12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
www.cassinfo.com
20 16 AN NUAL REP ORT A ND 1 0 - K
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321738_Cass_10K_Wrap_Cover_Final.indd 1
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www.cassinfo.com
Cass Information Systems, Inc. (NASDAQ: CASS) is a leading
provider of integrated information and payment management
solutions. Cass enables enterprises to achieve visibility, control
and efficiency in their supply chains, communications networks,
facilities and other operations.
Disbursing nearly $44 billion annually on behalf of its clients, and with total assets of
$1.5 billion, Cass is uniquely supported by Cass Commercial Bank. Founded in 1906
and a wholly owned subsidiary, Cass Bank provides sophisticated financial exchange
Benjamin F. Edwards & Company
Franklin D. Wicks, Jr., Ph. D.
services to the parent organization and its clients. Cass is part of the Russell 2000®.
Officer, Cass Information
Emerson
Systems, Inc.
CORPORATE HEADQUARTERS
INVESTOR RELATIONS
TRANSFER AGENT
Cass Information Systems, Inc.
Security analysts, investment managers
Shareholder correspondence should
12444 Powerscourt Drive, Suite 550
and others seeking financial information
be mailed to:
Saint Louis, Missouri 63131
about the Company should contact:
Shareholder Information
314-506-5500
cass@cassinfo.com
www.cassinfo.com
COMMON STOCK
The company’s common stock trades
on the NASDAQ stock market under
the symbol CASS.
ANNUAL MEETING
The annual meeting of shareholders
will be held April 25, 2017 at 8:30 a.m.
at the Cass office at 13001 Hollenberg
Drive, Bridgeton, Missouri 63044.
Board of Directors
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
Ralph W. Clermont
Retired Managing Partner,
KPMG LLP, St. Louis, MO
Lawrence A. Collett
Lead Director, and Retired
Chairman and Chief Executive
Executive Officers
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
P. Stephen Appelbaum
Executive Vice President
and Chief Financial Officer
Investor Relations Department
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
INDEPENDENT AUDITORS
KPMG LLP
Computershare
P.O. Box 30170
College Station, Texas 77842-3170
Overnight correspondence should
be mailed to:
Computershare
211 Quality Circle, Suite 210
College Station, Texas 77845
10 South Broadway, Suite 900
SHAREHOLDER WEBSITE:
Saint Louis, Missouri 63102
www.computershare.com/investor
SHAREHOLDER ONLINE INQUIRIES:
https://www-us.computershare.com/
investor/Contact
TOLL-FREE PHONE:
866-323-8170
Benjamin F. (Tad) Edwards, IV
President and Chief Executive
Robert A. Ebel
Chief Executive Officer,
Universal Printing Company
Chairman, Chief Executive
Officer and President,
James J. Lindemann
Executive Vice President,
Joseph D. Rupp
Chairman, Olin Corporation
Randall L. Schilling
Officer, BoardPaq LLC
Retired Executive Vice President
and President, Applied Markets,
Sigma-Aldrich
Mark A. Campbell
President, Transportation
Information Services
Gary B. Langfitt
President, Expense
Management Services
Robert J. Mathias
President and Chief Operating
Officer, Cass Commercial Bank
321738_Cass_10K_Wrap_Cover_Final.indd 2
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2016 Year in Review
FOR THE YEAR ENDED DECEMBER 31
2016
2015
% CHANGE
Total Net Revenue
Net Income
Basic Earnings per Common Share
Diluted Earnings per Common Share
Dividends Paid per Common Share
$125,537,000
$120,817,000
$24,348,000
$23,056,000
$2.18
$2.15
$0.89
$2.03
$2.00
$0.85
Total Number of Transactions Processed
57,897,000
54,521,000
3.91%
5.60%
7.39%
7.50%
4.71%
6.19%
Total Dollar Volume
$34,689,268,000
$36,264,188,000
-4.34%
Return on Average Total Shareholders’ Equity
Return on Average Assets
11.76%
1.62%
11.65%
1.60%
AS OF DECEMBER 31
Total Assets
Total Shareholders’ Equity
Book Value per Common Share
2016
2015
% CHANGE
$1,504,839,000
$1,455,506,000
$208,035,000
$207,378,000
$18.59
$18.30
3.39%
0.32%
1.58%
TOTAL TRANSACTIONS
TOTAL DOLLAR VOLUME
in millions
in billions of dollars
TOTAL NET REVENUES
in millions of dollars
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2
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2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
DILUTED EARNINGS PER
COMMON SHARE
in dollars
NET INCOME
in millions of dollars
BOOK VALUE PER SHARE
in dollars
2
0
2
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2
0
2
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6
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2012
2013
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2015
2016
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2015
2016
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2016
Dear Fellow Shareholders,
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
I’m pleased to report that 2016
generated by Cass Commercial
was a very successful year for our
Bank, was $39.4 million in 2016,
company. During the course of the
which represents a 5% increase
year, we were able to overcome
from the prior year. These results
significant external challenges
were particularly gratifying given
to post record total revenues of
the $1.8 billion decrease in available
$125.5 million, which were up 4%
transportation dollar volume and
from last year, and earnings of
declines in market investment rates.
$24.3 million, up 6%. Earnings per
Rates started their decline at the
share were $2.15, up 8%. Although
beginning of the year, reached
dollars processed and transaction
record lows after the “Brexit”
growth were muted by a significant
referendum, and only increased
decline in market activity from
after the November elections.
transportation clients, growth in new
accounts and the expansion of our
services led to record fee revenue
of $83.7 million, which was a 6%
increase over 2015.
Record-Setting
Year, Despite Low
Freight Volumes
Net investment income, which is
derived from our payment activities
combined with the balances
Total expenses for 2016 were
$93.5 million, a 4% increase over
2015. Although much of this increase
relates to the growth of our business,
a significant portion represents
a strategic investment in people,
technology and infrastructure
necessary to expand our information
and payment processing activities
into new markets.
The Cass Portfolio of Solutions
TR ANSPORTATION
ENERGY
TELECOM
Freight Audit
& Payment
Utility Bill
Payment
Communications
Lifecycle Management
Cass offers invoice management
We process and pay our customers’
We manage our clients’ telecom
for freight and parcel bills, supplier
invoices for electricity, gas, water
investments – from source to pay
payment management and general
and other facility-related expenses.
– for both mobile and fixed telecom
ledger account reconciliation,
Through advanced invoice
assets and services. Cass also
providing full visibliity via CassPort®,
management methods, we capture
manages “bring your own device”
the industry’s leading web-based
large amounts of data and develop
programs that allow our clients’
intelligence engine.
an energy data warehouse for each
employees to use their own personal
ExpenseSmart™ client.
devices for work purposes.
321738_Cass_10K_Wrap_Narrative_Final.indd 2
2/25/17 12:15 AM
generated by Cass Commercial
Bank, was $39.4 million in 2016,
which represents a 5% increase
from the prior year. These results
were particularly gratifying given
the $1.8 billion decrease in available
transportation dollar volume and
declines in market investment rates.
Rates started their decline at the
beginning of the year, reached
record lows after the “Brexit”
referendum, and only increased
after the November elections.
Total expenses for 2016 were
$93.5 million, a 4% increase over
2015. Although much of this increase
relates to the growth of our business,
a significant portion represents
a strategic investment in people,
technology and infrastructure
necessary to expand our information
and payment processing activities
into new markets.
Communications
Lifecycle Management
We manage our clients’ telecom
investments – from source to pay
– for both mobile and fixed telecom
assets and services. Cass also
manages “bring your own device”
programs that allow our clients’
employees to use their own personal
devices for work purposes.
Cass remains very profitable, posting
year from $.85 to $.89 per share.
a 1.6% return on average assets
In addition to the $10.0 million
and an 11.8% return on average
paid in dividends, we also returned
equity. These results are extremely
$9.2 million to our shareholders
impressive considering the rate
in the form of stock repurchases.
environment and our strong liquidity
and capital positions. For example,
our year-end tier 1 capital-to-assets
ratio was 13.8%, which greatly
exceeds all regulatory requirements.
I am very optimistic about our
future, but recognize that these
are challenging times for all
businesses. Rapid technological
change, cybersecurity risks, volatile
Cash Dividend Increased
markets, changing governmental
Acknowledgements
I also wish to thank you, our
shareholders, for your continued
support and belief in the success
of Cass. I am grateful for each of the
members of our board for their trust,
continued support and counsel. And
as always, I express my ultimate
gratitude for God’s blessings as
well as His inspiration and guidance
as we embrace the challenges
and opportunities of 2017.
Our strong financial position, combined
with the significant amount of cash
generated from our operations,
allows us to invest in strategic
opportunities when they become
available and return capital to
our shareholders. We once again
increased our cash dividend, this
policies and shifting customer
expectations mean that we have
to be both agile and committed
to our long-term vision and values.
Fortunately, we have the staff that
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
can rise and thrive in this environment.
Cass Information Systems, Inc.
I am thankful for all their hard
work and their professionalism,
resourcefulness and experience.
TELECOM
ENVIRONMENTAL
BANKING
B2B PAYMENTS
Waste Expense
Management
Commercial
Banking
Supplier Payment
Optimization
Cass drives durable expense
Cass Commercial Bank focuses
Companies rely on Cass as
reduction and improves sustainability
on three primary target segments:
their behind-the-scenes payment
practices for clients by leveraging
St. Louis-area businesses, faith-
management provider. Cass is
its waste expertise, powerful
based organizations and restaurant
able to move funds securely,
WasteVision™ technology platform
franchise owners. A Federal Reserve
consolidate payments and reduce
and aggregate buying power.
member bank, Cass provides safety,
cost and complexity.
security and control in moving
funds through the Cass electronic
payments network.
321738_Cass_10K_Wrap_Narrative_Final.indd 3
2/25/17 12:15 AM
10-K
CA SS INF ORM ATI ON SY STE M S
www.cassinfo.com
321738_Cass_10K_Wrap_Narrative_Final.indd 4
2/25/17 12:15 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 000-20827
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri
43-1265338
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
12444 Powerscourt Drive, Suite 550, St. Louis, Missouri 63131
(Address of principal executive offices)
(Zip Code)
(Telephone Number, incl. area code)
(314) 506-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, par value $.50
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
None
Name of each exchange on which registered
The Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. Large accelerated filer: Accelerated filer:
Non-accelerated filer: Smaller reporting company:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately
$548,000,000 based on the closing price of the common stock of $51.70 on June 30, 2016, as reported by The Nasdaq
Global Select Market. As of March 1, 2016, the Registrant had 11,197,226 shares outstanding of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the Registrant’s Proxy Statement
for the 2017 Annual Meeting of Shareholders.
CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Item 1.
BUSINESS
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
PROPERTIES
Item 3.
LEGAL PROCEEDINGS
Item 4. MINE SAFETY DISCLOSURES
PART II.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
1
7
12
12
13
13
14
16
16
30
32
61
61
63
64
64
64
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Forward-looking Statements - Factors That May Affect Future Results
65
65
66
68
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. Although we believe that, in making any such statements, our expectations are based on
reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks,
uncertainties, and other factors beyond our control, which may cause future performance to be materially different from
expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are
discussed in the section Part I, Item 1A, “Risk Factors.” 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.
ITEM 1. BUSINESS
Description of Business
PART I.
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
transportation invoice rating, payment processing, auditing, accounting and transportation information to many of the nation’s
largest companies. It is also a processor and payer of energy invoices, including electricity, gas, waste, and other facility related
expenses. Additionally, Cass competes in the telecommunications expense management market which includes bill processing,
audit and payment services for telephone, data line, wireless and communication equipment expense. The Company, through
its wholly owned bank subsidiary, Cass Commercial Bank (the “Bank”), also provides commercial banking services. The
Bank’s primary focus is to support the Company’s payment operations and provide banking services to its target markets,
which include privately-owned businesses and churches and church-related ministries. Services include commercial and
commercial real estate loans, checking, savings and time deposit accounts and other cash management services.
Company Strategy and Core Competencies
Cass is an information services company with a primary focus on processing payables and payables-related transactions for
large corporations located in the United States. Cass possesses four core competencies that encompass most of its processing
services.
Data acquisition – This refers to the gathering of data elements from diverse, heterogeneous sources and the building of
complete databases for our customers. Data is the raw material of the information economy. Cass gathers vital data from
complex and diverse input documents, electronic media, proprietary databases and data feeds, including data acquired from
vendor invoices as well as customer procurement and sales systems. Through its numerous methods of obtaining streams and
pieces of raw data, Cass is able to assemble vital data into centralized data management systems and warehouses, thus producing
an engine to create the power of information for managing critical corporate functions and processing systems.
Data management – Once data is assembled, Cass is able to utilize the power from derived information to produce significant
savings and benefits for its clients. This information is integrated into customers’ unique financial and accounting systems,
eliminating the need for internal accounting processing and providing internal and external support for these critical systems.
Information is also used to produce management and exception reporting for operational control, feedback, planning assistance
and performance measurement.
Business Intelligence – Receiving information in the right place at the right time and in the required format is paramount for
business survival. Cass’ information delivery solutions provide reports, digital images, data files and retrieval capabilities
through the Internet or directly into customer internal systems. Cass’ proprietary Internet management delivery system is the
foundation for driving these critical functions. Transaction, operational, control, status and processing exception information
are all delivered through this system creating an efficient, accessible and highly reliable asset for Cass customers.
Financial exchange – Since Cass is unique among its competition in that it owns a commercial bank, it is also able to manage
the movement of funds from its customers to their suppliers. This is a distinguishing factor, which clearly requires the
processing capability, operating systems and financial integrity of a banking organization. Cass provides immediate, accurate,
controlled and protected funds management and transfer system capabilities for all of its customers. Old and costly check
processing and delivery mechanisms are replaced with more efficient electronic cash management and funds transfer systems.
Cass’ core competencies allow it to perform the highest volumes of transaction processing in an integrated, efficient and
systematic approach. Not only is Cass able to process the transaction, it is also able to collect the data defining the transaction
and effect the financial payment governing its terms.
These core competencies, enhanced through shared business processes, drive Cass’ strategic business units. Building upon
these foundations, Cass continues to explore new business opportunities that leverage these competencies and processes.
Marketing, Customers and Competition
The Company, through its Transportation Information Services business unit, is one of the largest firms in the transportation
bill processing and payment industry in the United States based on the total dollars of transportation bills paid and items
processed. Competition consists of a few primary competitors and numerous small transportation bill audit firms located
throughout the United States. While offering transportation payment services, few of these audit firms compete on a national
basis. These competitors compete mainly on price, functionality and service levels. The Company, through its Expense
Management business unit, also competes with other companies, located throughout the United States, that pay energy and
waste bills and provide management reporting. Available data indicates that the Company is one of the largest providers of
1
energy information processing and payment services. Cass is unique among these competitors in that it is not exclusively
affiliated with any one energy service provider (“ESP”). The ESPs market the Company’s services adding value with their
unique auditing, consulting and technological capabilities. Many of Cass’ services are customized for the ESPs, providing a
full-featured solution without any development costs to the ESP. Also the Company, through its Telecom Information Services
business unit, is a leader in the growing telecom expense management market, and competes with other companies located
throughout the United States in this market.
The Bank is organized as a Missouri trust company with banking powers and was founded in 1906. The Company is classified
as a bank holding corporation due to its ownership of a federally-insured commercial bank and was originally organized in
1982 as Cass Commercial Corporation under the laws of Missouri. Approval by the Board of Governors of the Federal Reserve
System was received in February 1983. The Company changed its name to Cass Information Systems, Inc. in January 2001.
In December 2011, the Federal Reserve Bank (“FRB”) of St. Louis approved the election of Cass Information Systems, Inc. to
become a financial holding company. As a financial holding company, Cass may engage in activities that are financial in
nature or incidental to a financial activity. The Bank encounters competition from numerous banks and financial institutions
located throughout the St. Louis, Missouri metropolitan area and other areas in which the Bank competes. The Bank’s principal
competitors, however, are large bank holding companies that are able to offer a wide range of banking and related services
through extensive branch networks. The Bank targets its services to privately held businesses located in the St. Louis, Missouri
area and church and church-related institutions located in St. Louis, Missouri, Orange County, California, Colorado Springs,
Colorado, and other selected cities located throughout the United States.
The Company holds several trademarks for the payment and rating services it provides. These include: FreightPay,
Transdata, Ratemaker, Best Rate, Rate Exchange, CassPort, Expense$mart, WasteVision™ and Direct2Carrier
Payments™. The Company and its subsidiaries are not dependent on any one customer for a significant portion of their
businesses. The Company and its subsidiaries have a varied client base with no individual client exceeding 10% of total
revenue.
Employees
The Company and its subsidiaries had 790 full-time and 285 part-time employees as of March 3, 2017. Of these employees,
the Bank had 52 full-time and no 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 primarily 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 financial holding
company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and as such, it is
subject to regulation, supervision and examination by the FRB. Significant elements of the laws and regulations applicable to
the Company and the Bank are described below. The description is qualified in its entirety by reference to the full text of the
statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review
by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to the Company and its subsidiaries could have a material effect on the business, financial condition and
results of operations of the Company.
Bank Holding Company Activities – In general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other related activities. In addition, bank holding companies that qualify and elect to be
financial holding companies such as the Company, may engage in any activity, or acquire and retain the shares of a company
engaged in any activity, that is either (i) financial in nature or incidental to such financial activity complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system
generally. Such permitted activities include securities underwriting and dealing, insurance underwriting and making merchant
banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries
must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it
satisfies the requirements for this status discussed in the section “Prompt Corrective Action” below. A depository institution
subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in
its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well
capitalized” and “well managed’ under applicable FRB regulations. If a financial holding company ceases to meet these capital
and management requirements, the FRB may impose limitations or conditions on the conduct of its activities during the non-
compliance period, and the company may not commence any of the broader financial activities permissible for financial holding
companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does
not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.
2
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company
engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory” in its most recent examination under the Community
Reinvestment Act. See “Community Reinvestment Act” below.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies.
The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by the Company of more than 5% of
the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior
approval of the FRB or other appropriate bank regulatory authority is required for the Bank to merge with another bank or
purchase the assets or assume the deposits of another bank. In reviewing acquisition applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position
of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance
record under the Community Reinvestment Act and fair housing laws.
The Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in
July 2010, significantly restructured the financial regulatory environment in the United States, affecting all bank holding
companies and banks, including the Company and the Bank, some of which are described in more detail below. The scope and
impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become
effective. As a result, the Company cannot predict the ultimate impact of the Dodd-Frank Act on the Company or the Bank at
this time, including the extent to which it could increase costs or restrict the ability to pursue business opportunities, or
otherwise adversely affect the Company’s business, financial condition and results of operations. However, at a minimum, the
Company expects that the regulations enacted under the Dodd-Frank Act will increase operating and compliance costs.
Dividends –Both the Company and the Bank are subject to various regulations that restrict their ability to pay dividends and
the amount of dividends that they may pay. Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would cause it to become
undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain adequate capital and, under certain circumstances, the
ability of federal regulators to prohibit dividend payments as an unsound or unsafe practice.
Capital Requirements – As a bank holding company, the Company and the Bank are subject to capital requirements pursuant
to the FRB’s capital guidelines which include (i) risk-based capital guidelines, which are designed to make capital requirements
more sensitive to various risk profiles and account for off-balance sheet exposure; (ii) guidelines that 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 (iii) guidelines that
use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may
leverage its equity capital base.
Effective July 2, 2013, the FRB approved final rules known as the “Basel III Capital Rules” that substantially revised the risk-
based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including
the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital framework agreed upon by
the Basel Committee and incorporate changes required by the Dodd-Frank Act. The Basel III Capital Rules came into effect
for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
The Basel III Capital Rules require FDIC insured depository institutions to meet and maintain several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%,
a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is
generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain
noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in
Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions like
Cass, that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”),
up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The
calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
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In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including
certain off-balance sheet assets are multiplied by a risk weight factor assigned by the regulations based on the risks believed
inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For
example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to
prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and
consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is
assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions
and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum
risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at
0.625% of risk-weighted assets and increasing by that amount each subsequent January 1 until fully implemented at 2.5% on
January 1, 2019.
The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the particular risks or circumstances. As of December 31,
2016, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.
Source of Strength Doctrine – FRB and other regulations require bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. Under this requirement, the Company is expected to commit resources to support
the Bank. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to
depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to priority of payment.
Deposit Insurance – Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance
Fund (“DIF”) of the FDIC, and the Bank is subject to deposit insurance assessments to maintain the DIF. Deposit insurance
assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC’s risk-based
assessment system, insured institutions with less than $10 billion in assets, such as the Bank, are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions
paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other
factors.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September
30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for
the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.
FDIC insurance expense totaled approximately $309,700, $349,200 and $332,600 for the years ended December 31, 2016,
2015 and 2014, respectively.
The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC.
Prompt Corrective Action – The Basel III Capital Rules incorporate new requirements into the prompt correction action
framework, described above. The Federal Deposit Insurance Act (“FDIA”) requires that federal banking agencies take “prompt
corrective action” against depository institutions that do not meet minimum capital requirements and includes the following
five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various
relevant capital measures and certain other factors, as established by regulation.
A depository institution is deemed to be (i) “well-capitalized” if the institution has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 8% or greater, a leverage ratio of 5% or greater, a common equity Tier 1 ratio of
6.5% or greater and is not subject to any regulatory order agreement or written directive to meet and maintain a specific capital
level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8% or greater,
a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 4% or greater, a common equity Tier 1 ratio of 4.5% or
greater and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a leverage ratio of less than 4% or a common
equity Tier 1 ratio of less than 4.5%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of
less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a leverage ratio of less than 3% or a common equity Tier 1 ratio
of less than 3%; and (v) “critically undercapitalized” if the institution has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2%. An institution may be deemed to be in a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory
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examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying
prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall
financial condition or prospects for other purposes.
Subject to a narrow exception, a receiver or conservator is required to be appointed for an institution that is “critically
undercapitalized” within specified time frames. The regulations also provide that a capital restoration plan must be filed with
the FRB within 45 days of the date an institution is deemed to have received notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding
company up to the lesser of 5% of the institution’s total assets when it was deemed to be undercapitalized or the amount
necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by
regulators and restrictions on growth, capital distributions and expansion. The FRB could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers
and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary
measures.
As of December 31, 2016, the most recent notification from the regulatory agencies categorized the Company and the Bank as
well-capitalized. For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see Item
8, Note 2 of this report.
Safety and Soundness Regulations – In accordance with the FDIA, the federal banking agencies adopted guidelines establishing
general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the
guidelines require that institutions maintain appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies
authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and
may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt
corrective action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties.
Loans-to-One-Borrower – The Bank generally may not make loans or extend credit to a single or related group of borrowers
in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December
31, 2016, the Bank was in compliance with the loans-to-one-borrower limitations.
Depositor Preference – The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and
certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims
against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will
have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only
outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to
such insured depository institution.
Community Reinvestment Act – The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist
in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each
depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to
low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence
any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC
Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least
“satisfactory” in its most recent examination under the CRA. The Bank received a rating of “satisfactory” in its most recent
CRA exam.
Financial Privacy – Banks and other financial institutions are subject to regulations that limit their ability to disclose non-
public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to
consumers and affect how consumer information is transmitted through diversified financial companies and conveyed to
outside vendors.
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The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information and maintaining
information security programs. The standards set forth in the guidelines are intended to ensure the security and confidentiality
of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such
records and protect against unauthorized access to or use of such records or information that could result in substantial harm
or inconvenience to any customer.
Transactions with Affiliates – Transactions between the Bank and its affiliates are subject to regulations that limit the types and
amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’s-length
basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes
the Company and its non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase
of securities issued by an affiliate, certain purchases of assets from the affiliate, certain derivative transactions that create a
credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that any such transaction
by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be
limited to certain thresholds on an individual and aggregate basis.
Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well
as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms
that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing
for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than
the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s
capital.
Federal Reserve System – FRB regulations require depository institutions to maintain cash reserves against their transaction
accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction
accounts between $15.2 million and $110.2 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to
adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $110.2 million.
The first $15.2 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve
requirements. The Bank is in compliance with the foregoing requirements.
Other Regulations – The operations of the Company and the Bank are also subject to:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and
the use of consumer information;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies;
Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and
customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services.
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family
residential real estate receive various disclosures, including good faith estimates of settlement costs, lender
servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement
services;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such
as digital check images and copies made from that image, the same legal standing as the original paper check;
and
The USA PATRIOT Act, which requires banks and savings institutions to establish broadened anti-money
laundering compliance programs and due diligence policies and controls to ensure the detection and reporting
of money laundering.
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The Bank Secrecy Act, which requires U.S. financial institutions to collaborate with the U.S. government in
cases of suspected money laundering and fraud.
Website Availability of SEC Reports
Cass files annual, quarterly and current reports with the Securities and Exchange Commission (the “SEC”). Cass will, as soon
as reasonably practicable after they are electronically filed with or furnished to the SEC, 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 on Form 8-K, all
amendments to those reports, and its definitive proxy statements. The address of Cass’ website is: www.cassinfo.com. All
reports filed with the SEC are available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549-2736 or for more information call the Public Reference Room at 1-800-SEC-0330. The SEC also
makes all filed reports, proxy statements and information statements available on its website at www.sec.gov.
The reference to the Company’s website address does not constitute incorporation by reference of the information contained
on the website and should not be considered part of this report.
Financial Information about Segments
The services provided by the Company are classified in two reportable segments: Information Services and Banking Services.
The revenues from external customers, net income and total assets by segment as of and for each of the years in the three-year
period ended December 31, 2016, are set forth in Item 8, Note 16 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.”
ITEM 1A. RISK FACTORS
This section highlights specific risks that could affect the Company’s business. Although this section attempts to highlight key
factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time, and Cass
cannot predict such risks or estimate the extent to which they may affect the Company’s financial performance. In addition to
the factors discussed elsewhere or incorporated by reference in this report, the identified risks that could cause actual results to
differ materially include the following:
General political, economic or industry conditions may be less favorable than expected.
Local, domestic, and international economic, political and industry-specific conditions and governmental monetary and fiscal
policies affect the industries in which the Company competes, directly and indirectly. Conditions such as inflation, recession,
unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors outside
of Cass’ control may adversely affect the Company. Economic downturns could result in the delinquency of outstanding loans,
which could have a material adverse impact on Cass’ earnings.
Unfavorable developments concerning customer credit quality could affect Cass’ financial results.
Although the Company regularly reviews credit exposure related to its customers and various industry sectors in which it has
business relationships, default risk may arise from events or circumstances that are difficult to detect or foresee. Under such
circumstances, the Company could experience an increase in the level of provision for credit losses, delinquencies,
nonperforming assets, net charge-offs and allowance for credit losses.
The Company has lending concentrations, including, but not limited to, churches and church-related entities located in
selected cities and privately-held businesses located in or near St. Louis, Missouri, that could suffer a significant decline
which could adversely affect the Company.
Cass’ customer base consists, in part, of lending concentrations in several segments and geographical areas. If any of these
segments or areas is significantly affected by weak economic conditions, the Company could experience increased credit losses,
and its business could be adversely affected.
Fluctuations in interest rates could affect Cass’ net interest income and balance sheet.
The operations of financial institutions such as the Company are dependent to a large degree on net interest income, which is
the difference between interest income from loans and investments and interest expense on deposits and borrowings. Prevailing
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economic conditions, the fiscal and monetary policies of the federal government and the policies of various regulatory agencies
all affect market rates of interest, which in turn significantly affect financial institutions’ net interest income. Fluctuations in
interest rates affect Cass’ financial statements, as they do for all financial institutions. Volatility in interest rates can also result
in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal
government and corporate securities and other investment vehicles, which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than financial institutions. As discussed in greater
detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a continuation of the current low level of
interest rates would have a negative impact on the Company’s net interest income.
Operational difficulties or cyber-security problems could damage Cass’ reputation and business.
In the ordinary course of business, the Company depends on the reliable operation of its computer operations and network
connections from its clients to its systems. Any failure, interruption, or breach in security of these systems would cause Cass
to be unable to process transactions for its clients, resulting in decreased revenues. Additionally, any failure, interruption,
breach in security or loss of data, whatever the cause, could reduce client satisfaction with the Company’s products and services
and harm Cass’ financial results. These types of threats may derive from human error, fraud or malice on the part of external
or internal parties, or may result from accidental technological failure. Further, to access the Company’s products and services,
Cass’ customers may use computers and mobile devices that are beyond the Company’s security control systems. The
Company’s technologies, systems, networks and software, and those of other financial institutions have been, and are likely to
continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to
sophisticated and targeted measures directed at Cass. The risk of a security breach or disruption, particularly through cyber-
attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from
around the world have increased. A material security problem affecting Cass could damage its reputation, deter prospects from
purchasing its products and services, deter customers from using its products and services or result in liability to Cass.
Although the Company makes significant efforts to maintain the security and integrity of Cass’ information systems and have
implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that Cass’
security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or
damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because
attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the
techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and
in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, the Company may be unable to
anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually
impossible to entirely mitigate this risk. While specific “cyber” insurance coverage is maintained, which would apply in the
event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because
cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under
Cass’ cyber insurance coverage. A security breach or other significant disruption of Cass’ information systems or those related
to customers, merchants and third party vendors, including as a result of cyber-attacks, could 1) disrupt the proper functioning
of Cass’ networks and systems and therefore operations and/or those of certain customers; 2) result in the unauthorized access
to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of the
Company or its customers; 3) result in a violation of applicable privacy, data breach and other laws, subjecting the Company
to additional regulatory scrutiny and expose Cass to civil litigation, governmental fines and possible financial liability; 4)
require significant management attention and resources to remedy the damages that result; or 5) harm Cass’ reputation or cause
a decrease in the number of customers that choose to do business with the Company. The occurrence of any of the foregoing
could have a material adverse effect on Cass’ business, financial condition and results of operations.
Cass must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies, or if new industry standards and practices
emerge, the Company’s existing product and service offerings, technology and systems may become obsolete. Further, if Cass
fails to adopt or develop new technologies or to adapt its products and services to emerging industry standards, Cass may lose
current and future customers. Finally, Cass’ ability to adopt these technologies can also be inhibited by intellectual property
rights of third parties. Any of these could have a material adverse effect on its business, financial condition and results of
operations. The payment processing and financial services industries are changing rapidly and in order to remain competitive,
Cass must continue to enhance and improve the functionality and features of its products, services and technologies. These
changes may be more difficult or expensive than the Company anticipates.
Operations of the Company’s customer base are impacted by macro-economic factors such as a strong dollar and/or
volatility in commodity prices. A reduction in its customers’ operations could have a material adverse effect on Cass’ results
of operations.
The recent decline in the cost of oil worldwide has had a negative effect on both the number of freight transactions processed
and the dollar amount of invoices processed. For example, lower oil prices have caused a significant drop in drilling supplies
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being transported to fracking operations by domestic railroads and trucks, as U.S. oil prices are no longer as competitive with
the prices of imported oil. Lower oil prices have also resulted in lower gas and fuel prices, negatively affecting the dollar
amounts of the invoices that Cass processes for its freight and shipping customers. A further decline in oil prices would continue
to have an adverse effect on the Company’s revenues and could significantly impact its results of operations.
Methods of reducing risk exposures might not be effective.
Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, interest rate, market
and liquidity, operational, regulatory/compliance, business risks and enterprise-wide risks could be less effective than
anticipated. As a result, the Company may not be able to effectively mitigate its risk exposures in particular market
environments or against particular types of risk.
Customer borrowing, repayment, investment, deposit, and payable processing practices may be different than anticipated.
The Company uses a variety of financial tools, models and other methods to anticipate customer behavior as part of its strategic
and financial planning and to meet certain regulatory requirements. Individual, economic, political and industry-specific
conditions and other factors outside of Cass’ control could alter predicted customer borrowing, repayment, investment, deposit,
and payable processing practices. Such a change in these practices could adversely affect Cass’ ability to anticipate business
needs, including cash flow and its impact on liquidity, and to meet regulatory requirements.
Cass’ stock price can become volatile and fluctuate widely in response to a variety of factors.
The Company’s stock price can fluctuate based on factors that can include actual or anticipated variations in Cass’ quarterly
results; new technology or services by competitors; unanticipated losses or gains due to unexpected events, including losses or
gains on securities held for investment purposes; significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving the Company or its competitors; changes in accounting policies or practices;
failure to integrate acquisitions or realize anticipated benefits from acquisitions; or changes in government regulations.
General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or
recessions, governmental intervention, interest rate changes, credit loss trends, low trading volume or currency fluctuations
also could cause Cass’ stock price to decrease regardless of the Company’s operating results.
Competitive product and pricing pressure within Cass’ markets may change.
The Company operates in a very competitive environment, which is characterized by competition from a number of other
vendors and financial institutions in each market in which it operates. The Company competes with large payment processors
and national and regional financial institutions and also smaller auditing companies and banks in terms of products and pricing.
If the Company is unable to compete effectively in products and pricing in its markets, business could decline.
Management’s ability to maintain and expand customer relationships may differ from expectations.
The industries in which the Company operates are very competitive. The Company not only competes for business
opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers.
The Company continues to experience pressures to maintain these relationships as its competitors attempt to capture its
customers.
The introduction, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the
expansion of payment and processing activities to new markets, the expansion of products and services to existing markets
and opening of new bank branches, may be less successful or may be different than anticipated. Such a result could
adversely affect Cass’ business.
The Company makes certain projections as a basis for developing plans and strategies for its payment processing and banking
products. If the Company does not accurately determine demand for its products and services, it could result in the Company
incurring significant expenses without the anticipated increases in revenue, which could result in an adverse effect on its
earnings.
Management’s ability to retain key officers and employees may change.
Cass’ future operating results depend substantially upon the continued service of Cass’ executive officers and key personnel.
Cass’ future operating results also depend in significant part upon Cass’ ability to attract and retain qualified management,
financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense, and the Company
cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire personnel over time.
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Cass’ business, financial condition and results of operations could be materially adversely affected by the loss of any of its key
employees, by the failure of any key employee to perform in his or her current position, or by Cass’ inability to attract and
retain skilled employees.
Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous
restrictions and requirements that could detrimentally affect the Company’s business.
The Dodd-Frank Act is significantly changing the current bank regulatory structure and affecting the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies.
The Company and the Bank are supervised and regulated primarily by the FRB. In addition, the Company is subject to
consolidated capital requirements, made more strict by the recent adoptions and implementation of the Basel III Capital Rules,
and must serve as a source of strength to the Bank. It is possible such requirements may limit our capacity to pay dividends or
repurchase shares.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured
financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a
specific level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and the Bank expects to pay
high premiums in the future. Economic conditions during the recent recession increased bank failures and decreased the DIF.
The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the
statutory target level. Any increase in our FDIC premiums could have an adverse effect on the Bank’s profits and financial
condition.
The scope and impact of many of the Dodd-Frank Act provisions will be determined over time as regulations are issued and
become effective. As a result, the Company cannot predict the ultimate impact of the Dodd-Frank Act at this time, including
the extent to which it could increase costs or limit the ability to pursue business opportunities in an efficient manner, or
otherwise adversely affect the business, financial condition and results of operations. However, it is expected that at a minimum,
any new regulations issued will increase operating and compliance costs.
New capital rules generally require insured depository institutions and their holding companies to hold more capital. The
impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.
The Dodd-Frank Act requires the federal banking agencies to establish stricter risk-based capital requirements and leverage
limits to apply to banks and bank and savings and loan holding companies. In July 2013, the federal banking agencies published
the final Basel III Capital Rules that revised their risk-based and leverage capital requirements and their method for calculating
risk-weighted assets. The Basel III Capital Rules will apply to banking organizations, including the Company and the Bank.
As discussed in Item 1, “Business—Supervision and Regulation,” the Basel III Capital Rules became effective on January 1,
2015 with a phase-in period that generally extends through January 1, 2019. The final rules increase capital requirements and
generally include two new capital measurements that will affect the Company—a risk-based common equity Tier 1 ratio and a
capital conservation buffer. Common equity Tier 1 capital is a subset of Tier 1 capital and is limited to common equity (plus
related surplus), retained earnings, accumulated other comprehensive income and certain other items. Other instruments that
have historically qualified for Tier 1 treatment, including non-cumulative perpetual preferred stock, are consigned to a category
known as Additional Tier 1 capital and must be phased out over a period of nine years beginning in 2014. The rules permit
bank holding companies with less than $15 billion in assets (such as the Company) to continue to include trust preferred
securities and non-cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not common equity
Tier 1 capital. Tier 2 capital consists of instruments that have historically been placed in Tier 2, as well as cumulative perpetual
preferred stock.
The final rules adjust all three categories of capital by requiring new deductions from and adjustments to capital that will result
in more stringent capital requirements. Beginning January 1, 2015, the minimum capital requirements are (i) a common equity
Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio (common equity Tier 1 capital plus Additional Tier 1 capital) of 6%; (iii)
a total capital ratio of 8%; and (iv) a leverage ratio of 4%. Beginning in 2016, a capital conservation buffer is being phased in
over three years, ultimately resulting in a requirement of 2.5% on top of the common equity Tier 1, Tier 1 and total capital
requirements, resulting in a required common equity Tier 1 capital ratio of 7%, a Tier 1 capital ratio of 8.5%, and a total capital
ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in
share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained
income that could be utilized for such actions.
In addition to the higher required capital ratios and the new deductions and adjustments, the final rules increase the risk weights
for certain assets, meaning that the Company will have to hold more capital against these assets. For example, commercial real
estate loans that do not meet certain new underwriting requirements now must be risk-weighted at 150%, rather than the
previous 100%. There are also new risk weights for unsettled transactions and derivatives. There will also be a requirement to
hold capital against short-term commitments that are not unconditionally cancelable (currently, there are no capital
10
requirements for these off-balance sheet assets). All changes to the risk weights took effect in 2015. Implementation of changes
to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or
additional capital conservation buffers, could result in management modifying its business strategy and could limit the ability
to make distributions, including paying dividends or buying back shares.
Cass is subject to extensive regulatory oversight.
The Company is subject to extensive regulation and supervision that is designed primarily for the protection of the DIF and
depositors, and not to the benefit of the shareholders. As a result, the Company is limited in the manner in which it conducts
business, undertakes new investments and activities and obtains financing. This regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Failure to comply with these and other regulatory
requirements can lead to, among other remedies, administrative enforcement actions and other legal proceedings, including the
imposition of civil money penalties.
Changes in regulation or oversight may have a material adverse impact on Cass’ operations.
The Company is subject to extensive regulation, supervision and examination by the Missouri Division of Finance, the FDIC,
the FRB, the SEC and other regulatory bodies. Such regulation and supervision governs the activities in which the Company
may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the
imposition of restrictions on Cass’ operations, investigations and limitations related to Cass’ securities, the classification of
Cass’ assets and determination of the level of Cass’ allowance for loan losses. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on
Cass’ operations.
Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly
involving the Company and its subsidiaries, could adversely affect Cass or the financial services industry in general.
The Company is subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these
matters, and there can be no assurance that the Company will prevail in any proceeding or litigation. Any such matter could
result in substantial cost and diversion of Cass’ efforts, which by itself could have a material adverse effect on Cass’ financial
condition and operating results. Further, adverse determinations in such matters could result in actions by Cass’ regulators that
could materially adversely affect Cass’ business, financial condition or results of operations. Please refer to Item 3, “Legal
Proceedings.”
The Company’s accounting policies and methods are the basis of how Cass reports its financial condition and results of
operations, and they require management to make estimates about matters that are inherently uncertain. In addition,
changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting
Standards Board, or other authoritative bodies, could materially impact Cass’ financial statements.
The Company’s accounting policies and methods are fundamental to how Cass records and reports its financial condition and
results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and
methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment
as to the most appropriate manner in which to record and report Cass’ financial condition and results of operations. In some
cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might
be reasonable under the circumstances yet might result in the Company reporting materially different amounts than would have
been reported under a different alternative.
Cass has identified three accounting policies as being “critical” to the presentation of its financial condition and results of
operations because they require management to make particularly subjective and/or complex judgments about matters that are
inherently uncertain and because of the likelihood that materially different amounts would be reported under different
conditions or using different assumptions. More information on Cass’ critical accounting policies is contained in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
From time to time, the regulatory agencies, the Financial Accounting Standards Board (“FASB”), and other authoritative bodies
change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements.
These changes can be hard to predict and can materially impact how management records and reports the Company’s financial
condition and results of operations.
11
Cass is subject to examinations and challenges by tax authorities, which, if not resolved in the Company’s favor, could
adversely affect the Company’s financial condition and results of operations.
In the normal course of business, Cass and its affiliates are routinely subject to examinations and challenges from federal and
state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which
it is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions
taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts,
payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by
tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income
among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an
adverse effect on Cass’ financial condition and results of operations.
There could be terrorist activities or other hostilities, which may adversely affect the general economy, financial and capital
markets, specific industries, and the Company.
The terrorist attacks in September 2001 in the United States and ensuing events, as well as the resulting decline in consumer
confidence, had a material adverse effect on the economy. Any similar future events may disrupt Cass’ operations or those of
its customers. In addition, these events had and may continue to have an adverse impact on the U.S. and world economy in
general and consumer confidence and spending in particular, which could harm Cass’ operations. Any of these events could
increase volatility in the U.S. and world financial markets, which could harm Cass’ stock price and may limit the capital
resources available to its customers and the Company. This could have a significant impact on Cass’ operating results, revenues
and costs and may result in increased volatility in the market price of Cass’ common stock.
There could be natural disasters, including, but not limited to, hurricanes, tornadoes, earthquakes, fires and floods, which
may adversely affect the general economy, financial and capital markets, specific industries, and the Company.
The Company has significant operations and customer base in Missouri, California, Ohio, Massachusetts, South Carolina,
Kansas, Florida, Colorado and other regions where natural disasters may occur. These regions are known for being vulnerable
to natural disasters and other risks, such as tornadoes, hurricanes, earthquakes, fires and floods. These types of natural disasters
at times have disrupted the local economy, Cass’ business and customers and have posed physical risks to Cass’ property. A
significant natural disaster could materially affect Cass’ operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In September 2012, the Company entered into a 10-year lease for office space in St. Louis County, Missouri, to house the
headquarters of the Company and the Bank. The Company’s headquarters occupy 13,991 square feet in an office center at
12444 Powerscourt Drive along with 3,563 square feet in the same center at 12412 Powerscourt Drive. The Bank’s headquarters
occupy 10,564 square feet in the same center at 12412 Powerscourt Drive.
The Company owns approximately 61,500 square feet of office space at 13001 Hollenberg Drive in Bridgeton, Missouri where
the Company’s transportation processing activities are performed.
The Company owns a production facility of approximately 45,500 square feet located at 2675 Corporate Exchange Drive,
Columbus, Ohio. Additional facilities are located in Lowell, Massachusetts, Greenville, South Carolina, Wellington, Kansas,
Jacksonville, Florida and Columbus, Ohio. The Company has an office in Breda, Netherlands to service its multinational
customers.
In addition, the Bank owns a banking facility near downtown St. Louis, Missouri, has an operating branch in the Bridgeton,
Missouri location, and has additional leased facilities in Fenton, Missouri, Santa Ana, California and Colorado Springs,
Colorado.
Management believes that these facilities are suitable and adequate for the Company’s operations.
12
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 conditions of the Company or its subsidiaries.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s common stock is quoted on The Nasdaq Global Select Market under the symbol “CASS.” As of March 3,
2017, there were approximately 2,921 holders of record of the Company’s common stock. High and low sale prices, as reported
by The Nasdaq Global Select Market for each quarter of 2016 and 2015, were as follows:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2016
High
$ 53.66
52.76
58.64
74.83
Low
$ 47.65
45.05
49.55
52.69
2015
High
$ 57.54
58.25
59.09
54.71
Low
$ 43.00
48.97
43.78
47.40
The Company has continuously paid regularly scheduled cash dividends since 1934 and expects to continue to pay quarterly
cash dividends in the future. Cash dividends paid per share by the Company during the two most recent fiscal years were as
follows:
March
June
September
December
2016
$ .220
.220
.220
.230
2015
.210
$
.210
.210
.220
Subsidiary dividends can be a significant source of funds for payment of dividends by the Company to its shareholders. Both
the Company and the Bank are subject to various regulations that restrict their ability to pay dividends and the amount of
dividends that they may pay. Under the FDICIA, a depository institution, such as the Bank, may not pay dividends if payment
would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and
the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital and, under
certain circumstances, the ability of federal regulators to prohibit dividend payments as an unsound or unsafe practice. For
further information regarding capital ratios and leverage ratio requirements of the Company and the Bank and the effect on
payment of dividends, see Item 8, Note 2 of this report.
The Company repurchased a total of 187,123 shares at an aggregate cost of $9,215,000 during the year ended December 31,
2016 and 216,412 shares at an aggregate cost of $10,591,000 during the year ended December 31, 2015. A portion of the
repurchased shares may be used for the Company’s employee benefit plans, and the balance will be available for other general
corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity
will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt,
current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private
transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.
14
Performance Quoted on The Nasdaq Stock Market for the Last Five Fiscal Years
The following graph compares the cumulative total returns over the last five fiscal years of a hypothetical investment of $100
in shares of common stock of the Company with a hypothetical investment of $100 in The Nasdaq Stock Market (“Nasdaq”)
and in the index of Nasdaq computer and data processing stocks. The graph assumes $100 was invested on December 31,
2011, with dividends reinvested. Returns are based on period end prices.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for each of the five years ended December 31. 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)
Fee revenue and other income
Interest income on loans
Interest income on debt and equity securities
Other interest income
Total interest income
Interest expense on deposits
Provision for loan losses
Net interest income after provision
Operating expense
Income before income tax expense
Income tax expense
Net income
Diluted earnings per share
Dividends per share
Dividend payout ratio
Average total assets
Average net loans
Average investment securities
Average total deposits
Average total shareholders’ equity
Return on average total assets
Return on average equity
Average equity to assets ratio
Equity to assets ratio at year-end
Tangible common equity to tangible assets
Tangible common equity to risk-weighted
assets
Net interest margin
Allowance for loan losses to loans at year-end
Nonperforming assets to loans and foreclosed
assets
Net loan (recoveries) charge-offs to average
loans outstanding
$
$
$
2016
86,136 $
29,063
9,801
1,066
39,930
2,029
(1,500)
39,401
93,473
32,064
7,716
24,348 $
2.15 $
.89
40.98 %
2015
83,368 $
28,669
9,498
543
38,710
2,111
(850)
37,449
89,783
31,034
7,978
23,056 $
2.00 $
.85
42.06 %
2014
79,907 $
29,726
9,441
592
39,759
2,460
—
37,299
85,414
31,792
7,759
24,033 $
2.06 $
.81
38.85 %
2013
76,572 $
32,110
8,915
552
41,577
2,832
500
38,245
84,086
30,731
7,234
23,497 $
2.02 $
.74
36.21 %
2012
71,138
35,525
9,938
470
45,933
3,148
2,400
40,385
80,333
31,190
7,887
23,303
2.02
.64
31.59 %
$ 1,504,474 $ 1,439,511 $ 1,424,967 $ 1,351,782 $ 1,344,492
671,900
651,984
313,184
321,836
541,046
571,039
167,867
200,149
647,827
294,846
550,110
175,441
667,158
352,129
614,975
207,060
659,109
330,095
579,752
197,853
1.62 %
1.60 %
1.69 %
1.74 %
1.73 %
11.76
13.76
13.82
13.04
20.13
3.32
1.53
11.65
13.74
14.25
13.42
21.19
3.38
1.77
12.01
14.05
13.36
12.52
19.65
3.43
1.78
.04
.48 *
.07
(.01)
(.09)
(.03)
13.39
12.98
14.36
13.39
20.37
3.63
1.79
.27
.18
13.88
12.49
13.80
12.47
17.98
4.00
1.80
1.15 *
.44
*In February 2016, one nonaccrual loan with a balance of $2,727,000 was paid in full. The percentage, as adjusted, would have been .06%.
In February 2013, a payment of $4,115,000 was received for one nonaccrual loan with a balance of $4,198,000. $83,000 was charged off.
The percentage, as adjusted, would have been .54%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information about the financial condition and results of operations of the
Company for the years ended December 31, 2016, 2015 and 2014. This discussion and analysis should be read in conjunction
with the Company’s consolidated financial statements and accompanying notes and other selected financial data presented
elsewhere in this report.
Executive Overview
Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its
offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington,
Kansas, Jacksonville, Florida, and Breda, Netherlands. The Company’s services include freight invoice rating, payment
processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy
invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom
expense management solutions. Cass extracts, stores, and presents information from freight, energy, telecommunication and
environmental invoices, assisting its customers’ transportation, energy, environmental and information technology managers
in making decisions that will enable them to improve operating performance. The Company receives data from multiple
sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers.
It then provides the data in a central repository for access and archiving. The data is finally transformed into information
16
through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical
processing. The Company also, through Cass Commercial Bank, its St. Louis, Missouri-based bank subsidiary, provides
banking services in the St. Louis metropolitan area, Orange County, California, Colorado Springs, Colorado, and other selected
cities in the United States. In addition to supporting the Company’s payment operations, the Bank provides banking services
to its target markets, which include privately-owned businesses and churches and church-related ministries.
The specific payment and information processing services provided to each customer are developed individually to meet each
customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange,
imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that
pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through
service fees and investment of account balances generated during the payment process. The amount, type, and calculation of
service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from
the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to
payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are
therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in
the general level of interest rates, which have a significant effect on net interest income. The funds generated by these
processing activities are invested in overnight investments, investment grade securities, and loans generated by the Bank. The
Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and
investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as
cash management services.
Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business
functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved
by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by
factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs,
deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company
include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and
retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant
effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures
about Market Risk,” a decline in the general level of interest rates can have a negative impact on net interest income and
conversely, a rise in the general level of interest rates can have a positive impact on net interest income. The cost of fuel is
another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s
earnings increase or decrease with the dollar amount of transportation invoices. Another negative impact of low fuel prices
was a significant drop in the number of invoices related to drilling supplies carried by domestic railroads and trucks that move
pipes, sand and water for fracking operations.
In 2016, total fee revenue and other income increased $2,768,000, or 3%, net interest income after provision for loan losses
increased $1,952,000, or 5%, and total operating expenses increased $3,690,000, or 4%. This positive performance in 2016
was attributable to sales growth generated by new customers and broadened service offerings which helped offset the
headwinds created by the challenging economic environment plus the receipt of a one-time litigation settlement of $1.4 million
($800,000 reduction in other operating expenses and $600,000 loan loss recovery) in the fourth quarter of 2015. The Company
also was able to take advantage of tax benefits related to the continued investment in technology. Gains on sales of investments
securities were lower by $2,523,000 in 2016 compared to 2015. The asset quality of the Company’s loans and investments as
of December 31, 2016 remained strong.
Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing
service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership
position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique
in the industry.
Impact of New and Not Yet Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 – Revenue from Contracts with Customers.
The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific
revenue recognition guidance in the FASB Accounting Standards Codification (“ASC”). The core principle of the new guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance
identifies specific steps that entities should apply in order to achieve this principle. Under the ASU, the amendments are
effective for interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The impact of the
adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated
financial statements or results of operations.
17
In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC Topic 842). The ASU improves financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and
manufacturing equipment. Consistent with current generally accepted accounting principles (“GAAP”), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be
recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The
ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing,
and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the financial statements. The ASU will take effect for public
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The impact of
the adoption of this ASU is currently being evaluated but is not expected to have a material impact on the Company’s
consolidated financial statements or results of operations.
In March 2016, the FASB issued ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting. The ASU will simplify the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. This standard is effective for fiscal periods beginning after
December 15, 2016. The impact of the adoption of this ASU is currently being evaluated.
In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets
held. Under this standard, a company will be required to hold an allowance equal to the expected life-of-loan losses on the
loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. The impact of the adoption of
this ASU is currently being evaluated.
Critical Accounting Policies
The Company has prepared the consolidated financial statements in this report in accordance with the FASB ASC. In preparing
the consolidated financial statements, 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. These estimates have been generally accurate in the past, have been
consistent and have not required any material changes. There can be no assurances that actual results will not differ from those
estimates. Certain accounting policies that require significant management estimates and are deemed critical to the Company’s
results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are
described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess
overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan
portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual
results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and
associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance
for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly,
the Company expects to continue to utilize the present processes.
Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an
entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have
been recognized in the Company’s financial statements or tax returns such as the realization of deferred tax assets or changes
in tax laws or interpretations thereof. In addition, the Company is subject to the continuous examination of its income tax
returns by the Internal Revenue Service and other taxing authorities. In accordance with FASB ASC 740 - Income Taxes, the
Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Item 8, Note 13 to the
consolidated financial statements contained herein.
Pension Plans. The amounts recognized in the consolidated financial statements related to pension plans are determined from
actuarial valuations. Inherent in these valuations are assumptions, including expected return on plan assets, discount rates at
which the liabilities could be settled at December 31, 2016, rate of increase in future compensation levels and mortality rates.
These assumptions are updated annually and are disclosed in Item 8, Note 10 to the consolidated financial statements. Pursuant
to FASB ASC 715 - Compensation – Retirement Benefits, the Company has recognized the funded status of its defined benefit
postretirement plan in its balance sheet and has recognized changes in that funded status through comprehensive income. The
funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of
the date of its fiscal year-end.
18
Summary of Results
(In thousands except per share data)
Total processing volume
Total processing dollars
Payment and processing fees
Net interest income after provision for
loan losses
Total net revenue
Average earning assets
Net interest margin*
Net income
Diluted earnings per share
Return on average assets
Return on average equity
*Presented on a tax-equivalent basis
For the Years Ended December 31,
2015
2016
2014
57,897
54,521
$34,689,268 $36,264,188
$78,622
$83,713
$39,401
$125,537
$37,449
$120,817
$1,308,914 $1,244,797
3.38%
$23,056
$2.00
1.60%
11.65%
3.32%
$24,348
$2.15
1.62%
11.76%
54,741
$38,472,500
$77,427
$37,299
$117,206
$1,242,549
3.43%
$24,033
$2.06
1.69%
12.01%
% Change
2016 v. 2015 2015 v. 2014
(0.4)%
(5.7)
1.5
(4.3)
6.5
6.2%
5.2
3.9
5.2
—
5.6
7.5
—
—
0.4
3.1
0.2
—
(4.1)
(2.9)
—
—
The results of 2016 compared to 2015 include the following significant items:
Overall, the Company’s performance was boosted as a result of adding new accounts and expanding service lines as
payment and processing fees and total processing volume increased 7% and 6%, respectively. Lingering adverse economic
factors including low interest rates and low energy prices continued to impact total processing dollars, which decreased
4%, and net interest margin. The decrease in processing dollars generated smaller investable balances that lowered
investment income and fees from carrier services.
Average earning assets and net interest income after provision for loan losses both increased 5% year over year. The
increase in net interest income after provision for loan losses was primarily due to higher average earning assets and a
negative provision for loan losses of $1,500,000 in 2016 compared to $850,000 in 2015.
Gains from the sale of securities were $387,000 in 2016 and $2,910,000 in 2015. Bank service fees increased $53,000, or
4%, and other income increased $147,000. Operating expenses increased $3,690,000, or 4%, as the Company invested in
staff and technology to win and support new business and the Company received a one-time litigation settlement of $1.4
million ($800,000 reduction in other operating expenses and $600,000 loan loss recovery) in the prior year.
The results of 2015 compared to 2014 include the following significant items:
Overall, the Company’s performance was impacted by lingering adverse economic factors including low interest rates,
plummeting energy prices and a contraction in U.S. manufacturing output. Total processing dollars fell 6%. The decrease
in processing dollars generated smaller investable balances that lowered investment income. The Company received a one-
time litigation settlement of $1.4 million ($800,000 reduction in other operating expenses and $600,000 loan loss recovery)
in 2015.
Net interest income after provision for loan losses and average earning assets increased very slightly year over year,
primarily due to a negative provision for loan losses of $850,000 in the fourth quarter of 2015.
Gains from the sale of securities were $2,910,000 in 2015 and $23,000 in 2014. Bank service fees increased $91,000, or
8%, and other income was down $712,000. Operating expenses increased $4,369,000, or 5%, as the Company incurred
higher health insurance costs and retirement plan expenses. Salaries also increased as the Company invested in staff and
technology to win and support new business.
19
Fee Revenue and Other Income
The Company’s fee revenue is derived mainly from transportation and facility payment and processing fees. As the Company
provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item
basis, discounts received for services provided to carriers and by the accounts and drafts payable balances generated in the
payment process which can be used to generate interest income. Processing volumes, fee revenue and other income were as
follows:
(In thousands)
Transportation invoice transaction volume
Transportation invoice dollar volume
Expense management transaction volume*
Expense management dollar volume*
Payment and processing revenue
Bank service fees
Gains on sales of investment securities
Other
*Includes energy, telecom and environmental
2016
December 31,
2015
23,545
34,352
33,958
$22,774,909 $24,534,285
20,563
$11,914,359 $11,729,903
$78,622
$1,223
$2,910
$613
$83,713
$1,276
$387
$760
2014
34,141
$25,993,966
20,600
$12,478,534
$77,427
$1,132
$23
$1,325
% Change
2016 v. 2015 2015 v. 2014
(0.5)%
1.2%
(5.6)
(0.2)
(6.0)
1.5
8.0
n.m.
(53.7)
(7.2)
14.5
1.6
6.5
4.3
(86.7)
24.0
Fee revenue and other income in 2016 compared to 2015 include the following significant pre-tax components:
In the transportation sector, new business and a growing customer base boosted invoice volume, though lingering negative
factors continued to hinder dollar volume growth. Reduced average invoice amounts caused by low fuel and carrier prices
as well as shifts in modal activity impacted dollar volume. The decrease in dollar volume also generated smaller investable
balances that reduced investment income and more significantly lowered fees from carrier services. Expense management
transaction volume increased 15% and dollar volume increased 2% as new customer wins, including several large accounts
that migrated from competitors, fueled the increase. Gains on sales of investment securities decreased as market conditions
were not as favorable in the current year.
Fee revenue and other income in 2015 compared to 2014 include the following significant pre-tax components:
The transportation group added new accounts which produced higher transaction volume, but the benefits of that growth
were offset by declining activity from existing customers, especially those involved in oil and gas production, resulting in
a decrease of less than 1%. Transportation dollar volume fell 6% as lower fuel prices reduced average invoice amounts.
The decrease in dollar volume also generated smaller investable balances that reduced investment income and more
significantly lowered fees from carrier services. Expense management dollar volume declined as competitor consolidation
in the market offset success in growing new accounts. Gains on sales of investment securities increased significantly as
the Company took advantage of market gains.
Net Interest Income
Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest
expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues.
The following table summarizes the changes in tax-equivalent net interest income and related factors:
(In thousands)
Average earning assets
Net interest income*
Net interest margin*
Yield on earning assets*
Rate on interest bearing liabilities
*Presented on a tax-equivalent basis using a tax rate of 35% in all years.
2016
$1,308,914
$43,402
3.32%
3.47%
.48%
December 31,
2015
$1,244,797
$42,025
3.38%
3.55%
.51%
% Change
2016 v. 2015 2015 v. 2014
0.2%
(1.3)%
5.2%
3.3%
2014
$1,242,549
$42,587
3.43%
3.63%
.58%
Net interest income in 2016 compared to 2015:
The increase in net interest income was primarily due to an increase in average earning assets. This was partially
offset by a decrease in the net interest margin due to the difficulty finding acceptable investment alternatives in the
current low interest rate environment. More information is contained in the tables below and in Item 7A of this report.
Total average loans increased $7,042,000, or 1%, to $678,061,000. Loans have 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 for any
given maturity.
20
Total average investment in securities and certificates of deposit increased $25,537,000, or 8%. The investment
portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. All
purchases were made in accordance with the Company’s investment policy. Total average federal funds sold and
other short-term investments increased $34,621,000, or 31%. Interest bearing deposits in other financial institutions
decreased $3,083,000, or 2%.
The Bank’s total average interest-bearing deposits increased $7,255,000, or 2%, compared to the prior year. Average
rates paid on interest-bearing liabilities decreased from .51% to .48% as a result of the continued low interest rate
environment.
Net interest income in 2015 compared to 2014:
The decrease in net interest income was caused by a decrease in net interest margin. The decrease in net interest
margin was due to the lack of satisfactory investment alternatives in this historically low interest rate environment.
More information is contained in the tables below and in Item 7A of this report.
Total average loans increased $7,195,000, or 1%, to $671,019,000. Loans have 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 for any
given maturity.
Total average investment in securities and certificates of deposit increased $12,557,000, or 4%. The investment
portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. All
purchases were made in accordance with the Company’s investment policy. Interest bearing deposits in other financial
institutions decreased $7,189,000, or 5%. Total average federal funds sold and other short-term investments decreased
$10,315,000, or 8%.
The Bank’s total average interest-bearing deposits decreased $8,059,000, or 2%, compared to the prior year. Average
rates paid on interest-bearing liabilities decreased from .58% to .51% as a result of the continued low interest rate
environment.
Distribution of Assets, Liabilities and Shareholders' 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:
21
(In thousands)
Assets1
Earning assets
Loans2, 3:
Taxable
Tax-exempt4
Securities5:
Taxable
Tax-exempt4
Certificates of deposit
Interest-bearing deposits in other
financial institutions
Federal funds sold and other
short-term investments
Total earning assets
Non-earning assets
Cash and due from banks`
Premise and equipment, net
Bank owned life insurance
Goodwill and other
intangibles
Other assets
Allowance for loan losses
Total assets
Liabilities and Shareholders’
Equity1
Interest-bearing liabilities
Interest-bearing demand
deposits
Savings deposits
Time deposits >=$250
Other time deposits
Total interest-bearing deposits
Short-term borrowings
Total interest-bearing liabilities
Non-interest bearing liabilities
Demand deposits
Accounts and drafts payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and share-
holders’ equity
Net interest income
Net interest margin
Interest spread
Average
Balance
2016
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2015
Interest
Income/
Expense
2014
Yield/
Rate
Average
Balance
Interest
Income/
Expense
Yield/
Rate
$660,341 $28,506
857
17,720
4.32 % $649,472 $28,049
954
21,547
4.84
4.32 % $647,896 $29,316
630
15,928
4.43
4.52 %
3.96
5,030
347,099
7,801
93
14,858
51
1.85
4.28
.65
1,168
328,927
4,298
21
14,553
17
1.8
4.42
0.4
1,095
316,991
3,750
21
14,480
8
1.92
4.57
0.21
124,991
638
.51
128,074
393
0.31
135,263
424
0.31
145,932
1,308,914
428
45,431
.29
3.47
111,311
1,244,797
150
44,137
0.13
3.55
121,626
1,242,549
168
45,047
0.14
3.63
11,822
20,503
16,174
13,799
144,165
(10,903)
$1,504,474
13,050
18,544
15,665
14,187
145,178
(11,910)
$ 1,439,511
12,074
14,793
15,295
14,593
137,503
(11,840)
$ 1,424,967
$343,205 $1,388
100
172
369
2,029
20,524
14,463
44,468
422,660
—
422,660
.40 % $330,742 $1,392
65
14,656
.49
189
15,236
1.19
465
54,771
.83
2,111
415,405
.48
1
— —
63
2,112
415,468
.48
2,029
192,315
654,845
27,594
1,297,414
207,060
$1,504,474
$43,402
164,347
632,604
29,239
1,241,658
197,853
.42 % $317,120 $1,564
87
17,073
.44
202
17,715
1.24
71,556
.85
607
2,460
423,464
.51
1.59
6
423,470
.51
0.49 %
0.51
1.14
0.85
0.58
— —
0.58
2,460
147,575
643,077
10,696
1,224,818
200,149
$ 1,424,967
$ 1,439,511
$42,025
3.32%
2.99%
3.38%
3.04%
$42,587
3.43%
3.05%
1Balances shown are daily averages.
2For 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.
3Interest income on loans includes net loan fees of $586,000, $469,000, and $325,000 for 2016, 2015 and 2014, respectively.
4Interest income is presented on a tax-equivalent basis assuming a tax rate 35% in all years. The tax-equivalent adjustment was
approximately $5,500,000, $5,427,000 and $5,288,000 for 2016, 2015 and 2014, respectively.
5For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost
of the investments.
22
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.
(In thousands)
Increase (decrease) in interest income:
Loans2,3:
Taxable
Tax-exempt4
Securities:
Taxable
Tax-exempt4
Certificates of deposit
Interest-bearing deposits in other
financial institutions
Federal funds sold and other short-term
investments
Total interest income
Interest expense on:
Interest-bearing demand deposits
Savings deposits
Time deposits >=$250
Other time deposits
Short-term borrowings
Total interest expense
Net interest income
2016 Over 2015
Rate1
Volume1
Total
Volume1 Rate1
Total
2015 Over 2014
$469
(180)
71
789
19
(10)
58
$1,216
$52
28
(9)
(86)
(1)
(16)
$1,232
$(12)
83
1
(484)
15
255
220
$78
$(56)
7
(8)
(10)
—
(67)
$145
$457
(97)
72
305
34
245
278
$1,294
$(4)
35
(17)
(96)
(1)
(83)
$1,377
$71 $(1,338) $(1,267)
324
81
243
1
536
1
(1)
(463)
8
—
73
9
(22)
(9)
(31)
(14)
(4)
$816 $(1,726)
(18)
$(910)
$65
$(237)
(11)
(11)
(30)
17
(143)
1
—
1
(230)
(118)
$934 $(1,496)
$(172)
(22)
(13)
(142)
1
(348)
$(562)
1The 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.
2Average balances include nonaccrual loans.
3Interest income includes net loan fees.
4Interest income is presented on a tax-equivalent basis assuming a tax rate of 35% in all years.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was
$664,866,000 and represented 44% of the Company's total assets as of December 31, 2016 and generated $29,063,000 in
revenue during the year then ended. The Company had no sub-prime mortgage loans or residential development loans in its
portfolio for any of the years presented. The following tables show the composition of the loan portfolio at the end of the
periods indicated and remaining maturities for loans as of December 31, 2016.
Loans by Type
(In thousands)
Commercial and industrial
Real estate (commercial and church):
Mortgage
Construction
Industrial Revenue Bond
Other
Total loans
2016
$214,767
425,947
17,477
6,639
36
$664,866
2015
$193,430
415,564
30,139
19,831
91
$659,055
December 31,
2014
$203,350
423,641
18,612
23,348
395
$669,346
2013
$171,304
455,190
16,449
9,167
67
$652,177
2012
$160,862
502,961
23,475
—
435
$687,733
23
Loans by Maturity
(At December 31, 2016)
(In thousands)
Commercial and industrial
Real Estate:
Mortgage
Construction
One Year
Or Less
Fixed
Rate
Floating
Rate1
918 $ 91,414 $
$
Over 1 Year
Through 5 Years
Fixed
Rate
Floating
Rate1
Over
5 Years
Fixed
Rate
Floating
Rate1
Total
38,851 $
38,009 $
21,950 $ 23,625 $ 214,767
35,269
5,786
—
—
2,221
6,135
—
36
$ 41,973 $ 99,806 $ 340,022 $
294,055
477
6,639
—
22,652
—
—
—
60,661 $
62,751
341
__
—
425,947
8,999
17,477
4,738
6,639
—
36
—
85,042 $ 37,362 $ 664,866
Industrial Revenue Bonds
Other
Total loans
1Loans have been classified as having "floating" interest rates if the rate specified in the loan varies with the prime commercial rate of
interest. Note: Due to the historically low interest rates, the Company instituted a 4% floor for its prime lending rate.
The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan
portfolio composition table and as are discussed in Item 8, Note 4, of this report. As can be seen in the loan composition table
above and as discussed in Item 8, Note 4, the Company's primary market niche for banking services is privately held businesses
and churches and church-related ministries.
Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable,
inventory, machinery and equipment, and the real estate from which the borrower 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 loans. 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, 2015 to December 31, 2016:
Total loans increased $5,811,000, or 1%, to $664,866,000. Additional details regarding the types and maturities of
loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.
Loan portfolio changes from December 31, 2014 to December 31, 2015:
Total loans decreased $10,291,000, or 2%, to $659,055,000. Additional details regarding the types and maturities of
loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.
Provision and Allowance for Loan Losses (ALLL)
The Company recorded a ($1,500,000) provision for loan losses in 2016, ($850,000) in 2015 and $0 in 2014. The amount of
the provisions for loan losses was derived from the Company’s quarterly analysis of the ALLL. The amount of the provision
will fluctuate as determined by these quarterly analyses. The Company had net loan recoveries of $40,000, $591,000, and
$215,000 in 2016, 2015, and 2014, respectively. The ALLL was $10,175,000 at December 31, 2016 compared to $11,635,000
at December 31, 2015 and $11,894,000 at December 31, 2014. The year-end 2016 allowance represented 1.5% of outstanding
loans, while the allowance represented 1.8% of outstanding loans at both year-end 2015 and 2014. From December 31, 2015
to December 31, 2016, the level of nonperforming loans decreased $2,890,000 from $3,135,000 to $245,000, which represents
.04% of outstanding loans. Nonperforming loans are more fully explained in the section entitled “Nonperforming Assets.”
The ALLL has been established and is maintained to absorb reasonably estimated and probable losses in the loan portfolio. An
ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense to cover any
deficiency or reduce any excess, as required. The current methodology consists of two components: 1) estimated credit losses
on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310 - Allowance for Credit
Losses and 2) estimated credit losses inherent in the remainder of the loan portfolio in accordance with FASB ASC 450 -
Contingencies. Estimated credit losses is an estimate of the current amount of loans that is probable the Company will be
unable to collect according to the original terms.
For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of
expected future cash flows and 2) collateral value. For the remainder of the portfolio, the Company groups loans with similar
risk characteristics into eight segments and applies historical loss rates to each segment based on a five fiscal-year look-back
24
period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and
volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losses in collateral values,
trends in credit quality at the Company and in the banking industry and trends in risk-rating agencies are are also considered.
The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required
levels of regulatory capital. Federal and state agencies review the Company’s methodology for maintaining the ALLL. These
agencies may require the Company to adjust the ALLL based on their judgments and interpretations about information available
to them at the time of their examinations.
The following schedule summarizes activity in the ALLL and the allocation of the allowance to the Company’s loan categories.
Summary of Loan Loss Experience
(In thousands)
Allowance at beginning of year
Loans charged-off:
Commercial and industrial
Real estate (commercial and church):
Mortgage
Construction
Other
Total loans charged-off
Recoveries of loans previously charged-off:
Commercial and industrial
Real estate (commercial and church):
Mortgage
Construction
Other
Total recoveries of loans previously charged-off
Net loans (recovered) charged-off
Provision (credited) charged to expense
Allowance at end of year
Loans outstanding:
Average
December 31
Ratio of allowance for loan losses to loans
outstanding:
Average
December 31
Ratio of net (recoveries) charge-offs to average
loans outstanding
Allocation of allowance for loan losses1:
Commercial and industrial
Real estate (commercial and church):
Mortgage
Construction
Industrial Revenue Bond
Other2
Total
Percentage of categories to total loans:
Commercial and industrial
Real estate (commercial and church):
Mortgage
Construction
Industrial Revenue Bond
Other
Total
2016
$11,635
2015
$11,894
December 31,
2014
$11,679
2013
$12,357
2012
$12,954
—
—
—
—
—
39
1
—
—
40
(40)
(1,500)
$10,175
30
—
—
—
30
610
10
—
1
621
(591)
(850)
$11,635
76
3
79
41
252
1
294
(215)
$11,894
1,307
233
1,540
47
315
362
1,178
500
$11,679
1,546
1,562
3,108
111
111
2,997
2,400
$12,357
$678,061
664,866
$671,019
659,055
$663,824
669,346
$659,422
652,177
$684,597
687,733
1.50%
1.53%
1.76%
1.77%
1.79%
1.78%
1.77%
1.79%
1.81%
1.80%
(.01)%
(.09)%
(.03)%
.18%
.44%
$3,261
$3,083
$3,515
$3,139
$3,192
5,689
132
101
992
$10,175
6,885
226
320
1,121
$11,635
7,076
140
394
769
$11,894
7,439
124
155
822
$11,679
8,687
470
8
$12,357
32.3%
29.3%
30.4%
26.3%
23.4%
64.1%
2.6%
1.0%
%
100.0%
63.1%
4.6%
3.0%
%
100.0%
63.3%
2.8%
3.5%
%
100.0%
69.8%
2.5%
1.4%
%
100.0%
73.1%
3.4%
%
0.1%
100.0%
1Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.
2 Includes unallocated of $992,000 and $1,121,000 in 2016 and 2015, respectively.
Nonperforming Assets
Nonperforming loans are defined as loans on non-accrual status and loans 90 days or more past due but still accruing.
Nonperforming assets include nonperforming loans plus foreclosed real estate. Troubled debt restructurings are not included
in nonperforming loans unless they are on non-accrual status or past due 90 days or more.
25
It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan
for which collection is not probable. Subsequent payments received on such loans are applied to principal if collection of
principal is not probable; otherwise, these receipts are recorded as interest income. Interest on nonaccrual loans, which would
have been recorded under the original terms of the loans, was approximately $66,000 and $390,000 for the years ended
December 31, 2016 and 2015, respectively. Of this amount, approximately $47,000 and $34,000 was actually recorded as
interest income on such loans during the years ended December 31, 2016 and 2015, respectively.
Total nonaccrual loans at December 31, 2016 consists of one loan totaling $245,000 that relates to a business that has a weak
financial position. No allocation of the allowance for loan losses has been established as no loss on this credit is anticipated.
There were no foreclosed assets at December 31, 2016 and December 31, 2015.
The Company does not have any foreign loans. The Company's loan portfolio does not include a significant amount of single
family real estate mortgages, as the Company does not market its services to retail customers. Also, the Company had no sub-
prime mortgage loans or residential development loans in its portfolio in any of the years presented.
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
(In thousands)
Commercial and industrial:
Nonaccrual
Contractually past due 90 days or more and still
accruing
Real estate – mortgage:
Nonaccrual
Contractually past due 90 days or more and still
accruing
Total nonperforming loans
Total foreclosed assets
Total nonperforming assets
2016
2015
December 31,
2014
$—
—
245
—
$245
—
$245
$—
—
3,135*
—
$3,135
—
$3,135
$
488
$488
$488
2013
2012
$11
$1,439
1,786
5,133*
$1,797
$1,797
$6,572
1,322
$7,894
*In February 2016, one nonaccrual loan with a balance of $2,727,000 was paid in full. In February 2013, a payment of $4,115,000 was
received for one nonaccrual loan with a balance of $4,198,000. $83,000 was charged off.
Operating Expenses
Operating expenses in 2016 compared to 2015 include the following significant pre-tax components:
Salaries and employee benefits expense increased $2,267,000, or 3%, to $72,581,000 as the Company invested in staff and
technology to win and support new business. Equipment expense increased $160,000 to $4,451,000 primarily due to
depreciation of internally developed software. Other operating expense increased $1,273,000, or 11%, to $12,643,000
primarily due to a one-time litigation settlement that occurred in 2015 ($800,000 reduction in other operating expenses).
Operating expenses in 2015 compared to 2014 include the following significant pre-tax components:
Salaries and employee benefits expense increased $4,214,000, or 6%, to $70,314,000 as the Company invested in staff and
technology to win and support new business. Occupancy expense increased $228,000, or 7%, due to the expansion of the
Company’s operating facilities for its transportation and waste management operations. Equipment expense increased
$161,000 to $4,291,000 primarily due to depreciation on new furniture and additional systems hardware and software.
Amortization of intangibles decreased $75,000 to $408,000. Other operating expense decreased $159,000, or 1%, to
$11,370,000 primarily due to a one-time litigation settlement that occurred in 2015($800,000 reduction in other operating
expenses).
Income Tax Expense
Income tax expense in 2016 totaled $7,716,000 compared to $7,978,000 and $7,759,000 in 2015 and 2014, respectively. When
measured as a percent of income, the Company’s effective tax rate was 24% in 2016, 26% in 2015, and 24% in 2014. The
Company was able to take advantage of tax benefits related to the continued investment in technology and a result of the Bank’s
REIT holding a portion of the loan portfolio. Additionally, the effective tax rate varies from year-to-year primarily due to
changes in the Company’s pre-tax income and the amount of investment in tax-exempt municipal bonds.
26
Investment Portfolio
Investment portfolio changes from December 31, 2015 to December 31, 2016:
State and political subdivision securities increased modestly to $370,134,000. U.S. government agency securities
increased to $12,672,000. The investment portfolio provides the Company with a significant source of earnings,
secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates.
Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending
on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s
sources of funds and the economic outlook. During this period, the Company purchased state and political subdivision
along with U.S. government agency securities. These securities all had A or better credit ratings and maturities
approaching 15 years. With the additional liquidity provided by the increase in deposits and accounts and drafts payable,
the Company made these purchases to continue to reduce the level of short-term rate sensitive assets. All purchases were
made in accordance with the Company’s investment policy.
There was no single issuer of securities in the investment portfolio at December 31, 2016 for which the aggregate amortized
cost exceeded 10% of total shareholders' equity.
Investments by Type
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total investments
Investment Securities by Maturity
(At December 31, 2016)
$
$
December 31,
2015
2016
370,134 $
12,672
7,746
390,552 $
2014
369,070 $ 352,391
3,750
375,696 $ 356,141
6,626
Within 1
Year
Over 1 to 5
Years
Over 5 to
10 Years
Over
10 Years
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total investments
Weighted average yield1
159,366 $
159,366 $
3.91%
1Weighted average yield is presented on a tax-equivalent basis assuming a tax rate of 35%.
56,918 $
1,496
58,414 $
3.98%
27,875 $
6,250
34,125 $
4.59%
$
$
125,975
12,672
138,647
3.32%
Yield
3.89%
1.99%
.68%
3.82%
3.76%
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits increased 18% from December 31, 2015 to $214,656,000 at December 31, 2016. The
average balances of these deposits increased 17% in 2016 to $192,315,000. These balances are primarily maintained by
commercial customers and churches and can fluctuate on a daily basis.
Interest-bearing deposits decreased $57,356,000, or 12%, to $407,305,000 at December 31, 2016. The average balances of
these deposits increased to $422,660,000 in 2016 from $415,405,000 in 2015.
Accounts and drafts payable generated by the Company in its payment processing operations increased $65,028,000, or 11%,
to $642,287,000 at December 31, 2016. The average balance of these funds increased $22,241,000, or 4%, to $654,845,000 in
2016. This increase was the result of supplier payment optimization that more than offset the drop in energy prices which
reduced the average transportation and expense management invoice amounts. 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 Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier
in this discussion. The Company does not have any significant deposits from foreign depositors.
27
Maturities of Certificates of Deposit as of December 31, 2016
(In thousands)
Three months or less
Three to six months
Six to twelve months
Over twelve months
Total
Liquidity
$100 or Less
$100 to Less
Than $250
$250 or
More
$
$
1,399 $
673
602
849
3,523 $
29,215
6,043
434
1,487
37,179
$
$
1,995 $
3,826
4,553
4,708
15,082 $
Total
32,609
10,542
5,589
7,044
55,784
The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all
payment obligations relating to invoices processed as they become due and 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 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 obtain 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 items in its evaluation of liquidity.
The balances of liquid assets consist of cash and cash equivalents, which include cash and due from banks, interest-bearing
deposits in other financial institutions, federal funds sold, and money market funds, totaled $266,714,000 at December 31,
2016, an increase of $13,571,000, or 5%, from December 31, 2015. At December 31, 2016, these assets represented 18% of
total assets. Cash and cash equivalents 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 securities
available-for-sale at fair value was $390,552,000 at December 31, 2016, an increase of $14,856,000, or 4%, from December
31, 2015. These assets represented 26% of total assets at December 31, 2016 and were primarily state and political subdivision
securities. Of the total portfolio, 9% mature in one year or less, 15% mature after one year through five years and 76% mature
after five years. The Company sold $21,491,000 in securities available-for-sale during 2016.
As of December 31, 2016, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $78,000,000 at the following banks: Bank of America, $10,000,000; US Bank, $20,000,000; Wells Fargo Bank,
$15,000,000; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; JPM Chase Bank, $6,000,000; and UMB Bank
$5,000,000. As of December 31, 2016, the Bank had secured lines of credit with the Federal Home Loan Bank (“FHLB”) of
$205,768,000 collateralized by commercial mortgage loans. At December 31, 2016, the Company had a line of credit from
UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities.
There were no amounts outstanding under any of the lines of credit discussed above at December 31, 2016 or 2015.
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 have also historically been a stable source of funds.
Net cash flows provided by operating activities for the years 2016, 2015 and 2014 were $35,189,000, $33,493,000 and
$34,843,000, respectively. Net income plus depreciation and amortization accounts for most of the operating cash provided.
Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and
loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Further analysis
of the changes in these account balances is discussed earlier in this report. Due to the daily fluctuations in these account
balances, management believes that the analysis of changes in average balances, also discussed earlier in this report, can be
more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management
anticipates that cash and cash equivalents, maturing investments, cash from operations, and borrowing lines will continue to
be sufficient to fund the Company’s operations and capital expenditures in 2017. The Company anticipates the annual capital
expenditures for 2017 should range from $3 million to $5 million. Capital expenditures in 2017 are expected to consist of
equipment and software related to the payment and information processing services business.
There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels
that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly
impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business
opportunities available to the Company.
As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the
prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding
28
sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing
services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income.
Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively
manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance
sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in a low
interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer term relatively
higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater
reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate
deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.
The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income,
as the volume and size of customer invoices processed may increase or decrease. Lower levels of economic activity decrease
both fee income (as fewer invoices are processed) and balances of accounts and drafts payable generated (as fewer invoices are
processed) from the Company’s transportation customers.
The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs
will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts
payable. Decreases in accounts and drafts payable generate lower interest income and reduce liquidity.
New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance.
Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than
expenses. During 2016, new business was added in both the transportation and facility expense management operations, driven
by both successful marketing efforts and the solid market leadership position held by Cass.
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, 2016 as shown in Item 8, Note 2 of this
report.
In 2016, cash dividends paid were $.89 per share for a total of $9,979,000, an increase of $282,000, or 3%, compared to $.85
per share for a total of $9,697,000 in 2015. The increase is attributable to the per-share amount paid.
Shareholders’ equity was $208,035,000, or 14% of total assets, at December 31, 2016, an increase of $657,000 over the balance
at December 31, 2015. This increase resulted primarily from net income of $24,348,000 and an increase in additional paid in
capital related to equity compensation of $4,760,000. These increases were partially offset by the repurchase of treasury shares
of $9,215,000, cash dividends of $9,979,000, and a decrease in other comprehensive income of $7,879,000.
Dividends from the Bank are a 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, state corporate laws and prudent and sound
banking principles. As of December 31, 2016, unappropriated retained earnings of $26,374,000 were available at the Bank for
the declaration of dividends to the Company without prior approval from regulatory authorities.
The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the
repurchase of up to 500,000 shares of the Company’s common stock. The Company repurchased 187,123 shares at an aggregate
cost of $9,215,000 during the year ended December 31, 2016 and 216,412 shares at an aggregate cost of $10,591,000 during
the year ended December 31, 2015. As of December 31, 2016, 500,000 shares remained available for repurchase under the
program. A portion of the repurchased shares may be used for the Company's employee benefit plans, and the balance will be
available for other general corporate purposes. The stock repurchase authorization does not have an expiration date and the
pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for
investments, repayment of debt, current stock price, and other factors. The Company may repurchase shares from time to time
on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified
or discontinued at any time.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to activities that involve 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 and capital leases. 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
29
to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those
instruments. At December 31, 2016, 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 or its subsidiaries
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. At December 31, 2016, the balance of loan
commitments, standby and commercial letters of credit were $45,497,000, $14,381,000 and $1,962,000, respectively. 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 or its
subsidiaries may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.
The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time
deposits at December 31, 2016:
(In thousands)
Operating lease commitments
Time deposits
Total
Amount of Commitment Expiration per Period
1-3
Years
Less than 1
Year
3-5
Years
Over
5 Years
Total
$
$
6,285 $
55,784
62,069 $
1,490 $
48,740
50,230 $
2,211 $
4,907
7,118 $
1,751 $
2,137
3,888 $
833
833
During 2016, the Company made no contribution to its noncontributory defined benefit pension plan. In determining pension
expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets. These
assumptions are determined at the beginning of the plan year based on interest rate levels and financial market performance.
For 2016, these assumptions were as follows:
Assumption
Weighted average discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
Rate
4.50%
(a)
6.75%
(a) 6.00% graded down to 3.25% over the first seven years of service.
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 by 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 often differs significantly from most other financial 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 generate large balances of accounts and drafts payable. These balances,
which are noninterest bearing, contribute to the Company’s historical 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 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, 12-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.
Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitive
assets and liabilities in certain time horizons. A negative gap indicates that more liabilities re-price in that particular time frame
and, if rates rise, these liabilities will re-price faster than the assets. A positive gap would indicate the opposite. Gap reports
can be misleading in that they capture only the re-pricing timing within the balance sheet, and fail to capture other significant
30
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 12 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. A table containing simulation results as of December
31, 2016, from an immediate and sustained parallel change in interest rates is shown below.
While net interest income simulations do an adequate job of capturing interest rate risk to short term earnings, they do not
capture risk within the current balance sheet beyond 12 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 U.S.
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 table below contains the analysis, which illustrates the
effects of an immediate and sustained parallel change in interest rates as of December 31, 2016:
Change in Interest Rates
+200 basis points
+100 basis points
Stable rates
-100 basis points
-200 basis points
Interest Rate Sensitivity Position
% Change in Net Interest Income % Change in Fair Market Value of Equity
6%
3%
(4%)
(6%)
7%
4%
(3%)
(5%)
The following table presents the Company’s interest rate risk position at December 31, 2016 for the various time periods indicated:
Variable
Rate
0-90
Days
91-180
Days
181-364
Days
1-5
Years
Over
5 Years
Total
$
202,281 $ 13,826 $
13,510
1,250
12,365 $
15,651 $ 329,062 $
6,336
85,042 $
303
658,227
6,639
5,683
750
7,681
4,250
78,789
1,496
264,471
12,672
370,134
12,672
7,746
1,196
Investments in the FHLB
and FRB
1,196
(In thousands)
Earning assets:
Loans:
Taxable
Tax-exempt
Securities1:
Tax-exempt
U.S. government agencies
Certificates of deposit
Federal funds sold and other
short-term investments
Total earning assets
Interest-sensitive liabilities:
Money market accounts
Now accounts
Savings deposits
Time deposits:
$250K and more
$
$
Less than $250K
Federal funds purchased and
other short-term borrowing
$
$
Total interest-bearing liabilities
Interest sensitivity gap:
Periodic
Cumulative
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic
Cumulative
1Balances shown reflect earliest re-pricing date.
31
254,929
458,406 $ 28,586 $
18,798 $
254,929
27,582 $ 415,683 $ 362,488 $ 1,311,543
235,701 $
86,390
29,430
$
$
$
$
$
235,701
86,390
29,430
1,995
3,826
4,553
4,707
30,614
6,717
1,037
2,335
15,082
40,702
351,521 $ 32,609 $
10,543 $
5,590 $
7,042 $
$
407,305
106,885 $
106,885
(4,023) $
8,255 $
21,992 $ 408,640 $ 362,488 $
102,862
111,117
133,109
541,749
904,237
904,237
904,237
1.30
1.30
0.88
1.27
1.78
1.28
4.93
1.33
59.03
2.33
3.22
3.22
3.22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands except share and per share data)
Assets
Cash and due from banks
Interest-bearing deposits in other financial institutions
Federal funds sold and other short-term investments
Cash and cash equivalents
Securities available-for-sale, at fair value
Loans
Less allowance for loan losses
Loans, net
Premises and equipment, net
Investments in bank-owned life insurance
Payments in excess of funding
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Accounts and drafts payable
Other liabilities
Total liabilities
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; 40,000,000
shares authorized, 11,931,147 shares
issued at December 31, 2016 and 2015
Additional paid-in capital
Retained earnings
Common shares in treasury, at cost (742,681 and 598,875
shares at December 31, 2016 and 2015, respectively)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
2016
11,814
136,852
118,077
266,743
390,552
664,866
10,175
654,691
21,086
16,445
105,347
11,590
1,997
36,388
1,504,839
214,656
407,305
621,961
642,287
32,556
1,296,804
$
$
$
2015
9,015
176,405
67,752
253,172
375,696
659,055
11,635
647,420
19,648
15,933
105,526
11,590
2,405
24,116
1,455,506
181,823
464,661
646,484
577,259
24,385
1,248,128
─
─
5,966
128,455
118,363
(30,206)
(14,543)
208,035
1,504,839
5,966
126,290
103,994
(22,208)
(6,664)
207,378
1,455,506
$
$
$
$
$
32
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
2015
2016
2014
$
$
83,713
1,276
387
760
86,136
$
78,622
1,223
2,910
613
83,368
77,427
1,132
23
1,325
79,907
29,063
28,669
29,726
143
9,658
1,066
39,930
2,029
2,029
37,901
(1,500)
39,401
125,537
72,581
3,390
4,451
408
12,643
93,473
32,064
7,716
24,348
2.18
2.15
$
$
38
9,460
543
38,710
2,111
2,111
36,599
(850)
37,449
120,817
70,314
3,400
4,291
408
11,370
89,783
31,034
7,978
23,056
2.03
2.00
$
$
29
9,412
592
39,759
2,460
2,460
37,299
─
37,299
117,206
66,100
3,172
4,130
483
11,529
85,414
31,792
7,759
24,033
2.09
2.06
$
$
(In thousands except per share data)
Fee Revenue and Other Income:
Information services payment and processing revenue
Bank service fees
Gains on sales of securities
Other
Total fee revenue and other income
Interest Income:
Interest and fees on loans
Interest and dividends on securities:
Taxable
Exempt from federal income taxes
Interest on federal funds sold and
other short-term investments
Total interest income
Interest Expense:
Interest on deposits
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total net revenue
Operating Expense:
Personnel
Occupancy
Equipment
Amortization of intangible assets
Other operating
Total operating expense
Income before income tax expense
Income tax expense
Net income
Basic Earnings Per Share
Diluted Earnings Per Share
See accompanying notes to consolidated financial statements.
33
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Comprehensive income:
Net income
Other comprehensive income:
For the Years Ended December 31,
2016
2015
2014
$
24,348
$
23,056 $
24,033
Net unrealized (loss) gain on securities available-for-sale
Tax effect
Reclassification adjustments for gains included in
net income
Tax effect
FASB ASC 715 adjustment
Tax effect
Foreign currency translation adjustments
Total comprehensive income
$
See accompanying notes to consolidated financial statements.
(10,644)
3,954
(387)
144
(1,435)
531
(42)
16,469
$
1,527
(567)
(2,910)
1,081
6,256
(2,324)
(96)
26,023 $
8,333
(3,096)
(23)
8
(14,621)
5,432
(104)
19,962
34
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Net gains on sales of securities
Stock-based compensation expense
Provisions for loan losses
Deferred income tax expense (benefit)
Increase (decrease) in income tax liability
Increase in pension liability
Other operating activities, net
Net cash provided by operating activities
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Purchase of securities available-for-sale
Net (increase) decrease in loans
Decrease (increase) in payments in excess of funding
Purchases of premises and equipment, net
Net cash used in investing activities
Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits
Net (decrease) increase in interest-bearing demand and savings
deposits
Net decrease in time deposits
Net increase (decrease) in accounts and drafts payable
Cash dividends paid
Purchase of common shares for treasury
Other financing activities, net
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental information:
Cash paid for interest
Cash paid for income taxes
For the Years Ended December 31,
2016
2015
2014
$
24,348 $
23,056 $
24,033
9,429
(387)
1,959
(1,500)
319
357
4,137
(3,473)
35,189
21,491
43,524
(96,290)
(5,771)
179
(4,684)
(41,551)
8,859
(2,910)
2,059
(850)
(137)
47
4,550
(1,181)
33,493
99,347
38,460
(161,279)
10,882
14,701
(5,747)
(3,636)
32,833
(51,440)
22,824
23,536
(5,916)
65,028
(9,979)
(9,215)
(1,378)
19,933
13,571
253,172
266,743 $
(18,075)
(78,169)
(9,697)
(10,951)
(488)
(71,020)
(41,163)
294,335
253,172 $
8,181
(23)
2,041
─
(621)
(24)
2,282
(1,026)
34,843
587
18,340
(54,054)
(16,954)
(42,577)
(6,291)
(100,949)
15,158
39,766
(19,221)
111,475
(9,337)
(1,848)
(814)
135,179
69,073
225,262
294,335
2,017 $
7,061
2,133 $
8,190
2,491
8,476
$
$
See accompanying notes to consolidated financial statements.
35
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2013
$ 5,966
$ 125,062
$ 75,939
$ (10,980)
$ (5,560)
$ 190,427
Net income
Cash dividends ($.81 per share)
Issuance of 22,629 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 39,502 common shares
Other comprehensive loss
Balance, December 31, 2014
Net income
Cash dividends ($.85 per share)
Issuance of 42,786 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 216,412 common shares
Other comprehensive income
Balance, December 31, 2015
Net income
Cash dividends ($.89 per share)
Issuance of 36,196 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 187,123 common shares
Excess tax benefits associated with stock
based compensation
Other comprehensive loss
Balance, December 31, 2016
24,033
(9,337)
(594)
(340)
2,041
(38)
159
(1,848)
$ 5,966
$ 126,169
$ 90,635
$ (12,707)
(4,071)
$ (9,631)
23,056
(9,697)
(1,250)
(687)
2,058
797
293
(10,591)
$ 5,966
$ 126,290
$ 103,994
$ (22,208)
2,967
$ (6,664)
24,348
(9,979)
566
651
(9,215)
(1,231)
(1,364)
1,959
2,801
$ 5,966
$ 128,455
$ 118,363
$ (30,206)
(7,879)
$ (14,543)
2,801
(7,879)
$ 208,035
24,033
(9,337)
(632)
(181)
2,041
(1,848)
(4,071)
$ 200,432
23,056
(9,697)
(453)
(394)
2,058
(10,591)
2,967
$ 207,378
24,348
(9,979)
(665)
(713)
1,959
(9,215)
See accompanying notes to consolidated financial statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations Cass Information Systems, Inc. (the “Company”) provides payment and information services, which
include processing and payment of transportation, energy, telecommunications and environmental invoices. These services
include the acquisition and management of data, information delivery and financial exchange. The consolidated balance sheet
captions, “Accounts and drafts payable” and “Payments in excess of funding,” represent the Company’s resulting financial
position 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 Cass Commercial Bank (the “Bank”), its wholly owned
bank subsidiary.
Basis of Presentation The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally
accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries after elimination of intercompany transactions. Certain amounts in the 2015 and 2014 consolidated
financial statements have been reclassified to conform to the 2016 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.
Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers cash and due
from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments as
segregated in the accompanying consolidated balance sheets to be cash equivalents.
Investment in Debt Securities The Company classifies its debt marketable 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 shareholders’ 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. To determine whether impairment is other than temporary, the Company
considers guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 320 - Investments – Debt and Equity Securities. When determining whether a debt security is other-than-
temporarily impaired, the Company assesses whether it has the intent to sell the security and whether it is more likely than not
that the Company will be required to sell prior to recovery of the amortized cost basis. Evidence considered in this assessment
includes the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and
forecasted performance of the investee. Premiums and discounts are amortized or accreted to interest income over the estimated
lives of the securities using the level-yield method. Interest income is recognized when earned. Gains and losses are calculated
using the specific identification method.
Allowance for Loan Losses (ALLL) The ALLL is increased by provisions charged to expense and is available to absorb charge-
offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the
ALLL. Management’s approach provides for estimated credit losses on individually evaluated loans in accordance with FASB
ASC 310 - Allowance for Credit Losses (“ASC 310”). These estimates are based upon a number of factors, such as payment
history, financial condition of the borrower, expected future cash flows and discounted collateral exposure.
Estimated credit losses inherent in the remainder of the portfolio are estimated in accordance with FASB ASC 450 -
Contingencies. These loans are segmented into groups based on similar risk characteristics. Historical loss rates for each risk
group, which are updated quarterly, are generally quantified using all recorded loan charge-offs and recoveries over a prescribed
look-back period. These historical loss rates for each risk group are used as the starting point to determine the level of the
allowance. The Company’s methodology incorporates an estimated loss emergence period for each risk group. The loss
emergence period is the period of time from when a borrower experiences a loss event and when the actual loss is recognized
in the financial statements, generally at the time of initial charge-off of the loan balance. The Company’s methodology also
includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information
available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors
are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic
conditions and developments, the volume and severity of delinquent and internally classified loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in borrowers’ financial stability, and changes in lending
policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
Management believes the ALLL is adequate to absorb probable losses in the loan portfolio. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require
37
the Company to increase the ALLL based on their judgments and interpretations about information available to them at the
time of their examinations.
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, the lesser of 10 years
or the life of the lease 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.
Intangible Assets Cost in excess of fair value of net assets acquired has resulted from business acquisitions. Goodwill and
intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible
assets with definite useful lives are amortized on a straight-line basis over their respective estimated useful lives.
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.
Non-marketable Equity Investments The Company accounts for non-marketable equity investments, in which it holds less
than a 20% ownership, under the cost method. Under the cost method of accounting, investments are carried at cost and are
adjusted only for other than temporary declines in fair value, distributions of earnings and additional investments. The
Company periodically evaluates whether any declines in fair value of its investments are other than temporary. In performing
this evaluation, the Company considers various factors including any decline in market price, where available, the investee's
financial condition, results of operations, operating trends and other financial ratios. Non-marketable equity investments are
included in other assets on the consolidated balance sheets.
Foreclosed Assets Real estate acquired as a result of foreclosure is initially recorded at fair value less estimated selling costs.
Fair value is generally determined through the receipt of appraisals. Any write down to fair value at the time the property is
acquired is recorded as a charge-off to the allowance for loan losses. Any decline in the fair value of the property subsequent
to acquisition is recorded as a charge to non-interest expense.
Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon reissuance, treasury stock is reduced
based upon the average cost basis of shares held.
Comprehensive Income Comprehensive income consists of net income, changes in net unrealized gains (losses) on available-
for-sale securities and pension liability adjustments and is presented in the accompanying consolidated statements of
shareholders' equity and consolidated statements of comprehensive income.
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 collectability of principal or interest. Subsequent payments
received on such loans are applied to principal if there is any doubt as to the collectability 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. Loan origination and
commitment fees on originated loans, net of certain direct loan origination costs, are deferred and amortized to interest income
using the level-yield method over the estimated lives of the related loans.
Impairment of Loans A loan is considered impaired when it is probable that 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.
Information Services Revenue A majority of the Company’s revenues are attributable to fees for providing services. These
services include transportation invoice rating, payment processing, auditing, and the generation of accounting and
transportation information. The Company also processes, pays and generates management information from electric, gas,
telecommunications, environmental, and other invoices. The specific payment and information processing services provided
to each customer are developed individually to meet each customer’s specific requirements. The Company enters into service
agreements with customers typically for fixed fees per transaction that are invoiced monthly. Revenues are recognized in the
period services are rendered and earned under the service agreements, as long as collection is reasonably assured.
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
if necessary, by a
differences are expected
to be recovered or settled.
tax assets are reduced
Deferred
38
deferred tax asset valuation allowance. In the event that management determines it is more likely than not that it will not be
able to realize all or part of net deferred tax assets in the future, the Company adjusts the recorded value of deferred tax assets,
which would result in a direct charge to income tax expense in the period that such determination is made. Likewise, the
Company will reverse the valuation allowance when realization of the deferred tax asset is expected. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number
of common shares outstanding and the weighted average number of potential common shares outstanding.
Stock-Based Compensation The Company follows FASB ASC 718 - Accounting for Stock Options and Other Stock-based
Compensation (“ASC 718”), which requires that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award. FASB ASC 718 also requires that excess tax benefits
related to stock option exercises and restricted stock awards be reflected as financing cash inflows instead of operating cash
inflows.
Pension Plans The amounts recognized in the consolidated financial statements related to pension are determined from
actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at
which the liabilities could be settled at December 31, 2016, rate of increase in future compensation levels and mortality rates.
These assumptions are updated annually and are disclosed in Note 10. The Company follows FASB ASC 715 - Compensation
– Retirement Benefits (“ASC 715”), which requires companies to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its consolidated balance sheet and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. The funded status is measured as the difference
between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.
Fair Value Measurements The Company follows the provisions of FASB ASC 820 - Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and outlines disclosures
about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. A three-level hierarchy for valuation techniques is used to measure
financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or
unobservable. Financial instrument valuations are considered Level 1 when they are based on quoted prices in active markets
for identical assets or liabilities. Level 2 financial instrument valuations use quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Financial instrument valuations are considered Level 3 when they are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant model assumption or input is unobservable, and when
determination of the fair value requires significant management judgment or estimation. The Company records securities
available for sale at their fair values on a recurring basis using Level 2 valuations. Additionally, the Company records impaired
loans and other real estate owned at their fair value on a nonrecurring basis. The nonrecurring fair value adjustments typically
involve application of lower-of-cost-or-market accounting or impairment write-downs of individual assets.
Impact of New and Not Yet Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 – Revenue from Contracts with Customers.
The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific
revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies
specific steps that entities should apply in order to achieve this principle. Under the ASU, the amendments are effective for
interim and annual periods beginning January 1, 2018 and must be applied retrospectively. The impact of the adoption of this
ASU is currently being evaluated but is not expected to have a material impact on the Company’s consolidated financial
statements or results of operations.
In February 2016, the FASB issued ASU No. 2016-02 – Leases (ASC Topic 842). The ASU improves financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and
manufacturing equipment. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and
cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However,
unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require
both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other
financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in
the financial statements. The ASU will take effect for public companies for fiscal years, and interim periods within those fiscal
39
years, beginning after December 15, 2018. The impact of the adoption of this ASU is currently being evaluated but is not
expected to have a material impact on the Company’s consolidated financial statements or results of operations.
In March 2016, the FASB issued ASU No. 2016-09 – Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting. The ASU will simplify the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. This standard is effective for fiscal periods beginning after
December 15, 2016. The impact of the adoption of this ASU is currently being evaluated.
In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets
held. Under this standard, a company will be required to hold an allowance equal to the expected life-of-loan losses on the
loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. The impact of the adoption of
this ASU is currently being evaluated.
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’s 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 and common equity Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes that as of December 31, 2016 and 2015, the Company and the Bank met all
capital adequacy requirements to which they are subject.
Effective July 2, 2013, the Federal Reserve Board approved final rules known as the “Basel III Capital Rules” that substantially
revise the risk-based capital and leverage capital requirements applicable to bank holding companies and depository
institutions, including the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital
framework agreed upon by the Basel Committee and incorporate changes required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Among other things, the Basel III Capital Rules establish stricter capital requirements and calculation
standards, as well as more restrictive risk weightings for certain loans and facilities. The Basel III Capital Rules were effective
for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 2016, the most recent
notification from the regulatory agencies categorized the Bank as well-capitalized. To be categorized as well-capitalized, the
Bank must maintain minimum total risk-based, common equity Tier I 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 can be a significant source of funds for payment of dividends by the Company to its shareholders. At
December 31, 2016, unappropriated retained earnings of $26,374,000 were available at the Bank for the declaration of
dividends to the Company without prior approval from regulatory authorities. However, dividends paid by the Bank to the
Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum
capital requirements.
There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 2016 and 2015.
The Company’s and the Bank’s actual and required capital amounts and ratios are as follows:
40
(In thousands)
At December 31, 2016
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Common Equity Tier I Capital (to risk-
weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to average assets)
Cass Information Systems, Inc.
Cass Commercial Bank
At December 31, 2015
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Common Equity Tier I Capital (to risk-
weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to average assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Note 3
Investment in Securities
Actual
Amount
Ratio
Capital
Requirements
Amount Ratio
Requirement to be
Well-Capitalized
Amount Ratio
$ 219,747
110,576
22.75 %
16.72
$ 77,272
52,898
8.00 %
8.00
$ N/A N/A %
66,123 10.00
209,572
102,769
209,572
102,769
209,572
102,769
21.70
15.54
21.70
15.54
13.83
13.98
43,466
29,755
4.50
4.50
57,954
39,674
60,620
29,409
6.00
6.00
4.00
4.00
N/A N/A
6.50
42,980
N/A N/A
8.00
52,898
N/A N/A
5.00
36,761
$ 212,717
99,872
23.31 %
16.90
$ 72,994
47,281
8.00 %
8.00
$ N/A N/A %
59,102 10.00
201,312
92,470
201,312
92,470
201,312
92,470
22.06
15.65
22.06
15.65
13.88
13.15
41,059
26,596
4.50
4.50
54,746
35,461
6.00
6.00
57,995
28,124
4.00
4.00
N/A N/A
6.50
38,416
N/A N/A
8.00
47,281
N/A N/A
5.00
35,155
Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities
available-for-sale at December 31, 2016 and 2015 are measured at fair value using Level 2 valuations. The market evaluation
utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore falls into
the Level 2 category. The table below presents the balances of securities available-for-sale measured at fair value on a recurring
basis. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of debt and equity securities are
summarized as follows:
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total
(In thousands)
State and political subdivisions
Certificates of deposit
Total
December 31, 2016
Gross
Unrealized
Losses
Gross
Unrealized
Gains
$
$
5,239
─
─
5,239
$
$
3,328
403
─
3,731
$
$
Fair Value
370,134
12,672
7,746
390,552
Amortized
Cost
$ 368,223
13,075
7,746
$ 389,044
December 31, 2015
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Fair Value
$
$
12,552
─
12,552
$
$
13
─
13
$
$
369,070
6,626
375,696
Amortized
Cost
$ 356,531
6,626
$ 363,157
41
The fair values of securities with unrealized losses are as follows:
Less than 12 months
December 31, 2016
12 months or more
(In thousands)
State and political
subdivisions
U.S. government agencies
Certificates of deposit
Total
(In thousands)
State and political
subdivisions
Certificates of deposit
Total
Estimated Unrealized Estimated Unrealized
Fair Value
$ 140,384 $
Fair Value
3,328 $
Losses
Losses
─ $
Total
Estimated Unrealized
Fair value
─ $ 140,384 $
Losses
3,328
12,672
─
$ 153,056 $
403
─
3,731 $
─
─
─ $
12,672
─
─
─
─ $ 153,056 $
403
─
3,731
Less than 12 months
December 31, 2015
12 months or more
Estimated Unrealized Estimated Unrealized
Fair Value
$
Fair Value
1,208 $
3,638 $
Losses
Losses
5 $
Total
Estimated
Fair value
Unrealized
Losses
8 $
4,846 $
─
3,638 $
$
─
5 $
─
1,208 $
─
8 $
─
4,846 $
13
─
13
There were 108 securities, or 31% of the total, (none greater than 12 months) in an unrealized loss position as of December 31,
2016 compared to 5 securities (1 greater than 12 months) in an unrealized loss position as of December 31, 2015. All unrealized
losses are reviewed to determine whether the losses are other than temporary. Management believes that all unrealized losses
are temporary since they are market driven, the Company does not have the intent to sell the security, and it is more likely than
not that the Company will not be required to sell prior to recovery of the amortized basis.
The amortized cost and fair value of debt and equity securities 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.
(In thousands)
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
No stated maturity
Total
December 31, 2016
Amortized Cost
Fair Value
$
33,890
57,536
156,163
141,455
─
$ 389,044
$
$
34,125
58,414
159,366
138,647
─
390,552
The premium related to the purchase of state and political subdivisions was $5,749,000 and $5,443,000 in 2016 and 2015,
respectively.
The amortized cost of debt securities pledged to secure public deposits, securities sold under agreements to repurchase and for
other purposes at December 31, 2016 and 2015 was $3,750,000 and $3,750,000, respectively.
Proceeds from sales of debt securities classified as available-for-sale were $21,491,000 in 2016, $99,347,000 in 2015, and
$587,000 in 2014. Gross realized gains on the sales in 2016, 2015 and 2014 were $387,000, $2,910,000, and $23,000,
respectively. There were no gross realized losses on sales in 2016, 2015 or 2014.
Note 4
Loans
The Company originates commercial, industrial and real estate loans to businesses and churches throughout the metropolitan
St. Louis, Missouri area, Orange County, California and other selected cities in the United States. The Company does not have
any particular concentration of credit in any one economic sector; however, a substantial portion of the commercial and
industrial loans is extended to privately-held commercial companies in these market areas, and are generally secured by the
assets of the business. The Company also has a substantial portion of real estate loans secured by mortgages that are extended
to churches in its market area and selected cities in the United States.
42
A summary of loan categories is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total loans
December 31,
2016
214,767
$
$
2015
193,430
104,779
6,325
321,168
11,152
6,639
36
664,866
$
$
108,836
1,182
306,728
28,957
19,831
91
659,055
The following table presents the aging of loans by loan categories at December 31, 2016:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Current
214,767
$
104,534
6,325
321,168
11,152
6,639
24
664,609
$
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
$
$
$
$
12
12 $
$
$
245
$
---
245 $
The following table presents the aging of loans by loan categories at December 31, 2015:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
$
$
$
$
Current
193,430
$
105,804
1,182
306,625
28,957
19,831
91
655,920
$
$
$
$
$
3,032
103
3,135 $
Total
Loans
214,767
104,779
6,325
321,168
11,152
6,639
36
664,866
Total
Loans
193,430
108,836
1,182
306,728
28,957
19,831
91
659,055
43
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2016:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Loans
Subject to
Normal
Monitoring1
$
213,024 $
Performing
Loans Subject to
Special
Monitoring2
1,743
Nonperforming
Loans Subject
to Special
Monitoring2
$
Total Loans
214,767
$
103,778
6,325
318,030
11,152
6,639
36
658,984 $
$
756
3,138
5,637
245
$
245
$
104,779
6,325
321,168
11,152
6,639
36
664,866
1Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
2Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2015:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Loans
Subject to
Normal
Monitoring1
$
190,303 $
Performing
Loans Subject to
Special
Monitoring2
3,127
Nonperforming
Loans Subject to
Special
Monitoring2
$
$
104,642
1,182
299,135
28,957
19,831
91
644,141 $
$
1,162
7,490
11,779
$
3,032
103
3,135 $
Total
Loans
193,430
108,836
1,182
306,728
28,957
19,831
91
659,055
1Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
2Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled
debt restructurings, both performing and non-performing. Troubled debt restructuring involves the granting of a concession to
a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment
schedule or interest rate. The ALLL related to impaired loans was $0 and $1,142,000 at December 31, 2016 and 2015,
respectively. Nonaccrual loans were $245,000 and $3,135,000 at December 31, 2016 and 2015, respectively. Loans delinquent
90 days or more and still accruing interest were $0 at December 31, 2016 and 2015. At December 31, 2016 and 2015, there
were no loans classified as troubled debt restructuring. The average balances of impaired loans during 2016, 2015 and 2014
were $333,000, $3,188,000, and $1,262,000, respectively. Income that would have been recognized on non-accrual loans under
the original terms of the contract was $66,000, $390,000 and $108,000 for 2016, 2015 and 2014, respectively. Income that
was recognized on nonaccrual loans was $47,000, $34,000 and $77,000 for 2016, 2015 and 2014 respectively. There were no
foreclosed assets as of December 31, 2016 and December 31, 2015.
44
The following table presents the recorded investment and unpaid principal balance for impaired loans at December 31, 2016:
(In thousands)
Commercial and industrial:
Nonaccrual
Real estate
Commercial – Mortgage:
Nonaccrual
Church – Mortgage:
Nonaccrual
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
for Loan
Losses
$
$
$
245
245
$
245
245
$
$
The following table presents the recorded investment and unpaid principal balance for impaired loans at December 31, 2015:
(In thousands)
Commercial and industrial:
Nonaccrual
Real estate
Commercial – Mortgage:
Nonaccrual
Church – Mortgage:
Nonaccrual
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
for Loan
Losses
$
$
3,032
3,032
103
3,135
$
103
3,135
$
1,039
103
1,142
$
$
The Company does not record loans at fair value on a recurring basis. Once a loan is identified as impaired, management
measures impairment in accordance with FASB ASC 310. At December 31, 2016, impaired loans were evaluated based on the
present value of expected future cash flow. At December 31, 2015, all impaired loans were evaluated based on the fair value
of the collateral and the expected cash flow method. The fair value of the collateral is based upon an observable market price
or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 3.
A summary of the activity in the allowance for loan losses is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Church, church-related:
Mortgage
Construction
Industrial Revenue Bond
Other
Total
December 31,
2015
Charge-
Offs
Recoveries
$
3,083 $
$
39
$
Provision
139
December 31,
2016
$
3,261
2,803
9
4,082
217
320
1,121
11,635 $
$
$
1
40
(1,141)
38
(56)
(132)
(219)
(129)
(1,500)
$
1,662
47
4,027
85
101
992
10,175
$
As of December 31, 2016, there were no loans to affiliates of executive officers or directors.
45
Note 5
Premises and Equipment
A summary of premises and equipment is as follows:
(In thousands)
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Purchased software
Internally developed software
Less accumulated depreciation
Total
December 31,
$
2016
873
13,087
2,098
13,248
4,704
14,377
48,387
27,301
$ 21,086
2015
873
13,079
2,112
12,320
4,614
11,111
44,109
24,461
19,648
$
$
Total depreciation charged to expense in 2016, 2015 and 2014 amounted to $3,245,000, $3,008,000 and $2,613,000,
respectively.
The Company and its subsidiaries lease various premises and equipment under operating lease agreements which expire at
various dates through 2023. Rental expense for 2016, 2015 and 2014 was $1,397,000, $1,387,000 and $1,405,000, respectively.
The following is a schedule, by year, of future minimum rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December 31, 2016:
(In thousands)
2017
2018
2019
2020
2021
2022-2023
Total
Note 6
Acquired Intangible Assets
Amount
1,490
1,239
972
943
808
833
6,285
$
$
The Company accounts for intangible assets in accordance with FASB ASC 350 - Goodwill and Other Intangible Assets (“ASC
350”), which requires that intangibles with indefinite useful lives be tested annually for impairment and those with finite useful
lives be amortized over their useful lives. Details of the Company’s intangible assets are as follows:
(In thousands)
Assets eligible for amortization:
Customer lists
Patent
Non-compete agreements
Software
Other
Unamortized intangible assets:
December 31, 2016
December 31, 2015
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
3,933
72
261
234
500
(2,342)
(8)
(261)
(234)
(158)
$
$
$
3,933
72
261
234
500
11,817
16,817
$
(2,023)
(4)
(209)
(234)
(125)
(227)
(2,822)
Goodwill1
(227)
(3,230)
Total intangible assets
1Amortization through December 31, 2001 prior to adoption of FASB ASC 350.
11,817
16,817
$
$
The customer lists are amortized over seven and ten years; the patents over eight years, the non-compete agreements over five
years, software over three years and other intangible assets over fifteen years. Amortization of intangible assets amounted to
$408,000, $408,000 and $483,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated future
amortization of intangibles is $356,000 in each of 2017, 2018, 2019, 2020 and 2021.
46
Note 7
Interest-Bearing Deposits
Interest-bearing deposits consist of the following:
December 31,
(In thousands)
Interest-bearing demand deposits
Savings deposits
Time deposits:
Less than $100
$100 to less than $250
$250 or more
Total
Weighted average interest rate
Interest on deposits consists of the following:
(In thousands)
Interest-bearing demand deposits
Savings deposits
Time deposits:
Less than $100
$100 to less than $250
$250 or more
Total
$
$
2016
322,091 $
29,430
2015
386,203
16,758
3,523
4,758
37,179
43,178
15,082
407,305 $
.48%
13,764
464,661
.51%
December 31,
2015
1,392 $
65
$
346
119
189
2,111 $
$
2016
1,387
100
274
191
77
2,029
$
$
2014
1,564
87
472
135
202
2,460
The scheduled maturities of time deposits are summarized as follows:
December 31,
2016
2015
Amount
$
$
48,740
4,752
155
2,072
65
55,784
Percent
of Total
Amount
87.4%
$
8.5
0.3
3.7
0.1
100.0%
$
55,350
2,690
1,566
83
2,011
61,700
Percent
of Total
89.7%
4.4
2.5
0.1
3.3
100.0%
(In thousands)
Due within:
One year
Two years
Three years
Four years
Five years
Total
Note 8
Unused Available Lines of Credit
As of December 31, 2016, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $78,000,000 at the following banks: Bank of America, $10,000,000; US Bank, $20,000,000; Wells Fargo Bank,
$15,000,000; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; JPM Chase Bank, $6,000,000; and UMB Bank
$5,000,000. As of December 31, 2016, the Bank had secured lines of credit with the Federal Home Loan Bank (“FHLB”) of
$205,768,000 collateralized by commercial mortgage loans. At December 31, 2016, the Company had a line of credit from
UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities.
There were no amounts outstanding under any of the lines of credit discussed above at December 31, 2016 or 2015.
47
Note 9
Common Stock and Earnings per Share
The table below shows activity in the outstanding shares of the Company’s common stock during 2016.
Shares outstanding at January 1
Issuance of common stock:
Employee restricted stock grants
Employee SARs exercised
Directors’ compensation
Shares repurchased
Shares forfeited
Shares outstanding at December 31
2016
11,332,272
15,455
20,761
9,029
(187,123)
(1,928)
11,188,466
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common shares
outstanding and the weighted average number of potential common shares outstanding. Under the treasury stock method, stock
appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the
effect of any unamortized compensation expense, exceeds the SAR price during a period. Anti-dilutive shares are those SARs
with prices in excess of the current market value.
The calculations of basic and diluted earnings per share are as follows:
(In thousands except share and per share data)
Basic:
Net income
Weighted average common shares outstanding
Basic earnings per share
Diluted:
Net income
Weighted average common shares outstanding
$
$
$
Effect of dilutive restricted stock and SARs
Weighted average common shares outstanding
assuming dilution
Diluted earnings per share
$
Note 10
Employee Benefit Plans
2016
24,348
11,150,395
2.18
24,348
11,150,395
156,729
11,307,124
2.15
December 31,
2015
2014
$
$
$
23,056
11,358,609
2.03
23,056
11,358,609
159,819
$
$
$
24,033
11,479,025
2.09
24,033
11,479,025
164,954
11,518,428
2.00
11,643,979
2.06
$
$
Defined Benefit Plan
The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers most of its employees. Effective
December 31, 2016, the Plan was closed to all new participants. 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.
48
A summary of the activity in the Plan’s projected benefit obligation, assets, funded status and amounts recognized in the
Company’s consolidated balance sheets is as follows:
(In thousands)
Projected benefit obligation:
Balance, January 1
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Balance, December 31
Plan assets:
Fair value, January 1
Actual return
Employer contribution
Benefits paid
Fair value, December 31
Funded status:
Accrued pension liability
2016
2015
$
$
$
$
$
78,369 $
3,559
3,505
2,003
(1,885)
85,551 $
71,174 $
3,879
―
(1,885)
73,168 $
81,342
3,795
3,178
(8,358)
(1,588)
78,369
72,972
(210)
―
(1,588)
71,174
(12,383) $
(7,195)
The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2016, 2015
and 2014, the Plan’s expected benefit cash flows were discounted using the Citibank Above Median Curve. For 2016, the RP-
2014 Mortality Table and the MP-2016 Mortality Improvement Table were used. For 2015, the RP-2014 Mortality Table and
MP-2015 Mortality Improvement Table were used. For 2014, the RP-2014 Mortality Table and MP-2014 Mortality
Improvement Table were used.
Weighted average discount rate
Rate of increase in compensation levels
2016
4.25%
(a)
2015
4.50%
(a)
2014
4.00%
(a)
(a) 6.0% graded down to 3.25% over the first seven years of service
The accumulated benefit obligation was $74,425,000 and $68,321,000 as of December 31, 2016 and 2015, respectively. The
Company does not expect to make a contribution to the Plan in 2017. The following pension benefit payments, which reflect
expected future service, as appropriate, are expected to be paid by the Plan:
2017
2018
2019
2020
2021
2022-2026
Amount
$
2,319,000
2,660,000
2,814,000
3,045,000
3,309,000
21,898,000
The Plan’s pension cost included the following components:
(In thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligations
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
For the Year Ended
December 31,
2015
3,796 $
3,178
(4,864)
1,542
3,652 $
2016
3,559 $
3,505
(4,734)
1,259
3,589 $
$
$
The following represent the major assumptions used to determine the net pension cost of the Plan:
Weighted average discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
2016
4.50%
(a)
6.75%
2015
4.00%
(a)
6.75%
(a)
6.0% graded down to 3.25% over the first seven years of service
49
2014
3,003
3,037
(4,711)
244
1,573
2014
5.00%
3.75%
6.75%
For 2016, the RP-2014 Mortality Table and the MP-2016 Mortality Improvement Table were used. For 2015, the RP-2014
Mortality Table and the MP-2015 Mortality Improvement Table were used. For 2014, the RP-2010 Mortality Tables and the
AA Mortality Improvement scale were used.
The investment objective for the Plan is to maximize total return with a tolerance for average risk. Asset allocation is a balance
between fixed income and equity investments, with a target allocation of approximately 48% fixed income, 36% U.S. equity
and 16% non-U.S. equity. Due to volatility in the market, this target allocation is not always desirable and asset allocations can
fluctuate between acceptable ranges. The fixed income component is invested in pooled investment grade securities. The equity
components are invested in pooled large cap, small/mid cap and non-U.S. stocks. The expected one-year nominal returns and
annual standard deviations are shown by asset class below:
Asset Class
% of Total Portfolio
One-Year Nominal
Return
Annual Standard
Deviation
Core Fixed Income
Large Cap U.S. Equities
Large Cap U.S. Growth Equities
Small Cap U.S. Equities
International (Developed)
International (Emerging)
48%
10%
18%
8%
15%
1%
4.51%
7.36%
7.67%
8.49%
8.89%
10.68%
4.64%
16.14%
17.31%
20.02%
19.35%
27.66%
Applying appropriate correlation factors between each of the asset classes the long-term rate of return on assets is estimated
to be 6.50%.
A summary of the fair value measurements by type of asset is as follows:
Fair Value Measurements as of December 31,
2015
2016
(In thousands)
Cash
Equity securities
U.S. Large Cap Growth
U.S. Small/Mid Cap Growth
Non-U. S. Core
U.S. Large Cap Passive
Emerging Markets
Fixed Income
U.S. Core
U.S. Passive
Opportunistic
Total
Total
$340
13,306
5,655
10,588
7,364
652
24,438
9,571
1,254
$73,168
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$340
$ ―
Total
$283
12,908
5,418
10,474
7,153
599
13,306
5,655
10,588
7,364
652
24,438
9,571
1,254
$72,828
23,881
9,328
1,130
$71,174
―
―
―
―
―
―
―
$340
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$283
$ ―
―
―
―
―
―
―
―
$283
12,908
5,418
10,474
7,153
599
23,881
9,328
1,130
$70,891
Supplemental Executive Retirement Plan
The Company also has an unfunded supplemental executive retirement plan (“SERP”) which covers key executives of the
Company whose benefits are limited by the IRS under the Company’s qualified retirement plan. The SERP 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 the Plan.
A summary of the activity in the SERP’s projected benefit obligation, funded status and amounts recognized in the Company’s
consolidated balance sheets is as follows:
(In thousands)
Benefit obligation:
Balance, January 1
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Balance, December 31
December 31,
2016
2015
$
$
8,748 $
133
367
(247)
131
9,132 $
9,403
140
348
(243)
(900)
8,748
50
The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2016, 2015
and 2014, the SERP’s expected benefit cash flows were discounted using the Citigroup Above Median Curve.
Weighted average discount rate
Rate of increase in compensation levels
2016
4.00%
(a)
(a) 6.00% graded down to 3.25% over the first seven years of service.
2015
4.25%
(a)
2014
3.75%
(a)
The accumulated benefit obligation was $7,904,000 and $7,482,000 as of December 31, 2016 and 2015, respectively. Since
this is an unfunded plan, there are no plan assets. Benefits paid were $247,000 in 2016, $243,000 in 2015 and $236,000 in
2014. Expected future benefits payable by the Company over the next ten years are as follows:
2017
2018
2019
2020
2021
2022-2026
Amount
247,000
$
313,000
312,000
310,000
364,000
3,679,000
The SERP’s pension cost included the following components:
(In thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligations
Net amortization and deferral
Net periodic pension cost
For the Year Ended December 31,
2016
133 $
367
295
795 $
2015
140 $
348
654
1,142 $
2014
136
377
431
944
$
$
The pretax amounts in accumulated other comprehensive loss as of December 31 were as follows:
(In thousands)
Prior service cost
Net actuarial loss
Total
The Plan
SERP
2016
$
22,237
$ 22,237
2015
$
20,637
$ 20,637
2016
$
2,005
$ 2,005
2015
$
2,169
$ 2,169
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2016
expected to be recognized as components of net periodic benefit cost in 2017 for the Plan are $0 and $1,328,000, respectively.
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2016
expected to be recognized as components of net periodic benefit cost in 2017 for the SERP are $0 and $323,000, respectively.
The Company also maintains a noncontributory profit sharing program, which covers most 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 2016, 2015 and 2014 was $5,367,000, $5,211,000, and
$5,298,000, respectively.
The Company also sponsors a defined contribution 401(k) plan to provide additional retirement benefits to substantially all
employees. Contributions under the 401(k) plan for 2016, 2015 and 2014 were $658,000, $623,000, and $584,000, respectively.
Note 11
Stock-based Compensation
The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) provides incentive
opportunities for key employees and non-employee directors and to align the personal financial interests of such individuals
with those of the Company’s shareholders. The Omnibus Plan permits the issuance of up to 1,500,000 shares of the Company’s
common stock in the form of stock options, SARs, restricted stock, restricted stock units and performance awards.
Restricted Stock
Restricted shares granted prior to April 16, 2013 are amortized to expense over the three-year vesting period. Beginning on
April 16, 2013, restricted shares granted to Company employees are amortized to expense over the three-year vesting period
51
whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period
with the exception of those shares granted in lieu of cash payment for retainer fees which are expensed in the period earned.
Changes in restricted shares outstanding for the year ended December 31, 2016 were as follows:
Balance at December 31, 2015
Granted
Vested
Forfeited
Balance at December 31, 2016
Weighted Average
Grant Date
Fair Value
$51.33
$50.33
$50.89
$50.75
$51.03
Shares
69,041
36,196
(29,469)
(1,928)
73,840
During 2015 and 2014, 42,786 and 22,629 shares, respectively, were granted with weighted average per share market values
at date of grant of $51.04 in 2015 and $58.89 in 2014. The fair value of such shares, which is based on the market price on the
date of grant, is amortized to expense over the three-year vesting period whereas restricted shares granted to members of the
Board of Directors are amortized to expense over a one-year period. Amortization of the restricted stock bonus awards totaled
$1,712,000 for 2016, $1,514,000 for 2015 and $1,250,000 for 2014. As of December 31, 2016, the total unrecognized
compensation expense related to non-vested restricted stock awards was $1,688,000 and the related weighted average period
over which it is expected to be recognized is approximately 0.58 years. The total fair value of shares vested during the years
ended December 2016, 2015, and 2014 was $1,500,000, $1,089,000, and $1,066,000, respectively.
SARs
There were no SARs granted during the year ended December 31, 2016. The Company uses the Black-Scholes option-pricing
model to determine the fair value of the SARs at the date of grant.
During 2016, the Company recognized SARs expense of $247,000. As of December 31, 2016, the total unrecognized
compensation expense related to SARs was $18,000, and the related weighted average period over which it is expected to be
recognized is .08 years. Changes in SARs outstanding for the year ended December 31, 2016 were as follows:
Balance at December 31, 2015
Exercised
Forfeited
Balance at December 31, 2016
Exercisable at December 31, 2016
SARs
307,323
(69,855)
237,468
225,304
Weighted Average Exercise Price
$36.57
$30.96
$
$38.22
$36.95
The total intrinsic value of SARs exercised during 2016 and 2015 was $2,162,000 and $1,268,000, respectively. The average
remaining contractual term for SARs outstanding as of December 31, 2016 was 5.22 years, and the aggregate intrinsic value
was $8,395,000. The average remaining contractual term for SARs exercisable as of December 31, 2015 was 5.99 years, and
the aggregate intrinsic value was $4,577,000.
The total compensation cost for share-based payment arrangements was $1,959,000, $2,059,000, and $2,042,000 in 2016, 2015,
and 2014, respectively.
Note 12
Other Operating Expense
Details of other operating expense are as follows:
(In thousands)
Postage and supplies
Promotional expense
Professional fees
Outside service fees
Data processing services
Telecommunications
Other
Total other operating expense
For the Years Ended December 31,
2016
1,925 $
2,187
1,930
3,316
372
1,000
1,913
12,643 $
2015
1,954 $
2,268
1,690
2,848
357
1,068
1,185
11,370 $
2014
2,008
2,049
1,566
2,876
338
1,045
1,647
11,529
$
$
52
Note 13
Income Taxes
The components of income tax expense (benefit) are as follows:
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Total income tax expense
For the Years Ended December 31,
2016
2015
2014
$
$
6,456 $
941
6,825 $
1,290
301
18
7,716
$
(84)
(53)
7,978
$
7,189
1,191
(585)
(36)
7,759
A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 35%
for each of 2016, 2015 and 2014 to income before income tax expense is as follows:
(In thousands)
Expected income tax expense
(Reductions) increases resulting from:
Tax-exempt income
State taxes, net of federal benefit
Other, net
Total income tax expense
For the Years Ended December 31,
2016
11,223 $
2015
10,862 $
2014
11,127
(3,754)
623
(376)
7,716 $
(3,704)
804
16
7,978 $
(3,896)
751
(223)
7,759
$
$
The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
(In thousands)
Deferred tax assets:
Allowance for loan losses
ASC 715 pension funding liability
Net operating loss carryforward1
Supplemental executive retirement plan accrual
Stock compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Pension
Stock compensation
Intangible/assets
Unrealized gain on investment in securities available-for-sale
Other
Total deferred tax liabilities
December 31,
2016
$
$
3,718
8,969
169
2,604
1,695
177
17,332
$
$
2015
4,251
8,438
212
1,690
553
15,144
(2,731)
(3,601)
(1,402)
(560)
(8,294)
9,038
$
$
(2,081)
(4,181)
(510)
(1,314)
(4,658)
(452)
(13,196)
1,948
$
$
Net deferred tax assets
1As of December 31, 2016, the Company had approximately $484,000 of net operating loss carry forwards as a result of the
acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal
Revenue Code and limits the Company’s use to approximately $122,000 per year during the carry forward period, which expires
in 2020.
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, 2016 or 2015, 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.
53
The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table:
In thousands)
Balance at January 1
Changes in unrecognized tax benefits as a result of tax
positions taken during a prior year
Changes in unrecognized tax benefits as a result of tax
position taken during the current year
Decreases in unrecognized tax benefits relating to
settlements with taxing authorities
Reductions to unrecognized tax benefits as a result of a
lapse of the applicable statute of limitations
Balance at December 31
2016
$1,194
2015
$1,117
407
311
10
277
2014
$1,208
(107)
267
(289)
$1,623
(210)
$1,194
(251)
$1,117
At December 31, 2016, 2015 and 2014, the balance of the Company’s unrecognized tax benefits which would, if recognized,
affect the Company’s effective tax rate was $1,225,000, $861,000 and $819,000, respectively. These amounts are net of the
offsetting benefits from other taxing jurisdictions.
As of December 31, 2016, 2015 and 2014, the Company had $108,000, $54,000 and $45,000, respectively, in accrued interest
related to unrecognized tax benefits. During 2016 and 2015, the Company recorded a net increase in accrued interest of $54,000
and $9,000, respectively, as a result of settlements with taxing authorities and other prior-year adjustments.
The Company believes it is reasonably possible that the total amount of tax benefits will decrease by approximately $223,000
over the next twelve months. The reduction primarily relates to the anticipated lapse in the statute of limitations. The
unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax jurisdictions.
The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction.
The Company’s federal income tax returns for tax years 2013 through 2015 remain subject to examination by the Internal
Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2012 through 2015.
Note 14
Contingencies
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.
Note 15
Disclosures about Fair Value of 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, 2016 and 2015, 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 terms of commercial and standby letters of credit range from
less than one to five years. Since these 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.
54
The following table shows conditional commitments to extend credit, standby letters of credit and commercial letters:
(In thousands)
Conditional commitments to extend credit
Standby letters of credit
Commercial letters of credit
December 31,
2016
2015
$
45,497 $
14,381
1,962
25,212
11,581
1,857
The fair value of commitments to extend credit and standby letters of credit is 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.
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:
(In thousands)
Balance sheet assets:
Cash and cash equivalents
Investment in securities
Loans, net
Accrued interest receivable
Total
Balance sheet liabilities:
Deposits
Accounts and drafts payable
Accrued interest payable
Total
December 31,
2016
Carrying
Amount
$
266,743
390,552
654,691
6,543
$ 1,318,529
Fair Value
$
266,743
390,552
652,028
6,543
$ 1,315,866
2015
Carrying
Amount
Fair Value
$
253,172
375,696
647,420
6,647
$ 1,282,935
$
253,172
375,696
649,161
6,647
$ 1,284,676
$
621,961
642,287
46
$ 1,264,294
$
622,173
642,287
46
$ 1,264,506
$
646,484
577,259
35
$ 1,223,778
$
646,892
577,259
35
$ 1,224,186
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash and Cash Equivalents The carrying amount approximates fair value.
Investment in Securities The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 3, “Investment
in Securities,” for fair value and unrealized gains and losses by investment type.
Loans The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each
loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor
embedded in the interest rates along with the allowance for loan losses results in a fair valuation.
Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or current
appraised value and therefore, the fair value is a nonrecurring Level 3 valuation.
Accrued Interest Receivable The carrying amount approximates fair value.
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 and therefore, is a Level 2 valuation. 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 or the benefit derived from the customer relationship inherent in existing deposits.
Accounts and Drafts Payable The carrying amount approximates fair value.
Accrued Interest The carrying amount approximates fair value.
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
55
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.
Note 16
Industry Segment Information
The services provided by the Company are classified into two reportable segments: Information Services and Banking Services.
Each of these segments provides distinct services that are marketed through different channels. They are managed separately
due to their unique service, processing and capital requirements. The Information Services segment provides transportation,
energy, telecommunication, and environmental invoice processing and payment services to large corporations. The Banking
Services segment 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 fair value.
Substantially all revenue originates from and all long-lived assets are located within the United States, and no revenue from
any customer of any segment exceeds 10% of the Company’s consolidated revenue. Assets represent actual assets owned by
Information Services and Banking Services and there is no allocation methodology used. Loans are sold by Banking Services
to Information Services to create liquidity when the Bank’s loan to deposit ratio is greater than 100%. Segment interest from
customers is the actual interest earned on the loans owned by Information Services and Banking Services, respectively.
56
Summarized information about the Company’s operations in each industry segment for the years ended December 31, 2016,
2015 and 2014, is as follows:
Information
Services
Banking
Services
Corporate,
Eliminations
and Other
Total
$
84,612
12,164
$
1,524
1,575
$
─
(13,739)
$
86,136
─
13,820
2
3,368
1,478
14,049
11,454
1,997
763,999
82,144
10,078
14,598
12
3,164
2,818
14,635
11,454
2,405
702,491
78,773
9,210
15,678
12
2,795
3,006
16,379
11,454
2,762
782,844
$
$
$
$
$
25,581
(2)
165
6,238
10,299
136
─
756,164
1,224
1,648
22,851
(12)
151
5,160
8,421
136
─
761,739
1,134
1,504
21,621
(12)
182
4,753
7,654
136
─
755,400
$
$
$
$
$
$
$
$
$
$
─
─
120
─
─
─
─
(15,324)
─
(11,726)
─
─
101
─
─
─
─
(8,724)
─
(10,714)
─
─
119
─
─
─
─
(37,513)
$
$
$
$
$
39,401
─
3,653
7,716
24,348
11,590
1,997
1,504,839
83,368
─
37,449
─
3,416
7,978
23,056
11,590
2,405
1,455,506
79,907
─
37,299
─
3,096
7,759
24,033
11,590
2,762
1,500,731
(In thousands)
2016
Fee revenue and other income:
Income from customers
Intersegment income (expense)
Net interest income (expense) after provision
for loan losses:
Income from customers
Intersegment income (expense)
Depreciation and amortization
Income taxes
Net income
Goodwill
Other intangible assets, net
Total assets
2015
Fee revenue and other income:
Income from customers
Intersegment income (expense)
Net interest income (expense) after provision
for loan losses:
Income from customers
Intersegment income (expense)
Depreciation and amortization
Income taxes
Net income
Goodwill
Other intangible assets, net
Total assets
2014
Fee revenue and other income:
Income from customers
Intersegment income (expense)
Net interest income (expense) after provision
for loan losses:
Income from customers
Intersegment income (expense)
Depreciation and amortization
Income taxes
Net income
Goodwill
Other intangible assets, net
Total assets
Note 17
Subsequent Events
In accordance with FASB ASC 855 - Subsequent Events, the Company has evaluated subsequent events after the consolidated
balance sheet date of December 31, 2016, and there were no events identified that would require additional disclosures to prevent
the Company’s consolidated financial statements from being misleading.
57
Note 18
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only) and the related condensed statements of
income and cash flows.
(In thousands)
Assets
Cash and due from banks
Short-term investments
Securities available-for-sale, at fair value
Loans, net
Investments in subsidiaries
Premises and equipment, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Accounts and drafts payable
Other liabilities
Total liabilities
Total shareholders’ equity
$
$
$
Total liabilities and shareholders’ equity
$
Condensed Balance Sheets
December 31,
2016
2015
45,464
107,898
390,552
47,184
101,824
20,375
161,317
874,614
640,945
25,415
666,360
208,254
874,614
$
$
$
$
30,165
50,689
373,946
87,615
91,770
18,886
150,135
803,206
576,919
18,732
595,651
207,555
803,206
(In thousands)
Income from subsidiaries:
Interest
Management fees
Income from subsidiaries
Information services revenue
Net interest income after provision
Gain on sales of investment securities
Other income
Total income
Expenses:
Salaries and employee benefits
Other expenses
Total expenses
Income before income tax and equity in undistributed
income of subsidiaries
Income tax expense
Income before undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Condensed Statements of Income
For the Years Ended December 31,
2016
2015
2014
$
$
2
2,105
2,107
83,543
13,389
387
504
99,930
65,968
18,133
84,101
15,829
1,540
14,289
10,059
24,348
$
$
12
2,201
2,213
78,488
13,948
2,910
613
98,172
63,475
16,580
80,055
18,117
2,950
15,167
7,889
23,056
$
$
12
2,058
2,070
77,064
14,986
23
1,323
95,466
59,885
15,587
75,472
19,994
3,125
16,869
7,164
24,033
58
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed income of subsidiaries
Net change in other assets
Net change in other liabilities
Amortization of stock-based awards
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net increase in securities
Net decrease in loans
Purchases of premises and equipment, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase (decrease) in accounts and drafts payable
Cash dividends paid
Purchase of common shares for treasury
Other financing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 19
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
Condensed Statements of Cash Flows
For the Years Ended December 31,
2016
2015
2014
$
24,348
$
23,056
$
24,033
(10,059)
(7,085)
6,683
1,677
7,558
23,122
(33,025)
40,431
(4,557)
2,849
64,026
(9,979)
(9,215)
1,705
46,537
72,508
80,854
153,362
$
(7,889)
16,100
(2,779)
1,504
10,389
40,381
(23,472)
28,343
(5,708)
(837)
(78,439)
(9,697)
(10,951)
66
(99,021)
(59,477)
140,331
80,854
$
(7,164)
(44,879)
534
1,250
13,487
(12,739)
(35,128)
9,358
(8,941)
(34,711)
111,405
(9,337)
(1,848)
(21)
100,199
52,749
87,582
140,331
$
(In thousands except per share data)
2016
Fee revenue and other income
Interest income
Interest expense
Net interest income
Provision for loan losses
Operating expense
Income tax expense
Net income
Net income per share:
Basic earnings per share
Diluted earnings per share
2015
Fee revenue and other income
Interest income
Interest expense
Net interest income
Provision for loan losses
Operating expense
Income tax expense
Net income
Net income per share:
Basic earnings per share
Diluted earnings per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
YTD
$
$
$
$
$
$
20,505 $
9,777
513
9,264
(1,000)
22,916
2,020
5,833 $
21,457 $
10,010
504
9,506
—
23,059
2,035
5,869 $
22,149 $
9,985
505
9,480
—
23,552
1,855
6,222 $
22,025 $
10,158
507
9,651
(500)
23,946
1,806
6,424 $
.52 $
.51
.53 $
.52
.56 $
.55
.58 $
.57
20,832 $
9,552
591
8,961
—
22,308
1,946
5,539 $
20,838 $
9,803
521
9,282
—
22,640
1,932
5,548 $
21,514 $
9,581
498
9,083
—
22,634
2,083
5,880 $
20,184 $
9,774
501
9,273
(850)
22,201
2,017
6,089 $
.48 $
.48
.49 $
.48
.52 $
.51
.54 $
.53
86,136
39,930
2,029
37,901
(1,500)
93,473
7,716
24,348
2.18
2.15
83,368
38,710
2,111
36,599
(850)
89,783
7,978
23,056
2.03
2.00
59
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
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, 2016 and 2015, and the related consolidated statements of income, comprehensive income, cash
flows, and shareholders’ equity for each of the years in the three year period ended December 31, 2016. 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 the standards of the Public Company Accounting Oversight Board (United States).
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, 2016 and 2015, and the results of their
operations and their cash flows for each of the years in the three year period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 8, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 8, 2017
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2016.
Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31, 2016.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentations.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2016.
There have not been changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP,
our independent registered public accounting firm. KPMG LLP’s report, which expresses an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December 31, 2016, is included below.
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Cass Information Systems, Inc.:
We have audited Cass Information Systems, Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries as of December 31, 2016 and 2015, and the
related consolidated statements of income, comprehensive income, cash flows, and shareholders’ equity for each of the years
in the three-year period ended December 31, 2016, and our report dated March 8, 2017 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
St. Louis, Missouri
March 8, 2017
62
ITEM 9B. OTHER INFORMATION
None.
63
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by this Item 10 is incorporated herein by reference to the following sections of the Company’s
definitive Proxy Statement for its 2017 Annual Meeting of Shareholders (“2017 Proxy Statement”), a copy of which will be
filed with the SEC no later than 120 days after the close of the fiscal year: “Election of Directors – Proposal 1,” “Executive
Compensation and Related Information,” and “Beneficial Ownership of Securities.”
The Company has adopted a Code of Conduct and Business Ethics policy, applicable to all Company directors, executive
officers and employees. The policy is publicly available and can be viewed on the Company’s website at www.cassinfo.com.
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding the amendment to, or a
waiver of, a provision of this policy that applies to the Company’s principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions, and that relates to any element of the code
of ethics definition enumerated in Item 406(b) of Regulation S-K by posting such information on its website.
There were no material changes to the procedures by which shareholders may recommend nominees to the Board during the
fourth quarter of fiscal 2016.
ITEM 11. EXECUTIVE COMPENSATION
Certain information required pursuant to this Item 11 is incorporated herein by reference to the sections entitled “Election of
Directors – Proposal 1” and “Executive Compensation and Related Information” of the Company’s 2017 Proxy Statement, 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
AND RELATED STOCKHOLDER MATTERS
Information required pursuant to this Item 12 is incorporated herein by reference to the section entitled “Beneficial Ownership
of Securities” of the Company’s 2017 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after
the close of the fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following information is as of December 31, 2016:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
298,352
$40.40
589,177
_
_
_
298,352
$40.40
589,177
Plan Category
Equity compensation plans
approved by security
holders (1)
Equity compensation plans
not approved by security
holders
Total
(1) Amount disclosed relates to the Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”).
Refer to Note 11 to the consolidated financial statements for information concerning the Omnibus Plan.
64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this Item 13 is incorporated herein by reference to the section entitled “Election of Directors – Proposal
1” of the Company’s 2017 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close
of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning our principal accountant’s fees and services is incorporated herein by reference to the section entitled
“Ratification of Appointment of Independent Registered Public Accounting Firm – Proposal 4” of the Company’s 2017 Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year.
65
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
Included in Item 8 of this report.
(3)
Exhibits listed under (b) of this Item 15.
(b)
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 Amendment to Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1
to the current report on Form 8-K, filed with the SEC on April 19, 2013.
3.3 Articles of Merger of Cass Commercial Corporation, incorporated by reference to
Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended
September 30, 2006.
3.4 Second Amended and Restated Bylaws of Registrant, incorporated by reference to Exhibit
3.1 to the current report on Form 8-K, filed with the SEC on July 21, 2016.
10.3
10.4
10.5
10.6
10.7
Form of Directors’ Indemnification Agreement, incorporated by reference to Exhibit 10.1
to the quarterly report on Form 10-Q for the quarter ended March 31, 2003.*
Amended and Restated Omnibus Stock and Performance Compensation Plan, incorporated
by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on April
19, 2013.*
Amendment and Restatement of the Supplemental Executive Retirement Plan, incorporated
by reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended
September 30, 2007.*
Form of Restricted Stock Agreement (2013), incorporated by reference to Exhibit 10.1 to
the quarterly report on Form 10-Q for the quarter ended March 31, 2013.*
Form of Stock Appreciation Rights Award Agreement, incorporated by reference to Exhibit
10.4 to the quarterly report on Form 10-Q for the quarter ended September 30, 2007.*
10.8
Form of Restricted Stock Award Agreement.*
10.9
Form of Restricted Stock Unit Agreement.*
10.10
Description of Cass Information Systems, Inc. Profit Sharing Program.*
21
Subsidiaries of registrant.
23
Consent of Independent Registered Public Accounting Firm.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 .1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
66
32 .2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
*Management contract or compensatory plan arrangement
(c) None.
67
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
Date: March 8, 2017
Date: March 8, 2017
CASS INFORMATION SYSTEMS, INC.
By
/s/ Eric H. Brunngraber
Eric H. Brunngraber
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By
/s/ P. Stephen Appelbaum
P. Stephen Appelbaum
Executive Vice President and Chief Financial Officer
(Principal 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 registrant and in their capacity as a member of the Board of Directors of the Company.
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
Date: March 8, 2017
/s/ Eric H. Brunngraber
Eric H. Brunngraber
/s/ Ralph W. Clermont
Ralph W. Clermont
/s/ Lawrence A. Collett
Lawrence A. Collett
/s/ Robert A. Ebel
Robert A. Ebel
/s/ Benjamin F. Edwards, IV
Benjamin F. Edwards, IV
/s/ James J. Lindemann
James J. Lindemann
/s/ Joseph D. Rupp
Joseph D. Rupp
/s/ Randall L. Schilling
Randall L. Schilling
/s/ Franklin D. Wicks, Jr.
Franklin D. Wicks, Jr.
By
By
By
By
By
By
By
By
By
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Shareholder Information
CORPORATE HEADQUARTERS
Cass Information Systems, Inc.
INVESTOR RELATIONS
Security analysts, investment managers
TRANSFER AGENT
Shareholder correspondence should
12444 Powerscourt Drive, Suite 550
and others seeking financial information
be mailed to:
Saint Louis, Missouri 63131
about the Company should contact:
Cass Information Systems, Inc. (NASDAQ: CASS) is a leading
provider of integrated information and payment management
solutions. Cass enables enterprises to achieve visibility, control
and efficiency in their supply chains, communications networks,
facilities and other operations.
Disbursing nearly $44 billion annually on behalf of its clients, and with total assets of
$1.5 billion, Cass is uniquely supported by Cass Commercial Bank. Founded in 1906
and a wholly owned subsidiary, Cass Bank provides sophisticated financial exchange
services to the parent organization and its clients. Cass is part of the Russell 2000®.
314-506-5500
cass@cassinfo.com
www.cassinfo.com
COMMON STOCK
The company’s common stock trades
on the NASDAQ stock market under
the symbol CASS.
ANNUAL MEETING
The annual meeting of shareholders
will be held April 25, 2017 at 8:30 a.m.
at the Cass office at 13001 Hollenberg
Drive, Bridgeton, Missouri 63044.
Board of Directors
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
Ralph W. Clermont
Retired Managing Partner,
KPMG LLP, St. Louis, MO
Lawrence A. Collett
Lead Director, and Retired
Chairman and Chief Executive
Investor Relations Department
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
INDEPENDENT AUDITORS
KPMG LLP
Computershare
P.O. Box 30170
College Station, Texas 77842-3170
Overnight correspondence should
be mailed to:
Computershare
211 Quality Circle, Suite 210
College Station, Texas 77845
10 South Broadway, Suite 900
SHAREHOLDER WEBSITE:
Saint Louis, Missouri 63102
www.computershare.com/investor
SHAREHOLDER ONLINE INQUIRIES:
https://www-us.computershare.com/
investor/Contact
TOLL-FREE PHONE:
866-323-8170
Robert A. Ebel
Chief Executive Officer,
Universal Printing Company
Benjamin F. (Tad) Edwards, IV
Chairman, Chief Executive
Officer and President,
Benjamin F. Edwards & Company
James J. Lindemann
Executive Vice President,
Joseph D. Rupp
Chairman, Olin Corporation
Randall L. Schilling
President and Chief Executive
Officer, BoardPaq LLC
Franklin D. Wicks, Jr., Ph. D.
Retired Executive Vice President
and President, Applied Markets,
Sigma-Aldrich
Officer, Cass Information
Emerson
Systems, Inc.
Executive Officers
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
P. Stephen Appelbaum
Executive Vice President
and Chief Financial Officer
Mark A. Campbell
President, Transportation
Information Services
Gary B. Langfitt
President, Expense
Management Services
Robert J. Mathias
President and Chief Operating
Officer, Cass Commercial Bank
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12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
www.cassinfo.com
201 6 A NNUAL R EP ORT AND 10-K
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