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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from -------- to ---------
Commission file number 2-80070
CASS COMMERCIAL CORPORATION
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(Exact name of registrant specified in its charter)
Missouri 43-1265338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13001 Hollenberg Drive, Bridgeton, Missouri 63044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 506-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.50
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(Title of Class)
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.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
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As of March 15, 1999, 3,873,711 shares of common stock of the
registrant were outstanding; the aggregate market value of the shares of
common stock of the registrant held by non-affiliates was approximately
$75,590,623 based upon the NASDAQ Stock Market closing price of $24.875 for
March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year
ended December 31, 1998 are incorporated by reference in Part I and II
hereof.
2. Registrant's Proxy Statement for the Annual Meeting of Shareholders to
be held on April 19, 1999 is incorporated by reference in Part III
hereof.
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PART I.
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ITEM 1. BUSINESS
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Cass Commercial Corporation
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Registrant, Cass Commercial Corporation (the "Company"), is a bank
holding corporation organized in 1982 under the laws of Missouri and approved
by the Board of Governors of the Federal Reserve system in February 1983 and
is governed by regulations of the Board of Governors of the Federal Reserve
system applying to bank holding companies. As of December 31, 1998, the
Company owned 100% of the outstanding shares of common stock of Cass
Commercial Bank ("Cass Bank"), formerly known as Cass Bank and Trust Company
and Cass Information Systems, Inc. ("CIS"), a nonbanking subsidiary. The
business of the Company is providing supervisory assistance to its subsidiaries
in the form of centralized accounting, human resources and internal auditing
services.
The Company and its subsidiaries had 558 full-time and 33 part-time
employees as of March 15, 1999.
Total interest income, net revenue, income (loss) before income tax,
income tax expense (benefit), identifiable assets, depreciation and
amortization expense and capital expenditures attributable to each business
segment, for the three years ended December 31, 1998 are set forth in Note 12
of the Notes to Consolidated Financial Statements on page 29 of the Cass
Commercial Corporation 1998 Annual Report, which note is hereby incorporated
by reference.
Cass Commercial Bank
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Cass Bank was organized as a Missouri Trust Company with banking powers
in 1906. Its principal banking office is located at 13001 Hollenberg Drive,
Bridgeton, Missouri and it has five other banking branches in Missouri.
Cass Bank provides banking services in the commercial, industrial and
residential areas it serves. Its primary focus is privately owned businesses
and churches and church-related ministries. Services include commercial,
real estate and personal loans; checking, savings and time deposit accounts
and other cash management services. Although Cass Bank has trust powers, it
does not operate a trust department. At December 31, 1998, Cass Bank had
total assets of $228,032,000, deposits of $196,450,000 and aggregate capital
accounts of $25,364,000 and for the year ended December 31, 1998, had net
income of $3,199,000.
Cass Bank encounters substantial competition from other banks located
throughout the St. Louis metropolitan area. Savings and loan associations,
credit unions, other financial institutions and non-bank providers of
financial services also provide competition. However, the principal
competition is represented by bank holding company affiliates, many of which
are larger and have greater resources than Cass Bank, and are able to offer a
wide range of banking and related services.
Cass Information Systems, Inc.
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CIS provides information and payment related services. In 1956, Cass
Bank began the operation of a freight payment service to meet the needs of
shippers and receivers of freight and transportation companies in the St.
Louis metropolitan area. This service was well received and, in 1967, its
marketing was expanded to cover the entire United States. The range and
scope of the services have been expanded significantly over the years. Today
many Fortune 500 companies in the United States utilize the broad array
of services provided by CIS. These services now include the processing of
freight, utility and other payments, delivery of management reports, voice
response systems and the internet, and other services such as auditing,
rating and other payment related activities.
The headquarters and main operating location of CIS is at 13001
Hollenberg Drive, Bridgeton, Missouri. Other operating locations are in
Columbus, Ohio; Chicago, Illinois and Boston, Massachusetts.
CIS's competition comes from within and outside the banking industry.
Many banks, which had provided freight payment services in the past, have
ceased providing such services or have sold those operations. CIS also
competes with several nonbank companies throughout the United States. The
Company believes CIS to be the largest firm in the freight bill payment
industry in terms of the total dollars of freight bills paid, the total
number of employees on staff, total revenues and total assets employed.
Nonbank competition consists of five primary competitors and numerous small
freight bill audit firms located in cities throughout the United States.
While offering freight payment services, few of these audit firms compete on
a national basis.
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CIS owns several service marks for the freight payment services and
logistics information software it provides. Those marks deemed the most
valuable are:
Freightpay- The basic freight payment services provided by CIS
Ratemaker- The rate maintenance software product which is
provided to customers on a service basis as well
First Rate- The carrier selection software product which is
also available in a service environment
In addition, CIS either owns or has applied for other service marks.
CIS continues to expand its Electronic Data Interchange ("EDI")
capabilities. CIS currently processes approximately 50% of its freight
payment transactions via EDI and anticipates a continuing increase in this
method of processing.
CIS is not dependent on any one customer for a large portion of its
business. It has a varied client base with no individual client exceeding 5%
of total revenue.
For the year 1998, CIS had net income of $4,291,000. Total assets at
December 31, 1998 were $285,397,000.
REGULATION AND SUPERVISION
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General
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The Company and Cass Bank are extensively regulated under federal and
state law. These laws and regulations are intended to protect depositors,
not shareholders. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of the Company. The operations of the Company may be affected
by legislative changes and by the policies of various regulatory authorities.
The Company is unable to predict the nature or the extent of the effects on
its business and earnings that fiscal or monetary policies, economic control
or new federal or state legislation may have in the future.
Federal Bank Holding Company Regulation
---------------------------------------
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "BHC Act"), and as such, it is
subject to regulation, supervision and examination by the Board of Governors
of the Federal Reserve System (the "FRB"). The Company is required to file
quarterly and annual reports with the FRB and to provide to the FRB such
additional information as the FRB may require, and it is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority
over bank holding companies, including, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders and
to require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for
violations of law or regulations or for unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require,
and has required in the past, a bank holding company to contribute additional
capital to an undercapitalized subsidiary bank.
The BHC Act requires every bank holding company to obtain the prior
approval of the FRB before (1) acquiring, directly or indirectly, ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control 5% or more of such shares
(unless it already owns or controls the majority of such shares); (2)
acquiring all or substantially all of the assets of another bank or bank
holding company; or (3) merging or consolidating with another bank holding
company. The FRB will not approve
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any acquisition, merger or consolidation that would have a substantially
anticompetitive result, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting
the convenience and needs of the community to be served. The FRB also
considers capital adequacy and other financial and managerial factors in
reviewing acquisitions or mergers.
With certain exceptions, the BHC Act also prohibits a bank holding
company from acquiring or retaining direct or indirect ownership or control
of 5% or more of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or providing services
for its subsidiaries. The principal exceptions to these prohibitions involve
certain non-bank activities which, by statute or by FRB regulation or order,
have been identified as activities closely related to the business of banking
or of managing or controlling banks. In making this determination, the FRB
considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency in resources, which
can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. The scope of permissible nonbanking activities may be expanded
from time to time by the FRB by regulation or order. Such activities may
also be affected by Federal legislation.
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that its net income for
the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB also indicated
that it would be inappropriate for a company experiencing serious financial
problems to borrow funds to pay dividends. Furthermore, under the prompt
corrective regulations adopted by the FRB, the FRB may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
A bank holding company is required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of its consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that
the proposal would constitute an unsafe or unsound practice or would violate
any law, regulation, FRB order, written agreement with the FRB, or any
condition imposed by the FRB. This notification requirement does not apply
to any company that is "well-capitalized" and "well-managed" as defined in
the regulation and is not subject to any unresolved supervisory issues.
Additional aspects of the regulation of bank holding companies under
Federal law are discussed below.
State Bank Holding Company Regulation
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The Company, as a Missouri bank holding company, is also subject to
regulation by the Division of Finance of the State of Missouri (the "Division
of Finance"). Under the Missouri banking laws, prior approval of the
Division of Finance is required before a bank holding company may acquire
control of a Missouri chartered bank or a bank holding company incorporated
in Missouri. In addition, under the Missouri banking laws, it is unlawful
for any bank holding company to obtain control of any bank if the total
deposits in the bank together with the total deposits in all banks in
Missouri controlled by such bank holding company exceed 13% of the total
deposits held by all depository financial institutions in Missouri. In
computing deposits for purposes of this calculation, certificates of deposit
in the face amount of $100,000 or more, deposits from outside the United
States and deposits from banks not controlled by the bank holding company are
excluded. Depository financial institution is defined as any financial
institution which accepts deposits and which can insure such deposits through
an agency of the Federal government. As of December 31, 1998, the Company's
consolidated Missouri deposits represented less than 1% of the total deposits
held by all Missouri depository financial institutions.
Federal and State Bank Regulation
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Cass Bank is a Federally-insured Missouri state-chartered bank and is a
member of the Federal Reserve System. Cass Bank is subject to the
supervision and regulation of the Division of Finance, and to the supervision
and regulation of the FRB. These agencies may prohibit Cass Bank from
engaging in what they believe constitutes unsafe or unsound banking
practices.
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The maximum legal rate of interest which Cass Bank may charge on a
particular loan depends on a variety of factors such as the type of borrower,
the purpose of the loan, the amount of the loan and the date the loan is
made. There are several state and federal statutes which set maximum legal
rates of interest for various kinds of loans.
The ability of banks and bank holding companies to operate in multiple
locations or in more than one state is regulated by both Federal and state
law. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"), "adequately capitalized and adequately
managed" bank holding companies may acquire bank subsidiaries located in any
state notwithstanding any state laws to the contrary, and adequately
capitalized and adequately managed national and state-chartered banks may
merge across state lines and keep the branches of the merging banks. The
Riegle-Neal Act permits states to require banks to be in existence for a
specified period of time up to five years before they can be acquired (either
by purchase or through an interstate bank merger) by out-of-state bank
holding companies, and to impose state wide market share limits on
out-of-state bank holding companies after their initial entry into the state.
The Riegle-Neal Act does not authorize interstate branching other than by a
bank merger, such as by opening a new branch in another state or by acquiring
a branch in another state (without acquiring the entire bank); however, any
state may opt to permit out-of-state banks to branch within the state by
those methods.
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within its jurisdiction, the FRB shall
evaluate the record of the financial institutions in meeting the credit needs
of their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors
are also considered in evaluating mergers, acquisitions and applications to
open a branch or facility. Banks having branch offices in two or more states
will receive both an overall CRA performance rating and separate CRA ratings
for each of the states in which they have branches.
Section 23A of the Federal Reserve Act is designed to protect banks
from abuse in financial transactions with companies with which the bank is
affiliated, by (i) limiting a bank's extensions of credit and other covered
transactions with any single affiliate to no more than 10% of the bank's
capital and surplus, and with all affiliates to no more than 20% of the
bank's capital and surplus, (ii) requiring that all of the bank's extensions
of credit to an affiliate be appropriately secured by collateral, (iii)
requiring that all transactions between a bank and its affiliates be on terms
and conditions consistent with safe and sound banking practices, and (iv)
prohibiting a bank or its subsidiaries from purchasing low-quality loans or
other assets from the bank's affiliates.
Cass Bank is also subject to certain restrictions imposed by the
Federal Reserve Act on extensions of credit to executive officers, directors,
principal shareholders or any related interest of such persons. Extensions
of credit (i) must be made on substantially the same terms, including
interest rates and collateral as, and follow credit underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions with persons not covered above and who are not employees, and
(ii) must not involve more than the normal risk of repayment or present other
unfavorable features. Cass Bank is also subject to certain lending limits
and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on Cass Bank or any officer, director, employee, agent or other
person participating in the conduct of the affairs of Cass Bank, the
imposition of a cease and desist order and other regulatory sanctions.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency has adopted, by regulation,
guidelines on non-capital safety and soundness standards for institutions
under its authority. These cover, among other things, internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate and standards for asset quality, earnings and
stock valuation. An institution which fails to meet these standards must
develop a plan acceptable to the agency, specifying the steps that the
institution will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company
believes that Cass Bank meets all the standards of FDICIA. FDICIA also
imposed new capital standards on insured depository institutions, all of
which are met by Cass Bank.
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Deposit Insurance and Assessments
---------------------------------
As a Federal Depository Insurance Corporation ("FDIC") member
institution, the deposits of Cass Bank are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF"), administered
by the FDIC, and Cass Bank is required to pay periodic deposit insurance
premium assessments to the FDIC.
The FDIC has adopted a risk-based assessment system. Under the
risk-based assessment system, BIF members pay varying assessment rates
depending upon the level of the institution's capital and the degree of
supervisory concern over the institution. The assessment rates are set by
the FDIC semiannually. The FDIC reduced the assessment rates for 1997 to a
range of zero (0) cents to 27 cents per $100 of insured deposits and this
rate remained the same in 1998. The Bank qualified for the $0 assessment
rate for 1998, however the Bank paid approximately $21,000 in assessments
from the Financing Corporation (FICO). The FICO debt service assessment
became applicable to all insured institutions as of January 1, 1997, in
accordance with the Deposit Insurance Act of 1996. The FDIC has authority to
increase the annual assessment rate if it determines that a higher assessment
rate is necessary to increase BIF's reserve ratio. There is no cap on the
annual assessment rate which the FDIC may impose.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the
FDIC to a commonly controlled FDIC-insured depository institution in danger
of default (the "Cross Guarantee"). "Default" is defined generally as the
appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating either
that there is no reasonable prospect that the institution will be able to
meet the demands of its depositors or pay its obligations in the absence of
regulatory assistance, or that its capital has been depleted and there is no
reasonable prospect that it will be replenished in the absence of regulatory
assistance. The Cross Guarantee thus enables the FDIC to assess a holding
company's healthy BIF members for the losses of any of such holding company's
failed BIF members. Cross Guarantee liabilities are generally superior in
priority to obligations of the depository institution to its shareholders,
due solely to their status as shareholders, and obligations to other
affiliates. Under FIRREA, failure to meet applicable capital guidelines
could subject a banking institution to a variety of enforcement remedies
available to federal regulatory authorities, including the termination of
deposit insurance by the FDIC and a prohibition on the taking of "brokered
deposits."
Dividends
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The principal source of the Company's cash revenues is dividends
received from Cass Bank and CIS. The Missouri banking laws impose certain
limitations on the payment of dividends by Missouri state chartered banks
such as Cass Bank, as follows: (1) no dividends may be paid which would
impair capital; (2) until the surplus fund of a bank is equal to 40% of its
capital, no dividends may be declared unless there has been carried to the
surplus account no less than one-tenth of its net profits for the dividend
period; and (3) dividends are payable only out of a bank's undivided profits.
In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends which would
constitute an unsafe and unsound banking practice.
Capital Adequacy
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The federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the
bank holding company or bank may be denied approval to acquire or establish
additional banks or non-bank businesses or to open facilities.
The FRB and FDIC have adopted risk-based capital guidelines for banks
and bank holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance
sheet exposure and to minimize disincentives for holding liquid assets.
Assets and off-balance sheet items are assigned to broad risk categories,
each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items. The guidelines are minimums, and the FRB has noted that bank holding
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companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital
(see description of Tier 1 capital and Tier 2 capital below). Bank holding
companies are required under such guidelines to deduct all intangibles except
purchased mortgage servicing rights from capital.
Tier 1 capital for bank holding companies includes common shareholders'
equity, qualifying perpetual preferred stock (up to 25% of total Tier 1
capital, if cumulative; under a FRB rule, redeemable perpetual preferred
stock may not be counted as Tier 1 capital unless the redemption is subject
to the prior approval of the FRB) and minority interests in equity accounts
of consolidated subsidiaries, less intangibles except as described above.
Tier 2 capital includes: (i) the allowance for loan losses up to 1.25% of
risk-weighted assets; (ii) any qualifying perpetual preferred stock which
exceeds the amount which may be included in Tier 1 capital; (iii) hybrid
capital instruments; (iv) perpetual debt; (v) mandatory convertible
securities and (vi) subordinated debt and intermediate term preferred stock
of up to 50% of Tier 1 capital. Total capital is the sum of Tier 1 and Tier
2 capital less reciprocal holdings of other banking organizations, capital
instruments and investments in unconsolidated subsidiaries.
Banks' and bank holding companies' assets are given risk-weights of 0%,
20%, 50% or 100%, depending on the type of asset. In addition, certain
off-balance sheet items are given credit conversion factors to convert them
to asset equivalent amounts to which an appropriate risk-weight will apply.
These computations result in the total risk-weighted assets. Most loans are
assigned to the 100% risk-weight category, except for first mortgage loans
fully secured by residential property, which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for municipal
or state revenue bonds, which have a 50% risk-weight, and direct obligations
of or obligations guaranteed by the United States Treasury or United States
Government agencies, which have a 0% risk-weight. In converting off-balance
sheet items, direct credit substitutes, including general guarantees and
standby letters of credit backing financial obligations, are given a 100%
conversion factor. Transaction related contingencies such as bid bonds,
other standby letters of credit and undrawn commitments, including commercial
credit lines with an initial maturity of more than one year, have a 50%
conversion factor. Short-term, self-liquidating trade contingencies are
converted at 20%, and short-term commitments have a 0% factor.
In assessing a bank's capital adequacy, the FRB and FDIC also take into
consideration market risks, i.e., the risk of loss from the change in value
of assets and liabilities due to changes in interest rates, and may require
an institution to increase its capital level to address such risks. These
agencies have also adopted a policy statement that provides guidance to
institutions on the management of interest rate risk.
The FRB also has implemented a leverage ratio, which is Tier 1 capital
as a percentage of total average assets less intangibles, to be used as a
supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank
holding company may leverage its equity capital base. The FRB requires a
minimum leverage ratio of 3%. However, for all but the most highly rated
bank holding companies and for bank holding companies seeking to expand, the
FRB expects an additional cushion of at least 100 to 200 basis points.
As of December 31, 1998, the Company and the Bank's risk-based Total
Capital and Tier 1 Capital ratios, and Leverage ratio, were as follows:
Company Cass
Consolidated Bank
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Total Capital to Risk-Weighted Assets 21.14% 15.12%
Tier 1 Capital to Risk-Weighted Assets 19.89% 13.86%
Tier 1 Capital to Average Assets 12.05% 12.04%
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FDICIA
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FDICIA made extensive changes to the federal banking laws and
instituted certain changes to the supervisory process, including provisions
that mandate certain regulatory agency actions against undercapitalized
institutions within specified time limits. FDICIA contains various other
provisions that may affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories ("well capitalized", "adequately capitalized" or one of three
"undercapitalized" categories) and to take progressively more restrictive
actions based on the capital categorization, as specified below. Under
FDICIA, capital requirements include a leverage limit, a risk-based capital
requirement and any other measure of capital deemed appropriate by the
federal banking regulators for measuring the capital adequacy of an insured
depository institution. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or paying any
management fees that would cause the institution to fail to satisfy the
minimum levels for any relevant capital measure.
The FDIC and the Federal Reserve Board adopted capital-related
regulations under FDICIA. Under those regulations, a bank is well
capitalized if it: (i) has a risk-based capital ratio of 10% or greater;
(ii) has a ratio of Tier I capital to risk-adjusted assets of 6% or greater;
(iii) has a ratio of Tier I capital to average assets of 5% or greater; and
(iv) is not subject to an order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital
for any capital measure. A bank is adequately capitalized if it is not "well
capitalized" and: (i) has a risk-based capital ratio of 8% or greater; (ii)
has a ratio of Tier I capital to risk-adjusted assets of 4% or greater; and
(iii) has a ratio of Tier I capital to average assets of 4% or greater
(except that certain associations rated "Composite 1" under the federal
banking agencies' CAMEL rating system may be adequately capitalized if their
ratios of core capital to average asset are 3% or greater). At December 31,
1998 Cass Bank was categorized as "well capitalized".
FDICIA generally requires annual on-site, full scope examinations by
each bank's primary federal regulator. It also requires management, the
independent audit committee and outside accountants to develop or approve
reports regarding the effectiveness of internal controls, legal compliance
and off-balance-sheet liabilities and assets.
Monetary Policy
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The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or
paid on deposits. The monetary policies of the FRB have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future.
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I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST
RATES AND INTEREST DIFFERENTIAL
THE FOLLOWING TABLE SHOWS THE CONDENSED AVERAGE BALANCE SHEETS FOR EACH OF
THE PERIODS REPORTED, THE 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.
FOR THE YEAR ENDED DECEMBER 31
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1998 1997 1996
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INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ---- ------- ------- ----
(DOLLARS EXPRESSED IN THOUSANDS)
ASSETS
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Earning assets:
Loans :
Taxable $210,168 $17,404 8.28% $199,633 $16,781 8.41% $190,634 $16,096 8.44%
Tax-exempt 2,907 266 9.15 2,647 257 9.71 1,462 147 10.05
Debt and equity securities :
Taxable 107,924 6,538 6.06 146,534 9,074 6.19 158,884 9,729 6.12
Tax-exempt 1,351 103 7.62 1,493 114 7.64 1,407 110 7.82
Federal funds sold and other
short-term investments 110,805 5,858 5.29 57,900 3,181 5.49 40,639 2,132 5.25
-------- ------- -------- ------- -------- -------
Total earning assets 433,155 30,169 6.96 408,207 29,407 7.20 393,026 28,214 7.18
-------- ------- ==== -------- ------- ==== -------- ------- =====
Nonearning assets:
Cash and due from banks 21,124 17,665 17,945
Premises and equipment, net 9,516 7,902 8,091
Other assets 10,283 14,645 10,196
Allowance for loan losses (4,472) (4,519) (6,305)
-------- -------- --------
Total assets $469,606 $443,900 $422,953
======== ======== ========
(continued)
8
10
AVERAGE BALANCES, INTEREST AND RATES, CONTINUED
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- --------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ---- ------- ------- ----
(DOLLARS EXPRESSED IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS'
- -----------------------------
EQUITY
- ------
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 34,296 $ 1,198 3.49% $ 31,873 $ 1,130 3.55% $ 24,895 $ 826 3.32%
Savings deposits 62,246 2,624 4.22 59,918 2,562 4.28 68,565 3,139 4.58
Time deposits of
$100,000 or more 3,928 222 5.65 3,984 222 5.57 4,512 242 5.36
Other time deposits 4,665 227 4.87 5,296 267 5.04 5,790 296 5.11
-------- ------- -------- ------- -------- -------
Total interest-
bearing deposits 105,135 4,271 4.06 101,071 4,181 4.14 103,762 4,503 4.34
Short-term borrowings 280 10 3.57 1,241 67 5.40 3,090 139 4.50
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 105,415 4,281 4.06 102,312 4,248 4.15 106,852 4,642 4.34
-------- ------- ==== -------- ------- ==== -------- ------- =====
Noninterest-bearing
liabilities:
Demand deposits 71,649 60,707 57,833
Accounts and drafts payable 231,655 223,990 206,269
Other liabilities 5,641 6,926 6,749
-------- -------- --------
Total liabilities 414,360 393,935 377,703
Shareholders' equity 55,246 49,965 45,250
-------- -------- --------
Total liabilities and
shareholders' equity $469,606 $443,900 $422,953
======== ======== ========
Net interest income $25,888 $25,159 $23,572
======= ======= =======
Net interest margin 5.98% 6.16% 6.00%
==== ==== =====
Interest spread 2.90% 3.05% 2.84%
==== ==== =====
(continued)
9
11
AVERAGE BALANCES, INTEREST AND RATES, CONTINUED
NOTES:
Balances shown are daily averages.
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
1998 Consolidated Financial Statements, incorporated by reference
herein.
Interest income on loans includes net loan fees of $27,000, $6,000 and
$8,000 for 1998, 1997 and 1996, respectively.
Income is presented on a tax-equivalent basis assuming a tax rate of
34% for 1998, 1997 and 1996. The tax-equivalent adjustment was
approximately $125,000, $124,000 and $88,000 for 1998, 1997 and 1996,
respectively.
For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of
the investments.
10
12
INTEREST VOLUME AND RATE VARIANCE
THE FOLLOWING TABLE PRESENTS THE CHANGES IN INTEREST INCOME AND EXPENSE
BETWEEN YEARS 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.
FOR THE YEAR ENDED DECEMBER 31
------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN: TO CHANGE IN:
------------------- -------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ---- ------ ------ ---- ------
(DOLLARS EXPRESSED IN THOUSANDS)
Interest earned on:
Loans :
Taxable $ 875 $(252) $ 623 $ 757 $ (72) $ 685
Tax-exempt 24 (15) 9 115 (5) 110
Debt and equity securities:
Taxable (2,343) (193) (2,536) (764) 109 (655)
Tax-exempt (11) -- (11) 7 (3) 4
Federal funds sold and other
short-term investments 2,801 (124) 2,677 944 105 1,049
------- ----- ------- ------ ----- ------
Total interest income 1,346 (584) 762 1,059 134 1,193
------- ----- ------- ------ ----- ------
Interest expense on:
Interest-bearing demand deposits 85 (17) 68 244 60 304
Savings deposits 99 (37) 62 (379) (198) (577)
Time deposits of $100,000 or more (3) 3 -- (29) 9 (20)
Other time deposits (31) (9) (40) (25) (4) (29)
Short-term borrowings (40) (17) (57) (96) 24 (72)
------- ----- ------- ------ ----- ------
Total interest expense 110 (77) 33 (285) (109) (394)
------- ----- ------- ------ ----- ------
Net interest income $ 1,236 $(507) $ 729 $1,344 $ 243 $1,587
======= ===== ======= ====== ===== ======
NOTES:
Average balances include nonaccrual loans.
Interest income includes net loan fees.
Information is presented on a tax-equivalent basis assuming a tax rate
of 34% for 1998, 1997 and 1996.
11
13
II. INVESTMENT PORTFOLIO
THE CARRYING VALUE OF DEBT AND EQUITY SECURITIES BY CATEGORY OF SECURITIES
FOR EACH YEAR, IS AS FOLLOWS:
DECEMBER 31
----------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
U.S. Government Treasury securities $58,976 $ 93,148 $121,461
Obligations of U.S. Government
corporations and agencies 23,519 31,410 36,513
States and political
subdivisions 1,278 1,492 1,492
Stock of the Federal Reserve Bank 201 201 201
------- -------- --------
Total investments $83,974 $126,251 $159,667
======= ======== ========
AT DECEMBER 31, 1998, THE MATURITY AND WEIGHTED AVERAGE YIELD ON DEBT
SECURITIES IS AS FOLLOWS:
AFTER AFTER
ONE YEAR FIVE YEARS
ONE THROUGH THROUGH AFTER WEIGHTED
YEAR OR FIVE TEN TEN AVERAGE
LESS YEARS YEARS YEARS YIELD
---- ----- ----- ----- -----
(DOLLARS EXPRESSED IN THOUSANDS)
U.S. Government Treasury
securities $24,009 $34,967 $ -- $ -- 6.19%
Obligations of U.S. Govern-
ment corporations and
agencies 1,792 10,571 6,484 4,672 5.76
States and political
subdivisions 25 210 1,043 -- 5.02
------- ------- ------ ------
Total investments $25,826 $45,748 $7,527 $4,672 6.05%
======= ======= ====== ====== ====
Weighted average yield 6.17% 6.08% 6.29% 7.08%
======= ======= ====== ======
There was no single issuer of securities in the investment portfolio at
December 31, 1998 other than the U.S. Government and U.S. Government
corporations and agencies, for which the aggregate amortized cost exceeded
ten percent of total shareholders' equity.
12
14
III. LOAN PORTFOLIO
THE COMPOSITION OF THE LOAN PORTFOLIO IS AS FOLLOWS:
DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial and industrial $ 95,663 $ 93,633 $ 94,962 $ 98,641 $ 91,500
Real estate:
Mortgage 101,468 87,573 85,360 58,746 48,997
Construction 16,547 7,893 9,164 11,057 4,253
Industrial revenue bonds 5,951 2,520 2,851 1,117 1,561
Installment 2,458 3,066 3,794 3,954 5,226
Other 2,801 1,793 1,644 678 929
-------- -------- -------- -------- --------
Total loans $224,888 $196,478 $197,775 $174,193 $152,466
======== ======== ======== ======== ========
LOANS AT DECEMBER 31, 1998 MATURE AS FOLLOWS:
OVER ONE YEAR OVER
THROUGH FIVE YEARS FIVE YEARS
------------------ ----------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
------- ---- ---- ---- ---- -----
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial and industrial $ 71,177 $17,735 $ 6,417 $ 334 $ -- $ 95,663
Real estate:
Mortgage 20,974 74,823 4,232 1,439 -- 101,468
Construction 12,938 751 2,858 -- -- 16,547
Industrial revenue bonds 119 1,832 -- 4,000 -- 5,951
Installment 1,086 1,372 -- -- -- 2,458
Other 2,801 -- -- -- -- 2,801
-------- ------- ------- ------ ------ --------
Total loans $109,095 $96,513 $13,507 $5,773 $ -- $224,888
======== ======= ======= ====== ====== ========
Loans have been classified as having "floating" interest rates if the rate
specified in the loan varies with the prime commercial rate of interest.
13
15
RISK ELEMENTS INCLUDED IN LENDING ACTIVITIES
THE FOLLOWING IS A SUMMARY OF NONPERFORMING ASSETS:
DECEMBER 31
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
Commercial, industrial and industrial
revenue bonds:
Nonaccrual $477 $285 $480 $151 $247
Contractually past due 90 days
or more and still accruing 179 3 -- 186 --
Renegotiated loans 134 449 -- 278 213
Real estate-construction contractually
past due 90 days or more and still accruing -- -- -- 15 --
Real estate-mortgage contractually
past due 90 days or more and still accruing -- 24 306 -- --
---- ---- ---- ---- ----
Total nonperforming loans 790 761 786 630 460
Other real estate -- -- -- -- --
---- ---- ---- ---- ----
Total nonperforming assets $790 $761 $786 $630 $460
==== ==== ==== ==== ====
(1) Nonaccrual Loans
----------------
It is the policy of the Company to continually monitor its loan
portfolio and to discontinue the accrual of interest on any loan on
which payment of principal or interest in a timely manner in the normal
course of business is doubtful. Subsequent payments received on such
loans are applied to principal if there is any doubt as to the
collectibility of such principal; otherwise, these receipts are recorded
as interest income. Interest on nonaccrual loans, which would have been
recorded under the original terms of the loans, was approximately
$78,000 for the year ended December 31, 1998. Of this amount,
approximately $17,000 was actually recorded as interest income on such
loans.
(2) Potential Problem Loans
-----------------------
At December 31, 1998, after review of potential problem loans identified
by management including those noted above, management of the Company
concluded the allowance for loan losses was adequate. As of December
31, 1998, approximately $2,302,700 of loans not included in the table
above were identified by management as having potential credit problems
which raised doubts as to the ability of the borrowers to comply with
the present loan repayment terms. Of this balance of potential problem
loans, $92,000 are deemed to be impaired. While these borrowers are
currently meeting all of the terms of the applicable loan agreements,
their financial condition has caused management to believe that their
loans may result in disclosure at some future time as nonaccrual, past
due or restructured.
(3) Foreign Loans
-------------
The Company does not have any foreign loans.
14
16
(4) Loan Concentrations
-------------------
The Company has no concentrations of loans exceeding 10% of total loans
which are not otherwise disclosed in the loan portfolio composition
table. As can be seen in the loan composition table above and discussed
in Note 4 to the Company's 1998 Consolidated Financial Statements
(included in the Company's 1998 Annual Report to Shareholders
incorporated herein by reference), the Company's primary market niche is
the privately held commercial company and churches and church-related
ministries. Loans to the commercial entities are generally secured by
the business assets of the company, including accounts receivable,
inventory, machinery and equipment, and the building(s)/plant(s) from
which the company operates. Operating lines of credit to these companies
generally are secured by accounts receivable and inventory, with
specific percentages of each determined on a customer by customer basis,
based on the business in which the customer operates. Intermediate term
credit for machinery and equipment is generally loaned at some
percentage of the value of the equipment purchased, again depending on
the type of machinery or equipment purchased by the entity (e.g. less
funds would be loaned on restaurant equipment which has a lower resale
value than certain types of machinery which tend to hold their value).
Long term credits are secured by the entities' building(s)/plant(s) and
are generally loaned with a maximum 80% loan to value ratio.
Loans secured exclusively by real estate to businesses and churches are
generally made with a maximum 80% loan to value ratio, again depending
upon the Company's estimate of the resale value and ability for the
property to cash flow. The Company's loan policy requires an independent
appraisal for all loans over $250,000 secured by real estate. Company
management monitors the local economy in an attempt to determine whether
it has had a significant deteriorating effect on such real estate
credits. When problems are identified, appraised values are updated on a
continual basis, either internally or through ordering an updated
external appraisal.
The Company's loan portfolio does not include a significant amount of
single family real estate mortgage or installment credits, as the Company
has not concentrated on the consumer side of the business.
(5) Other Interest-Earning Assets
-----------------------------
The Company does not have any other interest-earning assets which would
have been included in nonaccrual, past due or restructured loans if such
assets were loans.
15
17
IV. SUMMARY OF LOAN LOSS EXPERIENCE
THE FOLLOWING IS A SUMMARY OF LOAN LOSS EXPERIENCE:
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
Allowance at beginning of year $ 4,484 $ 4,396 $ 6,358 $ 6,334 $ 6,446
Loans charged-off:
Commercial, industrial and IRB's 365 412 2,120 183 436
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- 1 3 24
-------- -------- -------- -------- --------
Total 365 412 2,121 186 460
-------- -------- -------- -------- --------
Recoveries of loans previously charged-off:
Commercial, industrial and IRB's 309 200 152 708 348
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- 7 2 --
-------- -------- -------- -------- --------
Total 309 200 159 710 348
-------- -------- -------- -------- --------
Net loans charged-off (recovered) 56 212 1,962 (524) 112
-------- -------- -------- -------- --------
Provision charged to expense -- 300 -- (500) --
-------- -------- -------- -------- --------
Allowance at end of year $ 4,428 $ 4,484 $ 4,396 $ 6,358 $ 6,334
======== ======== ======== ======== ========
Loans outstanding:
Average $213,075 $202,280 $192,096 $158,937 $142,696
December 31 224,888 196,478 197,775 174,193 152,466
Ratio of allowance for loan losses to
loans outstanding:
Average 2.08% 2.22% 2.29% 4.00% 4.44%
December 31 1.97% 2.28% 2.22% 3.65% 4.15%
Ratio of net charge-offs (recoveries) to
Average loans outstanding .03% .10% 1.02% (.33)% .08%
======== ======== ======== ======== ========
Allocation of allowance for loan losses :
Commercial, industrial and IRB's $ 3,982 $ 4,001 $ 3,825 $ 5,582 $ 5,485
Real estate:
Mortgage 19 366 119 502 492
Construction 427 15 173 7 101
Installment -- 102 279 267 256
-------- -------- -------- -------- --------
Total $ 4,428 $ 4,484 $ 4,396 $ 6,358 $ 6,334
======== ======== ======== ======== ========
Percent of categories to total loans:
Commercial and industrial and IRB's 45.2% 48.9% 49.5% 57.3% 61.0%
Real estate:
Mortgage 45.1 44.6 43.2 33.7 32.2
Construction 7.4 4.0 4.6 6.3 2.8
Installment 1.1 1.6 1.9 2.3 3.4
Other 1.2 .9 .8 .4 .6
-------- -------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
See notes (1) and (2) on the following page.
16
18
IV. SUMMARY OF LOAN LOSS EXPERIENCE, CONTINUED
Factors which influence management's determination of the provision for
loan losses charged to expense for each of the years presented above,
among other things, include evaluation of each nonperforming and/or
classified loan to determine the estimated loss exposure under existing
circumstances known to management; evaluation of all potential problem
loans identified in light of possible loss exposure based upon existing
circumstances known to management; an analysis of the loan portfolio
with regard to potential future loss exposure on loans to specific
customers and/or industries; current economic conditions and an overall
review of the remainder of the portfolio in light of past loan loss
experience.
The Company allocated its allowance for loan losses to the various loan
categories at December 31, 1998 based on the ratio of total
nonperforming loans over the last 5 years. Management views the
allowance for loan losses as being available for all potential or
presently unidentified loan losses which may occur in the future. The
risk of future losses that is inherent in the loan portfolio is not
precisely attributable to a particular loan or category of loans.
Allocations estimated for the categories do not specifically represent
that loan charge-offs of this magnitude will be required. The allocation
does not restrict future loan losses attributable to a particular
category of loans from being absorbed by the portion of the allowance
attributable to other categories of loans. The risk factors considered
when determining the overall level of the allowance are the same when
estimating the allocation by major category, as specified in the above
summary.
17
19
V. DEPOSITS
Certificates of deposit and other time deposits of $100,000 and more at
December 31, 1998 mature as follows:
AMOUNT
-----
(DOLLARS EXPRESSED
IN THOUSANDS)
Three months or less $ 736
Three to six months 1,098
Six to twelve months 1,300
Over twelve months 300
------
Total $3,434
======
The composition of average deposits and the average rates paid on those
deposits is represented in Table I included earlier in this discussion. The
Company does not have any significant deposits from foreign depositors.
VI. RETURN ON EQUITY AND ASSETS
The percent of net income to average assets and average shareholders' equity
and other data is presented below.
FOR THE YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
Return on average total assets 1.58% 1.58% 1.54%
Return on average total shareholders' equity 13.41 14.03 14.41
Ratio of average total shareholders' equity
to average total assets 11.77 11.26 10.70
Ratio of total dividends declared
to net income 37.55 35.77 35.22
18
20
ITEM 2. PROPERTIES
----------
Cass Commercial Corporation
- ---------------------------
The Company is headquartered at 13001 Hollenberg Drive, Bridgeton,
Missouri.
Cass Commercial Bank
- --------------------
Cass Bank moved its main banking office to 13001 Hollenberg Drive,
Bridgeton, Missouri in April, 1997. Cass Bank occupies approximately 20,500
square feet out of 61,500 square feet of property owned by CIS. Cass Bank owns
its facility at 1420 Thirteenth Street, St. Louis, which consists of
approximately 1,600 square feet with adjoining drive-up facilities. Cass Bank
has additional leased facilities in Maryland Heights, Missouri (2,500 square
feet); Fenton, Missouri (1,250 square feet); Chesterfield, Missouri (2,850
square feet) and St. Louis, Missouri (1,500 square feet).
Cass Information Systems, Inc.
- ------------------------------
CIS is currently headquartered at 13001 Hollenberg Drive, Bridgeton,
Missouri. This property is owned by CIS, and includes a building with
approximately 61,500 square feet of office space, 20,500 of which is occupied
by Cass Bank.
CIS also operates a production facility located in Columbus, Ohio where
approximately 20,000 square feet are leased through the year 2000. This
space is located at 2545 Farmers Drive, Columbus, Ohio. CIS operates an
additional production facility in Lowell, Massachusetts where approximately
25,800 square feet of office space is leased through October 31, 2005. CIS
also operates a production facility for its rating and software group in
Chicago, Illinois where approximately 10,000 square feet of office space is
leased through the year 2004.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to their
business. Management believes none of these proceedings, if determined
adversely, would have a material effect on the business or financial
condition of the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
19
21
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
------------------------------------------------
SHAREHOLDER MATTERS
-------------------
As of March 15, 1999, there were 286 holders of record of the Company's
common stock.
The Company's common stock was listed on the NASDAQ Stock Market
effective July 1, 1996. High and low bid prices for each quarter of 1998 and
1997 were as follows:
1998 1997
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $35 1/4 $24 3/4 $23 $19 1/4
2nd Quarter 34 3/4 30 27 1/4 20
3rd Quarter 30 3/4 23 7/8 26 1/2 24 3/4
4th Quarter 26 3/4 24 5/8 25 3/8 24 3/4
Dividends paid by the Company during the two most recent fiscal years were as
follows:
DIVIDENDS PER SHARE
1998 1997
---- ----
March 15 $.18 $.13
June 15 .18 .13
September 15 .18 .13
December 15 .18 .26
20
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
THE FOLLOWING TABLE SETS FORTH CERTAIN SELECTED CONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY.
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS)
Interest income:
Loans $ 17,579 $ 16,951 $ 16,193 $ 14,042 $ 11,538
Debt and equity securities 6,607 9,151 9,801 9,787 8,772
Other 5,858 3,181 2,132 2,972 1,963
-------- -------- -------- -------- --------
Total interest
income 30,044 29,283 28,126 26,801 22,273
-------- -------- -------- -------- --------
Interest expense:
Deposits 4,271 4,181 4,503 4,036 2,641
Short-term borrowings 10 67 139 92 42
-------- -------- -------- -------- --------
Total interest
expense 4,281 4,248 4,642 4,128 2,683
-------- -------- -------- -------- --------
Net interest
income 25,763 25,035 23,484 22,673 19,590
Provision for loan losses -- 300 -- (500) --
-------- -------- -------- -------- --------
Net interest income
after provision
for loan losses 25,763 24,735 23,484 23,173 19,590
Noninterest income 22,447 21,813 22,091 23,794 21,826
Noninterest expense 36,625 35,911 35,811 37,366 33,325
-------- -------- -------- -------- --------
Income before income
tax expense 11,585 10,637 9,764 9,601 8,091
Income tax expense 4,177 3,626 3,245 3,387 2,509
-------- -------- -------- -------- --------
Net income $ 7,408 $ 7,011 $ 6,519 $ 6,214 $ 5,582
======== ======== ======== ======== ========
(Continued)
Interest income on loans includes net loan fees.
21
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA, CONTINUED
-----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS EXPRESSED IN THOUSANDS
EXCEPT PER SHARE DATA)
Per share of common stock:
Basic earnings $ 1.92 $ 1.82 $ 1.69 $ 1.62 $ 1.46
Diluted earnings 1.89 1.79 1.66 1.61 1.46
Dividends .720 .650 .595 .535 .505
Average balances:
Total assets 469,606 443,900 422,953 400,197 369,126
Net loans 208,603 197,761 185,791 152,433 136,327
Debt and equity securities 109,275 148,027 160,291 161,047 154,264
Total deposits 176,784 161,778 161,595 143,001 140,970
Total shareholders'
equity 55,246 49,965 45,250 40,924 37,061
======== ======== ======== ======== ========
Selected ratios:
Return on average
total assets 1.58% 1.58% 1.54% 1.55% 1.51%
Return on average
total shareholders' equity 13.41 14.03 14.41 15.18 15.06
Total shareholders' equity
to total assets at year-end 11.39 12.01 10.90 10.12 9.52
Allowance for loan losses
to loans at year-end 1.97 2.28 2.22 3.65 4.15
Nonperforming assets
to loans and other
real estate at year-end .35 .39 .40 .36 .30
Net loan charge-offs (recoveries)
to average loans outstanding .03 .10 1.02 (.33) .08
22
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
HIGHLIGHTS
- ----------
Net income for the year ended December 31, 1998 was $7,408,000 or $1.92
and $1.89 on a basic and diluted earnings per share basis, respectively.
These results compare to net income of $7,011,000 or $1.82 and $1.79 on a
basic and diluted earnings per share basis for 1997, and $6,519,000 or $1.69
and $1.66 on a basic and diluted earnings per share basis for 1996. At
December 31, 1998 total assets were $503,912,000 compared to $438,327,000 at
December 31, 1997; loans were $224,888,000 compared to $196,478,000 and
deposits were $190,982,000 compared to $165,857,000. The following
paragraphs more fully discuss these highlights and other significant changes
and trends as they relate to the Company's financial condition, results of
operations, capital resources and liquidity during the three-year period
ended December 31, 1998. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto, which are
hereby incorporated by reference from the Company's 1998 Annual Report to
Shareholders.
RESULTS OF OPERATIONS
- ---------------------
Net Income
- ----------
Net income of $7,408,000 in 1998 increased from net income of
$7,011,000 in 1997 and $6,519,000 in 1996. Diluted net income of $1.89 per
share in 1998 increased from $1.79 per share in 1997 and $1.66 per share in
1996. The Company's return on average assets was 1.58% in 1998 and 1997 and
1.54% in 1996. Return on average equity was 13.41% in 1998 compared to 14.03%
in 1997 and 14.41% in 1996.
The main factors contributing to the increase in net income in 1998
over 1997 were the increase in average earning assets net of interest-bearing
liabilities from $305,895,000 in 1997 to $327,740,000 in 1998 and an increase
in fee revenue generated by CIS which was partially offset by the decrease in
net interest margin from 6.16% in 1997 to 5.98% in 1998. The main factors
contributing to the increase in net income in 1997 over 1996 were the
increase in net average earning assets from $286,174,000 in 1996 to
$305,895,000 in 1997; an improvement in the net interest margin from 6.00% in
1996 to 6.16% in 1997; and reduced occupancy expenses for 1997. See Table I
beginning on page 8.
Net Interest Income
- -------------------
The Company's tax-equivalent net interest margin on earning assets
decreased in 1998 to 5.98% from 6.16% in 1997 and was 6.00% in 1996. The
prime rate declined from 9.00% in January, 1996 to 8.25% in February, 1996,
increased to 8.50% in March, 1997 and declined in 1998 to 8.00% in October
and again to a low of 7.75% in November. The average yield on earning assets
decreased to 6.96% in 1998 from 7.20% in 1997 and was 7.18% in 1996 (See
Table I on pages 8 and 9). The Company is adversely affected by decreases in
the level of interest rates due to the fact that its rate sensitive assets
significantly exceed its rate sensitive liabilities. Conversely, the Company
is positively affected by increases in the level of interest rates. This is
primarily due to the noninterest-bearing liabilities generated by CIS in the
form of accounts and drafts payable (See Interest Rate Sensitivity Gap Table
under the section entitled "Interest Rate Sensitivity").
The increase of $21,845,000 in average net earning assets was the
primary contributor to the increase in net tax-equivalent interest income of
$729,000 in 1998 over 1997. The increase of $19,721,000 in average net
earning assets resulted in the increase in net tax-equivalent interest income
of $1,587,000 in 1997 over 1996. The mix of earning assets changed somewhat
in 1998 with an increase of $10,795,000 in the average balance of loans, a
decrease of approximately $38,752,000 in debt and equity securities and an
increase of $52,905,000 in average federal funds sold and other short-term
investments. The increase in average total earning assets of $24,948,000
from $408,207,000 in 1997 to $433,155,000 in 1998 was funded mainly by an
increase of $17,322,000 in average noninterest-bearing liabilities. The
interest volume and rate variance analysis presented on page 11 provides a
detailed explanation of the changes in net interest income for 1998 compared
to 1997 and 1997 compared to 1996, respectively.
23
25
Provision for Loan Losses
- -------------------------
The Company recorded no provision for loan losses in 1998 or 1996 and
recorded a provision of $300,000 in 1997. Loan charge-offs, net of
recoveries, experienced by the Company were $56,000 in 1998, $212,000 in 1997
and $1,962,000 in 1996. Loan charge-offs in 1996 included $2,000,000 in
loans to two borrowers, one in the printing industry and one in the wholesale
supply business, which discontinued operations abruptly in late 1996.
The allowance for loan losses was $4,428,000 at December 31, 1998,
compared to $4,484,000 at December 31, 1997 and $4,396,000 at December 31,
1996. The year-end 1998 allowance represents 1.97% of net outstanding loans.
At December 31, 1998, the level of nonperforming assets has increased
slightly from $761,000 at December 31, 1997 to $790,000. The total past due
over 90 days and nonaccrual loans of $656,000 at December 31, 1998 represents
.30% of outstanding loans which is well below industry standards.
Noninterest Income
- ------------------
Noninterest income is derived mainly from service fees generated by CIS.
Total noninterest income increased $634,000 (2.9%) in 1998 over 1997.
CIS experienced an increase in processing revenue of $946,000 (5.3%) in 1998
over 1997. Once again, CIS had a record processing year in paying over 25
million freight invoices with a value of over $7 billion. CIS has continued
to show strong earnings as more companies, particularly large Fortune 500
companies, seek to outsource this process. CIS's freight rating software
service and sales group experienced a decrease in revenue of $138,000 (5.4%)
in 1998 compared to 1997.
Other noninterest income decreased $361,000 (55.9%) in 1998 over 1997
due primarily to the negative goodwill related to a prior acquisition by CIS
being fully amortized in 1997. Also in 1997, the Bank received a buyout of
its headquarters lease in excess of the remaining net book value of leasehold
improvements which resulted in a one-time gain of $95,000.
Total noninterest income decreased $278,000 (1.3%) in 1997 from 1996.
CIS experienced an increase in processing revenue of $165,000 (.9%) in 1997
over 1996. CIS's freight rating software service and sales group experienced
a decrease of $733,000 (22.2%) in 1997 from 1996. This decrease resulted
primarily from a decline in software sales due to increased competition from
broad based providers of logistics software in the marketplace.
Noninterest Expense
- -------------------
Total noninterest expense increased $714,000 (2.0%) in 1998 over 1997.
Salaries and benefits expense increased $902,000 (3.7%) in 1998
compared to 1997. The increase relates primarily to separation costs
associated with the streamlining and integration of operations in the freight
rating software service and sales group combined with annual pay increases.
Occupancy expense increased $79,000 (4.9%) in 1998 compared to 1997.
The increase was due primarily to CIS's Chicago location receiving a $72,000
reimbursement for rent expense to vacate their building by the end of 1997.
Total noninterest expense increased $100,000 (.3%) in 1997 compared to
1996.
Salaries and benefits expense increased $96,000 (.4%) in 1997 compared
to 1996. This increase represents the net of normal annual pay increases
and a decrease in the number of employees.
Occupancy expense decreased $496,000 (23.5%) in 1997 compared to 1996.
The decrease was due primarily to the Company and the Bank moving their
headquarters in April, 1997 to a new facility which was added on to the
property owned by CIS in Bridgeton, Missouri. This consolidation of
facilities resulted in occupancy
24
26
expense savings. Additionally, CIS received a $72,000 reimbursement of rent
expense for its Chicago location in 1997. Rent payments for the last four
months of 1997 were also abated, resulting in total decreased rent expense of
$160,000 for 1997 for the CIS Chicago location.
Other noninterest expense increased $457,000 (6.4%) in 1997 compared to
1996. Expenses incurred for contract programming in CIS's payment processing
group accounted for $200,000 of the increase. Consulting expense for product
development incurred by CIS's freight rating group accounted for $150,000 of
the increase. Expenses associated with the headquarters move of the Company
and Bank in April, 1997 accounted for an increase of approximately $40,000.
Balance Sheet Analysis
- ----------------------
Federal funds sold and other short-term investments increased from
$88,275,000 at December 31, 1997 to $156,827,000 at December 31, 1998. The
average balance of these accounts increased $52,905,000 (91.4%) from
$57,900,000 in 1997 to $110,805,000 in 1998. The increase in the average
balance of these accounts resulted from increased balances in accounts and
drafts payable and the maturities of investments in debt securities. The
reinvestment of maturing debt securities into federal funds sold and other
short-term investments was part of management's ongoing asset-liability
management program. See Table I, page 8 for a presentation of average
balances.
Total loans increased $28,410,000 (14.5%) from $196,478,000 at December
31, 1997 to $224,888,000 at December 31, 1998. The average balances of loans
increased $10,795,000 (5.3%) in 1998 over 1997. Loan demand and new business
volume increased throughout 1998 and should continue into 1999.
Investments in debt and equity securities decreased $42,277,000 (33.5%)
from $126,251,000 at December 31, 1997 to $83,974,000 at December 31, 1998.
The average balance of investment in debt and equity securities decreased
$38,752,000 (26.2%) from $148,027,000 in 1997 to $109,275,000 in 1998.
Total earning assets increased $54,685,000 (13.3%) from $411,004,000 at
December 31, 1997 to $465,689,000 at December 31, 1998. The average balance
of earning assets increased $24,948,000 (6.1%) from $408,207,000 in 1997 to
$433,155,000 in 1998. This increase was largely funded by an increase in the
average balance of demand deposits and accounts and drafts payable.
Noninterest-bearing demand deposits increased $20,953,000 (33.8%) from
$61,958,000 at December 31, 1997 to $82,911,000 at December 31, 1998. The
average balance of these accounts increased $10,942,000 (18.0%) from
$60,707,000 in 1997 to $71,649,000 in 1998. New business volume increased
throughout 1998 and should continue into 1999.
Interest-bearing deposits increased from $103,899,000 at December 31,
1997 to $108,071,000 at December 31, 1998. The average balances of these
deposits increased $4,064,000 (4.0%) from $101,071,000 in 1997 to
$105,135,000 in 1998.
Accounts and drafts payable generated by CIS in its payment processing
operations increased $36,763,000 (17.2%) from $213,755,000 at December 31,
1997 to $250,518,000 at December 31, 1998. The average balances of these
funds increased $7,665,000 (3.4%) from $223,990,000 in 1997 to $231,655,000
in 1998. This increase resulted from successful sales efforts leading to
the conversion of new customers.
INFLATION
- ---------
Inflation can impact the financial position and results of the
operations of banks because banks hold monetary assets and monetary
liabilities. Monetary assets and liabilities are those which can be
converted into a fixed number of dollars, and include cash, investments,
loans and deposits. The Company's consolidated balance sheets, as is typical
of financial institutions, reflects a net positive monetary position
(monetary assets exceeding 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 bank.
25
27
LIQUIDITY
- ---------
At December 31, 1998 approximately 46% of the Company's loan portfolio
was composed of commercial and industrial loans, of which approximately 71%
represented loans maturing within one year. As of the same date, real estate
loans represented approximately 53% of the total and of these, approximately
29% represented balances maturing within one year. Approximately 1% of the
loan portfolio is represented by installment loans.
The strong liquidity of the Company is further exemplified by cash and
due from banks of $22,558,000 and federal funds sold and other short-term
investments of $156,827,000 at December 31, 1998.
Total investment in debt and equity securities represented
approximately 17% of total assets at year-end. Average total securities as a
percent of average total assets has decreased in 1998 compared to 1997. This
occurred as a result of an increase in loan demand and federal funds sold and
other short-term investments. Of the U.S. Government securities in the
Company's investment portfolio, which represented approximately 70% of the
total, approximately 41% have maturities of less than one year. Obligations
of U.S. Government corporations and agencies comprise approximately 28% of
the portfolio. Obligations of states and political subdivisions and other
security investments made up approximately 2% of the investment portfolio at
December 31, 1998. Of the total portfolio, approximately 85% of the
securities had maturities of five years or less.
The deposits of the Company's banking subsidiary have also been stable,
consisting of a sizable volume of core deposits. Historically, the Company's
banking subsidiary has been a net provider of federal funds. Net federal
funds sold averaged $23,037,000 in 1998 and $21,731,000 in 1997.
Additionally, the Company averaged $87,768,000 in other short-term
investments in 1998 and $36,169,000 in 1997. These investments were in
money market funds backed by U.S. Government and agency issues.
Cass Bank has unsecured lines at correspondent banks to purchase
federal funds up to a maximum of $14,200,000. Additionally, Cass Bank has a
line of credit at an unaffiliated financial institution in the maximum amount
$50,000,000 under securities sold under repurchase agreements.
INTEREST RATE SENSITIVITY
- -------------------------
The Company faces market risk to the extent that its net interest
income and its fair market value of equity are affected by changes in market
interest rates. The asset/liability management discipline as applied at the
Company seeks to limit the volatility, to the extent possible, of both net
interest income and the fair market value of equity that can result from
changes in market interest rates. This is accomplished by limiting the
maturities of fixed rate investments, loans, and deposits; matching fixed
rate assets and liabilities to the extent possible; and optimizing the mix of
non-interest fee and net interest income. However, as discussed below, the
Company's asset/liability position differs significantly from most other bank
holding companies with positive "gaps" shown for each time horizon presented.
This asset sensitive position is caused primarily by the operations of CIS,
which generates large balances of accounts and drafts payable. These
balances, which are noninterest bearing, contributes to the Company's high
net interest margin but causes the Company to become susceptible to changes
in interest rates, with a decreasing net interest margin and fair market
value of equity in periods of declining interest rates and an increasing net
interest margin and fair market value of equity in periods of rising interest
rates.
The Company's Asset/Liability Management Committee (ALCO) measures the
Company's interest rate risk sensitivity on a Quarterly basis to monitor and
manage the variability of earnings and fair market value of equity in various
interest rate environments. The ALCO evaluates the Company's risk position to
determine whether the level of exposure is significant enough to hedge a
potential decline in earnings and value or whether the Company can safely
increase risk to enhance returns. The ALCO uses gap reports, twelve-month net
interest income simulations, and fair market value of equity analyses as its
main analytical tools to provide management with insight into the Company's
exposure to changing interest rates.
A gap report is used by management to review any significant mismatch
between the repricing points of the Company's rate sensitive assets and
liabilities in certain time horizons. A negative gap indicates that more
liabilities reprice in that particular time frame and, if rates rise, these
liabilities will reprice faster than the assets. A positive gap would
indicate the opposite. Management has set policy limits specifying acceptable
levels of interest
26
28
rate risk as measured by the gap report. Gap reports can be misleading in
that they capture only the repricing timing within the balance sheet, and
fail to capture other significant risks such as basis risk and embedded
options risk. Basis risk involves the potential for the spread relationship
between rates to change under different rate environments and embedded
options risk relates to the potential for the alteration of the level and/or
timing of cash flows given changes in rates.
Another measurement tool used by management is net interest income
simulation, which forecasts net interest income during the coming twelve
months under different interest rate scenarios in order to quantify potential
changes in short term accounting income. Management has set policy limits
specifying acceptable levels of interest rate risk given multiple simulated
rate movements. These simulations are more informative than gap reports
because they are able to capture more of the dynamics within the balance
sheet, such as basis risk and embedded options risk. Simulation results
illustrate that the Company's net interest income over the next twelve months
is more vulnerable to declining rates than rising rates.
While net interest income simulations do a good job of capturing
interest rate risk to short term earnings, they do not capture risk within
the current balance sheet beyond twelve months. The Company uses fair market
value of equity analyses to help identify longer-term risk that may reside on
the current balance sheet. The fair market value of equity is represented by
the present value of all future income streams generated by the current
balance sheet. The Company measures the fair market value of equity as the
net present value of all asset and liability cash flows discounted at forward
rates suggested by the current Treasury curve plus appropriate credit
spreads. This representation of the change in the fair market value of
equity under different rate scenarios gives insight into the magnitude of
risk to future earnings due to rate changes. Management has set policy limits
relating to declines in the market value of equity. The results of these
analyses indicate that the Company's fair market value of equity declines as
rates decline and increases as rates increase.
27
29
INTEREST RATE SENSITIVITY GAP TABLE
- -----------------------------------
The following table presents the Company's gap or interest rate risk position
at December 31, 1998 for the various time periods indicated.
OVER OVER
THREE SIX OVER ONE
THREE THROUGH THROUGH THROUGH OVER
VARIABLE MONTHS SIX TWELVE FIVE FIVE
RATE OR LESS MONTHS MONTHS YEARS YEARS TOTAL
---- ------- ------ ------ ----- ----- -----
(DOLLARS EXPRESSED IN THOUSANDS)
Earning assets:
Loans:
Taxable $ 91,237 $ 9,341 $ 6,450 $ 15,455 $ 94,681 $ 1,773 $218,937
Tax-exempt -- 15 34 70 1,832 4,000 5,951
Debt and equity securities:
Taxable -- 11,179 6,007 14,328 45,538 5,443 82,495
Tax-exempt -- 25 -- -- 210 1,043 1,278
Other 201 -- -- -- -- -- 201
Federal funds sold and
other short term investments 156,827 -- -- -- -- -- 156,827
-------- -------- -------- -------- -------- -------- --------
Total earning assets 248,265 20,560 12,491 29,853 142,261 12,259 465,689
======== ======== ======== ======== ======== ======== ========
Interest-sensitive liabilities:
Money market deposit
accounts 25,798 -- -- -- -- -- 25,798
Interest-bearing
demand accounts 11,901 -- -- -- -- -- 11,901
Savings deposits 62,569 -- -- -- -- -- 62,569
Time deposits:
$100,000 and more -- 736 1,098 1,300 300 -- 3,434
Less than $100,000 -- 1,313 1,095 1,321 640 -- 4,369
Short-term borrowings 323 -- -- -- -- -- 323
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $100,591 $ 2,049 $ 2,193 $ 2,621 $ 940 $ -- $108,394
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap:
Periodic $147,674 $ 18,511 $ 10,298 $ 27,232 $141,321 $ 12,259 $357,295
Cumulative 147,674 166,185 176,483 203,715 345,036 357,295 357,295
Ratio of interest-bearing
assets to interest-bearing
liabilities:
Periodic 2.47x 10.03x 5.70x 11.39x 151.34x -- 4.30x
Cumulative 2.47x 2.62x 2.68x 2.90x 4.18x 4.30x 4.30x
Balances shown reflect earliest repricing date.
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30
CAPITAL RESOURCES
- -----------------
Shareholders' equity was $57,404,000 at December 31, 1998, an increase
of $4,751,000 (9.0%) from the amount at the end of 1997. The net increase
resulted from net income of $7,408,000, the payment of $2,782,000 in
dividends, the recognition of a net unrealized holding gain on debt and
equity securities available-for-sale of $23,000, an increase due to the net
effect of the exercise of stock options of $52,000 and the amortization of
stock bonus plan awards of $50,000. Total dividends paid to shareholders
increased to $.72 per share in 1998 from $.65 per share in 1997.
Subsidiary dividends are the principal source of funds for payment of
dividends by the Company to its shareholders. The Missouri banking laws
impose certain limitations on the payment of dividends by Missouri state
chartered banks such as Cass Bank, as follows: (1) no dividends may be paid
which would impair capital; (2) until the surplus fund of a bank is equal to
40% of its capital, no dividends may be declared unless there has been
carried to the surplus account no less than one-tenth of its net profits for
the dividend period; and (3) dividends are payable only out of a bank's
undivided profits. In addition, the appropriate regulatory authorities are
authorized to prohibit banks and bank holding companies from paying dividends
which would constitute an unsafe and unsound banking practice.
The Company and its banking subsidiary continue to exceed all
regulatory capital requirements, as evidenced by the following capital ratios
at December 31, 1998:
Company Cass
Consolidated Bank
------------ ----
Total Capital to Risk-Weighted Assets 21.14% 15.12%
Tier 1 Capital to Risk-Weighted Assets 19.89 13.86
Tier I Capital to Average Assets 12.05 12.04
THE YEAR 2000 ISSUE
- -------------------
The Company's operations are heavily dependent on the use of computer
systems. The Year 2000 issue centers around the inability of some computer
systems to properly read and interpret dates because many existing computers
and computer programs have been developed to use two digits rather than four
to refer to a year. The risk of system failure and data processing errors
may be the result of this issue.
The Company estimates it will incur costs of approximately $ 2.9
million to prepare for the century date change. As of December 31, 1998,
direct and indirect expenditures have been close to $1.9 million. This
includes internal and external costs that will be expensed as well as capital
expenditures that will be capitalized. Costs include, but are not limited to:
salary expenses, outside service fees (i.e., legal, audit, consulting),
hardware and software expenditures, and equipment costs. Funding for Year
2000 costs have been, and will continue to be, derived from normal operating
cash flow. As a result, Year 2000 expenses are not expected to have a
material impact on the Company's income.
The Company has focused its efforts on addressing those systems it
deems to be critical to ongoing operations. The Company-wide project for
addressing the Year 2000 issue was segmented into five phases, as recommended
by banking regulators. With regard to internal, mission critical systems,
the present state of each phase was estimated at December 31, 1998 as follows:
Expected
Phase Completion Date Percent Complete
----- --------------- ----------------
Awareness 02/01/1998 100%
Assessment 05/31/1998 100%
Renovation 12/31/1998 95%
Testing 03/31/1999 85%
Implementation 06/30/1999 75%
In addition to addressing the readiness of internal systems, the
Company continues to assess the readiness of its major vendors, suppliers,
customers and business partners. This process has been accomplished through
such avenues as user acceptance testing, interface testing, risk analysis and
periodic correspondence. Although our
29
31
efforts have been diligent, there can be no guarantee that the systems of
these outside parties will be fully functional in the Year 2000. Such
failures could have a material adverse effect on the Company.
The Company is developing business resumption contingency plans for the
purpose of assuring that core business processes will continue to operate
into the Year 2000. The plan will address failures such as payment system
failures, data processing system failures, increased cash withdrawals,
telecommunication failures, disruption in services provided by outside
parties and customer failures. The contingency plan provides for reasonable
alternatives to potential failures and the establishment of an implementation
strategy, including timelines and responsibility assignments.
The foregoing discussion of Year 2000 issues is based on management's
most current assessment and estimates. The information utilizes multiple
assumptions of future events, including, but not limited to, the continued
availability of certain resources, third party efforts, and other factors.
There can be no guarantee that the estimates included herein will be
achieved, and actual costs and results could differ materially from the
estimates currently anticipated by the Company.
EFFECT OF RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130) which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. The Company adopted SFAS 130 on
January 1, 1998. SFAS 130 is a disclosure requirement and had no impact on
the Company's consolidated financial position and results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131) which establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim reports issued to shareholders. SFAS 131
is effective for financial statements for periods beginning after December
15, 1997. The Company adopted SFAS 131 in 1998 and has disclosed the
required information in Note 12 to the Notes to Consolidated Financial
Statements on page 29 of the Cass Commercial 1998 Annual Report. SFAS 131 is
a disclosure requirement and had no impact on the Company's consolidated
financial position and results of operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits (SFAS 132) which standardizes the disclosure
requirements for presenting information about pensions and other
postretirement benefits. SFAS 132 is effective for the years beginning after
December 15, 1997. The Company adopted SFAS 132 and has disclosed the
required information in Note 7 to the Notes to Consolidated Financial
Statements on pages 24 through 26 of the Cass Commercial 1998 Annual Report.
SFAS 132 is a disclosure requirement and had no impact on the Company's
consolidated financial position and results of operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) which establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is effective for all
fiscal years beginning after June 15, 1999. Earlier application of SFAS 133
is encouraged but should not be applied retroactively to financial statements
of prior periods. The Company is currently evaluating the requirements and
impact of SFAS 133.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise (SFAS 134) which conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
SFAS 134 is effective for the first fiscal quarter beginning after December
15, 1998. Since the Company has not
30
32
securitized any mortgage loans, SFAS 134 will have no impact on the Company's
consolidated financial position and results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
Statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the other sections of this Report
that are not statements of historical fact are forward-looking statements.
Such statements are subject to important risks and uncertainties which could
cause the Company's actual results to differ materially from those expressed
in any such forward-looking statements made herein. The aforesaid
uncertainties include, but are not limited to: burdens imposed by federal
and state regulators, credit risk related to borrowers' ability to repay
loans from Cass Bank, concentration of loans in the St. Louis Metropolitan
area which subjects Cass Bank to risks associated with changes in the local
economy, risks associated with fluctuations in interest rates, competition
from other banks and other financial institutions, some of which are not as
heavily regulated as Cass Bank and, particularly in the case of CIS, risks
associated with breakdowns in data processing systems and competition from
other providers of similar services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - INTEREST RATE SENSITIVITY". The Company's
primary market risk exposure is to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements and related footnotes of the
Company and its subsidiaries on pages 14 through 30 of its Annual Report to
Shareholders and the report thereon of KPMG LLP on page 31 of the Annual
Report to Shareholders are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
NONE
31
33
PART III.
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information concerning directors and executive officers of the
Registrant is incorporated herein by reference from the Company's definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders, a copy of which
will be filed no later than 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
AND MANAGEMENT
--------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
32
34
PART IV.
--------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
--------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) The following documents are incorporated by reference in or filed
as an exhibit to this Report:
(1) Financial Statements:
---------------------
Annual Report
Page Number
----------
CASS COMMERCIAL CORPORATION AND SUBSIDIARIES
--------------------------------------------
Consolidated Balance Sheets, December 31,
1998 and 1997 14
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and
1996 15
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 16
Consolidated Statements of Shareholders' Equity
And Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996 17
Notes to Consolidated Financial Statements 18-30
Independent Auditors' Report 31
(2) Financial Statement Schedules:
------------------------------
None other than those included as Notes to Consolidated
Financial Statements.
(3) Exhibits
--------
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
3.2 By Laws of Registrant, incorporated by reference to
Exhibit 4.2 to Form S-8 Registration Statement
No. 333-44499, filed with the SEC on January 20, 1998
10.1 1995 Restricted Stock Bonus Plan, as amended, to
January 19, 1999, including form of Restriction
Agreement, incorporated by reference to Exhibit 4.3
to Post-Effective Amendment No. 2 to Form S-8
Registration Statement No. 33-91456, filed with the
SEC on February 16, 1999
10.2 1995 Performance-Based Stock Option Plan, as amended
to January 19, 1999, including forms of Option
Agreements, incorporated by reference to Exhibit 4.3
to Post-Effective Amendment No. 2 to Form S-8
Registration Statement No. 33-91568, filed with the
SEC on February 16, 1999
13 1998 Annual Report to Shareholders (only those
portions of such Annual Report as are incorporated by
reference in parts I and II hereof shall be deemed a
part of this Report)
21 Subsidiaries of registrant
23 Consent of KPMG LLP
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended December 31, 1998.
33
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CASS COMMERCIAL CORPORATION
Date: March 23, 1999 By /s/ Lawrence A. Collett
-------------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
Date: March 23, 1999 By /s/ Eric H. Brunngraber
-------------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on the dates indicated by the following
persons on behalf of the Company and in their capacity as a member of the
Board of Directors of the Company.
Date: March 23, 1999 By /s/ Bryan S. Chappel
-------------------------------------------
Bryan S. Chappel
Date: March 23, 1999 By /s/ Lawrence A. Collett
-------------------------------------------
Lawrence A. Collett
Date: March 23, 1999 By /s/ Thomas J. Fucoloro
-------------------------------------------
Thomas J. Fucoloro
Date: March 23, 1999 By /s/ Harry J. Krieg
-------------------------------------------
Harry J. Krieg
Date: March 23, 1999 By /s/ A. J. Signorelli
-------------------------------------------
A. J. Signorelli
Date: March 23, 1999 By /s/ John J. Vallina
-------------------------------------------
John J. Vallina
Date: March 23, 1999 By /s/ Bruce E. Woodruff
-------------------------------------------
Bruce E. Woodruff
34
1
Four Pillars Cass Commercial
One Foundation Corporation
[CASS LOGO] Annual Report 98
2
"HE IS LIKE A MAN BUILDING A HOUSE,
who dug deep and laid a foundation
upon the rock; and when a flood rose,
the torrent burst against that house and
could not shake it; because it had been
well built." Luke 6:48
3
Four Pillars
One Foundation
PRIVATELY HELD
BUSINESSES
BANKING SERVICES
CHURCHES AND
CHURCH-RELATED
BANKING SERVICES
FREIGHT PAYMENT
PROCESSING SERVICES
UTILITY PAYMENT
PROCESSING SERVICES
98
4
Chairman's Letter to Shareholders
Financial Highlights
1998 provided another record year of profits for Cass Commercial Corporation.
Net income was $7,408,000, an increase of 5.7% over the corresponding level
in 1997. Basic earnings per share were $1.92 compared to $1.82 in 1997. We
are indeed grateful for this continued growth in income, especially
considering the decreased level of interest rates in the last quarter of the
year.
At year-end, the company's total assets exceeded $500 million for the
first time in its history. Average assets grew at a rate of 5.8% over 1997.
Additionally, the company's loan portfolio increased an average of $10.8
million, representing a 5.5% increase over corresponding levels in 1997. At
year-end total capital represented 12.2% of average assets for the year. The
company continues to experience a strong capital position, providing
additional safety and the capability to exploit future growth opportunities.
Loan quality continues to improve. The ratio of our total non-accrual loans
to total loans at year-end stood at only .2%.
These results again demonstrate excellent asset quality, outstanding
capital protection and a solid base for continued growth and profitability.
We are grateful to be able to provide these results for our shareholders.
Business Highlights
All of the company's business units contributed growth in 1998.
PRIVATELY HELD BUSINESSES
This core banking unit produced substantial new relationships with well
managed, capable companies during the past year. This growth is attributed to
the functional team structure developed in 1997 and an increase in the number
of businesses utilizing Cass' business banking services. The growth
experienced in earning assets and deposits reflects our success in attracting
a growing number of business customers.
CHURCHES AND CHURCH-RELATED INSTITUTIONS
This unit, formed in 1997, showed significant growth during the last year.
Not only were a sizable number of new relationships developed, but
outstanding loan volume to these institutions was increased during the year.
We are excited by the reception of our services from these important
institutions.
2 Cass Commercial Corporation
5
FREIGHT PAYMENT PROCESSING
The number of companies utilizing our freight payment services increased
during the past year. This growth was slowed somewhat due to the high level
of Y2K remediation occurring in the marketplace. Nevertheless, new client
volume continued to increase. Cass' leadership in this core business unit is
represented by its large market share and leadership in providing high-quality
transaction processing for over 2,000 customers. No other firm can
match Cass' quality, dollar volume processed and market share. The trend to
outsourcing administrative functions is continuing and we believe over 50% of
the market is still processing their freight internally. This trend should
allow for continued future growth.
UTILITY PAYMENT PROCESSING
This new business unit also showed significant progress in 1998. This was
attributed to a new Sales and Marketing staff operating the entire year, and
the increased availability and knowledge of Cass' processing services
throughout the industry. Cass' volume grew to over $500 million annually
during 1998. We reacted quickly and decisively to market needs, developed
services to meet customer requirements and were one of the first
companies to begin providing these services. We anticipate significant growth
in this area of transaction processing as energy deregulation continues
throughout the country.
We continue to look favorably upon opportunities for growth in each of
our primary business units. We shall continue to focus our resources and
capital expenditures to improve market share, operating capabilities and
performance in each of these key areas.
The Cass Strategy
Our strategy of combining the operations of a uniquely focused transaction
processing business with the activities of a commercial banking enterprise is
working and continues to provide the basis for future growth and
profitability.
These businesses integrate at key junctions that promote the efficiency
and performance of each other. Together they generate higher levels of fee
income, greater returns on invested funds and larger levels of available
funds than could have been achieved independently. The results provide Cass
Commercial Corporation with a history of excellent performance, sustained
growth and strong capabilities.
98
Cass Commercial Corporation 3
6
The New Millennium
As we enter 1999, we will be completing the last year of this century. The
Cass organization began with the formation of the Cass Avenue Bank in 1906,
shortly after the beginning of the current century. Cass Commercial
Corporation now prepares to move into the next century, anticipating new
challenges and exciting opportunities. We are determined to continue to grow
the investment of our forefathers, providing long-term benefits for
shareholders and employees by providing excellent quality and responsive
services that produce significant value to our customers.
The year 2000 provides us with a host of opportunities, although not
without some concerns. Obviously, there is great concern about the Y2K
problem, requiring the remediation of significant computer systems. This
effort has caused our nation's business enterprises to spend billions of
dollars and millions of hours to correct and prepare corporate systems for
the future. Along with the effort to make these corrections has come dire
predictions of disaster, gloom and doom for the near future.
At Cass, we prefer to view the year 2000 from the perspective of the
Old Testament model of Caleb. Caleb, along with Joshua, was sent by Moses,
with 10 other individuals, to scout the Promised Land for the nation of
Israel. After returning from their task, the other 10 felt the inhabitants of
the land were too big and too strong to conquer and Israel should not make an
attempt at claiming what God had promised them. Caleb, however, was not
overcome by fear of the inhabitants, but instead focused on the beauty and
productivity of the land and the great opportunities it would provide their
nation. He looked beyond the problems and ultimately became part of God's
chosen vehicle to claim those lands.
It is our belief that the next millennium will be filled with
tremendous opportunities for businesses in our country. Cass will listen to
the marketplace and respond to future needs with innovative services and
products. We will train and develop our staff to be more flexible and
effective. Our technology will be used to provide even better services and
higher quality. We must grasp the opportunity and utilize the God-given
abilities and resources we have been provided and accept the great challenges
before us. Cass is indeed excited about the opportunities awaiting the new
millennium.
4 Cass Commercial Corporation
7
The Foundation
Obviously, there has been and will continue to be a great deal of change in
the years ahead. However, all things do not change. The foundation upon which
the Cass organization was built and upon which it currently rests will not
change. The four pillars, on the cover of our annual report, represent our
current four business units. However, they all rest upon the same foundation.
When the number of business units increase in the years ahead, there will
still be one foundation.
Our business foundation consists of an ongoing commitment to
maintaining a strong capital position, capable staff, effective systems and
technology, and high-quality performance that will lead to excellent results
over long-term periods. These traits have been characteristic of the Cass
organization and continue to drive our activities. Our business objectives and
goals are built on this business foundation.
Of greater importance and significance, however, is our dependence on
God for the future. No matter what we achieve or how well we perform, our
most important objective is to please God. Indeed, long-term significance,
long-term value and ultimate success are not determined by business results.
They are driven by a loving God who daily dispenses grace and mercy to an
undeserving humanity. Again, in 1998, we have tasted this grace and the
loving hand of a Creator who cares about all aspects of life. The Cass
foundation shall, indeed, be built upon a desire to conduct our affairs and
activities in a manner that upholds His righteousness and seeks to honor and
glorify Him by what we do and how it is accomplished.
/s/ L. A. Collett
Lawrence A. Collett
Chairman and Chief Executive Officer
Cass Commercial Corporation 5
8
Privately Held Businesses
1998 BUSINESS RESULTS
1998 was an excellent year in this core banking unit which provides financial
services to privately held businesses. As of December 31, 1998, loans
outstanding to privately held businesses were $193,500,000, representing 86%
of our total loan portfolio of $224,900,000. Total net loan growth was 14.8%
over the prior year-end balance. This is excellent considering the overall
economy is growing at an annual rate of approximately 3.5%.
The majority of our new clients in 1998 came from large national banks
which have acquired local banks causing many customers to consider
alternatives. We believe our operating strategies are continuing to be
effective in pursuing these under-served privately held companies while
satisfying the financial needs of our existing clients.
In light of this strong growth, it is important to note that credit
quality in our overall loan portfolio has continued to strengthen from
already superior levels. As of December 31, 1998, nonperforming loans
represented just .3% of total loans outstanding. As a point of reference,
under 1% is considered to be very strong. Our levels of loan delinquencies,
loans charged off and other important credit quality factors continue to
register historic low levels as well.
Total Impaired Loans (as of Dec. 31) Total Loans (as of Dec. 31)
(In Thousands) (In Millions)
[GRAPH] [GRAPH]
BUSINESS STRATEGY
Our main strategy has been to focus on our strenghts ... providing high levels
of expertise and personal attention to our clients balanced with electronic
technology, specifically tailored for privately held companies. This
continuing dedication to focus on our specialty was reflected in our decision in
1998 to change our legal name from Cass Bank & Trust Company to Cass Commercial
Bank. We have differentiated Cass
6 Cass Commercial Corporation
9
by listening to private business owners and making a sincere attempt to
service their banking needs.
Relationship Continuity -- We strive to provide continuity in account
management by creating teams of bankers, each having a specific role to play
on behalf of our client. This team of specialists provides better
responsiveness and multiple points of contact. Clients have immediate access
to the appropriate person to solve their problem. Further, should there be
any change in staff, our clients are assured continuity of the service
relationship. We also make it a special point to involve Cass' executive
management with our customers in the credit and relationship process.
Know How -- The experience level of our bankers is also a key attribute
and a major factor in our success. Private business owners want more than
just access to funds. They want helpful direction and advice when it comes to
financing decisions. With low turnover in our banking staff and many years of
experience in this particular niche, our bankers have the opportunity to
share firsthand experience and to add valuable insight. It is important that
our clients never feel they have to train their Cass banker.
Independence -- Now in our 93rd year of operations, Cass possesses a
long history and a strong commitment to remaining independent. The
dislocation caused by the recent banking consolidations will continue over
the next several years. Our clients place a premium on doing business with a
bank that has a long history of independence and clearly desires to remain
independent.
Operating Competence -- The high quality of our back room operations is
a strength and a key commitment to our valued clients. As banks have grown
and cut staff to achieve cost reductions, we hear many business owners
concerned about the quality of banking operations. Fundamentals such as
accurate check and statement processing or timely response to inquiries can
no longer be taken for granted. Further, we know that errors waste valuable
time and should be unnecessary. Business owners expect and deserve more from
their bank. Cass' operations staff focuses solely on commercial accounts
which allows us to minimize operating errors and to offer superior response
delivered through our service teams.
Tailored and Affordable Products -- Having products that work well is
very important, but clients also want these products at moderate cost.
Whether it is flexible loan structures, customized to fit the specific needs
of each borrower, or treasury management products (such as wholesale lockbox
services, controlled disbursement accounts, online information reporting,
money fund sweeps, and electronic commerce), we deliver banking services with
high technical functionality. Our fees are moderate because our clients do
not pay for large capacity enhancements or overhead requirements. Finally,
our products and services are specifically designed to meet the needs of our
business customers.
Attitude -- Being responsive, helpful and friendly is more than just a
good business strategy to us ... it is simply the right way to treat people.
This attitude is an outgrowth of our corporate culture. In the final
analysis, it is persistence and effort in serving our customers that
represents the difference between Cass and other banks.
1
Cass Commercial Corporation 7
10
Churches and Church-Related Institutions
1998 was another outstanding year for Cass Commercial Bank's Church and
Ministries' Division. And, in many ways, it was a continuation of the
positive trends that have been experienced in our church and ministries'
business.
In 1998, we more than doubled our loan outstandings, once again
exceeding the previous year's growth in new church and ministry
relationships, and our pipeline of new church and ministries' business is
stronger than ever.
Our church relationships continue to increase and diversify among
small, medium and large-size churches, representing a wide variety of
denominations and ministries.
One distinctive feature of Cass Commercial Bank is the way we work with
churches. We invest time to get to know each church and its unique needs,
building a relationship with each of our church customers. We help assess
total project sizes and affordable loan levels. We then partner in building a
financial game plan to address the immediate project, as well as the future
needs of the church.
Lending alternatives include the financing of a church's current
mortgage loan, the expansion of existing facilities and the building of an
entirely new church facility. We also offer a variety of term loans for
various other church and ministries' needs.
Another feature of our service is our approach to a church's
depository, savings and investment needs, both short and longer term. We work
closely with each church in understanding its fiscal philosophy and operating
approach. We then conduct a comprehensive analysis comparing various
operating, savings and investment alternatives to determine the best fit for
our customer.
We also provide a "team" approach to building a banking relationship.
Each of our customers is provided a team that includes a marketing officer, a
lending officer, a depository/cash management officer, and a customer service
officer, as well as executive management. This provides relationship
continuity and consistency for our church customers.
At Cass, we believe lending to churches and ministries is not just good
business; we also believe these ministries are excellent avenues to help
address the critical issues facing our communities. The focus on outreach
services provided by these organizations addresses society's deepest needs.
By providing financial support to churches and ministries, Cass plays a
small part in helping to renew and to restore our city and suburban
communities.
8 Cass Commercial Corporation
11
[PHOTO]
In 1999, the St. Louis community will be the recipient of two
significant events. The visit of Pope John Paul II was an exciting occasion
that brought spiritual focus and renewed attention on our need for God's
sustenance and support. The Billy Graham Crusade in the fall will continue that
focus by bringing together thousands of churches to proclaim the New Testament
gospel message and the love of God to hundreds of thousands in this region. Both
of these events remind us of the importance of our church and spiritual
community to the health and vitality of our nation.
2
Cass Commercial Corporation 9
12
Freight Payment Processing
Cass Information Systems provides audit, payment, cost accounting and
financial control of transportation and warehousing transactions for many of
the nation's largest manufacturing, chemical, food and personal products
companies. Our rating software helps businesses manage carrier rates and
integrate them with their decision support systems. The information we
provide enables our customers to focus their attention on controlling costs
and improving service levels to their customers. In 1998 Cass processed 25
million transactions with a value of $7.0 billion. With processing centers in
St. Louis, Missouri; Columbus, Ohio; and Boston, Massachusetts; and a
software development group in Chicago, Illinois; we are well-positioned to
meet the growth opportunities in the markets we serve.
In today's business climate we are adapting and taking advantage of
technology developments to leverage our unique financial strength to create a
transaction processing company that is distinctively identified as the market
leader. Our business model has been redefined and constructed entirely on an
electronic commerce platform.
ELECTRONIC DATA INTERCHANGE (EDI)
For many years Cass has focused on EDI as a very important strategic
initiative to reduce costs, improve data integrity and eliminate the
inefficiencies inherent in paper processing. Working with our customer base
and carrier partners, Cass has converted 50% of the 25 million freight bills
processed annually from paper to electronic transactions. And as part of a
bank holding company, Cass supports complete financial EDI services for
carriers, including Automated Clearing House (ACH) payments and more than 10
million electronic remittance advice transactions. Cass views the conversion
to EDI as a major initiative as we seek to reach our next EDI processing
milestone of 75% of freight bills processed.
IMAGING
Until Cass fully converts to EDI processing, access to paper transactions by
our customers will continue to be a requirement. Archiving and retrieving
individual freight bills is expensive and time consuming. Historically, image
scanning and storage costs were not competitive with microfilming. But
scanning and image storage costs have decreased dramatically allowing Cass to
offer our customers the convenience of CD-ROM storage of historical files, as
well as easy access to paper and EDI freight bill images via the Internet.
10 Cass Commercial Corporation
13
[PHOTO]
INTERNET INFORMATION DELIVERY
Cass provides multiple methods of information delivery to our customers,
including file transfers, e-mail and traditional paper reports. Without
internal information systems that respond to the unique requirements of
supply chain management, our customers rely on Cass to present information in
formats that allow them to manage transportation costs and company
distribution channels. Much of this information is displayed in paper report
formats that are more costly, inefficient and less timely.
The Internet offers ubiquitous, instantaneous access to information.
Cass' Internet plan has five phases of development. In addition to payment
records and carrier rates, a transportation data base will be included that
will accommodate virtually all of the current reporting needs of our
customers. Our information delivery system provides flexible query and
sorting of data, displays data in report formats, multiple charting options,
data export capability and new e-mail delivery services. The integration of
imaging will also allow our customers to view freight bill images from report
displays and, if necessary, approve transactions without paper copies.
Cass is the only company in the industry committing to the Internet on
this scale. The result will be a dramatic distinction of our services to
companies seeking to outsource freight bill payment and information delivery
services. As companies continue to seek the expertise of third-party service
providers to manage activities that are not directly related to their core
strengths, Cass is the only provider with the resources to meet the changing
demands in the marketplace.
3
Cass Commercial Corporation 11
14
Utilities Payment Processing
Cass Information Systems starts the new year with the creation of a new
Utility Payments Division. Since its inception, the utility payment business
has grown dramatically. In recognition of significant market opportunities,
we are now focused on this emerging business with dedicated resources and a
long-term capital commitment.
We process and pay utility invoices, including electricity, gas, water,
telephone and refuse collection. We also extract key energy information from
invoices, assisting our customers' energy managers in making decisions that
will reduce their companies' energy costs and prepare them for significant
opportunities becoming available with the deregulation of the utility
industry.
The utility payments unit of our business provides many of the same
benefits for our customers that are achieved through our freight payment
services. Our experience in payables outsourcing dates back to the beginning
of the industry. The relationship we have with our Bank assures our customers
that high levels of internal control and financial accountability are
maintained. We have developed a payables processing system that enabled us to
pay more than 25 million invoices in 1998. No other company in the utility
payment business can match our size and commitment to the payables business.
The economies of scale that we apply to the processing of utility invoices
allow us to provide our services to the market at a price that is lower than
a company's internal cost or any external alternative.
Annualized Utility Dollars Paid
(In Millions)
[GRAPH]
12 Cass Commercial Corporation
15
In 1997 we announced our plan to continue the development of our
utility payment unit by expanding our sales resources and marketing efforts.
Since implementing these steps, our sales growth has exceeded our
expectations. We began 1998 with a processing volume of $255 million and
294,000 invoices. The year ended with a 29% increase in dollars and 71%
increase in invoices paid on an annual basis. We believe that a great
opportunity exists for further growth in this marketplace. We have also made
a significant commitment to providing energy management information to our
customers via the Internet. We will continue to devote resources to the
refinement of our information delivery system to ensure that our customers
can take advantage of opportunities to reduce their energy costs.
In 1999 we will focus on continuing to build our leadership position in
this market. Our plans for the coming year include providing enhanced energy
information capabilities, expanded EDI processing, electronic payments and
remittances, Internet invoice retrieval, CD-ROM archival, and expanded energy
and payables reporting services via the Internet.
Our goal, since we entered the utility payment business, was to respond
to an emerging market for payment processing and energy information with a
speed that distances us from companies that are entering the business with
little or no experience. We have been fortunate to have leveraged our
experience in freight payment while adapting to the unique demands of the
energy market.
We expect, by the end of 1998, to be processing more than $1 billion in
energy payables on an annualized basis. Our commitment to grow this business
and further penetrate the energy processing marketplace is unwavering. By
leveraging our freight payment technology and staff resources, while
investing in new capabilities, we hope that this business volume will one day
rival that achieved by our other transaction processing activities.
Annualized Utility Bills Paid
(In Millions)
[GRAPH]
4
Cass Commercial Corporation 13
16
Consolidated Balance Sheets
December 31
(In Thousands of Dollars, Except per Share Data) 1998 1997
ASSETS
Cash and due from banks $ 22,558 $ 10,849
Federal funds sold and other short-term investments 156,827 88,275
-------- --------
Cash and cash equivalents 179,385 99,124
-------- --------
Investment in debt and equity securities:
Held-to-maturity, fair value of $57,191 and $90,389
at December 31, 1998 and 1997, respectively 56,605 90,139
Available-for-sale, at fair value 27,369 36,112
-------- --------
Total investment in debt and equity securities 83,974 126,251
-------- --------
Loans 224,888 196,478
Less: Allowance for loan losses 4,428 4,484
-------- --------
Loans, net 220,460 191,994
-------- --------
Premises and equipment, net 9,249 9,957
Accrued interest receivable 2,764 3,137
Other assets 8,080 7,864
-------- --------
Total assets $503,912 $438,327
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 82,911 $ 61,958
Interest-bearing 108,071 103,899
-------- --------
Total deposits 190,982 165,857
Accounts and drafts payable 250,518 213,755
Short-term borrowings 323 406
Other liabilities 4,685 5,656
-------- --------
Total liabilities 446,508 385,674
-------- --------
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; 20,000,000 shares
authorized and 4,000,000 shares issued 2,000 2,000
Surplus 4,796 4,740
Retained earnings 51,505 46,879
Accumulated other comprehensive income 387 364
Common shares in treasury, at cost (132,123 and 141,452 shares
at December 31, 1998 and 1997, respectively) (1,213) (1,284)
Unamortized stock bonus awards (71) (46)
-------- --------
Total shareholders' equity 57,404 52,653
-------- --------
Total liabilities and shareholders' equity $503,912 $438,327
======== ========
See accompanying notes to consolidated financial statements.
14 Cass Commercial Corporation
17
Consolidated Statements of Income
Year Ended December 31
(In Thousands of Dollars, Except per Share Data) 1998 1997 1996
INTEREST INCOME:
Interest and fees on loans $17,579 $16,951 $16,193
Interest and dividends on debt and equity securities:
Taxable 6,538 9,074 9,729
Exempt from federal income taxes 69 77 72
Interest on federal funds sold and other short-term investments 5,858 3,181 2,132
------- ------- -------
Total interest income 30,044 29,283 28,126
------- ------- -------
INTEREST EXPENSE:
Interest on deposits 4,271 4,181 4,503
Interest on short-term borrowings 10 67 139
------- ------- -------
Total interest expense 4,281 4,248 4,642
------- ------- -------
Net interest income 25,763 25,035 23,484
Provision for loan losses -- 300 --
------- ------- -------
Net interest income after provision for loan losses 25,763 24,735 23,484
------- ------- -------
NONINTEREST INCOME:
Information services revenue:
Freight and utility payment and processing revenue 18,809 17,863 17,698
Freight rating services income 2,426 2,564 3,297
Service charges on deposit accounts 642 524 532
Gain on sale of debt securities 285 216 --
Other 285 646 564
------- ------- -------
Total noninterest income 22,447 21,813 22,091
------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 24,995 24,093 23,997
Occupancy expense 1,698 1,619 2,115
Equipment expense 2,649 2,654 2,611
Other 7,283 7,545 7,088
------- ------- -------
Total noninterest expense 36,625 35,911 35,811
------- ------- -------
Income before income tax expense 11,585 10,637 9,764
Income tax expense 4,177 3,626 3,245
------- ------- -------
Net income $ 7,408 $ 7,011 $ 6,519
======= ======= =======
EARNINGS PER SHARE:
Basic $ 1.92 $ 1.82 $ 1.69
------- ------- -------
Diluted $ 1.89 $ 1.79 $ 1.66
======= ======= =======
See accompanying notes to consolidated financial statements.
Cass Commercial Corporation 15
18
Consolidated Statements of Cash Flows
Year Ended December 31
(In Thousands of Dollars) 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,408 $ 7,011 $ 6,519
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,359 2,470 2,583
Amortization of stock bonus awards 50 110 110
Provision for loan losses -- 300 --
Deferred income tax expense 131 271 854
Decrease (increase) in accrued interest receivable 373 229 (422)
Gain on sale of debt securities (285) (216) --
Other operating activities, net (1,422) (1,884) (82)
-------- -------- --------
Net cash provided by operating activities 8,614 8,291 9,562
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of debt securities available-for-sale 6,409 14,235 --
Proceeds from prepayments and maturities of debt securities:
Held-to-maturity 32,974 28,076 20,192
Available-for-sale 2,905 1,178 6,918
Purchases of debt and equity securities:
Held-to-maturity -- -- (8,608)
Available-for-sale -- (9,835) (30,632)
Net decrease (increase) in loans (28,466) 1,085 (25,544)
Purchases of premises and equipment, net (1,250) (3,901) (1,747)
-------- -------- --------
Net cash provided by (used in) investing activities 12,572 30,838 (39,421)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing demand,
interest-bearing demand and savings deposits 25,945 (10,878) 16,277
Net decrease in time deposits (820) (770) (498)
Net increase (decrease) in accounts and drafts payable, net 36,763 9,065 (4,339)
Net decrease in short-term borrowings (83) (2,070) (2,471)
Proceeds from exercise of stock options 52 -- --
Cash dividends paid (2,782) (2,508) (2,296)
-------- -------- --------
Net cash provided by (used in) financing activities 59,075 (7,161) 6,673
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 80,261 31,968 (23,186)
Cash and cash equivalents at beginning of year 99,124 67,156 90,342
-------- -------- --------
Cash and cash equivalents at end of year $179,385 $ 99,124 $ 67,156
======== ======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,314 $ 4,301 $ 4,669
Income taxes paid 3,712 2,785 2,295
See accompanying notes to consolidated financial statements.
16 Cass Commercial Corporation
19
Statements of Shareholders' Equity and
Comprehensive Income
Accumulated
Other Unamortized
(In Thousands of Dollars, Common Retained Comprehensive Treasury Stock Bonus Comprehensive
Except per Share Data) Stock Surplus Earnings Income Stock Awards Total Income
Balance, December 31, 1995 $10,000 $(3,260) $38,153 $(30) $(1,284) $(266) $43,313
Net income -- -- 6,519 -- -- -- 6,519 $6,519
Cash dividends ($.60 per share) -- -- (2,296) -- -- -- (2,296)
Other comprehensive income:
Net unrealized gain on debt
and equity securities
available-for-sale,
net of tax -- -- -- 135 -- -- 135 135
Reduction in par value of
common stock (8,000) 8,000 -- -- -- -- --
Amortization of Stock Bonus
Plan awards -- -- -- -- -- 110 110
------- ------- ------- ---- ------- ----- ------- ------
Balance, December 31, 1996 2,000 4,740 42,376 105 (1,284) (156) 47,781
Comprehensive income 6,654
======
Net income -- -- 7,011 -- -- -- 7,011 7,011
Cash dividends ($.65 per share) -- -- (2,508) -- -- -- (2,508)
Other comprehensive income:
Net unrealized gain on debt
and equity securities
available-for-sale,
net of tax 402
Adjustment for gain on sale
of debt and equity
securities, available-
for-sale, net of tax (143)
------
Total other
comprehensive income -- -- -- 259 -- -- 259 259
Amortization of Stock Bonus
Plan awards -- -- -- -- -- 110 110
------- ------- ------- ---- ------- ----- ------- ------
Balance, December 31, 1997 2,000 4,740 46,879 364 (1,284) (46) 52,653
Comprehensive income 7,270
======
Net income -- -- 7,408 -- -- -- 7,408 7,408
Cash dividends ($.72 per share) -- -- (2,782) -- -- -- (2,782)
Other comprehensive income:
Net unrealized gain on debt
and equity securities
available-for-sale,
net of tax 211
Adjustment for gain on sale
of debt and equity
securities, available-
for-sale, net of tax (188)
------
Total other
comprehensive income -- -- -- 23 -- -- 23 23
Issuance of 3,000 common shares
pursuant to Stock Bonus Plan -- 48 -- -- 27 (75) --
Amortization of Stock Bonus
Plan awards -- -- -- -- -- 50 50
Exercise of Stock Options -- 8 -- -- 44 -- 52
------- ------- ------- ---- ------- ----- ------- ------
Balance, December 31, 1998 $ 2,000 $ 4,796 $51,505 $387 $(1,213) $ (71) $57,404
======= ======= ======= ==== ======= ===== =======
Comprehensive income $7,431
======
See accompanying notes to consolidated financial statements.
Cass Commercial Corporation 17
20
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Cass Commercial Corporation (the Company) provides a full range of banking
services to individual, corporate and institutional customers through its
wholly owned subsidiary bank, Cass Commercial Bank (the Bank), formerly known
as Cass Bank & Trust Company. The Bank is subject to competition from other
financial and nonfinancial institutions throughout the metropolitan St.
Louis, Missouri, area. Additionally, the Company and the Bank are subject to
the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
The Company also provides information services through its wholly owned
subsidiary, Cass Information Systems, Inc. (CIS). These services include
processing and payment of freight and utility charges, preparation of
transportation management reports, auditing of freight charges and rating of
freight shipments. CIS is subject to competition from other commercial
concerns providing similar services to companies throughout the United States
and Canada. The consolidated balance sheet caption, "Accounts and Drafts
Payable," consists of obligations related to bill payment services which are
performed for customers.
The accounting and reporting policies of the Company and its
subsidiaries conform to generally accepted accounting principles. The
following is a description of the more significant of those policies:
Basis of Presentation The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries after elimination
of intercompany transactions.
In preparing the consolidated financial statements, Company management
is required to make estimates and assumptions which significantly affect the
reported amounts in the consolidated financial statements. A significant
estimate which is particularly susceptible to change in a short period of
time is the determination of the allowance for loan losses.
Stock Split The Company announced a two-for-one stock split in the
form of a 100% stock dividend payable March 15, 1997, to shareholders of record
as of March 5, 1997. All per share data for prior years has been restated to
give effect to the stock split. As a result of the restatement, surplus in
the years prior to 1996 reflected a negative balance.
Investment in Debt and Equity Securities At the time or purchase, debt
securities are classified into one of two categories: available-for-sale or
held-to-maturity. Held-to-maturity securities are those securities which the
Company has the ability and intent to hold until maturity. All equity
securities, and debt securities not classified as held-to-maturity, are
classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-
maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums or discounts. Unrealized gains and losses, net of
the related tax effect, on available-for-sale securities are excluded from
earnings and reported as accumulated other comprehensive income. Gains and
losses on the sale of available-for-sale securities are determined using the
specific identification method.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary is charged
to earnings and results in the establishment of a new cost basis for the
security.
The Bank is required to maintain an investment in the capital stock of
the Federal Reserve Bank. The stock is recorded at cost, which represents
redemption value.
Interest on Loans Interest on loans is recognized based upon the
principal amounts outstanding. It is the Company's policy to discontinue the
accrual of interest when there is reasonable doubt as to the collectibility
of principal or interest. Subsequent payments received on such loans are
applied to principal if there is any doubt as to the collectibility of such
principal; otherwise, these receipts are
18 Cass Commercial Corporation
21
recorded as interest income. The accrual of interest on a loan is resumed
when the loan is current as to payment of both principal and interest and/or
the borrower demonstrates the ability to pay and remain current.
Allowance for Loan Losses The allowance for loan losses is increased
by provisions charged to expense and reduced by net charge-offs. The provisions
charged to expense are based on economic conditions, past losses, collection
experience, risk characteristics of the portfolio and such other factors
which, in management's judgment, deserve current recognition.
Management believes the allowance for loan losses is adequate to absorb
losses in the loan portfolio. While management uses all available information
to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to increase the allowance for loan losses based on
their judgments and interpretations about information available to them at
the time of their examination.
Information Services Revenue Revenue from freight and utility related
services is recognized when fees are billed to customers, generally monthly.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the assets, or the respective lease terms for
leasehold improvements, using straight-line and accelerated methods.
Estimated useful lives are 31-1/2 to 39 years for buildings, 8 to 10 years for
leasehold improvements and 3 to 10 years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Intangible Assets Cost in excess of fair value of net assets acquired
and fair value in excess of cost of net assets acquired have resulted from
business acquisitions which were accounted for using the purchase method.
Cost in excess of fair value of net assets acquired and fair value in
excess of cost of net assets acquired are amortized on a straight-line basis
over 3 to 15 years.
Assets and liabilities acquired in business acquisitions accounted for
by the purchase method were recorded at their fair value at the date of
acquisition. The premiums and discounts related to the fair value adjustments
are amortized using the level-yield method.
Lines of Credit At December 31, 1998, the Bank has $14,200,000 of
unsecured federal funds lines of credit in place with unaffiliated financial
institutions. Additionally, at December 31, 1998, the Bank has a line of
credit of $50,000,000 under securities sold under repurchase agreements with
an unaffiliated financial institution.
Income Taxes Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings Per Share Earnings per share is computed based upon the
weighted average number of shares of common stock outstanding during each
year. The weighted average number of shares was 3,862,393, 3,858,548 and
3,858,548 in 1998, 1997 and 1996, respectively.
The only dilutive instruments are stock options and unvested stock
awards with an aggregate dilutive effect of 67,281, 59,000 and 46,938 shares
in 1998, 1997 and 1996, respectively, which result in weighted average shares
and dilutive potential common shares of 3,929,674, 3,917,548 and 3,905,486 in
1998, 1997 and 1996, respectively.
Cash Flows For purposes of the consolidated statements of cash flows,
the Company considers due from banks, federal funds sold and other short-term
investments to be cash equivalents.
Comprehensive Income On January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), which established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. The
Company
Cass Commercial Corporation 19
22
reports comprehensive income in the consolidated statements of shareholders'
equity and comprehensive income.
Reclassifications Certain amounts in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with the 1998
presentation. Such reclassifications have no effect on previously reported
net income.
Note 2
CAPITAL REQUIREMENTS AND
REGULATORY RESTRICTIONS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company and the Bank's capital amounts
and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes as of December 31, 1998, the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
The Bank is also subject to the regulatory framework for prompt
corrective action. The most recent notification from the regulatory agencies,
dated May 30, 1998, categorized the Bank as well capitalized. To be
categorized as well capitalized, the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
Subsidiary dividends are the principal source of funds for payment of
dividends by the Company to its shareholders. The Bank is subject to
regulations which require the maintenance of minimum capital levels. At
December 31, 1998, unappropriated retained earnings of $13,352,000 were
available at the Bank for the declaration of dividends to the Company without
prior approval from regulatory authorities.
Restricted funds on deposit used to meet regulatory reserve
requirements amounted to approximately $3,763,000 and $3,504,000 at December
31, 1998 and 1997, respectively.
The Company and the Bank's actual and required capital amounts and
ratios as of December 31, 1998, are as follows:
Requirement
to Be Well
Capitalized Under
Capital Prompt Corrective
Actual Requirements Action Provisions
-------------------- -------------------- -------------------
(Dollars In Thousands) Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk-weighted assets):
Cass Commercial Corporation $60,073 21.14% $22,732 8.00% $ N/A N/A%
Cass Commercial Bank 27,526 15.12 14,568 8.00 18,211 10.00
Tier I capital (to risk-weighted assets):
Cass Commercial Corporation $56,510 19.89% $11,366 4.00% $ N/A N/A%
Cass Commercial Bank 25,246 13.86 7,284 4.00 10,926 6.00
Tier I capital (to average assets):
Cass Commercial Corporation $56,510 12.05% $14,073 3.00% $ N/A N/A%
Cass Commercial Bank 25,246 12.04 6,291 3.00 10,485 5.00
20 Cass Commercial Corporation
23
Note 3
INVESTMENT IN DEBT AND
EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent.
The amortized cost and fair values of debt securities classified as
held-to-maturity at December 31, 1998 and 1997, are as follows:
1998
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
U.S. Government
Treasury securities $38,369 $484 $ -- $38,853
Obligations of
U.S. Government
corporations
and agencies 16,958 72 (28) 17,002
States and political
subdivisions 1,278 60 (2) 1,336
------- ---- ----- -------
$56,605 $616 $ (30) $57,191
======= ==== ===== =======
1997
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
U.S. Government
Treasury securities $66,473 $443 $ (32) $66,884
Obligations of
U.S. Government
corporations
and agencies 22,174 17 (221) 21,970
States and political
subdivisions 1,492 46 (3) 1,535
------- ---- ----- -------
$90,139 $506 $(256) $90,389
======= ==== ===== =======
The amortized cost and fair value of debt securities classified as
held-to-maturity at December 31, 1998, by contractual maturity, are as
follows. Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations with or without prepayment
penalties.
1998
Amortized Fair
(In Thousands) Cost Value
Due in 1 year or less $25,747 $25,945
Due after 1 year through 5 years 25,141 25,405
Due after 5 years through 10 years 5,517 5,630
Due after 10 years 200 211
------- -------
$56,605 $57,191
======= =======
The amortized cost and fair values of debt and equity securities
classified as available-for-sale at December 31, 1998 and 1997, are
summarized as follows:
1998
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
U.S. Government
Treasury securities $20,055 $552 $ -- $20,607
Obligations of
U.S. Government
corporations
and agencies 6,527 51 (17) 6,561
------- ---- ---- -------
Total debt securities 26,582 603 (17) 27,168
Stock of the Federal
Reserve Bank 201 -- -- 201
------- ---- ---- -------
$26,783 $603 $(17) $27,369
======= ==== ==== =======
1997
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
U.S. Government
Treasury securities $26,271 $404 $ -- $26,675
Obligations of
U.S. Government
corporations
and agencies 9,089 178 (31) 9,236
------- ---- ---- -------
Total debt securities 35,360 582 (31) 35,911
Stock of the Federal
Reserve Bank 201 -- -- 201
------- ---- ---- -------
$35,561 $582 $(31) $36,112
======= ==== ==== =======
The amortized cost and fair value of debt securities classified as
available-for-sale at December 31, 1998, 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.
Cass Commercial Corporation 21
24
1998
Amortized Fair
(In Thousands) Cost Value
Due in 1 year or less $ 79 $ 79
Due after 1 year through 5 years 20,055 20,607
Due after 5 years through 10 years 1,983 2,010
Due after 10 years 4,465 4,472
------- -------
$26,582 $27,168
======= =======
The amortized cost of debt securities pledged to secure public
deposits, securities sold under agreements to repurchase and for other
purposes was approximately $49,813,000 and $13,048,000 at December 31, 1998
and 1997, respectively.
Proceeds from the sales of debt securities classified as available-for-
sale were $6,409,000 and $14,235,000 for 1998 and 1997, respectively. Gross
gains were realized on those sales of $285,000 and $216,000 for 1998 and
1997, respectively. No debt or equity securities were sold in 1996.
Note 4
LOANS
A summary of loan categories at December 31, 1998 and 1997, is as follows:
(In Thousands) 1998 1997
Commercial and industrial $ 95,663 $ 93,633
Real estate:
Mortgage 101,468 87,573
Construction 16,547 7,893
Industrial revenue bonds 5,951 2,520
Installment 2,458 3,066
Other 2,801 1,793
-------- --------
$224,888 $196,478
======== ========
The Company grants commercial, industrial, residential and consumer
loans to customers throughout the metropolitan St. Louis area. The Company
does not have any particular concentration of credit in any one economic
sector; however, a substantial portion of the commercial and industrial loans
are extended to privately held commercial companies in this market area, and
are generally secured by the assets of the business. Such loans are subject
to the economic changes inherent in the St. Louis marketplace.
Aggregate loan transactions involving executive officers and directors
of the Company and its subsidiaries and loans to associates of executive
officers and directors for the year ended December 31, 1998, are summarized
below. Such loans were made in the normal course of business on
substantially the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable transactions with other
persons, and did not involve more than the normal risk of collectibility.
(In Thousands)
Aggregate balance, January 1, 1998 $ 2,213
New loans 2,372
Payments (1,167)
-------
Aggregate balance, December 31, 1998 $ 3,418
=======
A summary of the activity in the allowance for loan losses for 1998,
1997 and 1996 is as follows:
(In Thousands) 1998 1997 1996
Balance, January 1 $4,484 $4,396 $ 6,358
Provision charged to expense -- 300 --
Loans charged off (365) (412) (2,121)
Recoveries of loans previously
charged off 309 200 159
------ ------ -------
Net loan charge offs (56) (212) (1,962)
------ ------ -------
Balance, December 31 $4,428 $4,484 $ 4,396
====== ====== =======
A summary of impaired loans at December 31, 1998 and 1997, is as
follows:
(In Thousands) 1998 1997
Nonaccrual loans $ 477 $ 285
Impaired loans continuing
to accrue interest 273 1,046
------ ------
Total impaired loans $ 750 $1,331
====== ======
The allowance for loan losses on impaired loans was $397,000 and
$643,000 at December 31, 1998 and 1997, respectively. Impaired loans with no
related allowance for loan losses totaled $309,000 and $71,000 at December
31, 1998 and 1997, respectively. The average balance of impaired loans during
1998 and 1997 was $972,000 and $1,362,000, respectively.
22 Cass Commercial Corporation
25
A summary of interest income on impaired loans for 1998, 1997 and 1996
is as follows:
1998
Impaired
Loans
Continuing
Nonaccrual to Accrue
(In Thousands) Loans Interest Total
Income recognized $ 17 $ 25 $ 42
Interest income if interest
had accrued 78 26 104
1997
Impaired
Loans
Continuing
Nonaccrual to Accrue
(In Thousands) Loans Interest Total
Income recognized $ 1 $ 45 $ 46
Interest income if
interest had accrued 27 53 80
1996
Impaired
Loans
Continuing
Nonaccrual to Accrue
(In Thousands) Loans Interest Total
Income recognized $221 $260 $481
Interest income if
interest had accrued 299 279 578
Note 5
PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997, is as
follows:
(In Thousands) 1998 1997
Land $ 367 $ 367
Buildings 6,250 6,264
Leasehold improvements 1,268 1,278
Furniture, fixtures
and equipment 17,558 16,591
------- -------
25,443 24,500
Less accumulated depreciation
and amortization 16,194 14,543
------- -------
$ 9,249 $ 9,957
======= =======
Depreciation charged to expense in 1998, 1997 and 1996 amounted to
$1,953,000, $1,932,000 and $1,913,000, respectively.
The Company's subsidiaries lease various premises and equipment under
operating lease agreements which expire at various dates through 2007. The
following is a schedule, by year, of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1998:
(In Thousands)
1999 $ 670
2000 670
2001 378
2002 343
2003 345
2004 and thereafter 517
------
$2,923
======
Rental expense for 1998, 1997 and 1996 was $1,161,000, $1,205,000 and
$1,712,000, respectively.
Note 6
INTEREST-BEARING DEPOSITS
Interest-bearing deposits consist of the following at December 31, 1998 and
1997:
(In Thousands) 1998 1997
NOW and Money Market
Demand Accounts $ 37,699 $ 32,616
Savings deposits 62,569 62,660
Time deposits:
Less than $100 4,369 5,112
$100 and more 3,434 3,511
-------- --------
$108,071 $103,899
======== ========
Interest on deposits consists of the following for 1998, 1997 and 1996:
(In Thousands) 1998 1997 1996
NOW and Money Market
Demand Accounts $1,198 $1,130 $ 826
Savings deposits 2,624 2,562 3,139
Time deposits:
Less than $100 227 267 296
$100 and more 222 222 242
------ ------ ------
$4,271 $4,181 $4,503
====== ====== ======
Cass Commercial Corporation 23
26
The scheduled maturities of certificates of deposit at December 31,
1998 and 1997, are summarized as follows:
1998 1997
Percent Percent
(Dollars In Thousands) Amount of Total Amount of Total
Due within:
One year $6,863 88.0% $7,043 81.7%
Two years 921 11.8% 1,320 15.3%
Three years 19 0.2% 242 2.8%
Four years -- -- 14 0.1%
Five years -- -- 4 0.1%
------ ----- ------ -----
$7,803 100.0% $8,623 100.0%
====== ===== ====== =====
Note 7
EMPLOYEE BENEFITS
The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. The Company's subsidiaries accrue and
make 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.
The pension cost for 1998, 1997 and 1996 was $517,000, $538,000 and
$478,000, respectively, and included the following components:
(In Thousands) 1998 1997 1996
Service cost -- benefits earned
during the year $ 763 $ 706 $ 682
Interest cost on projected
benefit obligations 617 544 492
Expected return on plan assets (765) (622) (495)
Amortization of transition asset -- -- (99)
Net amortization and deferral (98) (90) (102)
----- ----- -----
Net periodic pension cost $ 517 $ 538 $ 478
===== ===== =====
A summary of the activity in the defined benefit pension plan's benefit
obligation, assets, funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 1998, 1997 and 1996, are as
follows:
(In Thousands) 1998 1997 1996
Benefit obligation:
Balance, January 1 $ 8,561 $ 7,322 $ 6,199
Service cost 763 706 682
Interest cost 617 544 492
Actuarial loss 963 503 740
Benefits paid (133) (105) (137)
------- ------- -------
Balance, December 31 $10,771 $ 8,970 $ 7,976
======= ======= =======
Plan assets:
Fair value, January 1 $ 9,232 $ 7,487 $ 6,241
Actual return 953 1,076 656
Employer contribution 834 774 727
Benefits paid (133) (105) (137)
------- ------- -------
Fair value, December 31 $10,886 $ 9,232 $ 7,487
======= ======= =======
Funded Status:
Unfunded projected
benefits obligation $ 115 $ 262 $ (489)
Unrecognized prior service cost 141 148 155
Unrecognized net gains (1,390) (1,861) (1,354)
------- ------- -------
Accrued pension cost $(1,134) $(1,451) $(1,688)
======= ======= =======
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.75% and 4.00% in 1998, 7.25% and 4.00% in
1997 and 7.50% and 5.00% in 1996. The expected long-term rate of return on
assets was 8.00% in 1998, 1997 and 1996.
In addition to the above funded benefit plan, in 1998 the Company
developed an unfunded supplemental executive retirement plan which covers key
executive employees of the Company. This is a noncontributory plan in which
the Company's subsidiaries make accruals designed to fund normal service
costs on a current basis using the same method and criteria as its defined
benefit plan.
24 Cass Commercial Corporation
27
The pension cost related to this plan for 1998 was $143,000 and
included the following components:
(In Thousands)
Service cost -- benefits earned during the year $ 25
Interest cost on projected benefit obligation 59
Net amortization and deferral 59
-----
Net periodic pension cost $ 143
=====
A summary of the activity in the supplemental executive retirement
plan's benefit obligation, funded status and amounts recognized in the
Company's consolidated balance sheets at December 31, 1998, is as follows:
(In Thousands)
Benefit obligation:
Balance, January 1 $ 822
Service cost 25
Interest cost 59
Actuarial loss 66
-----
Balance, December 31 $ 972
=====
Funded Status:
Unfunded projected benefits obligation $(972)
Unrecognized prior service cost 763
Unrecognized actuarial loss 66
-----
Accrued pension cost $(143)
Minimum liability
adjustment (451)
-----
Adjusted pension cost $(594)
=====
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.75% and 5.00%, respectively, in 1998.
The Company maintains a noncontributory profit sharing plan which
covers substantially all of its employees. Employer contributions are
calculated based upon formulas which relate to current operating results and
other factors. Profit sharing expense recognized in the consolidated
statements of income in 1998, 1997 and 1996 was $1,679,000, $1,564,000 and
$1,433,000, respectively.
The Company sponsors a defined contribution 401(k) plan to provide
additional retirement benefits to substantially all employees. Contributions
under the 401(k) plan for 1998, 1997 and 1996 were $199,000, $220,000 and
$227,000, respectively.
The Company maintains a restricted stock bonus plan which provides for
the issuance of up to 100,000 shares of the Company's common stock. During
1998 and 1995, the Company awarded 3,000 and 32,000 shares of common stock,
respectively, to six officers of the Company. The fair value of such shares
has been recorded in the consolidated statements through the establishment of
a contra shareholders' equity account which is amortized over the three-year
vesting period. Amortization of the restricted stock bonus awards totaled
$50,000, $110,000 and $110,000 for 1998, 1997 and 1996, respectively.
The Company also maintains a performance-based stock option plan which
provides for the granting of options to acquire up to 400,000 shares of
Company common stock. Options vest over a period not to exceed seven years,
but the vesting period can be less based on the Company's attainment of
certain financial operating performance criteria. The Company's original
grant of stock options occurred during May 1995. At that time, options to
purchase 120,000 shares were granted at an exercise price of $10.32. The
table below summarizes all subsequent activity.
Weighted
Average
Exercise
Shares Price
Balance at December 31, 1995 and 1996 120,000 $10.32
Granted 14,500 23.34
Forfeited (16,000) 10.32
-------
Balance at December 31, 1997 118,500 11.91
Exercised (7,200) 10.32
Forfeited (1,400) 10.32
-------
Balance at December 31, 1998 109,900 12.04
=======
At December 31, 1998, 95,400, 6,000 and 8,500 options were outstanding
at exercise prices of $10.32, $20.36 and $25.45, respectively, with weighted
average remaining contractual lives of 3.9 years, 5.0 years and 5.0 years,
respectively. At December 31, 1998, 25,960 shares were exercisable with a
weighted average exercise price of $10.32.
The Company accounts for stock-based compensation under the stock
option plan in accordance with Accounting
Cass Commercial Corporation 25
28
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and, accordingly, recognizes no compensation expense as the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant. The Company elected not to adopt the
recognition provisions of the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). An entity that continues to apply APB 25 shall
disclose certain pro forma information as if the fair value-based accounting
method in SFAS 123 had been used to account for stock-based compensation
costs. The pro forma effects were calculated and are immaterial to the
results of operations of the Company.
Note 8
OTHER NONINTEREST EXPENSE
Details of other noninterest expense for 1998, 1997 and 1996 are as follows:
(In Thousands) 1998 1997 1996
Postage, printing and supplies $2,161 $2,129 $2,114
Advertising and business
development 1,392 1,437 1,441
Professional fees 1,056 1,320 903
Data processing services 590 652 655
Telecommunications 531 518 488
Other 1,553 1,489 1,487
------ ------ ------
Total other noninterest expense $7,283 $7,545 $7,088
====== ====== ======
Note 9
INCOME TAXES
The components of income tax expense for 1998, 1997 and 1996 are as follows:
(In Thousands) 1998 1997 1996
Current:
Federal $3,654 $3,114 $2,238
State 392 241 153
Deferred 131 271 854
------ ------ ------
$4,177 $3,626 $3,245
====== ====== ======
A reconciliation of expected income tax expense, computed by applying
the effective federal statutory rate of 34% for 1998, 1997 and 1996 to income
before income tax expense, to reported income tax expense, is as follows:
(In Thousands) 1998 1997 1996
Expected income tax expense $3,939 $3,617 $3,320
(Reductions) increases
resulting from:
Tax-exempt interest (79) (78) (53)
State taxes, net of federal benefit 259 159 101
Amortization of intangibles -- (98) (98)
Other, net 58 26 (25)
------ ------ ------
Income tax expense $4,177 $3,626 $3,245
====== ====== ======
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997, are presented below:
(In Thousands) 1998 1997
Deferred tax assets:
Allowance for loan losses $ 920 $ 993
Accrued pension cost 390 500
Premises and equipment 13 51
Other 188 206
------ ------
Total deferred tax assets 1,511 1,750
------ ------
Deferred tax liabilities:
Unrealized gain on investment in debt
and equity securities available-for-sale (199) (187)
Discount accretion (165) (355)
Other (219) (137)
------ ------
Total deferred tax liabilities (583) (679)
------ ------
Net deferred tax asset $ 928 $1,071
====== ======
A valuation allowance would be provided on deferred tax assets when it
is more likely than not that some portion of the assets will not be realized.
The Company has not established a valuation allowance at December 31, 1998 or
1997, due to management's belief that all criteria for recognition have been
met, including the existence of a history of taxes paid sufficient to support
the realization of deferred tax assets.
26 Cass Commercial Corporation
29
Note 10
CONTINGENCIES
The Company's 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.
Note 11
DISCLOSURES ABOUT
FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, commercial
letters of credit and standby letters of credit. The Company's 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.
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 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. 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.
Conditional commitments to extend credit, commercial letters of credit
and standby letters of credit totaled approximately $17,921,000, $108,000 and
$4,733,000, respectively, at December 31, 1998.
Following is a summary of the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
1998
Carrying Fair
(In Thousands) Amount Value
Balance sheet assets:
Cash and cash equivalents $179,385 $179,385
Investment in debt and equity securities 83,974 84,560
Loans, net 220,460 222,877
Accrued interest receivable 2,764 2,764
-------- --------
$486,583 $489,586
======== ========
Balance sheet liabilities:
Deposits $190,982 $191,035
Accounts and drafts payable 250,518 250,518
Short-term borrowings 323 323
Accrued interest payable 60 60
-------- --------
$441,883 $441,936
======== ========
1997
Carrying Fair
(In Thousands) Amount Value
Balance sheet assets:
Cash and cash equivalents $ 99,124 $ 99,124
Investment in debt and equity securities 126,251 126,501
Loans, net 191,994 192,531
Accrued interest receivable 3,137 3,137
-------- --------
$420,506 $421,293
======== ========
Balance sheet liabilities:
Deposits $165,857 $165,880
Accounts and drafts payable 213,755 213,755
Short-term borrowings 406 406
Accrued interest payable 93 93
-------- --------
$380,111 $380,134
======== ========
Cass Commercial Corporation 27
30
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Other Short-term Instruments For cash and cash equivalents,
accrued interest receivable, accounts and drafts payable, short-term
borrowings and accrued interest payable, the carrying amount is a reasonable
estimate of fair value because of the demand nature or short maturities of
these instruments.
Investment in Debt and Equity Securities Fair values are based on
quoted market prices or dealer quotes.
Loans The fair value of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
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. 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 nor the benefit derived
from the customer relationship inherent in existing deposits.
Commitments to Extend Credit and Standby Letters of Credit The fair
value of commitments to extend credit and standby letters of credit are
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of
the counterparties drawing on such financial instruments and the present
credit-worthiness of such counterparties. The Company believes such
commitments have been made at terms which are competitive in the markets in
which it operates; however, no premium or discount is offered thereon and,
accordingly, the Company has not assigned a value to such instruments for
purposes of this disclosure.
Limitations Fair value estimates are based on existing on- and off-
balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets or
liabilities that are not considered financial assets or liabilities include
premises and equipment and the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds
in the market (core deposit intangible). In addition, tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
any of the estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on management's
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
28 Cass Commercial Corporation
31
Note 12
INDUSTRY SEGMENT INFORMATION
In 1998 the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which established standards for the way that public enterprises
report information about operating segments in annual financial statements.
The services provided by the Company are classified into two industry
segments: Information Services and Banking Services which are more fully
discussed in Note One.
The Company maintains separate financial statements for each of these
segments which identify each segment's assets and net income. Revenue from
the Banking Services segment is derived primarily from net interest revenue,
which includes both interest income and interest expense, and revenue from
the Information Services segment is derived primarily from interest income
and fees from its freight and utility payment, rating and processing
services. Total net revenue is comprised of total interest income and total
noninterest income, less provision for loan losses.
Summarized information about the Company's operations in each industry
as of and for the years ended December 31, 1998, 1997 and 1996, is as
follows:
Total Interest Income
(In Thousands) 1998 1997 1996
Information Services $ 15,306 $ 15,353 $ 14,211
Banking Services 14,910 14,087 14,022
Eliminations (172) (157) (107)
-------- -------- --------
Total $ 30,044 $ 29,283 $ 28,126
======== ======== ========
Total Net Revenue
(In Thousands) 1998 1997 1996
Information Services $ 36,878 $ 35,918 $ 35,501
Banking Services 16,060 15,235 15,019
Eliminations (447) (357) (303)
-------- -------- --------
Total $ 52,491 $ 50,796 $ 50,217
======== ======== ========
Income (Loss) Before
Income Tax
(In Thousands) 1998 1997 1996
Information Services $ 6,694 $ 6,352 $ 6,069
Banking Services 5,014 4,464 3,868
Corporate Items (123) (179) (173)
-------- -------- --------
Total $ 11,585 $ 10,637 $ 9,764
======== ======== ========
Total Income Tax
Expense (Benefit)
(In Thousands) 1998 1997 1996
Information Services $ 2,403 $ 2,157 $ 1,939
Banking Services 1,815 1,530 1,365
Corporate Items (41) (61) (59)
-------- -------- --------
Total $ 4,177 $ 3,626 $ 3,245
======== ======== ========
Identifiable Assets
(In Thousands) 1998 1997 1996
Information Services $285,397 $246,488 $237,963
Banking Services 228,032 209,485 212,776
Corporate Items 57,809 52,882 47,909
Eliminations (67,326) (70,528) (60,326)
-------- -------- --------
Total $503,912 $438,327 $438,322
======== ======== ========
Depreciation and
Amortization Expense
(In Thousands) 1998 1997 1996
Information Services $ 2,056 $ 2,024 $ 2,057
Banking Services 283 420 494
Corporate Items 20 26 32
-------- -------- --------
Total $ 2,359 $ 2,470 $ 2,583
======== ======== ========
Capital Expenditures
(In Thousands) 1998 1997 1996
Information Services $ 907 $ 3,427 $ 1,509
Banking Services 294 468 249
Corporate Items 49 6 21
-------- -------- --------
Total $ 1,250 $ 3,901 $ 1,779
======== ======== ========
Cass Commercial Corporation 29
32
Note 13
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are the condensed balance sheets of the Company (parent company
only) as of December 31, 1998 and 1997, and the related condensed schedules
of income and cash flows for each of the years in the three-year period ended
December 31, 1998.
Condensed
Balance Sheets
December 31
(In Thousands) 1998 1997
Assets:
Cash $ 694 $ 471
Investment in Cass Commercial Bank 25,364 23,271
Investment in Cass Information
Systems, Inc. 31,207 28,666
Other assets 544 474
------- -------
Total assets $57,809 $52,882
------- -------
Liabilities and Shareholders' Equity:
Total liabilities $ 405 $ 229
Total shareholders' equity 57,404 52,653
------- -------
Total liabilities and shareholders' equity $57,809 $52,882
======= =======
Condensed Schedules
of Income
December 31
(In Thousands) 1998 1997 1996
Income:
Dividends received from
subsidiaries $2,880 $2,680 $2,380
Management fees from
subsidiaries 1,328 1,282 954
------ ------ ------
Total income 4,208 3,962 3,334
------ ------ ------
Expenses:
Salaries and employee benefits 1,092 1,130 835
Other expenses 359 331 292
------ ------ ------
Total expenses 1,451 1,461 1,127
------ ------ ------
Income before income taxes and
equity in undistributed income
of subsidiaries 2,757 2,501 2,207
Income tax benefit (41) (61) (59)
------ ------ ------
2,798 2,562 2,266
Equity in undistributed
income of subsidiaries 4,610 4,449 4,253
------ ------ ------
Net income $7,408 $7,011 $6,519
====== ====== ======
Condensed Schedules
of Cash Flows
December 31
(In Thousands) 1998 1997 1996
Cash flows from operating
activities:
Net income $ 7,408 $ 7,011 $ 6,519
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net income of subsidiaries
exclusive of management
fees (8,818) (8,411) (7,587)
Dividends from subsidiaries 2,880 2,680 2,380
Management fees from
subsidiaries 1,328 1,282 954
Amortization of stock
bonus plan 50 110 110
Other, net 157 177 (200)
------- ------- -------
Net cash provided by
operating activities 3,005 2,849 2,176
------- ------- -------
Cash flows from financing
activities -- cash dividends paid (2,782) (2,508) (2,296)
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 223 341 (120)
Cash and cash equivalents
at beginning of year 471 130 250
------- ------- -------
Cash and cash equivalents
at end of year $ 694 $ 471 $ 130
======= ======= =======
30 Cass Commercial Corporation
33
Independent Auditors' Report
THE BOARD OF DIRECTORS
AND SHAREHOLDERS
CASS COMMERCIAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Cass
Commercial Corporation and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income, cash flows and
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cass
Commercial Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
February 8, 1999
Cass Commercial Corporation 31
34
Board of Directors and Shareholder Information
DIRECTORS
Cass Commercial
Corporation, Cass
Commercial Bank
and Cass Information
Systems, Inc.
Lawrence A. Collett
Chairman of the Board,
Chief Executive Officer,
Cass Commercial Corporation
John J. Vallina
President, Cass Commercial Bank
Robert J. Bodine
Chairman Emeritus,
Bodine Aluminum, Inc.
Bryan S. Chapell
President, Covenant
Theological Seminary
Thomas J. Fucoloro
Consultant
Harry J. Krieg
Chairman Emeritus
Howard A. Kuehner
Investor
Jake Nania
Investor
Irving A. Shepard
President, Venture
Consultants, Inc.
A.J. Signorelli
Founder, Andrews Educational &
Research Center and Hope
Educational & Research Center
Bruce E. Woodruff
Attorney; of counsel to
Armstrong Teasdale LLP
OFFICERS
Cass Commercial
Corporation
Lawrence A. Collett
Chairman of the Board,
Chief Executive Officer
Eric H. Brunngraber
Vice President, Secretary,
and Chief Financial Officer
William C. Bouchein
Vice President, Treasurer
Wayne D. Muskopf
Vice President, Human Resources
Barbara J. Netherton
Controller
CORPORATE HEADQUARTERS
Cass Commercial
Corporation
13001 Hollenberg Drive
Bridgeton, Missouri 63044
(314) 506-5500
COMMON STOCK
The common stock of Cass
Commercial Corporation is
listed on the over-the-
counter market and quoted
on the NASDAQ National
Market System under
the symbol "CASS." The
stock generally appears
as "CassCo" or
"CassCommrcl" in the
newspaper stock tables.
ANNUAL MEETING
The annual meeting
of shareholders of Cass
Commercial Corporation
will be held at the corporate
headquarters on April 19,
1999, at 11:00 a.m.
TRANSFER AGENT
Shareholders with inquiries
regarding stock accounts,
dividends, change of ownership
or address, lost certificates
or consolidation of
accounts should contact:
ChaseMellon Shareholder
Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park,
New Jersey 07660
(888) 213-0965
www.chasemellon.com
INDEPENDENT AUDITORS
KPMG LLP
10 South Broadway
Suite 900
St. Louis, Missouri 63102
INVESTOR RELATIONS
Analysts and others seeking
financial information about
Cass Commercial
Corporation should contact:
Cass Commercial
Corporation
Investor Relations
Department
13001 Hollenberg Drive
Bridgeton, Missouri 63044
(314) 506-5500
10K AND OTHER PUBLICATIONS
For additional copies of
this annual report and
Form 10K and other
financial information,
please contact the Investor
Relations Department at
the address and phone
number above.
32 Cass Commercial Corporation
35
Business Unit Officers
Cass Commercial Bank
Lawrence A. Collett
Chairman of the Board,
Chief Executive Officer
John J. Vallina
President
BANKING SERVICES
Ray E. McCormick
Vice President
Albert R. Buck
Vice President
Douglas J. Hoffman
Vice President, Treasurer
Patsy J. Moffitt
Assistant Vice President
Dana L. Pannett
Assistant Vice President,
Compliance
Dorothy M. Smith
Assistant Vice President
Nancy Elliott
Operations Officer
Sandra L. Hatchett
Operations Officer
LOAN ADMINISTRATION
Emory A. Jackson
Vice President, Secretary
Roberta L. Harrington
Assistant Vice President
BUSINESS DIVISION
Kenneth A. Witbrodt, Jr.
Executive Vice President
Mark A. Benten
Vice President, Team Leader
Edward L. Campbell, Jr.
Vice President
David A. Lucks
Vice President
Jeanne M. Scannell
Vice President
Robert J. Garagiola
Vice President, Team Leader
H. Ely Britton
Senior Vice President
Chris R. Dimond
Vice President
Donald P. Doherty
Vice President
John J. Scherer
Vice President, Team Leader
Robert C. Hockney
Vice President
Rebeckah L. Kenney
Vice President
Francis J. Sommer
Vice President
Alex D. Fennoy
Assistant Vice President
CHURCH DIVISION
Theodore F. Winters
Senior Vice President
Kirk D. Briden
Vice President
Thomas A. Dickson
Vice President
Dorothy M. Jones
Assistant Vice President
Cass Information Systems, Inc.
Lawrence A. Collett
Chairman of the Board,
Chief Executive Officer
Freight Payment Services
OFFICERS
John F. Pickering
President, Chief Operating
Officer
Gus A. Nelson
Senior Vice President,
Secretary
Terrence J. Cowee
Senior Vice President,
Marketing & Sales
Robert V. Delaney
Vice President
Mark A. Campbell
Vice President, General
Manager, St. Louis Facility
Kathleen A. Kehlmeier
Vice President, General
Manager, Columbus Facility
Anthony J. Rubico
Vice President, General
Manager, Boston Facility
OPERATIONS
Steven W. Aylward
Donna W. Bartley
Gunars A. Dunskis
James M. Dwyer
Sheila D. Foston
Ronald S. Franklin
Diane S. Galliers
Gail M. Hart
Barry L. Kitson
Vickie L. Maloney
Susan P. Millman
Nancy L. Moon
Carol A. Reynolds
James B. Rymer
Thomas G. Schaper
Kevin B. Weston
Jerry A. Young
David L. Zike
MARKETING
AND SALES
Richard E. Dekostic
Kim A. Deniszczuk
Stephen W. Johnson
Gregg R. Klein
Louis V. Nowak
Thomas M. Zygmunt
Utility Payment Services
OFFICERS
Harry M. Murray
Executive Vice President
Michael W. Birely
Vice President, General
Manager, Chicago Facility
OPERATIONS
James P. Crowley
Joe A. Getz
John D. McKissack
JoAnn Ross
MARKETING
AND SALES
Phyllis J. Higgins
Mary A. Shaw
Mark R. Summers
Brian D. Thornsberry
36
Cass Commercial Corporation
13001 Hollenberg Drive
Bridgeton, Missouri 63044
[CASS LOGO]
1
Exhibit 21
- ----------
SUBSIDIARIES OF CASS COMMERCIAL CORPORATION
-------------------------------------------
Name & Address State of Incorporation
- -------------- ----------------------
Cass Commercial Bank Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
Cass Information Systems, Inc. Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
1
Exhibit 23
- ----------
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cass Commercial Corporation:
We consent to the incorporation by reference in the registration statements
No. 33-91456, No. 33-91568, No. 333-44497 and No. 333-44499 on Form S-8 of
Cass Commercial Corporation (Cass) of our report dated February 8, 1999,
relating to the consolidated balance sheets of Cass Commercial Corporation
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998 annual
report on Form 10-K of Cass.
/s/ KPMG LLP
St. Louis, Missouri
March 23, 1999
9
1,000
12-MOS
DEC-31-1998
JAN-01-1998
DEC-31-1998
22,558
124,000
32,827
0
27,369
56,605
57,191
224,888
4,428
503,912
190,982
323
4,685
0
0
0
2,000
55,404
503,912
17,579
6,607
5,858
30,044
4,271
4,281
25,763
0
285
36,625
11,585
11,585
0
0
7,408
1.92
1.89
5.98
477
179
134
2,303
4,484
365
309
4,428
4,428
0
0
