CASS INFORMATION SYSTEMS INC (CASS)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cass Information Systems, Inc. ("Cass" or the "Company") provides payment and information processing services to large manufacturing, distribution, and retail enterprises across the United States. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays facility-related invoices, which include electricity and gas as well as waste and telecommunications expenses. Cass solutions include integrated payments, a B2B payment platform for clients that require an agile fintech partner. Additionally, the Company offers a church management software solution and an on-line platform to provide generosity services for faith-based and non-profit organizations. The Company’s bank subsidiary, Cass Commercial Bank (the “Bank”), supports the Company’s payment operations. The Bank also provides banking services to its target markets, which include privately held businesses in the St. Louis metropolitan area and restaurant franchises and faith-based ministries within the United States.

In general, Cass is compensated for its information processing services through service fees, transactional level payment services, and investment of account balances generated during the payment process. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. The Bank earns most of its revenue from net interest income.

Various factors will influence the Company’s revenue and profitability, such as changes in the general level of interest rates, which has a significant effect on net interest income; industry-wide factors, such as the willingness of large corporations to outsource key business functions, and the general level of transportation and energy costs; and economic factors that include the general level of economic activity, the ability to hire and retain qualified staff, the growth and quality of the Bank’s loan portfolio, and the effects of tariffs or other domestic or international governmental policies. For a more detailed discussion of the Company’s revenue drivers and factors that impact the Company’s results of operation and financial condition generally, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2025 Form 10-K.

Recent Industry Developments and Items of Note

Contract freight rates have recently begun to increase, and, together with fuel surcharges from rising diesel prices, are contributing to higher Transportation dollars processed and paid. The increase in Transportation dollars paid is expected to increase the overall level of average accounts and drafts payable, which results in increased interest income, and average payments in advance of funding, which results in increased financial fees.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three months ended June 30, 2026 (“second quarter of 2026”) compared to the three months ended June 30, 2025 (“second quarter of 2025”) and the six months ended June 30, 2026 ("first half of 2026") compared to the six months ended June 30, 2025 ("first half of 2025"). 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 2025 Form 10-K. Results of operations for the three and six months ended June 30, 2026 are not necessarily indicative of the results to be attained for any other period.

Discontinued Operations

The Company has applied discontinued operations accounting in accordance with Accounting Standards Codification, or ASC, Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities sold related to the Company's TEM Business Unit for the three and six months ended June 30, 2026, and 2025, as applicable. All financial information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. See Note 2 to our consolidated financial statements for further discussion regarding discontinued operations.

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Summary of Results

The following table summarizes the Company’s operating results:

Second quarter of 2026 compared to second quarter of 2025:

The Company recorded net revenue of $49.9 million during the second quarter of 2026, an increase of 12.5% from the second quarter of 2025, primarily driven by an increase in net interest income and financial fees, partially offset by lower processing fees. Operating expense decreased 3.5% compared to the second quarter of 2025 primarily due to $1.8 million bad debt recovery. Net income was $10.6 million, an increase of 19.6% and diluted EPS was $0.81 per share, an increase of 22.7% from the second quarter of 2025.

The Company posted a 1.67% return on average assets and 17.72% return on average equity.

First half of 2026 compared to first half of 2025:

The Company recorded net revenue of $99.0 million during the first half of 2026, an increase of 9.1% from the first half of 2025, primarily driven by an increase in net interest income and financial fees, partially offset by lower processing fees. Operating expense increased 1.8% compared to the first half of 2025. Net income was $19.4 million, an increase of 9.0% and diluted EPS was $1.48 per share, an increase of 13.0% from the first half of 2025.

The Company posted a 1.54% return on average assets and 16.17% return on average equity.

Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and facility processing and financial fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis, discounts received for services provided to carriers and by the accounts and drafts payable balances

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generated in the payment process which can be used to generate interest income. Processing volumes, average payments in advance of funding, and fee revenue were as follows:

Second quarter of 2026 compared to second quarter of 2025:

Processing fees decreased $614,000, or 3.7% over the same period in the prior year reflecting lower transportation and facility invoice volumes.

Financial fees increased $790,000, or 7.8%, primarily attributable to an increase in average payments in advance of funding of 19.4% compared to the prior period.

The Company sold $34.0 million of corporate investment securities with a weighted-average yield of 2.29% at a loss of $3.6 million during the second quarter of 2025.

First half of 2026 compared to first half of 2025:

Processing fees decreased $1.4 million, or 4.1%, reflecting lower transportation and facility invoice volumes.

Financial fees increased $1.3 million, or 6.3%, primarily attributable to an increase in average payments in advance of funding of 10.8% compared to the prior period.

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:

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Executive Overview

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

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, 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 and deregulation of energy costs. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a decline in the general level of interest rates can have a negative impact on net interest income and conversely, a rise in the general level of interest rates can have a positive impact on net interest income. The cost of energy is another factor that has a significant impact on the transportation and facility sectors. As the price of energy goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation and facility expense invoices.

The Company continues to operate profitably, posting a 1.43% return on average assets and 14.98% return on average equity. The Company’s common equity Tier 1 capital ratio was 15.10% at December 31, 2025, significantly exceeding regulatory requirements. In addition, the Company has maintained exceptional credit quality with no loan charge-offs during the year ended December 31, 2025.

The Company’s solid capital and liquidity positions, combined with ongoing earnings, are expected to continue to allow for investment in strategic opportunities when they become available, in addition to return of capital to shareholders. The Company delivered $16.5 million in dividend payments and $26.0 million in share repurchases during 2025. The Company continues to invest in the technology, processes, and people required to support its multi-national customer base.

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

Recent Industry Developments

While freight rates have recently begun gradually increasing after a number of quarters of decline since 2023, volumes continue to decline on a year-over-year basis, which continues to put pressure on transportation related processing fees. In addition, carrier consolidation with small and medium-sized trucking companies exiting the market or selling to larger carriers continues to put downward pressure on financial fees as the smaller trucking companies were larger users of our quick pay solutions.

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The Company started to see increased tariff related charges on shipping invoices of its clients beginning in April 2025. The Company estimates that transportation dollar volumes were approximately $600 million higher in 2025 than 2024 due to the impact of tariffs. The Company benefits from higher dollar volumes given the related increases in accounts and drafts payable and interest income.

The Company has experienced an increase in facility dollar volumes in recent quarters due to higher energy usage and prices, in addition to onboarding new clients with high dollar volumes as compared to the related transaction count. Energy prices are rising due to a number of factors, including an aging power grid, and rising demand for electricity as a result of data center construction to power artificial intelligence and electric vehicles.

Recent Items of Note

Net interest income increased $13.5 million, or 19.8%, as compared to the same period last year. The increase in net interest income was attributable to the net interest margin improving to 3.83% as compared to 3.42% in the same period last year, in addition to an increase in average interest-earning assets of $136.8 million, or 6.8%. The Company generally benefits from a higher interest rate environment due to a large percentage of its funding sources being non-interest bearing.

The One Big Beautiful Bill Act (“OBBBA”) was enacted on July 4, 2025. Among other things, the new law makes permanent certain expiring business tax provisions of the Tax Cuts and Jobs Act (“TCJA”). These include provisions which allow businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets and the cost of qualified domestic research and development. The OBBBA also imposes a floor on tax deductions taken on charitable contributions. The OBBBA also significantly changes U.S. tax law related to foreign operations and certain tax credits. The impact of the OBBBA is not expected to have a material impact on the Company's consolidated financial statements.

Discontinued Operations

On April 7, 2025, the Company signed an Asset Purchase Agreement providing for the sale of its Telecom Expense Management & Managed Mobility Services (“TEM”) business to Asignet USA Inc. The sale closed on June 30, 2025. We have applied discontinued operations accounting in accordance with FASB Accounting Standards Codification (“ASC”), Topic 205-20, “Presentation of Financial Statements – Discontinued Operations,” to the assets and liabilities sold related to the Company's TEM Business Unit as of and for the years ended December 31, 2025, 2024, and 2023, as applicable. All financial information in this Annual Report on Form 10-K is reported on a continuing operations basis, unless otherwise noted. See Note 2 and Note 20 to the Company's consolidated financial statements for further discussion regarding discontinued operations and subsequent events associated with discontinued operations.

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Summary of Results

The Company recorded revenue of $190.8 million in 2025, up 5.3% from the prior year, largely due to an increase in net interest income, partially offset by a decrease in financial fees and a loss on sale of investment securities. Operating expense decreased 3.6% in 2025, largely driven by $7.8 million of bad debt expense in 2024 and $2.0 million of bad debt recovery experienced in 2025. Net income was $35.1 million and diluted EPS was $2.61 per share in 2025, increases of 83.2% and 87.8%, respectively, from the prior year.

The Company posted a 1.43% return on average assets and 14.98% return on average equity in 2025.

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

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Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and facility payment and processing fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis, discounts received for services provided to carriers and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income. Processing volumes, average payments in advance of funding, fee revenue and other income were as follows:

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