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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
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(DOLLARS EXPRESSED IN THOUSANDS)
ASSETS <F1>
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Earning assets:
Loans <F2><F3>:
Taxable $210,168 $17,404 8.28% $199,633 $16,781 8.41% $190,634 $16,096 8.44%
Tax-exempt <F4> 2,907 266 9.15 2,647 257 9.71 1,462 147 10.05
Debt and equity securities <F5>:
Taxable 107,924 6,538 6.06 146,534 9,074 6.19 158,884 9,729 6.12
Tax-exempt <F4> 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<F1>
- ------
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
<FN>
NOTES:
<F1> Balances shown are daily averages.
<F2> 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.
<F3> Interest income on loans includes net loan fees of $27,000, $6,000 and
$8,000 for 1998, 1997 and 1996, respectively.
<F4> 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.
<F5> 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 <F1><F2>:
Taxable $ 875 $(252) $ 623 $ 757 $ (72) $ 685
Tax-exempt <F3> 24 (15) 9 115 (5) 110
Debt and equity securities:
Taxable (2,343) (193) (2,536) (764) 109 (655)
Tax-exempt <F3> (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
======= ===== ======= ====== ===== ======
<FN>
NOTES:
<F1> Average balances include nonaccrual loans.
<F2> Interest income includes net loan fees.
<F3> 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 <F1> -- 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 <F2>:
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
<FN>
<F1> 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.
<F2> 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 <F1> $ 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)
<FN>
<F1> 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.
28
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