactors as the ThirdSecond Quarter.

For more information on the changes in net interest income, please refer to the tables that follow.

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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.

Third Quarter of 2018Third Quarter of 2017 Second Quarter of 2019 Second Quarter of 2018
InterestInterest     Interest        Interest   
AverageIncome/Yield/AverageIncome/Yield/ Average Income/ Yield/ Average Income/ Yield/
(In thousands)     Balance     Expense      Rate     Balance     Expense     Rate     Balance      Expense     Rate     Balance     Expense     Rate
Assets1                    
Earning assets                    
Loans2, 3:
Loans2,3:                    
Taxable$     716,849$     8,3564.62%$     655,723$     7,1784.34% $      769,394  $     9,387      4.89% $     706,160  $     7,906      4.49%
Tax-exempt41,197134.314,466474.18  —   — —   2,009   21 4.19 
Investment securities5:                    
Taxable100,5305932.3419,703941.89  104,740   630 2.41   80,289   462 2.31 
Tax-exempt4339,7582,6713.12406,1314,0073.91  322,208   2,524 3.14   369,840   2,952 3.20 
Certificates of deposit6,707261.546,76314.82  1,995   10 2.01   7,188   27 1.51 
Interest-bearing deposits in other financial institutions163,0347941.93102,2033001.16  87,883   477 2.18   79,832   346 1.74 
Federal funds sold and other short-term investments69,4023251.86200,036444.88  144,763   830 2.30   102,870   423 1.65 
Total earning assets1,397,47712,7783.631,395,02512,0843.44  1,430,983   13,858 3.88   1,348,188   12,137 3.61 
Non-earning assets:                    
Cash and due from banks13,39812,704  12,726         12,769       
Premises and equipment, net22,58321,256  21,580         22,578       
Bank-owned life insurance17,19716,738  17,540         17,085       
Goodwill and other intangibles14,30014,742  13,975         14,410       
Other assets182,565149,266  216,337         176,425       
Allowance for loan losses(10,218)(10,199)  (10,498)        (10,213)      
Total assets$1,637,302$1,599,532 $1,702,643        $1,581,242       
Liabilities and Shareholders’ Equity1Liabilities and Shareholders’ Equity1                    
Interest-bearing liabilities:                    
Interest-bearing demand deposits$292,038$8021.09%$327,997$434.52%
Interest-bearing demand Deposits $296,017  $923 1.25% $301,190  $610 .81%
Savings deposits11,129301.0712,49317.54  9,867   26 1.06   12,250   27 .88 
Time deposits >= $10024,718951.5223,486681.15  24,954   120 1.93   23,171   86 1.49 
Other time deposits31,9081021.2729,28652.70  48,559   236 1.95   28,958   71 .98 
Total interest-bearing liabilities359,7931,0291.13393,262571.58
Total interest-bearing deposits  379,397   1,305 1.38   365,569   794 .87 
Non-interest bearing liabilities:                    
Demand deposits250,389208,932  259,377         236,708       
Accounts and drafts payable755,697739,293  774,623         714,277       
Other liabilities44,65237,317  55,879         44,203       
Total liabilities1,410,5311,378,804  1,469,276         1,360,757       
Shareholders’ equity226,771220,728  233,367         220,485       
Total liabilities and shareholders’ equity$1,637,302$1,599,532 $1,702,643        $1,581,242       
Net interest income$11,749$11,513     $12,553        $11,343   
Net interest margin3.34%3.27%        3.52%        3.37%
Interest spread2.502.86        2.50         2.74 
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 2017 consolidated financial statements, filed with the Company’s 2017 Annual Report on Form 10-K.
3.

Interest income on loans includes net loan fees of $98,000$77,000 and $81,000 for the ThirdSecond Quarter of 2019 and 2018, and $76,000 for the Third Quarter of 2017.respectively.

4.3.

Interest income is presented on a tax-equivalent basis. 2018 figures assumebasis assuming a tax rate of 21%for both 2019 and 2017 figures assume a tax rate of 35%.2018. The tax-equivalent adjustment was approximately $564,000$531,000 and $1,419,000$624,000 for the ThirdSecond Quarter of 2019 and 2018, and 2017, respectively. The TCJA reduced the yield/rate by approximately 70 basis points in 2018.

5.4.

For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

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Nine Months Ended 2018Nine Months Ended 2017
InterestInterest
AverageIncome/Yield/AverageIncome/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-exempt42,006573.805,2741573.98
Investment securities5:
Taxable78,6091,3482.2915,9052321.95
Tax-exempt4372,0398,8723.19401,90312,1004.03
Certificates of deposit7,134801.506,59236.73
Interest-bearing deposits in other financial institutions116,8081,5391.7699,206703.95
Federal funds sold and other short-term investments105,3571,2091.53163,059894.73
Total earning assets1,385,48836,8913.561,348,25335,2863.50
Non-earning assets:
Cash and due from banks13,47212,729
Premises and equipment, net22,32221,225
Bank-owned life insurance17,08416,615
Goodwill and other intangibles14,40914,408
Other assets173,833144,086
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 deposits11,23076.9017,00762.49
Time deposits >= $10023,7642571.4523,2381951.12
Other time deposits30,0462371.0531,402174.74
Total interest-bearing liabilities369,0162,502.91388,6931,521.52
Non-interest bearing liabilities:
Demand deposits245,002205,298
Accounts and drafts payable737,083703,912
Other liabilities42,95534,821
Total liabilities1,394,0561,332,724
Shareholders’ equity222,339214,402
Total liabilities and shareholders’ equity$1,616,395$1,547,126
Net interest income$34,389$33,765
Net interest margin3.32%3.35%
Interest spread2.652.98

  First Half of 2019 First Half of 2018  
      Interest        Interest   
  Average Income/ Yield/ Average Income/ Yield/
(In thousands)     Balance     Expense     Rate     Balance     Expense     Rate
Assets1                    
Earning assets                    
Loans2,3:                    
Taxable $     745,592  $     18,016      4.87% $     696,768  $     15,430      4.47%
Tax-exempt4  —   — —   2,417   45 3.75 
Investment securities5:                    
Taxable  105,685   1,262 2.41   67,465   756 2.26 
Tax-exempt4  326,393   5,103 3.15   388,448   6,199 3.22 
Certificates of deposit  1,995   20 2.02   7,351   54 1.48 
Interest-bearing deposits in other financial institutions  114,314   1,286 2.27   93,312   745 1.61 
Federal funds sold and other short-term investments  140,798   1,609 2.30   123,632   884 1.44 
Total earning assets  1,434,777   27,296 3.84   1,379,393   24,113 3.53 
Non-earning assets:                    
Cash and due from banks  13,268         13,510       
Premises and equipment, net  21,796         22,190       
Bank-owned life insurance  17,485         17,027       
Goodwill and other intangibles  14,027         14,465       
Other assets  203,974         169,394       
Allowance for loan losses  (10,365)        (10,211)      
Total assets $1,694,962        $1,605,768       
Liabilities and Shareholders’ Equity1                    
Interest-bearing liabilities:                    
Interest-bearing demand deposits $300,429  $1,845 1.24% $310,044  $1,130 .73%
Savings deposits  10,932   59 1.09   11,281   46 .82 
Time deposits >= $100  24,092   231 1.93   23,278   161 1.39 
Other time deposits  49,141   460 1.89   29,100   136 .94 
Total interest-bearing deposits  384,594   2,595 1.36   373,703   1,473 .79 
Non-interest bearing liabilities:                    
Demand deposits  264,743         242,264       
Accounts and drafts payable  762,416         727,622       
Other liabilities  53,666         42,093       
Total liabilities  1,465,419         1,385,682       
Shareholders’ equity  229,543         220,086       
Total liabilities and shareholders’ equity $1,694,962        $1,605,768       
Net interest income     $24,701        $22,640   
Net interest margin        3.47%        3.31%
Interest spread        2.48         2.74 
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 2017 consolidated financial statements, filed with the Company’s 2017 Annual Report on Form 10-K.
3.

Interest income on loans includes net loan fees of $289,000$242,000 and $319,000$191,000 for the Nine Months EndedFirst Half of 2019 and 2018, and 2017, respectively.

4.3.

Interest income is presented on a tax-equivalent basis. 2018 figures assumebasis assuming a tax rate of 21%for both 2019 and 2017 figures assume a tax rate of 35%.2018. The tax-equivalent adjustment was approximately $1,875,000$1,072,000 and $4,290,000$1,311,000 for the Nine Months EndedFirst Half of 2019 and 2018, and 2017, respectively. The TCJA reduced the yield/rate by approximately 70 basis points in 2018.

5.4.

For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

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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 2018 Over Second Quarter of 2019 Over
Third Quarter of 2017 Second Quarter of 2018
(In thousands)     Volume     Rate     Total Volume Rate Total
Increase (decrease) in interest income:                  
Loans1, 2:
Loans1:      
Taxable$     695$     483$     1,178 $        740  $      741  $       1,481 
Tax-exempt3(35)1(34)
Tax-exempt2  (21)  —   (21)
Investment securities:      
Taxable47227499  146   22   168 
Tax-exempt3(596)(740)(1,336)
Tax-exempt2  (374)  (54)  (428)
Certificates of deposit—1212  (24)  7   (17)
Interest-bearing deposits in other financial institutions234260494  37   94   131 
Federal funds sold and other short-term investments(409)290(119)  207   200   407 
Total interest income361333694  711   1,010   1,721 
Interest expense on:      
Interest-bearing demand deposits(52)420368  (11)  324   313 
Savings deposits(2)1513  (6)  5   (1)
Time deposits >=$10042327  7   27   34 
Other time deposits54550  67   98   165 
Total interest expense(45)503458  57   454   511 
Net interest income$406$(170)$236 $654  $556  $1,210 
1.Average balances include nonaccrual loans.
2.

Interest income includes net loan fees.

3.2.

Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the ThirdSecond Quarter of 20182019 and a tax rate of 35% for the Third Quarter of 2017.2018.


  First Half of 2019 Over
  First Half of 2018
(In thousands) Volume Rate Total
Increase (decrease) in interest income:                        
Loans1:            
Taxable $      1,124  $      1,462  $      2,586 
Tax-exempt2  (45)  —   (45)
Investment securities:            
Taxable  453   53   506 
Tax-exempt2  (972)  (124)  (1,096)
Certificates of deposit  (49)  15   (34)
Interest-bearing deposits in other financial institutions  192   349   541 
Federal funds sold and other short-term investments  137   588   725 
Total interest income  840   2,343   3,183 
Interest expense on:            
Interest-bearing demand deposits  (36)  751   715 
Savings deposits  (1)  14   13 
Time deposits >=$100  6   64   70 
Other time deposits  132   192   324 
Total interest expense  101   1,021   1,122 
Net interest income $739  $1,322  $2,061 
1.
Nine Months Ended 2018 Over
Nine Months Ended 2017
(In thousands)     Volume     Rate     Total
Increase (decrease) in interest income:
Loans1, 2:
Taxable$     1,567$     1,055$     2,622
Tax-exempt3(93)(7)(100)
Investment securities:
Taxable1,068481,116
Tax-exempt3(850)(2,378)(3,228)
Certificates of deposit34144
Interest-bearing deposits in other financial institutions143693836
Federal funds sold and other short-term investments(400)715315
Total interest income1,4381671,605
Interest expense on:
Interest-bearing demand deposits(47)889842
Savings deposits(26)4014
Time deposits >=$10055762
Other time deposits(8)7163
Total interest expense(76)1,057981
Net interest income$1,514$(890)$624
1.Average balances include nonaccrual loans.
2.

Interest income includes net loan fees.

3.2.

Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the Nine Months Ended 2018First Half of 2019 and a tax rate of 35% for the Nine Months Ended 2017.2018.

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 loss recordedlosses during the ThirdSecond Quarter of 20182019 or the ThirdSecond Quarter of 2017.2018. There was a loan loss provision of $250,000 recorded in the First Half of 2019 to support the growth in the loan portfolio. There was no loan loss provision recorded duringin the Nine Months Ended 2018 or the Nine Months Ended 2017.First Half of 2018. 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 $5,000 in$20,000 during the ThirdSecond Quarter of 20182019 and $6,000 in$5,000 during the ThirdSecond Quarter of 2017.2018. Net loan recoveries were $15,000$31,000 in the Nine Months Ended 2018First Half of 2019 and $27,000$10,000 during the Nine Months Ended 2017.First Half of 2018.

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The ALLL at SeptemberJune 30, 20182019 was $10,220,000$10,506,000 and at December 31, 20172018 was $10,205,000.$10,225,000. The ratio of ALLL to total loans outstanding was 1.33% and 1.43% at SeptemberJune 30, 2018 was 1.41% compared to 1.49% at2019 and December 31, 2017.2018, respectively. There were no nonperforming loans at SeptemberJune 30, 20182019 or December 31, 2017.2018.

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 ofNine Months Ended Second Quarter of First Half of
(In thousands)     2018     2017     2018     2017     2019     2018                      2019     2018
Allowance at beginning of period$10,215$10,196$10,205$10,175 $      10,486 $      10,210 $      10,225 $10,205
Provision charged to expense:————
Provision — — 250 —
Loans charged off———— — — — —
Recoveries on loans previously charged off561527 20 5 31 10
Net recoveries561527 20 5 31 10
Allowance at end of period$10,220$10,202$10,220$10,202 $10,506 $10,215 $10,506 $10,215
Loans outstanding:        
Average$     778,046$     660,189$     705,541$     661,588 $769,394 $708,169 $745,592 $699,185
September 30726,239658,090726,239658,090
June 30 790,552 714,861 790,552 714,861
Ratio of ALLL to loans outstanding:        
Average1.42%1.55%1.45%1.54% 1.37% 1.44% 1.41% 1.46%
September 301.41%1.55%1.41%1.55%
June 30 1.33% 1.43% 1.33% 1.43%
Impaired loans:        
Nonaccrual loans$—$215$—$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 SeptemberJune 30, 20182019 or SeptemberJune 30, 2017.2018.

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Operating Expenses

Total operating expenses for the ThirdSecond Quarter of 2019 were up 9.1%, or $2,508,000, compared to the Second Quarter of 2018 and were up 13.9%$4,788,000, or 8.9%, or $3,488,000,for the First Half of 2019 compared to the Third QuarterFirst Half of 2017 and were up 10.7%, or $7,914,000, for the Nine Months Ended 2018 compared to the Nine Months Ended 2017.2018.

Personnel expense for the ThirdSecond Quarter of 2019 increased $1,214,000 compared to the Second Quarter of 2018 and increased $2,324,000$3,109,000 to $45,080,000 for the First Half of 2019 compared to the Third QuarterFirst Half of 2017 and increased $6,334,0002018 as the Company continued to $63,718,000 forinvest in the Nine Months Ended 2018 compared to the Nine Months Ended 2017 due mainly to on-going strategic investment in technology and staff required to win new business and support services growth with existing clients, address increasing cybersecurity risk,new business, annual salary merit increases, and increased retirement plan costs.

Equipment expense for the Third Quarter of 2018 increased $192,000, or 15.5%, compared to the Third Quarter of 2017 and $404,000, or 10.8%, for the Nine Months Ended 2018 from the Nine Months Ended 2017. Outside service expense for the ThirdSecond Quarter of 20182019 increased $151,000,$372,000, or 8.6%20.2%, compared to the ThirdSecond Quarter of 20172018 and $372,000,$525,000, or 7.1%14.1%, for the Nine Months Ended 2018First Half of 2019 from the Nine Months Ended 2017.First Half of 2018. Equipment expense for the Second Quarter of 2019 increased $144,000, or 10.2%, compared to the Second Quarter of 2018 and $305,000, or 11.2%, for the First Half of 2019 from the First Half of 2018. These increases were the result of the continued strategic investment in technology.technology to win and support new business and the ongoing restructuring of the IT organization.

Financial Condition

Total assets at SeptemberJune 30, 20182019 were $1,678,247,000,$1,728,684,000, an increase of $21,038,000,$33,508,000, or 1.3%2.0%, from December 31, 2017.2018. The most significant changes in asset balances during this period were increases of $68,965,000 in loans of $40,008,000, other information services related assets of $25,901,000, and $13,571,000 in payments in excess of funding of $21,977,000. This wasfunding. These were partially offset by a decrease of $48,063,000 in cash and cash equivalents and a decrease of $24,083,000 in investment securities.$47,420,000. 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 SeptemberJune 30, 20182019 were $1,448,905,000,$1,488,263,000, an increase of $16,784,000,$22,935,000, or 1.2%1.6%, from December 31, 2017.2018. Total deposits at June 30, 2019 were $636,629,000, a decrease of $85,297,000, or 11.8%, from December 31, 2018. This deposit outflow was a result of the competitive interest rate environment and the fluctuations related to the B2B payment platform deposit accounts. Accounts and drafts payable at SeptemberJune 30, 20182019 were $769,638,000,$794,871,000, an increase of $53,750,000,$100,511,000, or 7.5%14.5%, from December 31, 2017. Total deposits decreased $43,364,000, or 6.4%, from December 31, 2017.2018. Total shareholders’ equity at SeptemberJune 30, 20182019 was $229,342,000,$240,421,000, a $4,254,000,$10,573,000, or 1.9%4.6%, increase from December 31, 2017.2018. Total shareholders’ equity increased as a result of net income of $23,211,000. This was offset by$15,847,000 and the change in accumulated other comprehensive lossincome of $9,987,000$8,940,000. These were partially offset by the share repurchases of $7,799,000 and dividends paid of $9,342,000.$7,548,000.

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).

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 $180,047,000$183,513,000 at SeptemberJune 30, 2018,2019, a decrease of $48,063,000,$47,420,000, or 21.1%20.5%, from December 31, 2017.2018. At SeptemberJune 30, 2018,2019, these assets represented 10.7%10.6% 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. Changes in the Company’s daily liquidity position are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $446,440,000$435,391,000 at SeptemberJune 30, 2018,2019, a decrease of $24,083,000$6,143,000 from December 31, 2017.2018. These assets represented 26.6%25.2% of total assets at SeptemberJune 30, 2018.2019. Of this total, 75%76% were state and political subdivision securities. Of the total portfolio, 3.1%5.8% mature in one year or less, 27.2%26.9% mature in one to five years, and 69.7%67.3% mature in five or more years.

The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $83,000,000 at the following banks: US Bank, $20,000,000; UMB Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $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 $189,918,000$187,396,000 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 bywith state and political subdivision securities.and U.S. government agency securities held in safekeeping to collateralize any borrowings. There were no amounts outstanding under any line of credit as of SeptemberJune 30, 20182019 or December 31, 2017.2018.

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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 increasinglyas mentioned above the 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 $32,000,000$48,844,000 of CDARS deposits and interest-bearing demand deposits include $73,562,000$61,503,000 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$26,373,000 for the Nine Months Ended 2018First Half of 2019, compared with $27,936,000$25,096,000 for the Nine Months ended 2017,First Half of 2018, an increase of $10,860,000.$1,277,000. 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 2018,2019, which are estimated to range from $6$4 million to $9$6 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.income and reduce liquidity.

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.

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.

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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 a 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,Fully phased-in as of January 1, 2019, the Basel III Capital Rules limitrequire banking organizations, like Cass, to maintain:

●a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer;
●a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;
●a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and
●a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.

The capital distributions and certain discretionary bonus paymentsconservation buffer is designed to management if the institution does not holdabsorb losses during periods of economic stress. Banking institutions with a “capital conservation buffer” consisting of 2.5%ratio of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capitalbut below the conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625%will face limitations on the payment of risk-weighted assetsdividends, common stock repurchases and increasing each year until fully implemented at 2.5%discretionary cash payments to executive officers based on January 1, 2019.the amount of the shortfall.

The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:

September 30, 2018December 31, 2017 June 30, 2019 December 31, 2018
(Dollars in thousands)     Amount     Ratio     Amount     Ratio Amount Ratio Amount Ratio
Total capital (to risk-weighted assets):
Total capital (to risk-weighted assets)                          
Cass Information Systems, Inc.$     248,488     21,42%$     234,389     22.53% $      246,788      20.05% $      244,660       21.38%
Cass Commercial Bank133,91618.23%122,44017.01% 146,107 18.38% 137,894 18.31%
Common Equity Tier I Capital (to risk-weighted assets):
Common Equity Tier I Capital (to risk-weighted assets)     
Cass Information Systems, Inc.$238,26720.54%$224,18421.55% $236,282 19.20% $234,435 20.49%
Cass Commercial Bank126,06317.16%114,60315.93% 138,069 17.37% 130,037 17.26%
Tier I capital (to risk-weighted assets):
Tier I capital (to risk-weighted assets)     
Cass Information Systems, Inc.$238,26720.54%$224,18421.55% $236,282 19.20% $234,435 20.49%
Cass Commercial Bank126,06317.16%114,60315.93% 138,069 17.37% 130,037 17.26%
Tier I capital (to average assets):
Tier I capital (to average assets)     
Cass Information Systems, Inc.$238,26714.55%$224,18413.87% $236,282 13.99% $234,435 13.89%
Cass Commercial Bank126,06314.78%114,60314.99% 138,069 16.90% 130,037 15.35%

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’sCompany'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 February 2016, the FASB issued Accounting Standards Update (“ASU”)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 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 requirerequires 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 Company elected to apply ASU on2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess (i) whether any expired or existing contracts are or contain leases, will take effect(ii) the lease classification for public companiesany expired or existing leases and (iii) initial direct costs for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. A third-party vendor solution has been selected to assistany existing leases. Adoption of the ASU resulted in the applicationrecognition of ASU 2016-02.lease liabilities totaling $7,808,000 and the right-of-use assets totaling $7,383,000. The impactinitial balance sheet gross up upon adoption was related to operating leases of the adoption of this ASU is currently being evaluated but is not expectedcertain real estate properties. See Note 14 – Leases for additional disclosures related to have a material impact on the Company’s consolidated financial statements or results of operations.leases.

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In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments –Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets held. Under this standard, the Companyit 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 Company has formed a cross-functional working group under the direction of the Chief Financial Officer comprised of individuals from various functional areas including credit, risk management, finance, and accounting to address the adoption and implementation of the ASU. The group is currently working through the implementation plan and in the process of developing an in-house solution to use in the adoption of the ASU. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the adoption of this ASU is currently being evaluated.new guidance on the consolidated financial statements.

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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, 2017,2018, 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 SeptemberJune 30, 20182019 has changed materially from that at December 31, 2017.2018.

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 ThirdSecond Quarter of 20182019 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. ITEM 1. OTHER INFORMATION

LEGAL PROCEEDINGS

 
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 of all such proceedings will not have a material effect on the businesses or financial conditions of the Company 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 ended December 31, 2017,2018, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). There are no material changes to the Risk Factors as disclosed in the Company’s 20172018 Annual Report on Form 10-K.

 
ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

During the three months ended June 30, 2019, the Company repurchased a total of 46,778 shares of its common stock pursuant to its treasury stock buyback program, as follows:


                     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
 April 1, 2019 – April 30, 2019 —  — — 497,000
 May 1, 2019 – May 31, 2019 28,225 $44.86 28,225 468,775
 June 1, 2019 – June 30, 2019 18,553 $44.84 18,553 450,222
 Total 46,778 $44.85 46,778 450,222
(1)

All repurchases made during the quarter ended June 30, 2019 were made pursuant to the treasury stock buyback program, which was authorized by the Board of Directors on October 17, 2011 and announced by the Company on October 20, 2011. The program, as modified by the Board of Directors on October 20, 2014, provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date. The program is periodically modified by the Board of Directors and was most recently modified on January 29, 2019 to restore the aggregate number of shares available for repurchase to 500,000.

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ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
 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 ThirdSecond Quarter of 2018.2019.

ITEM 6.

EXHIBITS

 
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.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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, 2018August 6, 2019By    /s/ Eric H. Brunngraber
Eric H. Brunngraber
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
  
 
DATE: November 7, 2018August 6, 2019ByBy/s/ P. Stephen Appelbaum
P. Stephen Appelbaum
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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