UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period from_________to_________
Commission file number 2-80070
CASS INFORMATION SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1265338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13001 Hollenberg Drive, Bridgeton, Missouri 63044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 506-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.50
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
As of March 7, 2004, 3,675,757 shares of Common Stock of the registrant
were outstanding; the aggregate market value of the shares of Common Stock of
the registrant held by non-affiliates was approximately $111,636,000 based upon
the Nasdaq Stock Market closing price of $40.86 for March 7, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 18, 2005 are incorporated by reference in
Part III hereof.
CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Item 1. BUSINESS ......................................................... 1
Item 2. PROPERTIES ....................................................... 3
Item 3. LEGAL PROCEEDINGS ................................................ 4
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 4
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS .......................................................... 4
Item 6. SELECTED FINANCIAL DATA .......................................... 5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ........................................ 5
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ........ 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ......................................... 50
Item 9A. CONTROLS AND PROCEDURES .......................................... 50
Item 9B. OTHER INFORMATION ................................................ 52
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 52
Item 11. EXECUTIVE COMPENSATION ........................................... 52
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ... 52
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 52
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ........................... 52
PART IV.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ....................... 53
SIGNATURES ....................................................... 54
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties, and other factors which may cause future
performance to vary from expected performance summarized in the future-looking
statements, including those set forth in this paragraph. Important factors that
could cause our actual results, performance, or achievements to be materially
different from any future results, performance, or achievements expressed or
implied by those statements include, but are not limited to: the failure to
successfully execute our corporate plan, the loss of key personnel or inability
to attract additional qualified personnel, the loss of key customers, increased
competition, the inability to remain current with rapid technological change,
risks related to acquisitions, risks associated with business cycles and
fluctuations in interest rates, utility and system interruptions or processing
errors, rules and regulations governing financial institutions and changes in
such rules and regulations, credit risk related to borrowers' ability to repay
loans, concentration of loans to certain segments such as commercial
enterprises, churches and borrowers in the St. Louis area which creates risks
associated with adverse factors that may affect these groups and volatility of
the price of our Common Stock. We undertake no obligation to publicly update or
revise any forward-looking statements to reflect changed assumptions, the
occurrence of anticipated or unanticipated events, or changes to future results
over time.
PART I.
ITEM 1. BUSINESS
Description of Business
Cass Information Systems, Inc. ("Cass" or "the Company") is a leading provider
of payment and information processing services to large manufacturing,
distribution and retail enterprises across the United States. The Company
provides freight invoice rating, payment, audit, cost accounting and
transportation information to many of the nation's largest companies. It is also
a leading processor and payer of utility invoices in the United States,
including electricity, gas, water, and refuse collection. The Company also
processes, audits and pays telecommunication invoices and expanded its
capabilities in this market with the purchase of PROFITLAB, Inc. in August,
2004. In addition, the Company, through its wholly-owned bank subsidiary, Cass
Commercial Bank ("the Bank"), provides commercial banking services. Its primary
focus is to support the Company's payment operations and provide banking
services to its target markets, which include privately-owned businesses and
churches and church-related ministries. Services include commercial, real estate
and personal loans; checking, savings and time deposit accounts and other cash
management services. The Company, through its subsidiary, Government
e-Management Solutions, Inc. ("GEMS"), also develops, licenses and installs
integrated financial, property and human resource management systems to the
public sector, primarily cities and counties. The principal offices of the
Company are at 13001 Hollenberg Drive, Bridgeton, Missouri, 63044. Other
operating locations are in Columbus, Ohio, Boston, Massachusetts and Greenville,
South Carolina. The Bank's headquarters are also located at the Bridgeton
location and operates five other branches, four in the St. Louis metropolitan
area and one in southern California. GEMS' offices are located in Ladue,
Missouri.
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 to provide
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.
Information delivery - 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. Funds
are managed and protected by our top-rated financial institution.
Cass' core competencies allow it to perform the highest levels 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.
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Cass' shared business processes - Accounting, Human Resources and Technology -
support its core competencies. Cass' accounting function provides the internal
control systems to ensure the highest levels of accountability and protection
for customers. Cass' human resources provide experienced people dedicated to
streamlining business procedures and reducing expenses. Cass' technology is
proven and reliable. The need to safeguard data and secure the efficiency, speed
and timeliness that governs its business is a priority within the organization.
The ability to leverage technology over its strategic units allows Cass the
advantage of deploying technology in a proven and reliable manner without
endangering clients' strategic business and system requirements.
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 is one of the largest firms in the freight bill processing and
payment industry in the United States based on the total dollars of freight
bills paid and items processed. Competition consists of two primary competitors
and numerous small freight bill audit firms located throughout the United
States. While offering freight payment services, few of these audit firms
compete on a national basis. These competitors compete mainly on price,
functionality and service levels. The Company also competes with other
companies, located throughout the United States, that pay utility bills and
provide management reporting. Available data indicates that the Company is one
of the largest providers of utility information processing and payment services.
Cass is unique among these competitors in that it is not exclusively affiliated
with any one energy service provider ("ESP"). The ESPs market the Company's
services adding value with their unique auditing, consulting and technological
capabilities. Many of Cass' services are customized with the ESPs, providing a
full-featured solution without any development costs to the ESP. There are also
many competitors that process, audit and pay telecommunication invoices located
throughout the United States.
The Bank is organized as a Missouri trust company with banking powers and was
founded in 1906. Due to its ownership of a federally insured commercial bank,
the Company is a bank holding corporation and was originally organized in 1982
as Cass Commercial Corporation under the laws of Missouri. It was approved by
the Board of Governors of the Federal Reserve System in February 1983. The
Company changed its name to Cass Information Systems, Inc. in January 2001. The
Company's bank subsidiary encounters competition from numerous banks and
financial institutions located throughout the St. Louis metropolitan area and
other areas in which the Bank competes. The principal competition however, is
represented by large bank holding companies that are able to offer a wide range
of banking and related services through extensive branch networks.
The governmental software unit, GEMS, was acquired on January 2, 2001 when the
Company's bank subsidiary foreclosed on the operating assets of a software
company in order to protect its financial interests. The Bank sold these assets
to a wholly-owned subsidiary, and invested in and stabilized this business. From
the date of foreclosure through December 31, 2002, these assets were accounted
for as a foreclosed asset held for sale. On January 1, 2003, the Company
reclassified the foreclosed assets relating to its software subsidiary, GEMS,
from held for sale to held and used and consolidated its operations into those
of the Company. GEMS markets its software applications and services to middle
market cities and counties throughout the United States. GEMS competes with
several competitors that market similar products to these governmental units.
These firms compete on price, functionality and support. No one firm appears to
have a dominant position in the marketplace.
The Company holds several trademarks for the payment and rating services it
provides. These include: FreightPay(R), Transdata(R), TransInq(R), Ratemaker(R),
Rate Advice(R), First Rate(R), Best Rate(R) and Rate Exchange(R). 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. The Bank
does however, target its services to privately-held businesses located in the
St. Louis, Missouri area and church and church-related institutions located in
St. Louis, Missouri and other selected cities located throughout the United
States.
Employees
The Company and its subsidiaries had 638 full-time and 162 part-time employees
as of December 31, 2004. Of these employees, the bank subsidiary had 64
full-time and 7 part-time employees and the bank's software subsidiary had 65
full-time and 3 part-time employees.
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Supervision and Regulation
The Company and its bank subsidiary are extensively regulated under federal and
state law. These laws and regulations are intended to protect depositors, not
shareholders. The Bank is subject to regulation and supervision by the Missouri
Division of Finance, the Federal Reserve Bank (the "FRB") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Company is a bank holding
company within the meaning of the Bank Holding Company Act of 1956, as amended,
and as such, it is subject to regulation, supervision and examination by the
FRB. The Company is required to file quarterly and annual reports with the FRB
and to provide to the FRB such additional information as the FRB may require,
and it is subject to regular inspections by the FRB. Bank regulatory agencies
use Capital Adequacy Guidelines in their examination and regulation of bank
holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the agencies may force certain remedial action
to be taken. The Capital Adequacy Guidelines are of several types and include
risk-based capital guidelines, which are designed to make capital requirements
more sensitive to various risk profiles and account for off-balance sheet
exposure; guidelines which consider market risk, which is the risk of loss due
to change in value of assets and liabilities due to changes in interest rates;
and guidelines that use a leverage ratio which places a constraint on the
maximum degree of risk to which a bank holding company may leverage its equity
capital base. For further discussion of the capital adequacy guidelines and
ratios, please refer to Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8, Note 3 of this
report.
The FRB also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law or regulations or for unsafe or
unsound practices. Both the FRB and Missouri Division of Finance also have
restrictions on the amount of dividends that banks and bank holding companies
may pay.
As a bank holding company, the Company must obtain prior approval from the FRB
before acquiring ownership or control of more than 5% of the voting shares of
another bank or bank holding company or acquiring all or substantially all of
the assets of such a company. In many cases, prior approval is also required for
the Company to engage in similar acquisitions involving a non-bank company or to
engage in new non-bank activities. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company.
Website Availability of SEC Reports
Cass will, as soon as practicable after they are electronically filed with the
Securities and Exchange Commission (SEC), make available free of charge on its
website each of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports of Form 8-K, all amendments to those reports, and its definitive
proxy statements. The address of Cass's website is: www.cassinfo.com. All
reports filed with the SEC are available at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 21549 or for more information call the
Public Reference Room at 1-800-SEC-0330. The SEC also makes all filed reports
available on their website at www.sec.gov.
The reference to our website address does not constitute incorporation by
reference of the information contained on the website and should not be
considered part of this report.
Financial Information about Segments
The revenues from external customers, net income (loss) and total assets by
segment, for the three years ended December 31, 2004 are set forth in Item 8,
Note 19 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 2. PROPERTIES
The Company's headquarters are located at 13001 Hollenberg Drive, Bridgeton,
Missouri. This location is owned by the Company, and includes a building with
approximately 61,500 square feet of office space. The Company also owns a
production facility of approximately 45,500 square feet located at 2675
Corporate Exchange Drive, Columbus, Ohio. The Company operates a production
facility in Lowell, Massachusetts where approximately 25,800 square feet of
office space is leased through October 31, 2005. Through the acquisition of
PROFITLAB, Inc. in
3
August, 2004 the Company now operates a production facility in Greenville, South
Carolina where approximately 5,800 square feet of office space is leased through
December 31, 2005.
The Bank's headquarters are also located at 13001 Hollenberg Drive, Bridgeton,
Missouri, 63044. The Bank occupies approximately 20,500 square feet of the
61,500 square foot building. In addition, the Bank owns a banking facility near
downtown St. Louis that consists of approximately 1,600 square feet with
adjoining drive-up facilities. The Bank has additional leased facilities in
Maryland Heights, Missouri (2,500 square feet); Fenton, Missouri (1,250 square
feet), Chesterfield, Missouri (2,850 square feet) and Santa Ana, California
(3,584 square feet).
GEMS' headquarters are located at 121 Hunter Avenue - Suite 100, St. Louis,
Missouri, 63124. GEMS leases approximately 9,486 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending proceedings
other than ordinary routine litigation incidental to their businesses.
Management believes none of these proceedings, if determined adversely, would
have a material effect on the businesses or financial conditions of the Company
or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2004.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market(R) under the symbol
"CASS". As of March 7, 2005 there were 240 holders of record of the Company's
Common Stock. High and low bid prices, as reported by Nasdaq, for each quarter
of 2004 and 2003 were as follows:
2004 2003
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High Low High Low
---- --- ---- ---
1st Quarter $ 35.000 $ 29.182 $ 25.255 $ 22.183
2nd Quarter 40.700 34.000 30.455 23.364
3rd Quarter 42.000 37.000 30.773 25.782
4th Quarter 38.500 34.950 31.745 26.555
Cash dividends paid per share by the Company during the two most recent fiscal
years were as follows:
2004 2003
March 15 $.191 $.191
June 15 .210 .191
September 15 .210 .191
December 15 .210 .191
The Company also maintains a treasury stock buyback program pursuant to which
the Board of Directors has authorized the repurchase of up to 100,000 shares of
the Company's Common Stock. The Company did not repurchase any shares during
2004 and repurchased 59,237 shares for $1,764,000 in 2003. As of December 31,
2004, 40,763 shares remained available for repurchase under the program.
Repurchases are made in the open market or through negotiated transactions from
time to time depending on market conditions.
Refer to Item 8 Notes 3, 12 and 14 to the consolidated financial statements for
additional shareholder information, including information concerning stock
options and bonus plans.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for each of the five
years ended December 31, 2004. 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) 2004 2003 2002 2001 2000
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Fee revenue and other income $ 39,204 $ 40,067 $ 28,030 $ 23,243 $ 21,114
Interest income on loans(1) 27,055 25,601 26,197 29,069 27,716
Interest income on debt and equity securities 2,558 2,033 4,733 4,323 5,264
Other interest income 1,120 609 687 2,790 4,085
Total interest income 30,733 28,243 31,617 36,182 37,065
Interest expense on deposits 3,024 1,847 2,240 3,863 5,165
Interest expense on short-term borrowings 1 14 33 9 20
Interest on subordinated convertible debentures 70 -- -- -- --
Total interest expense 3,095 1,861 2,273 3,872 5,185
Net interest income 27,638 26,382 29,344 32,310 31,880
Provision for loan losses 550 190 500 60 750
Net interest income after provision 27,088 26,192 28,844 32,250 31,130
Operating expense 55,025 54,904 46,575 44,729 41,236
Income before income tax expense 11,267 11,355 10,299 10,764 11,008
Income tax expense 3,262 3,453 2,987 3,739 3,861
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Net income $ 8,005 $ 7,902 $ 7,312 $ 7,025 $ 7,147
===============================================================================================================================
Basic earnings per share $ 2.18 $ 2.15 $ 1.98 $ 1.88 $ 1.78
Diluted earnings per share 2.15 2.13 1.96 1.86 1.75
Dividends per share .821 .764 .710 .693 .693
Dividend payout ratio 37.79% 35.61% 35.94% 36.71% 38.95%
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Average total assets $ 709,518 $ 626,451 $ 602,446 $ 572,724 $ 515,308
Average net loans 471,412 438,072 399,018 371,367 323,515
Average debt and equity securities 78,745 57,729 97,668 72,111 84,949
Average total deposits 292,379 249,951 240,640 214,954 186,684
Average subordinated convertible debentures 1,314 -- -- -- --
Average total shareholders' equity 65,804 61,346 57,300 54,929 54,308
===============================================================================================================================
Return on average total assets 1.13% 1.26% 1.21% 1.23% 1.39%
Return on average total shareholders' equity 12.16 12.88 12.76 12.79 13.16
Average equity to assets ratio 9.27 9.79 9.51 9.59 10.54
Equity to assets ratio at year-end 9.71 10.03 10.59 9.22 9.33
Net interest margin 4.48 4.85 5.60 6.27 6.69
Allowance for loan losses to loans at year-end 1.21 1.17 1.22 1.29 1.32
Nonperforming assets to loans and foreclosed
assets .18 1.12 3.50 1.60 .30
Net loan (recoveries) charge-offs to average
loans outstanding -- (.01) .03 .01 .04
===============================================================================================================================
1. Interest income on loans includes net loan fees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Cass Information Systems, Inc. provides payment and information processing
services to national manufacturing, distribution and retail enterprises from its
processing centers in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts
and Greenville, South Carolina. The Company's services include freight invoice
rating, payment processing, auditing, and the generation of cost accounting and
transportation information. Cass also processes and pays utility invoices,
including electricity, gas and telecommunications. The Company significantly
enhanced its telecommunication processing and audit capabilities with the
acquisition of PROFITLAB, Inc. located in Greenville, South Carolina during
2004. Cass extracts, stores and presents information from freight, utility and
telecommunication invoices, assisting our customers' transportation, energy and
information technology managers in making decisions that will enable them to
improve operating performance. The Company receives data from multiple
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sources, electronic and otherwise, and processes the data to accomplish the
specific operating requirements of its customers. It then provides the data in a
central repository for access and archiving. The data is finally transformed
into information through the Company's databases that allow client interaction
as required and provide Internet-based tools for analytical processing. The
Company also, through its St Louis, Missouri based bank subsidiary, provides
banking services in the St Louis metropolitan area and other selected cities in
the United States. The Company acquired Franklin Bancorp located in Orange
County, California in November 2004 and merged its subsidiary bank, Franklin
Bank of California into the Bank. This acquisition will allow the company to
establish branches in California to better serve existing customers and expand
the Bank's customer base. In addition to supporting the Company's payment
operations, the Bank also provides banking services to its target markets, which
include privately owned businesses and churches and church-related ministries.
The Company, through the Bank's subsidiary, GEMS, also develops and licenses
integrated financial, property and human resource management systems to the
public sector.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's specific
requirements. These requirements can vary greatly from customer to customer. In
addition, the degree of automation such as electronic data interchange ("EDI"),
imaging, and web-enhanced 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 account balances that are 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 has a significant affect 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 expense on its deposits. The Bank also assesses fees on other services
such as cash management services. GEMS earns most of its revenue from the
license of its enterprise software solutions and its installation and
maintenance services.
Industry-wide factors that impact the Company include the acceptance by large
corporations of the outsourcing of key business functions such as freight,
utility and telecommunication 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 our loan portfolio. The general level of interest rates
has a significant effect on the revenue of the Company. Finally, the general
fiscal condition of the counties and municipalities that can benefit from GEMS'
enterprise software can impact licenses sold and related revenue.
Currently, management views Cass' major opportunity and challenge 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 lead in applied technology, which, when combined with the security and
processing controls of the Bank, makes Cass unique in the industry. This trend
has been positive over the past years and management anticipates that this
should continue in 2005. The low level of interest rates has had a significant
negative impact on net income over the past few years. The general level of
interest rates, particularly short term interest rates, began to increase during
2004 and had a positive effect on the Company's net interest income during the
latter part of the year. If these rates continue to rise, this positive impact
on net interest income and net earnings should continue. Management had been
pleased over the past few years with the growth in revenue generated by GEMS.
However, during 2004, the sales of new systems declined sharply due mainly to a
sluggish marketplace. Despite the decline, the Company continues to invest in
system improvements and product enhancements and anticipates that 2005 should
reflect improved results. Management intends to continue to refine risk
management practices, monitor and manage the quality of the loan portfolio and
maintain a strong financial and liquidity position.
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP"). In preparing the consolidated financial statements in accordance with
U.S. GAAP, management makes estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. These estimates have been
generally accurate in the
6
past, they have been consistent and have not required any material changes.
There can be no assurances that actual results will not differ from those
estimates. Certain accounting policies that require significant management
estimates and are deemed critical to our results of operations or financial
position have been discussed with the Audit Committee of the Board of Directors
and are described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed
reviews of its loan portfolio to assess overall collectability. The level of the
allowance for loan losses reflects management's estimate of the collectability
of the loan portfolio. Although these estimates are based on established
methodologies for determining allowance requirements, actual results can differ
significantly from estimated results. These policies affect all segments of the
Company with the exception of governmental software services. The impact and
associated risks related to these policies on our business operations are
discussed in the " Allowance and Provision for Loan Losses" section of this
report.
Impairment of Assets. Management periodically evaluates certain long-term assets
such as intangible assets including goodwill, foreclosed assets, internally
developed software and investments in private equity securities for impairment.
Generally, these assets are initially recorded at cost, and recognition of
impairment is required when events and circumstances indicate that the carrying
amounts of these assets will not be recoverable in the future. If impairment
occurs, various methods of measuring impairment may be called for depending on
the circumstances and type of asset, including quoted market prices, estimates
based on similar assets, and estimates based on valuation techniques such as
discounted projected cash flows. Assets held for sale are carried at the lower
of cost or fair value less costs to sell. These policies affect all segments of
the Company and require significant management assumptions and estimates that
could result in materially different results if conditions or underlying
circumstances change.
Results of Operations
The results of 2004 compared to 2003 include the following significant items:
Information services payment and processing revenues increased $2,255,000
or 8% to $30,695,000 as the number of transactions processed increased
747,000 or 3% to 28,724,000. This increase was driven by the expansion of
the Company's customer base and number of services offered.
Net interest income after provision for loan losses increased $896,000 or
3% to $27,088,000 due primarily to the increase in average earning assets
of $80,776,000 or 14% to $643,847,000. This increase included an increase
in total average loans of $33,782,000 or 8% to $477,234,000, an increase
in average investments of $21,016,000 or 36% to $78,745,000 and an
increase in average federal funds sold and other short-term investments of
$25,978,000 or 42% to $87,868,000. The growth in average earning assets
was derived from both increases in deposits and accounts and drafts
payable. Interest income, derived from the increase in earning assets, was
partially offset by an increase in interest paid on deposit liabilities,
due to both an increase in balances and an increase in rates paid. Gains
from the sale of securities decreased $409,000 compared to last year,
$1,045,000 in 2004 and $1,454,000 in 2003.
Revenue generated from the Company's software subsidiary declined
$2,539,000 or 33% to $5,157,000 due primarily to a decrease in license
fees generated from new customers as the market for governmental software
appears to have softened from the previous year.
Bank service fees decreased $87,000 or 5% to $1,719,000 due primarily to
the fact that as the earnings credit rate granted customers on their
account balances increases with the general level of interest rates, the
amount of service fees charged decreases. Other income decreased $83,000
or 12% to $588,000 due mainly to a decrease in revenue generated from the
investment in bank owned life insurance during 2004. Operating expenses
increased a modest $121,000 or less than 1% to $55,025,000 despite the
additional expenses generated from the acquisition of PROFITLAB, Inc.
The results of 2003 compared to 2002 include the following significant items:
Information services payment and processing revenue increased $3,818,000
or 16% to $28,440,000 as the number of transactions processed increased
2,993,000 or 12% to 27,977,000. This increase was driven by the expansion
of the Company's customer base and number of services provided as well as
an increase in national freight activity during the second half of the
year.
Net interest income after provision for loan losses decreased $2,652,000
or 9% to $26,192,000 due to the dramatic decline in interest rates during
the past few years. This decline occurred despite the fact that total
average loans, typically the Company's highest-yielding asset for any
given maturity, grew $39,359,000 or 10%
7
to $443,452,000 and average earning assets grew $19,060,000 or 4% to
$563,071,000. The growth in average earning assets was derived from both
increases in deposits and accounts and drafts payable. Gains from the sale
of securities were comparable to last year, $1,454,000 in 2003 and
$1,477,000 in 2002.
On January 1, 2003, the Company reclassified the foreclosed assets
relating to its software subsidiary, GEMS, from held for sale to held and
used and consolidated its operations into those of the Bank subsidiary. On
January 2, 2001, the Company's bank subsidiary foreclosed on these
operating assets in order to protect its financial interests. The Bank
sold these assets to a wholly owned subsidiary, and invested in and
stabilized this business. From the date of foreclosure through December
31, 2002, these assets were accounted for as a foreclosed asset held for
sale. Statement of Financial Accounting Standards ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets", adopted
by the Company on January 1, 2002, requires that if certain criteria are
not met for long-lived asset (disposal) groups classified as held for sale
by the end of the fiscal year in which SFAS 144 is initially applied, the
related long-lived assets shall be reclassified as held and used. In 2003
revenues for this segment were $7,696,000 and operating profits were
$107,000.
Bank service fees increased $147,000 or 9% to $1,806,000 due primarily to
the fact that as the earnings credit rate granted customers on their
account balances decreases with the general level of interest rates, the
amount of service fees charged increases. Other income increased $399,000
or 147% to $671,000 due mainly to an investment in bank owned life
insurance during 2002. Operating expenses, excluding the effects of the
GEMS consolidation, increased a modest $996,000 or 2% to $47,571,000 due
mainly to increases in salaries and health and worker's compensation
insurance expenses.
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility 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 and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the years ended December 31,
2004, 2003 and 2002 are as follows:
December 31, % Change
----------------------------------------- ---------------------------
(In thousands) 2004 2003 2002 2004 v 2003 2003 v 2002
==================================================================================================================
Freight Invoice Transaction Volume 23,526 23,359 21,549 .7% 8.4%
Freight Invoice Dollar Volume $9,752,203 $8,673,993 $7,715,588 12.4% 12.4%
Utility Transaction Volume 5,198 4,618 3,435 12.6% 34.4%
Utility Transaction Dollar Volume $3,700,665 $3,340,375 $2,634,269 10.8% 26.8%
Payment and processing revenue $30,695 $28,440 $24,622 7.9% 15.5%
- ------------------------------------------------------------------------------------------------------------------
Fee revenue and other income in 2004 compared to 2003 include the following
significant pre-tax components:
Transaction volume from the Transportation Information Services increased
slightly due mainly to increased activity from existing clients. There was
also a change in mix from lower priced, simple transactions to higher
priced, complex transactions. Total dollar volume processed from this
division increased during this period due to increased activity from
existing clients and larger average freight charges. Fees for the period
grew due to the increased volume and additional services provided. The
increase in volume and fees from the Utility Information Services division
increased primarily due to new customers as the growth of this segment
continues. The acquisition of PROFITLAB, Inc. contributed $538,000 of
payment and processing fees for 2004.
Software revenue decreased $2,539,000 or 33% to $5,157,000. This decrease
was primarily due to the decrease in license fee revenue generated from
new customer sales. Although revenue generated by GEMS increased in each
of the past three years, sales were off significantly in 2004 as the
market for governmental software appears to have decreased from the prior
years.
Bank service fees decreased $87,000 or 5% to $1,719,000. This decrease was
due primarily to the fact that service fees decrease as the credit
allowance for noninterest bearing deposits increases, due to the general
level of interest rate increases.
During 2004 the Company recorded net gains of $1,045,000 on the sales of
securities with a fair value of $27,195,000. During 2003, net gains of
$1,454,000 were recorded on the sales of securities with a fair value of
$38,454,000. These sales of securities were made to adjust the portfolio
to reflect the changes in the
8
interest rate environment, growth in the loan portfolio during the past
two years and to offset the loss of interest income due to the dramatic
decline in the general level of interest rates.
Other income decreased $83,000 or 12% to $588,000. This decrease was
primarily due to a decrease in income recognized from the increase in the
cash surrender value of bank owned life insurance purchased by the Company
in 2002.
Fee revenue and other income in 2003 compared to 2002 include the following
significant pre-tax components:
Information services payment and processing fee revenue increased
$3,818,000 or 16% to $28,440,000. These increases both relate to new
customers and new product offerings. Utility processing volume and
revenue, which represents a newer market, had higher percentage increases.
Software revenue in 2003 of $7,696,000 represents the revenue of the
Bank's software subsidiary GEMS, which develops and licenses integrated
financial, property and human resource management systems to the public
sector. Prior to December 31, 2002, GEMS was accounted for as an asset
held for sale and its operating results were not consolidated with those
of the Company. SFAS 144, adopted by the company in 2002, now requires
that GEMS be reclassified as an asset held and used. Consequently, Cass
reclassified the entity's net assets and consolidated its operations with
the parent company on January 1, 2003. Although unconsolidated in 2002 and
2001, software revenue was $5,526,000 and $4,187,000, respectively.
Bank service fees increased $147,000 or 9% to $1,806,000. This increase
was due primarily to the fact that service fees increase as the credit
allowance for noninterest bearing deposits decreases, due to the general
level of interest rate decreases.
During 2003 the Company recorded net gains of $1,454,000 on the sales of
securities with a fair value of $38,454,000. During 2002, net gains of
$1,477,000 were recorded on the sales of securities with a fair value of
$63,945,000. These sales of securities were made to adjust the portfolio
to reflect the changes in the interest rate environment, growth in the
loan portfolio during the past two years and to offset the loss of
interest income due to the dramatic decline in the general level of
interest rates.
Other income increased $399,000 or 147% to $671,000. This increase was
primarily due to income recognized from the increase in the cash surrender
value of bank owned life insurance purchased by the Company in 2002.
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 net interest
income and related factors for the three periods ended December 31, 2004, 2003
and 2002:
% Change % Change
(Dollars In Thousands) 2004 2003 2002 2004 v. 2003 2003 v. 2002
- --------------------------------------------------------------------------------------------------------------
Average earning assets $643,847 $563,071 $544,011 14.3% 3.5%
Net interest income 28,838 27,310 30,466 5.6% (10.4%)
Net interest margin 4.48% 4.85% 5.60% (7.6%) (13.4%)
Yield on earning assets 4.96% 5.18% 6.02% (4.2%) (14.0%)
Rate on interest bearing liabilities 1.64% 1.24% 1.60% 32.3% (22.5%)
- --------------------------------------------------------------------------------------------------------------
Net interest income in 2004 compared to 2003:
The increase in net interest income was caused by the significant increase
in earning assets that exceeded the decline in net interest margin. This
increase in earning assets was funded by both an increase in accounts and
drafts payable due to the increased dollars processed and an increase in
bank deposits due to the expansion of the Banks' customer base. The
Company is negatively affected by decreases in the level of interest rates
due to the fact that its rate sensitive assets significantly exceed its
rate sensitive liabilities. Conversely, the Company is positively affected
by increases in the level of interest rates. This is primarily due to the
noninterest-bearing liabilities generated by the Company in the form of
accounts and drafts payable. Despite the slight increase in interest rates
during the second half of 2004 the net interest margin was lower than in
2003 due to the decreases over the past few years and the fact that
changes in interest rates affect some earning assets such as federal funds
sold and floating rate loans immediately and some earning
9
assets, such as fixed rate loans and municipal bonds, over time. This
decrease in net interest margin was also negatively impacted by an
increase in rates paid on deposits. More information is contained in the
tables below and in Item 7A of this report.
Total average loans increased $33,782,000 or 8% to $477,234,000. This
increase was attributable to new business relationships. Loans have a
positive effect on interest income and the net interest margin due to the
fact that loans are one of the Company's highest yielding earning assets
for any given maturity.
Total average investment in debt and equity securities increased
$21,016,000 or 36% to $78,745,000 as the Company invested part of the
increase in deposits and payables. Total average federal funds sold and
other short-term investments increased $25,978,000 or 42% to $87,868,000.
This increase was also funded by the increase in accounts and drafts
payable and growth in bank deposits and provides the Company with
additional liquidity to take advantage of higher interest rates.
The increase in both interest-bearing liabilities and rates paid on
deposits partially offsets the increases achieved by an increase in
earning assets. Interest-bearing deposits increased $38,638,000 or 25.9%
due to the Bank's marketing efforts to increase its customer base. Rates
paid on the deposits increased 29.8% from 1.24% to 1.61%. This resulted in
an increase of $1,177,000 or 63.7% in interest paid on deposits.
Net interest income in 2003 compared to 2002:
The decrease in net interest income and margin was primarily due to the
dramatic decrease in the general level of interest rates over the past few
years. The prime rate decreased from 9.50% at the beginning of 2001 to
4.00% at the end of 2003 and the 5-year Treasury note rate decreased from
4.80% to 3.22% during this same period. The Company is negatively affected
by decreases in the level of interest rates due to the fact that its rate
sensitive assets significantly exceed its rate sensitive liabilities.
Conversely, the Company is positively affected by increases in the level
of interest rates. This is primarily due to the noninterest-bearing
liabilities generated by the Company in the form of accounts and drafts
payable. Changes in interest rates will affect some earning assets such as
federal funds sold and floating rate loans immediately and some earning
assets, such as fixed rate loans and municipal bonds, over time. More
information is contained in the tables below and Item 7A of this report.
The Company partially offset the decrease in net interest income through
both an increase in earning assets and shift of earning assets to higher
yielding asset classes. Total average earning assets increased $19,060,000
or 4% to $563,071,000. This increase was funded by both an increase in
accounts and drafts payable due to the increase in payments processed and
an increase in bank deposits due to the expansion of the Banks' customer
base.
Total average loans increased $39,359,000 or 10% to $443,452,000. This
increase was attributable to new business relationships and was funded by
the increase in accounts and drafts payable, growth in bank deposits and
reallocation of earning assets from the investment portfolio. Although not
enough to offset the decline in the level of interest rates, this increase
in loans had a positive effect on interest income and the net interest
margin due to the fact that loans are one of the Company's highest
yielding earning assets for any given maturity.
Total average investment in debt and equity securities decreased
$39,939,000 or 41% to $57,729,000. This decrease was used partially to
fund the increase in loans and partially shifted into federal funds sold
and overnight investments. Total average federal funds sold and other
short-term investments increased $19,640,000 or 46% to $61,890,000.
10
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table contains condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported:
2004 2003 2002
--------------------------- --------------------------- --------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
====================================================================================================================================
Assets(1)
Earning assets:
Loans(2),(3):
Taxable $471,995 $26,807 5.68% $437,807 $25,319 5.78% $398,060 $25,897 6.51%
Tax-exempt(4) 5,239 376 7.18 5,645 427 7.56 6,033 455 7.54
Debt and equity securities(5):
Taxable 26,603 476 1.79 22,183 499 2.25 55,591 2,839 5.11
Tax-exempt(4) 52,142 3,154 6.05 35,546 2,317 6.52 42,077 2,861 6.80
Federal funds sold and other
short-term investments 87,868 1,120 1.27 61,890 609 .98 42,250 687 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 643,847 31,933 4.96 563,071 29,171 5.18 544,011 32,739 6.02
Nonearning assets:
Cash and due from banks 23,035 19,136 24,324
Premises and equipment, net 12,878 14,918 16,281
Bank owned life insurance 10,874 10,419 4,033
Goodwill and other
intangibles, net 6,700 5,232 809
Other assets 18,006 19,055 18,063
Allowance for loan losses (5,822) (5,380) (5,075)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $709,518 $626,451 $602,446
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 73,792 $ 845 1.15% $ 52,630 $ 371 .70% $ 56,705 $ 632 1.11%
Savings deposits 29,712 293 .99 36,192 281 .78 41,837 528 1.26
Time deposits of
$100 or more 49,540 1,160 2.34 44,793 844 1.88 36,158 902 2.49
Other time deposits 34,754 726 2.09 15,545 351 2.26 5,467 178 3.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 187,798 3,024 1.61 149,160 1,847 1.24 140,167 2,240 1.60
Short-term borrowings 91 1 1.10 943 14 1.48 1,485 33 2.22
Subordinated convertible
debentures 1,314 70 5.33 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 189,203 3,095 1.64 150,103 1,861 1.24 141,652 2,273 1.60
Noninterest-bearing liabilities:
Demand deposits 104,581 100,791 100,473
Accounts and drafts payable 341,247 306,227 297,322
Other liabilities 8,683 7,984 5,699
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 643,714 565,105 545,146
Shareholders' equity 65,804 61,346 57,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $709,518 $626,451 $602,446
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $28,838 $27,310 $30,466
Net interest margin 4.48% 4.85% 5.60%
Interest spread 3.32% 3.94% 4.42%
====================================================================================================================================
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 $178,000, $90,000 and
$441,000 for 2004, 2003 and 2002, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $1,200,000,
$928,000 and $1,122,000 for 2004, 2003 and 2002, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
11
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.
2004 Over 2003 2003 Over 2002
------------------------------------ -------------------------------------
(Dollars in thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
===========================================================================================================================
Increase (decrease) in interest income:
Loans(2),(3):
Taxable $ 1,950 $ (462) $ 1,488 $ 2,450 $(3,028) $ (578)
Tax-exempt(4) (30) (21) (51) (29) 1 (28)
Debt and equity securities:
Taxable 90 (113) (23) (1,212) (1,128) (2,340)
Tax-exempt(4) 1,015 (178) 837 (430) (114) (544)
Federal funds sold and other
short-term investments 300 211 511 251 (329) (78)
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 3,325 (563) 2,762 1,030 (4,598) (3,568)
- --------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 186 288 474 (43) (218) (261)
Savings deposits (56) 68 12 (64) (183) (247)
Time deposits of $100 or more 96 220 316 189 (247) (58)
Other time deposits 403 (28) 375 242 (69) 173
Short-term borrowings (10) (3) (13) (10) (9) (19)
Subordinated convertible debenture 35 35 70 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 654 580 1,234 314 (726) (412)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,671 $(1,143) $ 1,528 $ 716 $(3,872) $(3,156)
===========================================================================================================================
1. The change in interest due to the combined rate/volume variance has been
allocated in proportion to the absolute dollar amounts of the change in
each.
2. Average balances include nonaccrual loans.
3. Interest income includes net loan fees.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the
Company. The loan portfolio was $500,448,000 and represented 70% of the
Company's total assets as of December 31, 2004 and generated $27,055,000 in
revenue during the year then ended. The following tables shows the composition
of the loan portfolio at the end of the periods indicated and remaining
maturities for loans as of December 31, 2004.
Loans by Type
(At December 31)
(Dollars in thousands) 2004 2003 2002 2001 2000
================================================================================================================
Commercial and industrial $117,777 $103,638 $101,116 $115,316 $136,482
Real estate:
Mortgage 346,711 330,150 282,125 215,504 182,538
Construction 25,838 19,298 39,175 32,715 29,464
Industrial revenue bonds 4,955 5,373 5,773 6,155 15,804
Installment 1,741 1,911 1,918 1,787 2,533
Other 3,426 8,662 4,582 9,975 5,399
- ----------------------------------------------------------------------------------------------------------------
Total loans $500,448 $469,032 $434,689 $381,452 $372,220
================================================================================================================
12
Loans by Maturity
(At December 31, 2004)
Over 1 Year Over
Through 5 Years 5 Years
--------------- -------
One Year Fixed Floating Fixed Floating
(Dollars in thousands) or less Rate Rate(1) Rate Rate(1) Total
=============================================================================================================
Commercial and industrial $ 87,359 $ 17,323 $ 12,911 $ 74 $ 110 $117,777
Real estate:
Mortgage 38,311 257,143 50,636 621 -- 346,711
Construction 23,664 739 1,435 -- -- 25,838
Industrial revenue bonds -- 2,210 -- 2,745 -- 4,955
Installment 1,142 599 -- -- -- 1,741
Other 3,426 -- -- -- -- 3,426
- -------------------------------------------------------------------------------------------------------------
Total loans $153,902 $278,014 $ 64,982 $ 3,440 $ 110 $500,448
=============================================================================================================
(1) Loans have been classified as having "floating" interest rates if the rate
specified in the loan varies with the prime commercial rate of interest.
The Company has no concentrations of loans exceeding 10% of total loans, which
are not otherwise disclosed in the loan portfolio composition table and
discussed in Item 8, Note 5 of this report. As can be seen in the loan
composition table above and discussed in Item 8, Note 5, the Company's primary
market niche for banking services is privately-held businesses and churches and
church-related ministries.
Loans to commercial entities are generally secured by the business assets of the
company, including accounts receivable, inventory, machinery and equipment, and
the real estate from which the company operates. Operating lines of credit to
these companies generally are secured by accounts receivable and inventory, with
specific percentages of each determined on a customer by customer basis based on
various factors including the type of business. Intermediate term credit for
machinery and equipment is generally provided at some percentage of the value of
the equipment purchased, depending on the type of machinery or equipment
purchased by the entity. Loans secured exclusively by real estate to businesses
and churches are generally made with a maximum 80% loan to value ratio,
depending upon the Company's estimate of the resale value and ability of the
property to generate cash. The Company's loan policy requires an independent
appraisal for all loans over $250,000 secured by real estate. Company management
monitors the local economy in an attempt to determine whether it has had a
significant deteriorating effect on such real estate credits. When problems are
identified, appraised values are updated on a continual basis, either internally
or through an updated external appraisal.
Loan portfolio changes from December 31, 2003 to December 31, 2004:
Total loans increased $31,416,000 or 7% to $500,448,000. This increase was
due to both the expansion of church and church-related loans located
throughout the country and commercial and construction loans in the St.
Louis metropolitan area. At year-end, church and church-related real
estate and construction credits totaled $173,379,000, which represents a
7% increase over 2003. Additional details regarding the types and
maturities of loans in the loan portfolio are contained in the tables
above and in Item 8, Note 5.
Loan portfolio changes from December 31, 2002 to December 31, 2003:
Total loans increased $34,343,000 or 8% to $469,032,000. This increase was
due mainly to the expansion of church and church-related loans in the St.
Louis metropolitan area and selected areas across the United States. At
year-end, church and church-related real estate and construction credits
totaled $162,307,000, which represented a 15% increase over 2002.
Additional details regarding the types and maturities of the loan
portfolio are contained in the tables above and in Item 8, Note 5.
Provision and Allowance for Loan Losses
The Company recorded a provision for loan losses of $550,000 in 2004, $190,000
in 2003 and $500,000 in 2002. The amount of the provisions were derived from the
Company's quarterly analysis of the allowance for loan losses in relation to
probable losses in the loan portfolio. The larger provision made in 2004 was
primarily the result of the risks inherent in an expanding loan portfolio and
reserves made for specific problem loans. The larger provision made in 2002
partially resulted from risks inherent with the increase in average loans
outstanding and an increase in nonperforming loans. The amount of the provision
will fluctuate as determined by these quarterly analyses. The Company had net
loan charge-offs of $19,000 in 2004, net loan recoveries of $23,000 in 2003 and
net loan charge-offs of $113,000 in 2002. The allowance for loan losses was
$6,037,000 at December 31, 2004, compared to
13
$5,506,000 at December 31, 2003 and $5,293,000 at December 31, 2002. The
year-end 2004 allowance represented 1.21% of outstanding loans, compared to
1.17% at year-end 2004 and 1.22% at year-end 2002. From December 31, 2003 to
December 31, 2004 the level of nonperforming loans decreased $3,855,000 from
$4,393,000 to $538,000, which represents .11% of outstanding loans.
Nonperforming loans are more fully explained in the section entitled
"Nonperforming Assets".
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial,
commercial real estate, and construction loans based on individual review of
these loans and our estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and collection
options available to us. The general component relates to all other loans, which
are evaluated based on loan grade. The loan grade assigned to each loan is
typically evaluated on an annual basis, unless circumstances require interim
evaluation. The Company assigns a reserve amount consistent with each loan's
rating category. The reserve amount is based on derived loss experience over
prescribed periods. In addition to the amounts derived from the loan grades, a
portion is added to the general reserve to take into account other factors
including national and local economic conditions, downturns in specific
industries including loss in collateral value, trends in credit quality at the
Company and the banking industry, and trends in risk rating changes. As part of
their examination process, federal and state agencies review the Company's
methodology for maintaining the allowance for loan losses and the balance in the
account. These agencies may require the Company to increase the allowance for
loan losses based on their judgments and interpretations about information
available to them at the time of their examination.
Summary of Loan Loss Experience
December 31,
--------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 5,506 $ 5,293 $ 4,906 $ 4,897 $ 4,282
- --------------------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial and industrial loans and
industrial revenue bonds (IRB's) -- -- 152 110 183
Real estate:
Mortgage 48 -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- -- --
Other -- 2 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 48 2 152 110 183
- --------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial, industrial and IRB's 29 25 39 59 48
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 29 25 39 59 48
================================================================================================================================
Net loans charged-off (recovered) 19 (23) 113 51 135
Provision charged to expense 550 190 500 60 750
- --------------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 6,037 $ 5,506 $ 5,293 $ 4,906 $ 4,897
================================================================================================================================
Loans outstanding:
Average $ 477,234 $ 443,452 $ 404,093 $ 376,275 $ 327,962
December 31 500,448 469,032 434,689 381,452 372,220
Ratio of allowance for loan losses to
loans outstanding:
Average 1.26% 1.24% 1.31% 1.30% 1.49%
December 31 1.21% 1.17% 1.22% 1.29% 1.32%
Ratio of net charge-offs (recoveries) to
average loans outstanding -- (.01)% .03% .01% .04%.
================================================================================================================================
Allocation of allowance for loan losses(1):
Commercial, industrial and IRB's $ 3,066 $ 2,575 $ 2,167 $ 2,129 $ 3,159
Real estate:
Mortgage 2,742 2,761 2,780 2,442 416
Construction 207 152 302 303 1,317
Installment 9 10 10 10 5
Other loans 13 8 34 22 --
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 6,037 $ 5,506 $ 5,293 $ 4,906 $ 4,897
================================================================================================================================
Percent of categories to total loans:
Commercial and industrial and IRB's 24.5% 23.2% 24.6% 31.8% 40.9%
Real estate:
Mortgage 69.3 70.4 64.9 56.5 49.0
Construction 5.2 4.1 9.0 8.6 7.9
Installment .3 .4 .4 .5 .7
Other .7 1.9 1.1 2.6 1.5
- --------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
================================================================================================================================
(1) Although specific allocations exist the entire allowance is available to
absorb losses in any particular loan category.
14
Nonperforming Assets
It is the policy of the Company to continually monitor its loan portfolio and to
discontinue the accrual of interest on any loan on which payment of principal or
interest in a timely manner, in the normal course of business, is doubtful.
Subsequent payments received on such loans are applied to principal if there is
any doubt as to the collectibility of such principal; otherwise, these receipts
are recorded as interest income. Interest on nonaccrual and renegotiated loans,
which would have been recorded under the original terms of the loans, was
approximately $38,000 for the year ended December 31, 2004. Of this amount,
approximately $15,000 was actually recorded as interest income on such loans.
The total renegotiated loans of $168,000 at December 31, 2004 relates to one
borrower that is current under the new terms of the loan. Total nonaccrual
commercial loans consists primarily of one loan for $259,000 relating to a
business that is no longer operating, although payments are being made as the
inventory of the business is being sold and a specific reserve has been
established for the potential shortfall. Total nonaccrual real-estate mortgage
loans of $69,000 and the remaining balance of nonaccrual commercial loans of
$38,000 relate to one borrower. The collateral on these loans was sold during
the first quarter of 2005 and the remaining balance of $21,000 was charged-off
against the allowance for loan losses.
Total foreclosed assets of $375,000 at December 31, 2004 consisted of real
estate that was foreclosed on March 2, 2004 and was sold during the first
quarter of 2005 for a net gain of $38,000. The total foreclosed assets of
$859,000 at December 31, 2003 consisted of real estate property that was
foreclosed on August 8, 2001. This property was sold in the fourth quarter of
2004 and the Company recorded a net loss of $59,000. Foreclosed assets
classified as other real estate owned are recorded at what management estimates
to be fair value less cost to sell the property.
At December 31, 2004, approximately $5,008,000 of loans not included in the
table below were identified by management as having potential credit problems.
These loans are excluded from the table due to the fact they are current under
the original terms of the loans, however circumstances have raised doubts as to
the ability of the borrowers to comply with the current loan repayment terms.
Included in this balance is $3,805,000 related to one borrower that was
renegotiated in 2003 and although current under the new terms of the contract
management believes, due to the financial condition of the company, there still
remains risk as to the collectability of all amounts under the loan agreement.
The Company does not have any foreign loans. The Company's loan portfolio does
not include a significant amount of single family real estate mortgage or
installment credits, as the Company does not market its services to retail
customers.
The Company does not have any other interest-earning assets which would have
been included in nonaccrual, past due or restructured loans if such assets were
loans.
15
Summary of Nonperforming Assets
December 31,
-----------------------------------------------------------
(Dollars in thousands) 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Commercial, industrial and IRB's:
Nonaccrual $ 297 $ 318 $ 51 $ 157 $ 84
Contractually past due 90 days
or more and still accruing -- -- -- 18 --
Renegotiated loans -- 2,240 -- -- --
Real estate-construction on nonaccrual -- -- -- 265 1,043
Real estate-mortgage:
Nonaccrual 69 1,207 -- 32 --
Contractually past due 90 days
or more and still accruing 4 147 3,388 -- --
Renegotiated loans 168 481 4,252 -- --
Installment loans contractually past due
90 days or more and still accruing -- -- -- -- 4
Other loans contractually past due 90
days and still accruing -- -- 1,503 -- --
- ---------------------------------------------------------------------------------------------------------
Total nonperforming loans 538 4,393 9,194 472 1,131
- ---------------------------------------------------------------------------------------------------------
Total foreclosed assets 375 859 6,241 5,710 --
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 913 $ 5,252 $15,435 $ 6,182 $ 1,131
=========================================================================================================
Operating Expenses
Operating expenses in 2004 compared to 2003 include the following significant
pre-tax components:
Salaries and employee benefits expense increased $1,046,000 or 3% to
$38,198,000. Of this increase, $616,000 was related to the acquisition of
PROFITLAB, Inc. The remaining increase primarily relates to annual salary
increases and increases in pension and worker's compensation insurance
expense.
Occupancy expense increased $58,000 or 3% to $1,840,000. Of this increase
$28,000 relates to the acquisition of PROFITLAB, Inc. and the remaining
increase is primarily due to an increase in rent expense on leased office
space. Equipment expense decreased $786,000 or 18% to $3,692,000. This
decrease is primarily due to software that was capitalized in 2000 and
2001 that is now fully amortized. Amortization of intangibles increased
$57,000 or 18% to $368,000 due to the software acquired in the acquisition
of PROFITLAB, Inc. Other operating expenses decreased $254,000 or 2% to
$10,927,000. This decrease related to many factors including a decrease of
$544,000 in postage and supply expense related to the increase in
electronic processing in the Information Services Division and a decrease
of $310,000 related to costs associated with the decline in software
sales. These decreases were partially offset by expenses related to the
acquisition of PROFITLAB, Inc. of $171,000 and an increase of $465,000 in
outside service and professional fees, which includes fees of $225,000
related to the additional procedures required under Section 404 of the
Sarbanes-Oxley Act and an increase of $183,000 in outside imaging
expenses. More details on the components of other operating expenses are
contained in Item 8, Note 15 of this report.
Operating expenses in 2003 compared to 2002 include the following significant
pre-tax components:
Salaries and employee benefits expense increased $5,747,000 or 18% to
$37,152,000. Of this increase the consolidation of GEMS amounted to
$4,139,000. The remaining increase primarily relates to annual salary
increases and increases in health and worker's compensation insurance
expense.
Occupancy expense increased $282,000 or 19% to $1,782,000. Of this
increase $237,000 relates to the consolidation of GEMS. Equipment expense
increased $168,000 or 4% to $4,478,000. GEMS contributed $433,000 of
equipment expense. Excluding GEMS, equipment expense decreased $265,000
primarily due to decreases in computer equipment maintenance from the
consolidation of equipment within the transportation processing division.
Other operating expense increased $1,821,000 or 19% to $11,181,000. The
consolidation of GEMS contributed $2,213,000 to other operating expense.
More details on the components of other operating expenses are contained
in Item 8, Note 15 of this report.
16
Income Tax Expense
Income tax expense in 2004 totaled $3,262,000 compared to $3,453,000 in 2003 and
$2,987,000 in 2002. When measured as a percent of income before income taxes,
the Company's effective tax rate was 29% in 2004, 30% in 2003 and 29% in 2002.
The primary reason for the lower effective tax rates in 2004 and 2002 was the
Company's investment in tax-exempt municipal bonds and income recognized on bank
owned life insurance.
Investment Portfolio
Investment portfolio changes from December 31, 2003 to December 31, 2004:
U.S. Treasury securities increased $4,796,000 or 28% to $21,899,000. U.S.
government corporation and agency securities increased $1,404,000 or 30%
to $6,094,000. State and political subdivision securities increased
$1,756,000 or 4% to $48,533,000. 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 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 size of the investment portfolio increased as the Company
employed a portion of the increase in deposits and accounts and drafts
payable. The minor changes in asset mix reflects the relative interest
rates of the alternative investments and management's liquidity and
interest rate forecasts at the time funds became available for investment.
Investment portfolio changes from December 31, 2002 to December 31, 2003:
U.S. Treasury securities increased from $0 to $17,103,000. U.S. government
corporation and agency securities decreased $22,557,000 or 83% to
$4,690,000. State and political subdivision securities increased
$5,854,000 or 14% to $46,777,000. During this period, the size of the
investment portfolio remained fairly constant as the Company redeployed
funds from maturing securities and security sales back into the investment
portfolio. The increase in U.S. Treasury securities and decrease in U. S.
government agencies and corporations reflect the relative yields of these
securities at the time of investment.
There was no single issuer of securities in the investment portfolio at December
31, 2004, other than U.S. government corporations and agencies, for which the
aggregate amortized cost exceeded 10% of total shareholders' equity.
Investment by Type
December 31,
-------------------------------------------
(Dollars in thousands) 2004 2003 2002
================================================================================================================
U.S. Treasury securities $ 21,899 $ 17,103 $ --
U.S. government corporations and agencies 6,094 4,690 27,247
State and political subdivisions 48,533 46,777 40,923
Stock of the Federal Home Loan Bank 403 376 1,000
Stock of the Federal Reserve Bank 201 201 201
- ----------------------------------------------------------------------------------------------------------------
Total investments $ 77,130 $ 69,147 $ 69,371
================================================================================================================
Investment in Debt Securities by Maturity
(At December 31, 2004)
Within Over 1 to Over 5 to Over
(Dollars in thousands) 1 Year 5 Years 10 Years 10 Years Yield
================================================================================================================
U.S. Treasury securities $18,934 $2,965 $ -- $ -- 1.91%
U.S. government corporations and
agencies 996 5,098 -- -- 3.27%
State and political subdivisions(1) 149 10,587 25,044 12,753 5.84%
- ----------------------------------------------------------------------------------------------------------------
Total investment in debt securities 20,079 18,650 25,044 12,753 4.49%
- ----------------------------------------------------------------------------------------------------------------
Weighted average yield 1.92% 3.93% 6.10% 6.34%
================================================================================================================
1. Weighted average yield is presented on a tax-equivalent basis assuming a
tax rate of 34%.
17
Equity Investments
During 2003, the Company converted a $2,000,000 investment in a private imaging
company from a convertible debenture into Common Stock. As part of the
conversion, the Company committed to investing an additional $1,100,000 when
certain conditions were met. This additional commitment has funded and the total
investment of the Company in this entity was $3,100,000 at December 31, 2004 and
$2,908,000 at December 31, 2003. At December 31, 2004 the Company had a 19.99%
ownership interest in this entity and the Chairman and CEO of the Company was a
member of the entity's Board of Directors. In addition, the Company has extended
a $2,400,000 line of credit for working capital purposes to this entity, with a
50% interest sold to a new non-affiliated majority owner. As of December 31,
2004 the Company's interest in this line amounted to $1,200,000 and all payments
are current.
This business has performed poorly during the past few years and the new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. However, should this business fail to meet
its objectives, the Company's investment could be subject to future impairment.
The Company accounts for this investment, along with its other non-marketable
equity investments, 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.
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits decreased $18,272,000 or 16% from December
31, 2003 to $96,362,000 at December 31, 2004. The average balances of these
deposits increased $3,790,000 or 4% from December 31, 2003 to $104,581,000 at
December 31, 2004. The decrease in ending balances relates to normal daily
fluctuations in these accounts.
Interest-bearing deposits increased $21,473,000 or 14% from December 31, 2003 to
$179,267,000 at December 31, 2004. The average balances of these deposits
increased $38,638,000 or 26% from 2003 to $187,798,000 in 2004. These increases
relate mainly to the Bank's increased marketing efforts to attract more
deposits.
Accounts and drafts payable generated by the Company in its payment processing
operations increased $58,484,000 or 20% from December 31, 2003 to $358,473,000
at December 31, 2004. The average balances of these funds increased $35,020,000
or 11% from 2003 to $341,247,000 in 2004. These increases relate to the increase
in dollars processed. Due to the Company's payment processing cycle, average
balances are much more indicative of the underlying activity than period-end
balances since point-in-time comparisons can be misleading if the comparison
dates fall on different days of the week.
The composition of average deposits and the average rates paid on those deposits
is represented in the table entitled "Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rate and Interest Differential" which is included
earlier in this discussion. The Company does not have any significant deposits
from foreign depositors.
Maturities of Certificates of Deposits of $100,000 or More
(At December 31, 2004)
(Dollars in thousands)
================================================================================
Three months or less $16,296
Three to six months 8,962
Six to twelve months 5,480
Over twelve months 15,379
- --------------------------------------------------------------------------------
Total $46,117
================================================================================
Short-term Borrowings
Short-term borrowings increased $4,000 or 3% from December 31, 2003 to $127,000
at December 31, 2004. Average balances of these funds decreased $852,000 or 90%
from 2003 to $91,000 during 2004. These funds consist primarily of federal funds
purchased and can also include tax deposits of the U.S. Treasury. These balances
can vary significantly from day to day due to the Company's payment cycle and
therefore balances on any particular day are
18
not necessarily reflective of balances throughout the year. For more information
on borrowings please refer to Item 8, Note 10 of this report.
Subordinated Convertible Debentures
Total subordinated convertible debentures at December 31, 2004 were $3,700,000
and average balances of these funds were $1,314,000 for the year. The debentures
were issued on August 24, 2004 as part of the Company purchase of PROFITLAB,
Inc. The Company had no outstanding debentures in 2003. For more information on
these debentures please refer to Item 8, Note 11 of this report.
Liquidity
The discipline of liquidity management as practiced by the Company seeks to
ensure that funds are available to fulfill all payment obligations relating to
the freight and utility invoices processed as they become due, meet depositor
withdrawal requests and borrower credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of funds. Primary liquidity to meet demand
is provided by short-term liquid assets that can be converted to cash, maturing
securities and the ability to 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 consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold, and money market funds, and
were $87,543,000 at December 31, 2004, an increase of $25,176,000 or 40% from
December 31, 2003. At December 31, 2004 these assets represented 12% of total
assets. These funds are the Company's and its subsidiaries' primary source of
liquidity to meet future expected and unexpected loan demand, depositor
withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing
lines. Total investment in debt and equity securities was $77,130,000 at
December 31, 2004, an increase of $7,983,000 or 12% from December 31, 2003.
These assets represented 11% of total assets at December 31, 2004. Of this
total, 63% were state and political subdivision securities, 28% were U.S.
Treasury securities, 8% were U.S. government agencies and 1% were other
securities. Of the total portfolio, 26% mature in one year, 24% matures in one
to five years, and 50% matures in five or more years. During the year the
Company sold securities with a market value of $27,195,000 and a portion of
these funds were reinvested in state and political subdivision securities and
the loan portfolio.
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $29,000,000. Additionally, the Bank maintains lines of credit at
unaffiliated financial institutions in the maximum amount of $78,150,000
collateralized by U.S. Treasury and agency securities and commercial and
residential mortgage loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize many other commercial products of the Bank. The accounts and drafts
payable generated by the Company has also historically been a stable source of
funds.
The Company also maintains a treasury stock buyback program pursuant to which
the Board of Directors has authorized the repurchase of up to 100,000 shares of
the Company's Common Stock. The Company did not repurchase any shares during
2004 and repurchased 59,237 shares for $1,764,000 in 2003. As of December 31,
2004, 40,763 shares remained available for repurchase under the program.
Repurchases are made in the open market or through negotiated transactions from
time to time depending on market conditions.
Net cash flows provided by operating activities for the years 2004, 2003 and
2002 were $10,030,000, $10,181,000 and $8,978,000 respectively. Net income plus
the adjustment for 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, 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 and cash from
operations will continue to be sufficient to fund the Company's operations and
capital expenditures in 2005.
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
19
continue to exceed all regulatory capital requirements, as evidenced by the
capital ratios at December 31, 2004 as shown in Item 8, Note 3 of this report.
In 2004, cash dividends paid were $.821 per share for a total of $3,025,000, a
7% increase over the prior year, which is attributable to an increase in the per
share amount paid and additional shares outstanding. On February 17, 2004 the
Company declared a 10% stock dividend payable to holders of record on March 5,
2004.
Shareholders' equity was $69,589,000, or 10% of total assets, at December 31,
2004, an increase of $4,797,000 over the balance at December 31, 2003. This
increase resulted from net income of $8,005,000, proceeds from the exercise of
stock options of $190,000 and other items of $210,000, which was partially
offset by cash dividends paid of $3,025,000, a decrease in other comprehensive
income of $579,000 and payment of $4,000 related to the stock dividend.
Dividends from the bank subsidiary are a significant source of funds for payment
of dividends by the Company to its shareholders. The only restrictions on
dividends are those dictated by regulatory capital requirements and prudent and
sound banking principles. As of December 31, 2004, unappropriated retained
earnings of $6,714,000 were available at the Bank for the declaration of
dividends to the Company without prior approval from regulatory authorities.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating 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, 2004, 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, 2004 the balance of loan commitments, commercial and standby letters of
credit were $20,524,000, $6,097,000 and $1,091,000, 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.
On August 24, 2004 the Company issued $3,700,000 in subordinated convertible
debentures as part of the Company's acquisition of PROFITLAB, Inc. Interest, at
a rate of 5.33%, is payable annually on the anniversary date of the acquisition.
The holders of the debentures can convert the principal amount into fully paid
and non-assessable shares of the Common Stock of the Company at a rate per share
of $48.20 at various amounts over a 10-year period, at which time the securities
mature. The debentures may be called by the Company without penalty after August
24, 2010. For more information on the acquisition please refer to Item 8, Notes
2 and 11 of this report.
The following table summarizes contractual cash obligations of the Company
related to operating and capital lease commitments and convertible subordinated
debentures at December 31, 2004:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(Dollars in thousands at December 31, 2004) Total 1 year Years Years Years
- -------------------------------------------------------------------------------------------------------
Operating lease commitments $2,645 $ 625 $ 357 $ 306 $1,357
Capital lease commitments 25 17 8 -- --
Convertible subordinated debentures* 3,700 -- -- -- 3,700
- -------------------------------------------------------------------------------------------------------
Total $6,370 $ 642 $ 365 $ 206 $5,057
=======================================================================================================
* Includes principal payments only.
20
During 2004, the Company contributed $1,083,000 to its noncontributory defined
benefit pension plan. The contribution had no significant effect on the
Company's overall liquidity. 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 2004 these
assumptions were as follows:
----------------------------------------------------------------
Weighted average discount rate 6.25%
Rate of increase in compensation levels 4.00%
Expected long-term rate of return on assets 8.00%
----------------------------------------------------------------
Effect of Recent and Prospective Accounting Pronouncements
In 2003, the Emerging Issues Task Force ("EITF") reached a consensus on, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"), which provides guidance to assess whether there have
been any events or economic circumstances to indicate that a security is
impaired on an other-than-temporary basis. Factors to consider include the
length of time the security has had a market value less than the cost basis, the
intent and ability of the company to hold the security for a period of time
sufficient for a recovery in value, recent events specific to the issuer or
industry and for debt securities, external credit rating and recent downgrades.
Securities on which there is an unrealized loss that is deemed to be
other-than-temporary are written down to fair value with the write-down recorded
as a realized loss. In December 2004, the Financial Accounting Standards Board
("FASB") announced that it will reconsider in its entirety all guidance on
disclosing, measuring and recognizing other-than-temporary impairments of debt
and equity securities. Until new guidance is issued, companies must continue to
comply with the disclosure requirements of EITF 03-1 and all relevant
measurement and recognition requirements in other accounting literature. The
disclosure requirements required under EITF 03-1 are included in Item 8, Note 4
of this report.
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which addresses how a
business enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaced, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51,"
("FIN 46") issued in January 2003. Companies are required to apply FIN 46R to
variable interest entities ("VIEs") created after December 31, 2003. For
variable interest in VIEs created before January 1, 2004, FIN 46R will be
applied beginning on January 1, 2005. The Company is currently not a primary
beneficiary of a VIE and therefore the adoption of FIN 46R did not have a
material impact on its consolidated financial statements.
In December 2003, the FASB issued Statement of Financial Accounting Standard 132
(revised 2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132 (revised 2003)"), which increases the disclosure
requirements of the original statement by requiring more details about pension
plan assets, benefit obligations, cash flows, benefit costs and related
information and also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. Additional disclosures pertaining to
benefit payments are required for fiscal years ending after June 30, 2004. The
disclosure requirements of SFAS 132 (revised 2003) are included in Item 8, Note
13 of this report.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which replaced, "Accounting for Stock-Based Compensation" ("SFAS
123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R requires the measurement of all
employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in
our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for reporting periods beginning after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer will be an
alternative to financial statement recognition. See the section entitled "Stock
Options" of this Item 8, Note 1 for the pro forma net income and net income per
share amounts, for fiscal 2002 through fiscal 2004, as if we had used a
fair-value-based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock incentive awards. Although we
have not yet determined whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and do not expect the adoption to
have a significant adverse impact on our consolidated statements of income and
net income per share.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 differs
significantly from most other bank holding companies with significant positive
cumulative "gaps" shown for each time horizon presented. This asset sensitive
position is caused primarily by the operations of the Company, which generates
large balances of accounts and drafts payable. These balances, which are
noninterest bearing, contribute to the Company's 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, twelve-month net interest income simulations, and fair market value of
equity analyses as its main analytical tools to provide management with insight
into the Company's exposure to changing interest rates.
Management uses a gap report to review any significant mismatch between the
repricing points of the Company's rate sensitive assets and liabilities in
certain time horizons. A negative gap indicates that more liabilities reprice in
that particular time frame and, if rates rise, these liabilities will reprice
faster than the assets. A positive gap would indicate the opposite. Gap reports
can be misleading in that they capture only the repricing timing within the
balance sheet, and fail to capture other significant risks such as basis risk
and embedded options risk. Basis risk involves the potential for the spread
relationship between rates to change under different rate environments and
embedded options risk relates to the potential for the alteration of the level
and/or timing of cash flows given changes in rates.
Another measurement tool used by management is net interest income simulation,
which forecasts net interest income during the coming twelve months under
different interest rate scenarios in order to quantify potential changes in
short term accounting income. Management has set policy limits specifying
acceptable levels of interest rate risk given multiple simulated rate movements.
These simulations are more informative than gap reports because they are able to
capture more of the dynamics within the balance sheet, such as basis risk and
embedded options risk. A table containing simulation results as of December 31,
2004 from an immediate and sustained parallel change in interest rates is shown
below.
While net interest income simulations do a good job of capturing interest rate
risk to short term earnings, they do not capture risk within the current balance
sheet beyond twelve months. The Company uses fair market value of equity
analyses to help identify longer-term risk that may reside on the current
balance sheet. The fair market value of equity is represented by the present
value of all future income streams generated by the current balance sheet. The
Company measures the fair market value of equity as the net present value of all
asset and liability cash flows discounted at forward rates suggested by the
current Treasury curve plus appropriate credit spreads. This representation of
the change in the fair market value of equity under different rate scenarios
gives insight into the magnitude of risk to future earnings due to rate changes.
Management has set policy limits relating to declines in the market value of
equity. The table below contains the analysis, which illustrates the effects of
an immediate and sustained parallel change in interest rates as of December 31,
2004:
% Change in % Change in Fair
Change in Interest Rates Net Interest Income Market Value of Equity
----------------------------------------------------------------------------
+200 basis points 11% 12%
+100 basis points 6% 6%
Stable Rates 0% 0%
-100 basis points (6%) (8%)
-200 basis points (15%) (17%)
22
Interest Rate Sensitive Position
The following table presents the Company's gap or interest rate risk position at
December 31, 2004 for the various time periods indicated.
Variable 0-90 91-180 181-364 1-5 Over 5
(Dollars in thousands) Rate days days days years Years Total
- --------------------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans:
Taxable $ 198,983 $ 9,693 $ 1,446 $ 8,872 $ 275,804 $ 695 $ 495,493
Tax-exempt -- -- -- -- 2,210 2,745 4,955
Debt and equity securities(1):
Taxable -- 18,934 -- 996 8,063 -- 27,993
Tax-exempt -- -- -- 149 10,063 38,321 48,533
Other 604 -- -- -- -- -- 604
Federal funds sold and other
short term investments 64,412 -- -- -- -- -- 64,412
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 263,999 28,627 1,446 10,017 296,140 41,761 641,990
================================================================================================================================
Interest-sensitive liabilities:
Money market accounts 63,250 -- -- -- -- -- 63,250
Now accounts 17,225 -- -- -- -- -- 17,225
Savings deposits 23,161 -- -- -- -- -- 23,161
Time deposits:
$100 and more -- 16,296 8,962 5,480 15,379 -- 46,117
Less than $100 -- 8,939 11,279 6,649 2,647 -- 29,514
Federal funds purchased and
other short term borrowing 127 -- -- -- -- -- 127
Subordinated convertible debentures -- -- -- -- -- 3,700 3,700
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 103,763 $ 25,235 $ 20,241 $ 12,129 $ 18,026 $ 3,700 $ 183,094
================================================================================================================================
Interest sensitivity gap:
Periodic $ 160,236 $ 3,392 $ (18,795) $ (2,112) $ 278,114 $ 38,061 $ 458,896
Cumulative 160,236 163,628 144,833 142,721 420,835 458,896 458,896
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic 2.54x 1.13x .07x .83x 16.43x 11.29x 3.51x
Cumulative 2.54x 2.27x 1.97x 1.88x 3.35x 3.51x 3.51x
================================================================================================================================
(1) Balances shown reflect earliest repricing date.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
(In thousands, except share and per share data) 2004 2003
- ---------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 23,131 $ 17,754
Federal funds sold and other short-term investments 64,412 44,613
--------- ---------
Cash and cash equivalents 87,543 62,367
--------- ---------
Investment in debt and equity securities,
available-for-sale, at fair value 77,130 69,147
Loans 500,448 469,032
Less: Allowance for loan losses 6,037 5,506
--------- ---------
Loans, net 494,411 463,526
--------- ---------
Premises and equipment, net 12,187 13,538
Investment in bank owned life insurance 11,090 10,709
Payments in excess of funding 6,998 6,220
Goodwill 7,360 3,150
Other intangible assets, net 2,383 1,940
Other assets 17,419 15,319
--------- ---------
Total assets $ 716,521 $ 645,916
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 96,362 $ 114,634
Interest-bearing 179,267 157,794
--------- ---------
Total deposits 275,629 272,428
Accounts and drafts payable 358,473 299,989
Short-term borrowings 127 123
Subordinated convertible debentures 3,700 --
Other liabilities 9,003 8,584
--------- ---------
Total liabilities 646,932 581,124
--------- ---------
Shareholders' Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common Stock, par value $.50 per share;
20,000,000 shares authorized; 4,494,510 and 4,160,110
shares issued at December 31, 2004 and 2003, respectively 2,247 2,080
Additional paid-in capital 18,370 8,466
Retained earnings 64,685 69,695
Common shares in treasury, at cost (807,262 and 824,598
shares at December 31, 2004 and 2003, respectively) (16,096) (16,442)
Unamortized stock bonus awards (160) (129)
Accumulated other comprehensive income 543 1,122
--------- ---------
Total shareholders' equity 69,589 64,792
--------- ---------
Total liabilities and shareholders' equity $ 716,521 $ 645,916
========= =========
See accompanying notes to consolidated financial statements.
24
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31,
--------------------------------------
(In thousands, except share and per share data) 2004 2003 2002
- -----------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
Information services payment and processing revenue $ 30,695 $ 28,440 $ 24,622
Software revenue 5,157 7,696 --
Bank service fees 1,719 1,806 1,659
Gains on sales of investment securities 1,045 1,454 1,477
Other 588 671 272
---------- ---------- ----------
Total fee revenue and other income 39,204 40,067 28,030
---------- ---------- ----------
Interest Income:
Interest and fees on loans 27,055 25,601 26,197
Interest and dividends on debt and equity securities:
Taxable 476 499 2,839
Exempt from federal income taxes 2,082 1,534 1,894
Interest on federal funds sold and
other short-term investments 1,120 609 687
---------- ---------- ----------
Total interest income 30,733 28,243 31,617
---------- ---------- ----------
Interest Expense:
Interest on deposits 3,024 1,847 2,240
Interest on short-term borrowings 1 14 33
Interest on subordinated convertible debentures 70 -- --
---------- ---------- ----------
Total interest expense 3,095 1,861 2,273
---------- ---------- ----------
Net interest income 27,638 26,382 29,344
Provision for loan losses 550 190 500
---------- ---------- ----------
Net interest income after provision
for loan losses 27,088 26,192 28,844
---------- ---------- ----------
Operating Expense:
Salaries and employee benefits 38,198 37,152 31,405
Occupancy 1,840 1,782 1,500
Equipment 3,692 4,478 4,310
Amortization of intangible assets 368 311 --
Other operating 10,927 11,181 9,360
---------- ---------- ----------
Total operating expense 55,025 54,904 46,575
---------- ---------- ----------
Income before income tax expense 11,267 11,355 10,299
Income tax expense 3,262 3,453 2,987
---------- ---------- ----------
Net income $ 8,005 $ 7,902 $ 7,312
========== ========== ==========
Earnings per share:
Basic $ 2.18 $ 2.15 $ 1.98
Diluted $ 2.15 $ 2.13 $ 1.96
Weighted average shares outstanding:
Basic 3,674,767 3,677,314 3,697,788
Diluted 3,747,748 3,714,553 3,721,290
See accompanying notes to consolidated financial statements.
25
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
----------------------------------
(Dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 8,005 $ 7,902 $ 7,312
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,880 4,580 3,978
Gains on sales of investment securities (1,045) (1,454) (1,477)
Amortization of stock bonus awards 96 57 22
Tax benefit from exercise of stock options and bonuses 114 176 186
Provision for loan losses 550 190 500
Deferred income tax benefit (590) (599) (315)
(Decrease) increase in income tax liability (1,518) 1,115 164
Other operating activities, net 538 (1,786) (1,392)
-------- -------- --------
Net cash provided by operating activities 10,030 10,181 8,978
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available-for-sale 27,195 38,454 63,945
Proceeds from maturities of debt and equity securities
available-for-sale 31,200 15,522 40,878
Purchase of debt and equity securities available-for-sale (66,525) (52,970) (79,761)
Net increase in loans (31,810) (36,320) (53,613)
Purchases of premises and equipment, net (1,592) (1,881) (2,216)
Payment for business acquisitions, net of cash acquired (2,092) -- --
Purchase of bank owned life insurance -- -- (10,000)
-------- -------- --------
Net cash used in investing activities (43,624) (37,195) (40,767)
-------- -------- --------
Cash Flows From Financing Activities:
Net (decrease) increase in noninterest-bearing deposits (18,272) 5,282 (7,999)
Net increase (decrease) in interest-bearing demand
and savings deposits 16,947 342 (18,079)
Net increase in time deposits 4,446 23,286 21,618
Net increase (decrease) in accounts and drafts payable 58,484 72,098 (68,173)
Net increase (decrease) in short-term borrowings 4 (37,315) 37,238
Cash proceeds from exercise of stock options 190 260 348
Cash paid for stock dividend fractional shares (4) -- (2)
Cash dividends paid (3,025) (2,814) (2,628)
Purchase of common shares for treasury -- (1,764) (383)
-------- -------- --------
Net cash provided by (used in) financing activities 58,770 59,375 (38,060)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 25,176 32,361 (69,849)
Cash and cash equivalents at beginning of year 62,367 30,006 99,855
-------- -------- --------
Cash and cash equivalents at end of year $ 87,543 $ 62,367 $ 30,006
======== ======== ========
Supplemental information:
Cash paid for interest $ 3,019 $ 1,802 $ 2,270
Cash paid for income taxes 4,339 2,513 3,155
Noncash transactions:
Transfer of loans to other equity investments $ -- $ 2,000 $ --
Other real estate transferred from loans 375 -- 263
Issuance of subordinated convertible debentures 3,700 -- --
See accompanying notes to consolidated financial statements.
26
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Additional Unamortized Other Comp-
(In thousands, except Common Paid-in Retained Treasury Stock Bonus Comprehensive rehensive
per share data) Stock Capital Earnings Stock Awards Income (Loss) Total Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 2,000 $ 4,997 $ 63,623 $ (15,597) $ (25) $ 522 $ 55,520
Net income 7,312 7,312 $ 7,312
Cash dividends ($.710 per share) (2,628) (2,628)
Purchase of 15,664 common shares
for treasury (383) (383)
5% stock dividend, net 80 3,618 (3,700) (2)
Other comprehensive income (loss):
Net unrealized gain on debt securities
available-for-sale, net of tax 1,612 1,612 1,612
Reclassification adjustment for gains
on sales of investment securities,
available-for-sale, net of tax (975) (975) (975)
Minimum pension liability
adjustment, net of tax 34 34 34
Issuance of 1,040 common shares
pursuant to Stock Bonus Plan 5 17 (22) --
Amortization of Stock Bonus Plan awards 22 22
Exercise of stock options (340) 688 348
Tax benefit on stock awards 186 186
---------------------------------------------------------------------------------------------
Balance, December 31, 2002 2,080 8,466 64,607 (15,275) (25) 1,193 61,046
Comprehensive income for 2002 $ 7,983
=========
Net income 7,902 7,902 7,902
Cash dividends ($.764 per share) (2,814) (2,814)
Purchase of 59,237 common shares
for treasury (1,764) (1,764)
Other comprehensive income (loss):
Net unrealized gain on debt securities
available-for-sale, net of tax 899 899 899
Reclassification adjustment for gains
on sales of investment securities,
available-for-sale, net of tax (960) (960) (960)
Minimum pension liability
adjustment, net of tax (10) (10) (10)
Issuance of 6,501 common shares
pursuant to Stock Bonus Plan 47 114 (161) --
Amortization of Stock Bonus Plan awards 57 57
Exercise of stock options (223) 483 260
Tax benefit on stock awards 176 176
---------------------------------------------------------------------------------------------
Balance, December 31, 2003 2,080 8,466 69,695 (16,442) (129) 1,122 64,792
Comprehensive income for 2003 $ 7,831
=========
Net income 8,005 8,005 8,005
Cash dividends ($.821 per share) (3,025) (3,025)
10% Stock Dividend 167 9,819 (9,990) (4)
Other comprehensive income (loss):
Net unrealized gain on debt securities
available-for-sale, net of tax 261 261 261
Reclassification adjustment for gains
on sales of investment securities,
available-for-sale, net of tax (690) (690) (690)
Minimum pension liability
adjustment, net of tax (150) (150) (150)
Issuance of 3,886 common shares
pursuant to Stock Bonus Plan 53 74 (127) --
Amortization of Stock Bonus Plan awards 96 96
Exercise of stock options (82) 272 190
Tax benefit on stock awards 114 114
---------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 2,247 $ 18,370 $ 64,685 $ (16,096) $ (160) $ 543 $ 69,589
=================================================================================
Comprehensive income for 2004 $ 7,426
=========
See accompanying notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations The Company provides payment and information services,
which include processing and payment of freight, utility and telecommunications
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,"
consist of obligations related to the payment services that are performed for
customers. The Company also provides a full range of banking services to
individual, corporate and institutional customers through its wholly-owned bank
subsidiary and enterprise software solutions to governmental entities through
its software subsidiary.
Basis of Presentation The accounting and reporting policies of the Company and
its subsidiaries conform to U.S. generally accepted accounting principles. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries after elimination of intercompany transactions.
Certain amounts in the 2003 and 2002 consolidated financial statements have been
reclassified to conform to the 2004 presentation. Such reclassifications have no
effect on previously reported net income or shareholders' equity.
Use of Estimates In preparing the consolidated financial statements, Company
management is required to make estimates and assumptions which significantly
affect the reported amounts in the consolidated financial statements. A
significant estimate, which is particularly susceptible to change in a short
period of time, is the determination of the allowance for loan losses.
Cash and Cash Equivalents For purposes of the consolidated statements of cash
flows, the Company considers cash and due from banks, federal funds sold and
other short-term investments as segregated in the accompanying consolidated
balance sheets to be cash equivalents.
Investment in Debt and Equity Securities The Company classifies its debt and
marketable equity securities as available-for-sale. Securities classified as
available-for-sale are carried at fair value. Unrealized gains and losses, net
of the related tax effect, are excluded from earnings and reported in
accumulated other comprehensive income, a component of 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 an
impairment is other than temporary, the Company considers whether it has the
ability and intent to hold the investment until a market place recovery and
considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. 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. Interest income is recognized
when earned. Gains and losses are calculated using the specific identification
method. Investments in equity securities without readily determinable fair
values are stated at cost.
Allowance for Loan Losses The allowance for loan losses is increased by
provisions charged to expense and reduced by net charge-offs. The provisions
charged to expense are based on economic conditions, past losses, collection
experience, risk characteristics of the portfolio and such other factors which,
in management's judgment, deserve current recognition.
Management believes the allowance for loan losses is adequate to absorb losses
in the loan portfolio. While management uses all available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
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 and fair
value in excess of cost of net assets acquired have resulted from business
acquisitions which were accounted for using the purchase method. The
28
Company adopted the provisions of Statement of Financial Accounting Standard
142, "Goodwill and Other Intangible Assets" (SFAS 142), which requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. SFAS 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS 144. The disclosure requirements
of SFAS 142 are included in Item 8, Note 8 of this report.
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 in, 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 Other real estate, included in other assets in the
accompanying consolidated balance sheets, is recorded at fair value less
estimated selling costs. If the fair value of other real estate declines
subsequent to foreclosure, the difference is recorded as a valuation allowance
through a charge to expense. Subsequent increases in fair value are recorded
through reversal of the valuation allowance. Expenses incurred in maintaining
the properties are charged to expense.
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 minimum pension
liability adjustments and is presented in the accompanying consolidated
statements of shareholders' equity and comprehensive income.
Interest on Loans Interest on loans is recognized based upon the principal
amounts outstanding. It is the Company's policy to discontinue the accrual of
interest when there is reasonable doubt as to the collectibility of principal or
interest. Subsequent payments received on such loans are applied to principal if
there is any doubt as to the collectibility of such principal; otherwise, these
receipts are recorded as interest income. The accrual of interest on a loan is
resumed when the loan is current as to payment of both principal and interest
and/or the borrower demonstrates the ability to pay and remain current.
Impairment of Loans A loan is considered impaired when it is probable 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 Revenue from freight, utility and telecommunication
payment related services is recognized when earned and fees are billed to
customers, generally monthly.
Software Revenue Software revenue consists of license fees, hardware sales,
maintenance fees and other service fees. License fees and hardware sales are
recognized in accordance with Statement of Financial Position ("SOP") 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" and therefore revenue is deferred until the following criteria are
met: (a) persuasive evidence of an arrangement exists, (b) delivery has
occurred, (c) the fee is fixed and determinable and (d) collection is probable.
Maintenance fees are normally paid in advance and cover a period of one year and
therefore fees are recognized ratably over the maintenance term and the
unamortized balance is carried as deferred income and included in other
liabilities. Other services are provided on an as needed basis and revenue is
recognized once the service has been completed and the customer is billed.
29
Income Taxes Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
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, adjusted for the net income effect
of the interest expense on the outstanding convertible debentures, by the sum of
the weighted-average number of common shares outstanding and the
weighted-average number of potential common shares outstanding.
Stock Options The Company accounts for stock-based compensation under the stock
option plan in accordance with Accounting Principles Board ("APB") 25,
"Accounting for Stock Issued to Employees," and accordingly the Company
recognizes no compensation expense as the price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
The Company elected not to adopt the recognition provisions of Statement of
Financial Accounting Standard ("SFAS") 123, "Accounting for Stock-Based
Compensation," as amended by SFAS 148. An entity that continues to apply APB 25
shall disclose certain pro forma information as if the fair value-based
accounting method in SFAS 123 had been used to account for stock-based
compensation costs. The Company uses the Black-Scholes option-pricing model to
determine the fair value of the stock options at the date of grant. There were
10,130 options granted in 2004, 15,543 options granted in 2003 and 6,930 options
were granted in 2002. The required disclosure provisions of SFAS 123, as amended
by SFAS 148, are provided in the table below.
(In thousands, except per share data) 2004 2003 2002
- ------------------------------------------------------------------------------------------
Net income:
As reported $ 8,005 $ 7,902 $ 7,312
Add: Stock based compensation expense
included in reported net income, net of tax 63 38 15
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (109) (81) (60)
- ------------------------------------------------------------------------------------------
Pro forma net income $ 7,959 $ 7,859 $ 7,267
Net income effect of subordinated convertible
debentures 39 -- --
- ------------------------------------------------------------------------------------------
Proforma net income assuming dilution $ 7,998 $ 7,859 $ 7,267
- ------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ 2.18 $ 2.15 $ 1.98
Basic, proforma 2.18 2.14 1.97
Diluted, as reported 2.15 2.13 1.96
Diluted, proforma 2.13 2.12 1.95
- ------------------------------------------------------------------------------------------
Weighted average assumptions:
Risk-free interest rate 3.61% 3.22% 3.54%
Expected life 7 yrs. 7 yrs 7 yrs
Expected volatility 15% 15% 15%
Expected dividend yield 2.42% 3.32% 3.52%
- ------------------------------------------------------------------------------------------
Recent and Prospective Accounting Pronouncements In 2003, the Emerging Issues
Task Force ("EITF") reached a consensus on, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"), which
provides guidance to assess whether there have been any events or economic
circumstances to indicate that a security is impaired on an other-than-temporary
basis. Factors to consider include the length of time the security has had a
market value less than the cost basis, the intent and ability of the company to
hold the security for a period of time sufficient for a recovery in value,
recent events specific to the issuer or industry and for debt securities,
external credit rating and recent downgrades. Securities on which there is an
unrealized loss that is deemed to be other-than-temporary are written down to
fair value with the write-down recorded as a realized loss. In December 2004,
the Financial Accounting Standards Board ("FASB") announced that it will
reconsider in its entirety all guidance on disclosing, measuring and recognizing
other-than-temporary impairments of debt and equity securities. Until new
guidance is issued, companies must continue to comply with the disclosure
requirements of EITF 03-1 and all relevant measurement and recognition
requirements in other accounting literature. The disclosure requirements
required under EITF 03-1 are included in Note 4 of this report.
30
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which addresses how a
business enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaced, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51,"
("FIN 46") issued in January 2003. Companies are required to apply FIN 46R to
variable interest entities (VIEs) created after December 31, 2003. For variable
interest in VIEs created before January 1, 2004, FIN 46R will be applied
beginning on January 1, 2005. The Company is currently not a primary beneficiary
of a VIE and therefore the adoption of FIN 46R did not have a material impact on
its consolidated financial statements.
In December 2003, the FASB issued Statement of Financial Accounting Standard 132
(revised 2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132 (revised 2003)"), which increases the disclosure
requirements of the original statement by requiring more details about pension
plan assets, benefit obligations, cash flows, benefit costs and related
information and also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. Additional disclosures pertaining to
benefit payments are required for fiscal years ending after June 30, 2004. The
disclosure requirements of SFAS 132 (revised 2003) are included in Item 8, Note
13 of this report.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which replaced, "Accounting for Stock-Based Compensation" ("SFAS
123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R requires the measurement of all
employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in
our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for reporting periods beginning after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer will be an
alternative to financial statement recognition. See the section entitled "Stock
Options" of this note for the pro forma net income and net income per share
amounts, for fiscal 2002 through fiscal 2004, as if we had used a
fair-value-based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock incentive awards. Although we
have not yet determined whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and do not expect the adoption to
have a significant adverse impact on our consolidated statements of income and
net income per share.
Note 2
Acquisitions
On August 24, 2004 the Company acquired substantially all of the operating
assets of PROFITLAB, Inc., a provider of telecom auditing and application
services based in Greenville, South Carolina. Consideration for the acquisition
included cash in the amount of $1,098,000 and the issuance of $3,700,000 of
5.33% subordinated convertible debentures. The debentures are convertible, per a
schedule, into approximately 76,763 shares of the Company's Common Stock at a
price of $48.20 per share. The securities mature 10 years after the date of
issuance. The debentures may be called by the Company without penalty after
August 24, 2010. Total cost of the acquisition was approximately $4,977,000
which included $862,000 in acquired software, which is being amortized on a
straight-line basis over 5 years and $4,039,000 in goodwill based on the
Company's purchase price allocation. All acquired intangible assets are
deductible for tax purposes.
On November 24, 2004 the Company acquired Franklin Bancorp, Orange, California
and merged its subsidiary bank, Franklin Bank of California into the Bank. The
purpose of the acquisition and merger is to establish a branch in California to
serve existing customers and prospects. Total cost of the acquisition was
$2,707,000 which included $171,000 of goodwill based on the Company's purchase
price allocation. The acquired goodwill is not deductible for tax purposes.
The above mentioned acquisitions of PROFITLAB, Inc. and Franklin Bancorp were
accounted for using the purchase method of accounting and, accordingly, the
consolidated financial statements include the financial position and results of
operations for the periods subsequent to the respective acquisition dates, and
the assets acquired and liabilities assumed were recorded at their estimated
fair value as of the acquisition dates. These fair value adjustments represent
current estimates and are subject to further adjustments as the valuation data,
including the receipt of certain third party valuation data, is finalized.
31
Note 3
Capital Requirements And Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company and the Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulators to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets, and of Tier I capital to average
assets. Management believes that as of December 31, 2004 and 2003, the Company
and the Bank met all capital adequacy requirements to which they are subject.
The Bank is also subject to the regulatory framework for prompt corrective
action. As of December 31, 2004 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, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Subsidiary dividends are a significant source of funds for payment of dividends
by the Company to its shareholders. At December 31, 2004, unappropriated
retained earnings of $6,714,000 were available at the Bank for the declaration
of dividends to the Company without prior approval from regulatory authorities.
However, dividends paid by the Bank to the Company would be prohibited if the
effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
Restricted funds on deposit used to meet regulatory reserve requirements
amounted to approximately $766,000 and $663,000 at December 31, 2004 and 2003,
respectively.
The Company and the Bank's actual and required capital amounts and ratios as of
December 31, 2004 and 2003 are as follows:
Requirement
to be well
capitalized under
Capital prompt corrective
Actual requirements action provisions
---------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
At December 31, 2004
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $69,238 11.86% $46,691 8.00% $ N/A N/A%
Cass Commercial Bank 36,634 12.01 24,392 8.00 30,490 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $59,501 10.19% $23,345 4.00% $ N/A N/A%
Cass Commercial Bank 32,817 10.76 12,196 4.00 18,294 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $59,501 7.91% $22,563 3.00% $ N/A N/A%
Cass Commercial Bank 32,817 9.46 10,408 3.00 17,346 5.00
At December 31, 2003
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $64,480 11.93% $43,246 8.00% $ N/A N/A%
Cass Commercial Bank 31,741 11.18 22,722 8.00 28,403 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $58,974 10.91% $21,623 4.00% $ N/A N/A%
Cass Commercial Bank 28,190 9.93 11,361 4.00 17,042 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $58,974 8.59% $20,586 3.00% $ N/A N/A%
Cass Commercial Bank 28,190 9.34 9,056 3.00 15,316 5.00
32
Note 4
Investment in Debt and Equity Securities
Debt and marketable equity securities have been classified in the consolidated
balance sheets according to management's intent. The amortized cost, gross
unrealized gains, gross unrealized losses and fair value of debt and equity
securities at December 31, 2004 and 2003, are summarized as follows:
2004
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
U.S. Treasury securities $ 21,939 $ -- $ 40 $ 21,899
Obligations of U.S. government
corporations and agencies 6,077 51 34 6,094
State and political subdivisions 47,445 1,172 84 48,533
- -----------------------------------------------------------------------------------------------
Total debt securities 75,461 1,223 158 76,526
Stock in Federal Reserve Bank and
Federal Home Loan Bank 604 -- -- 604
- -----------------------------------------------------------------------------------------------
Total $ 76,065 $ 1,223 $ 158 $ 77,130
===============================================================================================
2003
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
U.S. Treasury securities $ 17,089 $ 15 $ 1 $ 17,103
Obligations of U.S. government
corporations and agencies 4,606 95 11 4,690
State and political subdivisions 45,160 1,619 2 46,777
- -----------------------------------------------------------------------------------------------
Total debt securities 66,855 1,729 14 68,570
Stock in Federal Reserve Bank and
Federal Home Loan Bank 577 -- -- 577
- -----------------------------------------------------------------------------------------------
Total $ 67,432 $ 1,729 $ 14 $ 69,147
===============================================================================================
The fair value of securities with unrealized losses at December 31, 2004 are as
follows:
Fair Unrealized
(In thousands) Value Losses
- --------------------------------------------------------------------------------
U. S. Treasury securities $ 21,899 $ 40
Obligations of U.S. government
corporations and agencies 2,970 34
State and political subdivisions 5,380 84
- --------------------------------------------------------------------------------
Total $ 30,249 $ 158
================================================================================
There are 18 securities in an unrealized loss position included in the table
above and all have been in an unrealized loss position for less than one year.
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 and the Company has the ability to hold these
securities until maturity.
The amortized cost and fair value of debt and equity securities at December 31,
2004, 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.
2004
--------------------------
Amortized Fair
(In thousands) Cost Value
- --------------------------------------------------------------------------------
Due in 1 year or less $ 20,097 $ 20,078
Due after 1 year through 5 years 18,617 18,651
Due after 5 years through 10 years 24,348 25,044
Due after 10 years 12,399 12,753
No stated maturity 604 604
- --------------------------------------------------------------------------------
Total $ 76,065 $ 77,130
================================================================================
33
The amortized cost of debt securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes at
December 31, 2004 and 2003 were $13,074,000 and $3,599,000, respectively.
Proceeds from sales of debt securities classified as available-for-sale were
$27,195,000, $38,454,000 and $63,945,000 for 2004, 2003 and 2002, respectively.
Gross gains realized on the sales in 2004 were $1,048,000 and gross realized
losses were $3,000, in 2003 gross realized gains were $1,454,000 and in 2002
gross realized gains were $1,501,000 and gross losses realized were $24,000.
Note 5
Loans
A summary of loan categories at December 31, 2004 and 2003, is as follows:
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Commercial and industrial $ 117,777 $ 103,638
Real estate:
Mortgage 182,476 184,221
Mortgage - Church & related 164,235 145,929
Construction 16,694 2,920
Construction - Church & related 9,144 16,378
Industrial revenue bonds 4,955 5,373
Installment 1,741 1,911
Other 3,426 8,662
- --------------------------------------------------------------------------------
Total $ 500,448 $ 469,032
================================================================================
The Company originates commercial, industrial, real estate and installment loans
to businesses, churches and consumers throughout the metropolitan St. Louis
area. The Company also originates church and church-related loans outside the
metropolitan St. Louis area. The Company does not have any particular
concentration of credit in any one economic sector; however, a substantial
portion of the commercial and industrial loans are extended to privately held
commercial companies in this market area, and are generally secured by the
assets of the business. The Company also has a substantial portion of real
estate loans that are extended to churches, in this market area and selected
cities throughout the United States, which are secured by mortgages.
Loan transactions involving executive officers and directors of the Company and
its subsidiaries and loans to affiliates of executive officers and directors for
the year ended December 31, 2004, are summarized below. Such loans were made in
the normal course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility.
(In thousands)
---------------------------------------------------------------------
Aggregate balance, January 1, 2004 $ 3,285
New loans 1,000
Payments 134
---------------------------------------------------------------------
Aggregate balance, December 31, 2004 $ 4,151
=====================================================================
A summary of the activity in the allowance for loan losses for 2004, 2003 and
2002 is as follows:
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Balance, January 1 $ 5,506 $ 5,293 $ 4,906
Provision charged to expense 550 190 500
Loans charged off (48) (2) (152)
Recoveries of loans previously
charged off 29 25 39
- -------------------------------------------------------------------------------
Net loan (charge-offs) recoveries (19) 23 (113)
- -------------------------------------------------------------------------------
Balance, December 31 $ 6,037 $ 5,506 $ 5,293
================================================================================
34
The following is a summary of information pertaining to impaired loans at
December 31, 2004 and 2003:
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 2,718 4,393
Allowance for loan losses related to impaired loans 1,023 627
- --------------------------------------------------------------------------------
Impaired loans consist primarily of renegotiated loans, nonaccrual loans and
loans 90 days past due and still accruing interest. In 2004, impaired loans also
included a loan for $2,180,000 related to one borrower that although current,
management has doubt as to the collectability of all amounts under the
agreement. Impaired loans continuing to accrue interest were $2,352,000 and
$2,868,000 at December 31, 2004 and 2003, respectively. Of these, loans
delinquent 90 days or more and still accruing interest at December 31, 2004 and
2003 totaled $4,000 and $147,000, respectively. The average balance of impaired
loans during 2004 and 2003 was $3,395,000 and $5,736,000, respectively. Income
that would have been recognized on non-accrual and renegotiated loans under the
original terms of the contract was $38,000, $272,000 and $346,000 for 2004, 2003
and 2002, respectively. Income that was recognized on non-accrual and
renegotiated loans was $15,000, $164,000 and $328,000 for 2004, 2003 and 2002,
respectively. Foreclosed loans, which have been reclassified and held as other
real estate owned were $375,000 and $859,000 at December 31, 2004 and 2003,
respectively and are included in other assets on the consolidated balance
sheets.
Note 6
Premises and Equipment
A summary of premises and equipment at December 31, 2004 and 2003, is as
follows:
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Land $ 873 $ 873
Buildings 10,459 10,374
Leasehold improvements 1,023 968
Furniture, fixtures and equipment 19,174 18,125
Purchased software 3,711 3,383
Internally developed software 4,474 4,474
- --------------------------------------------------------------------------------
39,714 38,197
Less accumulated depreciation and amortization 27,527 24,659
- --------------------------------------------------------------------------------
Total $12,187 $13,538
================================================================================
Internally developed software at December 31, 2004 and 2003 includes $344,000 of
software which is being sold to customers of the Company's Government Software
Services Division and amortization expense on this software was $37,000 in 2004
and no amortization was recorded in 2003 or 2002. Total depreciation and
amortization charged to expense in 2004, 2003 and 2002 amounted to $2,970,000,
$3,689,000 and $3,638,000, respectively.
The Company and its subsidiaries lease various premises and equipment under
operating lease agreements, which expire at various dates through 2020. The
following is a schedule, by year, of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2004:
(In thousands)
-----------------------------------------------------------
2005 $ 625
2006 196
2007 161
2008 153
2009 153
2010 and after 1,357
-----------------------------------------------------------
Total $ 2,645
===========================================================
Rental expense for 2004, 2003 and 2002 was $554,000, $686,000 and $604,000,
respectively.
35
Note 7
Equity Investments in Non-Marketable Securities
During 2003, the Company converted a $2,000,000 investment in a private imaging
company from a convertible debenture into Common Stock. As part of the
conversion, the Company committed to investing an additional $1,100,000 when
certain conditions were met. This additional commitment has funded and the total
investment of the Company in this entity was $3,100,000 at December 31, 2004 and
$2,908,000 at December 31, 2003. At December 31, 2004 the Company had a 19.99%
ownership interest in this entity and the Chairman and CEO of the Company was a
member of the entity's Board of Directors. In addition, the Company has extended
a $2,400,000 line of credit for working capital purposes to this entity, with a
50% interest sold to a new non-affiliated majority owner. As of December 31,
2004 the Company's interest in this line amounted to $1,200,000 and all payments
are current.
This business has performed poorly during the past few years and the new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. However, should this business fail to meet
its objectives, the Company's investment could be subject to future impairment.
This investment, along with $519,000 of other investments in non-marketable
securities, is included in other assets on the Company's consolidated balance
sheets.
Note 8
Acquired Intangible Assets
The Company accounts for intangible assets in accordance with SFAS 142,
"Goodwill and Other Intangible Assets," 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 as of December 31, 2004 are as follows:
December 31, 2004 December 31, 2003
-----------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
- ---------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Customer list $ 823 $ (110) $ 823 $ (55)
Software 1,886 (569) 1,024 (256)
- ---------------------------------------------------------------------------------------------------------------------
Total amortized intangible assets 2,709 (679) 1,847 (311)
- ---------------------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,587 (227)* 3,377 (227)*
Minimum pension liability 353 -- 404 --
- ---------------------------------------------------------------------------------------------------------------------
Total unamortized intangible assets 7,940 (227) 3,781 (227)
- ---------------------------------------------------------------------------------------------------------------------
Total intangible assets $ 10,649 $ (906) $ 5,628 $ (538)
- ---------------------------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS 142.
Changes in the carrying amount of goodwill, by segment, for the year ended
December 31, 2004, are as follows:
Information Governmental
Processing Banking Software Total
- --------------------------------------------------------------------------------------------------
Balance January 1, 2004 $ 223 $ -- $ 2,927 $ 3,150
Goodwill acquired during the year 4,039 171 -- 4,210
- --------------------------------------------------------------------------------------------------
Balance December 31, 2004 $ 4,262 $ 171 $ 2,927 $ 7,360
- --------------------------------------------------------------------------------------------------
On August 24, 2004 the Company acquired $4,039,000 of goodwill and $862,000 in
software related to the acquisition of PROFITLAB, Inc. On November 24, 2004 the
Company acquired $171,000 of goodwill from the acquisition of Franklin Bank. The
acquisitions of PROFITLAB, INC. and Franklin Bank are further discussed in Item
2 of this report.
The minimum pension liability was recorded in accordance with SFAS 87,
"Employers' Accounting for Pensions", which requires the Company to record an
additional minimum pension liability by the amount that the accumulated benefit
obligation exceeds the sum of the fair value of plan assets and accrued amounts
previously recorded and offset this liability by an intangible asset to the
extent of previously unrecognized prior service costs. The liability and
corresponding intangible assets are adjusted annually.
36
The weighted average amortization period at December 31, 2004 is 15 years for
customer list and 4.5 years for software and 7.7 years for all amortized
intangible assets combined. Amortization of intangible assets amounted to
$368,000 and $311,000 for the years ended December 31, 2004 and 2003,
respectively. There was no amortization of intangibles for the year ended
December 31, 2002. Estimated amortization of intangibles over the next five
years is as follows: $483,000 in 2005 and 2006, $227,000 in 2007 and 2008 and
$170,000 in 2009.
Note 9
Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 2004 and
2003:
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
NOW and Money Market Deposit Accounts $ 80,475 $ 53,983
Savings deposits 23,161 32,626
Time deposits:
Less than $100 29,514 27,909
$100 or more 46,117 43,276
- --------------------------------------------------------------------------------
Total $179,267 $157,794
================================================================================
Interest on deposits consist of the following for 2004, 2003 and 2002:
(In thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
NOW and Money Market Deposit Accounts $ 845 $ 371 $ 632
Savings deposits 293 281 528
Time deposits:
Less than $100 726 351 178
$100 or more 1,160 844 902
- --------------------------------------------------------------------------------
Total $3,024 $1,847 $2,240
================================================================================
The scheduled maturities of certificates of deposit at December 31, 2004 and
2003, are summarized as follows:
2004 2003
------------------------------------------------
Percent Percent
(In thousands) Amount of Total Amount of Total
- --------------------------------------------------------------------------------
Due within:
One year $57,605 76.2% $50,991 71.6%
Two years 1,454 1.9 8,826 12.4
Three years 1,311 1.7 276 .4
Four years 10,787 14.3 1,265 1.8
Five years 4,474 5.9 9,827 13.8
- --------------------------------------------------------------------------------
Total $75,631 100.0% $71,185 100.0%
================================================================================
Note 10
Short-Term Borrowings
Company short-term borrowings consist mainly of federal funds purchased and tax
deposits of the United States Treasury. At December 31, 2004 and 2003 the bank
subsidiary had short-term borrowings of $127,000 and $123,000, respectively that
consisted of borrowings from the Treasury related to tax deposits received from
customers not yet drawn upon by the Treasury. These borrowings are secured by
U.S. Treasury and agency securities. The average amount of all borrowings for
2004 was $91,000 at an average rate of 1.10% and the maximum amount outstanding
at the end of any month during the year was $131,000. The average amount of
borrowings for 2003 was $943,000 at an average rate of 1.48% and the maximum
amount outstanding at the end of any month during the year was $21,523,000.
Note 11
Subordinated Convertible Debentures
On August 24, 2004 the Company issued to PROFITLAB, Inc. $3,700,000 of 5.33%
subordinated convertible debentures in partial consideration for the acquisition
of the assets of PROFITLAB, Inc. Interest is payable annually on the anniversary
date of the acquisition. The holders of the debentures can convert up to 20% of
the principal amount into fully paid and non-assessable shares of the Common
Stock of the Company at a rate per share of $48.20
37
from and after the third anniversary of the issuance date. From and after the
fourth anniversary date an additional 30% can be converted under the same terms.
From and after the fifth anniversary date, 100% can be converted under the same
terms. The securities mature 10 years after the date of issuance. The debentures
may be called by the Company without penalty after August 24, 2010.
Note 12
Common Stock and Earnings Per Share
The table below shows activity in the outstanding shares of the Company's Common
Stock during 2004.
- --------------------------------------------------------------------------------
Shares outstanding at January 1, 2004 3,335,512
Issuance of stock:
10% stock dividend, issued March 15, 2004 334,400
Issued under Stock Bonus Plan* 3,699
Stock options exercised* 13,637
- --------------------------------------------------------------------------------
Shares outstanding at December 31, 2004 3,687,248
================================================================================
*Not restated for stock dividend, issued March 15, 2004
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, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding. The calculations of basic and
diluted earnings per share for the periods ended December 31, 2004, 2003 and
2002 are as follows:
(Dollars in thousands, except per share data) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------
Calculation of basic earnings per share:
Net income $8,005 $7,902 $7,312
Weighted-average number of common shares outstanding 3,674,767 3,677,314 3,697,788
- -------------------------------------------------------------------------------------------------------
Basic earnings per share $2.18 $2.15 $1.98
=======================================================================================================
Calculation of diluted earnings per share:
Net income $8,005 $7,902 $7,312
Net income effect of 5.33% convertible debentures 39 -- --
- -------------------------------------------------------------------------------------------------------
Net income assuming dilution $8,044 $7,902 $7,312
- -------------------------------------------------------------------------------------------------------
Weighted-average number of common shares outstanding 3,674,767 3,677,314 3,697,788
Effect of dilutive stock options and awards 45,864 37,239 23,502
Effect of 5.33% convertible debentures 27,117 -- --
- -------------------------------------------------------------------------------------------------------
Weighted-average number of common shares
assuming dilution 3,747,748 3,714,553 3,721,290
- -------------------------------------------------------------------------------------------------------
Diluted earning per share $2.15 $2.13 $1.96
=======================================================================================================
Note 13
Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan, which covers
most of its employees. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit
with service proration method to amortize prior service costs arising from
improvements in pension benefits and qualifying service prior to the
establishment of the plan over a period of approximately 30 years. Disclosure
information is based on a measurement date of December 31 of the corresponding
year.
A summary of the activity in the defined benefit pension plan's benefit
obligation, assets, funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 2004 and 2003, is as follows:
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 20,026 $ 16,461
Service cost 1,186 979
Interest cost 1,237 1,105
Actuarial loss 875 1,718
Benefits paid (373) (237)
- -------------------------------------------------------------------------------
Balance, December 31 $ 22,951 $ 20,026
===============================================================================
Plan assets:
Fair value, January 1 $ 15,085 $ 12,797
Actual return 1,199 1,622
Employer contribution 1,083 903
Benefits paid (373) (237)
- -------------------------------------------------------------------------------
Fair value, December 31 $ 16,994 $ 15,085
===============================================================================
Funded status:
Unfunded projected benefits obligation $ (5,957) $ (4,941)
Unrecognized prior service cost 82 90
Unrecognized net loss 3,472 2,614
- -------------------------------------------------------------------------------
Accrued pension cost $ (2,403) $ (2,237)
===============================================================================
38
The accumulated benefit obligation was $18,384,000 and $15,970,000 for the
periods ended December 31, 2004 and 2003, respectively. The Company expects to
contribute approximately $1,265,000 to the plan in 2005.
The following pension benefit payments, which reflect expected future service,
as appropriate, are expected to be paid:
2005 $ 498,000
2006 506,000
2007 619,000
2008 835,000
2009 897,000
2010 - 2014 5,367,000
The following represent the major assumptions used to determine the benefit
obligation of the plan:
2004 2003 2002
- --------------------------------------------------------------------------------
Weighted average discount rate 6.00% 6.25% 7.00%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
The pension cost for 2004, 2003 and 2002 was $1,250,000, $1,042,000 and
$948,000, respectively, and included the following components:
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 1,186 $ 979 $ 952
Interest cost on projected benefit obligations 1,237 1,105 1,012
Expected return on plan assets (1,233) (1,055) (1,031)
Net amortization and deferral 60 13 15
- -------------------------------------------------------------------------------
Net periodic pension cost $ 1,250 $ 1,042 $ 948
===============================================================================
The following represent the major assumptions used to determine the net benefit
cost of the plan:
2004 2003 2002
- -------------------------------------------------------------------------------
Weighted average discount rate 6.25% 7.00% 7.25%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
The asset allocation for the defined benefit pension plan as of the measurement
date, by asset category, is as follows:
Percentage of
Plan Assets
- --------------------------------------------------------------------------------
Asset Class 2004 2003
- --------------------------------------------------------------------------------
Equity securities 36.6% 34.6%
Debt securities 63.0% 65.1%
Cash and cash equivalents .4% .3%
- --------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================
The investment objective for the defined benefit pension plan is to maximize
total return with a tolerance for average risk. Asset allocation strongly favors
fixed income investments, with a target allocation of approximately 67% fixed
income, 33% equities, and 0% cash. 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 component is invested in pooled large cap stocks.
More aggressive or
39
volatile sectors, although currently not employed, can be represented in the
asset mix to pursue higher returns with proper diversification. The assumed
long-term rate of return on assets is 8.0% as derived below:
Expected Long-Term Contribution to
Asset Class Return on Class X Allocation = Assumption
- --------------------------------------------------------------------------------
Equity securities 9 - 11% 33.3% 3.0% - 3.67%
Fixed income 6 - 7% 66.7% 4.0% - 4.67%
- --------------------------------------------------------------------------------
7.0% - 8.34%
================================================================================
The 8% assumption falls within the expected range.
In addition to the above funded benefit plan, the Company has an unfunded
supplemental executive retirement plan which covers key executives of the
Company. This is a noncontributory plan in which the Company's subsidiaries make
accruals designed to fund normal service costs on a current basis using the same
method and criteria as its defined benefit plan.
The pension cost for 2004, 2003 and 2002 for the supplemental executive
retirement plan was $110,000, $145,000 and $177,000 respectively, and included
the following components:
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Service cost - benefits earned during the year $ (57) $ (24) $ (13)
Interest cost on projected benefit obligations 117 107 124
Net amortization and deferral 50 62 66
- -------------------------------------------------------------------------------
Net periodic pension cost $ 110 $ 145 $ 177
===============================================================================
A summary of the activity in the supplemental executive retirement plan's
benefit obligation, funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 2004 and 2003, is as follows:
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 1,695 $ 1,878
Service cost (57) (24)
Interest cost 117 107
Actuarial loss (gain) 211 (266)
- -------------------------------------------------------------------------------
Balance, December 31 $ 1,966 $ 1,695
===============================================================================
Funded status:
Unfunded projected benefits obligation $(1,966) $(1,695)
Unrecognized prior service cost 353 404
Unrecognized actuarial loss 317 105
- -------------------------------------------------------------------------------
Accrued pension cost (1,296) (1,186)
Minimum liability adjustment (595) (419)
- -------------------------------------------------------------------------------
Accrued pension cost $(1,891) $(1,605)
===============================================================================
The accumulated benefit obligation was $1,891,000 and $1,605,000 for the periods
ended December 31, 2004 and 2003, respectively. Since this is an unfunded plan
there are no plan assets. Benefits paid on the plan were $9,000 in 2004 and no
benefits were paid in 2003 and 2002. Expected future benefits over the next 10
years are as follows:
2005 $ 34,000
2006 34,000
2007 34,000
2008 201,000
2009 201,000
2010 - 2014 1,005,000
The major assumptions used to determine the projected benefit obligation and net
benefit cost are the same as those in the defined plan explained above.
The provisions of SFAS 87, "Employers' Accounting for Pensions," required the
Company to record an additional minimum liability of $595,000 and $419,000 at
December 31, 2004 and 2003, respectively. This liability represents the amount
by which the accumulated benefit obligation exceeds the sum of the fair value of
plan assets and accrued amounts previously recorded. The additional liability is
offset by an intangible asset to the extent of previously unrecognized prior
service cost. The intangible assets of $353,000 and $404,000 at December 31,
2004 and 2003,
40
respectively, are included in other intangible assets on the accompanying
consolidated balance sheets. The remaining amount at December 31, 2004 of
$242,000 is recorded, net of tax, as an accumulated other comprehensive loss.
The Company maintains a noncontributory profit sharing plan, 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 2004, 2003 and
2002 was $1,781,000, $1,755,000 and $1,632,000, respectively.
The Company sponsors a defined contribution 401(k) plan to provide additional
retirement benefits to substantially all employees. Contributions under the
401(k) plan for 2004, 2003 and 2002 were $349,000, $333,000 and $277,000,
respectively.
Note 14
Stock Option and Bonus Plans
The Company maintains a restricted stock bonus plan which provides for the
issuance of up to 115,500 shares of Common Stock, the purpose of which is to
permit grants of shares, subject to restrictions, to key employees and
non-employee directors of the Company as a means of retaining and rewarding them
for long-term performance. During 2004, 2003 and 2002, 3,886 shares, 6,501
shares and 1,040 shares, respectively, were granted with weighted average per
share market prices of $32.91 in 2004, $24.74 in 2003 and $21.21 in 2002. The
fair value of such shares, which is based on the market price on the date of
grant, has been recorded in the consolidated financial statements through the
establishment of a contra shareholders' equity account which is amortized to
expense over the three-year vesting period. Amortization of the restricted stock
bonus awards totaled $96,000 for 2004, $57,000 for 2003 and $22,000 for 2002. At
December 31, 2004 the weighted-average grant date fair value and weighted
average contractual life for outstanding shares of restricted stock was $28.24
and .9 years, respectively.
A summary of restricted stock bonus share activity follows:
2004 2003 2002
- -------------------------------------------------------------------------------
Awards available for grant beginning of year 58,641 65,142 66,182
Restricted shares awarded (3,886) (6,501) (1,040)
- -------------------------------------------------------------------------------
Awards available for grant end of year 54,755 58,641 65,142
===============================================================================
The Company also maintains a performance-based stock option plan, which provides
for the granting of options to acquire up to 462,000 shares of Company Common
Stock. Options currently vest and expire over a period not to exceed seven
years.
The following table summarizes stock options outstanding as of December 31,
2004:
Weighted Average
Exercise Options Remaining
Price Outstanding Contractual Life
--------------------------------------------------------------
$17.63 2,930 2.01 years
19.91 4,042 2.00
21.33 2,310 2.00
21.86 62,637 2.00
22.04 7,240 1.54
22.50 12,000 6.00
24.75 3,543 6.00
30.27 5,871 7.00
35.91 2,759 7.00
38.01 1,500 7.00
Changes in options outstanding were as follows:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance at December 31, 2001 171,925 $15.65
Granted 6,930 19.92
Exercised (44,850) 8.94
Forfeited (4,042) 21.86
- --------------------------------------------------------------------------------
Balance at December 31, 2002 129,963 18.01
Granted 15,543 23.01
Exercised (27,508) 10.81
Forfeited (6,930) 19.92
- --------------------------------------------------------------------------------
Balance at December 31, 2003 111,068 20.37
Granted 10,130 32.95
Exercised (14,406) 13.14
Forfeited (1,960) 21.86
- --------------------------------------------------------------------------------
Balance at December 31, 2004 104,832 $22.55
================================================================================
41
At December 31, 2004, 20,813 shares were exercisable with a weighted average
exercise price of $21.43. The restricted stock bonus plan and the
performance-based stock option plan have both been approved by the Company's
Shareholders.
Note 15
Other Operating Expense
Details of other operating expense for 2004, 2003 and 2002 are as follows:
(In thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Postage, printing and supplies $ 2,342 $ 2,886 $ 2,906
Advertising and business development 1,720 1,929 1,382
Professional fees 2,522 2,268 1,964
Outside service fees 1,527 1,316 1,175
Data processing services 210 207 231
Telecommunications 548 561 510
Other 2,056 2,014 1,192
- --------------------------------------------------------------------------------
Total other operating expense $10,927 $11,181 $ 9,360
================================================================================
Note 16
Income Taxes
The components of income tax expense (benefit) for 2004, 2003 and 2002 are as
follows:
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Current:
Federal $ 3,354 $ 3,571 $ 2,883
State 498 481 419
Deferred (590) (599) (315)
- -------------------------------------------------------------------------------
Total income tax expense $ 3,262 $ 3,453 $ 2,987
===============================================================================
A reconciliation of expected income tax expense (benefit), computed by applying
the effective federal statutory rate of 34% for 2004, 2003 and 2002 to income
before income tax expense, to reported income tax expense is as follows:
(In thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
Expected income tax expense $ 3,831 $ 3,861 $ 3,502
(Reductions) increases resulting from:
Tax-exempt income (964) (793) (800)
State taxes, net of federal benefit 328 317 277
Other, net 67 68 8
- -------------------------------------------------------------------------------
Total income tax expense $ 3,262 $ 3,453 $ 2,987
===============================================================================
The tax effects of temporary differences which give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2004 and
2003, are presented below:
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 2,123 $ 1,952
Accrued pension cost 841 783
Tax loss carryforward1 700 --
Deferred revenue 672 626
Unrealized loss minimum pension liability 82 5
Other 520 491
- -------------------------------------------------------------------------------
Total deferred tax assets 4,938 3,857
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on investment in debt
and equity securities available-for-sale (362) (583)
Premises and equipment (403) (641)
Intangibles (514) (532)
Other (148) (179)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (1,427) (1,935)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 3,511 $ 1,922
===============================================================================
42
1. As of December 31, 2004, the Company had approximately $2 million of net
operating loss carryforwards as a result of the acquisition of Franklin
Bancorp. The utilization of the net operating loss carryforward is subject
to Section 382 of the Internal Revenue Code and limits the Company's use
to approximately $120,000 per year during the carryforward period, which
expires in 2019.
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, 2004 or 2003,
due to management's belief that all criteria for recognition have been met,
including the existence of a history of taxes paid sufficient to support the
realization of deferred tax assets.
Note 17
Contingencies
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 18
Disclosures About Financial Instruments
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial letters
of credit and standby letters of credit. The Company's maximum potential
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, commercial letters of
credit and standby letters of credit is represented by the contractual amounts
of those instruments. At December 31, 2004, no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These off-balance
sheet financial instruments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The approximate remaining
term of commercial and standby letters of credit range from less than 1 to 5
years. Since 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 at December 31, 2004 and 2003:
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Conditional commitments to extend credit $20,524 $20,941
Standby letters of credit 6,097 4,516
Commercial letters of credit 1,091 347
- --------------------------------------------------------------------------------
43
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2004 and 2003:
2004 2003
--------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------
Balance sheet assets:
Cash and cash equivalents $ 87,543 $ 87,543 $ 62,367 $ 62,367
Investment in debt and
equity securities 77,130 77,130 69,147 69,147
Loans, net 494,411 493,066 463,526 464,502
Accrued interest receivable 2,588 2,588 2,231 2,231
- ----------------------------------------------------------------------------------------
Total $661,672 $660,327 $597,271 $598,247
========================================================================================
Balance sheet liabilities:
Deposits $275,629 $275,683 $272,428 $273,235
Accounts and drafts payable 358,473 358,473 299,989 299,989
Short-term borrowings 127 127 123 123
Subordinated convertible debentures 3,700 3,675 -- --
Accrued interest payable 226 226 150 150
- ----------------------------------------------------------------------------------------
Total $638,155 $638,184 $572,690 $573,497
========================================================================================
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 Other Short-term Instruments For cash and cash equivalents, accrued
interest receivable, accounts and drafts payable, short-term borrowings and
accrued interest payable, the carrying amount is a reasonable estimate of fair
value because of the demand nature or short maturities of these instruments.
Investment in Debt and Equity Securities Fair values are based on quoted market
prices or dealer quotes.
Loans The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits The fair value of demand deposits, savings deposits and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market nor the benefit derived from the customer relationship
inherent in existing deposits.
Subordinated Convertible Debentures The fair value of convertible subordinated
debentures is estimated by discounting the projected future cash flows using
estimated current rates for similar borrowings.
Commitments to Extend Credit and Standby Letters of Credit 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.
Limitations Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets or liabilities that are not
considered financial assets or liabilities include premises and equipment and
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market (core deposit
intangible). In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve
44
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Note 19
Industry Segment Information
The services provided by the Company are classified into three reportable
segments: Information Services, Banking Services and Government Software
Services. Each of these segments provides distinct services that are marketed
through different channels. They are managed separately due to their unique
service, processing and capital requirements.
The Information Services segment provides freight, utility and telecommunication
invoice processing and payment services to large corporations. The Banking
Services segment provides banking services primarily to privately-held
businesses and churches. The Government Software Services segment provides
integrated financial, property and human resource management systems to cities,
counties, and other public entities.
The Company's accounting policies for segments are the same as those described
in Note 1 of this report. Management evaluates segment performance based on net
income after allocations for corporate expenses and income taxes. Transactions
between segments are accounted for at what management believes to be market
value. Information for prior periods have been restated to reflect changes in
the composition of the Company's segments.
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.
Summarized information about the Company's operations in each industry segment
for the periods ended December 31, 2004, 2003 and 2002, is as follows:
Government Corporate
Information Banking Software and
(In thousands) Services Services Services Eliminations Total
- ------------------------------------------------------------------------------------------------------------------
2004
Fee revenue and other income:
Income from customers $ 32,320 $ 1,727 $ 5,157 $ -- $ 39,204
Intersegment income -- 1,467 -- (1,467) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 15,652 11,436 -- -- 27,088
Intersegment interest 62 (62) -- -- --
Depreciation and amortization 2,904 314 602 60 3,880
Income taxes 2,006 2,203 (947) -- 3,262
Net income 6,225 3,656 (1,876) -- 8,005
Goodwill 4,262 171 2,927 -- 7,360
Other intangible assets, net 805 -- 1,225 353 2,383
Total assets 397,722 314,625 5,539 (1,365) 716,521
- ------------------------------------------------------------------------------------------------------------------
2003
Fee revenue and other income:
Income from customers $ 30,454 $ 1,917 $ 7,696 $ -- $ 40,067
Intersegment income -- 1,512 -- (1,512) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 15,039 11,153 -- -- 26,192
Intersegment interest 155 (155) -- -- --
Depreciation and amortization 3,428 491 590 71 4,580
Income taxes 1,153 2,232 68 -- 3,453
Net income 4,090 3,705 107 -- 7,902
Goodwill 223 -- 2,927 -- 3,150
Other intangible assets, net -- -- 1,536 404 1,940
Total assets 335,955 328,412 7,488 (25,939) 645,916
- ------------------------------------------------------------------------------------------------------------------
2002
Fee revenue and other income:
Income from customers $ 26,195 $ 1,835 N/A $ -- $ 28,030
Intersegment income -- 1,511 N/A (1,511) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 17,244 11,600 N/A -- 28,844
Intersegment interest (106) 106 N/A -- --
Depreciation and amortization 3,460 453 N/A 65 3,978
Income taxes 553 2,434 N/A -- 2,987
Net income 3,220 4,092 N/A -- 7,312
Goodwill 223 -- N/A -- 223
Other intangible assets, net -- -- N/A 379 379
Total assets 293,428 315,294 N/A (36,489) 572,233
- ------------------------------------------------------------------------------------------------------------------
45
Note 20
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only)
as of December 31, 2004 and 2003, and the related condensed statements of income
and cash flows for each of the years in the three-year period ended December 31,
2004.
Condensed Balance Sheets
December 31
------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 8,595 $ 346
Short-term investments 56,395 26,666
Investment in debt and equity securities,
available-for-sale 71,933 63,679
Loans, net 216,826 207,134
Investment in subsidiary 37,150 32,709
Premises and equipment, net 10,746 11,879
Other assets 35,031 27,756
- --------------------------------------------------------------------------------
Total assets $436,676 $370,169
================================================================================
Liabilities and Shareholders' Equity:
Accounts and drafts payable $358,473 $299,989
Subordinated convertible debentures 3,700 --
Other liabilities 4,914 5,388
- --------------------------------------------------------------------------------
Total liabilities 367,087 305,377
Total shareholders' equity 69,589 64,792
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $436,676 $370,169
================================================================================
Condensed Statements of Income
December 31
------------------------------
(In thousands) 2004 2003 2002
- --------------------------------------------------------------------------------
Income from subsidiary:
Dividends $ -- $ 870 $ 2,100
Interest 75 163 41
Management fees 1,032 870 776
- --------------------------------------------------------------------------------
Income from subsidiary 1,107 1,903 2,917
Information services revenue 30,695 28,440 24,622
Net interest income after provision 14,574 13,973 16,119
Gains on sales of investment securities 1,045 1,415 1,313
Other income 581 599 259
- --------------------------------------------------------------------------------
Total income 48,002 46,330 45,230
- --------------------------------------------------------------------------------
Expenses:
Salaries and employee benefits 28,963 28,397 26,884
Other expenses 10,808 11,820 12,474
- --------------------------------------------------------------------------------
Total expenses 39,771 40,217 39,358
- --------------------------------------------------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 8,231 6,113 5,872
Income tax expense 2,006 1,153 552
- --------------------------------------------------------------------------------
Income before undistributed income
of subsidiary 6,225 4,960 5,320
Equity in undistributed income of subsidiary 1,780 2,942 1,992
- --------------------------------------------------------------------------------
Net income $ 8,005 $ 7,902 $ 7,312
================================================================================
46
Condensed Statements of Cash Flows
December 31
----------------------------------
(In thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,005 $ 7,902 $ 7,312
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income
of subsidiary (1,780) (2,942) (1,992)
Net change in other assets (4,077) (5,948) 3,249
Net change in other liabilities (651) 1,421 (322)
Amortization of stock bonus awards 96 57 22
Other, net 2,440 3,223 709
- ---------------------------------------------------------------------------------------
Net cash provided by
operating activities 4,033 3,713 8,978
- ---------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in securities (8,254) (8,825) 22,797
Net increase in loans (9,692) (1,894) (26,893)
Payment for business acquisitions, net of
cash acquired (2,092) -- --
Purchase of bank owned life insurance -- -- (10,000)
Purchases of premises and equipment, net (1,197) (605) (1,990)
- ---------------------------------------------------------------------------------------
Net cash used in investing activities (21,235) (11,324) (16,086)
- ---------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in accounts
and drafts payable 58,484 72,098 (68,173)
Advances from subsidiary -- (35,861) 35,861
Cash dividends paid (3,025) (2,814) (2,628)
Purchases of common shares for treasury -- (1,764) (383)
Other financing activities (279) 365 368
- ---------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 55,180 32,024 (34,955)
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 37,978 24,413 (42,063)
Cash and cash equivalents at beginning of year 27,012 2,599 44,662
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 64,990 $ 27,012 $ 2,599
=======================================================================================
47
Note 21
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter YTD
- ----------------------------------------------------------------------------------------------------
2004
Fee revenue and other income $ 9,767 $ 9,362 $ 9,606 $10,469 $39,204
Interest income 7,140 7,212 7,875 8,506 30,733
Interest expense 567 738 828 962 3,095
- ----------------------------------------------------------------------------------------------------
Net interest income 6,573 6,474 7,047 7,544 27,638
Provision for loan losses 200 150 150 50 550
Operating expense 13,482 13,313 13,796 14,434 55,025
Income tax expense 811 673 734 1,044 3,262
Net income $ 1,847 $ 1,700 $ 1,973 $ 2,485 $ 8,005
Net income per share:
Basic earnings per share $ .50 $ .47 $ .53 $ .68 $ 2.18
Diluted earnings per share .50 .45 .53 .67 2.15
====================================================================================================
2003
Fee revenue and other income $ 9,321 $10,686 $10,300 $ 9,760 $40,067
Interest income 7,139 6,929 6,963 7,212 28,243
Interest expense 460 444 449 508 1,861
- ----------------------------------------------------------------------------------------------------
Net interest income 6,679 6,485 6,514 6,704 26,382
Provision for loan losses 90 -- -- 100 190
Operating expense 13,796 13,895 13,857 13,356 54,904
Income tax expense 596 1,037 935 885 3,453
Net income $ 1,518 $ 2,239 $ 2,022 $ 2,123 $ 7,902
Net income per share:
Basic earnings per share $ .41 $ .61 $ .56 $ .57 $ 2.15
Diluted earnings per share .41 .60 .55 .57 2.13
====================================================================================================
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Cass Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cass
Information Systems, Inc. and subsidiaries (the Company) as of December 31, 2004
and 2003, and the related consolidated statements of income, cash flows, and
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cass
Information Systems, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Cass
Information Systems, Inc.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 11, 2005 expressed an unqualified opinion
on management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2005
49
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. Based
on this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of the period covered by this annual report.
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.
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
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 issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control - Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
follows.
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Cass Information Systems, Inc.:
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Cass Information
Systems, Inc. and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. 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. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Cass Information Systems, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also, in our opinion, Cass
Information Systems, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework 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), the consolidated balance sheets of
Cass Information Systems, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of income, cash flows, and shareholders' equity and
comprehensive income for each of the years in the three-year period ended
December 31, 2004, and our report dated March 11, 2005 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2005
51
ITEM 9B. OTHER INFORMATION
NONE
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Registrant is
incorporated herein by reference from the Company's definitive Proxy Statement
for its 2005 Annual Meeting of Shareholders ("2005 Proxy Statement"), a copy of
which will be filed with the Securities and Exchange Commission (SEC) no later
than 120 days after the close of the fiscal year. The following sections of the
2005 Proxy Statement are incorporated herein by reference: "Election of
Directors" and "Executive Officers" (please note that "Section 16(a) Beneficial
Ownership Compliance" is within the "Executive Officers" section).
The Company has adopted a Code of Conduct and Business Ethics policy, applicable
to all Company directors, executive officers and employees. Pursuant to Nasdaq
listing requirements, the policy is publicly available and can be viewed on the
Company's website at www.cassinfo.com.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the section "Executive Officers" of the Company's 2005 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
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the section "Executive
Officers" of the Company's 2005 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the section "Executive Officers" of the Company's 2005
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 fees billed by the Company's principal accountant for
services is incorporated herein by reference from the section "Independent
Auditors" of the Company's 2005 Proxy Statement, a copy of which will be filed
with the SEC no later than 120 days after the close of the fiscal year.
52
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
Submitted as a separate section of this report.
(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 Bylaws of Registrant, incorporated by reference to
Exhibit 4.2 to Form S-8 Registration Statement No.
333-44499, filed with the SEC on January 20, 1998
4 5.33% subordinated convertible debentures
10.1 1995 Restricted Stock Bonus Plan, as amended to January
19, 1999, including form of Restriction Agreement,
incorporated by reference to Exhibit 4.3 to
Post-Effective Amendment No. 2 to Form S-8 Registration
Statement No. 33-91456, filed with the SEC on February
16, 1999
10.2 1995 Performance-Based Stock Option Plan, as amended to
January 19, 1999, including forms of Option Agreements,
incorporated by reference to Exhibit 4.3 to
Post-Effective Amendment No. 2 to Form S-8 Registration
Statement No. 33-91568, filed with the SEC on February
16, 1999
21 Subsidiaries of registrant
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
Date: March 14, 2005 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
Date: March 14, 2005 By /s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on the dates indicated by the following persons on
behalf of the Company and in their capacity as a member of the Board of
Directors of the Company.
Date: March 14, 2005 By /s/ Robert J. Bodine
----------------------------------------
Robert J. Bodine
Date: March 14, 2005 By /s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Date: March 14, 2005 By /s/ Bryan S. Chapell
----------------------------------------
Bryan S. Chapell
Date: March 14, 2005 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Date: March 14, 2005 By /s/ Thomas J. Fucoloro
----------------------------------------
Thomas J. Fucoloro
Date: March 14, 2005 By /s/ Wayne J. Grace
----------------------------------------
Wayne J. Grace
Date: March 14, 2005 By /s/ Harry J. Krieg
----------------------------------------
Harry J. Krieg
Date: March 14, 2005 By /s/ Howard A. Kuehner
----------------------------------------
Howard A. Kuehner
Date: March 14, 2005 By /s/ Jake Nania
----------------------------------------
Jake Nania
Date: March 14, 2005 By /s/ Irving A. Shepard
----------------------------------------
Irving A. Shepard
Date: March 14, 2005 By /s/ A. J. Signorelli
----------------------------------------
A. J. Signorelli
54
Exhibit 21
SUBSIDIARIES OF CASS INFORMATION SYSTEMS, INC.
Name & Address State of Incorporation
- -------------- ----------------------
Cass Commercial Bank Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
Cass Information Systems, Inc. Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
Government e-Management Solutions, Inc. Missouri
121 Hunter Avenue
Suite 100
St. Louis, MO 63124
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Cass Information Systems, Inc.:
We consent to the incorporation by reference in the registration statement (Nos.
333-44499, 333-91456, and 333-91568) on Form S-8 of Cass Information Systems,
Inc. of our reports dated March 11, 2005, with respect to the consolidated
balance sheets of Cass Information Systems, Inc. as of December 31, 2004 and
2003, and the related consolidated statements of income, cash flows, and
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 2004, management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004 and the effectiveness of internal control over financial reporting as of
December 31, 2004, which reports appear in the December 31, 2004 annual report
on Form 10-K of Cass Information Systems, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2005
Exhibit 31.1
CERTIFICATION
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13(a)-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Lawrence A. Collett
- ------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
March 14, 2005
Exhibit 31.2
CERTIFICATION
I, Eric H. Brunngraber, Principal Financial and Accounting Officer of Cass
Information Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Eric H. Brunngraber
- --------------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Principal Financial and Accounting Officer)
March 14, 2005
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cass Information Systems, Inc. ("the
Company") on Form 10-K for the period ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Lawrence A. Collett, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Lawrence A. Collett
- ------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
March 14, 2005
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cass Information Systems, Inc. ("the
Company") on Form 10-K for the period ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric H.
Brunngraber, Principal Financial and Accounting Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Eric H. Brunngraber
- ------------------------------------------
Eric H. Brunngraber
Principal Financial and Accounting Officer
March 14, 2005
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.