# CASS INFORMATION SYSTEMS INC (CASS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CASS INFORMATION SYSTEMS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/708781/000162828022004254/cass-20211231.htm
Accession: 0001628280-22-004254
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/CASS/
All MD&A years: /company/CASS/mda/
Next year: /company/CASS/mda/fy2022/ (FY 2022)

Executive Overview

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

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grade securities, advances to payees, 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,” 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.

In 2021, total fee revenue and other income increased $9,251,000, or 9%, net interest income after provision for credit losses decreased $59,000, total operating expenses increased $5,711,000, or 5%, and net income increased $3,428,000, or 14%. This performance in 2021 rebounded from 2020, which was more severely impacted by the COVID-19 global pandemic. For payment processing services, dollar volumes experienced a significant increase during 2021 which contributed to the increase in total fee revenue and other income. The Federal Reserve’s actions to lower the Federal Funds rate during the first quarter of 2020 adversely impacted net interest income. However, an increase in interest-earning assets, specifically in loans and investment securities, were able to mostly offset the impact of a lower interest rate environment and resulting lower net interest margin. Total operating expenses increased as a higher number of transactions processed had a corresponding rise in personnel and other expenses. The asset quality of the Company’s loans and investments as of December 31, 2021 remained strong.

Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the 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. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to the Company's Consolidated Financial Statements are included in Item 8, "Financial Statements and Supplementary Data—Note 1.”

The accounting policy that requires significant management estimates and is deemed critical to the Company’s results of operations or financial position has been discussed with the Audit Committee of the Board of Directors and is described below.

Allowance for Credit Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses. The process combines many factors: economic factors, historical credit loss experience, of both the Company and similar peer banks, loan portfolio growth and concentrations, asset quality, lending management experience and risk tolerance, and other qualitative and quantitative factors which could affect future credit loss. Given the Company's recent historical loss experience, the impact of the qualitative risk factors related to the collective ACL is a substantial percentage of the overall ACL. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may

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not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Various regulatory agencies, as an integral part of the examination process, periodically review the ACL. Such agencies may require the Company to recognize additions to the ACL or reserve increases to adversely graded classified loans based on information available to them at the time of their examinations. The Company believes the level of ACL is appropriate. 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 Note 1 Summary of Significant Accounting Policies and Note 4 Loans, as well as the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.

Impact of COVID-19 on the Company’s Business

During the year ended December 31, 2020, the effects of COVID-19 and related actions to attempt to control its spread significantly impacted the global economy and adversely affected the Company’s operating results in both the Information Services and Banking Services segments. Substantial progress has been made to combat the spread of COVID-19, and financial results for the year-ended December 31, 2021 were driven, in part, by the continual improvement in economic conditions as compared to the same period in 2020, when the negative economic impact of the COVID-19 pandemic was most pronounced on Cass and its customers. Though macroeconomic conditions continue to trend positive as of December 31, 2021, the Company could experience future negative effects on its business, financial condition, results of operations, and cash flows if there continue to be significant outbreaks of COVID-19.

Information Services

With the spread of COVID-19 to the U.S. in the first quarter of 2020, many state and local governments recommended or mandated limitations on crowd size, closures of businesses and shelter-in-place orders in order to slow the transmission. The extent and nature of government actions varied during fiscal years 2020 and 2021 based upon the then-current extent and severity of the COVID-19 pandemic within the respective localities. Severe business disruptions, resulting constrictions in the manufacturing sector for most of 2020 and into the first quarter of 2021, labor force shortages, decreased oil demand and prices and general economic uncertainty, significantly and adversely impacted the Company’s customers’ business operations and had a corresponding negative affect on the Company’s revenue generation in each sector of the Company’s Information Services segment. The Federal Reserve also took action to lower the Federal Funds rate in connection with COVID-19 relief, adversely affecting the Company’s net interest income and operating results tied to Banking Services.

However, as vaccines for combatting Covid-19 became widely available in the United States in the first half of 2021 and the economy began to improve, consumer demand for products and services rebounded. Companies critical to the global supply chain, such as those in warehousing and transporting services, continued to experience the negative effects of the pandemic-related disruptions. As a result, carrier supply scarcity led to higher transportation costs and an increase in the Company’s transportation payment and processing fee revenues in fiscal 2021.

Banking Services

Like all banks and bank holding companies, the Company’s Banking Services segment has been especially impacted by instability in the global capital markets due to the COVID-19 pandemic. The Federal Reserve also took action to lower the Federal Funds rate to near zero levels in connection with COVID-19 relief, adversely affecting the Company’s net interest income and operating results tied to Banking Services.

During 2020 and into the first half of 2021, Bank regulatory agencies and various governmental authorities urged financial institutions to work prudently with borrowers who were unable to meet their contractual payment obligations because of the effects of COVID-19. Accordingly, and in coordination with its primary regulators, the Company deferred borrower principal payments on loans, on an as needed basis, for periods of up to six months. There were no borrowers remaining on deferred terms at December 31, 2021.

In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was adopted on March 27, 2020. The CARES Act provided for an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Among other things, the CARES Act established the Paycheck Protection Program (“PPP”), which allowed entities to apply for low-interest private loans to fund payroll and other costs which, subject to certain conditions and qualifications, are partially or fully forgivable. In March 2021, the American Rescue Plan Act of 2021 was enacted, which among other things, provided for additional funding and expansion of the PPP. In support of the CARES Act, the Bank processed nearly 350 applications for PPP loans of approximately $170,000,000 during the year ended December 31, 2020 and an additional 110 applications for approximately $40,000,000 during the year-ended December 31, 2021 to provide much-needed cash to small business and self-employed taxpayers during the COVID-19 crisis. The loans were primarily made to existing bank customers and are

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100% guaranteed by the SBA. As of December 31, 2021, substantially all of these PPP loans were forgiven by the SBA with $6,299,000 remaining outstanding.

Throughout 2020 and 2021, Congress enacted several pieces of legislation aimed at providing economic aid and stimulus to individuals and businesses in response to the Covid-19 pandemic’s severe economic interruptions. Among others, these significant actions included direct federal stimulus payments, a moratorium on evictions and foreclosures, deferral of federal student loan payments, increases in tax benefits, state and local government funding, and an expansion of bankruptcy relief for small businesses and individuals.

The stimulus actions of the federal government and policies implemented by the Federal Reserve have contributed to an increase in inflation during most of 2021. As a result, in December 2021, the Federal Reserve released projections related to the target range for the Federal Funds rate that imply varied increases in the rate over the next few years. There can be no assurance that any increases in the Federal Funds rate will occur, and the Company continues to monitor these developments.

While vaccination efforts are ongoing and a significant amount of previous business and other restrictions have been lifted, the ongoing impact of COVID-19, including any increases in infection rates, new variants, supply chain disruptions, labor force shortages, renewed restrictions to combat its spread, and the enactment of new laws and regulations that affect banks and bank holding companies, cannot be estimated. Given these and other uncertainties discussed throughout this report, the Company remains subject to heightened risk, and the aggregate impact that COVID-19 could have on the Company’s financial condition and operating results is presently unknown.

The Company remains committed to creating a safe and healthy environment for employees while offering assurance that it remains a financially strong service provider possessing the resources necessary to weather this pandemic in support of its valued customers.

For further discussion on COVID-19 and its impact on the Company, refer to Item 8, “Financial Statements and Supplementary Data—Note 1.

Summary of Results

[[GREPCENT_TABLE]]
[["(In thousands except per share data)","For the Years Ended December 31,","","% Change"],["2021","","2020","","2019","","2021 v. 2020","","2020 v. 2019"],["Fee revenue and other income","$","109,691","","","$","100,441","","","$","110,069","","","9.2","%","","(8.7)","%"],["Net interest income after provision","44,456","","","44,515","","","47,166","","","(0.1)","","","(5.6)"],["Operating expense","120,326","","","114,615","","","119,769","","","5.0","","","(4.3)"],["Income before income tax expense","33,821","","","30,341","","","37,466","","","11.5","","","(19.0)"],["Income tax expense","5,217","","","5,165","","","7,062","","","1.0","","","(26.9)"],["Net income","$","28,604","","","$","25,176","","","$","30,404","","","13.6","","","(17.2)"],["Diluted earnings per share","$","2.00","","","$","1.73","","","$","2.07","","","15.6","","","(16.4)"],["Average earning assets","$","1,999,609","","","$","1,674,297","","","$","1,472,399","","","19.4","","","13.7"],["Return on average assets","1.23","%","","1.29","%","","1.74","%","","\u2014","","","\u2014"],["Return on average equity","11.29","%","","10.23","%","","12.86","%","","\u2014","","","\u2014"],["Net interest margin(1)","2.31","%","","2.82","%","","3.36","%","","\u2014","","","\u2014"],["Total processing volume","64,039","","","60,476","","","63,567","","","5.9","","","(4.9)"],["Total invoice dollars processed and paid","$","52,697,397","","","$","39,975,033","","","$","42,973,242","","","31.8","","","(7.0)"]]
[[/GREPCENT_TABLE]]

(1)Presented on a tax-equivalent basis.

The results of 2021 compared to 2020 include the following significant items:

Overall, the Company’s revenue and profitability improved, primarily as a result of the increases in total processing volume and total invoice dollars processed and paid as compared to the prior year. Processing volume and invoice dollars processed increased 6% and 32%, respectively. The significant increase in dollars processed was due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply,

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among other factors. In addition, far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020 also contributed to the increase. The higher dollar volumes helped produce the 10% increase in payment and processing fees via financial fees earned on payment volumes.

The increase in dollar volumes also assisted in driving an increase in average earning assets of 19%. However, net interest income after provision for credit losses was flat year over year. The Federal Reserve’s actions to lower the Federal Funds rate in the first quarter of 2020, adversely impacted the net interest rate margin which declined to 2.31% as compared to 2.82%in the prior year. The increase in average earning assets partially offset the impact of the near-zero interest rate environment on the Company’s net interest margin. There was also a release of credit losses recorded of $130,000 in 2021 compared to a provision for credit losses of $810,000 in 2020. The positive variance in the provision for credit losses was primarily due to improved economic conditions in 2021, partially offset by the impact of loan growth on the Company's ACL calculation.

Operating expenses increased 5%, as the increase in the number of transactions processed had a corresponding impact on personnel expense. In addition, the Company continued the strategic investment in various technology initiatives in an effort to improve customer experience and drive efficiencies with respect to invoice payment and processing.

The Company's return on average equity and diluted earnings per share improved as compared to the prior year driven by higher earnings and share buybacks which reduced outstanding diluted shares and shareholders' equity.

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, discounts received for services provided to carriers 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:

[[GREPCENT_TABLE]]
[["(In thousands)","December 31,","","% Change"],["2021","","2020","","2019","","2021 v. 2020","","2020 v. 2019"],["Transportation invoice transaction volume","36,783","","","33,184","","","36,042","","","10.8","%","","(7.9)","%"],["Transportation invoice dollar volume","$","36,829,841","","","$","26,516,803","","","$","28,090,514","","","38.9","","","(5.6)"],["Expense management transaction volume(1)","27,256","","","27,292","","","27,525","","","(0.1)","","","(0.8)"],["Expense management dollar volume(1)","$","15,867,556","","","$","13,458,230","","","$","14,882,728","","","17.9","","","(9.6)"],["Payment and processing revenue","$","106,455","","","$","97,204","","","$","107,953","","","9.5","","","(10.0)"],["Bank service fees","$","2,239","","","$","1,704","","","$","1,386","","","31.4","","","22.9"],["Gains on sales of investment securities","$","51","","","$","1,075","","","$","19","","","(95.3)","","","5,557.9"],["Other","$","946","","","$","458","","","$","711","","","106.6","","","(35.6)"]]
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(1)Includes energy, telecom and environmental

The increase in invoice transaction volume in transportation was driven by an increase in economic activity as compared to 2020 in addition to new customer acquisition. Transaction volumes in expense management were flat year over year as new customer acquisition almost fully offset the loss of one large customer in the prior year.

The 39% increase in dollars processed in transportation was due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply, among other factors. The 18% increase in dollar volumes in expense management was driven by far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020.

The higher dollar volumes helped produce the 10% increase in payment and processing fees via financial fees earned on payment volumes. In addition, the increase in transportation invoice transaction volume also positively contributed to the increase in payment and processing fees in 2021.

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Bank service fees increased 31% year over year due to organic growth, specifically growth in the Company's integrated payments business.

There were gains from the sale of securities in 2021 and 2020 of $51,000 and $1,075,000, respectively.

Other income increased primarily due to the purchase of additional bank-owned life insurance in September 2021 and an increase in death benefits received over the prior year.

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:

[[GREPCENT_TABLE]]
[["(In thousands)","December 31,","","% Change"],["2021","","2020","","2019","","2021 v. 2020","","2020 v. 2019"],["Average earning assets","$","1,999,609","","","$","1,674,297","","","$","1,472,399","","","19.4","%","","13.7","%"],["Net interest income (1)","$","46,199","","","$","47,214","","","$","49,501","","","(2.1)","%","","(4.6)","%"],["Net interest margin (1)","2.31","%","","2.82","%","","3.36","%"],["Yield on earning assets (1)","2.37","%","","2.96","%","","3.71","%"],["Rate on interest bearing liabilities","0.20","%","","0.49 %","","1.32","%"]]
[[/GREPCENT_TABLE]]

(1)Presented on a tax-equivalent basis using a tax rate of 21%.

The decrease in net interest income in 2021 compared to 2020 is primarily due to the Federal Reserve’s actions to lower the Federal Funds rate in the first quarter of 2020, adversely impacting the net interest rate margin which declined to 2.31% as compared to 2.82% in the prior year. An increase in average earning assets partially offset the impact of the near-zero interest rate environment on the Company’s net interest margin. The yield on interest-earning assets declined 59 basis points from 2.96% in 2020 to 2.37% in 2021 while the cost of interest-bearing liabilities declined 29 basis points from 0.49 % in 2020 to 0.20% in 2021.

Average loans decreased $18,699,000, or 2%, to $887,662,000. This decrease was primarily the result of the decline in the average balance of PPP loans of $49,758,000 due to the forgiveness of these loans throughout the year. Excluding PPP loans, average loans increased $31,060,000. The average yield on loans declined 20 basis points to 3.96% in 2021 due to the continued repricing of loans in the current low interest rate environment in addition to lower fees earned on PPP loans.

Average investment securities increased $132,303,000, or 36%. The Company purchased investment securities throughout 2021 in an effort to deploy short-term investments into investment securities to enhance the yield on interest-earning assets. The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. The average yield on investment securities declined 62 basis points to 2.30% in 2021 due to the purchase of investment securities in 2021 in a historically low rate environment.

Average short-term investments, consisting of interest bearing deposits in other financial institutions and federal funds sold, increased $211,963,000, or 53%. The increase is a result of the increase in the average balance of deposits and accounts and drafts payable, partially offset by the purchase of investment securities. The average yield on short-term investments declined 18 basis points to 0.12% in 2021. The vast majority of these short-term investments are held at the Federal Reserve Bank.

Average interest-bearing deposits increased $111,651,000, or 23%, and average non-interest-bearing demand deposits increased $91,447,000, or 26%. These increases were largely due to the impact of government stimulus programs and resulting cash deposits, along with an increase in the Company's integrated payments activity. The cost of interest-bearing deposits decreased 29 basis points to 0.20% in 2021 as a result of the repricing of customer deposits in the historically low interest rate environment.

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Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential

The following table contains 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:

[[GREPCENT_TABLE]]
[["(In thousands)","2021","","2020","","2019"],["Average Balance","","Interest Income/ Expense","","Yield/ Rate","","Average Balance","","Interest Income/ Expense","","Yield/ Rate","","Average Balance","Interest Income/ Expense","","Yield/ Rate"],["Assets (1)"],["Interest-earning assets"],["Loans (2), (3):","$","887,662","","","$","35,178","","","3.96","%","","$","906,361","","","$","37,665","","","4.16","%","","$","760,153","","$","36,461","","","4.80","%"],["Securities (5):"],["Taxable","192,885","","","2,547","","","1.32","","","75,938","","","1,686","","","2.22","","","103,473","","2,465","","","2.38"],["Tax-exempt (4)","304,672","","","8,919","","","2.93","","","289,316","","","8,993","","","3.11","","","319,911","","9,924","","","3.10"],["Certificates of deposit","\u2014","","","\u2014","","","\u2014","","","255","","","6","","","2.35","","","1,573","","32","","","2.03"],["Short-term investments","614,390","","","726","","","0.12","","","402,427","","","1,226","","","0.30","","","287,289","","5,812","","","2.02"],["Total interest-earning assets","1,999,609","","","47,370","","","2.37","","","1,674,297","","","49,576","","","2.96","","","1,472,399","","54,694","","","3.71"],["Non-interest-earning assets"],["Cash and due from banks","21,220","","","","","","","16,979","","","","","","","15,455"],["Premises and equipment, net","17,846","","","","","","","19,623","","","","","","","21,319"],["Payments in excess of funding","211,809","","","","","","","160,692","","","","","","","168,186"],["Bank owned life insurance","26,766","","","","","","","17,817","","","","","","","17,489"],["Goodwill and other intangibles","17,273","","","","","","","18,132","","","","","","","15,433"],["Other assets","51,064","","","","","","","55,586","","","","","","","49,736"],["Allowance for credit losses","(11,595)","","","","","","","(11,016)","","","","","","","(10,443)"],["Total assets","$","2,333,992","","","","","","","$","1,952,110","","","","","","","$","1,749,574"],["Liabilities and Shareholders\u2019 Equity (1)"],["Interest-bearing liabilities"],["Interest-bearing demand deposits","$","521,409","","","$","582","","","0.11","%","","$","398,585","","","$","1,313","","","0.33","%","","$","311,434","","$","3,686","","","1.18","%"],["Savings deposits","18,398","","","9","","","0.05","","","13,819","","","24","","","0.17","","","10,285","","103","","","1.00"],["Time deposits =$250","14,576","","","139","","","0.95","","","20,036","","","267","","","1.33","","","17,634","","281","","","1.59"],["Other time deposits","37,676","","","441","","","1.17","","","47,970","","","756","","","1.58","","","55,490","","1,121","","","2.02"],["Total interest-bearing deposits","592,059","","","1,171","","","0.20","","","480,410","","","2,360","","","0.49","","","394,843","","5,191","","","1.31"],["Short-term borrowings","10","","","\u2014","","","\u2014","","","61","","","2","","","3.28","","","61","","2","","","3.28"],["Total interest-bearing liabilities","592,069","","","1,171","","","0.20","","","480,471","","","2,362","","","0.49","","","394,904","","5,193","","","1.32"],["Noninterest-bearing liabilities"],["Demand deposits","447,880","","","","","","","356,433","","","","","","","276,301"],["Accounts and drafts payable","986,572","","","","","","","803,605","","","","","","","785,202"],["Other liabilities","54,035","","","","","","","65,513","","","","","","","56,700"],["Total liabilities","2,080,556","","","","","","","1,706,022","","","","","","","1,513,107"],["Shareholders\u2019 equity","253,436","","","","","","","246,088","","","","","","","236,467"],["Total liabilities and share-holders\u2019 equity","$","2,333,992","","","","","","","$","1,952,110","","","","","","","$","1,749,574"],["Net interest income (4)","","","$","46,199","","","","","","","$","47,214","","","","","","$","49,501"],["Net interest margin (4)","","","","","2.31","%","","","","","","2.82","%","","","","","3.36","%"],["Interest spread","","","","","2.17","%","","","","","","2.47","%","","","","","2.39","%"]]
[[/GREPCENT_TABLE]]

(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 Item 8, Note 1 of this report.

(3)Interest income on loans includes net loan fees of $3,412,000, $3,608,000, and $650,000 for 2021, 2020 and 2019, respectively. Loan fees include $2,634,000 and $3,057,000 of PPP loan fees for 2021 and 2020, respectively.

(4)Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%. The tax-equivalent adjustment was approximately $1,873,000, $1,889,000, and $2,085,000 for 2021, 2020 and 2019, respectively.

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

Analysis of Net Interest Income Changes

The following table presents the changes in interest income and expense between years due to changes in volume and interest rates.

[[GREPCENT_TABLE]]
[["(In thousands)","2021 Over 2020","","2020 Over 2019"],["Volume (1)","","Rate (1)","","Total","","Volume(1)","","Rate (1)","","Total"],["Increase (decrease) in interest income:"],["Loans (2), (3):","$","(766)","","","$","(1,721)","","","$","(2,487)","","","$","6,476","","","$","(5,272)","","","$","1,204"],["Securities:"],["Taxable","1,761","","","(900)","","","861","","","(620)","","","(159)","","","(779)"],["Tax-exempt (4)","463","","","(537)","","","(74)","","","(951)","","","20","","","(931)"],["Certificates of deposit","(6)","","","\u2014","","","(6)","","","(30)","","","4","","","(26)"],["Short-term investments","256","","","(756)","","","(500)","","","1,467","","","(6,053)","","","(4,586)"],["Total interest income","$","1,708","","","$","(3,914)","","","$","(2,206)","","","$","6,342","","","$","(11,460)","","","$","(5,118)"],["Interest expense on:"],["Interest-bearing demand deposits","$","318","","","$","(1,049)","","","$","(731)","","","$","828","","","$","(3,201)","","","$","(2,373)"],["Savings deposits","6","","","(21)","","","(15)","","","27","","","(106)","","","(79)"],["Time deposits =$250","(63)","","","(65)","","","(128)","","","36","","","(50)","","","(14)"],["Other time deposits","(143)","","","(172)","","","(315)","","","(139)","","","(226)","","","(365)"],["Short-term borrowings","(1)","","","(1)","","","(2)","","","\u2014","","","\u2014","","","\u2014"],["Total interest expense","117","","","(1,308)","","","(1,191)","","","752","","","(3,583)","","","(2,831)"],["Net interest income","$","1,591","","","$","(2,606)","","","$","(1,015)","","","$","5,590","","","$","(7,877)","","","$","(2,287)"]]
[[/GREPCENT_TABLE]]

(1)The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the change in each.

(2)Average balances include nonaccrual loans.

(3)Interest income includes net loan fees.

(4)Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%.

Loan Portfolio

Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was $960,567,000 representing 38% of the Company's total assets as of December 31, 2021 and generated $35,178,000 in interest income during the year then ended. The following tables show the composition of the loan portfolio at the end of the periods indicated and remaining maturities for loans as of December 31, 2021.

[[GREPCENT_TABLE]]
[["Loans by Type","December 31,"],["(In thousands)","2021","","2020","","2019"],["Commercial and industrial","$","450,336","","","$","298,984","","","$","323,857"],["Real estate (commercial and faith-based):"],["Mortgage","464,341","","","434,080","","","407,480"],["Construction","39,461","","","48,908","","","41,244"],["PPP","6,299","","","109,704","","","\u2014"],["Other","130","","","\u2014","","","57"],["Total loans","$","960,567","","","$","891,676","","","$","772,638"]]
[[/GREPCENT_TABLE]]

27

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Loans by Maturity as of December 31, 2021

[[GREPCENT_TABLE]]
[["(In thousands)","One Year Or Less","","Over 1 Year Through 5 Years","","Over 5 Years Through 15 Years (1)","","Total"],["Fixed Rate","","Floating Rate","","Fixed Rate","","Floating Rate","","Fixed Rate","","Floating Rate"],["Commercial and industrial","$","30,378","","","$","54,011","","","$","156,084","","","$","17,035","","","$","180,234","","","$","12,594","","","$","450,336"],["Real Estate:"],["Mortgage","58,516","","","11,984","","","302,450","","","3,503","","","74,648","","","13,240","","","464,341"],["Construction","14,698","","","13,337","","","878","","","10,548","","","\u2014","","","\u2014","","","39,461"],["PPP","\u2014","","","\u2014","","","6,299","","","\u2014","","","\u2014","","","\u2014","","","6,299"],["Other","\u2014","","","130","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","130"],["Total loans","$","103,592","","","$","79,462","","","$","465,711","","","$","31,086","","","$","254,882","","","$","25,834","","","$","960,567"]]
[[/GREPCENT_TABLE]]

(1)The Company did not have any loans with maturities greater than 15 years.

The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan portfolio composition table and as are discussed in Item 8, Note 4, of this report. As can be seen in the loan composition table above and as discussed in Item 8, Note 4, the Company's primary market niche for banking services is privately held businesses, franchise restaurants, and faith-based ministries.

Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable, inventory, machinery and equipment, and the real estate from which the borrower operates. Operating lines of credit to these companies generally are secured by accounts receivable and inventory, with specific percentages of each determined on a customer-by-customer basis based on various factors including the type of business. Intermediate term credit for machinery and equipment is generally provided at some percentage of the value of the equipment purchased, depending on the type of machinery or equipment purchased by the entity. Loans secured exclusively by real estate to businesses and faith-based ministries are generally made with a maximum 80% loan to value ratio, depending upon the Company's estimate of the resale value and ability of the property to generate cash. The Company's loan policy requires an independent appraisal for all loans over $500,000 secured by real estate. Company management monitors the local economy in an attempt to determine whether it has had a significant deteriorating effect on such real estate loans. When problems are identified, appraised values are updated on a continual basis, either internally or through an updated external appraisal.

Loans increased $68,891,000, or 8%, during 2021 to $960,567,000 as of December 31, 2021. Franchise restaurant loans, which are included in commercial and industrial loans, increased $100,593,000 or 114%, during 2021 to $189,074,000 as of December 31, 2021. The increase in franchise loans was due to organic growth in an effort to expand this loan type. The Company also experienced organic loan growth in other loan types. These increases were partially offset by the decrease in PPP loans of $103,405,000 from $109,704,000 at December 31, 2020 to $6,299,000 at December 31, 2021. The decrease in PPP loans was due to ongoing forgiveness of these loans by the SBA in 2021. Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.

Provision and Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments

The Company recorded a release of credit losses and off-balance sheet credit exposures of $130,000 in 2021 and a provision for credit losses of $810,000 in 2020. The amount of the (release of) provision for credit losses was derived from the Company’s quarterly CECL model. The amount of the provision will fluctuate as determined by these quarterly analyses. The Company had net loan recoveries of $27,000 and $20,000 in 2021 and 2020, respectively. The ACL was $12,041,000 at December 31, 2021 compared to $11,944,000 at December 31, 2020. The ACL represented 1.25% of outstanding loans at December 31, 2021 as compared to 1.34% of outstanding loans at December 31, 2020. The allowance for unfunded commitments was $367,000 at December 31, 2021 and $567,000 at December 31, 2020. There were no nonperforming loans outstanding at December 31, 2021 and December 31, 2020.

The ACL has been established and is maintained to estimate the lifetime credit losses expected in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans. For loans that are individually

28

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evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value.

Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL. These agencies may require the Company to adjust the ACL based on their judgments and interpretations about information available to them at the time of their examinations.

The following schedule summarizes activity in the ACL and the allocation of the allowance to the Company’s loan categories.

Summary of Credit Loss Experience

[[GREPCENT_TABLE]]
[["(In thousands)","December 31,"],["2021","","2020","","2019","","2018","","2017"],["Allowance at beginning of year","$","11,944","","","$","11,279","","","$","10,225","","","$","10,205","","","$","10,175"],["Loans charged-off:"],["Commercial and industrial","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Real estate (commercial and faith-based):"],["Mortgage","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Construction","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Other","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total loans charged-off","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Recoveries of loans previously charged-off:"],["Commercial and industrial","12","","","19","","","81","","","20","","","30"],["Real estate (commercial and faith-based):"],["Mortgage","15","","","1","","","\u2014","","","\u2014","","","\u2014"],["Construction","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Other","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total recoveries of loans previously charged-off","27","","","20","","","81","","","20","","","30"],["Net loans recovered","(27)","","","(20)","","","(81)","","","(20)","","","(30)"],["Provision for credit losses","70","","","645","","","250","","","\u2014","","","\u2014"],["Allowance at end of year","$","12,041","","","$","11,944","","","$","10,556","","","$","10,225","","","$","10,205"],["Cumulative effect of accounting change (ASU 2016-13)","\u2014","","","\u2014","","","723","","","\u2014","","","\u2014"],["Allowance at beginning of next year","$","12,041","","","$","11,944","","","$","11,279","","","$","10,225","","","$","10,205"],["Allowance for unfunded commitments at beginning of year","$","567","","","$","402","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["(Release of) provision for credit losses","(200)","","","165","","","\u2014","","","\u2014","","","\u2014"],["Allowance for unfunded commitments at end of year","367","","","567","","","\u2014","","","\u2014","","","\u2014"],["Cumulative effect of accounting change (ASU 2016-13)","\u2014","","","\u2014","","","402","","","\u2014","","","\u2014"],["Allowance for unfunded commitments at beginning of next year","$","367","","","$","567","","","$","402","","","$","\u2014","","","$","\u2014"],["Loans outstanding:"],["Average","$","887,662","","","$","906,631","","","$","760,153","","","$","710,846","","","$","663,653"],["December 31","960,567","","","891,676","","","772,638","","","721,587","","","686,231"],["Ratio of allowance for credit losses to loans outstanding:"],["Average","1.36","%","","1.32","%","","1.39","%","","1.44","%","","1.54","%"],["December 31","1.25","%","","1.34","%","","1.37","%","","1.42","%","","1.49","%"],["Ratio of net recoveries to average loans outstanding","\u2014","","","\u2014","","","(.01)","%","","\u2014","","","\u2014"],["Allocation of allowance for credit losses (1):"],["Commercial and industrial","$","5,035","","","$","4,635","","","$","4,874","","","$","4,179","","","$","3,652"],["Real estate (commercial and faith-based):"],["Mortgage","6,714","","","6,892","","","5,370","","","5,378","","","5,356"],["Construction","292","","","417","","","312","","","244","","","266"],["Other","\u2014","","","\u2014","","","\u2014","","","424","","","931"],["Total","$","12,041","","","$","11,944","","","$","10,556","","","$","10,225","","","$","10,205"],["Percentage of categories to total loans:"],["Commercial and industrial","46.9","%","","33.5","%","","41.9","%","","38.4","%","","34.4","%"],["Real estate (commercial and faith-based):"],["Mortgage","48.3","%","","48.7","%","","52.8","%","","57.1","%","","59.9","%"],["Construction","4.1","%","","5.5","%","","5.3","%","","4.5","%","","5.1","%"],["PPP","0.7","%","","12.3","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Other","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%","","0.6","%"],["Total","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

(1)Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.

Nonperforming Assets

Nonperforming loans are defined as loans on non-accrual status and loans 90 days or more past due but still accruing. Nonperforming assets include nonperforming loans plus foreclosed real estate. Troubled debt restructurings are not included in nonperforming loans unless they are on non-accrual status or past due 90 days or more.

It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan for which collection is not probable. Subsequent payments received on such loans are applied to principal if collection of principal is not probable; otherwise, these receipts are recorded as interest income. There was no interest income recognized on nonaccrual loans for the years ended 2021 and 2020.

There were no nonaccrual loans or foreclosed assets at December 31, 2021 or December 31, 2020.

The Company does not have any foreign loans. The Company's loan portfolio does not include a significant amount of single family real estate mortgages, as the Company does not market its services to retail customers. Also, the Company had no sub-prime mortgage loans or residential development loans in its portfolio in any of the years presented.

The Company does not have any other interest-earning assets which would have been included in nonaccrual, past due or restructured loans if such assets were loans.

29

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Summary of Nonperforming Assets

[[GREPCENT_TABLE]]
[["(In thousands)","December 31,"],["2021","","2020","","2019","","2018","","2017"],["Commercial and industrial:"],["Nonaccrual","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Contractually past due 90 days or more and still accruing","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Real estate \u2013 mortgage:"],["Nonaccrual","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Contractually past due 90 days or more and still accruing","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming loans","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Total foreclosed assets","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total nonperforming assets","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

Operating Expenses

Operating expenses in 2021 compared to 2020 and 2019 include the following significant pre-tax components:

[[GREPCENT_TABLE]]
[["(In thousands)","December 31,"],["2021","","2020","","2019"],["Personnel","$","92,155","","","$","88,062","","","$","91,083"],["Occupancy","3,824","","","3,739","","","3,918"],["Equipment","6,745","","","6,568","","","6,140"],["Amortization of intangible assets","859","","","859","","","563"],["Other operating","16,743","","","15,387","","","18,065"],["Total operating expense","$","120,326","","","$","114,615","","","$","119,769"]]
[[/GREPCENT_TABLE]]

Personnel expense increased $4,093,000, or 5%, to $92,155,000 as a result of: a) an increase in 401(k) match expense of $1,980,000 due to the increase in Company 401(k) match as a result of the freezing of the defined benefit pension plan in February 2021; b) an increase in base salaries and other benefits (i.e. payroll taxes) due to the increase in transaction volume in 2021 as compared to 2020 along with general salary increases; and c) an increase in profit sharing of $773,000 associated with the corresponding increase in net income. These increases were partially offset by a reduction in cost associated with the Company's defined benefit pension plan of $5,918,000 due to the freezing of the plan in February 2021.

Other operating expense increased $1,356,000, or 9%, to $16,743,000 as a result of: a) an increase in business development expense; b) an increase in data processing and other outside service charges related to increased payment volumes; and c) an increase in employee procurement expense. These increases were partially offset by a decrease in professional fees as a result of the hiring of a General Counsel in late 2020 and an associated decrease in outside legal fees.

Income Tax Expense

Income tax expense in 2021 totaled $5,217,000, compared to $5,165,000 in 2020. When measured as a percent of pre-tax income, the Company’s effective tax rate was 15.4% and 17.0% in 2021 and 2020, respectively. The decrease in the effective tax rate in 2021 compared to 2020 was primarily due to changes in the levels of tax credits, tax-free interest income on municipal securities, income on bank-owned life insurance and other miscellaneous book to tax true-ups upon filing of the Company's tax returns for the years ended December 31, 2020 and 2019.

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Investment Portfolio

Investment securities increased $315,727,000, or 88%, during 2021 to $673,453,000 at December 31, 2021. State and political subdivision securities increased $65,154,000, or 21%, to $371,128,000. Mortgage-backed securities increased $116,894,000, or 226%, to $168,646,000. The Company also purchased corporate bonds and asset-backed securities throughout 2021 in an effort to invest liquidity and increase the yield on interest-earning assets. The investment portfolio provides the Company with a significant source of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates. Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s sources of funds and the economic outlook. During 2021, the Company's purchase of investment securities totaled $494,226,000.

There was no single issuer of securities in the investment portfolio at December 31, 2021 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.

[[GREPCENT_TABLE]]
[["Investments by Type"],["(In thousands)","December 31,"],["2021","","2020","","2019"],["State and political subdivisions","$","371,128","","","$","305,974","","","$","324,447"],["Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises","168,646","","","51,752","","","97,718"],["Corporate bonds","84,338","","","\u2014","","","\u2014"],["Asset-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises","49,341","","","\u2014","","","\u2014"],["Certificates of deposit","\u2014","","","\u2014","","","500"],["Total investments","$","673,453","","","$","357,726","","","$","422,665"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Investment Securities by Maturity"],["(At December 31, 2021)"],["(In thousands)","Within 1 Year","","Over 1 to 5 Years","","Over 5 to 10 Years","","Over 10 Years","","Yield"],["State and political subdivisions","$","24,168","","","$","109,064","","","$","137,986","","","$","99,910","","","2.59","%","(1)"],["Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises","43","","","238","","","24,764","","","143,601","","","1.39","%"],["Corporate bonds","\u2014","","","13,027","","","68,392","","","2,919","","","1.63","%"],["Asset-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises","\u2014","","","\u2014","","","\u2014","","","49,341","","","0.65","%"],["Total investments","$","24,211","","","$","122,329","","","$","231,142","","","$","295,771","","","2.01","%"],["Weighted average yield (1)","2.95","%","","2.92","%","","2.92","%","","1.39","%","","2.01","%"]]
[[/GREPCENT_TABLE]]

(1)Yields are presented on a tax-equivalent basis assuming a tax rate of 21% for 2021, 2020 and 2019.

Deposits and Accounts and Drafts Payable

Noninterest-bearing demand deposits increased 18% to $582,642,000 at December 31, 2021. Interest-bearing deposits increased $81,509,000, or 15%, to $638,861,000 at December 31, 2021. These balances increased considerably in 2021 as governmental stimulus programs and an increase in integrated payments activity boosted deposit balances.

Accounts and drafts payable generated by the Company in its payment processing operations increased $215,010,000, or 26%, to $1,050,396,000 at December 31, 2021. This increase was primarily the result of a significant increase in dollar volumes processed in transportation due to excess shipping miles in the freight network due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply, among other factors. An increase in dollar volumes in expense management

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driven by far fewer pandemic-related restrictions imposed on the restaurant, retail and hospitality sectors as compared to 2020 also contributed to the increase. Due to the Company’s payment processing cycle, average balances are much more indicative of the underlying activity than period-end balances since point-in-time comparisons can be misleading if the comparison dates fall on different days of the week. Average accounts and drafts payable increased $182,967,000, or 23% to $986,572,000 during 2021.

The composition of average deposits and the average rates paid on those deposits is represented in the table entitled “Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier in this discussion. The Company does not have any significant deposits from foreign depositors.

Maturities of Certificates of Deposit as of December 31, 2021

[[GREPCENT_TABLE]]
[["(In thousands)","$100 or Less","","$100 to Less Than $250","","$250 or More","","Total"],["Three months or less","$","761","","","$","14,975","","","$","3,224","","","$","18,960"],["Three to six months","681","","","1,340","","","1,483","","","3,504"],["Six to twelve months","617","","","5,472","","","2,302","","","8,391"],["Over twelve months","1,477","","","8,861","","","5,991","","","16,329"],["Total","$","3,536","","","$","30,648","","","$","13,000","","","$","47,184"]]
[[/GREPCENT_TABLE]]

Liquidity

The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources. The Company's Asset/Liability Committee (“ALCO”) has direct oversight responsibility for the Company's liquidity position and profile. Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity.

The balances of liquid assets consist of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and money market funds, totaled $514,928,000 at December 31, 2021, a decrease of $155,600,000, or 23%, from December 31, 2020. The decrease during 2021 is primarily attributed to the funds being used for purchases of available-for-sale investment securities. At December 31, 2021, cash and cash equivalents represented 20% of total assets and are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment securities available-for-sale at fair value were $673,453,000 at December 31, 2021, an increase of $315,727,000, or 88%, from December 31, 2020. Investment securities represented 26% of total assets at December 31, 2021. Of the total portfolio, 4% mature in one year or less, 18% mature after one year through five years and 78% mature after five years.

As of December 31, 2021, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83,000,000 in aggregate. As of December 31, 2021, the Bank had secured lines of credit with the Federal Home Loan Bank of $228,849,000 collateralized by commercial mortgage loans. At December 31, 2021, the Company had lines of credit from two banks up to a maximum of $150,000,000 in aggregate collateralized by state and political subdivision securities. There were no amounts outstanding at December 31, 2021, and 2020 under any of the lines of credit.

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 many other commercial products of the Bank. The accounts and drafts payable generated by the Company have also historically been a stable source of funds.

Net cash flows provided by operating activities for the years 2021, 2020 and 2019 were $34,547,000, $47,781,000, and $42,126,000, respectively. Net income plus depreciation and amortization accounts for most of the operating cash provided. 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

32

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balances. Further analysis of the changes in these account balances is discussed earlier in this report. Due to the daily fluctuations in these account balances, management believes that 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, cash from operations, and borrowing lines will continue to be sufficient to fund the Company’s operations and capital expenditures in 2022. The Company anticipates the annual capital expenditures for 2022 should range from $8 million to $10 million. Capital expenditures in 2022 are expected to consist of equipment and software related to the payment and information processing services business.

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 noninterest-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. Lower levels of economic activity decrease both fee income (as fewer invoices are processed) and balances of accounts and drafts payable generated (as fewer invoices are processed) from the Company’s transportation customers.

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 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. During 2021, new business was added in both the transportation and facility expense management operations, driven by both successful marketing efforts and the solid market leadership position held by Cass.

Capital Resources

One of management’s primary objectives is to maintain a strong capital base to warrant the confidence of customers, shareholders, and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities that arise and to provide assurance to depositors and creditors. The Company and its banking subsidiary continue to exceed all regulatory capital requirements, as evidenced by the capital ratios at December 31, 2021 as shown in Item 8, Note 2 of this report.

In 2021, cash dividends paid were $15,446,000, a decrease of $153,000, or 1%, compared to $15,599,000 in 2020. The decrease is attributable to the amount of shares repurchased, partially offset by the increase to the per-share amount paid during the fourth quarter of 2021.

Shareholders’ equity was $245,798,000, or 10% of total assets, at December 31, 2021, a decrease of $15,362,000 as compared to December 31, 2020. The decrease was primarily a result of the repurchase of treasury shares of $30,997,000 and the payment of cash dividends of $15,446,000, partially offset by net income of $28,604,000.

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Dividends from the Bank are a source of funds for payment of dividends by the Company to its shareholders. The only restrictions on dividends are those dictated by regulatory capital requirements, state corporate laws and prudent and sound banking principles. During 2021, the Bank paid a dividend of $15,000,000 to the Company. As of December 31, 2021, unappropriated retained earnings of $34,976,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

The Company maintains a treasury stock buyback program approved by the Board of Directors in October 2021 pursuant to which the Board of Directors has authorized the repurchase of up to 750,000 shares of the Company’s common stock and has no expiration date. During the three months ended December 31, 2021, the Company repurchased a total of 278,919 shares of its common stock pursuant to its treasury stock buyback program. As such, 471,081 shares remain under the buyback program at December 31, 2021.

The Company repurchased a total of 713,857 shares at an aggregate cost of $30,997,000 during the year ended December 31, 2021 and 162,901 shares at an aggregate cost of $6,825,000 during the year ended December 31, 2020. A portion of the repurchased shares may be used for the Company’s employee benefit plans, and the balance will be available for other general corporate purposes. The pace of future repurchase activity will depend on factors such as levels of regulatory capital, cash generation from operations, cash requirements for investments, repayment of debt, current stock price, business and market conditions, and other factors. The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.

Impact of Inflation

Inflation could have the impact of increasing our operating expenses, such as compensation expense. Inflationary pressures may also have an impact on total assets, earnings and capital, which could impact the Company's ability to grow. During 2021, supply chain disruption and inflation, among other factors, had the impact of increasing the average balance of accounts and drafts payable and total assets. An increase in total assets could have the impact of decreasing our regulatory capital ratios if earnings and total regulatory capital do not increase at the same rate. As a result of rising inflation, in December 2021, the Federal Reserve released projections related to the target range for the Federal Funds rate that imply varied increases in the rate over the next few years. There can be no assurance that any increases in the Federal Funds rate will occur, and the Company continues to monitor these developments.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

In the normal course of business, the Company is party to activities that involve credit, market and operational risk 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. 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 December 31, 2021, an allowance for unfunded commitments of $367,000 had been recorded. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Provision and Allowance for Credit Losses and Unfunded Commitments”

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 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 December 31, 2021, the balance of loan commitments, standby and commercial letters of credit were $208,395,000, $12,859,000 and $771,000, 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 its guarantees on these financial instruments. See Note 14 – Disclosures about Fair Value of Financial Instruments for more information.

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During 2021, the Company made a contribution of $330,000 to its noncontributory defined benefit pension plan. In determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets. These assumptions are determined at the beginning of the plan year based on interest rate levels and financial market performance.

For 2021, these assumptions were as follows:

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[["Assumption","Rate"],["Weighted average discount rate","2.55","%"],["Rate of increase in compensation levels","(a)"],["Expected long-term rate of return on assets","6.00","%"]]
[[/GREPCENT_TABLE]]

(a) 6.00% graded down to 3.25% over the first seven years of service.