UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended    June 30, 2016
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________________ to ___________________

 Commission File No. 000-20827
________________
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares outstanding of the registrant's only class of common stock as of July 26, 2016: Common stock, par value $.50 per share – 11,172,333 shares outstanding.

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TABLE OF CONTENTS

PART I – Financial Information
Item 1.		FINANCIAL STATEMENTS
		Consolidated Balance Sheets
		June 30, 2016 (unaudited) and December 31, 2015		3
		Consolidated Statements of Income
		Three and six months ended June 30, 2016 and 2015 (unaudited)		4
		Consolidated Statements of Comprehensive Income
		Three and six months ended June 30, 2016 and 2015 (unaudited)		5
		Consolidated Statements of Cash Flows
		Six months ended June 30, 2016 and 2015 (unaudited)		6
		Notes to Consolidated Financial Statements (unaudited)		7
Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
		AND RESULTS OF OPERATIONS		17
Item 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
Item 4.		CONTROLS AND PROCEDURES		28
PART II – Other Information – Items 1. – 6.				28
SIGNATURES				31

Forward-looking Statements - Factors That May Affect Future Results

This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are discussed in Part I, Item 1A, “Risk Factors” of the Company’s 2015 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.

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PART I.	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

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

		June 30,
		2016				December 31,
		(Unaudited)				2015
Assets
Cash and due from banks		$	7,963			$	9,015
Interest-bearing deposits in other financial institutions			141,572				176,405
Federal funds sold and other short-term investments			124,598				67,752
Cash and cash equivalents			274,133				253,172
Securities available-for-sale, at fair value			368,041				375,696
Loans			698,134				659,055
Less: Allowance for loan losses			10,672				11,635
Loans, net			687,462				647,420
Premises and equipment, net			20,688				19,648
Investment in bank-owned life insurance			16,191				15,933
Payments in excess of funding			117,200				105,526
Goodwill			11,590				11,590
Other intangible assets, net			2,201				2,405
Other assets			23,678				24,116
Total assets		$	1,521,184			$	1,455,506
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing		$	195,636			$	181,823
Interest-bearing			435,359				464,661
Total deposits			630,995				646,484
Accounts and drafts payable			650,988				577,259
Other liabilities			28,939				24,385
Total liabilities			1,310,922				1,248,128
Shareholders’ Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued			—				—
Common stock, par value $.50 per share; 40,000,000
shares authorized and 11,931,147 shares issued at June 30, 2016
and December 31, 2015			5,966				5,966
Additional paid-in capital			125,915				126,290
Retained earnings			110,749				103,994
Common shares in treasury, at cost (761,290 shares at June 30,
2016 and 598,875 shares at December 31, 2015)			(30,631	)			(22,208	)
Accumulated other comprehensive loss			(1,737	)			(6,664	)
Total shareholders’ equity			210,262				207,378
Total liabilities and shareholders’ equity		$	1,521,184			$	1,455,506

See accompanying notes to unaudited consolidated financial statements.

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

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2016			2015			2016					2015
Fee Revenue and Other Income:
Information services payment and processing		$	20,880		$	19,699		$	40,425			$	39,117
revenue
Bank service fees			289			299			647				600
Gains on sales of securities			79			690			387				1,639
Other			209			150			503				314
Total fee revenue and other income			21,457			20,838			41,962				41,670
Interest Income:
Interest and fees on loans			7,316			7,356			14,447				14,442
Interest and dividends on securities:
Taxable			21			12			33				15
Exempt from federal income taxes			2,437			2,322			4,831				4,625
Interest on federal funds sold and
other short-term investments			236			113			476				273
Total interest income			10,010			9,803			19,787				19,355
Interest Expense:
Interest on deposits			504			521			1,017				1,112
Net interest income			9,506			9,282			18,770				18,243
Provision for loan losses			—			—			(1,000	)			—
Net interest income after provision for
loan losses			9,506			9,282			19,770				18,243
Total net revenue			30,963			30,120			61,732				59,913
Operating Expense:
Salaries and employee benefits			18,102			17,543			35,948				34,869
Occupancy			866			856			1,700				1,693
Equipment			1,110			1,070			2,165				2,141
Amortization of intangible assets			102			102			204				203
Other operating expense			2,879			3,069			5,958				6,042
Total operating expense			23,059			22,640			45,975				44,948
Income before income tax expense			7,904			7,480			15,757				14,965
Income tax expense			2,035			1,932			4,055				3,878
Net income		$	5,869		$	5,548		$	11,702			$	11,087
Basic earnings per share		$	.53		$	.49		$	1.05			$	.97
Diluted earnings per share			.52			.48			1.03				.96

See accompanying notes to unaudited consolidated financial statements.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Comprehensive income:
Net income		$	5,869			$	5,548			$	11,702			$	11,087
Other comprehensive income:
Net unrealized gain (loss) on securities
available-for-sale			4,538				(5,068	)			8,212				(3,572	)
Tax effect			(1,686	)			1,884				(3,051	)			1,327
Reclassification adjustments for gains
included in net income			(79	)			(690	)			(387	)			(1,639	)
Tax effect			29				242				143				574
Foreign currency translation adjustments			(35	)			(7	)			11				(71	)
Total comprehensive income		$	8,636			$	1,909			$	16,630			$	7,706

See accompanying notes to unaudited consolidated financial statements.

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

	Six Months Ended
	June 30,
	2016				2015
Cash Flows From Operating Activities:
Net income	$	11,702			$	11,087
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization		4,613				4,214
Net gains on sales of securities		(387	)			(1,639	)
Stock-based compensation expense		985				1,031
Provision for loan losses		(1,000	)			—
Increase (decrease) in income tax benefit		16				(1,911	)
Increase (decrease) in income tax liability		1,325				(284	)
Increase in pension liability		2,010				2,419
Other operating activities, net		(1,512	)			2,102
Net cash provided by operating activities		17,752				17,019
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale		21,491				65,952
Proceeds from maturities of securities available-for-sale		19,609				21,460
Purchase of securities available-for-sale		(28,053	)			(85,264	)
Net increase in loans		(39,042	)			(5,813	)
Increase in payments in excess of funding		(11,674	)			(283	)
Purchases of premises and equipment, net		(2,631	)			(3,384	)
Net cash used in investing activities		(40,300	)			(7,332	)
Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits		13,813				3,016
Net decrease in interest-bearing demand and savings deposits		(27,575	)			(56,514	)
Net decrease in time deposits		(1,728	)			(9,291	)
Net increase (decrease) in accounts and drafts payable		73,729				(70,896	)
Cash dividends paid		(4,947	)			(4,812	)
Purchase of common shares for treasury		(9,217	)			(6,128	)
Other financing activities, net		(566	)			(786	)
Net cash provided by (used in) financing activities		43,509				(145,411	)
Net increase (decrease) in cash and cash equivalents		20,961				(135,724	)
Cash and cash equivalents at beginning of period		253,172				294,335
Cash and cash equivalents at end of period	$	274,133			$	158,611
Supplemental information:
Cash paid for interest	$	1,009			$	1,114
Cash paid for income taxes		2,787				3,634

See accompanying notes to unaudited consolidated financial statements.

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

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2015.

Note 2 – Intangible Assets

The Company accounts for intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Goodwill and Other Intangible Assets,” (“FASB ASC 350”), which requires that intangibles with indefinite useful lives be tested annually for impairment and those with finite useful lives be amortized over their useful lives.

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

		June 30, 2016							December 31, 2015
		Gross Carrying			Accumulated				Gross Carrying			Accumulated
(In thousands)		Amount			Amortization				Amount			Amortization
Assets eligible for amortization:
Customer lists		$	3,933			(2,182	)		$	3,933		$	(2,023	)
Patents			72			(6	)			72			(4	)
Non-compete agreements			261			(235	)			261			(209	)
Software			234			(234	)			234			(234	)
Other			500			(142	)			500			(125	)
Unamortized intangible assets:
Goodwill1			11,817			(227	)			11,817			(227	)
Total intangible assets		$	16,817		$	(3,026	)		$	16,817		$	(2,822	)

The customer lists are amortized over seven and ten years; the patents over 18 years; the non-compete agreements over five years; software over three years; and other intangible assets over fifteen years. Amortization of intangible assets amounted to $204,000 and $203,000 for the six-month periods ended June 30, 2016 and 2015, respectively. Estimated annual amortization of intangibles is as follows: $407,000 in 2016, and $356,000 in each of 2017, 2018, 2019 and 2020.

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Note 3 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding. There were no anti-dilutive shares in the three months and six months ended June 30, 2016 and 2015. The calculations of basic and diluted earnings per share are as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(In thousands except share and per share data)		2016			2015			2016			2015
Basic
Net income		$	5,869		$	5,548		$	11,702		$	11,087
Weighted-average common shares
outstanding			11,134,559			11,388,907			11,184,058			11,414,489
Basic earnings per share		$	.53		$	.49		$	1.05		$	.97
Diluted
Net income		$	5,869		$	5,548		$	11,702		$	11,087
Weighted-average common shares
outstanding			11,134,559			11,388,907			11,184,058			11,414,489
Effect of dilutive restricted stock
and stock appreciation rights			153,459			163,898			153,379			162,705
Weighted-average common shares
outstanding assuming dilution			11,288,018			11,552,805			11,337,437			11,577,194
Diluted earnings per share		$	.52		$	.48		$	1.03		$	.96

Note 4 – Stock Repurchases

The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the repurchase of up to 500,000 shares of the Company’s common stock. As restored by the Board of Directors on October 19, 2015, the program provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date. The Company repurchased 111,241 and 55,297 shares during the three-month periods and 187,123 and 124,585 for the six-month periods ended June 30, 2016 and 2015, respectively. As of June 30, 2016, 301,156 shares remained available for repurchase under the program. Repurchases may be made in the open market or through negotiated transactions from time to time depending on market conditions.

Note 5 – Industry Segment Information

The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service, processing and capital requirements.

The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations. The Banking Services segment provides banking services primarily to privately held businesses and churches.

The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Management evaluates segment performance based on net income after allocations for corporate expenses and income taxes. Transactions between segments are accounted for at what management believes to be fair value.

Substantially all revenue originates from, and all long-lived assets are located within, the United States, and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue.

Assets represent actual assets owned by Information Services and Banking Services and there is no allocation methodology used. Segment interest from customers is the actual interest earned on the loans owned by Information Services and Banking Services, respectively.

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Summarized information about the Company’s operations in each industry segment is as follows:

								Corporate,
		Information			Banking			Eliminations
(In thousands)		Services			Services			and Other				Total
Three Months Ended June 30, 2016
Fee revenue and other income:
Income from customers		$	24,436		$	6,527		$	—			$	30,963
Intersegment income (expense)			2,815			403			(3,218	)			—
Net income			3,478			2,391			—				5,869
Goodwill			11,454			136			—				11,590
Other intangible assets, net			2,201			—			—				2,201
Total assets			777,312			753,333			(9,461	)			1,521,184
Three Months Ended June 30, 2015
Fee revenue and other income
Income from customers		$	24,152		$	5,968		$	—			$	30,120
Intersegment income (expense)			2,350			433			(2,783	)			—
Net income			3,591			1,957			—				5,548
Goodwill			11,454			136			—				11,590
Other intangible assets, net			2,597			—			—				2,597
Total assets			709,754			675,777			(18,651	)			1,366,880
Six Months Ended June 30, 2016
Fee revenue and other income:
Income from customers		$	47,994		$	13,738		$	—			$	61,732
Intersegment income (expense)			6,073			779			(6,852	)			—
Net income			6,425			5,277			—				11,702
Goodwill			11,454			136			—				11,590
Other intangible assets, net			2,201			—			—				2,201
Total assets			777,312			753,333			(9,461	)			1,521,184
Six Months Ended June 30, 2015
Fee revenue and other income
Income from customers		$	48,426		$	11,487		$	—			$	59,913
Intersegment income (expense)			4,544			856			(5,400	)			—
Net income			7,407			3,680			—				11,087
Goodwill			11,454			136			—				11,590
Other intangible assets, net			2,597			—			—				2,597
Total assets			709,754			675,777			(18,651	)			1,366,880

Note 6 – Loans by Type

A summary of loan categories is as follows:

	June 30,			December 31,
(In thousands)	2016			2015
Commercial and industrial	$	225,657		$	193,430
Real estate
Commercial:
Mortgage		104,355			108,836
Construction		13,997			1,182
Church, church-related:
Mortgage		311,012			306,728
Construction		24,842			28,957
Industrial Revenue Bonds		18,204			19,831
Other		67			91
Total loans	$	698,134		$	659,055

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The following table presents the aging of loans by loan categories at June 30, 2016 and December 31, 2015:

		Performing									Nonperforming
											90 Days
					30-59			60-89			and			Non-			Total
(In thousands)		Current			Days			Days			Over			accrual			Loans
June 30, 2016
Commercial and industrial		$	225,657		$	—		$	—		$	—		$	—		$	225,657
Real estate
Commercial:
Mortgage			104,080			—			—			—			275			104,355
Construction			13,997			—			—			—			—			13,997
Church, church-related:
Mortgage			309,936			989			—			—			87			311,012
Construction			24,842			—			—			—			—			24,842
Industrial Revenue Bonds			18,204			—			—			—			—			18,204
Other			67			—			—			—			—			67
Total		$	696,783		$	989		$	—		$	—		$	362		$	698,134
December 31, 2015
Commercial and industrial		$	193,430		$	—		$	—		$	—		$	—		$	193,430
Real estate
Commercial:
Mortgage			105,804			—			—			—			3,032			108,836
Construction			1,182			—			—			—			—			1,182
Church, church-related:
Mortgage			306,625			—			—			—			103			306,728
Construction			28,957			—			—			—			—			28,957
Industrial Revenue Bonds			19,831			—			—			—			—			19,831
Other			91			—			—			—			—			91
Total		$	655,920		$	—		$	—		$	—		$	3,135		$	659,055

The following table presents the credit exposure of the loan portfolio by internally credit grade as of June 30, 2016 and December 31, 2015:

		Loans			Performing			Nonperforming
		Subject to			Loans Subject to			Loans Subject
		Normal			Special			to Special
(In thousands)		Monitoring1			Monitoring2			Monitoring2			Total Loans
June 30, 2016
Commercial and industrial		$	223,288		$	2,369		$	—		$	225,657
Real estate
Commercial:
Mortgage			102,978			1,102			275			104,355
Construction			13,997			—			—			13,997
Church, church-related:
Mortgage			303,534			7,391			87			311,012
Construction			24,842			—			—			24,842
Industrial Revenue Bonds			18,204			—			—			18,204
Other			67			—			—			67
Total		$	686,910		$	10,862		$	362		$	698,134
December 31, 2015
Commercial and industrial		$	190,303		$	3,127		$	—		$	193,430
Real estate
Commercial:
Mortgage			104,642			1,162			3,032			108,836
Construction			1,182			—			—			1,182
Church, church-related:
Mortgage			299,135			7,490			103			306,728
Construction			28,957			—			—			28,957
Industrial Revenue Bonds			19,831			—			—			19,831
Other			91			—			—			91
Total		$	644,141		$	11,779		$	3,135		$	659,055

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Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled debt restructurings, both performing and nonperforming. Troubled debt restructuring involves the granting of a concession to a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment schedule or interest rate. Management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses.” At June 30, 2016, impaired loans were evaluated using the expected cash flow method. At December 31, 2015, all impaired loans were evaluated based on the fair value of the collateral and the expected cash flow method. The fair value of the collateral is based upon an observable market price or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 3. There were no loans delinquent 90 days or more and still accruing interest at June 30, 2016 and December 31, 2015. There were no loans classified as troubled debt restructuring at June 30, 2016 and December 31, 2015.

There were no foreclosed loans recorded as other real estate owned as of June 30, 2016, and December 31, 2015.

The following table presents the recorded investment and unpaid principal balance for impaired loans at June 30, 2016 and December 31, 2015:

					Unpaid			Related
		Recorded			Principal			Allowance for
(In thousands)		Investment			Balance			Loan Losses
June 30, 2016
Commercial and industrial:
Nonaccrual		$	—		$	—		$	—
Real estate
Commercial – Mortgage:
Nonaccrual			275			275			—
Church – Mortgage:
Nonaccrual			87			87			87
Total impaired loans		$	362		$	362		$	87
December 31, 2015
Commercial and industrial:
Nonaccrual		$	—		$	—		$	—
Real estate
Commercial – Mortgage:
Nonaccrual			3,032			3,032			1,039
Church – Mortgage:
Nonaccrual			103			103			103
Total impaired loans		$	3,135		$	3,135		$	1,142

A summary of the activity in the allowance for loan losses from December 31, 2015 to June 30, 2016 is as follows:

		December 31,			Charge-										June 30,
(In thousands)		2015			Offs			Recoveries			Provision				2016
Commercial and industrial		$	3,083		$	—		$	37		$	497			$	3,617
Real estate
Commercial:
Mortgage			2,803			—			—			(1,113	)			1,690
Construction			9			—			—			96				105
Church, church-related:
Mortgage			4,082			—			—			34				4,116
Construction			217			—			—			(30	)			187
Industrial Revenue Bonds			320			—			—			(34	)			286
Other			1,121			—			—			(450	)			671
Total		$	11,635		$	—		$	37		$	(1,000	)		$	10,672

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A summary of the activity in the allowance for loan losses from December 31, 2014 to June 30, 2015 is as follows:

		December 31,			Charge-										June 30,
(In thousands)		2014			Offs			Recoveries			Provision				2015
Commercial and industrial		$	3,515		$	—		$	7		$	78			$	3,600
Real estate
Commercial:
Mortgage			3,060			—			—			(57	)			3,003
Construction			—			—			—			—				—
Church, church-related:
Mortgage			4,016			—			1			52				4,069
Construction			140			—			—			20				160
Industrial Revenue Bonds			394			—			—			(27	)			367
Other			769			—			—			(66	)			703
Total		$	11,894		$	—		$	8		$	—			$	11,902

Note 7 – Commitments and Contingencies

In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. At June 30, 2016 and December 31, 2015, no amounts have been accrued for any estimated losses for these instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The balance of unused loan commitments, standby and commercial letters of credit were $23,093,000, $15,036,000, and $2,056,000 at June 30, 2016 and were $11,755,000, $11,581,000, and $1,857,000 at December 31, 2015, respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under guarantees on these financial instruments.

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at June 30, 2016:

		Amount of Commitment Expiration per Period
					Less than			1-3			3-5			Over 5
(In thousands)		Total			1 Year			Years			Years			Years
Operating lease commitments		$	6,475		$	1,421		$	2,322		$	1,676		$	1,056
Time deposits			59,972			55,110			2,709			2,153			—
Total		$	66,447		$	56,531		$	5,031		$	3,829		$	1,056

The Company and its subsidiaries are involved in various pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate resolution of these legal actions and proceedings will not have a material effect upon the Company’s consolidated financial position or results of operations.

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Note 8 – Stock-Based Compensation

The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) permits the issuance of up to 1,500,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and performance awards. The Company issues shares out of treasury stock for these awards. During the six months ended June 30, 2016, 34,925 restricted shares and 0 SARs were granted under the Omnibus Plan.

Restricted Stock

Restricted shares granted prior to April 16, 2013 are amortized to expense over a three-year vesting period. Beginning on April 16, 2013, restricted shares granted to Company employees are amortized to expense over a three-year vesting period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned. As of June 30, 2016, the total unrecognized compensation expense related to non-vested restricted shares was $2,591,000, and the related weighted-average period over which it is expected to be recognized is approximately 1.0 years.

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

	Six Months Ended
	June 30, 2016
	Shares			Fair Value
Balance at December 31, 2015	69,041			$	51.33
Granted	34,925			$	49.95
Vested	(29,268	)		$	50.93
Balance at June 30, 2016	74,698			$	50.59

SARs

SARs vest over a three-year period, with one-third of the shares vesting and becoming exercisable each year on the anniversary date of the grant, and they expire 10 years from the original grant date. As of June 30, 2016, the total unrecognized compensation expense was $129,000, and the related weighted-average period over which it is expected to be recognized is 0.6 years. Following is a summary of the activity of the Company’s SARs program for the six-month period ended June 30, 2016:

				Weighted-			Average		Aggregate
				Average			Remaining		Intrinsic
				Exercise			Contractual		Value
	Shares			Price			Term Years		(In thousands)
Outstanding at December 31, 2015	307,323			$	36.57		5.99		$	4,577
Exercised	(5,803	)		$	31.96
Outstanding at June 30, 2016	301,520			$	36.66		5.49			4,536
Exercisable at June 30, 2016	289,356			$	35.61		5.40		$	4,657

Following is a summary of the activity of the non-vested SARs during the six-month period ended June 30, 2016:

				Weighted-Average
	Shares			Grant Date Fair Value
Non-vested at December 31, 2015	52,507			$	51.17
Vested	(40,343	)		$	48.02
Non-vested at June 30, 2016	12,164			$	61.64

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Note 9 – Defined Pension Plans

The Company has a noncontributory defined-benefit pension plan, which covers most of its employees. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs for 2015 and an estimate for 2016:

	Estimated				Actual
(In thousands)	2016				2015
Service cost – benefits earned during the year	$	3,527			$	3,796
Interest cost on projected benefit obligations		3,480				3,178
Expected return on plan assets		(4,734	)			(4,864	)
Net amortization and deferral		1,200				1,542
Net periodic pension cost	$	3,473			$	3,652

Pension costs recorded to expense were $882,000 and $977,000 for the three-month periods ended June 30, 2016 and 2015, respectively, and totaled $1,759,000 and $1,968,000 for the six-month periods ended June 30, 2016 and 2015, respectively. Pension costs decreased in 2016 due to an increase in the discount rate assumption and the use of the updated mortality tables. The Company made no contribution to the plan during the six-month period ended June 30, 2016 and is evaluating the amount of additional contributions, if any, in the remainder of 2016.

In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan. The following table represents the components of the net periodic pension costs for 2015 and an estimate for 2016:

	Estimated			Actual
(In thousands)	2016			2015
Service cost – benefits earned during the year	$	133		$	140
Interest cost on projected benefit obligation		367			348
Net amortization		295			654
Net periodic pension cost	$	795		$	1,142

Pension costs recorded to expense were $202,000 and $286,000 for the three-month periods ended June 30, 2016 and 2015, respectively, and were $403,000 and $571,000 for the six-month periods ended June 30, 2016 and 2015, respectively.

Note 10 – Income Taxes

As of June 30, 2016, the Company’s unrecognized tax benefits were approximately $1,326,000, of which $964,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2015, the Company’s unrecognized tax benefits were approximately $1,194,000, of which $861,000 would, if recognized, affect the Company’s effective tax rate. During the next 12 months, the Company may realize a reduction of its unrecognized tax benefits of approximately $374,000 due to the lapse of federal and state statutes of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company had $72,000 and $54,000 of gross interest accrued as of June 30, 2016 and December 31, 2015, respectively. There were no penalties for unrecognized tax benefits accrued at June 30, 2016 and December 31, 2015.

The Company is subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions. U.S. federal income tax returns for tax years 2012 through 2014 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2011 through 2014.

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Note 11 – Investment in Securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore fall into the Level 2 category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:

		June 30, 2016
					Gross			Gross
		Amortized			Unrealized			Unrealized
(In thousands)		Cost			Gains			Losses			Fair Value
State and political subdivisions		$	339,803		$	20,362		$	—		$	360,165
Certificates of deposit			7,876			—			—			7,876
Total		$	347,679		$	20,362		$	—		$	368,041
		December 31, 2015
					Gross			Gross
		Amortized			Unrealized			Unrealized
(In thousands)		Cost			Gains			Losses			Fair Value
State and political subdivisions		$	356,531		$	12,552		$	13		$	369,070
Certificates of deposit			6,626			—			—			6,626
Total		$	363,157		$	12,552		$	13		$	375,696

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

		June 30, 2016
		Less than 12 months						12 months or more						Total
		Estimated			Unrealized			Estimated			Unrealized			Estimated			Unrealized
(In thousands)		Fair Value			Losses			Fair Value			Losses			Fair Value			Losses
State and political		$	2,503		$	—		$	—		$	—		$	2,503		$	—
subdivisions
Certificates of deposit			—			—			—			—			—			—
Total		$	2,503		$	—		$	—		$	—		$	2,503		$	—
		December 31, 2015
		Less than 12 months						12 months or more						Total
		Estimated			Unrealized			Estimated			Unrealized			Estimated			Unrealized
(In thousands)		Fair Value			Losses			Fair Value			Losses			Fair Value			Losses
State and political		$	3,638		$	5		$	1,208		$	8		$	4,846		$	13
subdivisions
Certificates of deposit			—			—			—			—			—			—
Total		$	3,638		$	5		$	1,208		$	8		$	4,846		$	13

There were four securities, or less than 1% of the total (none greater than 12 months) in an unrealized loss position as of June 30, 2016. There were 5 securities, or 1% of the total (1 greater than 12 months), in an unrealized loss position as of December 31, 2015. All unrealized losses were reviewed to determine whether the losses were other than temporary. Management believes that all unrealized losses are temporary since they were market driven, and it is more likely than not that the Company will not be required to sell prior to recovery of the amortized basis.

The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

		June 30, 2016
(In thousands)		Amortized Cost			Fair Value
Due in 1 year or less		$	40,517		$	40,998
Due after 1 year through 5 years			53,112			55,288
Due after 5 years through 10 years			134,465			144,119
Due after 10 years			119,585			127,636
Total		$	347,679		$	368,041

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Proceeds from sales of investment securities classified as available for sale were $2,452,000 and $20,754,000 for the three months ended June 30, 2016 and 2015, respectively, and were $21,491,000 and $65,952,000 for the six months ended June 30, 2016 and 2015, respectively. Gross realized gains were $79,000 and $690,000 for the three months ended June 30, 2016 and 2015, respectively, and were $387,000 and $1,639,000 for the six months ended June 30, 2016 and 2015, respectively. There was one security totaling $3,750,000 pledged to secure public deposits and for other purposes at June 30, 2016.

Note 12 – Fair Value of Financial Instruments

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

		June 30, 2016						December 31, 2015
		Carrying						Carrying
(In thousands)		Amount			Fair Value			Amount			Fair Value
Balance sheet assets:
Cash and cash equivalents		$	274,133		$	274,133		$	253,172		$	253,172
Investment securities			368,041			368,041			375,696			375,696
Loans, net			687,462			688,697			647,420			649,161
Accrued interest receivable			6,345			6,345			6,647			6,647
Total		$	1,335,981		$	1,337,216		$	1,282,935		$	1,284,676
Balance sheet liabilities:
Deposits		$	630,995		$	631,360		$	646,484		$	646,892
Accounts and drafts payable			650,988			650,988			577,259			577,259
Accrued interest payable			43			43			35			35
Total		$	1,282,026		$	1,282,391		$	1,223,778		$	1,224,186

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents – The carrying amount approximates fair value.

Investment in Securities – The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 11, “Investment in Securities,” for fair value and unrealized gains and losses by investment type.

Loans – The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses result in a fair valuation.

Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or a current appraised value and therefore, the fair value is a nonrecurring Level 3 valuation.

Accrued Interest Receivable – The carrying amount approximates fair value.

Deposits – The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits.

Accounts and Drafts Payable – The carrying amount approximates fair value.

Accrued Interest – The carrying amount approximates fair value.

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the six months ended June 30, 2016 and 2015. No financial instruments are measured using Level 3 inputs for the six months ended June 30, 2016 and 2015.

Note 13 – Subsequent Events

In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events after the consolidated balance sheet date of June 30, 2016, and there were no events identified that would require additional disclosures to prevent the Company’s unaudited consolidated financial statements from being misleading.

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ITEM 2.

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

Overview

Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, and Breda, Netherlands. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy invoices, which include electricity and gas as well as environmental and telecommunications expense and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from transportation, energy, telecommunication and environmental invoices, assisting its customers’ transportation, energy, environmental and information technology managers in making decisions that will enable them to improve operating performance. The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers. It then provides the data in a central repository for access and archiving. The data is finally transformed into information through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical processing. The Company also, through Cass Commercial Bank, its St. Louis, Missouri-based bank subsidiary provides banking services in the St. Louis metropolitan, Orange County, California, Colorado Springs, Colorado, and other selected cities in the United States. In addition to supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-related ministries.

The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services.

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in the Company’s 2015 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income and conversely, a rise in the general level of interest rates can have a positive impact on net interest income.

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

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.

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Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly, the Company expects to continue to utilize the present processes.

Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns such as the realization of deferred tax assets or changes in tax laws or interpretations thereof. In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other taxing authorities. In accordance with FASB ASC 740, “Income Taxes,” the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 10 to the unaudited consolidated financial statements contained herein.

Pension Plans. The amounts recognized in the unaudited consolidated financial statements related to pension plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2015, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 10 to the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Pursuant to FASB ASC 715, “Compensation – Retirement Benefits,” the Company has recognized the funded status of its defined benefit postretirement plan in its balance sheet and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended June 30, 2016 (“Second Quarter of 2016”) compared to the three-month period ended June 30, 2015 (“Second Quarter of 2015”) and the six-month period ended June 30, 2016 (“First Half of 2016”) compared to the six-month period ended June 30, 2015 (“First Half of 2015”). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 2015 Annual Report on Form 10-K. Results of operations for the Second Quarter and First Half of 2016 are not necessarily indicative of the results to be attained for any other period.

Net Income

The following table summarizes the Company’s operating results:

	Second Quarter of										First Half of
									%										%
(In thousands except per share data)	2016				2015				Change		2016				2015				Change
Net income	$	5,869			$	5,548			5.8		$	11,702			$	11,087			5.5
Diluted earnings per share	$	.52			$	.48			8.3		$	1.03			$	.96			7.3
Return on average assets		1.59	%			1.58	%		—			1.60	%			1.56	%		—
Return on average equity		11.44	%			11.27	%		—			11.41	%			11.29	%		—

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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 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:

		Second Quarter of									First Half of
								%									%
(In thousands)		2016			2015			Change			2016			2015			Change
Transportation invoice transaction
volume			8,776			8,969		(2.2	)%			16,888			17,094		(1.2	)%
Transportation invoice dollar
volume		$	5,800,675		$	6,541,917		(11.3	)%		$	11,243,007		$	12,598,628		(10.8	)%
Expense management transaction
volume*			5,667			5,021		12.9	%			10,955			10,062		8.9	%
Expense management dollar
volume*		$	2,775,639		$	2,755,930		0.7	%		$	5,581,132		$	5,739,120		(2.8	)%
Payment and processing revenue		$	20,880		$	19,699		6.0	%		$	40,425		$	39,117		3.3	%
*Includes energy, telecom and waste

Second Quarter of 2016 compared to Second Quarter of 2015:

In the transportation group, new accounts boosted transaction volume, but multiple factors more than offset the benefits of that growth. The foremost impediment was declining activity from existing customers, especially those involved in oil and gas production. Transportation dollar volume was also retarded by lower fuel prices which reduced average invoice amounts. The decrease in dollar volume lowered fees from carrier services. The expense management group had 12.9% growth in transaction volume, the result of highly focused and successful marketing efforts that generated a number of new customers. Expense management dollar volume was also up for the quarter.

There were gains of $79,000 on sales of securities in the Second Quarter of 2016, compared to $690,000 in the Second Quarter of 2015.

First Half of 2016 compared to First Half of 2015:

Transportation transaction and dollar volumes as well as expense management transaction volumes fluctuated for the same reasons as the Second Quarter. Expense management dollar volume decreased due to a change in the mix of its customer base.

There were $387,000 gains on sales of securities in the First Half of 2016, compared to $1,639,000 in the First Half of 2015.

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:

		Second Quarter of											First Half of
										%											%
(In thousands)		2016				2015				Change			2016				2016				Change
Average earnings assets		$	1,289,339			$	1,209,959			6.6	%		$	1,275,824			$	1,235,878			3.2	%
Average interest-bearing        liabilities			426,287				401,354			6.2	%			425,834				427,545			(0.4	)%
Net interest income*			10,896				10,617			2.6	%			21,528				20,903			3.0	%
Net interest margin*			3.40	%			3.52	%						3.39	%			3.41	%
Yield on earning assets*			3.56	%			3.69	%						3.55	%			3.59	%
Rate on interest-bearing        liabilities			.48	%			.52	%						.48	%			.52	%
*Presented on a tax-equivalent basis assuming a tax rate of 35%.

Second Quarter of 2016 compared to Second Quarter of 2015:

Second Quarter of 2016 average earning assets increased $79,380,000, or 6.6%, compared to the same period in the prior year (see discussion in the following paragraphs).

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Average federal funds sold and other short-term investments increased $26,856,000, or 29.0%, average investment securities increased $28,123,000, or 8.9%, and interest bearing deposits in other financial institutions increased $15,601,000, or 14.4%, for the Second Quarter of 2016 as compared to the Second Quarter of 2015. This was due to an increase in deposits (see discussion in following paragraph) and accounts and drafts payable balances.

Total average interest-bearing deposits for the Second Quarter of 2016 increased $24,933,000, or 6.2%, compared to the Second Quarter of 2015. Average interest-bearing demand deposits increased $33,233,000, or 10.6%, for the Second Quarter of 2016. This was partially offset by a decrease in time deposits of $11,388,000 or 15.7%.

Net interest margin and yield on earning assets decreased due to a less favorable mix of earning assets in the Second Quarter of 2016. However, the 6.6% increase in the volume of earning assets more than offset the decrease in yield and resulted in a 2.6% increase in net interest income.

First Half of 2016 compared to First Half of 2015:

First Half of 2016 average earning assets increased $39,946,000, or 3.2%, compared to the same period in the prior year (see discussion in the following paragraphs).

Average investment securities increased $29,904,000, or 9.5%, for the First Half of 2016 as compared to the First Half of 2015 as the Company took advantage of market opportunities and an increase in non-interest bearing deposits.

Total average interest-bearing deposits for the First Half of 2016 remained relatively stable compared to the First Half of 2015. For the First Half of 2016, time deposits decreased $13,689,000, or 18.3%, which was offset by an increase in interest bearing demand of $9,555,000, or 2.8%.

Net interest margin and yield on earning assets decreased slightly, however, the 3.2% increase in the volume of earning assets more than offset the slight decrease in yield and resulted in a 3.0% increase in net interest income.

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

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

The following tables show the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.

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		Second Quarter of 2016										Second Quarter of 2015
						Interest										Interest
		Average				Income/			Yield/			Average				Income/			Yield/
(In thousands)		Balance				Expense			Rate			Balance				Expense			Rate
Assets1
Earning assets
Loans2, 3:
Taxable		$	674,227			$	7,173		4.28	%		$	665,788			$	7,199		4.34	%
Tax-exempt4			18,521				221		4.80				22,028				242		4.41
Investment securities5:
Taxable			1,196				10		3.36				1,189				10		3.37
Tax-exempt4			344,248				3,748		4.38				316,132				3,572		4.53
Certificates of deposit			7,618				12		.63				3,750				2		.21
Interest-bearing deposits in
other financial institutions			124,045				154		.50				108,444				84		.31
Federal funds sold and other
short-term investments			119,484				82		.28				92,628				29		.13
Total earning assets			1,289,339				11,400		3.56				1,209,959				11,138		3.69
Non-earning assets
Cash and due from banks			11,481										13,227
Premises and equipment, net			20,496										18,223
Bank-owned life insurance			16,110										15,602
Goodwill and other
intangibles			13,851										14,237
Other assets			147,701										148,015
Allowance for loan losses			(10,649	)									(11,901	)
Total assets		$	1,488,329									$	1,407,362
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
Interest-bearing demand
deposits		$	347,598			$	345		.40	%		$	314,365			$	335		.43	%
Savings deposits			17,634				21		.48				14,535				16		.44
Time deposits >= $100			21,676				66		1.22				25,032				81		1.30
Other time deposits			39,379				72		.74				47,411				89		.75
Federal funds purchased			—				—		—				11				—		—
Total interest-bearing deposits			426,287				504		.48				401,354				521		.52
Non-interest bearing liabilities
Demand deposits			187,668										155,350
Accounts and drafts payable			641,013										624,987
Other liabilities			27,069										28,225
Total liabilities			1,282,037										1,209,916
Shareholders’ equity			206,292										197,446
Total liabilities and
shareholders’ equity		$	1,488,329									$	1,407,362
Net interest income						$	10,896									$	10,617
Net interest margin									3.40	%									3.52	%
Interest spread									3.08										3.17

1.	Balances shown are daily averages.
2.	For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s 2015 consolidated financial statements, filed with the Company’s 2015 Annual Report on Form 10-K.
3.	Interest income on loans includes net loan fees of $93,000 and $170,000 for the Second Quarter of 2016 and 2015, respectively.
4.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $1,390,000 and $1,135,000 for the Second Quarter of 2016 and 2015, respectively.
5.	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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		First Half of 2016										First Half of 2015
						Interest										Interest
		Average				Income/			Yield/			Average				Income/			Yield/
(In thousands)		Balance				Expense			Rate			Balance				Expense			Rate
Assets1
Earning assets
Loans2, 3:
Taxable		$	659,782			$	14,157		4.31	%		$	655,913			$	14,126		4.34	%
Tax-exempt4			18,929				447		4.75				22,434				486		4.37
Investment securities5:
Taxable			1,193				10		1.69				1,146				11		1.94
Tax-exempt4			343,430				7,432		4.35				313,573				7,115		4.58
Certificates of deposit			7,265				23		.64				3,750				4		.22
Interest-bearing deposits in other
financial institutions			130,540				323		.50				142,888				210		.30
Federal funds sold and other
short-term investments			114,685				153		.27				96,174				63		.13
Total earning assets			1,275,824				22,545		3.55				1,235,878				22,015		3.59
Non-earning assets
Cash and due from banks			11,523										13,148
Premises and equipment, net			20,167										17,865
Bank-owned life insurance			16,045										15,541
Goodwill and other
intangibles			13,902										14,274
Other assets			141,804										148,843
Allowance for loan losses			(11,137	)									(11,898	)
Total assets		$	1,468,128									$	1,433,651
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
Interest-bearing demand
deposits		$	346,326			$	695		.40	%		$	336,771			$	723		.43	%
Savings deposits			18,290				44		.48				15,861				35		.44
Time deposits >= $100			22,520				133		1.19				25,954				162		1.26
Other time deposits			38,698				145		.75				48,953				192		.79
Federal funds purchased			—				—		—				6				—		—
Total interest-bearing deposits			425,834				1,017		.48				427,545				1,112		.52
Non-interest bearing liabilities
Demand deposits			184,129										158,784
Accounts and drafts payable			626,508										621,294
Other liabilities			25,468										27,960
Total liabilities			1,261,939										1,235,583
Shareholders’ equity			206,189										198,068
Total liabilities and
shareholders’ equity		$	1,468,128									$	1,433,651
Net interest income						$	21,528									$	20,903
Net interest margin									3.39	%									3.41	%
Interest spread									3.07										3.07

1.	Balances shown are daily averages.
2.	For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s 2015 consolidated financial statements, filed with the Company’s 2015 Annual Report on Form 10-K.
3.	Interest income on loans includes net loan fees of $235,000 and $229,000 for the First Half of 2016 and 2015, respectively.
4.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $2,758,000 and $2,660,000 for the First Half of 2016 and 2015, respectively.
5.	For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

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Analysis of Net Interest Income Changes

The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

		Second Quarter of 2016 Over
		Second Quarter of 2015
(In thousands)		Volume				Rate				Total
Increase (decrease) in interest income:
Loans1, 2:
Taxable		$	81			$	(107	)		$	(26	)
Tax-exempt3			(41	)			20				(21	)
Investment securities:
Taxable			—				—				—
Tax-exempt3			302				(126	)			176
Certificates of deposit			3				7				10
Interest-bearing deposits in other financial institutions			11				59				70
Federal funds sold and other short-term investments			10				43				53
Total interest income			366				(104	)			262
Interest expense on:
Interest-bearing demand deposits			33				(23	)			10
Savings deposits			4				1				5
Time deposits >=$100			(11	)			(4	)			(15	)
Other time deposits			(15	)			(2	)			(17	)
Total interest expense			11				(28	)			(17	)
Net interest income		$	355			$	(76	)		$	279

1.	Average balances include nonaccrual loans.
2.	Interest income includes net loan fees.
3.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

		First Half of 2016 Over
		First Half of 2015
(In thousands)		Volume				Rate				Total
Increase (decrease) in interest income:
Loans1, 2:
Taxable		$	102			$	(71	)		$	31
Tax-exempt3			(80	)			41				(39	)
Investment securities:
Taxable			—				(1	)			(1	)
Tax-exempt3			672				(355	)			317
Certificates of deposit			6				13				19
Interest-bearing deposits in other financial institutions			(20	)			133				113
Federal funds sold and other short-term investments			15				75				90
Total interest income			695				(165	)			530
Interest expense on:
Interest-bearing demand deposits			21				(49	)			(28	)
Savings deposits			6				3				9
Time deposits >=$100			(20	)			(9	)			(29	)
Other time deposits			(40	)			(7	)			(47	)
Total interest expense			(33	)			(62	)			(95	)
Net interest income		$	728			$	(103	)		$	625

1.	Average balances include nonaccrual loans.
2.	Interest income includes net loan fees.
3.	Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

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Provision and Allowance for Loan Losses (“ALLL”)

A significant determinant of the Company’s operating results can be the provision for loan losses. Provision for loan losses were $0 during the Second Quarter of 2016 and the Second Quarter of 2015. Due to the improved assessment of the overall quality of the Company’s loan portfolio, primarily due to the payoff of a large nonperforming loan, a negative loan loss provision of ($1,000,000) was recorded during the First Half of 2016. There was no loan loss provision recorded in the First Half of 2015. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. Net loan recoveries were $35,000 and $4,000 during the Second Quarter of 2016 and the Second Quarter of 2015, respectively. Net loan recoveries were $37,000 in the First Half of 2016 and $8,000 during the First Half of 2015, respectively.

The ALLL at June 30, 2016 was $10,672,000 and at December 31, 2015 was $11,635,000. The ratio of ALLL to total loans outstanding at June 30, 2016 was 1.53% compared to 1.77% at December 31, 2015. Nonperforming loans were $362,000, or .05%, of total loans at June 30, 2016 compared to $3,135,000, or .48%, of total loans at December 31, 2015. These loans, which are also considered impaired, consisted of two nonaccrual loans at June 30, 2016. Total nonaccrual loans decreased $2,773,000 from December 31, 2015 to June 30, 2016, primarily due to the payoff of two loans.

The ALLL has been established and is maintained to absorb reasonably estimated and probable losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense to cover any deficiency or reduce any excess, as required. The current methodology consists of two components: 1) estimated credit losses on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310 “Allowance for Credit Losses,” and 2) estimated credit losses inherent in the remainder of the loan portfolio in accordance with FASB ASC 450, “Contingencies.” Estimated credit losses is an estimate of the current amount of loans that is probable the Company will be unable to collect according to the original terms.

For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value. For the remainder of the portfolio, the Company groups loans with similar risk characteristics into eight segments and applies historical loss rates to each segment based on a five fiscal-year look-back period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losses in collateral value, trends in credit quality at the Company and in the banking industry and trends in risk-rating agencies are also considered.

The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required levels of regulatory capital. Federal and state agencies review the Company’s methodology for maintaining the ALLL. These agencies may require the Company to adjust the ALLL based on their judgments and interpretations about information available to them at the time of their examinations.

Summary of Asset Quality

The following table presents information on the Company’s provision for loan losses and analysis of the ALLL:

		Second Quarter of								First Half of
(In thousands)		2016				2015				2016				2015
Allowance at beginning of period		$	10,637			$	11,898			$	11,635			$	11,894
Provision charged to expense			—				—				(1,000	)			—
Loans charged off			—				—				—				—
Recoveries on loans previously charged off			35				4				37				8
Net recoveries			35				4				37				8
Allowance at end of period		$	10,672			$	11,902			$	10,672			$	11,902
Loans outstanding:
Average		$	692,748			$	687,816			$	678,711			$	678,347
June 30			698,134				675,167				698,134				675,167
Ratio of ALLL to loans outstanding:
Average			1.54	%			1.73	%			1.57	%			1.75	%
June 30			1.53	%			1.76	%			1.53	%			1.76	%
Impaired loans:
Nonaccrual loans		$	362			$	3,177			$	362			$	3,177
Loans past due 90 days or more			—				—				—				—
Troubled debt restructurings			—				—				—				—
Total impaired loans		$	362			$	3,177			$	362			$	3,177
Foreclosed assets		$	—				—			$	—				—
Impaired loans as percentage of average loans			.05	%			.46	%			.05	%			.47	%

The Bank had no property carried as other real estate owned as of June 30, 2016 or December 31, 2015.

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Operating Expenses

Total operating expenses for the Second Quarter of 2016 were up 1.9%, or $419,000, compared to the Second Quarter of 2015 and were up $1,027,000 for the First Half of 2016 compared to the First Half of 2015.

Salaries and benefits expense for the Second Quarter of 2016 increased $559,000 compared to the Second Quarter of 2015 and increased $1,079,000 to $35,948,000 for the First Half of 2016 compared to the First Half of 2015 due to strategic investment in staff and technology to win and support new business, annual merit increases, and higher health insurance expense. This was offset by a decrease in retirement plan expense related to the use of new mortality tables and an increase in the discount rate.

Equipment expense for the Second Quarter of 2016 increased $40,000, or 3.7%, compared to the Second Quarter of 2015 and $24,000, or 1.1%, for the First Half of 2016 from the First Half of 2015.

Other operating expenses for the Second Quarter of 2016 decreased $190,000, or 6.2%, compared to the Second Quarter of 2015 due to a decrease in postage and supply expense. Other operating expenses decreased $84,000 for the First Half of 2016 compared to the First Half of 2015 due to lower legal fees and postage and supply expense.

Income tax expense for the Second Quarter of 2016 increased $103,000 compared to the Second Quarter of 2015 and increased $177,000 for the First Half of 2016 compared to the First Half of 2015. The effective tax rate was 25.7% and 25.8% for the Second Quarters of 2016 and 2015, respectively, and was 25.7% and 25.9% for the First Halves of 2016 and 2015, respectively.

Financial Condition

Total assets at June 30, 2016 were $1,521,184,000, an increase of $65,678,000, or 4.5%, from December 31, 2015. The most significant changes in asset balances during this period were an increase of $39,079,000 in loans and an increase of $20,961,000 in cash and cash equivalents. Changes in cash and cash equivalents reflect the Company’s daily liquidity position and are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.

Total liabilities at June 30, 2016 were $1,310,922,000, an increase of $62,974,000, or 5.0%, from December 31, 2015. Accounts and drafts payable at June 30, 2016 were $650,988,000, an increase of $73,729,000, or 12.8%. Total deposits decreased $15,489,000, or 2.4%, from December 31, 2015. Total shareholders’ equity at June 30, 2016 was $210,262,000, a $2,884,000, or 1.4%, increase from December 31, 2015.

Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when payments clear and higher balances on days when payments are issued. For this reason, average balances are a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).

The increase in total shareholders’ equity of $2,884,000 resulted primarily from net income of $11,702,000 and a decrease of $4,927,000 in accumulated other comprehensive loss. These were offset by an increase in common shares in treasury of $8,423,000 as a result of share repurchase activity and dividends paid of $4,947,000.

Liquidity and Capital Resources

The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments was $274,133,000 at June 30, 2016, an increase of $20,961,000, or 8.3%, from December 31, 2015. At June 30, 2016, these assets represented 18.0% of total assets. These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $368,041,000 at June 30, 2016, a decrease of $7,655,000 from December 31, 2015. These assets represented 24.2% of total assets at June 30, 2016. Of this total, 98% were state and political subdivision securities. Of the total portfolio, 11.1% mature in one year or less, 15.0% mature in one to five years, and 73.9% mature in five or more years.

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The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $78,000,000 at the following banks: Bank of America, $10,000,000; US Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $5,000,000; and JPM Chase Bank, $6,000,000. The Bank also has secured lines of credit with the Federal Home Loan Bank of $179,049,000 collateralized by commercial mortgage loans. The Company also has secured lines of credit with UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of June 30, 2016 or December 31, 2015.

The deposits of the Company’s banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $37,413,000 of CDARS deposits and interest-bearing demand deposits include $75,298,000 of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.

Net cash flows provided by operating activities were $17,752,000 for the First Half of 2016, compared with $17,019,000 for the First Half of 2015, an increase of $733,000. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2016, which are estimated to range from $5 million to $7 million.

The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business opportunities available to the Company.

As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in the lower interest rate environment currently faced by the Company, short-term, relatively lower rate liquid investments are reduced in favor of longer-term relatively higher yielding investments and loans.

The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable.

The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income.

New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.

The Basel III Capital Rules require FDIC insured depository institutions to meet and maintain several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The FDIC also requires a minimum leverage ratio of 3%, defined as the ratio of Tier 1 capital less purchased mortgage serving rights to total assets, for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly-rated banking organizations.

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Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions like Cass, that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The calculation of all types of regulatory capital is subject to deductions and adjustments specified in applicable regulations.

In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

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

		June 30, 2016					December 31, 2015
(Dollars in thousands)		Amount			Ratio		Amount			Ratio
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.		$	209,594		21.32%		$	212,717		23.31%
Cass Commercial Bank			105,551		16.07%			99,872		16.90%
Common Equity Tier I Capital (to risk-weighted assets)
Cass Information Systems, Inc.		$	198,922		20.24%		$	201,312		22.06%
Cass Commercial Bank			97,747		14.88%			92,470		15.65%
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.		$	198,922		20.24%		$	201,312		22.06%
Cass Commercial Bank			97,747		14.88%			92,470		15.65%
Tier I capital (to average assets)
Cass Information Systems, Inc.		$	198,922		13.37%		$	201,312		13.88%
Cass Commercial Bank			97,747		13.36%			92,470		13.15%

Inflation

The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company’s consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.

Impact of New and Not Yet Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 – Revenue from Contracts with Customers. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. Under the ASU, the amendments are effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

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In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC Topic 842). The ASU improves financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The impact of the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets held. Under this standard, it will be required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. The impact of the adoption of this ASU is currently being evaluated.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15.0% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company’s most recent evaluation, management does not believe the Company’s risk position at June 30, 2016 has changed materially from that at December 31, 2015.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.

There were no changes in the Second Quarter of 2016 in the Company’s internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS
	The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Management believes the outcome of all such proceedings will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.
ITEM 1A.	RISK FACTORS
	The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2015, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). There are no material changes to the Risk Factors as disclosed in the Company’s 2015 Annual Report on Form 10-K.

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ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	During the three months ended June 30, 2016, the Company repurchased a total of 111,241 shares of its common stock pursuant to its treasury stock buyback program, as follows:

							Total Number		Maximum
							of Shares		Number of
							Purchased as		Shares that
							Part of		May Yet Be
			Total				Publicly		Purchased
			Number of				Announced		Under the
			Shares		Average Price		Plans or		Plans or
	Period		Purchased		Paid per Share		Programs1		Programs
	April 1, 2016 –
	April 30, 2016		38,409		$49.46		38,409		373,988
	May 1, 2016 –
	May 31, 2016		50,946		$48.33		50,946		323,042
	June 1, 2016 –
	June 30, 2016		21,886		$49.41		21,886		301,156
	Total		111,241		$48.94		111,241		301,156

1.

All repurchases made during the quarter ended June 30, 2016 were made pursuant to the treasury stock buyback program, which was authorized by the Board of Directors on October 17, 2011 and announced by the Company on October 20, 2011. The program, as modified by the Board of Directors on October 20, 2014, provided that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date. The program was further modified by the Board of Directors on October 19, 2015 to restore the aggregate number of shares available for repurchase to 500,000.

	(a)		None.
	(b)		There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the Second Quarter of 2016.

ITEM 6. EXHIBITS

Exhibit 3.1 Restated Articles of Incorporation of Registrant, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement No. 333-44499, filed with the SEC on January 20, 1998.

Exhibit 3.2 Amendment to Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on April 19, 2013.

Exhibit 3.3 Articles of Merger of Cass Commercial Corporation, incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended September 30, 2006.

Exhibit 3.4 Second Amended and Restated Bylaws of Registrant, as amended effective July 18, 2016, incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on July 21, 2016.

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS XBRL Instance Document.

Exhibit 101.SCH XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document.

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CASS INFORMATION SYSTEMS, INC.
DATE:	August 2, 2016	By	/s/ Eric H. Brunngraber
			Eric H. Brunngraber
		Chairman, President and Chief Executive Officer
			(Principal Executive Officer)
DATE:	August 2, 2016	By	/s/ P. Stephen Appelbaum
			P. Stephen Appelbaum
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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