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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, 2002
|_| 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 INFORMATION SYSTEMS, INC.
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(Exact name of registrant as 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
- ------------------- -----------------------------------------
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 |_|
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|
As of March 5, 2003, 3,367,468 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 $66,989,000 based upon
the Nasdaq Stock Market closing price of $26.88 for March 5, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 2003 are incorporated by reference in
Part III hereof.
CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Item 1. BUSINESS ........................................................ 1
Item 2. PROPERTIES ...................................................... 3
Item 3. LEGAL PROCEEDINGS ............................................... 3
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 3
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................. 3
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ............................ 4
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ....................................... 4
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 19
PART II.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ............................ 43
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .............. 43
Item 11. EXECUTIVE COMPENSATION .......................................... 43
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .. 43
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 43
Item 14. CONTROLS AND PROCEDURES ......................................... 43
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . 44
SIGNATURES ...................................................... 45
CERTIFICATIONS .................................................. 46
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties, and other factors, including those set forth in
this paragraph. Important factors that could cause our actual results,
performance, or achievements to be materially different from any future results,
performance, or achievements expressed or implied by those statements include,
but are not limited to: the failure to successfully execute our corporate plan,
the loss of key personnel or inability to attract additional qualified
personnel, the loss of key customers, increasing competition, the inability to
remain current with rapid technological change, risks related to acquisitions,
risks associated with business cycles, utility and system interruptions or
processing errors, rules and regulations governing financial institutions and
changes in such rules and regulations, credit risk related to borrowers' ability
to repay loans, concentration of loans to commercial enterprises, churches and
loans in the St. Louis Metropolitan area which subjects the Company to risks
associated with adverse factors that may affect these groups, risks associated
with fluctuations in interest rates, and volatility of the price of our common
stock. We undertake no obligation to publicly update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events, or changes to future results over time.
PART I.
ITEM 1. BUSINESS
Description of Business
Cass Information Systems, Inc. ("Cass" or "the Company") is a leading provider
of payment and information processing services to large manufacturing,
distribution and retail enterprises across the United States. The Company
provides freight invoice rating, payment, audit, cost accounting and
transportation information to many of the nation's largest companies. It is also
the leading processor and payer of utility invoices in the United States,
including electricity, gas, water, telephone and refuse collection. Cass
extracts, stores and presents information from freight and utility invoices,
assisting our customers' traffic and energy managers in making decisions that
will enable them to improve their operating performance. Cass utilizes Internet
technologies such as web-based applications and browsers in all of its systems.
It heavily utilizes electronic commerce in transferring over $10 billion in
transactions annually and integrates financial and transaction processing into a
single process. As an information processing company, Cass focuses on these
critical business areas: Data Acquisition, Data Warehousing and Data Delivery.
The Company receives data from multiple sources, electronic and otherwise, and
processes the data to accomplish specific operating requirements of its
customers. It then makes the data available in a central repository for access
and archiving. Finally, the data is turned into information through the
Company's databases that communicate with clients as required and provide
internet-based methods and tools for analytical processing. In addition, the
Company, through its wholly-owned bank subsidiary, Cass Commercial Bank ("the
Bank"), provides banking services in the commercial, industrial and residential
areas it serves. Its primary focus is to support the Company's payment
operations, and it also provides banking services to its target markets, which
include 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.
An important component of the Company's services is the financial control and
stability provided by the Bank for handling the billions of dollars of payments
and the infrastructure for electronic funds transfers (EFT). Cass Commercial
Bank is organized as a Missouri trust company with banking powers and was
founded in 1906. Its principal banking office is located at 13001 Hollenberg
Drive, Bridgeton, Missouri, 63044 and it has four other branches in the St.
Louis, Missouri metropolitan area. Due to its ownership of a federally insured
commercial bank, the Registrant is a bank holding corporation and was originally
organized in 1982 as Cass Commercial Corporation under the laws of Missouri and
approved by the Board of Governors of the Federal Reserve Bank (the "FRB") in
February 1983. The Company changed its name to Cass Information Systems, Inc. in
January 2001. The principal offices of the Company are also at 13001 Hollenberg
Drive, Bridgeton, Missouri. Other operating locations are in Columbus, Ohio and
Boston, Massachusetts.
Marketing, Customers and Competition
The Company believes it is the largest firm in the freight bill payment industry
in the United States based on the total dollars of freight bills paid.
Competition consists of two primary competitors and numerous small freight bill
audit firms located throughout the United States. While offering freight payment
services, few of these audit firms compete on a national basis. The Company also
competes with other companies, located throughout the United States, that pay
utility bills and provide management reporting. Available data indicates that
the Company is one of the largest providers of utility information processing
and payment services. Due to the fact that this is a new market, the competitive
environment for utility bill processing and payment is difficult to assess and
is changing rapidly. Cass is unique among these competitors in that it is not
exclusively affiliated with any one energy service provider (ESP). In January
2001, the Company purchased the assets of "The Utility Navigator(R)", a division
of privately-held Insite Services, Inc. for $750,000. This acquisition added new
ESP's which market the Company's product as well as provided additional
processing growth.
The Company's bank subsidiary encounters competition from other banks located
throughout the St. Louis metropolitan area and other areas in which the Bank
competes. Savings banks, credit unions, other financial institutions and
non-bank providers of financial services also provide competition. The principal
competition however, is represented by large bank holding companies that are
able to offer a wide range of banking and related services through extensive
branch networks.
The Company holds several trademarks for the payment and rating services it
provides. These include: FreightPay(R), Transdata(R), TransInq(R), Ratemaker(R),
Rate Advice(R), First Rate(R), Best Rate(R) and Rate Exchange(R).
1
The Company is not dependent on any one customer for a significant portion of
its business. It has a varied client base with no individual client exceeding
10% of total revenue. The Bank is also not dependent on any one customer. The
Bank does however, target its services to privately-held businesses located in
the St. Louis, Missouri area and church and church-related institutions located
in St. Louis, Missouri and other selected cities located throughout the United
States.
Employees
The Company had 599 full-time and 138 part-time employees as of December 31,
2002. Of these employees, the bank subsidiary had 66 full-time and 8 part-time
employees.
Supervision and Regulation
The Company and its bank subsidiary are extensively regulated under federal and
state law. These laws and regulations are intended to protect depositors, not
shareholders. The Bank is subject to regulation and supervision by the Missouri
Division of Finance, the FRB and the Federal Deposit Insurance Corporation (the
"FDIC"). The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended, and as such, it is subject to
regulation, supervision and examination by 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. 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
agencies may force certain remedial action to be taken. The Capital Adequacy
Guidelines are of several types and include risk-based capital guidelines, which
are designed to make capital requirements more sensitive to various risk
profiles and account for off-balance sheet exposure; guidelines which consider
market risk, which is the risk of loss due to change in value of assets and
liabilities due to changes in interest rates; and guidelines that use a leverage
ratio which places a constraint on the maximum degree of risk to which a bank
holding company may leverage its equity capital base. For further discussion of
the capital adequacy guidelines and ratios, please refer to Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8, Note 2 of this report.
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. Both the FRB and Missouri Division of Finance also have
restrictions on the amount of dividends that banks and bank holding companies
may remit.
As a bank holding company, the Company must obtain prior approval from the FRB
before acquiring ownership or control of more than 5% of the voting shares of
another bank or bank holding company or acquiring all or substantially all of
the assets of such a company. In many cases, prior approval is also required for
the Company to engage in similar acquisitions involving a non-bank company or to
engage in new non-bank activities. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company.
Website Availability of SEC Reports
Cass will, as soon as practicable after they are electronically filed with the
Securities and Exchange Commission, make available free of charge on its website
each of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports of Form 8-K, all amendments to those reports, and its definitive proxy
statements. The address of Cass's website is: www.cassinfo.com.
Financial Information about Segments
The revenues from external customers, net income (loss) and total assets by
segment, for the three years ended December 31, 2002 are set forth in Item 8,
Note 14 of this report.
Statistical Disclosure by Bank Holding Companies
For the statistical disclosure by bank holding companies refer to Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
2
ITEM 2. PROPERTIES
The Company's headquarters are located at 13001 Hollenberg Drive, Bridgeton,
Missouri. This location is owned by the Company, and includes a building with
approximately 61,500 square feet of office space, 20,500 of which is occupied by
the Bank. In March 2001, the Company moved into its newly-owned production
facility of approximately 45,500 square feet located at 2675 Corporate Exchange
Drive, Columbus, Ohio. The Company operates an additional production facility in
Lowell, Massachusetts where approximately 25,800 square feet of office space is
leased through October 31, 2005.
The Company's bank subsidiary's headquarters are also located at 13001
Hollenberg Drive, Bridgeton, Missouri, 63044. The Bank leases approximately
20,500 square feet of the 61,500 square foot building owned by the Company. In
addition, the Bank owns a banking facility near downtown St. Louis that consists
of approximately 1,600 square feet with adjoining drive-up facilities. The Bank
has additional leased facilities in Maryland Heights, Missouri (2,500 square
feet); Fenton, Missouri (1,250 square feet) and Chesterfield, Missouri (2,850
square feet).
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending proceedings
other than ordinary routine litigation incidental to their businesses.
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 2002.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol
"CASS". As of March 5, 2003, there were 227 holders of record of the Company's
common stock. High and low bid prices, as reported by Nasdaq and restated for
the 5% stock dividend distributed in December 2002, for each quarter of 2002 and
2001 were as follows:
2002 2001
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High Low High Low
---- --- ---- ---
1st Quarter $25.000 $22.010 $22.381 $16.548
2nd Quarter 24.876 22.857 20.000 16.310
3rd Quarter 25.476 21.476 20.143 18.095
4th Quarter 25.750 21.857 23.333 19.048
Dividends paid per share by the Company during the two most recent fiscal years
were as follows:
2002 2001
---- ----
March 15 $.20 $.20
June 15 .20 .20
September 15 .20 .20
December 15 .21 .20
Refer to Item 8 Notes 2, 8 and 9 to the consolidated financial statements for
additional shareholder information.
3
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information for
each of the five years ended December 31, 2002. The selected financial data
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes included in Item 8 of this report.
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
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Interest income on loans(1) $ 26,197 $ 29,069 $ 27,716 $ 20,371 $ 17,579
Interest income on debt and equity securities 4,733 4,323 5,264 4,722 6,607
Other interest income 687 2,790 4,085 5,782 5,858
Total interest income 31,617 36,182 37,065 30,875 30,044
Interest expense on deposits 2,240 3,863 5,165 4,357 4,271
Interest expense on short-term borrowings 33 9 20 9 10
Total interest expense 2,273 3,872 5,185 4,366 4,281
Net interest income 29,344 32,310 31,880 26,509 25,763
Provision for loan losses 500 60 750 -- --
Net interest income after provision 28,844 32,250 31,130 26,509 25,763
Noninterest income 28,030 23,243 21,114 21,444 22,447
Noninterest expense 46,575 44,729 41,236 38,344 36,625
Income before income tax expense 10,299 10,764 11,008 9,609 11,585
Income tax expense 2,987 3,739 3,861 3,411 4,177
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Net income $ 7,312 $ 7,025 $ 7,147 $ 6,198 $ 7,408
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Basic earnings per share(2) $ 2.18 $ 2.07 $ 1.95 $ 1.56 $ 1.83
Diluted earnings per share(2) 2.16 2.05 1.93 1.53 1.80
Dividends per share .81 .80 .80 .76 .72
Dividend payout ratio 35.94% 36.71% 38.95% 46.61% 37.55%
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Average total assets $598,566 $572,724 $515,308 $491,450 $469,606
Average net loans 399,018 371,367 323,515 254,353 208,603
Average debt and equity securities 97,668 72,958 84,276 78,903 109,275
Average total deposits 240,640 214,954 186,684 190,661 176,784
Average total shareholders' equity 57,300 54,929 54,308 57,118 55,246
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Return on average total assets 1.22% 1.23% 1.39% 1.26% 1.58%
Return on average total shareholders' equity 12.76 12.79 13.16 10.85 13.41
Average equity to assets ratio 9.57 9.59 10.54 11.62 11.76
Equity to assets ratio at year-end 10.67 9.22 9.33 11.29 11.39
Net interest margin 5.60 6.27 6.69 5.87 5.98
Allowance for loan losses to loans at year-end 1.22 1.29 1.32 1.54 1.97
Nonperforming assets to loans and foreclosed
assets(3) 3.50 1.60 .30 .15 .35
Net loan charge-offs to average
loans outstanding .03 .01 .04 .06 .03
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(1). Interest income on loans includes net loan fees.
(2). Basic and diluted earnings per share have been restated to reflect the 5%
stock dividend issued in 2002.
(3). Foreclosed assets include other real estate owned and the Company's
investment in the operating assets of Government e-Management Solutions,
Inc. (GEMS), which are more fully explained in Item 7 entitled
"Nonperforming Assets". Excluding the investment in the operating assets
of GEMS, the ratio for 2002 is 2.33% and for 2001 is .28%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of the Company's
consolidated financial condition and results of operations as of the dates and
for the periods indicated. This discussion should be read in conjunction with
Item 1 "Business", Item 6 "Selected Consolidated Financial Data", the Company's
Consolidated Financial Statements and accompanying notes contained in Item 8 and
other financial data appearing in this report.
4
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, management makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurances that actual results will not differ
from those estimates.
Management has identified the accounting policy related to the allowance for
loan losses as critical to the understanding of the Company's results of
operations, since the application of this policy requires significant management
assumptions and estimates that could result in materially different amounts to
be reported if conditions or underlying circumstances were to change. The impact
and any associated risks related to these policies on our business operations
are discussed in the " Allowance and Provision for Loan Losses" section of this
report.
In addition, management evaluates certain long-term assets such as premises and
equipment, goodwill, and foreclosed assets for impairment. Generally,
recognition of impairment is required when events and circumstances indicate
that the carrying amounts of these assets will not be recoverable in the future.
If impairment occurs, various methods of measuring impairment may be called for
depending on the circumstances and type of asset, including quoted market
prices, estimates based on similar assets, and estimates based on valuation
techniques such as discounted projected cash flows. Assets held for sale are
carried at the lower of cost or fair value less costs to sell. The application
of this policy also requires significant management assumptions and estimates
that could result in materially different results if conditions or underlying
circumstances change.
Net Income Summary
The 2002 results compared to 2001 include the following significant pre-tax
components:
Net interest income after provision for loan losses decreased $3,406,000
or 10.6% due primarily to the decrease in the general level of interest
rates and partially due to an increase of $440,000 in the provision for
loan losses. The increase in the provision for loan losses was due to many
factors including the increase in nonperforming loans and the size of the
loan portfolio. The decrease in net interest income from these factors was
significantly offset by an increase in tax-exempt securities, expansion of
the loan portfolio and increase in earning assets.
Total noninterest income increased $4,787,000 or 20.6%. Total freight and
utility payment and processing fees increased $3,870,000 or 19.2%, with an
increase of $2,188,000 or 49.0% in utility payment and processing fees and
$1,682,000 or 10.7% in freight payment and processing fees. The increase
in utility payment and processing fees relates to the rapid expansion of
the customer base. During 2002 the Company processed over 3.4 million
utility transactions representing over $2.6 billion of invoice value. The
increase in freight payment and processing fees relates to new customers
and new services. Freight rating service fees were down $738,000 or 54.7%
due to the discontinuance of the sale and maintenance of rating software.
These software products were replaced with the new Internet-based service
"Ratemaker". Ratemaker fees increased $210,000 or 52.4%. Bank service fees
increased $137,000 or 9.0% due to an expansion of the Bank's customer base
and the fact that service fees increase as the value of noninterest
bearing deposits, used to compensate the Bank for services provided,
decrease as the general level of interest rates decrease. The Company also
recognized gains of $1,477,000 from the sales of securities in 2002.
Total noninterest expense increased $1,846,000 or 4.1% due to several
factors. The most significant was salaries and benefits, which increased
$936,000 or 3.1% due to an increase in staff in the transportation and
utility processing divisions to accommodate the increase in production and
an increase in pension and health insurance expense. Second, equipment
expense increased $479,000 or 12.5% primarily due to an increased
investment in information technology. Finally, other noninterest expense
increased $589,000 or 6.7% due to increases in various other miscellaneous
expenses such as postage, printing and professional fees.
The 2001 results compared to 2000 include the following significant pre-tax
components:
Net interest income after provision for loan losses increased $1,120,000 or 3.6%
due primarily to a $42,479,000 increase in average earning assets, including a
$48,313,000 increase in average loans outstanding and a decrease in the
provision for loan losses of $690,000. The increase in net interest income from
these factors offset the negative effect of the decrease in the general level of
interest rates.
5
Total noninterest income increased $2,129,000 or 10.1% due to several
factors. Total freight and utility payment and processing fees increased
$2,052,000 or 11.3%, with an increase of $2,234,000 or 100.2% in utility
payment and processing fees and offset by a $182,000 or 1.1% decrease in
revenue from freight payment and processing services. The increase in
utility payment and processing fees relates to the rapid expansion of the
customer base. At the end of 2001 the Company processed over 2.7 million
utility transactions representing nearly $2.5 billion of invoice value.
The decrease in revenue from freight payment and processing services was
due to several factors. The most significant of these was that due to the
slowing economy, freight shipments of its customer base decreased
significantly from 2000. In addition, a greater percentage of payment and
processing revenue was obtained from increased investable balances
generated rather than from fees. Bank service fees increased $137,000 or
9.9% due to an expansion of the Bank's customer base and the fact that
service fees increase as the value of noninterest bearing deposits, used
to compensate the Bank for services provided, decrease as the general
level of interest rates decrease.
Total noninterest expense increased $3,493,000 or 8.5% due to several
factors. The most significant of these include salaries and benefits which
increased $1,969,000 or 6.9% primarily due to an increased staff at the
Company's new utility processing facility in Columbus, Ohio. Second,
equipment expense increased $804,000 or 26.6% primarily due to an
increased investment in information technology. Finally, outside service
fees increased due to an increase in outsourced programming services to
assist in the expansion of the utility payment and processing division as
well as increased outsourcing of data entry services.
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest paid on deposits and other
interest-bearing liabilities. Net interest income is the most significant source
of the Company's revenues.
Net interest income in 2002 compared to 2001:
On a tax-equivalent basis, net interest income for 2002 totaled $30,466,000, a
decrease of $2,194,000 or 6.7% from 2001. The net interest margin for 2002 was
5.60% compared to 6.27% in 2001. The following factors account for this decrease
in net interest income and net interest margin:
The dramatic decrease in the general level of interest rates significantly
impacted the Company's net interest income and margin. The prime rate
decreased from 9.50% at the beginning of 2001 to 4.75% at the end of 2001
and 4.25% at the end of 2002. Also, the Federal funds rate ended the year
at 1.25%, the lowest level in over 40 years. The average yield on earning
assets decreased to 6.02% in 2002 from 7.01% in 2001. The Company is
negatively 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 the Company in the form of
accounts and drafts payable. More information is contained in Item 7A of
this report.
The Company partially offset these decreases through both an increase in
earning assets and shift of investments to higher yielding assets. Total
average earning assets increased $22,737,000 or 4.4% to $544,011,000. This
increase was funded by an increases in deposits generated by the Bank. The
Bank saw increases in both interest bearing deposits, as a result of
increased marketing efforts, and noninterest bearing deposits, mainly from
bank customers that maintained higher balances to compensate the Bank for
services and to avoid increased service fees in a lower rate environment.
Total average loans increased $27,818,000 or 7.4% to $404,093,000. This
increase was attributable to new business relationships and funded by the
increase in deposit liabilities and reallocation of assets. This increase
in loans had a positive effect on interest income and the net interest
margin due to the fact that loans are one of the Company's highest
yielding earning assets.
Total average investment in debt and equity securities increased
$25,557,000 or 35.4% to $97,668,000. In addition to this increased
investment, the Company shifted its purchase of securities from taxable to
tax-exempt due to the higher tax-equivalent yield such investments
produce. This increase and shift also allowed the Company to offset the
effect of lower interest rates.
Total average federal funds sold and other short-term investments
decreased $30,638,000 or 42.0% to $42,250,000. These are the lowest
yielding earning assets so decreases in these funds have a positive effect
on net interest margin. In another attempt to offset the effect of
declining interest rates the Company shifted excess short-term funds to
higher yielding investments.
6
Net interest income in 2001 compared to 2000:
On a tax-equivalent basis, net interest income for 2001 totaled $32,660,000, an
increase of $549,000 or 1.7% over 2000. The net interest margin for 2001 was
6.27% compared to 6.69% in 2000. The following factors account for this increase
in net interest income and decrease in net interest margin:
Total average earning assets increased $42,479,000 or 8.9% to
$521,274,000. This increase was funded by an increase in average accounts
and drafts payable and an increase in deposit liabilities generated by the
Bank. The Company's accounts and drafts payable increased due to an
increase in dollars processed and a lengthening of the time funds were
available for investment. The time funds are available for investment is
negotiated by customer and is part of the compensation for providing the
Company's services. The Bank saw an increase in both interest bearing
deposits, as a result of increased marketing efforts, and noninterest
bearing deposits, mainly from bank customers that maintained higher
balances to compensate the Bank for services and to avoid increased
service fees in a lower rate environment. The interest generated from the
increase in average earning assets was offset by a decrease in the general
level of interest rates.
Total average loans increased $48,313,000 or 14.7% to $376,275,000. This
increase was attributable to new business relationships and funded by the
increase in payables and deposit liabilities. This increase in loans
increased interest income and had a positive effect on the net interest
margin due to the fact that loans are one of the Company's highest
yielding earning assets.
Total average federal funds sold and other short-term investments
increased $7,004,000 or 10.6% to $72,888,000. Since these are the lowest
yielding earning assets, increases in average balances outstanding can
increase interest income but may lower the yield on earning assets and
decrease the net interest margin.
The net interest margin decreased primarily because of the dramatic
decrease in the general level of interest rates. Prime decreased from
9.50% at the end of 2000 to 4.75% at the end of 2001. Also, the Federal
funds rate ended the year at 1.75%, at that time the lowest level in
nearly 40 years. The average yield on earning assets decreased to 7.01% in
2001 from 7.79% in 2000. The Company is negatively 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 the Company in the form of accounts and drafts payable. More
information is contained in Item 7A of this report.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table contains condensed average balance sheets for each of the
periods reported, the tax-equivalent 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.
2002 2001 2000
----------------------------- ----------------------------- --------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
====================================================================================================================================
Assets(1)
Earning assets:
Loans(2),(3):
Taxable $398,060 $ 25,897 6.51% $364,792 $ 28,435 7.79% $320,801 $ 27,322 8.49%
Tax-exempt(4) 6,033 455 7.54 11,483 961 8.37 7,161 596 8.30
Debt and equity securities(5):
Taxable 55,591 2,839 5.11 71,038 4,276 6.02 83,756 5,205 6.20
Tax-exempt(4) 42,077 2,861 6.80 1,073 70 6.52 1,193 88 7.36
Federal funds sold and other
short-term investments 42,250 687 1.63 72,888 2,790 3.83 65,884 4,085 6.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 544,011 32,739 6.02 521,274 36,532 7.01 478,795 37,296 7.79
Nonearning assets:
Cash and due from banks 24,324 23,448 21,366
Premises and equipment, net 16,281 16,542 10,444
Other assets 19,025 16,368 9,150
Allowance for loan losses (5,075) (4,908) (4,447)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $598,566 $572,724 $515,308
- ------------------------------------------------------------------------------------------------------------------------------------
7
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 56,705 $ 632 1.11% $ 56,124 $ 1,544 2.75% $ 44,596 $ 1,961 4.39%
Savings deposits 41,837 528 1.26 53,757 1,761 3.28 55,979 2,885 5.14
Time deposits of
$100 or more 36,158 902 2.49 8,245 363 4.40 2,488 129 5.17
Other time deposits 5,467 178 3.26 3,986 195 4.89 3,872 190 4.89
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 140,167 2,240 1.60 122,112 3,863 3.16 106,935 5,165 4.82
Short-term borrowings 1,485 33 2.22 362 9 2.49 272 20 7.33
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 141,652 2,273 1.60 122,474 3,872 3.16 107,207 5,185 4.82
Noninterest-bearing liabilities:
Demand deposits 100,473 92,842 79,749
Accounts and drafts payable 293,442 294,608 267,963
Other liabilities 5,699 7,871 6,081
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 541,266 517,795 461,000
Shareholders' equity 57,300 54,929 54,308
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $598,566 $572,724 $515,308
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $30,466 $32,660 $32,111
Net interest margin 5.60% 6.27% 6.69%
Interest spread 4.42% 3.85% 2.97%
=============================================================================================================================
(1). Balances shown are daily averages.
(2). 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 Item 8, Note 1 of this report.
(3). Interest income on loans includes net loan fees of $441,000, $301,000 and
$327,000 for 2002, 2001 and 2000, respectively.
(4). Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $1,122,000,
$350,000 and $231,000 for 2002, 2001 and 2000, respectively.
(5). For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
years due to changes in volume and interest rates.
2002 Over 2001 2001 Over 2000
------------------------------- --------------------------------
(Dollars in thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
==============================================================================================================
Increase (decrease) in interest income:
Loans(2),(3):
Taxable $ 2,441 $(4,979) $(2,538) $ 3,498 $(2,385) $ 1,113
Tax-exempt(4) (419) (87) (506) 360 5 365
Debt and equity securities:
Taxable (847) (590) (1,437) (781) (148) (929)
Tax-exempt(4) 2,788 3 2,791 (8) (10) (18)
Federal funds sold and other
short-term investments (888) (1,215) (2,103) 395 (1,690) (1,295)
- --------------------------------------------------------------------------------------------------------------
Total interest income 3,075 (6,868) (3,793) 3,464 (4,228) (764)
- --------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 16 (928) (912) 426 (843) (417)
Savings deposits (327) (906) (1,233) (111) (1,013) (1,124)
Time deposits of $100 or more 757 (218) 539 256 (22) 234
Other time deposits 60 (77) (17) 5 -- 5
Short-term borrowings 25 (1) 24 5 (16) (11)
- --------------------------------------------------------------------------------------------------------------
Total interest expense 531 (2,130) (1,599) 581 (1,894) (1,313)
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 2,544 $(4,738) $(2,194) $ 2,883 $(2,334) $ 549
==============================================================================================================
(1). The change in interest due to the combined rate/volume variance has been
allocated in proportion to the absolute dollar amounts of the change in
each.
(2). Average balances include nonaccrual loans.
(3). Interest income includes net loan fees.
(4). Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
8
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the
Company. The loan portfolio represented 76% of the Company's total assets as of
December 31, 2002 and generated $26,197,000 in revenue during the year then
ended. The following tables shows the composition of the loan portfolio at the
end of the periods indicated and remaining maturities for loans as of December
31, 2002.
Loans by Type
(At December 31)
(Dollars in thousands) 2002 2001 2000 1999 1998
================================================================================================================
Commercial and industrial $101,116 $115,316 $136,482 $106,444 $95,663
Real estate:
Mortgage 282,125 215,504 182,538 129,482 101,468
Construction 39,175 32,715 29,464 29,633 16,547
Industrial revenue bonds 5,773 6,155 15,804 7,265 5,951
Installment 1,918 1,787 2,533 1,541 2,458
Other 4,582 9,975 5,399 3,978 2,801
- ----------------------------------------------------------------------------------------------------------------
Total loans $434,689 $381,452 $372,220 $278,343 $224,888
================================================================================================================
Loans by Maturity
(At December 31, 2002)
Over One Year Over
Through Five Years Five Years
-------------------- ------------------
One Year Fixed Floating Fixed Floating
(Dollars in thousands) or less Rate Rate(1) Rate Rate(1) Total
================================================================================================================
Commercial and industrial $ 60,196 $ 26,860 $12,560 $1,500 $ -- $101,116
Real estate:
Mortgage 34,541 205,645 38,665 3,274 -- 282,125
Construction 38,371 804 -- -- -- 39,175
Industrial revenue bonds -- 2,568 -- 3,205 -- 5,773
Installment 1,746 172 -- -- -- 1,918
Other 4,515 10 -- 57 -- 4,582
- ----------------------------------------------------------------------------------------------------------------
Total loans $139,369 $236,059 $51,225 $8,036 $ -- $434,689
================================================================================================================
(1) Loans have been classified as having "floating" interest rates if the rate
specified in the loan varies with the prime commercial rate of interest.
The Company has no concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed in the loan portfolio composition table and
discussed in Item 8, Note 4 of this report. As can be seen in the loan
composition table above and discussed in Item 8, Note 4, the Company's primary
market niche for banking services is privately-held commercial companies 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) 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 various factors including the type of business. Intermediate term
credit for machinery and equipment is generally provided at some percentage of
the value of the equipment purchased, depending on the type of machinery or
equipment purchased by the entity. Loans secured exclusively by real estate to
businesses and churches are generally made with a maximum 80% loan to value
ratio, depending upon the Company's estimate of the resale value and ability of
the property to generate cash. 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 an updated external appraisal.
Loan portfolio changes from December 31, 2001 to December 31, 2002:
Total loans increased $53,237,000 or 14.0% to $434,689,000. This increase
was due mainly to the expansion of church and church-related loans in the
St. Louis metropolitan area and selected areas across the
9
United States. At year-end church and church-related real estate and
construction credits totaled $141,532,000, which represented a 36.7%
increase over 2001. Additional details regarding the types and maturities
of the loan portfolio are contained in the tables above and in Item 8,
Note 4.
Loan portfolio changes from December 31, 2000 to December 31, 2001:
Total loans increased $9,232,000 or 2.5% to $381,452,000. This increase
was due mainly to the expansion of church and church-related loans in the
St. Louis metropolitan area and selected areas across the United States.
At year-end church and church-related real estate and construction credits
totaled $103,527,000, which represented a 22% increase over 2000.
Additional details regarding the types and maturities of the loan
portfolio are contained in the tables above and in Item 8, Note 4.
Allowance and Provision for Loan Losses
The Company recorded a provision for loan losses of $500,000 in 2002, $60,000 in
2001 and $750,000 in 2000. The provisions were due to the Company's analysis of
the allowance for loan losses in relation to probable losses in the loan
portfolio. The larger provisions made in 2002 and 2000 partially resulted from
the increase in average loans outstanding and the increases in nonperforming
loans. Loan charge-offs, net of recoveries, experienced by the Company were
$113,000 in 2002, $51,000 in 2001 and $135,000 in 2000. The allowance for loan
losses was $5,293,000 at December 31, 2002, compared to $4,906,000 at December
31, 2001 and $4,897,000 at December 31, 2000. The year-end 2002 allowance
represented 1.22% of outstanding loans, compared to 1.29% at year-end 2001 and
1.32% at year-end 2000. From December 31, 2001 to December 31, 2002 the level of
nonperforming loans increased $8,722,000 from $472,000 to $9,194,000, which
represents 2.12% of outstanding loans. Nonperforming loans are more fully
explained in the section entitled "Nonperforming Assets" in Item 7 of this
report.
The allowance for loan losses has been established and is maintained to absorb
losses inherent in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial,
commercial real estate, and construction loans when a loan is considered to be
impaired. A loan is impaired when, based on an evaluation of current information
and events, it is probable that the Company will not be able to collect all
amounts due (principal and interest) pursuant to the original contractual terms.
The Company measures impairment based upon the present value of expected future
cash flows discounted at the loan's original effective interest rate or the fair
value of the collateral if the loan is collateral dependent. The general
component relates to all other loans, which are evaluated based on loan grade.
The loan grade assigned to each loan is typically evaluated on an annual basis,
unless circumstances require interim evaluation. The Company assigns a reserve
amount consistent with each loan's rating category. The reserve amount is based
on loss experience over prescribed periods. In addition to the amounts derived
from the loan grades, a portion is added to the general reserve to take into
account other factors including national and local economic conditions,
downturns in specific industries including loss in collateral value, trends in
credit quality at the Company and the banking industry, and trends in risk
rating changes. As part of their examination process, federal and state agencies
review the Company's methodology for maintaining the allowance for loan losses
and the balance in the account. These agencies may require the Company to
increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
Summary of Loan Loss Experience
December 31,
------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
================================================================================================================
Allowance at beginning of year $ 4,906 $ 4,897 $ 4,282 $ 4,428 $ 4,484
- ----------------------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial and industrial loans and
industrial revenue bonds (IRB's) 152 110 183 255 365
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- 1 --
- ----------------------------------------------------------------------------------------------------------------
Total loans charged-off 152 110 183 256 365
================================================================================================================
10
Recoveries of loans previously charged-off:
Commercial, industrial and IRB's 39 59 48 109 309
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- 1 --
- ----------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 39 59 48 110 309
================================================================================================================
Net loans charged-off 113 51 135 146 56
Provision charged to expense 500 60 750 -- --
- ----------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 5,293 $ 4,906 $ 4,897 $ 4,282 $ 4,428
================================================================================================================
Loans outstanding:
Average $404,093 $376,275 $327,962 $258,742 $213,075
December 31 434,689 381,452 372,220 278,343 224,888
Ratio of allowance for loan losses to
loans outstanding:
Average 1.31% 1.30% 1.49% 1.65% 2.08%
December 31 1.22% 1.29% 1.32% 1.54% 1.97%
Ratio of net charge-offs to
average loans outstanding .03% .01% .04% .06% .03%
================================================================================================================
Allocation of allowance for loan losses(1):
Commercial, industrial and IRB's $ 2,167 $ 2,129 $ 3,159 $ 3,844 $ 3,982
Real estate:
Mortgage 2,780 2,442 416 19 19
Construction 302 303 1,317 419 427
Installment 10 10 5 -- --
Other loans 34 22 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total $ 5,293 $ 4,906 $ 4,897 $ 4,282 $ 4,428
================================================================================================================
Percent of categories to total loans:
Commercial and industrial and IRB's 24.6% 31.8% 40.9% 40.9% 45.2%
Real estate:
Mortgage 64.9 56.5 49.0 46.5 45.1
Construction 9.0 8.6 7.9 10.6 7.4
Installment .4 .5 .7 .6 1.1
Other 1.1 2.6 1.5 1.4 1.2
- ----------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
================================================================================================================
(1) Although specific allocations exist the entire allowance is available to
absorb losses in any particular loan category.
Nonperforming Assets
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 and renegotiated loans,
which would have been recorded under the original terms of the loans, was
approximately $346,000 for the year ended December 31, 2002. Of this amount,
approximately $328,000 was actually recorded as interest income on such loans.
At December 31, 2002, after review of potential problem loans identified by
management, including those noted in the table below, management of the Company
concluded the allowance for loan losses was adequate. As of December 31, 2002,
approximately $2,994,000 of loans not included in the table below were
identified by management as having potential credit problems, resulting in a
total of $12,188,000 in impaired loans. These loans are excluded from the table
due to the fact that they are current under the original terms of the loans, but
circumstances have raised doubts as to the ability of the borrowers to comply
with the loan repayment terms.
The total renegotiated loans of $4,252,000 at December 31, 2002 relates to two
borrowers, both of which are current under the new terms of the loans and are
considered performing as of January 1, 2003. The real-estate mortgage loans of
$3,388,000 and other loans of $1,503,000 contractually past due 90 days or more
relate to one borrower and these loans have been fully paid-off subsequent to
year-end.
11
The total foreclosed assets of $6,241,000 at December 31, 2002 consist of two
parcels of real estate and a $5,298,000 investment in a software company. On
January 2, 2001, the Bank foreclosed on certain operating assets relating to one
borrower in order to protect its financial interests. This borrower was a
software company that provided the public sector with integrated financial,
property and human resource management systems. The Bank sold these assets to a
wholly-owned subsidiary, Government e-Management Solutions, Inc. (GEMS) and
invested in and stabilized this business. GEMS generated $5,526,000 in revenues
and incurred $5,997,000 in operating expenses for the year ended December 31,
2002. From the date of foreclosure through December 31, 2002 these assets have
been accounted for as a foreclosed asset that is held for sale. Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", adopted by the Company on January 1, 2002,
requires that if certain criteria are not met for long-lived asset (disposal)
groups classified as held for sale by the end of the fiscal year in which SFAS
144 is initially applied, the related long-lived assets shall be reclassified as
held and used. Therefore, as of January 1, 2003, the Company will reclassify the
foreclosed assets relating to GEMS as held and used and consolidate its
operations into those of the Company.
The Bank currently has two properties which it is carrying as other real estate
owned at what management believes to be fair value less cost to sell of the
property. The first property was foreclosed on August 8, 2001 and is recorded at
$680,000. The second property was foreclosed on December 19, 2002 and is
recorded at $263,000, which was the remaining balance of the related loan at the
time of foreclosure.
The Company does not have any foreign loans. The Company's loan portfolio does
not include a significant amount of single family real estate mortgage or
installment credits, as the Company does not market its services to retail
customers.
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.
Summary of Nonperforming Assets
December 31,
------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
===================================================================================================================
Commercial, industrial and IRB's:
Nonaccrual $ 51 $ 157 $ 84 $170 $477
Contractually past due 90 days
or more and still accruing -- 18 -- 167 179
Renegotiated loans -- -- -- 70 134
Real estate-construction on nonaccrual -- 265 1,043 -- --
Real estate-mortgage:
Nonaccrual -- 32 -- -- --
Contractually past due 90 days
or more and still accruing 3,388 -- -- -- --
Renegotiated loans 4,252 -- -- -- --
Installment loans contractually past due
90 days or more and still accruing -- -- 4 -- --
Other loans contractually past due 90
days and still accruing 1,503 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 9,194 472 1,131 407 790
- -------------------------------------------------------------------------------------------------------------------
Total foreclosed assets(1) 6,241 5,710 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $15,435 $6,182 $1,131 $407 $790
===================================================================================================================
(1) Total foreclosed assets includes the Company's investment in GEMS of
$5,298,000 and other real estate owned of $943,000. These items are more
fully explained in Nonperforming Assets above and Item 8, Note 1 of this
report.
Noninterest Income
The Company's noninterest income is derived mainly from freight and utility
payment and processing fees. As the Company provides its freight and utility
processing and payment services, it is compensated by service fees which are
typically calculated on a per-item basis and by the accounts and drafts payable
generated in the payment process which can be used to generate interest income.
Processing volumes related to fees and accounts and drafts payable for the years
ended December 31, 2002, 2001 and 2000 are as follows:
12
December 31,
---------------------------------------------
(In thousands) 2002 2001 2000
================================================================================================================
Transportation Information Services:
Invoice Bill Volume 21,549 20,095 18,777
Invoice Dollar Volume $7,715,588 $7,294,586 $7,397,959
Utility Information Services:
Transaction Volume 3,435 2,738 1,880
Transaction Dollar Volume $2,634,269 $2,481,086 $1,062,848
- ----------------------------------------------------------------------------------------------------------------
In addition to payment processing fees, the Company also received fees from the
sale, maintenance, and service operations relating to freight rating software.
After December 31, 2001 the Company ceased the sale and maintenance of its
rating software and replaced this product with its web-based Ratemaker product,
which generates revenue from subscription and related service fees. Other
noninterest revenue is generated in the form of fees that relate to the credit,
depository, and cash management products of the Bank. Customers compensate the
Bank for these services through fees, the maintenance of demand deposit
balances, or both.
Noninterest income in 2002 compared to 2001 include the following significant
pre-tax components:
Freight and utility payment and processing revenue increased $3,870,000 or
19.2% to $24,012,000. Of the total payment and processing revenue, fees
related to utility payment and processing increased $2,188,000 and fees
relating to freight payment and processing services increased $1,682,000.
These increases relate to new customers and new product offerings.
Freight rating services revenue decreased $738,000 or 54.7% to $610,000. A
change in the strategic direction of the Company from selling rating
software to a new Internet-based delivery system of carrier rates occurred
during 2000 and 2001. After December 31, 2001 the Company ceased support
of the old product and therefore no longer recognized maintenance revenue.
This new system offers the shipping community an expanded level of
features, capabilities and ease of access. Fees from the new Ratemaker
product increased $210,000 or 52.4% from 2001.
Service fees generated by the Bank increased $137,000 or 9.0% to
$1,659,000. This increase was due primarily to the growth of the Bank's
customer base and the fact that service fees increase as the value of
noninterest bearing deposits, used to compensate the Bank for services
provided, decrease as the general level of interest rates decrease.
The Company recorded net gains of $1,477,000 on the sales of securities
with a fair value of $63,945,000. The sales of securities were transacted
to adjust the portfolio to reflect the changes in the interest rate
environment, growth in the loan portfolio during the past year and to
offset the loss of interest income due to the dramatic decline in the
general level of interest rates.
Other miscellaneous noninterest income increased $41,000 or 17.7% to
$272,000. This increase was primarily due to income recognized from the
increase in the cash surrender value of bank owned life insurance
purchased by the Company in 2002.
Noninterest income in 2001 compared to 2000 include the following significant
pre-tax components:
Freight and utility payment and processing revenue increased $2,052,000 or
11.3% to $20,142,000. Of the total payment and processing revenue, fees
related to utility payment and processing increased $2,234,000 and fees
relating to freight payment and processing services decreased $182,000.
The increase in utility payment and processing fees relates to the rapid
expansion of the customer base. During 2001 the Company processed over 2.7
million utility transactions representing over $2.4 billion of invoice
value. The decrease in revenue from freight payment and processing
services was primarily due to the slowing economy, which resulted in
freight shipments of the existing customer base decreasing significantly
from 2000 levels. In addition, a greater percentage of payment and
processing revenue was obtained from increased investable balances
generated rather than from fees.
Freight rating services revenue increased $14,000 or 1.0% to $1,348,000. A
change in the strategic direction of the Company from selling rating
software to a new Internet-based delivery system of carrier rates occurred
during 2000 and 2001. This system will offer the shipping community an
expanded level of
13
features, capabilities and ease of access. The Company saw a decrease in
revenue from its rating software maintenance fees, which it discontinued
on December 31, 2001, but this decrease was more than offset by the fees
generated from the new Ratemaker product.
Service fees generated by the Bank increased $137,000 or 9.9% to
$1,522,000. This increase was due primarily to the growth of the Bank's
customer base and the fact that service fees increase as the value of
noninterest bearing deposits, used to compensate the Bank for services
provided, decrease as the general level of interest rates decrease.
Other miscellaneous noninterest income decreased $74,000 or 24.3% to
$231,000. This decrease was due primarily to the discontinuance of the
sale of the Company's rating software in 2001.
Noninterest Expense
Noninterest expense in 2002 compared to 2001 include the following significant
pre-tax components:
Salaries and employee benefits expense increased $936,000 or 3.1% to
$31,405,000. This increase primarily relates to increased staff in both
the transportation and utility processing divisions to accommodate the
increase in production. The Company also experienced an increase in
pension and health insurance expense.
Occupancy expense decreased $158,000 or 9.5% to $1,500,000 primarily due
to a decrease in rent expense after moving the Company's Columbus
operations from leased space to a newly-acquired building, closing of the
Chicago office, which was the facility used to support the rating software
business that was discontinued in 2002 and closing one of the two bank
subsidiary branches located in downtown St. Louis. Equipment expense
increased $479,000 or 12.5% to $4,310,000 and other noninterest expense
increased $589,000 or 6.7% to $9,360,000. This increase relates mainly to
the expansion of utility payment processing capabilities, increased
investment in freight payment processing and Internet capabilities and
other normal operating expense fluctuations. More details on the
components of other noninterest operating expenses are contained in Item
8, Note 10 of this report.
Noninterest expense in 2001 compared to 2000 include the following significant
pre-tax components:
Salaries and employee benefits expense increased $1,969,000 or 6.9% to
$30,469,000. This increase primarily related to an increased staff at the
Company's new utility processing facility in Columbus, Ohio. The Company
also experienced an increase in pension and health insurance expense.
Occupancy expense decreased $100,000 or 5.7% to $1,658,000 primarily due
to a decrease in rent expense the Company experienced after moving the
Company's Columbus operations from leased space to a newly acquired
building. Equipment expense increased $804,000 or 26.6% to $3,831,000 and
other noninterest expense increased $820,000 or 10.3% to $8,771,000. This
increase relates mainly to the expansion of utility payment processing
capabilities, increased investment in freight payment processing and
Internet capabilities and other normal operating expense fluctuations.
More details on the components of other noninterest operating expenses are
contained in Item 8, Note 10 of this report.
Income Tax Expense
Income tax expense in 2002 totaled $2,987,000 compared to $3,739,000 in 2001 and
$3,861,000 in 2000. When measured as a percent of income before income taxes,
the Company's effective tax rate was 29.0% in 2002, 34.7% in 2001 and 35.1% in
2000. The primary reason for the decline in the effective rate in 2002 was the
Company's investment in tax-exempt municipal bonds and bank owned life
insurance.
Investment Portfolio
Investment portfolio changes from December 31, 2001 to December 31, 2002:
The balance of $12,284,000 invested in U.S. Government Treasury securities
at December 31, 2001 matured during 2002 and these funds were invested in
higher-yielding securities and used to fund loan growth.
U.S. Government corporation and agency securities decreased $50,066,000 or
64.8% to $27,249,000. The decrease was primarily from the sales of these
securities, which were transacted to adjust the portfolio to
14
reflect the changes in the interest rate environment, accommodate growth
in the loan portfolio and to recognize gains to offset the loss in
interest income due to the dramatic decline in the general level of
interest rates.
State and political subdivision securities increased $38,824,000 to
$40,923,000. This increase was due to the decision to invest in
longer-term, higher-yielding investments.
Investment portfolio changes from December 31, 2000 to December 31, 2001:
U.S. Government Treasury securities decreased $17,963,000 or 59.4% to
$12,284,000. This decrease occurred due to a decision to invest in
higher-yielding securities and fund future loan growth.
U.S. Government corporation and agency securities increased $40,050,000 or
107.5% to $77,313,000. This increase was due to a decision to invest in
longer-term, higher-yielding investments, given the declining interest
rate environment.
State and political subdivision securities increased $918,000 or 77.7% to
$2,099,000. This was also due to the decision to invest in longer-term,
higher-yielding investments.
There was no single issuer of securities in the investment portfolio at December
31, 2002 other than U.S. Government corporations and agencies, for which the
aggregate amortized cost exceeded ten percent of total shareholders' equity.
Investment by Type
December 31,
------------------------------------------
(Dollars in thousands) 2002 2001 2000
================================================================================================================
U.S. Treasury securities $ -- $12,284 $30,247
U.S. Government corporations and agencies 27,247 77,313 37,263
State and political subdivisions 40,923 2,099 1,181
Stock of the Federal Home Loan Bank 1,000 433 433
Stock of the Federal Reserve Bank 201 201 201
- ----------------------------------------------------------------------------------------------------------------
Total investments $69,371 $92,330 $69,325
================================================================================================================
Investment in Debt Securities by Maturity
(At December 31)
Within Over 1 to Over 5 to Over
(Dollars in thousands) 1 Year 5 Years 10 Years 10 Years Yield
================================================================================================================
U.S. Government corporations and
agencies $ -- $5,687 $21,560 -- 4.20%
State and political subdivisions(1) -- 1,289 11,605 28,029 7.72%
Total investment in debt securities $ -- $6,976 $33,165 $28,029 6.31%
- ----------------------------------------------------------------------------------------------------------------
Weighted average yield --% 4.77% 5.39% 7.78%
================================================================================================================
(1). Weighted average yield is presented on a tax-equivalent basis assuming a
tax rate of 34%.
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits decreased $7,999,000 or 6.8% from
$117,351,000 at December 31, 2001 to $109,352,000 at December 31, 2002. The
average balances of these accounts increased $7,631,000 or 8.2% from $92,842,000
in 2001 to $100,473,000 in 2002. The decrease in ending balances relates to
normal daily fluctuations in these accounts. The increase in the average
balances relates to new business and to the fact that the earnings credit rate
on noninterest-bearing demand deposits decreased with the general decline in
interest rates. In order to compensate the Bank for services rendered, customers
increased balances in those accounts, paid more in fees, or both.
Interest-bearing deposits increased from $130,627,000 at December 31, 2001 to
$134,166,000 at December 31, 2002. The average balances of these deposits
increased $18,055,000 or 14.8% from $122,112,000 in 2001 to $140,167,000 in
2002. These increases relate mainly to the Bank's increased marketing efforts to
attract more deposits.
Accounts and drafts payable generated by the Company in its payment processing
operations decreased $68,173,000 or 23.4% from $291,794,000 at December 31, 2001
to $223,621,000 at December 31, 2002. The average balances of
15
these funds decreased $1,166,000 or .4% from $294,608,000 in 2001 to
$293,442,000 in 2002. Due to the Company's payment processing cycle, average
balances are much more indicative of the underlying activity than period-end
balances since point-in-time comparisons can be misleading if the comparison
dates fall on different days of the week.
The composition of average deposits and the average rates paid on those deposits
is represented in the table entitled "Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rate and Interest Differential" which is included
earlier in this discussion. The Company does not have any significant deposits
from foreign depositors.
Maturities of Certificates of Deposits of $100,000 or More
(At December 31, 2002)
(Dollars in thousands)
================================================================================
Three months or less $32,900
Three to six months 1,822
Six to twelve months 3,592
Over twelve months 3,974
- --------------------------------------------------------------------------------
Total $42,288
================================================================================
Short-term Borrowings
Short-term borrowings increased $37,238,000 from $200,000 at December 31, 2001
to $37,438,000 at December 31, 2002. Average balances of these funds increased
$1,123,000 from $362,000 during 2001 to $1,485,000 during 2002. These funds
consist primarily of federal funds purchased and can also include tax deposits
of the United States Treasury. The borrowings at December 31, 2002 were used to
fund a decrease in accounts and drafts payable, due to a combination of special
year-end funding arrangements with large customers, seasonality and the last day
of the year being the low point of the weekly payment cycle. These balances can
vary significantly from day to day due to the Company's payment cycle and
therefore balances on any particular day are not necessarily reflective of
balances throughout the year. For more information on borrowings please refer to
Item 8, Note 7 of this report.
Liquidity
The discipline of liquidity management as practiced by the Company seeks to
ensure that funds are available to fulfill all payment obligations relating to
the freight and utility invoices processed as they become due, meet depositor
withdrawal requests and borrower credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of funds. Primary liquidity to meet demand
is provided by short-term liquid assets that can be converted to cash, maturing
securities and the ability to attract funds from external sources. The Company's
Asset/Liability Committee (ALCO) has direct oversight responsibility for the
Company's liquidity position and profile. Management considers both on-balance
sheet and off-balance sheet transactions in its evaluation of liquidity.
The balances of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold, and money market funds, and
were $30,006,000 at December 31, 2002, a decrease of $69,849,000 or 70.0% from
December 31, 2001. At December 31, 2002 these assets represented 5.2% of total
assets. These funds are the Company's and its subsidiaries' primary source of
liquidity to meet future expected and unexpected loan demand, depositor
withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing
lines. Total investment in debt and equity securities was $69,371,000 at
December 31, 2002, a decrease of $22,959,000 or 24.9% from December 31, 2001.
These assets represented 12.1% of total assets at December 31, 2002. Of this
total, 59% were state and political subdivision securities, 32% were
mortgage-backed securities, 7% were U.S. government agencies and 2% were other
securities. Of the total portfolio, none mature in one year, 10% matures in one
to five years, and 90% matures in five or more years. During the year the
Company sold securities with a market value of $63,945,000 and a portion of
these funds were reinvested in state and political subdivision securities and
the loan portfolio. At January 2, 2001 the Company transferred the remaining
balance of held-to-maturity securities into available-for-sale securities as
allowed upon the adoption of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". The investment portfolio provides secondary liquidity
through regularly scheduled maturities, the ability to sell securities out of
the available-for-sale portfolio, and the ability to use these securities in
conjunction with the Company's repurchase lines of credit.
16
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $29,000,000. Additionally, the Bank maintains a line of credit
at an unaffiliated financial institution in the maximum amount of $40,000,000
collateralized by securities sold under repurchase agreements.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize many other commercial products of the Bank. The accounts and drafts
payable generated by the Company has also historically been a stable source of
funds.
Net cash provided by operating activities totaled $9,166,000 for the year ended
December 31, 2002, compared to $8,697,000 for the year ended December 31, 2001.
Net cash used in investing activities was $40,955,000 for the year ended
December 31, 2002, compared with $43,441,000 for the year ended December 31,
2001. Net cash used in financing activities for the year ended December 31, 2002
was $38,060,000, compared with net cash provided of $18,668,000 for the year
ended December 31, 2001. The increase in net cash used in investing activities
relates primarily to the sales of securities during the year ended December 31,
2002 and was partially offset by the purchase of more debt and equity
securities, increases in loan balances and the investment in bank owned life
insurance. The increase in net cash used in financing activities compared with
net cash provided for the year ended December 31, 2001 relates primarily to the
decrease in accounts and drafts payable at December 31, 2002. Balances in
accounts and drafts payable can vary significantly from day to day due to the
Company's payment cycle and therefore balances on any one particular day are not
necessarily reflective of balances throughout the year. The decrease in accounts
and drafts payable at December 31, 2002 was partially offset by short-term
borrowings.
Other Off-Balance Sheet Activities
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating leases. For details of operating leases refer to
Item 8, Note 5 of this report.
The Company provides customers with off-balance sheet credit support through
unused loan commitments to extend credit, standby letters of credit and
commercial letters of credit. Summarized credit-related financial instruments,
including both commitments to extend credit and letters of credit at December
31, 2002 are as follows:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5
(Dollars in thousands at December 31, 2002) Total 1 year Years Years
----------------------------------------------------------------------------------------------------------
Unused loan commitments $29,463 $20,863 $8,600 $ --
Standby letters of credit 5,663 3,440 2,178 45
Commercial letters of credit 100 100 -- --
Since many of the unused commitments are expected to expire or be only partially
used, the total amount of commitments in the preceding table does not
necessarily represent future cash requirements.
Capital Resources
One of management's primary objectives is to maintain a strong capital base to
warrant the confidence of customers, shareholders, and bank regulatory agencies.
A strong capital base is needed to take advantage of profitable growth
opportunities that arise and to provide assurance to depositors and creditors.
The Company and its banking subsidiary continue to exceed all regulatory capital
requirements, as evidenced by the capital ratios at December 31, 2002 as shown
in Item 8, Note 2 of this report.
In 2002, cash dividends paid were $.81 per share for a total of $2,628,000, a
1.9% increase over the prior year, which is attributable to both an increase in
the per share amount paid and an increase in the number of shares outstanding.
On December 16, 2002 the Company issued a 5% stock dividend payable to holders
of record on December 5, 2002 and also paid an additional $.01 per share over
the per share amounts paid for each of the quarters of 2001 and the first three
quarter of 2002.
Shareholders' equity was $61,046,000 or 10.7% of total assets at December 31,
2002, an increase of $5,526,000 over the balance at December 31, 2001. This
increase resulted from net income of $7,312,000, an increase in other
comprehensive income of $671,000, proceeds from the exercise of stock options of
$348,000 and other items of $208,000, which was partially offset by cash
dividends paid of $2,628,000, repurchases of stock of $383,000 and $2,000 for
payments of fractional shares related to the 5% stock dividend.
17
Management believes that current cash, cash equivalents, maturing investments
and cash from operations will be sufficient to fund the Company's operations and
capital expenditures in 2003.
Dividends from the bank subsidiary are a significant 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. As of December 31, 2002, unappropriated retained
earnings of $3,836,000 were available at the Bank for the declaration of
dividends to the Company without prior approval from regulatory authorities.
Effect of Recent and Prospective Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34". This interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligation under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the interpretation are applicable to guarantees issued or modified
after December 31, 2002 and are not expected to have a material effect on the
Company's consolidated financial statements. The disclosure requirements are
effective for financial statements of periods ending after December 15, 2002 and
are included in Item 8, Note 13 of this report.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123". This statement amends SFAS
123 "Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both the
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
Item 8, Note 9 of this report.
Effects of Inflation
The Company's assets and liabilities are primarily monetary, consisting of cash,
cash equivalents, securities, loans, payables and deposits. Monetary assets and
liabilities are those that can be converted into a fixed number of dollars. The
Company's consolidated balance sheet reflects a net positive monetary position
(monetary assets exceed 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 company. Management believes that replacement costs of
equipment, furniture, and leasehold improvements will not materially affect
operations. The rate of inflation does affect certain expenses, such as those
for employee compensation, which may not be readily recoverable in the price of
the Company's services.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 fees and net interest income.
However, as discussed below, the Company's asset/liability position differs
significantly from most other bank holding companies with significant positive
cumulative "gaps" shown for each time horizon presented. This asset sensitive
position is caused primarily by the operations of the Company, which generates
large balances of accounts and drafts payable. These balances, which are
noninterest bearing, contribute to the Company's high net interest margin but
cause 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. 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 would decrease 3.1% from an
immediate and sustained parallel decrease in interest rates of 100 basis points
and increase 1.7% from a corresponding increase in interest 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 would decrease 5.8% from an immediate and sustained parallel
decrease in interest rates of 100 basis points and increase 3.9% from a
corresponding increase in interest rates.
19
Interest Rate Sensitive Position
The following table presents the Company's gap or interest rate risk position at
December 31, 2002 for the various time periods indicated.
Variable 0-90 91-180 181-364 1-5 Over 5
(Dollars in thousands) Rate days days days years Years Total
=======================================================================================================================
Earning assets:
Loans:
Taxable $166,613 $ 8,136 $ 5,269 $ 10,576 $233,491 $ 4,831 $428,916
Tax-exempt -- -- -- -- 2,568 3,205 5,773
Debt and equity securities(1):
Taxable -- -- -- -- 5,687 21,560 27,247
Tax-exempt -- -- -- 502 1,289 39,132 40,923
Other 1,201 -- -- -- -- -- 1,201
Federal funds sold and other
short term investments 5,727 -- -- -- -- -- 5,727
- -----------------------------------------------------------------------------------------------------------------------
Total earning assets 173,541 8,136 5,269 11,078 243,035 68,728 509,787
=======================================================================================================================
Interest-sensitive liabilities:
Money market accounts 40,115 -- -- -- -- -- 40,115
Now accounts 13,428 -- -- -- -- -- 13,428
Savings deposits 32,724 -- -- -- -- -- 32,724
Time deposits:
$100 and more -- 32,900 1,822 3,592 3,974 -- 42,288
Less than $100 -- 2,035 1,166 1,163 1,247 -- 5,611
Federal funds purchased and
other short term borrowing 37,438 -- -- -- -- -- 37,438
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $123,705 $ 34,935 $ 2,988 $ 4,755 $ 5,221 $ -- $171,604
=======================================================================================================================
Interest sensitivity gap:
Periodic $ 49,836 $(26,799) $ 2,281 $ 6,323 $237,814 $ 68,728 $338,183
Cumulative 49,836 23,037 25,318 31,641 269,455 338,183 338,183
Ratio of interest-bearing
assets to interest-bearing
liabilities:
Periodic 1.40x .23x 1.76x 2.33x 46.55x -- 2.97x
Cumulative 1.40x 1.15x 1.16x 1.19x 2.57x 2.97x 2.97x
=======================================================================================================================
(1) Balances shown reflect earliest repricing date.
20
PART II.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
-----------------------
(In thousands, except share and per share data) 2002 2001
- -----------------------------------------------------------------------------------
Assets
Cash and due from banks $ 24,279 $ 31,915
Federal funds sold and other short-term investments 5,727 67,940
--------- ---------
Cash and cash equivalents 30,006 99,855
--------- ---------
Investment in debt and equity securities,
available-for-sale, at fair value 69,371 92,330
Loans 434,689 381,452
Less: Allowance for loan losses 5,293 4,906
--------- ---------
Loans, net 429,396 376,546
--------- ---------
Premises and equipment, net 15,359 16,798
Accrued interest receivable 2,539 2,627
Investment in bank owned life insurance 10,178 --
Other assets 15,384 14,221
--------- ---------
Total assets $ 572,233 $ 602,377
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 109,352 $ 117,351
Interest-bearing 134,166 130,627
--------- ---------
Total deposits 243,518 247,978
Accounts and drafts payable 223,621 291,794
Short-term borrowings 37,438 200
Other liabilities 6,610 6,885
--------- ---------
Total liabilities 511,187 546,857
--------- ---------
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
4,160,110 and 4,000,000 shares issued at
December 31, 2002 and 2001, respectively 2,080 2,000
Additional paid-in capital 8,466 4,997
Retained earnings 64,607 63,623
Common shares in treasury, at cost (796,278 and 818,185
shares at December 31, 2002 and 2001, respectively) (15,275) (15,597)
Unamortized stock bonus awards (25) (25)
Accumulated other comprehensive income 1,193 522
--------- ---------
Total shareholders' equity 61,046 55,520
--------- ---------
Total liabilities and shareholders' equity $ 572,233 $ 602,377
========= =========
See accompanying notes to consolidated financial statements.
21
CASS INFORMATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31
--------------------------------------
(In thousands, except share and per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 26,197 $ 29,069 $ 27,716
Interest and dividends on debt and equity securities:
Taxable 2,839 4,276 5,205
Exempt from federal income taxes 1,894 47 59
Interest on federal funds sold and
other short-term investments 687 2,790 4,085
---------- ---------- ----------
Total interest income 31,617 36,182 37,065
---------- ---------- ----------
Interest Expense:
Interest on deposits 2,240 3,863 5,165
Interest on short-term borrowings 33 9 20
---------- ---------- ----------
Total interest expense 2,273 3,872 5,185
---------- ---------- ----------
Net interest income 29,344 32,310 31,880
Provision for loan losses 500 60 750
---------- ---------- ----------
Net interest income after provision
for loan losses 28,844 32,250 31,130
---------- ---------- ----------
Noninterest Income:
Payment and processing fees:
Freight and utility payment and processing fees 24,012 20,142 18,090
Freight rating services fees 610 1,348 1,334
---------- ---------- ----------
Total payment and processing fees 24,622 21,490 19,424
---------- ---------- ----------
Bank service fees 1,659 1,522 1,385
Gains on sales of investment securities 1,477 -- --
Other 272 231 305
---------- ---------- ----------
Total noninterest income 28,030 23,243 21,114
---------- ---------- ----------
Noninterest Expense:
Salaries and employee benefits 31,405 30,469 28,500
Occupancy expense 1,500 1,658 1,758
Equipment expense 4,310 3,831 3,027
Other 9,360 8,771 7,951
---------- ---------- ----------
Total noninterest expense 46,575 44,729 41,236
---------- ---------- ----------
Income before income tax expense 10,299 10,764 11,008
Income tax expense 2,987 3,739 3,861
---------- ---------- ----------
Net income $ 7,312 $ 7,025 $ 7,147
========== ========== ==========
Earnings per share*:
Basic $ 2.18 $ 2.07 $ 1.95
Diluted $ 2.16 $ 2.05 $ 1.93
Weighted average shares outstanding*:
Basic 3,361,625 3,390,035 3,660,078
Dilutive effect of stock options and awards 21,365 43,851 47,102
Diluted 3,382,990 3,433,886 3,707,180
*Earnings per share and weighted average shares outstanding have been restated
to reflect the 5% stock dividend distributed in December 2002.
See accompanying notes to consolidated financial statements.
22
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31
-------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 7,312 $ 7,025 $ 7,147
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,978 3,276 2,571
Gains on sales of investment securities (1,477) -- --
Amortization of stock bonus awards 22 80 81
Tax benefit from exercise of stock options and bonuses 186 29 10
Provision for loan losses 500 60 750
(Increase) decrease in accounts receivable (400) (260) 1,690
Deferred income tax (benefit) expense (315) 761 (501)
Increase (decrease) in income tax liability 164 (845) (110)
Decrease (increase) in accrued interest receivable 88 901 (764)
(Decrease) increase in pension liability (53) 292 560
Change in other assets (1,521) (3,213) (256)
Change in other liabilities 665 616 1,483
Other operating activities, net (171) (930) (350)
--------- --------- ---------
Net cash provided by operating activities 8,978 7,792 12,311
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available-for-sale 63,945 -- --
Proceeds from maturities of debt and equity securities:
Held-to-maturity -- -- 20,757
Available-for-sale 40,878 38,993 12,909
Purchase of debt and equity securities available-for-sale (79,761) (61,497) (19,322)
Net increase in loans (53,613) (14,088) (94,012)
Purchases of premises and equipment, net (2,216) (5,944) (7,041)
Purchase of bank owned life insurance (10,000) -- --
--------- --------- ---------
Net cash used in investing activities (40,767) (42,536) (86,709)
--------- --------- ---------
Cash Flows From Financing Activities:
Net (decrease) increase in noninterest-bearing deposits (7,999) 17,410 8,269
Net (decrease) increase in interest-bearing demand
and savings deposits (18,079) (1,307) 15,063
Net increase in time deposits 21,618 19,209 598
Net (decrease) increase in accounts and drafts payable (68,173) (11,046) 52,946
Net increase (decrease) in short-term borrowings 37,238 200 (208)
Cash proceeds from exercise of stock options 348 60 56
Cash paid for stock dividend for fractional shares (2) -- --
Cash dividends paid (2,628) (2,579) (2,784)
Purchase of common shares for treasury (383) (3,279) (7,828)
--------- --------- ---------
Net cash (used in) provided by financing activities (38,060) 18,668 66,112
--------- --------- ---------
Net decrease in cash and cash equivalents (69,849) (16,076) (8,286)
Cash and cash equivalents at beginning of year 99,855 115,931 124,217
--------- --------- ---------
Cash and cash equivalents at end of year $ 30,006 $ 99,855 $ 115,931
========= ========= =========
Supplemental information:
Cash paid for interest $ 2,270 $ 3,877 $ 5,143
Cash paid for income taxes 3,155 3,352 4,382
Noncash transactions:
Foreclosed assets transferred from loans $ -- $ 4,205 $ --
Other real estate transferred from loans 263 600 --
Transfer of securities from held-to-maturity to available-for-sale -- 6,682 --
See accompanying notes to consolidated financial statements.
23
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Additional Unamortized Other Comp-
(In thousands, except Common Paid-in Retained Treasury Stock Bonus Comprehensive rehensive
per share data) Stock Capital Earnings Stock Awards Income (Loss) Total Income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 2,000 $ 5,087 $ 54,814 $ (4,770) $ (151) $ (417) $ 56,563
Net income 7,147 7,147 $ 7,147
Cash dividends ($.80 per share) (2,784) (2,784)
Purchase of 394,510 common shares
for treasury (7,828) (7,828)
Other comprehensive income (loss):
Net unrealized gain on debt
securities available-for-
sale, net of tax 576 576 576
Issuance of 1,200 common shares
pursuant to Stock Bonus Plan 2 22 (24)
Amortization of Stock Bonus
Plan awards 81 81
Exercise of stock options (40) 96 56
Tax benefit on stock awards 10 10
------------------------------------------------------------------------------------------
Balance, December 31, 2000 2,000 5,059 59,177 (12,480) (94) 159 53,821
Comprehensive income for 2000 $ 7,723
========
Net income 7,025 7,025 7,025
Cash dividends ($.80 per share) (2,579) (2,579)
Purchase of 161,700 common shares
for treasury (3,279) (3,279)
Other comprehensive income (loss):
Net unrealized gain on debt
securities available-for-
sale, net of tax 397 397 397
Minimum pension liability
adjustment, net of tax (34) (34) (34)
Issuance of 600 common shares
pursuant to Stock Bonus Plan 11 (11)
Amortization of Stock Bonus
Plan awards 80 80
Exercise of stock options (91) 151 60
Tax benefit on stock awards 29 29
------------------------------------------------------------------------------------------
Balance, December 31, 2001 2,000 4,997 63,623 (15,597) (25) 522 55,520
Comprehensive income for 2001 $ 7,388
========
Net income 7,312 7,312 7,312
Cash dividends ($.81 per share) (2,628) (2,628)
Purchase of 15,664 common shares
for treasury (383) (383)
5% stock dividend, net 80 3,618 (3,700) (2)
Other comprehensive income (loss):
Net unrealized gain on debt
securities available-for-
sale, net of tax 1,597 1,597 1,597
Reclassification adjustment for gains
on sales of investment securities,
available-for-sale, net of tax (960) (960) (960)
Minimum pension liability
adjustment, net of tax 34 34 34
Issuance of 900 common shares
pursuant to Stock Bonus Plan 5 17 (22) --
Amortization of Stock Bonus
Plan awards 22 22
Exercise of stock options (340) 688 348
Tax benefit on stock awards 186 186
------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 2,080 $ 8,466 $ 64,607 $(15,275) $ (25) $ 1,193 $ 61,046
===============================================================================
Comprehensive income for 2002 $ 7,983
========
See accompanying notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations The Company provides payment and information services,
which include processing and payment of freight and utility invoices,
preparation of transportation management reports, auditing of freight charges
and rating of freight shipments. The consolidated balance sheet caption,
"Accounts and Drafts Payable," consists of obligations related to the payment
services that are performed for customers. The Company also provides a full
range of banking services to individual, corporate and institutional customers
through its wholly-owned bank subsidiary.
On January 9, 2001 the Company's subsidiary, Cass Information Systems, Inc. was
merged into the parent company, Cass Commercial Corporation, and the parent's
name was subsequently changed to Cass Information Systems, Inc.
Basis of Presentation The accounting and reporting policies of the Company and
its subsidiaries conform to accounting policies generally accepted in the United
States of America. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of intercompany
transactions. Certain amounts in the 2001 and 2000 consolidated financial
statements have been reclassified to conform to the 2002 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity.
Use of Estimates In preparing the consolidated financial statements, Company
management is required to make estimates and assumptions which significantly
affect the reported amounts in the consolidated financial statements. A
significant estimate which is particularly susceptible to change in a short
period of time is the determination of the allowance for loan losses.
Investment in Debt and Equity Securities The Company classifies its debt and
equity securities as available-for-sale. Securities classified as
available-for-sale are carried at fair value. Unrealized gains and losses, net
of the related tax effect, are excluded from earnings and reported in
accumulated other comprehensive income, a component of stockholders' equity. A
decline in the fair value of any available-for-sale security below cost that is
deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security. Premiums and discounts are
amortized or accreted to interest income over the estimated lives of the
securities. Interest income is recognized when earned. Gains and losses are
calculated using the specific identification method. Investments in equity
securities without readily determinable fair values are stated at cost.
Interest on Loans Interest on loans is recognized based upon the principal
amounts outstanding. It is the Company's policy to discontinue the accrual of
interest when there is reasonable doubt as to the collectibility of principal or
interest. Subsequent payments received on such loans are applied to principal if
there is any doubt as to the collectibility of such principal; otherwise, these
receipts are recorded as interest income. The accrual of interest on a loan is
resumed when the loan is current as to payment of both principal and interest
and/or the borrower demonstrates the ability to pay and remain current.
Impairment of Loans A loan is considered impaired when it is probable a creditor
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are discounted at
the loan's effective interest rate. Alternatively, impairment could be measured
by reference to an observable market price, if one exists, or the fair value of
the collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, the Company measures impairment based on the fair value
of the collateral when the Company determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement. The Company uses its nonaccrual methods
as discussed above for recognizing interest on impaired loans.
Allowance for Loan Losses The allowance for loan losses is increased by
provisions charged to expense and reduced by net charge-offs. The provisions
charged to expense are based on economic conditions, past losses, collection
experience, risk characteristics of the portfolio and such other factors which,
in management's judgment, deserve current recognition.
Management believes the allowance for loan losses is adequate to absorb losses
in the loan portfolio. While management uses all available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. Additionally, various regulatory
agencies, as an integral part of
25
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to increase the allowance for loan
losses based on their judgments and interpretations about information available
to them at the time of their examination.
Information Services Revenue Revenue from freight and utility payment related
services is recognized when fees are billed to customers, generally monthly.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the assets, or the respective lease terms for
leasehold improvements, using straight-line and accelerated methods. Estimated
useful lives do not exceed 40 years for buildings, 10 years for leasehold
improvements and range from 3 to 7 years for software, equipment, furniture and
fixtures. Maintenance and repairs are charged to expense as incurred.
Foreclosed assets On January 2, 2001, the Company foreclosed on certain
operating assets to one borrower in order to protect the financial interest in
that borrower. The Bank sold these assets to a wholly-owned subsidiary and
invested in and stabilized this business. From the date of foreclosure through
December 31, 2002 these assets have been accounted for as a foreclosed asset
that is held for sale. At December 31, 2002 and 2001 other assets includes
$7,108,000 and $6,612,000, respectively and other liabilities includes
$1,810,000 and $1,502,000, respectively related to this business.
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective January 1, 2002. SFAS 144 requires that if certain
criteria are not met for long-lived asset (disposal) groups classified as held
for sale by the end of the fiscal year in which SFAS 144 is initially applied,
the related long-lived assets shall be reclassified as held and used. Therefore,
as of January 1, 2003, the Company is required to reclassify these foreclosed
assets as held and used and consolidate its operations into those of the
Company.
Other real estate, included in other assets in the accompanying consolidated
balance sheets, is recorded at fair value less estimated selling costs. If the
fair value of other real estate declines subsequent to foreclosure, the
difference is recorded as a valuation allowance through a charge to expense.
Subsequent increases in fair value are recorded through reversal of the
valuation allowance. Expenses incurred in maintaining the properties are charged
to expense.
Intangible Assets Cost in excess of fair value of net assets acquired and fair
value in excess of cost of net assets acquired have resulted from business
acquisitions which were accounted for using the purchase method. The Company
adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets",
effective January 1, 2002 which requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS 144.
At the date of adoption, the Company had $223,000 of unamortized goodwill, which
is included in other assets in the accompanying consolidated balance sheets and
was subject to the provisions of SFAS 142. Prior to the adoption of SFAS 142,
goodwill was amortized on a straight-line basis over 15 years. Amortization
expense related to goodwill was $91,000 for the year ended December 31, 2001.
Periodically, the Company reviews intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable. Based on those reviews, adjustments of recorded amounts have not
been required.
Income Taxes Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Cash and Cash Equivalents For purposes of the consolidated statements of cash
flows, the Company considers cash and due from banks, federal funds sold and
other short-term investments as segregated in the accompanying consolidated
balance sheets to be cash equivalents.
26
Earnings Per Share Basic earnings per share (EPS) is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of common shares adjusted for the dilutive effect of outstanding stock
options and awards. All per share data has been restated to reflect the 5% stock
dividend distributed in December 2002.
Stock Options The Company accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees". Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Comprehensive Income Comprehensive income consists of net income, changes in net
unrealized gains (losses) on available-for-sale securities and minimum pension
liability adjustments and is presented in the accompanying consolidated
statements of shareholders' equity and comprehensive income.
Recent and Prospective Accounting Pronouncements In November 2002, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34". This
interpretation elaborates on the disclosures to be made by a guarantor in its
financial statements about its obligation under guarantees issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements for periods ending after December 15, 2002 and are included
in Item 8, Note 13 of this report.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This statement amends SFAS 123 "Accounting for Stock-Based Compensation",
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both the annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal years ending
after December 15, 2002 and are included in Item 8, Note 9 of this report.
Note 2
Capital Requirements And Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company and the Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulators to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets, and of Tier I capital to average
assets. Management believes as of December 31, 2002 and 2001, the Company and
the Bank met all capital adequacy requirements to which they are subject.
The Bank is also subject to the regulatory framework for prompt corrective
action. The most recent notification from the regulatory agencies, dated
December 31, 2002, categorized the Bank as well capitalized. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
Subsidiary dividends are a significant source of funds for payment of dividends
by the Company to its shareholders. The Bank is subject to regulations which
require the maintenance of minimum capital levels. At December 31, 2002,
unappropriated retained earnings of $3,836,000 were available at the Bank for
the declaration of dividends to the Company without prior approval from
regulatory authorities.
27
Restricted funds on deposit used to meet regulatory reserve requirements
amounted to approximately $707,000 and $431,000 at December 31, 2002 and 2001,
respectively.
The Company and the Bank's actual and required capital amounts and ratios as of
December 31, 2002 and 2001 are as follows:
Requirement
to be well
capitalized under
Capital prompt corrective
Actual requirements action provisions
--------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
At December 31, 2002
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $59,625 12.07% $39,513 8.00% $ N/A N/A%
Cass Commercial Bank 27,425 10.94 20,052 8.00 25,064 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $54,332 11.00% $19,756 4.00% $ N/A N/A%
Cass Commercial Bank 24,412 9.74 10,026 4.00 15,039 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $54,332 9.16% $17,791 3.00% $ N/A N/A%
Cass Commercial Bank 24,412 8.98 8,157 3.00 13,595 5.00
At December 31, 2001
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $54,537 12.22% $35,718 8.00% $ N/A N/A%
Cass Commercial Bank 25,363 11.41 17,787 8.00 22,234 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $49,631 11.12% $17,859 4.00% $ N/A N/A%
Cass Commercial Bank 22,608 10.17 8,894 4.00 13,340 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $49,631 8.75% $17,022 3.00% $ N/A N/A%
Cass Commercial Bank 22,608 9.20 7,375 3.00 12,291 5.00
Note 3
Investment in Debt and Equity Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost, gross unrealized
gains, gross unrealized losses and fair value of debt and equity securities at
December 31, 2002 and 2001, are summarized as follows:
2002
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
Obligations of U.S. Government
corporations and agencies $ 26,791 $ 456 $ -- $ 27,247
State and political subdivisions 39,571 1,352 -- 40,923
-----------------------------------------------------------------------------------------------
Total debt securities 66,362 1,808 -- 68,170
Stock in Federal Reserve Bank and
Federal Home Loan Bank 1,201 -- -- 1,201
-----------------------------------------------------------------------------------------------
Total $ 67,563 $ 1,808 $ -- $ 69,371
===============================================================================================
28
2001
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
U.S. Government Treasury securities $ 11,962 $ 322 $ -- $ 12,284
Obligations of U.S. Government
corporations and agencies 76,822 581 (90) 77,313
State and political subdivisions 2,070 36 (7) 2,099
-----------------------------------------------------------------------------------------------
Total debt securities 90,854 939 (97) 91,696
Stock in Federal Reserve Bank and
Federal Home Loan Bank 634 -- -- 634
-----------------------------------------------------------------------------------------------
Total $91,488 $ 939 $ (97) $ 92,330
===============================================================================================
The amortized cost and fair value of debt and equity securities at December 31,
2002, by contractual maturity, are shown in the following table. Expected
maturities may differ from contractual maturities because borrowers have the
right to prepay obligations with or without prepayment penalties.
2002
---------------------------
Amortized Fair
(In thousands) Cost Value
----------------------------------------------------------------------
Due in 1 year or less $ -- $ --
Due after 1 year through 5 years 6,758 6,975
Due after 5 years through 10 years 32,518 33,165
Due after 10 years 27,086 28,030
No stated maturity 1,201 1,201
----------------------------------------------------------------------
Total $ 67,563 $ 69,371
======================================================================
There were no securities pledged to secure public deposits, securities sold
under agreements to repurchase and for other purposes at December 31, 2002, and
the amortized cost of debt securities pledged at December 31, 2001 was
approximately $11,788,000.
Proceeds from sales of debt securities classified as available-for-sale were
$63,945,000 for 2002 and there were no sales of debt and equity securities in
2001 or 2000. Gross gains realized on the sales in 2002 were $1,501,000 and
gross losses realized were $24,000.
On January 2, 2001 the Company transferred the remaining balance of
held-to-maturity securities into available-for-sale securities as allowed upon
the adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities". At the time of the transfer the fair value of the securities
transferred was $6,682,000.
Note 4
Loans
A summary of loan categories at December 31, 2002 and 2001, is as follows:
(In thousands) 2002 2001
-----------------------------------------------------------------------
Commercial and industrial $ 101,116 $ 115,316
Real estate:
Mortgage 176,667 128,651
Mortgage - Church & related 105,458 86,853
Construction 3,101 16,041
Construction - Church & related 36,074 16,674
Industrial revenue bonds 5,773 6,155
Installment 1,918 1,787
Other 4,582 9,975
-----------------------------------------------------------------------
Total $ 434,689 $ 381,452
=======================================================================
The Company originates commercial, industrial, real estate and installment loans
to businesses, churches and consumers throughout the metropolitan St. Louis
area. The Company also originates church and church-related loans outside the
metropolitan St. Louis area. The Company does not have any particular
concentration of credit in any one
29
economic sector; however, a substantial portion of the commercial and industrial
loans are extended to privately held commercial companies in this market area,
and are generally secured by the assets of the business. The Company also has a
substantial portion of real estate loans that are extended to churches, in this
market area and selected cities throughout the United States, which are secured
by mortgages.
Loan transactions involving executive officers and directors of the Company and
its subsidiaries and loans to affiliates of executive officers and directors for
the year ended December 31, 2002, are summarized below. Such loans were made in
the normal course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility.
(In thousands)
-------------------------------------------------------------------
Aggregate balance, January 1, 2002 $ 3,661
New loans 50
Payments (337)
-------------------------------------------------------------------
Aggregate balance, December 31, 2002 $ 3,374
===================================================================
A summary of the activity in the allowance for loan losses for 2002, 2001 and
2000 is as follows:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Balance, January 1 $ 4,906 $ 4,897 $ 4,282
Provision charged to expense 500 60 750
Loans charged off (152) (110) (183)
Recoveries of loans previously
charged off 39 59 48
-------------------------------------------------------------------------------------------
Net loan charge-offs (113) (51) (135)
-------------------------------------------------------------------------------------------
Balance, December 31 $ 5,293 $ 4,906 $ 4,897
===========================================================================================
A summary of impaired loans at December 31, 2002 and 2001, is as follows:
(In thousands) 2002 2001
------------------------------------------------------------------------------------------
Nonaccrual loans $ 51 $ 454
Impaired loans continuing to accrue interest 7,885 71
Renegotiated loans 4,252 --
------------------------------------------------------------------------------------------
Total impaired loans $ 12,188 $ 525
==========================================================================================
The impaired loans continuing to accrue interest of $7,885,000 includes
$4,891,000 of loans that are over 90 days or more past due and have paid-off
subsequent to year-end and also includes $2,994,000 of loans that are current
under the original terms of the loans, but current circumstances have raised
questions as to the ability of the borrowers to comply with the loan repayment
terms in the future.
The allowance for loan losses on impaired loans was $1,007,000 and $211,000 at
December 31, 2002 and 2001, respectively. Impaired loans with no related
allowance for loan losses totaled $11,181,000 and $314,000 at December 31, 2002
and 2001, respectively. The average balance of impaired loans during 2002 and
2001 was $7,773,000 and $1,206,000, respectively. Income that would have been
recognized on non-accrual and renegotiated loans under the original terms of the
contract was $346,000, $65,000 and $123,000 for 2002, 2001 and 2000,
respectively. Income that was recognized on total impaired loans was $972,000,
$9,000 and $106,000 for 2002, 2001 and 2000, respectively. Loans delinquent 90
days or more and still accruing interest at December 31, 2002 totaled
$4,891,000.
30
Note 5
Premises and Equipment
A summary of premises and equipment at December 31, 2002 and 2001, is as
follows:
(In thousands) 2002 2001
------------------------------------------------------------------------------------------
Land $ 873 $ 873
Buildings 10,288 10,222
Leasehold improvements 968 1,168
Furniture, fixtures and equipment 16,799 17,017
Purchased software 3,105 3,407
Internally developed software 4,130 3,924
------------------------------------------------------------------------------------------
36,163 36,611
Less accumulated depreciation and amortization 20,804 19,813
------------------------------------------------------------------------------------------
Total $ 15,359 $ 16,798
==========================================================================================
Depreciation charged to expense in 2002, 2001 and 2000 amounted to $3,638,000,
$3,085,000 and $2,275,000, respectively.
The Company and its subsidiaries lease various premises and equipment under
operating lease agreements which expire at various dates through 2007. The
following is a schedule, by year, of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2002:
(In thousands)
----------------------------------------------------------
2003 $ 252
2004 242
2005 209
2006 42
2007 7
----------------------------------------------------------
Total $ 752
==========================================================
Rental expense for 2002, 2001 and 2000 was $604,000, $761,000 and $1,161,000,
respectively.
Note 6
Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 2002 and
2001:
(In thousands) 2002 2001
--------------------------------------------------------------------------------------------
NOW and Money Market Demand Accounts $ 53,543 $ 57,908
Savings deposits 32,724 46,438
Time deposits:
Less than $100 5,611 4,576
$100 or more 42,288 21,705
--------------------------------------------------------------------------------------------
Total $ 134,166 $ 130,627
============================================================================================
Interest on deposits consist of the following for 2002, 2001 and 2000:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
NOW and Money Market Demand Accounts $ 632 $ 1,544 $ 1,961
Savings deposits 528 1,761 2,885
Time deposits:
Less than $100 178 195 190
$100 or more 902 363 129
-------------------------------------------------------------------------------------------
Total $ 2,240 $ 3,863 $ 5,165
===========================================================================================
31
The scheduled maturities of certificates of deposit at December 31, 2002 and
2001, are summarized as follows:
2002 2001
--------------------------------------------------
Percent Percent
(In thousands) Amount of Total Amount of Total
----------------------------------------------------------------------------------------------
Due within:
One year $ 42,678 89.1% $24,274 92.4%
Two years 3,066 6.4 1,027 3.9
Three years 920 1.9 325 1.2
Four years 10 -- 55 .2
Five years 1,225 2.6 -- --
Over five years -- -- 600 2.3
----------------------------------------------------------------------------------------------
Total $47,899 100.0% $26,281 100.0%
==============================================================================================
Note 7
Short-Term Borrowings
Company short-term borrowings consist mainly of federal funds purchased and tax
deposits of the United States Treasury. At December 31, 2002 the bank subsidiary
borrowed $37,438,000 in federal funds at a year-end weighted average rate of
1.56%. Of this amount, $17,438,000 were unsecured borrowings and $20,000,000
were borrowings from the Federal Home Loan Bank secured by commercial and
residential mortgage loans. Average borrowings for 2002 were $1,485,000 with an
average rate of 2.22%. The borrowings for the month ended December 31, 2002 was
the maximum amount that was outstanding at the end of any month during the year.
For the year ended December 31, 2001 short-term borrowing totaled $200,000 and
consisted of borrowing from the Treasury related to tax deposits received from
customers not yet drawn upon by the Treasury. These borrowings are secured by
U.S. Treasury and Agency securities. The average amount of all borrowings for
2001 was $362,000 at an average rate of 2.49% and the maximum amount outstanding
at the end of any month during the year was $1,000,000.
Note 8
Common Stock
On December 16, 2002 the Company paid a 5% stock dividend to shareholders of
record on December 5, 2002. Based on the number of common shares outstanding on
the record date, the Company issued 160,110 new shares. The fair market value of
the additional shares issued aggregated $3,700,000 and was charged to retained
earnings. In addition, common stock and additional paid-in capital were
increased by $80,000 and $3,618,000, respectively. All references in the
accompanying consolidated financial statements to per share amounts are based on
the increased number of shares giving retroactive effect to the stock dividend.
The following table reflects changes in outstanding common shares for the years
ended December 31, 2002 and 2001:
2002 2001
-----------------------------------------------------------------------
Balance at January 1 3,181,815 3,334,911
Repurchase of shares (15,664) (161,700)
Issuance of shares for stock bonus plan 900 600
Exercise of stock options, net 36,671 8,004
5% Stock dividend 160,110 --
-----------------------------------------------------------------------
Balance at December 31 3,363,832 3,181,815
=======================================================================
Note 9
Employee Benefits
The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. The Company accrues and makes contributions
designed to fund normal service costs on a current basis using the projected
unit credit with service proration method to amortize prior service costs
arising from improvements in pension benefits and qualifying service prior to
the establishment of the plan over a period of approximately 30 years.
The pension cost for 2002, 2001 and 2000 was $948,000, $700,000 and $386,000,
respectively, and included the following components:
32
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 952 $ 824 $ 747
Interest cost on projected benefit obligations 1,012 898 778
Expected return on plan assets (1,031) (960) (959)
Net amortization and deferral 15 (62) (180)
-------------------------------------------------------------------------------------------
Net periodic pension cost $ 948 $ 700 $ 386
===========================================================================================
A summary of the activity in the defined benefit pension plan's benefit
obligation, assets, funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 2002 and 2001, is as follows:
(In thousands) 2002 2001
-------------------------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 14,166 $11,931
Service cost 952 824
Interest cost 1,012 898
Actuarial loss 551 736
Benefits paid (220) (223)
-------------------------------------------------------------------------------------------
Balance, December 31 $ 16,461 $14,166
===========================================================================================
Plan assets:
Fair value, January 1 $ 12,640 $12,089
Actual return (524) 51
Employer contribution 901 723
Benefits paid (220) (223)
-------------------------------------------------------------------------------------------
Fair value, December 31 $ 12,797 $12,640
===========================================================================================
Funded status:
Unfunded projected benefits obligation $ (3,664) $(1,526)
Unrecognized prior service cost 103 12
Unrecognized net loss (gain) 1,463 (537)
-------------------------------------------------------------------------------------------
Accrued pension cost $ (2,098) $(2,051)
===========================================================================================
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.00% and 4.00% in 2002, 7.25% and 4.00% in
2001 and 7.50% and 4.00% in 2000. The expected long-term rate of return on
assets was 8.00% in 2002, 2001 and 2000.
In addition to the above funded benefit plan, the Company has an unfunded
supplemental executive retirement plan which covers key executives of the
Company. This is a noncontributory plan in which the Company's subsidiaries make
accruals designed to fund normal service costs on a current basis using the same
method and criteria as its defined benefit plan.
The pension cost for 2002, 2001 and 2000 for the supplemental executive
retirement plan was $177,000, $220,000 and $245,000 respectively, and included
the following components:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ (13) $ 11 $ 29
Interest cost on projected benefit obligations 124 120 131
Net amortization and deferral 66 89 85
-------------------------------------------------------------------------------------------
Net periodic pension cost $ 177 $ 220 $ 245
===========================================================================================
A summary of the activity in the supplemental executive retirement plan's
benefit obligation, funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 2002 and 2001, is as follows:
(In thousands) 2002 2001
-------------------------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 1,787 $ 1,798
Service cost (13) 11
Interest cost 124 120
Actuarial gain (20) (142)
-------------------------------------------------------------------------------------------
Balance, December 31 $ 1,878 $ 1,787
===========================================================================================
33
Funded status:
Unfunded projected benefits obligation $ (1,878) $(1,787)
Unrecognized prior service cost 454 587
Unrecognized actuarial loss 383 336
-------------------------------------------------------------------------------------------
Accrued pension cost (1,041) (864)
Minimum liability adjustment (379) (638)
-------------------------------------------------------------------------------------------
Accrued pension cost $ (1,420) $(1,502)
===========================================================================================
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.00% and 4.00% in 2002, 7.25% and 4.00% in
2001 and 7.50% and 4.00% in 2000.
The provisions of SFAS 87, "Employers' Accounting for Pensions", required the
Company to record an additional minimum liability of $379,000 and $638,000 at
December 31, 2002 and 2001, respectively. This liability represents the amount
by which the accumulated benefit obligation exceeds the sum of the fair value of
plan assets and accrued amounts previously recorded. The additional liability is
offset by an intangible asset to the extent of previously unrecognized prior
service cost. The intangible assets of $379,000 and $587,000 at December 31,
2002 and 2001, respectively, are included in other assets on the accompanying
consolidated balance sheets. The remaining amount at December 31, 2001 of
$51,000 is recorded, net of tax, as an accumulated other comprehensive loss.
The Company maintains a noncontributory profit sharing plan which covers
substantially all of its employees. Employer contributions are calculated based
upon formulas which relate to current operating results and other factors.
Profit sharing expense recognized in the consolidated statements of income in
2002, 2001 and 2000 was $1,632,000, $1,588,000 and $1,617,000, respectively.
The Company sponsors a defined contribution 401(k) plan to provide additional
retirement benefits to substantially all employees. Contributions under the
401(k) plan for 2002, 2001 and 2000 were $277,000, $260,000 and $247,000,
respectively.
Stock Option and Bonus Plans*
The Company maintains a restricted stock bonus plan which provides for the
issuance of up to 102,820 shares of common stock, the purpose of which is to
permit grants of shares, subject to restrictions, to key employees and
non-employee directors of the Company as a means of retaining and rewarding them
for long-term performance. During 2002, 2001 and 2000, 945 shares, 630 shares
and 1,260 shares, respectively, were granted at market prices of $23.33 in 2002,
$18.67 in 2001 and $19.05 in 2000. The fair value of such shares, which is based
on the market price on the date of grant, has been recorded in the consolidated
financial statements through the establishment of a contra shareholders' equity
account which is amortized to expense over the three-year vesting period.
Amortization of the restricted stock bonus awards totaled $22,000 for 2002,
$80,000 for 2001 and $81,000 for 2000. At December 31, 2002 the weighted-average
grant date fair value and weighted average contractual life for outstanding
shares of restricted stock was $21.23 and 2.3 years, respectively.
A summary of restricted stock bonus share activity follows:
2002 2001 2000
------------------------------------------------------------------------------------------
Awards available for grant beginning of year 60,165 60,795 62,055
Restricted shares awarded (945) (630) (1,260)
------------------------------------------------------------------------------------------
Awards available for grant end of year 59,220 60,165 60,795
==========================================================================================
The Company also maintains a performance-based stock option plan, which provides
for the granting of options to acquire up to 410,786 shares of Company common
stock. Options vest over a period not to exceed seven years.
34
The following table summarizes stock options outstanding as of December 31,
2002:
Weighted Average
Exercise Options Remaining
Price Outstanding Contractual Life
------------------------------------------------------------------
$ 9.80 31,681 2.00 years
19.34 6,300 2.43
21.85 3,675 3.00
21.86 6,300 6.00
23.40 2,100 3.00
23.99 59,167 3.00
24.18 8,925 2.08
Changes in options outstanding were as follows:
Weighted Average
Shares Exercise Price
------------------------------------------------------------------------------------------------
Balance at December 31, 1999 175,129 $16.51
Exercised (5,639) 9.80
------------------------------------------------------------------------------------------------
Balance at December 31, 2000 169,490 16.73
Exercised (10,924) 9.80
Forfeited (2,270) 19.65
------------------------------------------------------------------------------------------------
Balance at December 31, 2001 156,296 17.18
Granted 6,300 21.86
Exercised (40,773) 9.80
Forfeited (3,675) 23.99
------------------------------------------------------------------------------------------------
Balance at December 31, 2002 118,148 $19.76
================================================================================================
At December 31, 2002, 39,679 shares were exercisable with a weighted average
exercise price of $12.32.
The Company accounts for stock-based compensation under the stock option plan in
accordance with APB 25, "Accounting for Stock Issued to Employees", and
accordingly, recognizes no compensation expense as the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant. The Company elected not to adopt the recognition
provisions of the SFAS 123, "Accounting for Stock-Based Compensation", as
amended by SFAS 148. An entity that continues to apply APB 25 shall disclose
certain pro forma information as if the fair value-based accounting method in
SFAS 123 had been used to account for stock-based compensation costs. The
required disclosure provisions of SFAS 123, as amended by SFAS 148, are provided
in the table below. The Company uses the Black-Scholes option-pricing model to
determine the fair value of the stock options at the date of grant. The weighted
average assumptions for shares granted in 2002 were: an expected life of 7
years, dividend yield of 3.52%, expected volatility of 15% and risk-free
interest rate of 3.54%. There were no grants in 2000 and 2001. The following
table represents the effect on earnings and diluted earnings per share for the
periods ended December 31, 2002, 2001 and 2000:
(In thousands, except per share data) 2002 2001 2000
-------------------------------------------------------------------------------------------
Net income:
As reported $ 7,312 $ 7,025 $ 7,147
Add: Stock based compensation expense
included in reported net income, net of tax 15 53 53
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (60) (126) (126)
-------------------------------------------------------------------------------------------
Pro forma net income $ 7,267 $ 6,952 $ 7,074
-------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ 2.18 $ 2.07 $ 1.95
Basic, proforma 2.16 2.05 1.93
Diluted, as reported 2.16 2.05 1.93
Diluted, proforma 2.15 2.02 1.91
-------------------------------------------------------------------------------------------
*All share and per share amounts in this section have been adjusted to reflect
the 5% stock dividend issued in December 2002.
35
Note 10
Other Noninterest Expense
Details of other noninterest expense for 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Postage, printing and supplies $ 2,906 $ 2,662 $ 2,357
Advertising and business development 1,382 1,280 1,407
Professional fees 1,964 1,740 1,223
Outside service fees 1,175 1,006 810
Data processing services 231 416 499
Telecommunications 510 605 635
Other 1,192 1,062 1,020
-------------------------------------------------------------------------------------------
Total other noninterest expense $ 9,360 $ 8,771 $ 7,951
===========================================================================================
Note 11
Income Taxes
The components of income tax expense for 2002, 2001 and 2000 are as follows:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Current:
Federal $ 2,843 $ 2,571 $ 4,035
State 419 407 327
Deferred (315) 761 (501)
-------------------------------------------------------------------------------------------
Total income tax expense $ 2,987 $ 3,739 $ 3,861
===========================================================================================
A reconciliation of expected income tax expense, computed by applying the
effective federal statutory rate of 34% for 2002, 2001 and 2000 to income before
income tax expense, to reported income tax expense is as follows:
(In thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------
Expected income tax expense $ 3,502 $ 3,660 $ 3,743
(Reductions) increases resulting from:
Tax-exempt interest (800) (229) (150)
State taxes, net of federal benefit 277 269 216
Other, net 8 39 52
-------------------------------------------------------------------------------------------
Total income tax expense $ 2,987 $ 3,739 $ 3,861
===========================================================================================
The tax effects of temporary differences which give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001, are presented below:
(In thousands) 2002 2001
--------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,452 $ 1,124
Accrued pension cost 724 716
Other 459 444
--------------------------------------------------------------------------------------------
Total deferred tax assets 2,635 2,284
--------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on investment in debt
and equity securities available-for-sale (615) (286)
Discount accretion (19) (71)
Premises and equipment (724) (645)
Other (218) (209)
--------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,576) (1,211)
--------------------------------------------------------------------------------------------
Net deferred tax assets $ 1,059 $ 1,073
============================================================================================
A valuation allowance would be provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized. The
Company has not established a valuation allowance at December 31, 2002 or 2001,
due to management's belief that all criteria for recognition have been met,
including the existence of a history of taxes paid sufficient to support the
realization of deferred tax assets.
36
Note 12
Contingencies
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 13
Disclosures About Financial Instruments
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial letters
of credit and standby letters of credit. The Company's maximum potential
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, commercial letters of
credit and standby letters of credit is represented by the contractual amounts
of those instruments. At December 31, 2002, no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These off-balance
sheet financial instruments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The approximate remaining
term of commercial and standby letters of credit range from less than 1 to 5
years. Since some of the financial instruments may expire without being drawn
upon, the total amounts do not necessarily represent future cash requirements.
Commitments to extend credit and letters of credit are subject to the same
underwriting standards as those financial instruments included on the
consolidated balance sheets. The Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of the credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but is generally accounts
receivable, inventory, residential or income-producing commercial property or
equipment. In the event of nonperformance, the Company may obtain and liquidate
the collateral to recover amounts paid under its guarantees on these financial
instruments.
The following table shows conditional commitments to extend credit, standby
letters of credit and commercial letters at December 31, 2002 and 2001:
(In thousands) 2002 2001
------------------------------------------------------------------------------------------
Conditional commitments to extend credit $ 29,463 $ 28,644
Standby letters of credit 5,663 6,026
Commercial letters of credit 100 111
------------------------------------------------------------------------------------------
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2002 and 2001:
2002 2001
----------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------------------------------------------------------------------------------
Balance sheet assets:
Cash and cash equivalents $ 30,006 $ 30,006 $ 99,855 $ 99,855
Investment in debt and
equity securities 69,371 69,371 92,330 92,330
Loans, net 429,396 434,208 376,546 379,249
Accrued interest receivable 2,539 2,539 2,627 2,627
------------------------------------------------------------------------------------------------
Total $ 531,312 $ 536,124 $ 571,358 $ 574,061
================================================================================================
Balance sheet liabilities:
Deposits $ 243,518 $ 243,871 $ 247,978 $ 248,159
Accounts and drafts payable 223,621 223,621 291,794 291,794
Short-term borrowings 37,438 37,438 200 200
Accrued interest payable 91 91 88 88
------------------------------------------------------------------------------------------------
Total $ 504,668 $ 505,021 $ 540,060 $ 540,241
================================================================================================
37
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Other Short-term Instruments For cash and cash equivalents, accrued
interest receivable, accounts and drafts payable, short-term borrowings and
accrued interest payable, the carrying amount is a reasonable estimate of fair
value because of the demand nature or short maturities of these instruments.
Investment in Debt and Equity Securities Fair values are based on quoted market
prices or dealer quotes.
Loans The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits The fair value of demand deposits, savings deposits and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market nor the benefit derived from the customer relationship
inherent in existing deposits.
Commitments to Extend Credit and Standby Letters of Credit The fair value of
commitments to extend credit and standby letters of credit are estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the likelihood of the counterparties
drawing on such financial instruments and the present credit-worthiness of such
counterparties. The Company believes such commitments have been made at terms
which are competitive in the markets in which it operates; however, no premium
or discount is offered thereon and, accordingly, the Company has not assigned a
value to such instruments for purposes of this disclosure.
Limitations Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets or liabilities that are not
considered financial assets or liabilities include premises and equipment and
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market (core deposit
intangible). In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Note 14
Industry Segment Information
The services provided by the Company are classified into three reportable
segments: Transportation Information Services, Utility Information Services, and
Banking Services. Each of these segments offers distinct services that are
marketed through different channels. They are managed separately due to their
unique service, processing and capital requirements.
The Transportation Information Services unit provides freight invoice rating,
payment, auditing, cost accounting and transportation information services to
large corporate shippers. The Utility Information Services unit processes and
pays utility invoices, including electricity, gas, water, telephone and refuse,
for large corporate entities that have many locations or are heavy users of
energy. The Banking Services unit provides banking services primarily to
privately-held businesses and churches.
The Company's accounting policies for segments are the same as those described
in Note 1 of this report. Management evaluates segment performance based on net
income after allocations for corporate expenses and income taxes. Transactions
between segments are accounted for at what management believes to be market
value. The Company initiated the reporting of information relating to the
Utility Information Services unit in 2001 due to its growth and formalization of
its existence as an operating unit. Previous period information has been
restated, when practical, to reflect this addition.
38
All three segments market their services within the United States and no revenue
from any customer of any segment exceeds 10% of the Company's consolidated
revenue.
Summarized information about the Company's operations in each industry segment
for the periods ended December 31, 2002, 2001 and 2000, is as follows:
Transportation Utility Corporate
Information Information Banking and
(In thousands) Services Services Services Eliminations Total
==============================================================================================================
2002
Net interest income (expense) after
provision for loan losses:
Interest from customers $ 14,117 $ 3,127 $ 11,600 $ -- $ 28,844
Intersegment interest (87) (19) 106 -- --
Noninterest income:
Income from customers 19,275 6,920 1,835 -- 28,030
Intersegment income -- -- 1,511 (1,511) --
Depreciation and amortization 2,544 916 453 65 3,978
Income taxes 185 368 2,434 -- 2,987
Net income 2,130 1,090 4,092 -- 7,312
Total assets 240,611 52,817 315,294 (36,489) 572,233
- --------------------------------------------------------------------------------------------------------------
2001
Net interest income (expense) after provision
for loan losses:
Interest from customers $ 16,867 $ 3,271 $ 12,112 $ -- $ 32,250
Intersegment interest 127 24 (151) -- --
Noninterest income:
Income from customers 17,262 4,450 1,531 -- 23,243
Intersegment income -- -- 1,412 (1,412) --
Depreciation and amortization 2,300 516 425 35 3,276
Income taxes 1,319 25 2,419 (24) 3,739
Net income 2,945 34 4,095 (49) 7,025
Total assets 262,707 58,844 288,887 (8,061) 602,377
- --------------------------------------------------------------------------------------------------------------
2000
Net interest income (expense) after provision
for loan losses:
Interest from customers $ 18,498 $ 1,694 $ 10,938 $ -- $ 31,130
Intersegment interest 224 22 (246) -- --
Noninterest income:
Income from customers 17,500 2,228 1,386 -- 21,114
Intersegment income -- -- 1,131 (1,131) --
Depreciation and amortization 2,033 61 444 33 2,571
Income taxes 2,292 (273) 1,891 (49) 3,861
Net income 4,572 (572) 3,246 (99) 7,147
Total assets 309,698 28,400 238,782 6 576,886
- --------------------------------------------------------------------------------------------------------------
Note 15
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter YTD
==================================================================================================================
2002
Interest income $ 7,919 $ 8,199 $ 7,863 $ 7,636 $ 31,617
Interest expense 551 585 579 558 2,273
- ------------------------------------------------------------------------------------------------------------------
Net interest income 7,368 7,614 7,284 7,078 29,344
Provision for loan losses 90 180 90 140 500
Noninterest income 6,004 7,502 6,756 7,768 28,030
Noninterest expense 11,324 11,713 11,493 12,045 46,575
Income tax expense 612 992 683 700 2,987
39
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter YTD
==================================================================================================================
2002 cont'd
Net income $ 1,346 $ 2,231 $ 1,774 $ 1,961 $ 7,312
Net income per share:
Basic earnings per share* $. 40 $ .67 $ .53 $ .58 $ 2.18
Diluted earnings per share* .40 .66 .52 .58 2.16
==================================================================================================================
2001
Interest income $ 9,448 $ 9,051 $ 9,030 $ 8,653 $ 36,182
Interest expense 1,446 952 825 649 3,872
- ------------------------------------------------------------------------------------------------------------------
Net interest income 8,002 8,099 8,205 8,004 32,310
Provision for loan losses -- -- 60 -- 60
Noninterest income 5,740 5,655 5,886 5,962 23,243
Noninterest expense 11,088 11,037 11,100 11,504 44,729
Income tax expense 904 942 1,035 858 3,739
Net income $ 1,750 $ 1,775 $ 1,896 $ 1,604 $ 7,025
Net income per share:
Basic earnings per share* $ .50 $ .52 $ .57 $ .48 $ 2.07
Diluted earnings per share* .50 .52 .56 .47 2.05
==================================================================================================================
*Basic and diluted earnings per share have been adjusted to reflect the 5% stock
dividend issued in 2002.
Note 16
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only)
as of December 31, 2002 and 2001, and the related condensed statements of income
and cash flows for each of the years in the three-year period ended December 31,
2002.
Condensed Balance Sheets
December 31
---------------------------
(In thousands) 2002 2001
--------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 2,599 $ 6,773
Short-term investments -- 37,889
Investment in debt and equity securities,
available-for-sale 54,854 77,651
Loans, net 205,240 178,347
Investment in Cass Commercial Bank 29,910 27,792
Premises and equipment, net 14,354 15,650
Other assets 17,538 7,501
--------------------------------------------------------------------------------------------
Total assets $ 324,495 $ 351,603
============================================================================================
Liabilities and Shareholders' Equity:
Accounts and drafts payable $ 223,621 $ 291,794
Borrowings from Cass Commercial Bank 35,861 --
Other liabilities 3,967 4,289
--------------------------------------------------------------------------------------------
Total liabilities 263,449 296,083
Total shareholders' equity 61,046 55,520
--------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 324,495 $ 351,603
============================================================================================
40
Condensed Statements of Income
December 31
----------------------------------------
(In thousands) 2002 2001 2000
---------------------------------------------------------------------------------------------
Income from Cass Commercial Bank:
Dividends $ 2,100 $ -- $ 5,497
Interest 41 253 364
Management fees 776 827 692
---------------------------------------------------------------------------------------------
Income from subsidiary 2,917 1,080 6,553
Information services revenue 24,622 21,490 19,424
Net interest income after provision 16,119 19,055 19,242
Gains on sales of investment securities 1,313 -- --
Other income 259 222 304
---------------------------------------------------------------------------------------------
Total income 45,230 41,847 45,523
---------------------------------------------------------------------------------------------
Expenses:
Salaries and employee benefits 26,884 26,080 24,272
Other expenses 12,474 11,517 9,883
---------------------------------------------------------------------------------------------
Total expenses 39,358 37,597 34,155
---------------------------------------------------------------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 5,872 4,250 11,368
Income tax expense 552 1,320 1,970
---------------------------------------------------------------------------------------------
Income before undistributed income
of subsidiary 5,320 2,930 9,398
Equity in undistributed income (loss) of subsidiary 1,992 4,095 (2,251)
---------------------------------------------------------------------------------------------
Net income $ 7,312 $ 7,025 $ 7,147
=============================================================================================
Condensed Statements of Cash Flows
December 31
-----------------------------------------
(In thousands) 2002 2001 2000
---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,312 $ 7,025 $ 7,147
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed (income) loss
of subsidiary (1,992) (4,095) 2,251
Net change in other assets 3,249 3,452 2,250
Net change in other liabilities (322) (2,234) 2,112
Amortization of stock bonus awards 22 80 81
Other, net 709 375 538
---------------------------------------------------------------------------------------------
Net cash provided by
operating activities 8,978 4,603 14,379
---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease (increase) in securities 22,797 (25,603) 16,738
Net (increase) decrease in loans (26,893) 7,629 (67,717)
Purchase of bank owned life insurance (10,000) -- --
Purchases of premises and equipment, net (1,990) (5,625) (6,785)
---------------------------------------------------------------------------------------------
Net cash used in investing activities (16,086) (23,599) (57,764)
---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in accounts
and drafts payable (68,173) (11,046) 52,946
Advances from Cass Commercial Bank 35,861 -- --
Cash dividends paid (2,628) (2,579) (2,784)
Purchase of common shares for treasury (383) (3,279) (7,828)
Other financing activities 368 60 56
---------------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (34,955) (16,844) 42,390
---------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (42,063) (35,840) (995)
Cash and cash equivalents at beginning of year 44,662 80,502 81,497
---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,599 $ 44,662 $ 80,502
=============================================================================================
41
Independent Auditors' Report
The Board of Directors and Shareholders of Cass Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cass
Information Systems, Inc. and subsidiaries (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of income, cash flows, and
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cass
Information Systems, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
January 23, 2003
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
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 2003 Annual Meeting of Shareholders, a copy of which will be filed with
the Securities and Exchange Commission (SEC) 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 2003 Annual
Meeting of Shareholders, a copy of which will be filed with the SEC no 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 2003 Annual Meeting of Shareholders, a copy of which
will be filed with the SEC no 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 2003
Annual Meeting of Shareholders, a copy of which will be filed with the SEC no
later than 120 days after the close of the fiscal year.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that the
information it is required to disclose in the reports it files with the SEC is
recorded, processed, summarized and reported to management, including the Chief
Executive Officer and Chief Financial Officer within the time periods specified
in the rules of the SEC. The Company's Chief Executive and Chief Financial
Officers have reviewed and evaluated these controls within 90 days of the filing
of this report and based on their evaluation believe that these procedures are
effective to ensure that the Company is able to collect, process and disclose
the information it is required to disclose in the reports it files with the SEC
within the required time periods.
Since the date of the most recent evaluation of the Company's internal controls
by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
43
PART IV.
ITEM 15. 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) and (2) Financial Statements and Financial Statement
Schedules
Submitted as a separate section of this report.
(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 Bylaws 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
21 Subsidiaries of registrant
23 Consent of KPMG LLP
99.1 Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Exhibit 99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 2002.
44
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 INFORMATION SYSTEMS, INC.
Date: March 10, 2003 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
Date: March 10, 2003 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 10, 2003 By /s/ Robert J. Bodine
----------------------------------------
Robert J. Bodine
Date: March 10, 2003 By /s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Date: March 10, 2003 By /s/ Bryan S. Chapell
----------------------------------------
Bryan S. Chapell
Date: March 10, 2003 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Date: March 10, 2003 By /s/ Thomas J. Fucoloro
----------------------------------------
Thomas J. Fucoloro
Date: March 10, 2003 By /s/ Harry J. Krieg
----------------------------------------
Harry J. Krieg
Date: March 10, 2003 By /s/ Howard A. Kuehner
----------------------------------------
Howard A. Kuehner
Date: March 10, 2003 By /s/ Jake Nania
----------------------------------------
Jake Nania
Date: March 10, 2003 By /s/ Irving A. Shepard
----------------------------------------
Irving A. Shepard
Date: March 10, 2003 By /s/ A. J. Signorelli
----------------------------------------
A. J. Signorelli
Date: March 10, 2003 By /s/ Bruce E. Woodruff
----------------------------------------
Bruce E. Woodruff
45
CERTIFICATIONS
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cass Information
Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Lawrence A. Collett
- ------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
March 10, 2003
46
I, Eric H. Brunngraber, Chief Financial and Accounting Officer of Cass
Information Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cass Information
Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Eric H. Brunngraber
- ----------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
March 10, 2003
47