CASS INFORMATION SYSTEMS INC

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02 – Leases (ASC Topic 842). The Company leases certain premises under operating leases. As of March 31, 2019, the Company had lease liabilities of $7,590,000 and right-of-use assets of $6,895,000. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. Presented within occupancy expense on the Consolidated Statements of Income for the three months ended March 31, 2019, operating lease cost was $420,000, short-term lease cost was $36,000, and there was no variable lease cost. For the three months ended March 31, 2019, the weighted average remaining lease term for the operating leases was 7.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.5%. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2019. At March 31, 2019, the Company had one lease that had not yet commenced, but is expected to create approximately $800,000 of additional lease liabilities and right-of-use assets for the Company. This lease is anticipated to commence in 2020.

Payment and processing fee revenue increased 7%. Transportation activity was mixed with dollar volume increasing 3% in the quarter aided by higher carrier and fuel prices, while transportation invoice volume declined 3% compared to a strong First Quarter of 2018 that included one additional processing day. Facility-related dollar volume was up 5%. New customer wins, coupled with increased volume from current accounts, supported the increase. Facility expense transactions were down 2% for the period primarily due to a reduction in the number of sites for existing retail customers and one less processing day in the First Quarter of 2019.

Total liabilities at March 31, 2019 were $1,450,401,000, a decrease of $14,927,000, or 1.0%, from December 31, 2018. Total deposits at March 31, 2019 were $655,432,000, a decrease of $66,494,000, or 9.2%, from December 31, 2018. The decrease in deposits was a result of maintaining conservative rates on interest-bearing accounts and daily fluctuations in the B2B payment platform. Accounts and drafts payable at March 31, 2019 were $739,357,000, an increase of $44,997,000, or 6.5%, from December 31, 2018.

Total shareholders’ equity at March 31, 2019 was $234,480,000, a $4,632,000, or 2.0%, increase from December 31, 2018. Total shareholders’ equity increased as a result of net income of $8,163,000 and the change in accumulated other comprehensive loss of $5,417,000. These were partially offset by share repurchases of $5,701,000 and dividends paid of $3,776,000.

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 requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. Adoption of the ASU resulted in the recognition of lease liabilities totaling $7,808,000 and the right-of-use assets totaling $7,383,000. The initial balance sheet gross up upon adoption was related to operating leases of certain real estate properties. See Note 14 – Leases for additional disclosures related to leases.