CASS INFORMATION SYSTEMS INC (CASS) FY 2022 MD&A

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, transactional level payment services, and investment of account balances

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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. Transactional level payment services and interest income from the balances generated during the payment processing cycle are 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, 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.

The Company recorded revenue of $182.5 million in 2022, up 18.4% from the prior year, primarily due to an increase in transportation and facility dollar volumes processed and rising interest rates. Net income was $34.9 million, and diluted EPS was $2.53 per share, increases of 22.0% and 26.5% from the prior year, respectively.

The Company continues to operate profitably, posting a 1.35% return on average assets and 16.53% return on average equity. The Company’s common equity Tier 1 capital ratio was 12.80% at December 31, 2022, significantly exceeding regulatory requirements. In addition, the Company has maintained exceptional credit quality with non-performing loans to total loans of 0.11% at December 31, 2022 and no loan charge-offs during the year ended December 31, 2022.

The Company’s solid capital and liquidity positions, combined with ongoing earnings, are expected to continue to allow for investment in strategic opportunities when they become available, in addition to return of capital to shareholders. The Company delivered $20.7 million in dividend payments and share repurchases during 2022. The Company continues to invest in the technology, processes, and people required to support its multi-national customer base.

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.

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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, 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 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.

Summary of Results

The Company recorded revenue of $182.5 million in 2022, up 18.4% from the prior year, primarily due to an increase in transportation and facility dollar volumes processed and rising interest rates. Net income was $34.9 million, and diluted EPS was $2.53 per share, increases of 22.0% and 26.5% from the prior year, respectively.

The Company posted a 1.35% return on average assets and 16.53% return on average equity.

Further detail about the components of revenue and expenses are explained in the sections following.

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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:

(1)Includes energy, telecom and environmental

Financial fees increased $11.0 million, or 33.7%, in 2022 as a result of the increases in total invoice dollars processed and paid and a higher interest rate environment as compared to the prior year. Transportation and facility invoice dollars processed and paid increased 21.5% and 23.0%, respectively. The significant increase in dollars processed and paid was due to inflationary pressures and higher energy prices, among other factors.

Processing fees increased $1.9 million, or 2.5%, during 2022 largely driven by a 3.9% increase in facility transaction volumes as well as an increase in fees received for ancillary processing services.

Other revenue increased $2.4 million as compared to the prior year primarily due to the TouchPoint acquisition in June 2022 and increased bank service fees due to customer growth.

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:

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

The increase in net interest income in 2022 compared to 2021 is primarily due to the Federal Reserve’s actions to increase the Federal Funds rate throughout the year of 2022, positively affecting the net interest rate margin which increased to 2.74% as compared to 2.31% in the prior year. Additionally, a 10.3% increase in average earning assets contributed to the increase in net interest income. The yield on interest-earning assets increased 53 basis points from 2.37% in 2021 to 2.90% in 2022 while the cost of interest-bearing liabilities increased 38 basis points from 0.20% in 2021 to 0.58% in 2022.

Average loans increased $104.3 million, or 11.8%, to $992.0 million. This increase was due to solid loan growth during 2022, specifically in the Company's franchise restaurants, faith-based and lease financing receivables portfolios. These

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increases were offset by a $64.9 million decrease in average PPP loans as compared to 2021. The average yield on loans increased 2 basis points to 3.98% in 2022 as the increase in market interest rates was offset by a decline of $2.4 million in PPP loan fees.

Average investment securities increased $291.2 million, or 58.5%. The Company purchased investment securities throughout 2021 and 2022 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 tax-equivalent yield on investment securities in 2022 was consistent with 2021 at 2.30%.

Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, decreased $189.3 million, or 30.8%. The decrease is primarily a result of the increase in the average balances of investment securities, loans, payments in advance of funding and bank owned life insurance, partially offset by the increase in the average balances of deposits and accounts and drafts payable. The average yield on short-term investments increased 139 basis points to 1.51% in 2022 due to the increase in short-term market interest rates. The vast majority of these short-term investments are held at the Federal Reserve Bank.

Average interest-bearing deposits increased $11.2 million, or 1.9%, and average non-interest-bearing demand deposits increased $140.2 million, or 31.3%. These increases were largely due to organic growth within our customer base. The cost of interest-bearing deposits increased 38 basis points to 0.58% in 2022 as a result of the rising rate environment.

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:

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(1)Balances shown are daily averages.

(2)Interest income on loans includes net loan fees of $684,000, $3.4 million, and $3.6 million for 2022, 2021 and 2020, respectively. Loan fees include $167,000, $2.6 million, and $3.1 million of PPP loan fees for 2022, 2021 and 2020, respectively.

(3)Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%. The tax-equivalent adjustment was approximately $1.7 million for 2022 and $1.9 million for each of 2021 and 2020.

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

(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)Interest income includes net loan fees.

(3)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 $1.08 billion, representing 42.1% of the Company's total assets as of December 31, 2022 and generated $39.5 million 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, 2022.

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Loans by Maturity as of December 31, 2022

(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. 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 $122.3 million, or 12.7%, to $1.08 billion at December 31, 2022. Lease finance receivables and franchise restaurant loans, which are both included in commercial and industrial loans, increased $80.4 million, or 100.1%, and $34.3 million, or 18.1%, respectively, during 2022. These increases were due to organic growth in an effort to expand these loan types. Faith-based mortgages increased $31.7 million, or 8.9%, during 2022. These increases were partially offset by the decrease in PPP loans of $6.3 million at December 31, 2021 to $0 at December 31, 2022. 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 provision for credit losses and off-balance sheet credit exposures of $1.4 million in 2022 and a release of credit losses of $130,000 in 2021. The amount of the provision for (release of) credit losses was derived from the Company’s CECL model. The amount of the provision will fluctuate as determined by these analyses. The Company had net loan recoveries of $13,000 and $27,000 in 2022 and 2021, respectively. The ACL was $13.5 million at December 31, 2022 compared to $12.0 million at December 31, 2021. The ACL represented 1.25% of outstanding loans at both December 31, 2022 and December 31, 2021. The allowance for unfunded commitments was $232,000 at December 31, 2022 and $367,000 at December 31, 2021. There was one nonperforming loan outstanding with an outstanding balance of $1.2 million, or 0.11% of total loans, at December 31, 2022 and no nonperforming loans outstanding at December 31, 2021. The single nonperforming loan at December 31, 2022 paid off in full during January 2023.

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

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

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

(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 2022 and 2021.

There was one nonaccrual loan of $1.2 million at December 31, 2022 and no nonaccrual loans at December 31, 2021. There were no foreclosed assets at December 31, 2022 or December 31, 2021. The single nonperforming loan at December 31, 2022 paid off in full during January 2023.

The Company does not have any foreign loans. The Company's loan portfolio includes $212,000 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.

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Summary of Nonperforming Assets

Operating Expenses

Operating expenses in 2022 compared to 2021 and 2020 include the following significant pre-tax components:

Total operating expenses increased 16.0% in 2022 compared to 2021, primarily as a result of higher personnel and other operating expenses.

Personnel expense increased $14.3 million, or 15.5%, to $106.5 million as a result of merit increases, wage pressures, an increase in average full-time equivalent employees of 10.0% due to the TouchPoint acquisition and strategic investment in optical character recognition, artificial intelligence, machine learning and other processes to consume images and produce data. Also driving the increase in personnel expense was an increase in stock compensation and profit sharing due to improved Company earnings and the impact on performance based restricted stock. Stock compensation increased $3.9 million and profit sharing increased $1.4 million as compared to the prior year.

Other operating expense increased $5.3 million, or 31.9%, to $22.1 million as a result of higher levels of travel, business development, employee procurement, data processing, insurance, and other professional fees. Partially causing the increase in data processing, other professional fees, and other operating expenses are investments in technology initiatives, resulting in elevated expense levels as multiple technology platforms are being maintained prior to switching over to what the Company believes will be more efficient technology platforms for facility and freight data entry processing by the end of 2023.

Income Tax Expense

Income tax expense in 2022 totaled $8.0 million, compared to $5.2 million in 2021. When measured as a percent of pre-tax income, the Company’s effective tax rate was 18.6% and 15.4% in 2022 and 2021, respectively. The increase in the effective tax rate in 2022 compared to 2021 was primarily due to changes in the levels of tax credits, tax-free interest

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income on municipal securities, and other miscellaneous book to tax true-ups upon filing of the Company's tax returns for the years ended December 31, 2021 and 2020.

Investment Portfolio

Investment securities increased $81.0 million, or 12.0%, during 2022 to $754.5 million at December 31, 2022. U.S. Treasury securities increased to $155.3 million during 2022 compared to none held in 2021. State and political securities decreased $76.0 million, or 20.5%, to $295.1 million as a result of runoff in the portfolio and a decrease in fair value due to the change in market interest rates. 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 2022, the Company's purchase of investment securities totaled $232.1 million.

There was no single issuer of securities in the investment portfolio at December 31, 2022 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.

(1)Yields are presented on a tax-equivalent basis assuming a tax rate of 21%.

Deposits and Accounts and Drafts Payable

Noninterest-bearing demand deposits increased 10.3% to $642.8 million at December 31, 2022 primarily as a result of an increase in balances related to CassPay customers. These balances can fluctuate significantly on a day to day basis. Interest-bearing deposits decreased $24.4 million, or 3.8%, to $614.5 million at December 31, 2022.

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Accounts and drafts payable generated by the Company in its payment processing operations increased $17.2 million, or 1.6%, to $1.07 billion, at December 31, 2022. 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 $154.8 million, or 15.7%, to $1.14 billion during 2022. The higher average accounts and drafts payable was due to a significant increase in dollars processed from inflationary pressures and higher energy prices, among other factors.

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, 2022

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 $200.9 million at December 31, 2022, a decrease of $314.0 million, or 61.0%, from December 31, 2021. The decrease during 2022 is primarily attributed to available cash being used for purchases of available-for-sale investment securities and to fund loan growth. At December 31, 2022, cash and cash equivalents represented 7.8% 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 $754.5 million at December 31, 2022, an increase of $81.0 million, or 12.0%, from December 31, 2021. Investment securities represented 29.3% of total assets at December 31, 2022. Of the total portfolio, 8.8% mature in one year or less, 34.6% mature after one year through five years and 56.6% mature after five years.

As of December 31, 2022, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83.0 million in aggregate. As of December 31, 2022, the Bank had secured lines of credit with the Federal Home Loan Bank of $237.8 million collateralized by commercial mortgage loans. At December 31, 2022, the Company had lines of credit from three banks up to a maximum of $200.0 million in aggregate collateralized by state and political subdivision securities. There were no amounts outstanding at December 31, 2022, and 2021 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 2022, 2021 and 2020 were $51.6 million, $34.5 million, and $47.8 million, respectively. Net income plus depreciation and amortization accounts for most of the operating cash

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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 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 2023. The Company anticipates the annual capital expenditures for 2023 should range from $8 million to $10 million. Capital expenditures in 2023 are expected to consist of equipment and software related to the payment and information processing services business.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $45.9 million and $41.1 million for the years ended December 31, 2022 and 2021, respectively, an increase of $4.8 million year over year. The increase was due to the increase in net income of $6.3 million, partially offset by a decrease in net amortization of premium/discount on investment securities of $1.1 million. The net amortization of premium/discount on investment securities is dependent on the type of securities purchased and changes in the prevailing market interest rate environment.

Other factors impacting the $17.1 million increase in net cash provided by operating activities include:

•An increase in other operating activities, net of $9.4 million, primarily due to changes in various accounts receivable and payable;

•An increase in stock-based compensation expense of $3.9 million due to improved Company earnings and the impact on performance based stock; and

•A change in the provision for (release of) credit losses of $1.5 million due to loan growth in 2022.

On an overall basis, the Company's $17.1 million increase in net cash provided by operating activities was due to improved revenue and profitability largely due to higher financial fee revenue and net interest income. The improved revenue and profitability for 2022 is in large part due to a 33.7% increase in financial fees and 32.8% increase in net interest income. Financial fees increased as a result of an increase in total invoice dollars processed and paid and a higher interest rate environment as compared to the prior year. Transportation and facility invoice dollars processed and paid increased 21.5% and 23.0%, respectively. The significant increase in dollars processed and paid was due to inflationary pressures and higher energy prices, among other factors. The increase in net interest income in 2022 compared to 2021 is primarily due to the Federal Reserve’s actions to increase the Federal Funds rate throughout the year of 2022, positively affecting the net interest rate margin which increased to 2.74% as compared to 2.31% in the prior year. Additionally, a 10.3% increase in average earning assets contributed to the increase in net interest income.

The Company generated net cash provided by operating activities of $34.5 million and $47.8 million for the years ended December 31, 2021 and 2020, respectively, a decrease of $13.2 million.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $41.1 million and $36.4 million for the years ended December 31, 2021 and 2020, respectively, an increase of $4.7 million. The increase was largely due to the increase in net income of $3.4 million in addition to an increase in net amortization of premium/discount on investment securities of $1.4 million primarily resulting from the purchase of $494.2 million of securities available-for-sale in 2021, typically at a premium given the prevailing low interest rate environment.

Other factors impacting the $13.2 million decrease in net cash provided by operating activities include:

•An increase in the change in the pension liability of $6.2 million primarily due to the investment performance of the pension assets and changes in other actuarial assumptions, including the discount rate;

•A change in other operating activities, net, of $10.1 million primarily due to a $5.0 million change associated with payroll taxes deferred under the CARES Act in 2020 that were paid in 2021, and the receipt of PPP fees from the SBA in 2020 that were recognized into interest income in 2021 resulting in a $3.6 million change; partially offset by:

◦An increase in stock-based compensation expense of $592,000 due to an increase in the fair value of restricted stock grants to personnel and improved company performance; and

◦A change in the (release of) provision for credit losses of $940,000 due to improved credit quality.

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On an overall basis, despite the $13.2 million decrease in net cash provided by operating activities, the Company generated a higher level of cash from operating activities in 2021 due to improved revenue and profitability, partially offset by an increase in the negative impact of noncash items. The improved revenue and profitability for 2021 is in large part due to a 38.9% increase in dollars processed in transportation due to supply chain disruptions, fuel surcharges, and scarcity of carrier supply experienced throughout the market generally in 2021, among other factors.

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, inflation, 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 2022, 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, 2022 as shown in Item 8, Note 2 of this report.

Cash dividends paid were $15.4 million in each of 2022 and 2021.

Shareholders’ equity was $206.3 million, or 8.0% of total assets, at December 31, 2022, a decrease of $39.5 million as compared to December 31, 2021. The decrease was primarily a result of an increase in accumulated other comprehensive loss of $59.8 million due to the change in market values on investment securities as a result of the rising interest rate environment, the payment of cash dividends of $15.4 million, and the repurchase of treasury shares of $5.3 million, partially offset by net income of $34.9 million.

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 2022, the Bank paid dividends of $15.0 million to the Company. As of December 31, 2022,

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unappropriated retained earnings of $29.2 million 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. A total of 340,707 shares remain under the buyback program at December 31, 2022.

The Company repurchased a total of 130,374 shares at an aggregate cost of $5.3 million during the year ended December 31, 2022 and 713,857 shares at an aggregate cost of $31.0 million during the year ended December 31, 2021. 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 and 2022, supply chain disruption, rising energy prices 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, the Federal Reserve has increased the Federal Funds rate over the course of 2022 and into the first quarter of 2023. The increase in the Federal Funds rate has contributed to the increase in the Company's net interest margin to 2.74% in 2022 from 2.31% in 2021, therefore positively impacting net interest income. There can be no assurance that further increases in the Federal Funds rate will occur, and the Company continues to monitor such impact to its future levels of net interest income.

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, 2022, an allowance for unfunded commitments of $232,000 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, 2022, the balance of loan commitments, standby and commercial letters of credit were $237.0 million, $14.5 million and $354,000, 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 2022, the Company did not make a contribution 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 2022, these assumptions were as follows: