12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
www.cassinfo.com >
The Power To
Deliver Solutions
2018
Annual Report and Form 10K
Around the world, leading enterprises
rely on Cass for our domain expertise,
processing power and global payment
network to execute critical financial
transactions while driving greater visibility,
control, and efficiency in their operations.
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352987_2019_Cass-10K-Wrap-Cover_Final_R1.indd 1
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Visit us online at the new 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 over $60 billion annually on behalf of its clients, and
with total assets of $1.6 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®.
Shareholder Information
Board of Directors
CORPORATE HEADQUARTERS
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
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
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
Officer, Cass Information
Systems, Inc.
will be held April 23, 2019 at 8:30 a.m.
at the Cass office at 13001 Hollenberg
ROBERT A. EBEL
Retired Chief Executive Officer,
Drive, Bridgeton, Missouri 63044.
Universal Printing Company
JAMES J. LINDEMANN
Retired Executive Vice President,
Emerson
JOSEPH D. RUPP
Retired Chairman, President
and Chief Executive Officer,
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
BENJAMIN F. (TAD) EDWARDS, IV
Chairman, Chief Executive
Officer and President,
Benjamin F. Edwards & Company
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
JAMES M. CAVELLIER
Executive Vice President
and Chief Information Officer
No presentations are planned.
INVESTOR RELATIONS
Security analysts, investment
managers and others seeking
financial information about the
Company should contact:
INVESTOR RELATIONS DEPARTMENT
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
INDEPENDENT AUDITORS
KPMG LLP
10 South Broadway, Suite 900
Saint Louis, Missouri 63102
TRANSFER AGENT
Shareholder correspondence should
be mailed to:
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
SHAREHOLDER WEBSITE:
www.computershare.com/investor
SHAREHOLDER ONLINE INQUIRIES:
https://www-us.computershare.com/
investor/Contact
TOLL-FREE PHONE:
866-323-8170
DWIGHT D. ERDBRUEGGER
President, Cass Commercial Bank
GARY B. LANGFITT
President, Expense
Management Services
ROBERT J. MATHIAS
Vice Chairman, Cass
Commercial Bank
Cass Information Systems 10-K
352987_2019_Cass-10K-Wrap-Cover_Final_R1.indd 2
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2018 Year in Review
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
% CHANGE
Total Net Revenue
Net Income
Basic Earnings per Common Share
Diluted Earnings per Common Share
Dividends Paid per Common Share
Total Number of Transactions Processed
Total Dollar Volume Paid
$148,266,000
$135,302,000
$30,268,000
$25,014,000
$2.06
$2.03
$0.89
$1.70
$1.68
$0.72
66,255,000
63,207,000
$42,380,453,000
$37,597,035,000
9.58%
21.00%
21.18%
20.83%
23.61%
4.82%
12.72%
Return on Average Total Shareholders’ Equity
Return on Average Assets
13.55%
1.85%
11.55%
1.60%
AS OF DECEMBER 31,
Total Assets
Total Shareholders’ Equity
Book Value per Common Share
2018
2017
% CHANGE
$1,695,176,000
$1,657,209,000
$229,848,000
$225,088,000
$15.72
$15.27
2.29%
2.11%
2.95%
TOTAL TRANSACTIONS
in millions
TOTAL DOLLAR VOLUME PAID
in billions of dollars
TOTAL NET REVENUES
in millions of dollars
7
.
4
5
5
.
4
5
9
.
7
5
2
.
3
6
3
.
6
6
5
.
8
3
3
.
6
3
7
.
4
3
6
.
7
3
4
.
2
4
2
.
7
1
1
8
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0
2
1
5
.
5
2
1
3
.
5
3
1
3
.
8
4
1
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
DILUTED EARNINGS
PER COMMON SHARE
in dollars
NET INCOME
in millions of dollars
BOOK VALUE PER SHARE
in dollars
6
5
1
.
2
5
1
.
3
6
1
.
8
6
1
.
3
0
2
.
.
0
4
2
.
1
3
2
.
3
4
2
.
0
5
2
.
3
0
3
0
2
3
1
.
7
8
3
1
.
8
0
4
1
.
7
2
5
1
.
2
7
5
1
.
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
352987_2019_Cass-10K-Wrap-Narrative_Final.indd 1
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Dear Fellow Shareholders
A Letter from Cass Chairman, President and CEO, Eric Brunngraber
Cass posted
record revenue
of $148.3 million
in 2018, up 10%
from 2017.
I am proud to report on the completion
Financial Highlights
of a landmark year at Cass.
Financially, we achieved record
invoice volume, dollars processed,
revenue and net income in 2018.
We remained liquid, strong and
highly profitable. Operationally, we
made significant progress on our
ongoing investments to support
our strategic plan, including new
and enhanced platforms to support
planned growth. Significant
expenditures were made in the staff
Cass posted record revenue of
$148.3 million in 2018, up 10%
from 2017, driven mainly by strong
growth in fee income. Payment
and processing fees increased
10%, or $8.9 million, over the
previous year. The growth was
broad-based, across markets,
and produced by new clients,
increased activity from existing
accounts and a strong economy.
necessary to support this growth
Net investment income was up
and in other key areas including
11% to $44.2 million, due to an
innovation and cybersecurity.
increase in dollars paid and higher
We also completed a major
interest rates. Net investment
restructuring of our IT organization
income is derived from returns on
to promote responsiveness in each
the funding balances generated
of our businesses yet capture the
by our payment processing
benefits of scalability, efficiency
clients as well as deposit balances
and security that centralization can
from Cass Commercial Bank.
bring. Strategically, we continued
to advance our plan by building
For the year, Cass earned $2.03 per
domain expertise in the specific
diluted share, an increase of 21% over
markets in which we can best apply
2017. Net income was $30.3 million
our proficiencies in transaction
compared to $25.0 million in 2017.
processing and financial exchange.
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
payment management and general
and other facility-related expenses.
pay — for both mobile and fixed
ledger account reconciliation,
Through advanced invoice
telecom assets and services. Cass
providing full visibility via CassPort®,
management methods, we capture
also manages “bring your own
the industry’s leading web-based
large amounts of data and develop
device” programs that allow our
intelligence engine.
an energy data warehouse for each
clients’ employees to use their own
ExpenseSmart® client.
personal devices for work purposes.
352987_2019_Cass-10K-Wrap-Narrative_Final.indd 2
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The passage of the Tax Cuts and
liquidity and capital positions. Our
Looking to the Future
Jobs Act of 2017 impacted Cass
year-end Tier 1 capital-to-assets ratio
in multiple ways. Financially, it
was 13.9%, a figure that far surpasses
In the Freight Audit and Payment
triggered a $1.8 million non-cash
that of our peers and that greatly
marketplace, Cass posted a
charge to 4th quarter 2017 earnings.
exceeds all regulatory requirements.
strong year benefiting from a vital
In 2018, after adjusting for the one-
time charge, it produced an effective
tax rate of 17% compared to 2017’s
23%. More importantly, the passage
of the act enabled Cass to reevaluate
investment criteria as we seek to
improve long-term shareholder
value by balancing top line revenue
growth with strong earnings per
share growth. Our focus was to
ramp up our investment in staff,
systems and infrastructure while
Over the past
16 months,
Cass boosted
dividend payments
nearly 50%
economy that helped produce an
historic level of transaction volume.
We were also encouraged by a
very successful sales year which
validated our investment decisions
in technology, process and people.
In 2019, we are poised to further
leverage those decisions as we
broaden target markets and grow
globally to meet increasing demand
from prospects and customers.
simultaneously increasing returns to
This strong financial position —
Demand remained strong for our
our shareholders through increased
combined with the considerable
Utility Bill Payment solutions,
cash and stock dividends and
cash generated by our operations
with 31 new customers and more
share repurchases. Total expenses
— allows us to invest in strategic
than $1.4 billion in managed spend
recorded in 2018 were $111.9
opportunities as they become
added in 2018. We finished the year
million, an 11% increase over 2017.
available and to return capital
with a record 15.2 million utility
to our shareholders. Over the
transactions processed. While
Cass continued to operate very
past 16 months, Cass boosted
profitably, posting a 1.9% return on
dividend payments nearly 50%
average assets and 13.6% return on
through increases in both cash
average equity. These returns are
and stock dividends. Over the
noteworthy considering the interest
past five years, Cass has returned
demand is generally expected
to remain strong in the coming
year, we anticipate activity to
be tempered somewhat by our
decision to deemphasize a low
rate environment and our strong
$38 million to shareholders
margin submarket. This anticipated
through share repurchases.
development will be countered
TELECOM
ENVIRONMENTAL
B2B PAYMENTS
BANKING
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.
Waste Expense
Management
Integrated Financial
Solutions
Commercial
Banking
Cass drives durable expense
Companies rely on Cass as their
Cass Commercial Bank focuses on
reduction and improves
behind-the-scenes payment
three primary target segments:
sustainability practices for clients
management provider. Cass is
St. Louis-area businesses,
by leveraging its waste expertise,
able to move funds securely,
faith-based organizations and
powerful WasteVision® technology
consolidate payments and
restaurant franchise owners.
platform and aggregate
reduce cost and complexity.
A Federal Reserve member bank,
buying power.
Cass provides safety, security and
control in moving funds through the
Cass electronic payments network.
352987_2019_Cass-10K-Wrap-Narrative_Final.indd 3
3/2/19 12:44 AM
by a projected division-wide
WasteVision2 investments continue
Under Bob and his team, the Bank
margin increase tied to investment
to advance the next generation of
has consistently ranked among
in new technology. The first
auditing, procurement, dispatch
the top-performing financial
phase of a multi-year project to
and financial systems. Cass expects
institutions in the U.S. In addition
completely overhaul our core
full deployment of the new system
to providing full-scope banking
bill management system went
and sun-setting of WasteVision1 by
solutions to corporations and
live in 2018 and will deliver value
the end of 2019. Additionally, a new
faith-based institutions, Cass Bank
to both Cass and its customers
selling model is being rolled out to
provides payment and investment
as it is propagated in 2019.
reflect a pivot from concentrating
services to the entire organization,
Our Communications Lifecycle
a wider prospect group with a
Management team had its most
larger number of locations.
Acknowledgements
on a sole submarket to targeting
disbursing over $60 billion annually.
successful sales year ever, adding
prominent new logos to its roster of
Fortune 1000 clients. Our product
line continued to expand with a
product serving the burgeoning
cloud infrastructure market. Cass
has partnered with the largest
independent cloud management
platform provider, CloudCheckr, to
deliver cost optimization, financial
reporting and compliance validation.
Introduced in October 2018, Cass
For the year, Cass
earned $2.03
per diluted share,
an increase of
21% over 2017.
I express my deep gratitude to
every member of our staff, our
board of directors and our clients.
You all played a role in our record-
breaking year. I also acknowledge
the contributions made over the
past decades by Larry A. Collett,
former Chairman, CEO and
President of Cass. Larry will not
stand for reelection to our board
Recently established to meet the
this year, as he has reached our
expects this product to become an
complex information and payment
mandatory retirement age. Of all
increasingly important contributor to
requirements of the growing FinTech
Larry’s accomplishments, I believe
our revenue mix. Other investments
sector, Cass Integrated Financial
in global delivery in 2018 included
Solutions attracted several major
he will most be remembered
as the standard-bearer of the
new office space for our Singapore
and Basingstoke, United Kingdom
clients in 2018. Leveraging the core
Cass Culture and business
capabilities of the Cass payment
strategy. He will be missed.
offices and strategic partnerships
engine, we continue to scale very
to fill gaps in key Asia-Pacific
and Latin American countries.
Cass also opened a new office
efficiently and to deliver solutions
unique in the payments space. In
2019, we will continue to enhance
in Greenville, South Carolina to
our solution and expand efforts
accommodate future growth.
to attract new customers. We are
optimistic about our prospects
Our Waste Expense Management
in this new marketplace.
group continued the transition
from a shared savings procurement
Cass Commercial Bank is also
model to a sophisticated end-to-
well positioned for continued
end environmental management
success in 2019. Bob Mathias,
offering. We made significant
who has led the Bank since 2008,
Finally, I wish to thank you, our
shareholders, for your continued
support and belief in the future
success of Cass. I also remain
humbly grateful for God’s
blessings as well as His enduring
inspiration and guidance.
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
upgrades to client reporting and
augmented our scope of service.
will retire in the upcoming year.
Cass Information Systems, Inc.
352987_2019_Cass-10K-Wrap-Narrative_Final.indd 4
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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, 2018
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 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,
a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. Large accelerated filer: Accelerated filer: Non-accelerated filer: Smaller reporting company:
Emerging growth company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
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
$846,000,000 based on the closing price of the common stock of $57.35 on June 30, 2018, as reported by The Nasdaq
Global Select Market. As of February 19, 2019, the Registrant had 14,523,407 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 2019 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
8
12
12
12
12
13
15
15
30
32
62
62
64
65
65
65
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
Item 16. FORM 10-K SUMMARY
SIGNATURES
Forward-looking Statements - Factors That May Affect Future Results
66
66
67
68
69
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. Further, 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. Cass also provides a
B2B payment platform for clients that require an agile fintech partner. 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 faith-based 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
1
bills and provide management reporting. Available data indicates that the Company is one of the largest providers of 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”). Various 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. 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 Company, through its Waste Expense Management business competes against small
expense management companies along with large national account programs of major haulers. Also, the Company through its
Integrated Payments business competes with providers of corporate payment solutions.
The Bank is organized as a Missouri trust company with banking powers and was founded in 1906. The Company was
originally 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 faith-based ministries 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®, Cass Freight Index®, Cass Truckload Linehaul Index®,
Cass Intermodal Price Index® Expense$mart®, ExpenseSmart®, WasteVision™ and Direct2Carrier Payments™. The
Company holds patents for methods and systems for managing employee-liable expenses and methods and systems for
communicating expense management information. 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 870 full-time and 273 part-time employees as of February 19, 2019. Of these employees,
the Bank had 51 full-time and one 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 or (ii) 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
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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.
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 its compliance with 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 impact of
the Dodd-Frank Act on the Company and the Bank has been substantial.
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 that ended on December 31, 2018.
The Basel III Capital Rules implemented common equity Tier 1 capital as a new capital measure, which 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 non-advanced approaches institutions like Cass that have
exercised a one-time 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.
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
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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.
Fully phased-in as of January 1, 2019, the Basel III Capital Rules require banking organizations, like Cass, to maintain:
•
•
•
•
a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital
conservation buffer;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;
a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the
2.5% capital conservation buffer; and
a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio
of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face
limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers
based on the amount of the shortfall.
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,
2018, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.
In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax
assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking
organizations, such as Cass, that are not subject to the advanced approaches capital framework that applies to large,
internationally active banking organizations with at least $250 billion in total consolidated assets or at least $10 billion in total
on-balance sheet foreign exposure. In November 2017, the federal banking regulators revised the Basel III Capital Rules to
extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September
2017 proposal is finalized.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee's
standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for
certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized
approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1,
2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk
capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company or the Bank.
The impact of Basel IV on the Company will depend on the manner in which it is implemented by the federal bank regulators.
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 $222,200, $220,100 and $309,700 for the years ended December 31, 2018,
2017 and 2016, respectively.
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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
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, 2018, 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, 2018, the Bank was in compliance with the loans-to-one-borrower limitations.
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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.
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 negotiable order of withdrawal 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.
Cybersecurity – In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement
indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure
that their risk management processes address the risk posed by compromised customer credentials, including security measures
to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates
that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure
the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive
malware. A financial institution is expected to develop appropriate processes to enable recovery of data and business operations
and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this
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type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions,
including financial penalties.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct
operations and store sensitive data. The Company employs an in-depth, layered, defensive approach that leverages people,
processes and technology to manage and maintain cybersecurity controls. The Company also employs a variety of preventative
and detective tools to identify, protect, detect, respond, and recover against suspicious activity, as well as to report on any
suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from
cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive
measures. While the Company has not experienced a significant compromise to date, significant data loss or any material
financial losses related to cybersecurity attacks, the Company’s systems and those of its customers and third-party service
providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks
and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving
nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other
technology-based products and services by the Company and its customers. See Item 1A, “Risk Factors” for a further discussion
of risks related to cybersecurity.
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;
• 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; and
• 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.
Certain of these laws are consumer protection laws that extensively govern the Company’s relationship with its customers.
Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by
customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state
and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other
remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each
jurisdiction in which the Company operates and civil money penalties. Failure to comply with consumer protection
requirements may also result in the Company’s inability to pursue merger or acquisition transactions.
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
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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.
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.
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, faith-based ministries 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
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 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,
8
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.
A decline in the cost of oil worldwide can have a negative effect on both the number of freight transactions processed and the
dollar amount of invoices processed. For example, lower oil prices can cause a significant drop in drilling supplies being
transported to fracking operations by domestic railroads and trucks. Lower oil prices can also result in lower gas and fuel prices,
negatively affecting the dollar amounts of the invoices that Cass processes for its freight and shipping customers. A decline in
oil prices could 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,
9
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.
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.
The Company and the Bank are subject to extensive government regulation and supervision and possible enforcement or
other legal actions that could detrimentally affect Cass’ business.
The Company and the Bank are subject to extensive federal and state regulation and supervision, the primary focus of which
is to protect customers, depositors, the deposit insurance fund and the safety and soundness of the banking system as a whole,
and not shareholders. In addition, since the global financial crisis, financial institutions generally have been subject to increased
scrutiny from regulatory authorities, with an increased focus on risk management and consumer compliance. This regulatory
structure and heightened focus 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 applicable laws, regulations, policies or guidance could result in enforcement and other legal actions
by federal and state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking
10
charter, and other regulatory sanctions, as well as reputational damage, any of which could have a material adverse effect on
the Company’s business, financial condition and results of operations.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The
substance and impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although
any change could impact the regulatory structure under which the Company or its competitors operate and may significantly
increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require
modifications to the Company’s business strategy, and/or limit its ability to pursue business opportunities in an efficient
manner. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could
have a material, adverse effect on the Company’s business, financial condition and results of operations.
See Item 1, “Business—Supervision and Regulation,” and Item 8, Note 2 to the consolidated financial statements included
elsewhere in this report for additional information.
The Company may be forced to raise capital or sell assets if it fails to meet regulatory capital requirements.
The Dodd-Frank Act required 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 apply to banking organizations, including the Company and the Bank, and
are fully phased in as of January 1, 2019.
Among other things, the rules require that the Company maintain a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital
ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%. As of January 1, 2019, the Company must maintain a capital
conservation buffer of 2.5% on top of the common equity Tier 1, Tier 1 and total capital requirements, effectively 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 capital requirements will result in limits on paying dividends, engaging in share repurchases and paying
discretionary bonuses. These limitations 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 deductions and adjustments relevant to the capital calculations, the Basel
III Capital rules increase the risk weights for certain assets, meaning that the Company is required to hold more capital against
these assets. Complying with these more stringent capital requirements could result in management modifying its business
strategy and could limit the Company’s ability to make distributions, including paying dividends, or buying back shares.
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 one accounting policy 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.”
11
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.
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.
Certain events beyond the Company’s control, such as severe weather, natural disasters, terrorist activities or other
hostilities, may adversely affect the general economy, financial and capital markets, specific industries, and the Company.
Severe weather, natural disasters, acts of terrorism or other hostilities, and other adverse external events beyond the Company’s
control, could have a significant impact on the Company’s ability to conduct business. Such events could disrupt Cass’
operations or those of its customers, affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue
and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material
adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial
condition and results of operations.
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 offices in Breda, Netherlands, Basingstoke, United Kingdom,
and Singapore 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.
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.
12
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is quoted on The Nasdaq Global Select Market® under the symbol “CASS.” As of February
19, 2019, there were approximately 4,555 holders of record of the Company’s common stock.
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. As restored by the Board of Directors in January 2019,
the program provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no
expiration date. Adjusted for the stock dividend that was paid on December 14, 2018, the Company repurchased a total of
169,143 shares at an aggregate cost of $8,838,000 during the year ended December 31, 2018 and 50,215 shares at an aggregate
cost of $2,270,000 during the year ended December 31, 2017. Shares repurchased have been restated to give effect to the 20%
stock dividend that was paid on December 14, 2018. 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 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.
During the three months ended December 31, 2018, the Company repurchased a total of 150,087 shares of its common stock
pursuant to its treasury stock buyback program, as follows:
Total
Number of
Shares
Purchased
7,200
7,200
136,087
150,487
Period
October 1, 2018 –
October 31, 2018 2
November 1, 2018 –
November 30, 2018 2
December 1, 2018 –
December 31, 2018
Total
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs1
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
Average Price
Paid per Share
$54.10
$54.05
$52.73
$52.86
7,200
7,200
136,087
150,487
492,800
485,600
349,513
349,513
(1) All repurchases made during the quarter ended December 31, 2018 were made pursuant to the treasury stock buyback program, which was
authorized by the Board of Directors on October 17, 2011 and announced by the Company on October 20, 2011. The program, as
modified by the Board of Directors on October 20, 2014, provides that the Company may repurchase up to an aggregate of 500,000 shares
of common stock and has no expiration date. The program is periodically modified by the Board of Directors and was most recently
modified on October 23, 2018 and again on January 30, 2019, in each case to restore the aggregate number of shares available for
repurchase to 500,000.
(2) Shares and average share price have been restated for the 20% stock dividend that was paid by the Company on December 14, 2018.
13
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,
2013, with dividends reinvested. Returns are based on period end prices.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2018
250.00
200.00
150.00
100.00
50.00
0.00
2013
2014
2015
2016
2017
2018
Cass Information Systems Inc
NASDAQ Stock Market (US Companies)
NASDAQ Computer and Data Processing Index
14
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 (2)
Dividends per share (2)
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
2018
$ 104,076 $
32,477
11,167
4,282
47,926
3,736
—
44,190
111,919
36,347
6,079
30,268 $
2.03 $
.89
43.53 %
2017
95,512 $
28,641
10,993
2,343
41,977
2,187
—
39,790
100,403
34,899
9,885 (1)
25,014 $
1.68 $
.72
42.68 %
$
$
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 $
1.63 $
.68
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 $
1.52 $
.65
42.06 %
2014
79,907
29,726
9,441
592
39,759
2,460
—
37,299
85,414
31,792
7,759
24,033
1.56
.61
38.85 %
$ 1,637,876 $ 1,568,112 $ 1,504,474 $ 1,439,511 $ 1,424,967
651,984
667,158
700,631
321,836
352,129
448,890
571,039
614,975
624,877
200,149
207,060
223,372
653,459
426,657
602,490
216,548
659,109
330,095
579,752
197,853
1.85 %
13.55
13.64
13.56
12.83
18.85
3.32
1.42
—
—
1.60 %
11.55
13.81
14.04
13.25
20.23
3.34
1.49
—
—
1.62 %
11.76
13.76
13.82
13.04
20.13
3.32
1.53
1.60 %
11.65
13.74
14.25
13.42
21.19
3.38
1.77
1.69 %
12.01
14.05
13.36
12.52
19.65
3.43
1.78
.04
.48 (3)
.07
(.01)
(.09)
(.03)
(1) Includes one-time, non-cash Tax Cuts and Jobs Act (“TCJA”) charge of $1,824,000.
(2) Diluted earnings per share and dividends per share were adjusted for the 20% stock dividend that was paid on December 14, 2018.
(3) 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%
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, 2018, 2017 and 2016. All share and per share data have been restated to give
effect to the 20% stock dividend that was paid on December 14, 2018. 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, Breda, Netherlands, Basingstoke, United Kingdom, and Singapore. 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. Additionally, Cass provides a B2B payment platform
for clients that require an agile fintech partner. 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
15
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 faith-based 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
could be a 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 2018, total fee revenue and other income increased $8,564,000, or 9%, net interest income after provision for loan losses
increased $4,400,000, or 11%, total operating expenses increased $11,516,000, or 11%, and net income increased $5,254,000,
or 21%. This positive performance in 2018 was driven by new customer wins, increased business from existing customers, the
development and deployment of new revenue generating services, and higher interest rates. Additionally, the growth in net
income was enhanced by the 2017 one-time, non-cash charge of $1,824,000 due to tax reform. The increase in total operating
expense was due mainly to the Company continuing to invest in personnel, technology, and infrastructure to support future
service growth. As a part of that investment, the Company hired a chief information officer and a vice president of security
and risk as a part of a major restructuring of the IT organization to promote responsiveness in each business yet obtain the
benefits of scalability, efficiency, and security that centralization can bring. The asset quality of the Company’s loans and
investments as of December 31, 2018 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.
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers (“FASB ASC 606”), and selected the modified
retrospective transition method. The adoption of this new standard did not impact the Company’s results of operations or
balance sheet and there was no cumulative effect of initially applying this new revenue standard to the opening balance of
16
retained earnings. Since interest income on loans and securities are both excluded from this topic, a significant portion of the
Company’s revenues are not subject to the new guidance. The services that fall within the scope of FASB ASC 606 are
presented within fee revenue and other income in the Consolidated Statements of Income and are recognized as revenue as the
obligation to the customer is satisfied. Services within the scope of FASB ASC 606 include invoice processing and payment
fees, bank service fees, and other real estate owned (“OREO”).
In February 2016, the FASB issued Accounting Standards Update (“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 on leases will take effect
for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. A
third-party vendor solution has been selected to assist in the application of ASU 2016-02. The Company will adopt this ASU
using a prospective transition approach, which applies the provisions of the new guidance at the effective date without adjusting
the comparative periods presented. The adoption of this ASU is expected to add assets and liabilities of approximately $9-11
million to the Company’s balance sheet.
In June 2016, the FASB issued ASU No. 2016-13 - Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“CECL”). The ASU requires measurement and recognition of expected credit losses for
financial assets held. Under this standard, it 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 Company expects to
recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting
period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the
overall impact of the new guidance on the consolidated financial statements.
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. An accounting policy that requires significant management estimates and is deemed critical to the Company’s results
of operations or financial position has been discussed with the Audit Committee of the Board of Directors and is 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 thru 2019, after which CECL will be adopted.
17
Summary of Results
For the Years Ended December 31,
2017
% Change
2018 v. 2017 2017 v. 2016
9.2%
8.4
11.5
4.8%
66,255
2018
2016
$102,181
57,897
$34,689,268
$83,713
63,207
$42,380,453 $37,597,035
$93,322
(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 (1)
Net income
Diluted earnings per share (2)
Return on average assets
Return on average equity
(1) Presented on a tax-equivalent basis. The TCJA reduced the net interest margin by approximately 20 basis points in 2018.
(2) Diluted earnings per share was restated for the stock dividend that was paid on December 14, 2018.
$39,790
$135,302
$1,403,748 $1,362,660
3.34%
$25,014
$1.68
1.60%
11.55%
$39,401
$125,537
$1,308,914
3.32%
$24,348
$1.63
1.62%
11.76%
3.32%
$30,268
$2.03
1.85%
13.55%
11.1
9.6
3.0
—
21.0
20.8
—
—
$44,190
$148,266
12.7
9.5
1.0
7.8
4.1
—
2.7
3.1
—
—
The results of 2018 compared to 2017 include the following significant items:
Overall, the Company’s performance improved as a result of new customer wins, increased business from existing
customers, the development and deployment of new revenue-generating services, and higher interest rates. Payment and
processing fees and total processing volume increased 9% and 5%, respectively. Higher carrier and fuel prices in concert
with higher volume from current accounts and new customer wins produced an increase in processing dollars of 13%. Net
income in 2018 increased 21% because of the aforementioned items as well as the one-time, non-cash tax charge to income
tax expense in 2017 triggered by the passage of the TCJA.
Average earning assets increased 3% and net interest income after provision for loan losses increased 11% year over year.
The increase in net interest income after provision for loan losses was due to higher interest rates and higher average
earning assets. There was no loan loss provision recorded in either 2017 or 2018.
There were losses from the sale of securities in 2018 of $42,000 and no gains or losses on sales of securities in 2017.
Operating expenses increased $11,516,000, or 11%, as the Company continued to invest in personnel, technology, and
infrastructure to support future service growth.
The results of 2017 compared to 2016 include the following significant items:
Overall, the Company’s performance improved as a result of continued growth in the customer base and new revenue-
generating services. Payment and processing fees and total processing volume increased 12% and 9%, respectively.
Against the backdrop of a strengthening global economy, increased carrier and fuel prices combined with higher volume
from current accounts to produce an increase in processing dollars of 8%. Net income in 2017 increased 3% despite a one-
time, non-cash charge to income tax expense of $1,824,000 triggered by the passage of the TCJA on December 22, 2017.
Average earning assets increased 4% and net interest income after provision for loan losses increased 1% year over year.
The increase in net interest income after provision for loan losses was primarily due to higher average earning assets but
was largely offset by a negative provision for loan losses of $1,500,000 in 2016 compared to none in 2017.
There were no gains from the sale of securities in 2017 and $387,000 in 2016. Bank service fees increased $73,000, or
6%, and other income increased $81,000. Operating expenses increased $6,930,000, or 7%, as the Company continued to
invest in staff and technology to win and support new business.
18
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(1)
Expense management dollar volume(1)
Payment and processing revenue
Bank service fees
(Losses) gains on sales of investment
securities
Other
(1)Includes energy, telecom and environmental
2018
December 31,
2017
28,713
37,542
35,546
$28,549,225 $24,801,733
27,661
$13,831,228 $12,795,302
$93,322
$1,349
$102,181
$1,335
2016
34,352
$22,774,909
23,545
$11,914,359
$83,713
$1,276
$(42)
$602
—
$841
$387
$760
% Change
2018 v. 2017 2017 v. 2016
3.5%
5.6%
15.1
3.8
8.1
9.5
(1.0)
—
(28.4)
8.9
17.5
7.4
11.5
5.7
—
10.7
Fee revenue and other income in 2018 compared to 2017 include the following significant pre-tax components:
In the transportation sector, higher volume from current accounts helped increase invoice volume 6%. Higher carrier and
fuel prices in concert with the higher volume from current accounts produced a 15% increase in dollar volume. The increase
in dollar volume generated larger investable balances that improved investment income and raised fees from carrier
services. Expense management transaction volume increased 4% and dollar volume increased 8% as a result of new
customer wins and increased volumes from current accounts. There were losses from the sale of securities in 2018 of
$42,000 and no gains or losses on sales of securities in 2017.
Fee revenue and other income in 2017 compared to 2016 include the following significant pre-tax components:
In the transportation sector, new business and a growing customer base increased invoice volume 4%. The strong global
economy combined with increased carrier and fuel prices produced a 9% increase in dollar volume. The increase in dollar
volume generated larger investable balances that improved investment income and raised fees from carrier services.
Expense management transaction volume increased 18% and dollar volume increased 7% as a result of new customer wins
and increased volumes from current accounts. There were no gains on sales of investment securities.
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:
December 31,
(In thousands)
Average earning assets
Net interest income (1)
Net interest margin (1)
Yield on earning assets (1)
Rate on interest bearing liabilities
2018
$1,403,748
$46,612
3.32%
3.59%
1.00%
2016
2017
$1,362,660 $1,308,914
$43,402
3.32%
3.47%
.48%
$45,480
3.34%
3.50%
.56%
% Change
2018 v. 2017 2017 v. 2016
3.0%
2.5%
4.1%
4.8%
(1) Presented on a tax-equivalent basis using a tax rate of 21% in 2018 and 35% in both 2017 and 2016. The net interest margin
and yield on earning assets are lower by approximately 20 basis points and net interest income was approximately $2,700,000
lower in 2018 as a result of a lower tax-equivalent adjustment due to TCJA.
Net interest income in 2018 compared to 2017:
The increase in net interest income was primarily due to an increase in average earning assets and was partially offset
by a slight decrease in the net interest margin as a result of TCJA. More information is contained in the tables below
and in Item 7A of this report.
Total average investment in securities and certificates of deposit increased $21,499,000, or 5%. 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
19
institutions increased $23,700,000, or 24%. Total average federal funds sold and other short-term investments
decreased $51,304,000, or 31%.
Total average loans increased $47,193,000, or 7%, to $710,846,000. 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.
The Bank’s total average interest-bearing deposits decreased $21,525,000, or 5%, compared to the prior year. Average
rates paid on interest-bearing liabilities increased from .56% to 1.00% as a result of overall market rate increases for
deposits.
Net interest income in 2017 compared to 2016:
The increase in net interest income was primarily due to an increase in average earning assets combined with a slight
improvement in the net interest margin as a result of an improving interest rate environment. More information is
contained in the tables below and in Item 7A of this report.
Total average investment in securities and certificates of deposit increased $73,697,000, or 20%. 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 $19,047,000, or 13%. Interest bearing deposits in other financial institutions
decreased $24,590,000, or 20%.
Total average loans decreased $14,408,000, or 2%, to $663,653,000. 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.
The Bank’s total average interest-bearing deposits decreased $29,184,000, or 7%, compared to the prior year. Average
rates paid on interest-bearing liabilities increased from .48% to .56%.
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:
20
(In thousands)
Assets (1)
Earning assets
Loans (2), (3):
Taxable
Tax-exempt (4)
Securities (5):
Taxable
Tax-exempt (4)
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
Premises and equipment, net
Bank owned life insurance
Goodwill and other
intangibles
Other assets
Allowance for loan losses
Total assets
Liabilities and Shareholders’
Equity (1)
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
Noninterest-bearing liabilities
Demand deposits
Accounts and drafts payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and share-
holders’ equity
Net interest income (4)
Net interest margin (4)
Interest spread
2018
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2017
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2016
Interest
Income/
Expense
Yield/
Rate
$709,280 $32,429
60
1,566
4.57 % $658,791 $28,511
199
3.83
4,862
4.33 % $660,341 $28,506
857
4.09
17,720
4.32 %
4.84
86,164
362,726
6,236
2,007
11,473
97
2.33
3.16 (4)
1.56
23,172
403,485
6,970
472
16,060
82
2.04
3.98
1.18
5,030
347,099
7,801
93
14,858
51
1.85
4.28
.65
124,101
2,338
1.88
100,401
1,036
1.03
124,991
638
.51
113,675
1,403,748
1,944
50,348
1.71
164,979
3.59 (4) 1,362,660
1,307
47,667
.79
3.50
145,932
1,308,914
428
45,431
.29
3.47
13,336
22,355
17,142
14,354
177,156
(10,215)
$1,637,876
12,904
21,299
16,676
14,464
150,303
(10,194)
$1,568,112
11,822
20,503
16,174
13,799
144,165
(10,903)
$1,504,474
$302,816
11,451
16,639
41,045
371,951
10
371,961
$2,832
109
210
585
3,736
—
3,736
.94 %
.95
1.26
1.43
1.00
—
1.00
$323,635
15,540
16,022
38,279
393,476
13
393,489
$1,610
79
150
348
2,187
—
2,187
.50 % $343,205
20,524
.51
14,463
.94
44,468
.91
422,660
.56
—
—
422,660
.56
252,926
745,713
43,904
1,414,504
223,372
209,014
713,052
36,009
1,351,564
216,548
192,315
654,845
27,594
1,297,414
207,060
$1,388
100
172
369
2,029
.40 %
.49
1.19
.83
.48
— —
.48
2,029
$1,637,876
$46,612 (4)
$1,568,112
$45,480
3.32% (4)
2.59%
$1,504,474
$43,402
3.32%
2.99%
3.34%
2.94%
(1) Balances shown are daily averages.
(2) For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans
is recorded when received as discussed further in Item 8, Note 1 of this report.
(3) Interest income on loans includes net loan fees of $393,000, $415,000, and $586,000 for 2018, 2017 and 2016, respectively.
(4) Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in 2018 and 35% in both 2017 and 2016. The tax-
equivalent adjustment was approximately $2,422,000, $5,691,000 and $5,500,000 for 2018, 2017 and 2016, respectively. The TCJA
reduced the yield/rate on tax-exempt securities by approximately 70 basis points and the yield on earning assets and net interest margin
by approximately 20 basis points in 2018. Net interest income also decreased by approximately $2,700,000 as a result of TCJA.
(5) For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized
cost of the investments.
21
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:
Loans (2), (3):
Taxable
Tax-exempt (4)
Securities:
Taxable
Tax-exempt (4)
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
2018 Over 2017
2017 Over 2016
Volume (1) Rate (1)
Total
Volume(1) Rate (1)
Total
$2,256
(127)
$1,662
(12)
$3,918
(139)
1,458
(1,512)
(9)
77
(3,075)
24
1,535
(4,587)
15
$(67)
(543)
369
2,291
(6)
$72
(115)
10
(1,089)
37
$5
(658)
379
1,202
31
289
1,013
1,302
(146)
544
398
1,143
$832
637
$2,681
63
$1,961
(506)
$1,849
$(110)
(25)
6
27
—
(102)
$1,951
$1,332
55
54
210
—
1,651
$(819)
$1,222
30
60
237
—
1,549
$1,132
816
$275
$304
4
(39)
33
—
879
$2,236
$222
(21)
(22)
(21)
—
$(82)
(25)
17
(54)
—
(144)
$2,105
302
$(27)
158
$2,078
(1) The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the
change in each.
(2) Average balances include nonaccrual loans.
(3) Interest income includes net loan fees.
(4) Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in 2018 and 35% in both 2017 and 2016. The TCJA
reduced interest income on tax-exempt securities by approximately $2,700,000 in 2018.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was
$721,587,000 and represented 43% of the Company's total assets as of December 31, 2018 and generated $32,477,000 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, 2018.
Loans by Type
(In thousands)
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other
Total loans
2018
$277,091
411,752
32,434
—
310
$721,587
2017
$236,394
410,748
35,307
3,374
408
$686,231
December 31,
2016
$214,767
425,947
17,477
6,639
36
$664,866
2015
$193,430
415,564
30,139
19,831
91
$659,055
2014
$203,350
423,641
18,612
23,348
395
$669,346
22
Loans by Maturity
(At December 31, 2018)
One Year
Or Less
Fixed
Rate
Floating
Rate (1)
Over 1 Year
Through 5 Years
Fixed
Rate
Floating
Rate (1)
Over
5 Years
Fixed
Rate
Floating
Rate (1)
$
15,697 $ 68,029 $
(In thousands)
Commercial and industrial
Real Estate:
Mortgage
Construction
Other
Total loans
(1) Loans have been classified as having "floating" interest rates if the rate specified in the loan varies with the prime commercial rate of
interest.
5,588
1,430
310
84,089 $ 75,357 $ 347,908 $
411,752
32,434
310
8,884 $ 721,587
10,977
10,914
—
268,428
1,321
—
49,623
18,769
—
75,079
—
—
74,706 $ 130,643 $
2,057
—
—
6,827 $ 277,091
78,159 $
55,564 $
52,815 $
Total
$
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,
franchises, and faith-based 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 faith-based
ministries 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, 2017 to December 31, 2018:
Total loans increased $35,356,000, or 5%, to $721,587,000. 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, 2016 to December 31, 2017:
Total loans increased $21,365,000, or 3%, to $686,231,000. 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 no provision for loan losses in 2018 or 2017, and ($1,500,000) in 2016. 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 $20,000, $30,000, and $40,000 in 2018,
2017, and 2016, respectively. The ALLL was $10,225,000 at December 31, 2018 compared to $10,205,000 at December 31,
2017 and $10,175,000 at December 31, 2016. The year-end 2018 allowance represented 1.4% of outstanding loans, while the
allowance represented 1.5% of outstanding loans at year-end 2017 and 2016. From December 31, 2017 to December 31, 2018,
there were no nonperforming 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
period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and
23
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 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 faith-based):
Mortgage
Construction
Other
Total loans charged-off
Recoveries of loans previously charged-off:
Commercial and industrial
Real estate (commercial and faith-based):
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 losses (1):
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other (2)
Total
Percentage of categories to total loans:
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other
Total
2018
$10,205
2017
$10,175
December 31,
2016
$11,635
2015
$11,894
2014
$11,679
—
—
—
—
—
20
—
—
—
—
—
30
—
—
—
—
—
39
—
—
—
20
(20)
—
$10,225
—
—
—
30
(30)
—
$10,205
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
$710,846
721,587
$663,653
686,231
$678,061
664,866
$671,019
659,055
$663,824
669,346
1.44%
1.41%
—
1.54%
1.49%
—
1.50%
1.53%
1.76%
1.77%
1.79%
1.78%
(.01)%
(.09)%
(.03)%
$4,179
$3,652
$3,261
$3,083
$3,515
5,378
244
—
424
$10,225
5,356
266
52
879
$10,205
5,689
132
101
992
$10,175
6,885
226
320
1,121
$11,635
7,076
140
394
769
$11,894
38.4%
34.4%
32.3%
29.3%
30.4%
57.1%
4.5%
—%
—%
100.0%
59.9%
5.1%
.59%
.01%
100.0%
64.1%
2.6%
1.0%
⎯%
100.0%
63.1%
4.6%
3.0%
⎯%
100.0%
63.3%
2.8%
3.5%
⎯%
100.0%
(1) Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.
(2) Includes unallocated allowance of $423,000 and $877,000 in 2018 and 2017, 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.
24
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 $0 and $24,000 for the years ended December 31,
2018 and 2017, respectively. Of this amount, approximately $0 and $17,000 was actually recorded as interest income on such
loans during the years ended December 31, 2018 and 2017, respectively.
There were no nonaccrual loans or foreclosed assets at December 31, 2018 or December 31, 2017.
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
2018
2017
December 31,
2016
2015
2014
$—
—
—
—
$—
—
$—
$—
—
$—
—
$—
—
—(1)
245
3,135(1)
—
$—
—
$—
—
$245
—
$245
—
$3,135
—
$3,135
$⎯
⎯
488
⎯
$488
⎯
$488
(1) In October 2017, one nonaccrual loan with a balance of $215,000 was paid in full. In February 2016, one nonaccrual loan with a
balance of $2,727,000 was paid in full.
Operating Expenses
Operating expenses in 2018 compared to 2017 include the following significant pre-tax components:
Salaries and employee benefits expense increased $8,542,000, or 11%, to $85,881,000 as the Company invested in staff
and technology development to win and support new business. Outside service expense increased $1,026,000, or 15%, for
continual technology advancements to support customers. Equipment expense increased $539,000 to $5,610,000 primarily
due to depreciation of internally developed software. As a part of the increased investment in technology, the Company
hired a chief information officer and a vice president of security and risk as a part of a major restructuring of the IT
organization to promote responsiveness in each business yet obtain the benefits of scalability, efficiency, and security that
centralization can bring.
Operating expenses in 2017 compared to 2016 include the following significant pre-tax components:
Salaries and employee benefits expense increased $4,758,000, or 7%, to $77,339,000 as the Company invested in staff and
technology development to win and support new business. Outside service expense increased $1,355,000, or 24%, for
continual technology advancements to support customers. Equipment expense increased $620,000 to $5,071,000 primarily
due to depreciation of internally developed software.
Income Tax Expense
On December 22, 2017, the TCJA was enacted. Among other things, the new law (i) establishes a new, flat corporate federal
statutory income tax rate of 21%; (ii) eliminates the corporate alternative minimum tax and allows the use of any such
carryforwards to offset regular tax liability for any taxable year; (iii) limits the deduction for net interest expense incurred by
U.S. corporations; (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain
qualified depreciable assets; (v) eliminates or reduces certain deductions related to meals and entertainment expenses; (vi)
modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation
and clarifies the definition of a covered employee; and (vii) limits the deductibility of deposit insurance premiums. The TCJA
also significantly changes U.S. tax law related to foreign operations, though, such changes do not currently impact the Company
on a significant level.
25
Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for tax effects of the TCJA. SAB 118 provides a measurement period of up to one year from the enactment date to
complete the accounting. Based on the information available and current interpretation of the rules at December 31, 2017, the
Company made provisional estimates of the impact of the reduction in the corporate tax rate and remeasurement of certain
deferred tax assets and liabilities based on the rate at which they were expected to reverse in the future totaling $1,824,000.
The final analysis and measurement was completed during the fourth quarter of 2018 when the Company filed the 2017 U.S.
federal income tax return and a reduction of tax expense in the amount of $74,000 was recorded.
As more fully described in this Item 7 and Item 8, Note 13, the Company’s 2017 results of operations are skewed by a one-
time, non-cash charge to income tax expense of $1,824,000, triggered by the passage of the TCJA. While the reduction in the
federal corporate tax rate negatively impacted 2017 earnings, the rate reduction is projected to significantly boost after-tax
earnings in the future.
Taxable-equivalent adjustments noted throughout this report are the result of increasing income from tax-free loans and
investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 35% federal tax
rate, thus making tax-exempt yields comparable to taxable asset yields. Beginning January 1, 2018, taxable-equivalent
adjustments are based upon the new tax rate of 21% as a result of the TCJA.
Income tax expense in 2018 totaled $6,079,000 compared to $9,885,000 and $7,716,000 in 2017 and 2016, respectively. When
measured as a percent of pre-tax income, the Company’s effective tax rate was 17% in 2018, 28% in 2017, and 24% in 2016.
The decrease in 2018 tax expense was primarily the result of two items:
•
•
the decrease in the federal income tax rate and
the one-time, non-cash charge of $1,824,000 that increased 2017 tax expense triggered by the passage of the TCJA
on December 22, 2017.
Investment Portfolio
Investment portfolio changes from December 31, 2017 to December 31, 2018:
State and political subdivision securities decreased $82,315,000, or 20%, to $334,717,000. U.S. government agency
securities increased $59,322,000 to $104,822,000. 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 primarily purchased U.S.
government agency securities. These securities all had A or better credit ratings and maturities approaching 15 years.
Due to the passage of the TCJA and tax-exempt interest becoming less advantageous, the Company reduced the state and
political subdivision security portfolio. 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, 2018 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, 2018)
$
$
2018
334,717 $
104,822
1,995
441,534 $
December 31,
2017
417,032 $
2016
370,134
12,672
7,746
470,523 $ 390,552
45,500
7,991
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 yield (1)
Yield
3.02% (1)
2.39%
1.99%
2.86%
2.86%
(1) Yields are presented on a tax-equivalent basis assuming a tax rate of 21% in 2018 and 35% in both 2017 and 2016. The TCJA
reduced the yield by approximately 70 basis points.
64,668 $
61,085
500
126,253 $
2.64%
6,491 $
⎯
1,495
7,986 $
3.56%
17,922
⎯
244,118 $
3.05%
37,362
25,815
⎯
63,177
2.52%
226,196 $
$
$
26
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits increased 11% from December 31, 2017 to $313,258,000 at December 31, 2018. The
average balances of these deposits increased 21% in 2018 to $252,926,000. These balances are primarily maintained by
commercial customers, faith-based ministries, and new payment and information processing relationships and can fluctuate on
a daily basis.
Interest-bearing deposits increased $12,121,000, or 3%, to $408,668,000 at December 31, 2018. The average balances of these
deposits decreased 5% to $371,951,000 in 2018 from $393,476,000 in 2017.
Accounts and drafts payable generated by the Company in its payment processing operations increased $21,528,000, or 3%, to
$694,360,000 at December 31, 2018. The average balance of these funds increased $32,661,000, or 5%, to $745,713,000 in
2018. This increase was the result of continued growth in the customer base, a strengthening global economy, increased carrier
rates, and higher energy prices. 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.
Maturities of Certificates of Deposit as of December 31, 2018
(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
$
$
3,646 $
342
322
552
4,862 $
16,634
21,327
1,856
11,841
51,658
$
$
1,286 $
1,742
3,999
8,910
15,937 $
Total
21,566
23,411
6,177
21,303
72,457
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 $230,933,000 at December 31,
2018, an increase of $2,823,000, or 1%, from December 31, 2017. At December 31, 2018, these assets represented 14% 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 $441,534,000 at December 31, 2018, a decrease of $28,989,000, or 6%, from December 31,
2017. These assets represented 26% of total assets at December 31, 2018 and were primarily state and political subdivision
and treasury securities. Of the total portfolio, 2% mature in one year or less, 29% mature after one year through five years and
69% mature after five years.
As of December 31, 2018, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $83,000,000 at the following banks: 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 $20,000,000. As of December
31, 2018, the Bank had secured lines of credit with the Federal Home Loan Bank (“FHLB”) of $193,460,000 collateralized by
commercial mortgage loans. At December 31, 2018, 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, 2018 or 2017.
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.
27
Net cash flows provided by operating activities for the years 2018, 2017 and 2016 were $48,335,000, $38,890,000, and
$35,189,000, 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 2019. The Company anticipates the annual capital
expenditures for 2019 should range from $4 million to $6 million. Capital expenditures in 2019 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
sources are the noninterest-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 2018, 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, 2018 as shown in Item 8, Note 2 of this
report. All share and per share data have been restated to give effect to the 20% stock dividend that was paid on December 14,
2018.
In 2018, cash dividends paid were $.89 per share for a total of $13,177,000, an increase of $2,502,000, or 23%, compared to
$.72 per share for a total of $10,675,000 in 2017. The increase is attributable to the per-share amount paid and the increase in
outstanding shares as a result of the stock dividend.
Shareholders’ equity was $229,848,000, or 14% of total assets, at December 31, 2018, an increase of $4,760,000 over the
balance at December 31, 2017. This increase resulted primarily from net income of $30,268,000. This increase was partially
offset by cash dividends of $13,177,000, the repurchase of treasury shares of $8,838,000, and an increase in other
comprehensive loss of $5,552,000.
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
28
banking principles. As of December 31, 2018, unappropriated retained earnings of $37,150,000 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 169,143 shares at an aggregate
cost of $8,838,000 during the year ended December 31, 2018 and 50,215 shares at an aggregate cost of $2,270,000 during the
year ended December 31, 2017. As of December 31, 2018, 349,513 shares remained available for repurchase under the
program. Shares repurchased have been restated to give effect to the 20% stock dividend that was paid on December 14, 2018.
In January 2019, the Board restored the capacity of the buyback program to 500,000 shares. 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
to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those
instruments. At December 31, 2018, 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, 2018, the balance of loan
commitments, standby and commercial letters of credit were $144,010,000, $11,368,000 and $3,486,000, 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, 2018:
(In thousands)
Operating lease commitments
Time deposits
Total
Amount of Commitment Expiration per Period
1-3
Years
Less than 1
Year
3-5
Years
Total
$
$
10,720 $
72,457
83,177 $
1,639 $
51,154
52,793 $
3,671 $
18,402
22,073 $
2,370 $
2,901
5,271 $
Over
5 Years
3,040
⎯
3,040
During 2018, 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 2018, 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
3.75%
(a)
6.50%
(a) 6.00% graded down to 3.25% over the first seven years of service.
29
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
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, 2018, 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, 2018:
Change in Interest Rates
+200 basis points
+100 basis points
Stable rates
-100 basis points
-200 basis points
% Change in Net Interest Income % Change in Fair Market Value of Equity
10%
5%
⎯
(4%)
(10%)
11%
6%
⎯
(2%)
(11%)
30
Interest Rate Sensitivity Position
The following table presents the Company’s interest rate risk position at December 31, 2018 for the various time periods indicated:
(In thousands)
Earning assets:
Loans:
Taxable
Tax-exempt
Securities (1):
Tax-exempt
U.S. government agencies
Treasuries
Certificates of deposit
Investments in the FHLB
and FRB
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:
Variable
Rate
0-90
Days
91-180
Days
181-364
Days
1-5
Years
Over
5 Years
Total
$
158,754 $ 29,550 $
⎯
⎯
⎯
⎯
⎯
1,279
⎯
1,318
⎯
⎯
⎯
⎯
21,694 $
⎯
3,129
⎯
⎯
⎯
⎯
33,038 $ 347,908 $ 130,643 $
⎯
⎯
⎯
2,044
⎯
⎯
1,495
⎯
64,667
1,956
59,129
500
⎯
263,559
43,737
⎯
⎯
721,587
⎯
334,717
45,693
59,129
1,995
1,279
$
$
215,891
375,924 $ 30,868 $
⎯
⎯
24,823 $
⎯
215,891
36,577 $ 474,160 $ 437,939 $ 1,381,291
⎯
⎯
239,724 $
82,985
13,502
⎯ $
⎯
⎯
⎯ $
⎯
⎯
⎯ $
⎯
⎯
⎯ $
⎯
⎯
⎯ $
⎯
⎯
239,724
82,985
13,502
⎯
⎯
⎯
1,286
1,742
3,999
8,910
20,280
21,669
2,178
12,393
⎯
⎯
15,937
56,520
336,211 $ 21,566 $
⎯
⎯
23,411 $
⎯
⎯
6,177 $ 21,303 $
⎯
⎯ $
⎯
408,668
Periodic
Cumulative
$
39,713 $
39,713
9,302 $
49,015
1,412 $
50,427
30,400 $ 452,857 $ 437,939 $
80,827
533,684
971,623
971,623
971,623
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic
Cumulative
1.12
1.12
1.43
1.14
1.06
1.13
5.92
1.21
22.26
2.31
⎯
3.38
3.38
3.38
(1) Balances shown reflect earliest re-pricing date.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(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, 15,505,772 and 13,047,858 shares
issued at December 31, 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Common shares in treasury, at cost (894,486 and 760,962
shares at December 31, 2018 and 2017, respectively)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2018
2017
15,042
179,281
36,610
230,933
441,534
721,587
10,225
711,362
22,031
17,384
160,777
12,569
1,554
97,032
1,695,176
313,258
408,668
721,926
694,360
49,042
1,465,328
$
$
$
17,422
152,056
58,632
228,110
470,523
686,231
10,205
676,026
21,586
16,927
139,103
12,569
1,996
90,369
1,657,209
281,541
396,547
678,088
715,888
38,145
1,432,121
─
─
7,753
205,770
75,171
(39,974)
(18,872)
229,848
1,695,176
6,524
204,631
59,314
(32,061)
(13,320)
225,088
1,657,209
$
$
$
$
$
32
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
2017
2018
2016
$
$
102,181
1,335
(42)
602
104,076
32,477
2,104
9,063
4,282
47,926
3,736
3,736
44,190
─
44,190
148,266
85,881
3,723
5,610
442
16,263
111,919
36,347
6,079
30,268
2.06
2.03
$
$
$
$
93,322
1,349
─
841
95,512
28,641
554
10,439
2,343
41,977
2,187
2,187
39,790
─
39,790
135,302
77,339
3,480
5,071
427
14,086
100,403
34,899
9,885
25,014
1.70
1.68
$
$
$
83,713
1,276
387
760
86,136
29,063
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
1.65
1.63
(In thousands except per share data)
Fee Revenue and Other Income:
Information services payment and processing revenue
Bank service fees
(Losses) 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
For the Years Ended December 31,
2018
2017
2016
$
30,268
$
25,014 $
24,348
(7,534)
1,793
42
(10)
341
(81)
(103)
24,716
$
6,637
(2,465)
(10,644)
3,954
─
─
(1,311)
487
161
28,523 $
(387)
144
(1,435)
531
(42)
16,469
$
(In thousands)
Comprehensive Income:
Net income
Other comprehensive (loss) income:
Net unrealized (loss) gain on securities available-for-sale
Tax effect
Reclassification adjustments for losses (gains) included in
net income
Tax effect
FASB ASC 715 pension adjustment
Tax effect
Foreign currency translation adjustments
Total comprehensive income
See accompanying notes to consolidated financial statements.
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 losses (gains) on sales of securities
Stock-based compensation expense
Provision for loan losses
Deferred income tax (benefit) expense
Increase (decrease) in current income tax liability
Increase in pension liability
Decrease (increase) in accounts receivable
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 in loans
(Increase) decrease 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 in interest-bearing demand and savings deposits
Net increase (decrease) in time deposits
Net (decrease) increase in accounts and drafts payable
Cash dividends paid
Purchase of common shares for treasury
Other financing activities, net
Net cash provided by 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
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2018
2017
2016
$
30,268 $
25,014 $
24,348
11,238
42
3,006
─
(3,521)
3,746
4,641
4,709
(5,794)
48,335
58,520
38,116
(82,022)
(35,336)
(21,674)
(4,399)
(46,795)
11,341
─
2,339
─
3,997
(3,026)
8,008
(4,656)
(4,127)
38,890
─
44,156
(124,777)
(21,335)
(33,756)
(4,127)
(139,839)
31,717
(7,838)
19,959
(19,595)
(13,177)
(8,838)
(945)
1,283
2,823
228,110
230,933 $
66,885
(7,472)
(3,286)
19,601
(10,675)
(2,270)
(467)
62,316
(38,633)
266,743
228,110 $
9,429
(387)
1,959
(1,500)
319
357
4,137
(4,070)
597
35,189
21,491
43,524
(96,290)
(5,771)
179
(4,684)
(41,551)
32,833
(51,440)
(5,916)
65,028
(9,979)
(9,215)
(1,378)
19,933
13,571
253,172
266,743
3,701 $
6,723
2,178 $
7,677
2,017
7,061
$
$
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, 2015
$ 5,966
$ 126,290
$ 103,994
$ (22,208)
$ (6,664)
$ 207,378
Net income
Cash dividends ($.68 per share)
Issuance of 47,779 common shares pursuant
to stock-based compensation plan, net (1)
Exercise of SARs
Stock-based compensation expense
Purchase of 247,002 common shares (1)
Excess tax benefits associated with stock
based compensation
Other comprehensive loss
Balance, December 31, 2016
Net income
Cash dividends ($.72 per share)
Stock dividend
Issuance of 29,378 common shares pursuant
to stock-based compensation plan, net (1)
Exercise of SARs
Stock-based compensation expense
Purchase of 50,215 common shares (1)
Other comprehensive income
Other comprehensive income
reclassification for ASU 2018-02
Balance, December 31, 2017
Net income
Cash dividends ($.89 per share)
Stock dividend
Issuance of 33,039 common shares pursuant
to stock-based compensation plan, net (1)
Exercise of SARs
Stock-based compensation expense
Purchase of 169,143 common shares (1)
Other comprehensive loss
Balance, December 31, 2018
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)
273
142
(2,270)
3,509
$ (32,061)
(2,286)
$ (13,320)
─
$ 225,088
25,014
(10,675)
(75,674)
2,286
$ 59,314
30,268
(13,177)
(1,234)
558
75,108
(821)
(451)
2,340
$ 6,524
$ 204,631
1,229
(991)
(876)
3,006
$ 7,753
$ 205,770
$ 75,171
$ (39,974)
(5,552)
$ (18,872)
624
301
(8,838)
24,348
(9,979)
(665)
(713)
1,959
(9,215)
2,801
(7,879)
$ 208,035
25,014
(10,675)
(8)
(548)
(309)
2,340
(2,270)
3,509
30,268
(13,177)
(5)
(367)
(575)
3,006
(8,838)
(5,552)
$ 229,848
(1) Share and per share figures adjusted for the 20% stock dividend that was paid on December 14, 2018.
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 2017 and 2016 consolidated
financial statements have been reclassified to conform to the 2018 presentation. Such reclassifications have no effect on
previously reported net income or shareholders’ equity. The Company issued a 20% stock dividend on December 14, 2018.
The share and per share information have been restated unless indicated otherwise for all periods presented in the accompanying
consolidated financial statements.
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.
37
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
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.
38
to be recovered or settled.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected
if necessary, by a
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. The
Company and its subsidiaries file U.S. federal and certain state income tax returns on a consolidated basis. In addition, certain
state jurisdictions are filed on a separate company basis by the Company or its subsidiaries.
tax assets are reduced
Deferred
The Company recognizes and measures income tax benefits using a two-step model: 1) a tax position must be more likely than
not to be sustained based solely on its technical merits in order to be recognized; and 2) the benefit must be measured as the
largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the
benefit recognized for a tax position in this model and the tax benefit claimed on a tax return is treated as an unrecognized tax
benefit. The Company recognizes income tax related interest and penalties in income tax expense.
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, 2018, 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 (“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.
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers (“FASB ASC 606”), and selected the modified
39
retrospective transition method. The adoption of this new standard did not impact the Company’s results of operations or
balance sheet and there was no cumulative effect of initially applying this new revenue standard to the opening balance of
retained earnings. Since interest income on loans and securities are both excluded from this topic, a significant portion of the
Company’s revenues are not subject to the new guidance. The services that fall within the scope of FASB ASC 606 are
presented within fee revenue and other income in the Consolidated Statements of Income and are recognized as revenue as the
obligation to the customer is satisfied. Services within the scope of FASB ASC 606 include invoice processing and payment
fees, bank service fees, and other real estate owned (“OREO”).
In February 2016, the FASB issued Accounting Standards Update (“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 on leases will take effect for public companies for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. A third-party vendor solution has
been selected to assist in the application of ASU 2016-02. The Company will adopt this ASU using a prospective transition
approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods
presented. The adoption of this ASU is expected to add assets and liabilities of approximately $9-11 million to the Company’s
balance sheet.
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, it 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 Company expects to recognize a one-time
cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new
standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new
guidance on the consolidated financial statements.
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, 2018 and 2017, 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
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 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 that ended on December 31, 2018.
The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 2018, 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.
The Company has traditionally paid a quarterly cash dividend to its shareholders. Subsidiary dividends can be a significant
source of funds for payment of dividends by the Company to its shareholders. Banking regulations may limit the amount of
40
dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the
regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed
the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend
restrictions and while maintaining its “well capitalized” status, at December 31, 2018, unappropriated retained earnings of
$37,150,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory
authorities. In addition to regulatory requirements and considerations, any payment of dividends in the future will depend on
the Company’s earnings, financial condition and other factors considered relevant by the Company’s Board of Directors.
There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 2018 and 2017.
The Company’s and the Bank’s actual and required capital amounts and ratios are as follows:
(In thousands)
At December 31, 2018
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, 2017
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
$ 244,660
137,894
21.38 %
18.31
$ 91,550
60,257
8.00 %
8.00
$ N/A N/A %
75,321 10.00
234,435
130,037
234,435
130,037
234,435
130,037
20.49
17.26
20.49
17.26
13.89
15.35
51,497
33,895
4.50
4.50
68,662
45,193
6.00
6.00
67,500
33,884
4.00
4.00
N/A N/A
6.50
48,959
N/A N/A
8.00
60,257
N/A N/A
5.00
42,354
$ 234,389
122,440
22.53 %
17.01
$ 83,233
57,568
8.00 %
8.00
$ N/A
N/A %
71,960 10.00
224,184
114,603
224,184
114,603
224,184
114,603
21.55
15.93
21.55
15.93
13.87
14.99
46,819
32,382
4.50
4.50
62,425
43,176
6.00
6.00
64,649
30,581
4.00
4.00
N/A N/A
6.50
46,774
N/A N/A
8.00
57,568
N/A N/A
5.00
38,227
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, 2018 and 2017 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
Amortized
Cost
$ 332,732
106,153
1,995
$ 440,880
December 31, 2018
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Fair Value
3,791
86
─
3,877
$
$
1,806
1,417
─
3,223
$
$
334,717
104,822
1,995
441,534
$
$
41
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total
December 31, 2017
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Fair Value
$
$
9,528
─
─
9,528
$
$
661
722
─
1,383
$
$
417,032
45,500
7,991
470,523
Amortized
Cost
$ 408,165
46,222
7,991
$ 462,378
The fair values of securities with unrealized losses are as follows:
Less than 12 months
December 31, 2018
12 months or more
Estimated Unrealized Estimated Unrealized
Fair Value
Fair Value
Losses
Losses
Total
Estimated Unrealized
Fair value
Losses
(In thousands)
State and political subdivisions $
U.S. government agencies
Certificates of deposit
Total
91,248 $
30,409
─
$ 121,657 $
556 $
130
─
686 $
60,546 $
38,005
─
98,551 $
1,250 $ 151,794 $
1,287
─
68,414
─
2,537 $ 220,208 $
1,806
1,417
─
3,223
(In thousands)
State and political subdivisions $
U.S. government agencies
Certificates of deposit
Total
$
Less than 12 months
December 31, 2017
12 months or more
Total
Estimated Unrealized Estimated Unrealized Estimated
Fair value
Fair Value
Fair Value
Losses
Losses
Unrealized
Losses
34,755 $
34,183
─
68,938 $
123 $
376
─
499 $
31,251 $
11,317
─
42,568 $
538 $
346
─
66,006 $
45,500
─
884 $ 111,506 $
661
722
─
1,383
There were 136 securities, or 43% of the total (61 greater than 12 months), in an unrealized loss position as of December 31,
2018 compared to 64 securities, or 17% (24 greater than 12 months), in an unrealized loss position as of December 31, 2017.
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, 2018
Amortized Cost
Fair Value
$
7,956
125,746
242,119
65,059
─
$ 440,880
$
$
7,987
126,252
244,118
63,177
─
441,534
The premium related to the purchase of state and political subdivisions was $6,857,000 and $7,147,000 in 2018 and 2017,
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, 2018 was $0 and at December 31, 2017 was $3,750,000.
Proceeds from sales of debt securities classified as available-for-sale were $58,520,000 in 2018, $0 in 2017, and $21,491,000
in 2016. Gross realized gains on the sales in 2018, 2017 and 2016 were $180,000, $0, and $387,000, respectively. Gross
realized losses on sales in 2018, 2017 and 2016 were $222,000, $0, and $0, respectively.
Loans
Note 4
The Company originates commercial, industrial and real estate loans to businesses and faith-based ministries throughout the
metropolitan St. Louis, Missouri area, Orange County, California, Colorado Springs, Colorado and other selected cities in the
42
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 and franchises
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 faith-based ministries in its market area and selected cities in the
United States.
A summary of loan categories is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total loans
December 31,
2018
277,091
$
$
2017
236,394
95,605
11,858
316,147
20,576
⎯
310
721,587
$
$
94,675
9,359
316,073
25,948
3,374
408
686,231
The following table presents the aging of loans by loan categories at December 31, 2018:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
⎯ $
⎯
$
⎯ $
⎯ $
Current
277,091
$
95,605
11,858
316,147
20,576
⎯
310
721,587
$
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
⎯
⎯
⎯
⎯
⎯
⎯
⎯
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
⎯
⎯
⎯
⎯
⎯ $
The following table presents the aging of loans by loan categories at December 31, 2017:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
⎯ $
⎯
$
⎯ $
⎯ $
Current
236,394
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
⎯
⎯
⎯
⎯
⎯ $
94,675
9,359
316,073
25,948
3,374
408
686,231
$
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
43
Total
Loans
277,091
95,605
11,858
316,147
20,576
⎯
310
721,587
Total
Loans
236,394
94,675
9,359
316,073
25,948
3,374
408
686,231
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2018:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Loans
Subject to
Normal
Monitoring(1)
$
275,308 $
Performing
Loans Subject to
Special
Monitoring(2)
1,783
$
Nonperforming
Loans Subject
to Special
Monitoring(2)
Total Loans
277,091
⎯ $
95,447
11,858
158
⎯
⎯
⎯
95,605
11,858
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
(1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
(2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
314,940
20,576
⎯
310
718,439 $
316,147
20,576
⎯
310
721,587
1,207
⎯
⎯
⎯
3,148
⎯
⎯
⎯
⎯
⎯ $
$
$
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2017:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Loans
Subject to
Normal
Monitoring(1)
$
234,271 $
Performing
Loans Subject to
Special
Monitoring (2)
2,123
$
Nonperforming
Loans Subject to
Special
Monitoring (2)
Total Loans
236,394
⎯ $
93,788
9,359
887
⎯
⎯
⎯
94,675
9,359
Mortgage
Construction
Industrial Revenue Bonds
Other
Total
(1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
(2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
316,042
25,948
3,374
408
683,190 $
316,073
25,948
3,374
408
686,231
31
⎯
⎯
⎯
3,041
⎯
⎯
⎯
⎯
⎯ $
$
$
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. There was no ALLL related to impaired loans at both December 31, 2018 and 2017. There were no
non-accrual loans at December 31, 2018 and 2017. There were no loans delinquent 90 days or more and still accruing interest
at both December 31, 2018 and 2017. At December 31, 2018 and 2017, there were no loans classified as troubled debt
restructuring. The average balances of impaired loans during 2018, 2017 and 2016 were $0, $166,000, and $333,000,
respectively. Income that would have been recognized on non-accrual loans under the original terms of the contract was $0,
$24,000, and $66,000 for 2018, 2017 and 2016, respectively. Income that was recognized on nonaccrual loans was $0, $17,000,
and $47,000 for 2018, 2017 and 2016 respectively. There were no foreclosed assets as of December 31, 2018 or 2017.
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, 2018 and 2017, there were no impaired loans.
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 for the period ended December 31, 2018 is as follows:
44
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bond
Other
Total
December 31,
2017
Charge-
Offs
Recoveries
$
3,652 $
⎯ $
20
$
Provision
507
December 31,
2018
$
4,179
1,394
70
3,962
196
52
879
10,205 $
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
⎯
⎯
⎯
⎯
⎯
⎯
20
$
23
19
(1)
(41)
(52)
(455)
⎯
$
1,417
89
3,961
155
⎯
424
10,225
A summary of the activity in the allowance for loan losses for the period ended December 31, 2017 is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bond
Other
Total
December 31,
2016
Charge-
Offs
Recoveries
$
3,261 $
⎯ $
30
$
Provision
361
December 31,
2017
$
3,652
1,662
47
4,027
85
101
992
10,175 $
$
⎯
⎯
⎯
⎯
⎯
⎯
⎯ $
⎯
⎯
⎯
⎯
⎯
⎯
30
$
(268)
23
(65)
111
(49)
(113)
⎯
$
1,394
70
3,962
196
52
879
10,205
As of December 31, 2018, there were loans totaling $278,153 to affiliates of executive officers or directors. There were no
loans to affiliates of executive officers or directors at December 31, 2017.
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,
$
2018
873
14,684
2,537
16,332
5,043
17,428
56,897
34,866
$ 22,031
2017
873
13,386
2,120
14,801
4,819
16,485
52,484
30,898
21,586
$
$
Total depreciation charged to expense in 2018, 2017 and 2016 amounted to $3,954,000, $3,624,000 and $3,245,000,
respectively.
The Company and its subsidiaries lease various premises under operating lease agreements which expire at various dates
through 2024. Rental expense for 2018, 2017 and 2016 was $1,648,000, $1,499,000 and $1,397,000, 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, 2018:
(In thousands)
2019
2020
2021
2022
2023
2024+
Total
Note 6
Acquired Intangible Assets
Amount
1,639
1,902
1,769
1,646
724
3,040
10,720
$
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, 2018
December 31, 2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
4,288
72
332
234
500
(3,071)
(16)
(326)
(234)
(225)
$
$
$
4,288
72
332
234
500
12,796
18,222
$
(2,702)
(12)
(291)
(234)
(191)
(227)
(3,657)
Goodwill (1)
(227)
Total intangible assets
(4,099)
(1)Amortization through December 31, 2001 prior to adoption of FASB ASC 350.
12,796
18,222
$
$
The customer lists are amortized over seven and ten years; the patents over 18 years, the non-compete agreements over two
and five years, software over three years and other intangible assets over 15 years. Amortization of intangible assets amounted
to $442,000, $427,000 and $408,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Estimated future
amortization of intangibles is $412,000 in 2019, $406,000 in both 2020 and 2021 and $88,000 in both 2022 and 2023.
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
$
$
2018
322,709 $
13,502
2017
332,881
11,168
4,862
2,658
51,658
33,385
15,937
408,668 $
1.00%
16,455
396,547
.56%
December 31,
2017
1,611 $
79
$
234
114
149
2,187 $
$
2018
2,832
109
433
152
210
3,736
$
$
2016
1,387
100
274
191
77
2,029
The scheduled maturities of time deposits are summarized as follows:
December 31,
2018
2017
Amount
$
$
51,154
18,262
140
983
1,918
72,457
Percent
of Total
Amount
70.6%
$
25.2
0.2
1.4
2.6
100.0%
$
48,370
281
2,383
25
1,439
52,498
Percent
of Total
92.1%
0.5
4.5
0.1
2.8
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, 2018, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $83,000,000 at the following banks: US Bank, $20,000,000; UMB Bank $20,000,000; Wells Fargo Bank,
$15,000,000; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; and JPM Chase Bank, $6,000,000. As of December
31, 2018, the Bank had secured lines of credit with the Federal Home Loan Bank of $193,460,000 collateralized by commercial
mortgage loans. At December 31, 2018, the Company had lines 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, 2018 or 2017.
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 2018.
Shares outstanding at January 1
20% stock dividend paid on December 14, 2018
Issuance of common stock:
Employee restricted stock grants
Employee SARs exercised
Directors’ compensation
Shares repurchased
Shares forfeited
Shares outstanding at December 31
2018
12,286,896
2,457,484
9,530
12,048
9,526
(163,634)
(564)
14,611,286
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, performance
based restricted stock (“PBRS”), and SARs
Weighted average common shares outstanding
assuming dilution
Diluted earnings per share
2018
30,268
14,675,136
2.06
30,268
14,675,136
$
$
$
December 31,
2017
2016
$
$
$
25,014
14,700,557
1.70
25,014
14,700,558
$
$
$
24,348
14,718,228
1.65
24,348
14,718,228
239,065
215,332
206,878
14,914,202
2.03
$
14,915,890
1.68
14,925,106
1.63
$
$
All share and per share data have been restated to give effect to the 20% stock dividend that was paid on December 14, 2018
Note 10
Employee Benefit Plans
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
2018
2017
$
$
$
$
$
98,790 $
4,017
3,703
(7,768)
(2,341)
96,401 $
81,427 $
(4,506)
―
(2,341)
74,580 $
85,551
3,733
3,621
7,916
(2,031)
98,790
73,168
10,290
―
(2,031)
81,427
(21,821) $
(17,363)
The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2018, 2017
and 2016, the Plan’s expected benefit cash flows were discounted using the Citibank Above Median Curve. For 2018, the RP-
2014 Mortality Table and the MP-2018 Mortality Improvement Table were used. For 2017, the RP-2014 Mortality Table and
MP-2017 Mortality Improvement Table were used. For 2016, the RP-2014 Mortality Table and MP-2016 Mortality
Improvement Table were used.
Weighted average discount rate
Rate of increase in compensation levels
2018
4.30%
(a)
2017
3.75%
(a)
2016
4.25%
(a)
(a) 6.0% graded down to 3.25% over the first seven years of service.
The accumulated benefit obligation was $83,724,000 and $85,236,000 as of December 31, 2018 and 2017, respectively. The
Company does not expect to make a contribution to the Plan in 2019. The following pension benefit payments, which reflect
expected future service, as appropriate, are expected to be paid by the Plan:
2019
2020
2021
2022
2023
2024-2028
Amount
$2,893,000
3,099,000
3,363,000
3,769,000
4,196,000
25,643,000
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,
2017
3,733 $
3,621
(4,681)
1,382
4,055 $
2018
4,017 $
3,703
(5,202)
1,522
4,040 $
$
$
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
2018
3.75%
(a)
6.50%
2017
4.25%
(a)
6.50%
(a)
6.0% graded down to 3.25% over the first seven years of service
49
2016
3,559
3,505
(4,734)
1,259
3,589
2016
4.50%
(a)
6.75%
For 2018, the RP-2014 Mortality Table and the MP-2017 Mortality Improvement Table were used. For 2017, the RP-2014
Mortality Table and the MP-2016 Mortality Improvement Table were used. For 2016, the RP-2014 Mortality Table and the MP-
2015 Mortality Improvement Table 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 51% fixed income, 19% U.S. equity
and 30% 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
Small Cap U.S. Equities
International (Developed)
International (Emerging)
51%
14%
5%
25%
5%
4.44%
7.02%
8.04%
8.19%
10.45%
3.90%
15.10%
18.75%
17.36%
25.35%
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,
2017
2018
(In thousands)
Cash
Equity securities
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
$423
3,405
18,398
10,471
3,217
10,609
23,827
4,230
$74,580
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$423
$ ―
Total
$374
4,111
21,065
11,717
4,052
3,405
18,398
10,471
3,217
10,609
23,827
4,230
11,284
24,345
4,479
$74,157 $81,427
―
―
―
―
―
―
―
$423
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$374
$ ―
―
―
―
―
―
―
―
$374
4,111
21,065
11,717
4,052
11,284
24,345
4,479
$81,053
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 Internal Revenue Service 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,
2018
2017
$
$
10,094 $
92
348
(260)
(177)
10,097 $
9,132
143
360
(247)
706
10,094
50
The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2018, 2017
and 2016, 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
2018
4.10%
(a)
(a) 6.00% graded down to 3.25% over the first seven years of service.
2017
3.50%
(a)
2016
4.00%
(a)
The accumulated benefit obligation was $8,830,000 and $8,734,000 as of December 31, 2018 and 2017, respectively. Since
this is an unfunded plan, there are no plan assets. Benefits paid were $260,000 in 2018, and $247,000 in both 2017 and 2016.
Expected future benefits payable by the Company over the next ten years are as follows:
2019
2020
2021
2022
2023
2024-2028
Amount
$313,000
312,000
372,000
749,000
817,000
4,014,000
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,
2018
92 $
348
581
1,021 $
$
$
2017
143 $
360
324
827 $
2016
133
367
295
795
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
2018
$ ⎯
23,580
$ 23,580
2017
$ ⎯
23,160
$ 23,160
2018
$ ⎯
1,629
$ 1,629
2017
$ ⎯
2,388
$ 2,388
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2018
expected to be recognized as components of net periodic benefit cost in 2019 for the Plan are $0 and $1,634,000, respectively.
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2018
expected to be recognized as components of net periodic benefit cost in 2019 for the SERP are $0 and $277,000, 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 2018, 2017 and 2016 was $6,810,000, $5,799,000, and
$5,367,000, 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 2018, 2017 and 2016 were $1,109,000, $925,000, and $658,000,
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.
All share and per share data have been restated to give effect to the 20% stock dividend that was paid on December 14, 2018.
51
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 annual vesting
period 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. Beginning on February 2, 2017, restricted shares granted to Company employees are amortized to expense over the
three-year cliff vesting period.
Changes in restricted shares outstanding for the year ended December 31, 2018 were as follows:
Balance at December 31, 2017
Granted
Vested
Forfeited
Balance at December 31, 2018
Weighted Average
Grant Date
Fair Value
$41.92
49.79
39.03
46.70
$45.48
Shares
93,775
35,000
(28,487)
(564)
99,724
During 2017 and 2016, 31,277 and 47,779 shares, respectively, were granted with weighted average per share market values
at date of grant of $49.55 in 2017 and $38.13 in 2016. The fair value of such shares are based on the market price on the date
of grant. Amortization of the restricted stock bonus awards totaled $1,571,000 for 2018, $1,743,000 for 2017 and $1,712,000
for 2016. As of December 31, 2018, the total unrecognized compensation expense related to non-vested restricted stock awards
was $1,345,000 and the related weighted average period over which it is expected to be recognized is approximately 0.75 years.
The total fair value of shares vested during the years ended December 2018, 2017, and 2016 was $1,112,000, $1,389,000, and
$1,500,000, respectively.
Performance-Based Restricted Stock
In February of 2017, the Company granted three-year PBRS awards which are contingent upon the Company’s achievement
of pre-established financial goals over the period from January 1, 2017 through December 31, 2019. The PBRS awards cliff
vest on the three year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity based on the
actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS shares
granted was 30,388 with an average grant date fair value of $49.33 per share. The 2018 expense related to these grants totaled
$690,000 and is based on the grant date fair value of the awards and the Company’s achievement of 132% of the target financial
goals. The estimated expense for 2018 and each future period through the vesting date is subject to prospective adjustment
based upon changes in the expected achievement of the financial goals.
In each of February and July of 2018, the Company granted three-year PBRS awards which are contingent upon the Company’s
achievement of pre-established financial goals over the period from January 1, 2018 through December 31, 2020. The PBRS
awards cliff vest on the three-year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity
based on the actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS
shares granted was 35,602 with an average grant date fair value of $48.67 per share. The 2018 expense related to these grants
totaled $745,000 and is based on the grant date fair value of the awards and the Company’s achievement of 144% of the target
financial goals. The estimated expense for 2018 and each future period through the vesting date is subject to prospective
adjustment based upon changes in the expected achievement of the financial goals.
SARs
During 2018, there were no SARs granted and no expense recognized. As of December 31, 2018, there was no unrecognized
compensation expense related to SARs.
Changes in SARs outstanding for the year ended December 31, 2018 were as follows:
Balance at December 31, 2017
Exercised
Forfeited
Balance at December 31, 2018
Exercisable at December 31, 2018
SARs
281,067
(43,946)
⎯
237,121
237,121
Weighted Average Exercise Price
$29.14
25.26
⎯
29.86
$29.86
52
The total intrinsic value of SARs exercised during 2018 and 2017 was $1,110,000 and $892,000, respectively. The average
remaining contractual term for SARs outstanding as of December 31, 2018 was 3.50 years, and the aggregate intrinsic value
was $5,468,000. The average remaining contractual term for SARs exercisable as of December 31, 2017 was 5.03 years, and
the aggregate intrinsic value was $7,291,000.
The total compensation cost for share-based payment arrangements was $3,006,000, $2,340,000, and $1,959,000 in 2018, 2017,
and 2016, 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
Note 13
Income Taxes
The components of income tax expense are as follows:
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Total income tax expense
For the Years Ended December 31,
2018
2,180 $
3,344
2,170
4,909
919
778
1,963
16,263 $
2017
2,087 $
2,557
1,650
4,424
897
749
1,722
14,086 $
2016
1,925
2,187
1,930
3,316
372
1,000
1,913
12,643
For the Years Ended December 31,
2018
2017
2016
8,557 $
1,043
4,250 $
1,638
(3,404)
(117)
6,079
$
4,256
(259)
9,885
$
6,456
941
301
18
7,716
$
$
$
$
A reconciliation of expected income tax expense, computed by applying the effective federal statutory rate of 21% for 2018
and 35% for each of 2017 and 2016 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
Share-based compensation adjustment
Adjustment of deferred tax asset or liability for TCJA
Other, net
Total income tax expense
For the Years Ended December 31,
2018
7,633 $
2017
12,214 $
2016
11,223
(2,009)
732
(286)
(74)
83
6,079 $
(3,868)
896
(376)
1,824
(805)
9,885 $
(3,754)
623
⎯
⎯
(376)
7,716
$
$
On December 22, 2017, the TCJA was enacted. Among other things, the new law (i) establishes a new, flat corporate federal
statutory income tax rate of 21%; (ii) eliminates the corporate alternative minimum tax and allows the use of any such
carryforwards to offset regular tax liability for any taxable year; (iii) limits the deduction for net interest expense incurred by
U.S. corporations; (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain
qualified depreciable assets; (v) eliminates or reduces certain deductions related to meals and entertainment expenses; (vi)
modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation
and clarifies the definition of a covered employee; and (vii) limits the deductibility of deposit insurance premiums. The TCJA
also significantly changes U.S. tax law related to foreign operations, though, such changes do not currently impact the Company
on a significant level.
Also on December 22, 2017, the SEC issued SAB 118, which provides guidance on accounting for tax effects of the TCJA.
SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Based on the
53
information available and current interpretation of the rules at December 31, 2017, the Company made provisional estimates
of the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities based on
the rate at which they were expected to reverse in the future totaling $1,824,000. The final analysis and measurement was
completed during the fourth quarter of 2018 when the Company filed the 2017 U.S. federal income tax return and a reduction
of tax expense in the amount of $74,000 was recorded.
Income tax expense in 2018 totaled $6,079,000 compared to $9,885,000 and $7,716,000 in 2017 and 2016, respectively. When
measured as a percent of pre-tax income, the Company’s effective tax rate was 17% in 2018, 28% in 2017, and 24% in 2016.
The decrease in 2018 tax expense was primarily the result of two items:
•
•
the decrease in the federal income tax rate and
the one-time, non-cash charge of $1,824,000 that increased 2017 tax expense triggered by the passage of the TCJA
on December 22, 2017.
The Company’s effective tax rate for 2018 was 17% and the Company’s 2017 effective tax rate was 25% excluding the one-
time TCJA charge. The Company’s effective tax rate has traditionally been lower than the statutory rate because of investments
and loans that are tax exempt.
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 carryforward (1)
Supplemental executive retirement plan accrual
Stock compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Pension
Intangible assets
Unrealized gain on investment in securities available-for-sale
Deferred income
Other
Total deferred tax liabilities
December 31,
2018
$
$
2,376
6,000
50
1,968
1,673
⎯
12,067
$
$
2017
2,413
6,080
76
1,833
1,307
118
11,827
(1,937)
(409)
(1,212)
(156)
⎯
(80)
(3,794)
8,273
$
$
(2,248)
(1,379)
(1,091)
(1,938)
(2,121)
⎯
(8,777)
3,050
$
$
Net deferred tax assets
(1) As of December 31, 2018, the Company had approximately $238,000 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, 2018 or 2017, due to
management’s belief that all criteria for recognition have been met, including the expectation of projected future taxable income
sufficient to support the realization of deferred tax assets.
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
54
2018
$1,632
(135)
192
⎯
2017
$1,623
2016
$1,194
(15)
263
⎯
407
311
⎯
(286)
$1,403
(239)
$1,632
(289)
$1,623
At December 31, 2018, 2017 and 2016, the balance of the Company’s unrecognized tax benefits which would, if recognized,
affect the Company’s effective tax rate was $1,272,000, $1,464,000 and $1,225,000, respectively. These amounts are net of
the offsetting benefits from other taxing jurisdictions.
As of December 31, 2018, 2017 and 2016, the Company had $136,000, $139,000 and $108,000, respectively, in accrued interest
related to unrecognized tax benefits. During 2018, the Company recorded a net decrease in accrued interest of $3,000 and in
2017 a net increase of $31,000. The Company recognizes income tax related interest and penalties in income tax expense.
The Company believes it is reasonably possible that the total amount of tax benefits will decrease by approximately $316,000
over the next 12 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 2015 through 2017 remain subject to examination by the Internal
Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2014 through 2017 and
currently is not under examination in any tax jurisdictions.
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, 2018 and 2017, 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.
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,
$
2018
144,010 $
11,368
3,486
2017
87,013
14,347
3,246
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.
55
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,
2018
2017
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
$
230,933
441,534
711,362
7,069
$ 1,390,898
$
230,933
441,534
711,090
7,069
$ 1,390,626
$
228,110
470,523
676,026
7,413
$ 1,382,072
$
228,110
470,523
675,020
7,413
$ 1,381,066
$
721,926
694,360
91
$ 1,416,377
$
722,018
694,360
91
$ 1,416,469
$
678,088
661,888
55
$ 1,340,031
$
678,346
661,888
55
$ 1,340,289
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
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
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted FASB ASC 606 and selected the modified retrospective transition method. The
adoption of this new standard did not impact the Company’s results of operations or balance sheet and there was no cumulative
effect of initially applying this new revenue standard to the opening balance of retained earnings. Since interest income on
loans and securities are both excluded from this topic, a significant portion of the Company’s revenues are not subject to the
new guidance. The services that fall within the scope of FASB ASC 606 are presented within fee revenue and other income in
the Consolidated Statements of Income and are recognized as revenue as the obligation to the customer is satisfied. Services
56
within the scope of FASB ASC 606 include invoice processing and payment fees, bank service fees, and other real estate owned
(“OREO”).
Invoice processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered
on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly
fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The
Company also earns interest income from the balances generated during the payment cycle for the invoices processed, which
is an integral component of the Company’s compensation for invoice processing services but is out-of-scope of FASB ASC
606. The contracts have no significant impact of variable consideration and no significant financing components.
Invoice payment fees – The Company earns fees on a transaction level basis for invoice payment services when making
customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the
performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant
financing components.
Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository
agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction based
fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a
monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant
impact of variable consideration and no significant financing components.
OREO – The Company currently does not have any OREO and has not in recent years. Net gains or losses would be recorded
when other real estate is sold to a third party and substantially all of the consideration for the transfer of property is received.
(In thousands)
Fee revenue and other income
In-scope of FASB ASC 606
Invoice processing fees
Invoice payment fees
Information services payment and processing revenue
Bank service fees
Fee revenue (in-scope of FASB ASC 606)
Other income (out-of-scope of FASB
ASC 606)
Total fee revenue and other income
Net interest income after provision for loan losses
(out-of-scope of FASB ASC 606)
Total net revenue
Note 17
Industry Segment Information
For the Years Ended December 31,
2016
2017
2018
$
$
78,461
23,720
102,181
1,335
103,516
560
104,076
$
72,961
20,361
93,322
1,349
94,671
841
95,512
67,276
16,437
83,713
1,276
84,989
1,147
86,136
44,190
148,266
$
39,790
135,302
39,401
125,537
$
$
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 and processing 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 faith-based ministries as well as supporting the banking needs of the Information Services segment.
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 tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax
income after allocations for corporate expenses. 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.
Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is
no allocation methodology used. Segment interest income is a function of the relative share of average funding sources
generated by each segment multiplied by the following rates:
57
Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and
•
• Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets.
Any difference between total segment interest income and overall total Company interest income is included in Corporate,
Eliminations, and Other. Certain amounts in the table below for 2017 and 2016 have been reclassified to conform to 2018
presentation.
Summarized information about the Company’s operations in each industry segment for the years ended December 31, 2018,
2017 and 2016, is as follows:
(In thousands)
2018
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
2017
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
2016
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
Information
Services
Banking
Services
Corporate,
Eliminations
and Other
Total
$
102,839 $
1,307 $
(70) $
104,076
22,273
─
─
4,254
24,962
12,433
1,554
826,201
642,733
23,706
3,736
1,880
142
11,625
136
─
886,291
572,653
4,369
─
(1,880)
─
2,181
─
─
(17,316)
─
$
93,484 $
1,547 $
481 $
20,634
─
─
3,902
24,990
12,433
1,996
854,214
604,493
23,732
2,187
1,362
149
13,691
136
─
830,672
598,986
3,301
─
(1,362)
─
1,908
─
─
(27,677)
─
50,348
3,736
─
4,396
38,768
12,569
1,554
1,695,176
1,215,386
95,512
47,667
2,187
─
4,051
40,589
12,569
1,996
1,603,209
1,203,479
$
83,821 $
1,417 $
898 $
86,136
18,729
─
─
3,488
20,065
11,454
1,997
763,999
545,726
24,088
2,029
1,136
165
15,090
136
─
756,164
614,974
2,614
─
(1,136)
─
2,410
─
─
(15,324)
─
45,431
2,029
─
3,653
37,565
11,590
1,997
1,504,839
1,160,700
* Presented on a tax-equivalent basis assuming a tax rate of 21% for 2018 and 35% for 2017 and 2016. The tax-equivalent adjustment was approximately
$2,422,000 for 2018, $5,691,000 for 2017, and $5,550,000 for 2016.
58
Note 18
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, 2018, and there were no events identified that would require additional disclosures to prevent
the Company’s consolidated financial statements from being misleading.
Note 19
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.
Condensed Balance Sheets
December 31,
2018
2017
35,735
35,201
441,534
20,188
130,231
21,358
278,151
962,398
693,026
39,362
732,388
230,010
962,398
$
$
$
$
56,462
48,324
470,523
12,239
113,681
20,927
199,865
922,021
661,342
35,533
696,875
225,146
922,021
Condensed Statements of Income
For the Years Ended December 31,
2018
2017
2016
—
2,668
2,668
100,628
14,159
(42)
456
117,869
77,946
23,442
101,388
16,481
1,788
14,693
15,575
30,268
$
$
—
2,172
2,172
93,133
13,217
—
483
109,005
70,409
20,333
90,742
18,263
4,394
13,869
11,145
25,014
$
$
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
$
$
$
$
$
(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
(In thousands)
Income from subsidiaries:
Interest
Management fees
Income from subsidiaries
Information services revenue
Net interest income after provision
(Loss) 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
$
59
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in)
provided by 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 decrease (increase) in securities
Net (increase) decrease in loans
Purchases of premises and equipment, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase in accounts and drafts payable
Cash dividends paid
Purchase of common shares for treasury
Other financing activities
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 20
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
Condensed Statements of Cash Flows
For the Years Ended December 31,
2018
2017
2016
$
30,268
$
25,014
$
24,348
(15,575)
(76,686)
3,829
2,583
10,242
(45,339)
14,615
(7,949)
(4,211)
2,455
31,684
(13,177)
(8,838)
(635)
9,034
(33,850)
104,786
70,936
$
(11,145)
(41,013)
10,118
1,743
9,219
(6,064)
(80,621)
34,944
(4,020)
(49,697)
20,397
(10,675)
(2,270)
(267)
7,185
(48,576)
153,362
104,786
$
(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
$
First
Quarter
$
$
(In thousands except per share data)
2018
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
2017
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
(1) Includes one-time, non-cash TCJA charge of $1,824,000
$
$
$
$
25,374 $
11,288
679
10,609
—
26,182
1,709
8,092 $
.55 $
.54
22,771 $
9,999
480
9,519
—
24,318
1,665
6,307 $
.43 $
.42
Second
Quarter
Third
Quarter
Fourth
Quarter
25,640 $
11,513
794
10,719
—
27,463
1,387
7,509 $
26,435 $
12,215
1,029
11,186
—
28,530
1,481
7,610 $
26,627 $
12,910
1,234
11,676
—
29,744
1,502
7,057 $
YTD
104,076
47,926
3,736
44,190
—
111,919
6,079
30,268
.51 $
.50
.52 $
.51
.48 $
.47
2.06
2.03
23,800 $
10,332
470
9,862
—
24,901
2,248
6,513 $
24,207 $
10,665
571
10,094
—
25,042
2,396
6,863 $
24,734 $
10,981
666
10,315
—
26,142
3,576 (1)
5,331 $
95,512
41,977
2,187
39,790
—
100,403
9,885 (1)
25,014
.44 $
.44
.47 $
.46
.36 $
.36
1.70
1.68
60
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cass Information Systems, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries (the
Company) as of December 31, 2018 and 2017, 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, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations
and its cash flows for each of the years in the three-year period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1983.
St. Louis, Missouri
March 1, 2019
61
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, 2018.
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, 2018.
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, 2018.
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, 2018 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, 2018, is included below.
62
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cass Information Systems, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Cass Information Systems, Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated
March 1, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ KPMG LLP
St. Louis, Missouri
March 1, 2019
63
ITEM 9B. OTHER INFORMATION
None.
64
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 2019 Annual Meeting of Shareholders (“2019 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 2018.
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 2019 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 2019 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, 2018:
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)
390,644
$36.47
507,654
_
_
_
390,644
$36.47
507,654
Plan Category
Equity compensation plans
approved by security
holders (1)(2)
Equity compensation plans
not approved by security
holders
Total
Note: All share and per share data have been restated to give effect to the 20% stock dividend that was paid on December 14, 2018.
(1) Amount disclosed relates to the Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”).
(2) Includes restricted stock units, restricted stock, SARs, and performance-based stock. Performance-based stock is included assuming
100% attainment of the targets. The actual number of shares of performance-based stock to be awarded at the end of applicable
performance periods ranges from 0% to 150% of the target amount awarded depending on the Company’s achievement of pre-
established financial goals.
Refer to Note 11 to the consolidated financial statements for information concerning the Omnibus Plan.
65
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 2019 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 3” of the Company’s 2019 Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year.
66
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.
10.1
10.2
10.3
10.4
10.5
10.6
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 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.*
Form of Restricted Stock Award Agreement, incorporated by reference to Exhibit 10.8 to
the annual report on Form 10-K for the year ended December 31, 2016.*
Form of Restricted Stock Unit Agreement, incorporated by reference to Exhibit 10.9 to the
annual report on Form 10-K for the year ended December 31, 2016.*
10.7
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
32 .2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
67
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.
ITEM 16. FORM 10-K SUMMARY
None.
68
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: February 28, 2019
Date: February 28, 2019
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: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
/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
69
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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 over $60 billion annually on behalf of its clients, and
with total assets of $1.6 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®.
Shareholder Information
Board of Directors
CORPORATE HEADQUARTERS
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
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
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
Officer, Cass Information
Systems, Inc.
will be held April 23, 2019 at 8:30 a.m.
at the Cass office at 13001 Hollenberg
ROBERT A. EBEL
Retired Chief Executive Officer,
Drive, Bridgeton, Missouri 63044.
Universal Printing Company
JAMES J. LINDEMANN
Retired Executive Vice President,
Emerson
JOSEPH D. RUPP
Retired Chairman, President
and Chief Executive Officer,
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
BENJAMIN F. (TAD) EDWARDS, IV
Chairman, Chief Executive
Officer and President,
Benjamin F. Edwards & Company
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
JAMES M. CAVELLIER
Executive Vice President
and Chief Information Officer
No presentations are planned.
INVESTOR RELATIONS
Security analysts, investment
managers and others seeking
financial information about the
Company should contact:
INVESTOR RELATIONS DEPARTMENT
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
INDEPENDENT AUDITORS
KPMG LLP
10 South Broadway, Suite 900
Saint Louis, Missouri 63102
TRANSFER AGENT
Shareholder correspondence should
be mailed to:
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
SHAREHOLDER WEBSITE:
www.computershare.com/investor
SHAREHOLDER ONLINE INQUIRIES:
https://www-us.computershare.com/
investor/Contact
TOLL-FREE PHONE:
866-323-8170
DWIGHT D. ERDBRUEGGER
President, Cass Commercial Bank
GARY B. LANGFITT
President, Expense
Management Services
ROBERT J. MATHIAS
Vice Chairman, Cass
Commercial Bank
Cass Information Systems 10-K
352987_2019_Cass-10K-Wrap-Cover_Final_R1.indd 2
3/4/19 9:33 PM
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
www.cassinfo.com >
The Power To
Deliver Solutions
2018
Annual Report and Form 10K
Around the world, leading enterprises
rely on Cass for our domain expertise,
processing power and global payment
network to execute critical financial
transactions while driving greater visibility,
control, and efficiency in their operations.
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Visit us online at the new cassinfo.com