<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
COMMISSION FILE NO. 2-80070
-----------------
CASS COMMERCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF MISSOURI
I.R.S. EMPLOYER IDENTIFICATION NO. 43-1265338
13001 HOLLENBERG DRIVE, BRIDGETON, MISSOURI 63044
TELEPHONE: (314) 506-5500
-----------------
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of registrant's only class of stock as
of March 31, 1999: Common stock, par value $.50 per share - 3,873,711 shares
outstanding.
- -------------------------------------------------------------------------------
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
- -------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
PART I, ITEM 1
- --------------
CASS COMMERCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
-------------------------------------
MARCH 31 DECEMBER 31
1999 1998
-------------- ----------------
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 16,409 $ 22,558
Federal funds sold and other short-term investments 116,521 156,827
-------- --------
Cash and cash equivalents 132,930 179,385
-------- --------
Investment in debt and equity securities:
Held-to-maturity, fair value of $49,440 and
$57,191 at March 31, 1999 and December
31, 1998, respectively 49,078 56,605
Available-for-sale, at fair value 26,573 27,369
-------- --------
Total investment in debt and equity securities 75,651 83,974
-------- --------
Loans 231,489 224,888
Less: Allowance for loan losses 4,438 4,428
-------- --------
Loans, net 227,051 220,460
-------- --------
Premises and equipment, net 9,109 9,249
Accrued interest receivable 2,689 2,764
Other assets 6,978 8,080
-------- --------
Total assets $454,408 $503,912
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Deposits:
Noninterest-bearing $ 70,489 $ 82,911
Interest-bearing 108,349 108,071
-------- --------
Total deposits 178,838 190,982
Accounts and drafts payable 211,373 250,518
Short-term borrowings 267 323
Other liabilities 5,843 4,685
-------- --------
Total liabilities 396,321 446,508
-------- --------
Shareholders' Equity:
- --------------------
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common stock, par value $.50 per share;
20,000,000 shares authorized and
4,000,000 shares issued 2,000 2,000
Surplus 4,803 4,796
Retained earnings 52,288 51,505
Accumulated other comprehensive income 232 387
Common shares in treasury, at cost (126,289 shares at
March 31, 1999 and 132,123 shares at December 31, 1998) (1,172) (1,213)
Unamortized stock bonus awards (64) (71)
-------- --------
Total shareholders' equity 58,087 57,404
-------- --------
Total liabilities and shareholders' equity $454,408 $503,912
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
-1-
<PAGE> 3
<TABLE>
CASS COMMERCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
------------------------
THREE MONTHS ENDED
MARCH 31
-----------------------------
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME:
- ----------------
Interest and fees on loans $4,332 $4,209
Interest and dividends on debt and equity securities:
Taxable 1,177 1,798
Exempt from federal income taxes 16 19
Interest on federal funds sold and
other short-term investments 1,655 1,305
------ ------
Total interest income 7,180 7,331
------ ------
INTEREST EXPENSE:
- -----------------
Interest on deposits 1,039 1,053
Interest on short-term borrowings 2 3
------ ------
Total interest expense 1,041 1,056
------ ------
Net interest income 6,139 6,275
Provision for loan losses -- --
------ ------
Net interest income after provision
for loan losses 6,139 6,275
------ ------
NONINTEREST INCOME:
- -------------------
Freight and utility payment and processing revenue 5,254 5,590
Service charges on deposit accounts 165 162
Other 90 100
------ ------
Total noninterest income 5,509 5,852
------ ------
NONINTEREST EXPENSE:
- --------------------
Salaries and employee benefits 6,268 6,594
Occupancy expense 424 435
Equipment expense 647 644
Other 1,953 1,863
------ ------
Total noninterest expense 9,292 9,536
------ ------
Income before income tax expense 2,356 2,591
Income tax expense 837 918
------ ------
Net income $1,519 $1,673
====== ======
Earnings per share:
Basic $ .39 $ .43
------ ------
Diluted $ .39 $ .43
------ ------
See accompanying notes to consolidated financial statements.
</TABLE>
-2-
<PAGE> 4
<TABLE>
CASS COMMERCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 1,519 $ 1,673
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 587 589
Amortization of stock bonus awards 7 28
(Increase) decrease in accrued interest receivable (75) 73
Other operating activities, net 2,458 (1,741)
-------- --------
Net cash provided by operating activities 4,496 622
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Proceeds from maturities of debt and equity securities:
Held-to-maturity 7,470 7,059
Available-for-sale 530 993
Net increase in loans (6,591) (6,768)
Purchases of premises and equipment (327) (133)
-------- --------
Net cash provided by investing activities 1,082 1,151
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Net increase (decrease) in noninterest-bearing demand,
interest-bearing demand and savings deposits (12,424) 25,340
Net increase in time deposits 280 405
Net decrease in accounts and drafts payable (39,145) (6,673)
Net decrease in short-term borrowings (56) (406)
Cash proceeds from exercise of stock options 48 28
Cash dividends paid (736) (696)
-------- --------
Net cash provided by (used in) financing activities (52,033) 17,998
-------- --------
Net increase (decrease) in cash and cash equivalents (46,455) 19,771
Cash and cash equivalents at beginning of period 179,385 99,124
-------- --------
Cash and cash equivalents at end of period $132,930 $118,895
======== ========
Supplemental information:
Cash paid for interest $ 1,023 $ 1,044
======== ========
Cash paid for income taxes $ 30 $ 935
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
-3-
<PAGE> 5
CASS COMMERCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
Note 1 - Basis of Presentation
Cass Commercial Corporation (the Company) provides a full range of
banking services to individual, corporate and institutional customers, with a
primary focus on privately held companies and church-related ministries,
through its wholly owned subsidiary bank, Cass Commercial Bank (the Bank).
The Bank is subject to competition from other financial and nonfinancial
institutions throughout the metropolitan St. Louis, Missouri area.
Additionally, the Company and the Bank are subject to the regulations of
certain federal and state agencies and undergo periodic examinations by those
regulatory agencies.
The Company also provides payment processing and information
services through its wholly owned subsidiary, Cass Information Systems, Inc.
(CIS). These services include processing and payment of freight and utility
charges, preparation of management reports, auditing of freight charges,
rating of freight shipments and other payment related activities. CIS is
subject to competition from other commercial concerns providing similar
services to companies throughout the United States and Canada. The
consolidated balance sheet caption, "Accounts and Drafts Payable", consists
of obligations related to payment services which are performed for customers.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation, have been included. Operating results for
the period ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Note 2 - Impact Of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) which establishes
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. 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 does not securitize any mortgage loans, SFAS 134
had no impact on the Company's consolidated financial position and results of
operations.
-4-
<PAGE> 6
Note 3 - Comprehensive Income
For the three-month periods ended March 31, 1999 and 1998,
unrealized holding gain (loss) on debt and equity securities
available-for-sale is the Company's only other comprehensive income
component. Comprehensive income for the three-month periods ended March 31,
1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Net Income $1,519 $1,673
Other comprehensive income:
Net unrealized gain (loss) on debt and
equity securities available-for-sale, net of tax (155) 58
------ ------
$1,364 $1,731
====== ======
</TABLE>
Note 4 - Earnings Per Share
Average common shares outstanding for the three month periods ended
March 31, 1999 and 1998 were 3,872,443 and 3,860,954, respectively. The only
dilutive instruments are stock options and unvested stock awards with an
aggregate dilutive effect of 55,852 and 73,218 shares for the three month
periods ended March 31, 1999 and 1998, respectively.
Note 5 - Industry Segment Information
The services provided by the Company are classified into two
industry segments: Banking Services and Information Services which are more
fully discussed in Note 1. Total net revenue is comprised of total interest
income and total noninterest income, less provision for loan losses. There
have been no material changes in assets, changes in the basis of segmentation
or changes in the basis of measurement of segment profits from the amounts
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
Summarized information about the Company's operations in each
industry segment for the three months ended March 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Total Net Revenue:
Banking Services $ 3,856 $ 3,986
Information Services 8,907 9,349
Eliminations (74) (152)
------- -------
Total $12,689 $13,183
------- -------
Income (Loss) Before Income Tax:
Banking Services $ 1,100 $ 1,194
Information Services 1,277 1,441
Corporate Items (21) (44)
------- -------
Total $ 2,356 $ 2,591
------- -------
Income Tax Expense (Benefit):
Banking Services $ 406 $ 417
Information Services 438 516
Corporate Items (7) (15)
------- -------
Total $ 837 $ 918
------- -------
Net Income (Loss):
Banking Services $ 694 $ 777
Information Services 839 925
Corporate Items (14) (29)
------- -------
Total $ 1,519 $ 1,673
======= =======
</TABLE>
-5-
<PAGE> 7
Note 6 - Reclassifications
Certain amounts in the 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. Such
reclassifications have no effect on previously reported net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Net Income
- ----------
Cass Commercial Corporation (the Company) operates in two primary
business segments through its two wholly owned subsidiaries, Cass Commercial
Bank (the Bank), a commercial bank, and Cass Information Systems, Inc. (CIS),
a payment processing and information services company, whose operations
include the processing and payment of freight and utility charges,
preparation of transportation management reports, auditing of freight
charges, rating of freight shipments and other payment related activities.
The Company had net income of $1,519,000 for the three-month period ended
March 31, 1999 (the "First Three Months of 1999") compared to net income of
$1,673,000 for the three-month period ended March 31, 1998 (the "First Three
Months of 1998").
The following paragraphs more fully discuss the changes in financial
condition and results of operations for the First Three Months of 1999
compared to the First Three Months of 1998. Most information is provided on
a consolidated basis for the Company, the Bank and CIS, with expanded
disclosures for specific effects CIS's operations have on particular account
captions.
Net Interest Income
- -------------------
The Company's tax-equivalent net interest margin decreased in the
First Three Months of 1999 to 5.64% from 6.05% in the First Three Months of
1998. This decrease was the primary contributor to the decrease in
tax-equivalent net interest income of $116,000 in the First Three Months of
1999 compared to the First Three Months of 1998. The average yield on
earning assets decreased to 6.59% in the First Three Months of 1999 from
7.06% in the First Three Months of 1998 (See Table I on page 7). This
decrease was due primarily to the general decrease in interest rates, the
maturity of higher-yielding debt securities and an increased investment in
federal funds sold and other short-term investments. The prime rate declined
from 8.50% in January, 1998 to 8.00% in October and again to a low of 7.75%
in November where it has remained through the First Three Months of 1999.
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").
Average net earning assets, net of interest-bearing liabilities
increased $15,909,000 in the First Three Months of 1999 compared to the First
Three Months of 1998. The mix of earning assets changed in the First Three
Months of 1999 compared to the First Three Months of 1998 with an increase of
$43,363,000 in the average balance of federal funds sold and other short-term
investments, an increase of $19,792,000 in the average balance of loans and a
decrease of $41,175,000 in debt and equity securities. These changes are a
result of the Company's ongoing asset/liability management program.
-6-
<PAGE> 8
<TABLE>
TABLE 1: CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST
INCOME ANALYSIS
For the Three Months Ended March 31, 1999 and 1998
(TAX=EQUIVALENT BASIS, IN THOUSANDS)
<CAPTION>
AVERAGE INTEREST INCREASE (DECRASE)
AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE DUE TO CHANGE IN
--------------- ------------ -------------- NET ------------------
1999 1998 1999 1998 1999 1998 CHANGE VOLUME RATE
---- ---- ---- ---- ---- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Loans $224,060 $204,268 7.92% 8.40% $4,373 $4,229 $144 $395 $(251)
Investment in debt and equity
securities 79,785 120,960 6.10 6.12 1,201 1,826 (625) (620) (5)
Federal funds sold and other
short-term investments 140,754 97,391 4.77 5.43 1,655 1,305 350 525 (175)
-------- -------- ------ ------ ---- ---- -----
Total interest=earning assets 444,599 422,619 6.59 7.06 7,229 7,360 (131) 300 (431)
-------- -------- ------ ------ ---- ---- -----
Nonearning assets:
Cash and due from banks 20,808 17,954
Premises and equipment, net 9,217 9,838
Other assets 9,946 12,746
Allowance for loan losses (4,432) (4,498)
-------- --------
Total assets 480,138 458,659
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest=bearing liabilities:
Interest=bearing demand deposits 37,423 34,494 3.34 3.57 308 304 4 25 (21)
Savings deposits 63,982 60,080 4.01 4.27 633 633 -- 40 (40)
Time deposits of $100,000
or more 3,646 3,821 5.23 5.73 47 54 (7) (2) (5)
Other time deposits 4,362 4,965 4.74 5.06 51 62 (11) (7) (4)
-------- -------- ------ ------ ---- ---- -----
Total interest-bearing deposits 109,413 103,360 3.85 4.13 1,039 1,053 (14) 56 (70)
Short=term borrowings 284 266 2.86 4.57 2 3 (1) -- (1)
-------- -------- ------ ------ ---- ---- -----
Total interest-bearing
liabilities 109,697 103,626 3.85 4.13 1,041 1,056 (15) 56 (71)
-------- -------- ------ ------ ---- ---- -----
Noninterest=bearing liabilities:
Demand deposits 71,824 65,811
Accounts and drafts payable 234,430 230,059
Other liabilities 5,775 6,299
-------- --------
Total liabilities 421,726 405,795
Shareholders' equity 58,412 52,864
-------- --------
Total liabilities and
shareholders' equity $480,138 $458,659
======== ========
Net interest income $6,188 $6,304 $(116) $244 $(360)
====== ====== ===== ==== =====
Net interest margin 5.64% 6.05%
==== ====
Interest spread 2.74% 2.93%
==== ====
</TABLE>
-7-
<PAGE>
<PAGE> 10
AVERAGE BALANCES, INTEREST AND RATES, CONTINUED
NOTES:
(1) For purposes of these computations, nonaccrual loans are included in
the average loan amounts outstanding.
(2) Interest income on loans includes net fees of $7,000 and $2,000 for the
First Three Months of 1999 and 1998, respectively.
(3) Income is presented on a tax=equivalent basis assuming a tax rate of
34%. The tax=equivalent adjustment was approximately $49,000 and
$29,000 for the First Three Months of 1999 and 1998, respectively.
-8-
<PAGE> 11
Provision for Loan Losses
- -------------------------
A significant determinant of the Company's operating results is the
level of loan losses and the provision for loan losses. There was no charge
to earnings to provide for loan losses for the First Three Months of 1999 or
1998. The quality of the loan portfolio has continued to remain strong. The
level of nonperforming loans, at .29% of average loans for the three months
ended March 31, 1999, remains well below industry averages. Nonperforming
loans are covered approximately 7 times by the allowance for loan losses at
March 31, 1999. The Company experienced recoveries of $10,000 with no
charge-offs in the First Three Months of 1999.
Factors which influence management's determination of the adequacy
of the allowance for loan losses, among other things, include: evaluation of
each nonperforming and/or classified loan to determine the estimated loss
exposure under existing circumstances known to management; evaluation of all
potential problem loans identified in light of possible loss exposure based
upon existing circumstances known to management; 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 loan portfolio in light of past loan loss experience.
At March 31, 1999, impaired loans totalled $569,000 which includes
$503,000 of nonaccrual loans. The allowance for loan losses on impaired
loans was $410,000 at March 31, 1999. The average balance of impaired loans
during the First Three Months of 1999 and the First Threee Months of 1998 was
$693,000 and $1,412,000, respectively.
The allowance for loan losses at March 31, 1999 was $4,438,000 and
at December 31, 1998 was $4,428,000. The allowance for loan losses at March
31, 1999 represents 1.92% of total loans outstanding compared to 1.97% at
December 31, 1998.
-9-
<PAGE> 11
The following table presents information as of and for the three
month periods ended March 31, 1999 and 1998 pertaining to the Company's
provision for loan losses and analysis of the allowance for loan losses.
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1999 1998
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Allowance at beginning of period $ 4,428 $ 4,484
Provision for loan losses charged to expense -- --
Loans charged off -- --
Recoveries on loans previously charged off 10 19
-------- --------
Net loan recoveries 10 19
-------- --------
Allowance at end of period $ 4,438 $ 4,503
======== ========
Loans outstanding:
Average $224,060 $204,268
March 31 231,489 203,265
Ratio of allowance for loan losses to
loans outstanding:
Average 1.98% 2.20%
March 31 1.92% 2.22%
Nonperforming loans:
Nonaccrual loans $ 503 $ 746
Loans past due 90 days or more 139 45
-------- --------
Total $ 642 $ 791
-------- --------
Nonperforming loans as a percent of
average loans .29% .39%
</TABLE>
-10-
<PAGE> 12
Noninterest Income
- ------------------
Noninterest income is principally derived from service fees
generated by CIS's Payment Systems and Software Systems Groups. Total
noninterest income for the First Three Months of 1999 decreased $343,000
(5.9%) compared to the First Three Months of 1998.
CIS's Payment Systems and Software Group experienced a decrease in
revenues of $336,000 (6.0%) in the First Three Months of 1999 compared to the
First Three Months of 1998. This decrease is due primarily to decreased
shipping volume and a decrease in the number of software package sales during
the First Three Months of 1999. The volume of accepted new business
proposals remains strong and should result in increasing revenues in CIS's
Payment Systems and Software Group as new accounts are placed in service
throughout the remainder of 1999.
Other noninterest income decreased $10,000 (10.0%) in the First
Three Months of 1999 compared to the First Three Months of 1998. This
decrease was due primarily to a decrease in the amount of fees received
relating to letters of credit issued.
Noninterest Expense
- -------------------
Total noninterest expense for the First Three Months of 1999
decreased $244,000 (2.6%) over the First Three Months of 1998.
Salaries and benefits expense decreased $326,000 (4.9%) in the First
Three Months of 1999 compared to the First Three Months of 1998. The
decrease relates primarily to separation costs associated with the
streamlining and integration of operations in the freight rating services
group which were expensed in the First Three Months of 1998. This decrease
was partially offset by normal pay increases and increased expenses related
to an increased investment at CIS to support expected future processing
volumes.
Occupancy expense decreased $11,000 (2.5%) in the First Three Months
of 1999 compared to the First Three Months of 1998. This decrease was
primarily attributable to a decrease in depreciation on premises and
equipment.
Other noninterest expense increased $90,000 (4.8%) in the First
Three Months of 1999 compared to the First Three Months of 1998. This
increase is attributable to several items including outside service fees,
advertising and telecommunications expense.
Balance Sheet Analysis
- ----------------------
Cash and due from banks decreased from $22,558,000 at December 31,
1998 to $16,409,000 at March 31, 1999. The average balance of cash and due
from banks increased $2,854,000 (15.9%) from $17,954,000 in the First Three
Months of 1998 to $20,808,000 in the First Three Months of 1999.
Federal funds sold and other short-term investments decreased from
$156,827,000 at December 31, 1998 to $116,521,000 at March 31, 1999. The
average balance of these accounts was $140,754,000 in the First Three Months
of 1999 compared to $97,391,000 in the First Three Months of 1998. The
increase in the average balance of these accounts resulted primarily from the
reinvestment of funds generated from maturities of investments in debt
securities. See Table 1 on page 7 for a presentation of average balances.
Total loans increased $6,601,000 (2.9%) from $224,888,000 at
December 31, 1998 to $231,489,000 at March 31, 1999. The average balances of
loans increased $19,792,000 (9.7%) from $204,268,000 in the First Three
Months of 1998 to $224,060,000 in the First Three Months of 1999. Loan
demand and new business volume increased throughout 1998 and has continued
into the First Three Months of 1999.
Investments in debt and equity securities decreased $8,323,000
(9.9%) from $83,974,000 at December 31, 1998 to $75,651,000 at March 31,
1999. The average balance of investment securities decreased $41,175,000
(34.0%) from $120,960,000 in the First Three Months of 1998 to $79,785,000 in
the First Three Months of 1999 as a result of the Company's ongoing
asset/liability management program.
-11-
<PAGE> 13
Total earning assets decreased $42,028,000 (9.0%) From $465,689,000
at December 31, 1998 to $423,661,000 at March 31, 1999. The average balance
of earning assets increased $21,980,000 (5.2%) from $422,619,000 in the First
Three Months of 1998 to $444,599,000 in the First Three Months of 1999.
Interest-bearing deposits increased from $108,071,000 at December
31, 1998 to $108,349,000 at March 31, 1999. The average balances of these
deposits increased $6,053,000 (5.9%) from $103,360,000 in the First Three
Months of 1998 to $109,413,000 in the First Three Months of 1998.
Noninterest-bearing deposits decreased $12,422,000 (15.0%) from
$82,911,000 at December 31, 1998 to $70,489,000 at March 31, 1999. The
average balance of these accounts increased $6,013,000 (9.1%) from
$65,811,000 in the First Three Months of 1998 to $71,824,000 in the First
Three Months of 1999 which reflects increased business development efforts at
the Bank.
Accounts and drafts payable generated by CIS in its payment
operations decreased $39,145,000 (15.6%) from $250,518,000 at December 31,
1998 to $211,373,000 at March 31, 1999. The average balances of these funds
increased $4,371,000 (1.9%) from $230,059,000 for the First Three Months of
1998 to $234,430,000 in the First Three Months of 1999. Ending balances of
accounts and drafts payable will fluctuate from month to month due to the
payment processing cycle, which results in lower balances on days when checks
are issued. Since funds generated from accounts and drafts payable are
invested, fluctutation caused by the processing cycle also impacts short-term
investments, causing them to also be lower on days when checks are issued.
Liquidity
- ---------
As of March 31, 1999, approximately 50% of the Company's loan
portfolio was composed of commercial loans, of which 81% represented loans
maturing within one year. As of the same date, real estate loans, primarily
commercial, represented approximately 49% of the total and of these, 19%
represented balances maturing within one year. Approximately 1% of the loan
portfolio is represented by installment loans.
The liquidity of the Company is primarily represented by cash and
due from banks of $16,409,000 and federal funds sold and other short-term
investments of $116,521,000 at March 31, 1999. Included in this caption are
$91,000,000 invested in money market funds consisting of short-term U.S.
Government and agency issues.
Investment in debt and equity securities represented approximately
17% of total assets at March 31, 1999. Of the U.S. Government securities in
the Company's investment portfolio, which represented 70% of the total, 46%
have maturities of less than one year. U.S. Government Agencies and
Corporations represented 28% of the total. Obligations of states and
political subdivisions constituted 2% of the investment portfolio at March
31, 1999. There were no sales of debt securities in the First Three Months
of 1999. Of the total portfolio, approximately 85% of the securities have
maturities of five years or less. These securities provide the Company
longer term liquidity than its primary sources, cash and due from banks and
other short-term instruments. Additionally, short-term liquidity could be
satisfied, if necessary, by the sale of certain debt securities maintained as
available-for-sale; however, the Company does not foresee any such short-term
liquidity needs.
The funds provided by the Bank consist of a sizable volume of core
deposits. Historically, the Company has been a net provider of federal
funds. During the First Three Months of 1999, the Company was a net provider
of federal funds, averaging over $30,012,000 in net funds sold.
Additionally, the Company averaged over $110,742,000 in short-term money
market funds during the First Three Months of 1999. The Company was able to
meet its liquidity requirements in the First Three Months of 1999 through the
growth of deposit accounts and the liquid nature of federal funds sold and
other short-term investments.
-12-
<PAGE> 14
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 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.
-13-
<PAGE> 15
Interest Rate Sensitivity Gap Table
- -----------------------------------
The following table presents the Company's gap or interest rate position at
March 31, 1999 for the various time frames indicated.
<TABLE>
<CAPTION>
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 in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 88,592 $ 7,221 $ 5,693 $ 15,929 $106,995 $ 7,059 $231,489
Investment in debt and
equity securities -- 10,089 9,071 11,019 44,429 1,043 75,651
Federal funds sold and other
short-term investments 116,521 -- -- -- -- -- 116,521
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets $205,113 $ 17,310 $ 14,764 $ 26,948 $151,424 $ 8,102 $423,661
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing
transaction accounts $100,267 $ -- $ -- $ -- $ -- $ -- $100,267
Time deposits-$100,000 or more -- 1,636 896 1,117 -- -- 3,649
Other time deposits -- 1,212 1,338 1,187 696 -- 4,433
Short-term borrowings 267 -- -- -- -- -- 267
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $100,534 $ 2,848 $ 2,234 $ 2,304 $ 696 $ -- $108,616
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap:
Periodic $104,579 $ 14,462 $ 12,530 $ 24,644 $150,728 $ 8,102 $315,045
Cumulative 104,579 119,041 131,571 156,215 306,943 315,045 315,045
Ratio of interest-sensitive
assets to interest-sensitive
liabilities:
Periodic 2.04x 6.08x 6.61x 11.70x 217.56x -- 3.90x
Cumulative 2.04x 2.15x 2.25x 2.45x 3.83x 3.90x 3.90x
</TABLE>
-14-
<PAGE> 16
Capital Resources
- -----------------
Shareholders' Equity was $58,087,000 or 12.78% of total assets at
March 31, 1999, an increase of $683,000 over the balance at December 31,
1998. This increase resulted from net income of $1,519,000; the amortization
of the stock bonus plan of $7,000; cash received from the exercise of stock
options of $48,000 and offset by a decrease in other comprehensive income of
$155,000 and dividends paid of $736,000 ($.19 per share).
Subsidiary dividends are the principal source of funds for payment
of dividends by the Company to its shareholders. The only restrictions on
dividends are those dictated by regulatory capital requirements and prudent
and sound banking principles.
The Company and its banking subsidiary continue to significantly
exceed all regulatory capital requirements, as evidenced by the following
capital ratios at March 31, 1999:
<TABLE>
<CAPTION>
Company Cass
Consolidated Bank
------------ ------
<S> <C> <C>
Total capital (to risk-weighted assets) 21.35% 15.94%
Tier I capital (to risk-weighted assets) 20.10 14.69
Tier I capital (to average assets) 11.96 11.88
</TABLE>
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 $ 2.7
million to prepare for the century date change. 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. As of March 31, 1999, direct and indirect
expenditures have been approximately $2.0 million. Funding for year 2000
costs have been, and will continue to be, derived from normal operating cash
flow. 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: awareness,
assessment, renovation, testing and implementation. As of March 31, 1999 the
Company has completed all phases of the plan for its internal, mission
critical 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 efforts
have been diligent and assessment results have been positive, 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 plans 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 conbtngency plans provides for reasonable
alternatives to potential failures and the establishment of an implementation
strategy, including timelines and responsibility assignments. The Company
anticipates completing its contingency planning by June 30, 1999.
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.
-15-
<PAGE> 17
Inflation
- ---------
Inflation can impact the financial position and results of the
operations of financial institutions because financial institutions hold
monetary assets and monetary liabilities. Monetary assets and liabilities
are those which can be converted into a fixed number of dollars, and include
cash, investments, loans and deposits. The Company's consolidated balance
sheets, as is typical of financial institutions, reflect a net positive
monetary position (monetary assets exceeding monetary liabilities). During
periods of inflation, the holding of a net positive monetary position will
result in an overall decline in the purchasing power of a financial
institution.
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 the Bank, concentration of loans in the St. Louis Metropolitan
area which subjects the 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 the 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 3. 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.
-16-
<PAGE> 18
PART II
- -------
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES
---------------------
None
Item 3. DEFAULTS IN SENIOR SECURITIES
-----------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) None
(b) Cass Commercial Corporation did not file any reports on Form
8-K during the three months ended March 31, 1999.
-17-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS COMMERCIAL CORPORATION
DATE: April 27, 1999 By Lawrence A. Collett
---------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: April 27, 1999 By Eric H. Brunngraber
---------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
-18-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS COMMERCIAL CORPORATION
DATE: April 27, 1999 By
-------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: April 27, 1999 By
-------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<S> <C>
<CASH> 16,409
<INT-BEARING-DEPOSITS> 91,000
<FED-FUNDS-SOLD> 25,521
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,573
<INVESTMENTS-CARRYING> 49,078
<INVESTMENTS-MARKET> 49,440
<LOANS> 231,489
<ALLOWANCE> 4,438
<TOTAL-ASSETS> 454,408
<DEPOSITS> 178,838
<SHORT-TERM> 267
<LIABILITIES-OTHER> 217,216
<LONG-TERM> 0
0
0
<COMMON> 2,000
<OTHER-SE> 56,087
<TOTAL-LIABILITIES-AND-EQUITY> 454,408
<INTEREST-LOAN> 4,332
<INTEREST-INVEST> 1,193
<INTEREST-OTHER> 1,655
<INTEREST-TOTAL> 7,180
<INTEREST-DEPOSIT> 1,039
<INTEREST-EXPENSE> 1,041
<INTEREST-INCOME-NET> 6,139
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,292
<INCOME-PRETAX> 2,356
<INCOME-PRE-EXTRAORDINARY> 2,356
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,519
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 5.64
<LOANS-NON> 503
<LOANS-PAST> 139
<LOANS-TROUBLED> 122
<LOANS-PROBLEM> 569
<ALLOWANCE-OPEN> 4,428
<CHARGE-OFFS> 0
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 4,438
<ALLOWANCE-DOMESTIC> 4,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
