1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NO. 2-80070 _________________ CASS COMMERCIAL CORPORATION INCORPORATED UNDER THE LAWS OF MISSOURI I.R.S. EMPLOYER IDENTIFICATION NO. 43-1265338 13001 HOLLENBERG DRIVE, BRIDGETON, MISSOURI 63044 TELEPHONE: (314) 506-5500 _________________ Indicate by check mark whether the registrant 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, and has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of registrant's only class of stock as of May 5, 2000: Common stock, par value $.50 per share - 3,500,937 shares outstanding. - ------------------------------------------------------------------------------ This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. - ------------------------------------------------------------------------------
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASS COMMERCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Thousands except Per Share Data) MARCH 31 DECEMBER 31 2000 1999 ASSETS Cash and due from banks $ 28,174 $ 18,497 Federal funds sold and other short-term investments 56,624 105,720 -------- -------- Cash and cash equivalents 84,798 124,217 -------- -------- Investment in debt and equity securities: Held-to-maturity, fair value of $22,353 and $25,381 at March 31, 2000 and December 31, 1999, respectively 22,550 25,554 Available-for-sale, at fair value 71,755 57,442 -------- -------- Total investment in debt and equity securities 94,305 82,996 -------- -------- Loans 320,378 278,343 Less: Allowance for loan losses 4,409 4,282 -------- -------- Loans, net 315,969 274,061 -------- -------- Premises and equipment, net 9,306 9,181 Accrued interest receivable 2,972 2,764 Other assets 7,554 7,626 -------- -------- Total assets $514,904 $500,845 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: - ------------ Deposits: Noninterest-bearing $ 80,703 $ 91,672 Interest-bearing 91,228 97,064 -------- -------- Total deposits 171,931 188,736 Accounts and drafts payable 282,250 249,894 Short-term borrowings 200 208 Other liabilities 6,610 5,444 -------- -------- Total liabilities 460,991 444,282 -------- -------- 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 5,064 5,087 Retained earnings 55,941 54,814 Accumulated other comprehensive loss (569) (417) Common shares in treasury, at cost (456,763 shares at March 31, 2000 and 277,149 shares at December 31, 1999) (8,391) (4,770) Unamortized stock bonus awards (132) (151) -------- -------- Total shareholders' equity 53,913 56,563 -------- -------- Total liabilities and shareholders' equity $514,904 $500,845 ======== ======== See accompanying notes to consolidated financial statements. -2-
3 CASS COMMERCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in Thousands except Per Share Data) THREE MONTHS ENDED MARCH 31 ------------------------------------- 2000 1999 INTEREST INCOME: Interest and fees on loans $ 6,157 $4,332 Interest and dividends on debt and equity securities: Taxable 1,371 1,177 Exempt from federal income taxes 15 16 Interest on federal funds sold and other short-term investments 862 1,655 ------- ------ Total interest income 8,405 7,180 ------- ------ INTEREST EXPENSE: Interest on deposits 954 1,039 Interest on short-term borrowings 2 2 ------- ------ Total interest expense 956 1,041 ------- ------ Net interest income 7,449 6,139 Provision for loan losses 100 -- ------- ------ Net interest income after provision for loan losses 7,349 6,139 ------- ------ NONINTEREST INCOME: Freight and utility payment and processing revenue 5,336 5,177 Bank service fees 334 230 Other 85 102 ------- ------ Total noninterest income 5,755 5,509 ------- ------ NONINTEREST EXPENSE: Salaries and employee benefits 7,050 6,268 Occupancy expense 434 424 Equipment expense 752 647 Other 1,943 1,953 ------- ------ Total noninterest expense 10,179 9,292 ------- ------ Income before income tax expense 2,925 2,356 Income tax expense 1,069 837 ------- ------ Net income $ 1,856 $1,519 ======= ====== Earnings per share: Basic $.51 $.39 Diluted $.50 $.39 Weighted average shares outstanding: Basic 3,643,604 3,869,443 Effect of stock options and awards 45,361 55,852 Diluted 3,688,965 3,925,295 See accompanying notes to consolidated financial statements. -3-
4 CASS COMMERCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) THREE MONTHS ENDED MARCH 31 -------------------------------------- 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,856 $ 1,519 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 650 587 Provision for loan losses 100 -- Amortization of stock bonus awards 19 7 Increase in accrued interest receivable (208) (75) Increase (decrease) in deferred income (408) 840 Increase in income tax liability 610 810 Other operating activities, net 1,103 808 -------- -------- Net cash provided by operating activities 3,722 4,496 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of debt and equity securities: Held-to-maturity 2,950 7,470 Available-for-sale 4,323 530 Purchase of debt and equity securities: Held-to-maturity (2,000) -- Available-for-sale (16,889) -- Net increase in loans (42,008) (6,591) Purchases of premises and equipment, net (676) (327) -------- -------- Net cash provided (used) in investing activities (54,300) 1,082 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in noninterest-bearing demand deposits (10,969) (12,422) Net decrease in interest-bearing demand and savings deposits (5,663) (2) Net increase (decrease) in time deposits (173) 280 Net increase (decrease) in accounts and drafts payable 32,356 (39,145) Net decrease in short-term borrowings (8) (56) Cash proceeds from exercise of stock options 47 48 Cash dividends paid (729) (736) Purchase of common shares for treasury (3,702) -- -------- -------- Net cash provided by (used in) financing activities 11,159 (52,033) -------- -------- Net decrease in cash and cash equivalents (39,419) (46,455) Cash and cash equivalents at beginning of period 124,217 179,385 -------- -------- Cash and cash equivalents at end of period $ 84,798 $132,930 ======== ======== Supplemental information: Cash paid for interest $ 950 $ 1,023 Cash paid for income taxes 439 30 See accompanying notes to consolidated financial statements. -4-
5 CASS COMMERCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Note 2 - Impact of New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (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. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133, an amendment of FASB Statement No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Earlier application of SFAS 133, as amended, 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, as amended. Note 3 - Loans by Type (DOLLARS IN THOUSANDS) MARCH 31, 2000 DECEMBER 31, 1999 - --------------------------------------------------------------------------------- Commercial and industrial $120,121 $106,444 Real estate: Mortgage 96,051 86,171 Mortgage - Churches & Related 52,836 43,311 Construction 16,136 6,987 Construction - Churches & Related 22,857 22,646 Industrial revenue bonds 7,202 7,265 Installment 2,553 1,541 Other 2,622 3,978 - --------------------------------------------------------------------------------- Total loans $320,378 $278,343 - --------------------------------------------------------------------------------- Note 4 - Stock Repurchase Program On December 21, 1999 the Board of Directors authorized a stock repurchase program that would allow the repurchase of up to 200,000 shares of its common stock through December 31, 2000. On March 21, 2000 the Board of Directors authorized a 100,000 increase in the number of shares that can be purchased under the program. As of March 31, 2000, 190,210 shares were repurchased under the program. Repurchases can be made in the open market or through negotiated transactions from time to time depending on market conditions. The stock, if repurchased, will be held as treasury stock to be used for general corporate purposes. -5-
6 Note 5 - Comprehensive Income For the three-month periods ended March 31, 2000 and 1999, unrealized losses on debt and equity securities available-for-sale is the Company's only other comprehensive income component. Comprehensive income for the periods ended March 31, 2000 and 1999 is summarized as follows: THREE MONTHS ENDED MARCH 31 ----------------------- (IN THOUSANDS) 2000 1999 - ---------------------------------------------------------------------------- Net Income $1,856 $1,519 Other comprehensive income: Net unrealized loss on debt and equity securities available-for-sale, net of tax (152) (155) - ---------------------------------------------------------------------------- Total comprehensive income $1,704 $1,364 - ---------------------------------------------------------------------------- Note 6 - Industry Segment Information The services provided by the Company are classified into two industry segments: Banking Services and Information Services. Total net revenue is comprised of total interest income and total noninterest income, less provision for loan losses. There have been no material changes in assets, changes in the basis of segmentation or changes in the basis of measurement of segment profits from the amounts disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Summarized information about the Company's operations in each industry segment for the periods ended March 31, 2000 and 1999, is as follows: THREE MONTHS ENDED MARCH 31 ------------------------ (IN THOUSANDS) 2000 1999 - ----------------------------------------------------------------------------- Total Net Revenue: Information Services $ 9,835 $ 8,907 Banking Services 4,484 3,856 Eliminations (259) (74) - ----------------------------------------------------------------------------- Total $14,060 $12,689 - ----------------------------------------------------------------------------- Income (Loss) Before Income Tax: Information Services $ 1,569 $ 1,277 Banking Services 1,392 1,100 Corporate Items (36) (21) - ----------------------------------------------------------------------------- Total $ 2,925 $ 2,356 - ----------------------------------------------------------------------------- Income Tax Expense (Benefit): Information Services $ 563 $ 438 Banking Services 518 406 Corporate Items (12) (7) - ----------------------------------------------------------------------------- Total $ 1,069 $ 837 - ----------------------------------------------------------------------------- Net Income (Loss): Information Services $ 1,006 $ 839 Banking Services 874 694 Corporate Items (24) (14) - ----------------------------------------------------------------------------- Total $ 1,856 $ 1,519 - ----------------------------------------------------------------------------- -6-
7 Note 7 - Reclassifications Certain amounts in the 1999 consolidated financial statements have been reclassified to conform with the 2000 presentation. Such reclassifications have no effect on previously reported net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cass Commercial Corporation (the "Company") operates in two primary business segments through two wholly owned subsidiaries, Cass Commercial Bank ("Cass Bank"), a commercial bank, and Cass Information Systems, Inc. ("CIS"), a payment processing company. Cass Bank provides specialized banking services to privately held businesses located primarily in the St. Louis, Missouri metropolitan area and church and church-related entities located in the St. Louis metropolitan area and selected cities throughout the United States. CIS is a payment processing and information services company, whose operations include the processing and payment of freight and utility charges, preparation of transportation management reports, auditing of freight charges, rating of freight shipments and other payment related activities for customers located throughout the United States. The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended March 31, 2000 (the "First Quarter of 2000") compared to the three-month period ended March 31, 1999 (the "First Quarter of 1999"). Most information is provided on a consolidated basis for the Company, Cass Bank and CIS, with expanded disclosures for the specific effects CIS's operations have on particular account captions. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 1999 Annual Report on Form 10-K. Results of operations for the First Quarter of 2000 are not necessarily indicative of the results to be attained for any other period. RESULTS OF OPERATIONS NET INCOME The Company had net income of $1,856,000 for the First Quarter of 2000, a $337,000 or 22.2% increase compared to net income of $1,519,000 for the First Quarter of 1999. Diluted earnings per share was $.50 for the First Quarter of 2000, a 28.2% increase compared to $.39 for the First Quarter of 1999. The increase in net income was primarily a result of strong loan demand, combined with increases in service fees and a general increase in the level of interest rates. Return on average assets for the First Quarter of 2000 was 1.50% compared to 1.28% for the First Quarter of 1999. Return on average equity for the First Quarter of 2000 was 13.35% compared to 10.55% for the First Quarter of 1999. NET INTEREST INCOME The Company's tax-equivalent net interest income increased 21.0% or $1,300,000 from $6,188,000 in the First Quarter of 1999 to $7,488,000 in the First Quarter of 2000. The average tax-equivalent yield on earning assets increased from 6.59% in the First Quarter of 1999 to 7.44% in the First Quarter of 2000. The average rate paid on interest-bearing liabilities increased from 3.85% in the First Quarter of 1999 to 3.90% in the First Quarter of 2000. The interest spread increased from 2.74% in the First Quarter of 1999 to 3.54% in the First Quarter of 2000. The net interest margin increased from 5.64% in the First Quarter of 1999 to 6.60% in the First Quarter of 2000. The average balance of loans increased $80,790,000 from $224,060,000 to $304,850,000, investment in debt and equity securities increased $10,192,000 from $79,785,000 to $89,977,000, and federal funds sold and other short-term investments decreased $79,241,000 from $140,754,000 to $61,513,000 from the First Quarter of 1999 to the First Quarter of 2000. The average balance of noninterest bearing demand deposit accounts increased $11,031,000 from $71,824,000 to $82,855,000, accounts and drafts payable increased $20,263,000 from $234,430,000 to $254,693,000, and interest bearing liabilities decreased $11,176,000 from $109,697,000 to $98,521,000 from the First Quarter of 1999 to the First Quarter of 2000. -7-
8 The increases experienced during the First Quarter in net interest margin and interest spread were caused primarily by the shift in earning assets from lower-yielding investments into higher-yielding loans. Loans increased significantly due to strong loan demand for both commercial loans and church and church-related loans. Increases in the general level of interest rates, specifically, the federal fund, short term government, and prime rates also contributed to these increases. The Company is positively affected by increases 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 adversely affected by decreases 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. The significant balances of the Company's noninterest-bearing liabilities cause the net interest margin to be a more meaningful figure than the interest spread in explaining the influence of interest rates and balances on the results of operations. Net interest income also increased due to the increase in earning assets that were funded primarily by increases in accounts and drafts payable generated by CIS. The increases experienced during the First Quarter in accounts and drafts payable were attributable mainly to an increase in the dollar value of items processed at CIS. Increases in noninterest bearing demand deposits were attributable mainly to the addition of new business at Cass Bank. The decreases in interest-bearing deposits were caused mainly by the transfer of balances by several large customers from bank deposits into investment products. Please refer to the following tables for more information regarding the affect of interest rates and account balances on the Company's net interest income. -8-
9 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATE 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. FIRST QUARTER 2000 FIRST QUARTER 1999 ------------------------------------- ------------------------------------ INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ----------------------------------------------------------------------------------------------------------------------------- ASSETS
Earning assets: Loans : Taxable $297,627 $6,058 8.19% $218,132 $4,252 7.91% Tax-exempt 7,223 133 7.41 5,928 121 8.28 Debt and equity securities : Taxable 88,748 1,371 6.21 78,516 1,177 6.08 Tax-exempt 1,229 20 6.55 1,269 24 7.67 Federal funds sold and other short-term investments 61,513 862 5.64 140,754 1,655 4.77 - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets 456,340 8,444 7.44 444,599 7,229 6.59 Nonearning assets: Cash and due from banks 26,896 20,808 Premises and equipment, net 9,440 9,217 Other assets 9,515 9,946 Allowance for loan losses (4,325) (4,432) - ----------------------------------------------------------------------------------------------------------------------------- Total assets $497,866 $480,138 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits $ 43,486 $ 383 3.54% $ 37,423 $ 308 3.34% Savings deposits 48,387 496 4.12 63,982 633 4.01 Time deposits of $100,000 or more 2,622 32 4.91 3,646 47 5.23 Other time deposits 3,826 43 4.52 4,362 51 4.74 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 98,321 954 3.90 109,413 1,039 3.85 Short-term borrowings 200 2 4.02 284 2 2.86 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 98,521 956 3.90 109,697 1,041 3.85 Noninterest-bearing liabilities: Demand deposits 82,855 71,824 Accounts and drafts payable 254,693 234,430 Other liabilities 5,877 5,775 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 441,946 421,726 Shareholders' equity 55,920 58,412 Total liabilities and shareholders' equity $497,866 $480,138 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $7,488 $6,188 Interest spread 3.54% 2.74% Net interest margin 6.60% 5.64% - ----------------------------------------------------------------------------------------------------------------------------- Balances shown are daily averages. -9- 10
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 1999 Consolidated Financial Statements, incorporated by reference herein. Interest income on loans includes net loan fees of $12,000 and $7,000 for the First Quarter of 2000 and 1999, respectively. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34%. The tax-equivalent adjustment was approximately $39,000 and $49,000 for the First Quarter of 2000 and 1999, respectively. For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments. ANALYSIS OF NET INTEREST INCOME CHANGES The following table presents the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each. 2000 OVER 1999 ------------------------------------------------ (DOLLARS IN THOUSANDS) VOLUME RATE TOTAL - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Loans : Taxable $ 1,645 $161 $1,806 Tax-exempt 25 (13) 12 Debt and equity securities: Taxable 166 28 194 Tax-exempt (1) (3) (4) Federal funds sold and other short-term investments (1,059) 266 (793) - --------------------------------------------------------------------------------------------------------------------- Total interest income 776 439 1,215 - --------------------------------------------------------------------------------------------------------------------- Interest expense on: Interest-bearing demand deposits 54 21 75 Savings deposits (155) 18 (137) Time deposits of $100,000 or more (12) (3) (15) Other time deposits (6) (2) (8) Short-term borrowings (1) 1 -- - --------------------------------------------------------------------------------------------------------------------- Total interest expense (120) 35 (85) - --------------------------------------------------------------------------------------------------------------------- Net interest income $ 896 $404 $1,300 - --------------------------------------------------------------------------------------------------------------------- The change in interest due to both volume and rate has been allocated proportionately. Average balances include nonaccrual loans. Interest income includes net loan fees. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34% for the First Quarter of 2000 and 1999. ALLOWANCE AND PROVISION FOR LOAN LOSSES A significant determinant of the Company's operating results is the provision for loan losses and the level of loans charged off. There was a $100,000 provision made for loan losses during the First Quarter of 2000, due to the loan growth experienced and there was no provision made during the First Quarter of 1999. Net loan recoveries for the First Quarter of 2000 were $27,000 compared to $10,000 for the First Quarter of 1999. The allowance for loan losses at March 31, 2000 was $4,409,000 and at December 31, 1999 was $4,282,000. The allowance for loan losses at March 31, 2000 represented 1.38% of total loans outstanding compared to 1.54% at December 31, 1999. The ratio of allowance for loan losses as of March 31 to average loans outstanding during the First Quarter was 1.45% in 2000 compared to 1.98% in 1999. The ratio of nonperforming loans as of March 31 to average loans during the First Quarter was .06% in 2000 compared to .29% in 1999. -10- 11 At March 31, 2000, impaired loans totaled $178,000 which includes $167,000 of nonaccrual loans. The allowance for loan losses on impaired loans was $172,000 at March 31, 2000. The average balance of impaired loans during the First Quarter of 2000 and the First Quarter of 1999 was $179,000 and $693,000, respectively. Factors which influence management's determination of the adequacy of the allowance for loan losses, 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 loss exposure based upon existing circumstances known to management; analysis of the loan portfolio with regard to future loss exposure on loans to specific customers and/or industries; current economic conditions; and, an overall review of the loan portfolio in light of past loan loss experience. In management's judgment, the allowance for loan losses is considered adequate to absorb losses in the loan portfolio. SUMMARY OF ASSET QUALITY The following table presents information as of and for the three-month periods ended March 31, 2000 and 1999 pertaining to the Company's provision for loan losses and analysis of the allowance for loan losses. THREE MONTHS ENDED MARCH 31 ------------------------------- (DOLLARS IN THOUSANDS) 2000 1999 - ---------------------------------------------------------------------------------------------------- Allowance at beginning of period $ 4,282 $ 4,428 Provision charged to expense 100 -- Loans charged off -- -- Recoveries on loans previously charged off 27 10 - ---------------------------------------------------------------------------------------------------- Net loan recoveries 27 10 Allowance at end of period $ 4,409 $ 4,438 - ---------------------------------------------------------------------------------------------------- Loans outstanding: Average $304,850 $224,059 March 31 320,378 231,489 Ratio of allowance for loan losses to loans outstanding: Average 1.45% 1.98% March 31 1.38% 1.92% Nonperforming loans: Nonaccrual loans $ 167 $ 503 Loans past due 90 days or more 6 139 - ---------------------------------------------------------------------------------------------------- Total $ 173 $ 642 - ---------------------------------------------------------------------------------------------------- Nonperforming loans as a percent of average loans .06% .29% - ---------------------------------------------------------------------------------------------------- NONINTEREST INCOME Noninterest income is principally derived from service fees generated by CIS. Total noninterest income for the First Quarter of 2000 was $5,755,000, a $246,000 or 4.5% increase compared to the First Quarter of 1999. CIS payment and processing revenue for the First Quarter of 2000 was $5,336,000, a $159,000 or 3.1% increase compared to the First Quarter of 1999. Several factors influenced this increase. First, fees relating to the processing and payment of utility invoices increased significantly due to an increase in the number of customers serviced. Second, fees relating to the processing and payment of freight invoices increased primarily due to increased activity with existing customers, but was largely offset by non-recurring fees experienced during the First Quarter of 1999 and continued anticipated decreases relating to some freight payment services that were part of a prior acquisition. Freight rating services revenue also decreased due to a change in the strategic direction from selling rating software to a new Internet-based delivery system of carrier rates to the shipping community that is being developed and will offer an expanded level of features and capabilities. Bank service charges for the First Quarter of 2000 were $334,000, a $104,000 or 45.2% increase compared to the First Quarter of 1999. This increase was attributable to increases in the number of customer relationships developed by the Bank. -11-
12 NONINTEREST EXPENSE Total noninterest expense for the First Quarter of 2000 was $10,179,000, a $887,000 or 9.6% increase compared to the First Quarter of 1999. Salaries and benefits expense for the First Quarter of 2000 was $7,050,000, a $782,000 or 12.5% increase compared to the First Quarter of 1999. This increase in expense was caused by annual pay increases and expenses related to an increased staff at CIS to support expanded utility operations. Occupancy expense for the First Quarter of 2000 was $434,000, a $10,000 or 2.4% increase compared to the First Quarter of 1999. This increase was caused by increases in rental expense, which was partially offset by decreases in utility expense. Equipment expense for the First Quarter of 2000 was $752,000, an increase of $105,000 or 16.2% compared to the First Quarter of 1999. This increase was due primarily to increased investments in information technology. Other noninterest expense for the First Quarter of 2000 was $1,943,000, a decrease of $10,000 or .5% compared to the First Quarter of 1999. This decrease was primarily attributable to decreases in advertising and telecommunications expense, which was partially offset by increases in correspondent bank charges, postage and delivery expense and training and development expense. FINANCIAL CONDITION Total assets at March 31, 2000 were $514,904,000, an increase of $14,059,000 or 2.8% from December 31, 1999. Loans, net of the allowance for loan losses, at March 31, 2000 were $315,969,000, an increase of $41,908,000 or 15.3% from December 31, 1999. Total investments in debt and equity securities at March 31, 2000 were $94,305,000, a $11,309,000 or 13.6% increase from December 31, 1999. Federal Funds sold and other short-term investments at March 31, 2000 were $56,624,000 a $49,096,000 or 46.4% decrease from December 31, 1999. Total deposits at March 31, 2000 were $171,931,000, a $16,805,000 or 8.9% decrease from December 31, 1999. Accounts and drafts payable were $282,250,000, a $32,356,000 or 13.0% increase from December 31, 1999. Total shareholders' equity at March 31, 2000 was $53,913,000, a $2,650,000 or 4.7% decrease from December 31, 1999. The increase in loans is related to the successful expansion of the church and church-related ministries unit, along with increases in loans to privately held businesses from Cass Bank's ongoing marketing efforts. The decrease in federal funds sold and other short-term investments relates primarily to this increase in loans and also to the purchase of investment securities. The ending balances of accounts and drafts payable will fluctuate from period end to period end due to the payment processing cycle, which results in lower balances on days when checks clear and higher balances on days when checks are issued. For this reason, average balances are a more meaningful measure of accounts and drafts payable. The decrease in total shareholders' equity resulted from the purchase of treasury shares for $3,702,000 (184,210 shares); dividends paid of $729,000 ($.20 per share); decrease in other comprehensive income of $152,000 offset by net income of $1,856,000; cash received from the exercise of stock options of $47,000, a tax benefit of $11,000 on stock options exercised and the amortization of the stock bonus plan of $19,000. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents, which consist of cash and due from banks, federal funds sold, and money market funds, were $84,798,000 or 16.5% of total assets at March 31, 2000. These funds represent the Company's and its subsidiaries' primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawls or reductions in accounts and drafts payable. Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in debt and equity securities represented approximately $94,305,000 or 18% of total assets at March 31, 2000. Of this -12-
13 total, 51% were U.S. treasury securities, 48% were U.S. government agencies, and 1% were other securities. Of the total portfolio, 32% matures in one year, 59% matures in one to five years, and 9% matures in five or more years. Of the total portfolio, 76% is designated available-for-sale and 24% is designated held-to-maturity. The investment portfolio provides secondary liquidity through regularly scheduled maturities, the ability to sell securities out of the available-for-sale portfolio, and the ability to use these securities in conjunction with its reverse repurchase lines of credit. Cass Bank has unsecured lines at correspondent banks to purchase federal funds up to a maximum of $19,820,000. Additionally, Cass Bank has a line of credit at an unaffiliated financial institution in the maximum amount of $50,000,000 collateralized by securities sold under repurchase agreements. The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize many other commercial products of the bank. The accounts and drafts payable generated by CIS has also historically been a stable source of funds. The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company's financial instruments, see Item 3. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK". Risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital generally consists of (a) common shareholders' equity (excluding the unrealized market value adjustments on the available-for-sale securities), (b) qualifying perpetual preferred stock and related surplus subject to certain limitations specified by the FDIC, (c) minority interests in the equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights within certain limits, and (f) any other intangible assets and investments in subsidiaries that the FDIC determines should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier 1 capital less purchased mortgage servicing rights to total assets, for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for loan losses, and debt considered equity for regulatory capital purposes. The Company and the Bank continue to significantly exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios at March 31, 2000 and December 31, 1999: MARCH 31, 2000 AMOUNT RATIO - ---------------------------------------------------------------------------------------- Total capital (to risk-weighted assets) Cass Commercial Corporation $58,505,000 15.92% Cass Commercial Bank 27,796,000 15.54 Tier I capital (to risk-weighted assets) Cass Commercial Corporation $54,096,000 14.72% Cass Commercial Bank 25,558,000 14.29 Tier I capital (to average assets) Cass Commercial Corporation $54,096,000 10.88% Cass Commercial Bank 25,558,000 11.54 - ---------------------------------------------------------------------------------------- DECEMBER 31, 1999 AMOUNT RATIO - ---------------------------------------------------------------------------------------- Total capital (to risk-weighted assets) Cass Commercial Corporation $60,736,000 18.23% Cass Commercial Bank 28,014,000 16.39 Tier I capital (to risk-weighted assets) Cass Commercial Corporation $56,570,000 16.98% Cass Commercial Bank 25,873,000 15.14 Tier I capital (to average assets) Cass Commercial Corporation $56,570,000 11.53% Cass Commercial Bank 25,873,000 11.54 - ---------------------------------------------------------------------------------------- -13-
14 INFLATION Inflation can impact the financial position and results of the operations of financial institutions because financial institutions 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, reflect 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 financial institution. FORWARD-LOOKING STATEMENTS - 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, concentration of loans in the St. Louis Metropolitan area which subjects the Company 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 the Company and, particularly in the case of CIS, risks associated with breakdowns in data processing systems and competition from other providers of similar services. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As described in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company's most recent evaluation, management does not believe the Company's risk position at March 31, 2000 has changed materially from that at December 31, 1999. -14-
15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS IN SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None (b) Cass Commercial Corporation did not file any reports on Form 8-K during the three-month period ended March 31, 2000. -15-
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CASS COMMERCIAL CORPORATION DATE: March 11, 2000 By /s/ Lawrence A. Collett ---------------------------------------- Lawrence A. Collett Chairman and Chief Executive Officer DATE: March 11, 2000 By /s/ Eric H. Brunngraber ---------------------------------------- Eric H. Brunngraber Vice President-Secretary (Chief Financial and Accounting Officer) -16-
9 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 28,174 51,000 5,624 0 71,755 22,550 22,353 320,378 4,409 514,904 171,931 200 288,860 0 0 0 2,000 51,913 514,904 6,157 1,386 862 8,405 954 956 7,449 100 0 10,179 2,925 2,925 0 0 1,856 .51 .50 6.60 167 6 0 178 4,282 0 27 4,409 0 0 0 TO BE DOCUMENTED IN THE DEC-31-2000 STATEMENTS.