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, 2003
|_| 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 |_| No |X|
As of March 5, 2004, 3,679,452 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 $87,125,000 based upon
the Nasdaq Stock Market closing price of $31.84 for March 5, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 19, 2004 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
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND 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 DISCLOSURES ABOUT MARKET RISK ....... 21
PART II.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .............................. 47
Item 9A. CONTROLS AND PROCEDURES .......................................... 47
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 47
Item 11. EXECUTIVE COMPENSATION ........................................... 47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ....................... 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 47
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ........................... 47
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .. 48
SIGNATURES ....................................................... 49
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, telecommunication and refuse collection. In
addition, the Company, through its wholly-owned bank subsidiary, Cass Commercial
Bank ("the Bank"), provides banking services in the commercial, industrial and
residential areas it serves. Its primary focus is to support the Company's
payment operations and 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 and Boston,
Massachusetts. The Bank's headquarters are also located at the Bridgeton
location and operates four other branches in the St. Louis metropolitan area.
GEMS' offices are located in St. Louis County, 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 United States corporations.
Cass possesses four core competencies that envelop 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 used to integrate 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.
1
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 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. Due to the fact that this is a new
market, the competitive environment for utility bill processing and payment is
difficult to assess and is changing rapidly. Cass is unique among these
competitors in that it is not exclusively affiliated with any one energy service
provider (ESP). 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.
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 and 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 other banks located
throughout the St. Louis metropolitan area and other areas in which the Bank
competes. Savings banks, credit unions, other financial institutions and
non-bank providers of financial services also provide competition. The principal
competition however, is represented by large bank holding companies that are
able to offer a wide range of banking and related services through extensive
branch networks.
The 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 its business. It has 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 633 full-time and 119 part-time employees
as of December 31, 2003. Of these employees, the bank subsidiary had 64
full-time and 7 part-time employees and the bank's software subsidiary had 63
full-time and 3 part-time employees.
2
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 2 of this
report.
The FRB also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law or regulations or for unsafe or
unsound practices. Both the FRB and Missouri Division of Finance also have
restrictions on the amount of dividends that banks and bank holding companies
may remit.
As a bank holding company, the Company must obtain prior approval from the FRB
before acquiring ownership or control of more than 5% of the voting shares of
another bank or bank holding company or acquiring all or substantially all of
the assets of such a company. In many cases, prior approval is also required for
the Company to engage in similar acquisitions involving a non-bank company or to
engage in new non-bank activities. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company.
Website Availability of SEC Reports
Cass will, as soon as practicable after they are electronically filed with the
Securities and Exchange Commission (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, 2003 are set forth in Item 8,
Note 15 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. In March 2001, the Company
moved into a newly-owned production facility of approximately 45,500 square feet
located at 2675 Corporate Exchange Drive, Columbus, Ohio. The Company operates
an additional production facility in Lowell, Massachusetts where approximately
25,800 square feet of office space is leased through October 31, 2005.
3
Cass Commercial Bank's headquarters are also located at 13001 Hollenberg Drive,
Bridgeton, Missouri, 63044. The Bank leases approximately 20,500 square feet of
the 61,500 square foot building. In addition, the Bank owns a banking facility
near downtown St. Louis that consists of approximately 1,600 square feet with
adjoining drive-up facilities. The Bank has additional leased facilities in
Maryland Heights, Missouri (2,500 square feet); Fenton, Missouri (1,250 square
feet) and Chesterfield, Missouri (2,850 square feet).
Government e-Management Solutions' 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 business or financial condition of the Company or
its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol
"CASS". As of March 5, 2004 there were 224 holders of record of the Company's
common stock. High and low bid prices, as reported by Nasdaq and restated for
stock dividends, for each quarter of 2003 and 2002 were as follows:
2003 2002
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $25.255 $22.183 $22.727 $20.009
2nd Quarter 30.455 23.364 22.615 20.779
3rd Quarter 30.773 25.782 23.160 19.524
4th Quarter 31.745 26.555 23.409 19.870
Cash dividends paid per share, restated for stock dividends, by the Company
during the two most recent fiscal years were as follows:
2003 2002
---- ----
March 15 $.191 $.173
June 15 .191 .173
September 15 .191 .173
December 15 .191 .191
Refer to Item 8 Notes 2 and 10 to the consolidated financial statements for
additional shareholder information.
4
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for each of the five
years ended December 31, 2003. 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) 2003 2002 2001 2000 1999
====================================================================================================================================
Fee revenue and other income $40,067 $28,030 $23,243 $21,114 $21,444
Interest income on loans (1) 25,601 26,197 29,069 27,716 20,371
Interest income on debt and equity securities 2,033 4,733 4,323 5,264 4,722
Other interest income 609 687 2,790 4,085 5,782
Total interest income 28,243 31,617 36,182 37,065 30,875
Interest expense on deposits 1,847 2,240 3,863 5,165 4,357
Interest expense on short-term borrowings 14 33 9 20 9
Total interest expense 1,861 2,273 3,872 5,185 4,366
Net interest income 26,382 29,344 32,310 31,880 26,509
Provision for loan losses 190 500 60 750 --
Net interest income after provision 26,192 28,844 32,250 31,130 26,509
Operating expense 54,904 46,575 44,729 41,236 38,344
Income before income tax expense 11,355 10,299 10,764 11,008 9,609
Income tax expense 3,453 2,987 3,739 3,861 3,411
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $7,902 $7,312 $7,025 $7,147 $6,198
====================================================================================================================================
Basic earnings per share (2) $2.15 $1.98 $1.88 $1.78 $1.42
Diluted earnings per share (2) 2.13 1.96 1.86 1.75 1.39
Dividends per share (2) .764 .710 .693 .693 .658
Dividend payout ratio 35.61% 35.94% 36.71% 38.95% 46.61%
====================================================================================================================================
Average total assets $620,801 $598,566 $572,724 $515,308 $491,450
Average net loans 438,072 399,018 371,367 323,515 254,353
Average debt and equity securities 57,729 97,668 72,111 84,949 78,903
Average total deposits 249,951 240,640 214,954 186,684 190,661
Average total shareholders' equity 61,346 57,300 54,929 54,308 57,118
====================================================================================================================================
Return on average total assets 1.27% 1.22% 1.23% 1.39% 1.26%
Return on average total shareholders' equity 12.88 12.76 12.79 13.16 10.85
Average equity to assets ratio 9.88 9.57 9.59 10.54 11.62
Equity to assets ratio at year-end 10.13 10.67 9.22 9.33 11.29
Net interest margin 4.85 5.60 6.27 6.69 5.87
Allowance for loan losses to loans at year-end 1.17 1.22 1.29 1.32 1.54
Nonperforming assets to loans and foreclosed
Assets 1.12 3.50 1.60 .30 .15
Net loan (recoveries) charge-offs to average
loans outstanding (.01) .03 .01 .04 .06
====================================================================================================================================
1. Interest income on loans includes net loan fees.
2. Per share information has been restated to reflect the 10% stock dividend
declared in February 2004.
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, and Boston,
Massachusetts. 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. Cass extracts, stores and presents
information from freight and utility invoices, assisting our customers'
transportation and energy managers in making decisions that will enable them to
improve their operating performance. The Company receives data from multiple
sources, electronic and otherwise, and processes the data to accomplish the
specific operating requirements of its customers. It then provides the data in a
5
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. In addition to supporting the Company's payment operations,
it 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 influence revenue and profitability however, 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 and
utility payment. 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 and the
deregulation of energy costs. 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 our lead
in applied technology, which, when combined with the security and processing
controls of the Company's Bank, makes Cass unique in the industry. This trend
has been positive over the past years and management anticipates that this
should continue in 2004. The low level of interest rates has had a significant
negative impact on net income over the past few years. While management doesn't
anticipate that these rates will rise in the near term, the Company is well
positioned to take advantage of rising rates when they occur. Management is
pleased with the growth in software revenue generated by GEMS and is making
additional investments to continue this trend. 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 accounting principles generally accepted in the United
States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, management makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. These estimates have been generally accurate in the 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.
6
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 2003 compared to 2002 include the following significant items:
Payment and processing fees 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
loans, typically our highest-yielding asset for any given maturity, grew
$34,343,000 or 8% to $469,032,000 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.
The results of 2002 compared to 2001 include the following significant items:
Payment and processing fees increased $3,132,000 or 15% to $24,622,000 as
the number of transactions processed increased 2,151,000 or 9% to
24,984,000. This increase was driven by the expansion of the Company's
customer base and the services provided and offset the negative impact on
processing volumes and fees caused by a decrease in national freight
activity.
Net interest income after provision for loan losses decreased $3,406,000
or 11% to $28,844,000 due to the dramatic decline in the general level of
interest rates. This decline occurred despite the fact that total loans,
typically the Company's highest-yielding asset for any given maturity,
grew $53,237,000 or 14% to $434,689,000 and average earning assets grew
$22,737,000 or 4% to $544,011,000. The growth in average assets was
derived from growth in Bank deposits, both interest and noninterest
bearing. Gains from the sale of securities were $1,477,000 in 2002, which
mitigated some of the impact of the decline in interest rates. No gains
were realized in 2001.
7
Bank service fees increased $137,000 or 9% to $1,659,000 due to 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. Operating expenses increased $1,846,000 or 4% to
$46,575,000 due mainly to increased personnel expenses, equipment expenses
and other expenses related to the increased volume and service offerings.
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 freight and utility processing and
payment services, it is compensated by service fees which are typically
calculated on a per-item basis and by the accounts and drafts payable 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, 2003, 2002 and 2001 are as follows:
December 31,
--------------------------------------
(In thousands) 2003 2002 2001
================================================================================
Transportation Information Services:
Invoice Transaction Volume 23,359 21,549 20,095
Invoice Dollar Volume $8,673,993 $7,715,588 $7,294,586
Utility Information Services:
Transaction Volume 4,618 3,435 2,738
Transaction Dollar Volume $3,340,375 $2,634,269 $2,481,086
- --------------------------------------------------------------------------------
Fee revenue and other income in 2003 compared to 2002 include the following
significant pre-tax components:
Freight and utility payment and processing fee revenue increased
$3,818,000 or 16% to $28,440,000. Of the total payment and processing
revenue, fees related to utility payment and processing increased
$2,484,000 or 37% to $9,134,000 and fees relating to freight payment and
processing services increased $1,334,000 or 7% to $19,306,000. 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 value of
noninterest bearing deposits, used to compensate the Bank for services
provided, decrease as the general level of interest rates 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 transacted 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.
Fee revenue and other income in 2002 compared to 2001 include the following
significant pre-tax components:
Freight and utility payment and processing fee revenue increased
$3,132,000 or 15% to $24,622,000. Of the total payment and processing
revenue, fees related to utility payment and processing increased
$2,188,000 or 49% to $6,650,000 and fees relating to freight payment and
processing services increased $944,000 or 6% to $17,972,000. These
increases both relate to new customers and new product offerings. Utility
processing volume and revenue, which represents a newer market, had higher
8
percentage increases. Freight rating services revenue, a component of
freight processing revenue, decreased $738,000 or 55% to $610,000. A
change in the strategic direction of the Company from selling rating
software to a new Internet-based delivery system of carrier rates occurred
during 2000 and 2001. After December 31, 2001 the Company ceased support
of the old product and therefore no longer recognized maintenance revenue.
This new system offers the shipping community an expanded level of
features, capabilities and ease of access.
Bank service fees increased $137,000 or 9% to $1,659,000. This increase
was due primarily to the fact that service fees increase as the value of
noninterest bearing deposits, used to compensate the Bank for services
provided, decreases as the general level of interest rates decreases.
During 2002 the Company recorded net gains of $1,477,000 on the sales of
securities with a fair value of $63,945,000. There were no gains realized
in 2001. The sales of securities were transacted to adjust the portfolio
to reflect the changes in the interest rate environment, growth in the
loan portfolio and to offset the loss of interest income due to the
dramatic decline in the general level of interest rates.
Other miscellaneous income increased $41,000 or 18% to $272,000. This
increase was primarily due to income recognized from the increase in the
cash surrender value of bank owned life insurance purchased by the Company
in 2002.
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.
Net interest income in 2003 compared to 2002:
On a tax-equivalent basis, net interest income for 2003 totaled $27,310,000, a
decrease of $3,156,000 or 10% from 2002. The net interest margin for 2003 was
4.85% compared to 5.60% in 2002. The following factors account for this decrease
in net interest income and net interest margin:
The dramatic decrease in the general level of interest rates significantly
impacted the Company's net interest income and margin. The prime rate
decreased from 9.50% at the beginning of 2001 to 4.00% at the end of 2003
and the 5-year Treasury note rate decreased from 4.80% to 3.22% during
this same period. The average yield on earning assets decreased to 5.18%
in 2003 from 6.02% in 2002. 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 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 affect 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. This increase provides
additional liquidity and positions the Company to take advantage of higher
interest rates should they occur.
9
Net interest income in 2002 compared to 2001:
On a tax-equivalent basis, net interest income for 2002 totaled $30,466,000, a
decrease of $2,194,000 or 7% from 2001. The net interest margin for 2002 was
5.60% compared to 6.27% in 2001. The following factors account for this decrease
in net interest income and net interest margin:
The dramatic decrease in the general level of interest rates significantly
impacted the Company's net interest income and margin. The prime rate
decreased from 9.50% at the beginning of 2001 to 4.25% at the end of 2002
and the 5-year Treasury note rate decreased from 4.80% to 2.89% during
this same period. The average yield on earning assets decreased to 6.02%
in 2002 from 7.01% in 2001. The Company is negatively affected by
decreases in the level of interest rates due to the fact that its rate
sensitive assets significantly exceed its rate sensitive liabilities.
Conversely, the Company is positively affected by increases in the level
of interest rates. This is primarily due to the noninterest-bearing
liabilities generated by the Company in the form of accounts and drafts
payable. 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 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 investments to higher
yielding assets. Total average earning assets increased $22,737,000 or 4%
to $544,011,000. This increase was funded by an increase in deposits
generated by the Bank. The Bank saw increases in both interest bearing
deposits, as a result of increased marketing efforts, and noninterest
bearing deposits, mainly from bank customers that maintained higher
balances to compensate the Bank for services and to avoid increased
service fees in a lower rate environment.
Total average loans increased $27,818,000 or 7% to $404,093,000. This
increase was attributable to new business relationships and funded by the
increase in deposit liabilities and a reallocation of assets. This
increase in loans had a positive effect on interest income and the net
interest margin due to the fact that loans are one of the Company's
highest yielding earning assets for any given maturity.
Total average investment in debt and equity securities increased
$25,557,000 or 35% to $97,668,000. In addition to this increased
investment, the Company shifted its purchase of securities from taxable to
tax-exempt due to the higher tax-equivalent yield such investments
produce. This increase and shift also allowed the Company to partially
offset the effect of lower interest rates.
Total average federal funds sold and other short-term investments
decreased $30,638,000 or 42% to $42,250,000. These are the lowest yielding
earning assets so decreases in these funds have a positive effect on net
interest margin. In another attempt to offset the effect of declining
interest rates, the Company shifted excess short-term funds to higher
yielding investments.
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.
10
2003 2002 2001
-------------------------- ------------------------- --------------------------
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 $437,807 $25,319 5.78% $398,060 $25,897 6.51% $364,792 $28,435 7.79%
Tax-exempt (4) 5,645 427 7.56 6,033 455 7.54 11,483 961 8.37
Debt and equity securities (5):
Taxable 22,183 499 2.25 55,591 2,839 5.11 71,038 4,276 6.02
Tax-exempt (4) 35,546 2,317 6.52 42,077 2,861 6.80 1,073 70 6.52
Federal funds sold and other
short-term investments 61,890 609 .98 42,250 687 1.63 72,888 2,790 3.83
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 563,071 29,171 5.18 544,011 32,739 6.02 521,274 36,532 7.01
Nonearning assets:
Cash and due from banks 19,136 24,324 23,448
Premises and equipment, net 14,918 16,281 16,542
Other assets 29,056 19,025 16,368
Allowance for loan losses (5,380) (5,075) (4,908)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $620,801 $598,566 $572,724
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders'
Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 52,630 $ 371 .70% $ 56,705 $ 632 1.11% $ 56,124 $ 1,544 2.75%
Savings deposits 36,192 281 .78 41,837 528 1.26 53,757 1,761 3.28
Time deposits of
$100 or more 44,793 844 1.88 36,158 902 2.49 8,245 363 4.40
Other time deposits 15,545 351 2.26 5,467 178 3.26 3,986 195 4.89
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 149,160 1,847 1.24 140,167 2,240 1.60 122,112 3,863 3.16
Short-term borrowings 943 14 1.48 1,485 33 2.22 362 9 2.49
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 150,103 1,861 1.24 141,652 2,273 1.60 122,474 3,872 3.16
Noninterest-bearing liabilities:
Demand deposits 100,791 100,473 92,842
Accounts and drafts payable 300,577 293,442 294,608
Other liabilities 7,984 5,699 7,871
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 559,455 541,266 517,795
Shareholders' equity 61,346 57,300 54,929
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $620,801 $598,566 $572,724
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $27,310 $30,466 $32,660
Net interest margin 4.85% 5.60% 6.27%
Interest spread 3.94% 4.42% 3.85%
- -----------------------------------------------------------------------------------------------------------------------------------
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 $90,000, $441,000 and
$301,000 for 2003, 2002 and 2001, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $928,000,
$1,122,000 and $350,000 for 2003, 2002 and 2001, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
years due to changes in volume and interest rates.
2003 Over 2002 2002 Over 2001
---------------------------------- ----------------------------------
(Dollars in thousands) Volume (1) Rate (1) Total Volume (1) Rate (1) Total
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (2),(3):
Taxable $ 2,450 $(3,028) $ (578) $ 2,441 $(4,979) $(2,538)
Tax-exempt (4) (29) 1 (28) (419) (87) (506)
Debt and equity securities:
Taxable (1,212) (1,128) (2,340) (847) (590) (1,437)
Tax-exempt (4) (430) (114) (544) 2,788 3 2,791
Federal funds sold and other
short-term investments 251 (329) (78) (888) (1,215) (2,103)
- ----------------------------------------------------------------------------------------------------------------
Total interest income 1,030 (4,598) (3,568) 3,075 (6,868) (3,793)
- ----------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (43) (218) (261) 16 (928) (912)
Savings deposits (64) (183) (247) (327) (906) (1,233)
Time deposits of $100 or more 189 (247) (58) 757 (218) 539
Other time deposits 242 (69) 173 60 (77) (17)
Short-term borrowings (10) (9) (19) 25 (1) 24
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 314 (726) (412) 531 (2,130) (1,599)
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 716 $(3,872) $(3,156) $ 2,544 $(4,738) $(2,194)
================================================================================================================
11
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 $469,032,000 and represented 73% of the
Company's total assets as of December 31, 2003 and generated $25,601,000 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, 2003.
Loans by Type
(At December 31)
(Dollars in thousands) 2003 2002 2001 2000 1999
====================================================================================================================================
Commercial and industrial $103,638 $101,116 $115,316 $136,482 $106,444
Real estate:
Mortgage 330,150 282,125 215,504 182,538 129,482
Construction 19,298 39,175 32,715 29,464 29,633
Industrial revenue bonds 5,373 5,773 6,155 15,804 7,265
Installment 1,911 1,918 1,787 2,533 1,541
Other 8,662 4,582 9,975 5,399 3,978
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $469,032 $434,689 $381,452 $372,220 $278,343
====================================================================================================================================
Loans by Maturity
(At December 31, 2003)
Over One Year Over
Through Five Years Five Years
---------------------- ---------------------
One Year Fixed Floating Fixed Floating
(Dollars in thousands) or less Rate Rate(1) Rate Rate(1) Total
===================================================================================================================================
Commercial and industrial $ 73,926 $ 18,505 $10,605 $ -- $602 $103,638
Real estate:
Mortgage 41,542 248,575 38,595 1,123 315 330,150
Construction 17,887 554 857 -- -- 19,298
Industrial revenue bonds 1,146 1,247 -- 2,980 -- 5,373
Installment 1,837 74 -- -- -- 1,911
Other 8,610 -- -- 52 -- 8,662
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $144,948 $268,955 $50,057 $4,155 $917 $469,032
===================================================================================================================================
(1)Loans have been classified as having "floating" interest rates if the rate
specified in the loan varies with the prime commercial rate of interest.
The Company has no concentrations of loans exceeding 10% of total loans, which
are not otherwise disclosed in the loan portfolio composition table and
discussed in Item 8, Note 4 of this report. As can be seen in the loan
composition table above and discussed in Item 8, Note 4, the Company's primary
market niche for banking services is privately-held commercial companies and
churches and church-related ministries.
Loans to the commercial entities are generally secured by the business assets of
the company, including accounts receivable, inventory, machinery and equipment,
and the 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.
12
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 4.
Loan portfolio changes from December 31, 2001 to December 31, 2002:
Total loans increased $53,237,000 or 14% to $434,689,000. This increase
was due mainly to the expansion of church and church-related loans in the
St. Louis metropolitan area and selected areas across the United States.
At year-end, church and church-related real estate and construction
credits totaled $141,532,000, which represented a 37% increase over 2001.
Additional details regarding the types and maturities of the loan
portfolio are contained in the tables above and in Item 8, Note 4.
Provision and Allowance for Loan Losses
The Company recorded a provision for loan losses of $190,000 in 2003, $500,000
in 2002 and $60,000 in 2001. The provisions were due to the Company's quarterly
analysis of the allowance for loan losses in relation to probable losses in the
loan portfolio. The larger provisions made in 2002 partially resulted from 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 recoveries of $23,000 for 2003 and net loan
charge-offs of $113,000 in 2002 and $51,000 in 2001. The allowance for loan
losses was $5,506,000 at December 31, 2003, compared to $5,293,000 at December
31, 2002 and $4,906,000 at December 31, 2001. The year-end 2003 allowance
represented 1.17% of outstanding loans, compared to 1.22% at year-end 2002 and
1.29% at year-end 2001. From December 31, 2002 to December 31, 2003 the level of
nonperforming loans decreased $4,801,000 from $9,194,000 to $4,393,000, which
represents .94% of outstanding loans. Nonperforming loans are more fully
explained in the section entitled "Nonperforming Assets" in Item 7 of this
report.
The allowance for loan losses has been established and is maintained to absorb
losses inherent in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial,
commercial real estate, and construction loans 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.
13
Summary of Loan Loss Experience
December 31,
------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
======================================================================================================================
Allowance at beginning of year $ 5,293 $ 4,906 $ 4,897 $ 4,282 $ 4,428
- ----------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial and industrial loans and
industrial revenue bonds (IRB's) -- 152 110 183 255
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- -- 1
Other 2 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total loans charged-off 2 152 110 183 256
- ----------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial, industrial and IRB's 25 39 59 48 109
Real estate:
Mortgage -- -- -- -- --
Construction -- -- -- -- --
Installment -- -- -- -- 1
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 25 39 59 48 110
======================================================================================================================
Net loans (recovered) charged-off (23) 113 51 135 146
Provision charged to expense 190 500 60 750 --
- ----------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 5,506 $ 5,293 $ 4,906 $ 4,897 $ 4,282
======================================================================================================================
Loans outstanding:
Average $ 443,452 $ 404,093 $ 376,275 $ 327,962 $ 258,742
December 31 469,032 434,689 381,452 372,220 278,343
Ratio of allowance for loan losses to
loans outstanding:
Average 1.24% 1.31% 1.30% 1.49% 1.65%
December 31 1.17% 1.22% 1.29% 1.32% 1.54%
Ratio of net (recoveries) charge-offs to
average loans outstanding (.01)% .03% .01% .04% .06%
======================================================================================================================
Allocation of allowance for loan losses(1):
Commercial, industrial and IRB's $ 2,575 $ 2,167 $ 2,129 $ 3,159 $ 3,844
Real estate:
Mortgage 2,761 2,780 2,442 416 19
Construction 152 302 303 1,317 419
Installment 10 10 10 5 --
Other loans 8 34 22 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total $ 5,506 $ 5,293 $ 4,906 $ 4,897 $ 4,282
======================================================================================================================
Percent of categories to total loans:
Commercial and industrial and IRB's 23.2% 24.6% 31.8% 40.9% 40.9%
Real estate:
Mortgage 70.4 64.9 56.5 49.0 46.5
Construction 4.1 9.0 8.6 7.9 10.6
Installment .4 .4 .5 .7 .6
Other 1.9 1.1 2.6 1.5 1.4
- ----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======================================================================================================================
(1) Although specific allocations exist the entire allowance is available to
absorb losses in any particular loan category.
Nonperforming Assets
It is the policy of the Company to continually monitor its loan portfolio and to
discontinue the accrual of interest on any loan on which payment of principal or
interest in a timely manner, in the normal course of business, is doubtful.
Subsequent payments received on such loans are applied to principal if there is
any doubt as to the collectibility of such principal; otherwise, these receipts
14
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 $272,000 for the year ended December 31, 2003. Of this amount,
approximately $164,000 was actually recorded as interest income on such loans.
The total renegotiated loans of $2,721,000 at December 31, 2003 relates to two
borrowers, both of which are current under the new terms of the loans. The
balance of nonaccrual real-estate mortgage loans of $1,207,000 consists of one
loan for $752,000 that is collateralized by real estate and has a SBA guarantee.
There has been delinquency in loan payments due to slower than expected lease-up
of real estate property. The remaining balance consists of two other loans
totaling $455,000 relating to property that is for sale. These loans are
collateralized by the property and a specific reserve has been established for
the potential shortfall. Nonaccrual commerical loans consist primarily of one
loan for $276,000 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.
The total foreclosed assets of $859,000 at December 31, 2003 consist of real
estate property that was foreclosed on August 8, 2001. This property is being
carried as other real estate owned at what management believes to be fair value
less cost to sell the property.
At December 31, 2003, approximately $3,234,000 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, but circumstances have raised doubts as to the
ability of the borrowers to comply with the current loan repayment terms.
The Company does not have any foreign loans. The Company's loan portfolio does
not include a significant amount of single family real estate mortgage or
installment credits, as the Company does not market its services to retail
customers.
The Company does not have any other interest-earning assets which would have
been included in nonaccrual, past due or restructured loans if such assets were
loans.
Summary of Nonperforming Assets
December 31,
---------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Commercial, industrial and IRB's:
Nonaccrual $ 318 $ 51 $ 157 $ 84 $ 170
Contractually past due 90 days
or more and still accruing -- -- 18 -- 167
Renegotiated loans 2,240 -- -- -- 70
Real estate-construction on nonaccrual -- -- 265 1,043 --
Real estate-mortgage:
Nonaccrual 1,207 -- 32 -- --
Contractually past due 90 days
or more and still accruing 147 3,388 -- -- --
Renegotiated loans 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 4,393 9,194 472 1,131 407
- -----------------------------------------------------------------------------------------------
Total foreclosed assets 859 6,241 5,710 -- --
- -----------------------------------------------------------------------------------------------
Total nonperforming assets $ 5,252 $15,435 $ 6,182 $ 1,131 $ 407
===============================================================================================
Operating Expenses
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.
15
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 $2,132,000 or 23% to $11,492,000. The
consolidation of GEMS contributed $2,524,000 to other operating expense.
Excluding GEMS, other operating expenses decreased $392,000 or 4%. More
details on the components of other operating expenses are contained in
Item 8, Note 11 of this report.
Operating expenses in 2002 compared to 2001 include the following significant
pre-tax components:
Salaries and employee benefits expense increased $936,000 or 3% to
$31,405,000. This increase primarily relates to increased staff in both
the transportation and utility processing divisions to accommodate the
increase in production. The Company also experienced an increase in
pension and health insurance expense.
Occupancy expense decreased $158,000 or 10% to $1,500,000 primarily due to
a decrease in rent expense after moving the Company's Columbus operations
from leased space to a newly-acquired building, closing of the Chicago
office, which was the facility used to support the rating software
business that was discontinued in 2002 and closing one of the two bank
subsidiary branches located in downtown St. Louis. Equipment expense
increased $479,000 or 13% to $4,310,000 and other operating expense
increased $589,000 or 7% to $9,360,000. These increases relate mainly to
the expansion of utility payment processing capabilities, increased
investment in freight payment processing and Internet capabilities and
other normal operating expense fluctuations. More details on the
components of other operating expenses are contained in Item 8, Note 11 of
this report.
Income Tax Expense
Income tax expense in 2003 totaled $3,453,000 compared to $2,987,000 in 2002 and
$3,739,000 in 2001. When measured as a percent of income before income taxes,
the Company's effective tax rate was 30% in 2003, 29% in 2002 and 35% in 2001.
The primary reason for the decline in the effective rate in 2002 was the
Company's investment in tax-exempt municipal bonds and bank owned life
insurance.
Investment Portfolio
Investment portfolio changes from December 31, 2002 to December 31, 2003:
U.S. Government Treasury securities increased from $0 to $17,103,000. This
increase occurred due to a decision to decrease holdings in U.S.
Government corporations and agencies given changes in the relative yields
of these securities.
U.S. Government corporation and agency securities decreased $22,557,000 or
83% to $4,690,000. This decrease was due to a decision to reinvest in U.S.
Government Treasury securities given the small differential in yields
between these types of securities in 2003.
State and political subdivision securities increased $5,854,000 or 14% to
$46,777,000. This was the result of a decision to invest in longer-term,
higher-yielding investments.
Investment portfolio changes from December 31, 2001 to December 31, 2002:
The balance of $12,284,000 invested in U.S. Government Treasury securities
at December 31, 2001 matured during 2002 and these funds were invested in
higher-yielding securities and used to fund loan growth.
U.S. Government corporation and agency securities decreased $50,066,000 or
65% to $27,249,000. The decrease was primarily from the sales of these
securities, which were transacted to adjust the portfolio to reflect the
changes in the interest rate environment, accommodate growth in the loan
portfolio and to recognize gains to offset the loss in interest income due
to the dramatic decline in the general level of interest rates.
State and political subdivision securities increased $38,824,000 to
$40,923,000. This increase was due to the decision to invest in
longer-term, higher-yielding investments.
16
There was no single issuer of securities in the investment portfolio at December
31, 2003, other than U.S. Government corporations and agencies, for which the
aggregate amortized cost exceeded ten percent of total shareholders' equity.
Investment by Type
December 31,
-----------------------------
(Dollars in thousands) 2003 2002 2001
================================================================================
U.S. Treasury securities $17,103 $ -- $12,284
U.S. Government corporations and agencies 4,690 27,247 77,313
State and political subdivisions 46,777 40,923 2,099
Stock of the Federal Home Loan Bank 376 1,000 433
Stock of the Federal Reserve Bank 201 201 201
- --------------------------------------------------------------------------------
Total investments $69,147 $69,371 $92,330
================================================================================
Investment in Debt Securities by Maturity
(At December 31, 2003)
Within Over 1 to Over 5 to Over
(Dollars in thousands) 1 Year 5 Years 10 Years 10 Years Yield
===========================================================================================
U.S. Treasury securities $14,104 $ 2,999 $ -- $ -- 1.24%
U.S. Government corporations and
agencies -- 4,690 -- -- 3.04%
State and political subdivisions(1) -- 1,087 14,427 31,263 6.31%
- -------------------------------------------------------------------------------------------
Total investment in debt securities $14,104 $ 8,776 $14,427 $31,263 4.79%
- -------------------------------------------------------------------------------------------
Weighted average yield 1.05% 2.88% 6.50% 6.29%
===========================================================================================
1. Weighted average yield is presented on a tax-equivalent basis assuming a tax
rate of 34%.
Equity Investment
During 2003, the Company converted its $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 invest an additional $1,100,000 if certain
conditions were met. As of December 31, 2003, the total investment of the
Company in this entity was $2,908,000 and is included in other assets in the
accompanying consolidated balance sheets. The Company now has an effective
19.93% ownership interest in this entity and the Chairman and CEO of the Company
is a member of the entity's Board of Directors. No business has been transacted
between the companies during the year.
The Company made its initial investment in this entity in 2001 through a
convertible debenture. The business has since performed poorly and during 2003
received a commitment of an additional $3,000,000 from a new non-affiliated
majority owner, in addition to the Company's additional commitment. The new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. The primary condition for any additional
investment by the Company is the amount of the new majority owner's actual
financial investment. 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 increased $5,282,000 or 5% from December 31,
2002 to $114,634,000 at December 31, 2003. The average balances remained level
from 2002 to 2003, recording a slight $318,000 or less than 1% increase to
$100,791,000. The increase in ending balances relates to normal daily
fluctuations in these accounts.
Interest-bearing deposits increased $23,628,000 or 18% from December 31, 2002 to
$157,794,000 at December 31, 2003. The average balances of these deposits
increased $8,993,000 or 6% from 2002 to $149,160,000 in 2003. These increases
relate mainly to the Bank's increased marketing efforts to attract more
deposits.
17
Accounts and drafts payable generated by the Company in its payment processing
operations increased $70,148,000 or 31% from December 31, 2002 to $293,769,000
at December 31, 2003. The average balances of these funds increased $7,135,000
or 2% from 2002 to $300,577,000 in 2003. 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, 2003)
(Dollars in thousands)
================================================================================
Three months or less $18,779
Three to six months 4,945
Six to twelve months 5,562
Over twelve months 13,990
- --------------------------------------------------------------------------------
Total $43,276
================================================================================
Short-term Borrowings
Short-term borrowings decreased $37,315,000 or 99.7% from December 31, 2002 to
$123,000 at December 31, 2003. Average balances of these funds decreased
$542,000 or 36% from 2002 to $943,000 during 2003. These funds consist primarily
of federal funds purchased and can also include tax deposits of the United
States Treasury. The borrowings at December 31, 2002 were used to fund a
decrease in accounts and drafts payable due to a combination of special year-end
funding arrangements with large customers, seasonality and the last day of the
year being the low point of the weekly payment cycle. These balances can vary
significantly from day to day due to the Company's payment cycle and therefore
balances on any particular day are not necessarily reflective of balances
throughout the year. For more information on borrowings please refer to Item 8,
Note 9 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 transactions in its evaluation of liquidity.
The balances of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold, and money market funds, and
were $62,367,000 at December 31, 2003, an increase of $32,361,000 or 108% from
December 31, 2002. At December 31, 2003 these assets represented 10% of total
assets. These funds are the Company's and its subsidiaries' primary source of
liquidity to meet future expected and unexpected loan demand, depositor
withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing
lines. Total investment in debt and equity securities was $69,147,000 at
December 31, 2003, a slight decrease of $224,000 from December 31, 2002. These
assets represented 11% of total assets at December 31, 2003. Of this total, 67%
were state and political subdivision securities, 25% were U.S. Treasury
securities, 7% were U.S. government agencies and 1% were other securities. Of
the total portfolio, 20% mature in one year, 13% matures in one to five years,
and 67% matures in five or more years. During the year the Company sold
securities with a market value of $38,454,000 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 $33,000,000. Additionally, the Bank maintains a line of credit
at an unaffiliated financial institution in the maximum amount of $79,661,000
collateralized by securities sold under repurchase agreements.
18
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize many other commercial products of the Bank. The accounts and drafts
payable generated by the Company has also historically been a stable source of
funds.
Net cash flows provided by operating activities for the years 2003, 2002 and
2001 were $12,131,000, $8,978,000 and $7,792,000 respectively. Net income plus
the adjustment for depreciation and amortization accounts for most of the
operating cash provided and has grown consistently over the past three years.
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 2004.
Other Off-Balance Sheet Activities
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating leases.
The Company provides customers with off-balance sheet credit support through
unused loan commitments to extend credit, standby letters of credit and
commercial letters of credit. Summarized credit-related financial instruments,
including both commitments to extend credit and letters of credit and operating
lease commitments at December 31, 2003 are as follows:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5
(Dollars in thousands at December 31, 2003) Total 1 year Years Years
----------------------------------------------------------------------------------------------
Unused loan commitments $20,941 $12,422 $ 8,519 $ --
Standby letters of credit 4,516 3,759 694 63
Commercial letters of credit 347 347 -- --
Operating lease commitments 736 461 268 7
Since many of the unused credit-related commitments are expected to expire or be
only partially used, the total amount of these commitments in the preceding
table does not necessarily represent future cash requirements.
Capital Resources
One of management's primary objectives is to maintain a strong capital base to
warrant the confidence of customers, shareholders, and bank regulatory agencies.
A strong capital base is needed to take advantage of profitable growth
opportunities that arise and to provide assurance to depositors and creditors.
The Company and its banking subsidiary continue to exceed all regulatory capital
requirements, as evidenced by the capital ratios at December 31, 2003 as shown
in Item 8, Note 2 of this report.
In 2003, cash dividends paid were $.764 per share for a total of $2,814,000, 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. All per share cash dividend amounts have been restated to reflect this
stock dividend.
Shareholders' equity was $64,792,000, or 10% of total assets, at December 31,
2003, an increase of $3,746,000 over the balance at December 31, 2002. This
increase resulted from net income of $7,902,000, proceeds from the exercise of
stock options of $260,000 and other items of $233,000, which was partially
offset by cash dividends paid of $2,814,000, repurchases of stock of $1,764,000
and a decrease in other comprehensive income of $71,000.
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, 2003, unappropriated retained
earnings of $8,922,000 were available at the Bank for the declaration of
dividends to the Company without prior approval from regulatory authorities.
19
Effect of Recent and Prospective Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34." This interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligation under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the interpretation are applicable to guarantees issued or modified
after December 31, 2002 and did not have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of periods ending after December 15, 2002 and are included
in "Other Off-Balance Sheet Activities" in this section of the report.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123." This statement amends SFAS
123 "Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both the
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
Item 8, Note 1 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 replaces FIN 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," 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 adoption of FIN 46R is not expected to have a material
impact on the consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of derivative. The amendments set forth in SFAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The provisions of SFAS 149 did not
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement requires that an
issuer classify a financial instrument that is within its scope, which may have
previously been reported as equity, as a liability (or an asset in some
circumstances). This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic companies. The Company currently
does not have any instruments that fall within the scope of SFAS 150 and
therefore the adoption of SFAS 150 did not have a material impact on its
consolidated financial statements.
In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on
certain disclosure requirements under EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
new disclosure requirements apply to investments in debt and marketable equity
securities that are accounted under SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS 124, "Accounting for
Certain Investments Held by Not-for-Profit Organizations." Effective for fiscal
years ending after December 15, 2003 companies are required to disclosure
information about debt or marketable equity securities with market values below
carrying values. The Company has adopted the disclosure requirements of EITF
Issue No. 03-1 and they are included in Item 8, Note 3 of this report.
20
In December 2003, the FASB issued SFAS 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," 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) that is
required for fiscal years ending after December 15, 2003 are included in Item 8,
Note 10 of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company faces market risk to the extent that its net interest income and its
fair market value of equity are affected by changes in market interest rates.
The asset/liability management discipline as applied at the Company seeks to
limit the volatility, to the extent possible, of both net interest income and
the fair market value of equity that can result from changes in market interest
rates. This is accomplished by limiting the maturities of fixed rate
investments, loans, and deposits; matching fixed rate assets and liabilities to
the extent possible; and optimizing the mix of fees and net interest income.
However, as discussed below, the Company's asset/liability position differs
significantly from most other bank holding companies with significant positive
cumulative "gaps" shown for each time horizon presented. This asset sensitive
position is caused primarily by the operations of the Company, which generates
large balances of accounts and drafts payable. These balances, which are
noninterest bearing, contribute to the Company's 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 Asset/Liability Management Committee (ALCO) measures the Company's
interest rate risk sensitivity on a quarterly basis to monitor and manage the
variability of earnings and fair market value of equity in various interest rate
environments. The ALCO evaluates the Company's risk position to determine
whether the level of exposure is significant enough to hedge a potential decline
in earnings and value or whether the Company can safely increase risk to enhance
returns. The ALCO uses gap reports, twelve-month net interest income
simulations, and fair market value of equity analyses as its main analytical
tools to provide management with insight into the Company's exposure to changing
interest rates.
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,
2003 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,
2003:
21
% Change in % Change in Fair
Change in Interest Rates Net Interest Income Market Value of Equity
--------------------------------------------------------------------------
+200 basis points 10% 10%
+100 basis points 5% 5%
Stable Rates 0% 0%
-100 basis points (7%) (7%)
-200 basis points (13%) (14%)
Interest Rate Sensitive Position
The following table presents the Company's gap or interest rate risk position at
December 31, 2003 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 $ 180,237 $ 5,029 $ 1,914 $ 7,596 $ 267,708 $ 1,175 $ 463,659
Tax-exempt -- -- -- 1,146 1,247 2,980 5,373
Debt and equity securities(1):
Taxable -- 3,003 6,065 5,036 7,689 -- 21,793
Tax-exempt -- -- -- -- 1,086 45,691 46,777
Other 577 -- -- -- -- -- 577
Federal funds sold and other
short term investments 44,613 -- -- -- -- -- 44,613
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 225,427 8,032 7,979 13,778 277,730 49,846 582,792
================================================================================================================================
Interest-sensitive liabilities:
Money market accounts 40,653 -- -- -- -- -- 40,653
Now accounts 13,330 -- -- -- -- -- 13,330
Savings deposits 32,626 -- -- -- -- -- 32,626
Time deposits:
$100 and more -- 18,779 4,945 5,562 13,990 -- 43,276
Less than $100 -- 2,183 13,222 6,300 6,204 -- 27,909
Federal funds purchased and
other short term borrowing 123 -- -- -- -- -- 123
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 86,732 $ 20,962 $ 18,167 $ 11,862 $ 20,194 $ -- $ 157,917
================================================================================================================================
Interest sensitivity gap:
Periodic $ 138,695 $ (12,930) $ (10,188) $ 1,916 $ 257,536 $ 49,846 $ 424,875
Cumulative 138,695 125,765 115,577 117,493 375,029 424,875 424,875
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic 2.60x .38x .44x 1.16x 13.75x -- 3.69x
Cumulative 2.60x 2.17x 1.92x 1.85x 3.37x 3.69x 3.69x
================================================================================================================================
(1) Balances shown reflect earliest repricing date.
22
PART II.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
(In thousands, except share and per share data) 2003 2002
- ------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 17,754 $ 24,279
Federal funds sold and other short-term investments 44,613 5,727
--------- ---------
Cash and cash equivalents 62,367 30,006
--------- ---------
Investment in debt and equity securities,
available-for-sale, at fair value 69,147 69,371
Loans 469,032 434,689
Less: Allowance for loan losses 5,506 5,293
--------- ---------
Loans, net 463,526 429,396
--------- ---------
Premises and equipment, net 13,538 15,359
Investment in bank owned life insurance 10,709 10,178
Goodwill 3,150 223
Other intangible assets 1,940 379
Other assets 15,319 17,321
--------- ---------
Total assets $ 639,696 $ 572,233
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 114,634 $ 109,352
Interest-bearing 157,794 134,166
--------- ---------
Total deposits 272,428 243,518
Accounts and drafts payable 293,769 223,621
Short-term borrowings 123 37,438
Other liabilities 8,584 6,610
--------- ---------
Total liabilities 574,904 511,187
--------- ---------
Shareholders' Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common stock, par value $.50 per share;
20,000,000 shares authorized and 4,160,110
shares issued at December 31, 2003 and 2002 2,080 2,080
Additional paid-in capital 8,466 8,466
Retained earnings 69,695 64,607
Common shares in treasury, at cost (824,598 and 796,278
shares at December 31, 2003 and 2002, respectively) (16,442) (15,275)
Unamortized stock bonus awards (129) (25)
Accumulated other comprehensive income 1,122 1,193
--------- ---------
Total shareholders' equity 64,792 61,046
--------- ---------
Total liabilities and shareholders' equity $ 639,696 $ 572,233
========= =========
See accompanying notes to consolidated financial statements.
23
CASS INFORMATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31,
--------------------------------------
(In thousands, except share and per share data) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
Freight and utility payment and processing revenue $ 28,440 $ 24,622 $ 21,490
Software revenue 7,696 -- --
Bank service fees 1,806 1,659 1,522
Gains on sales of investment securities 1,454 1,477 --
Other 671 272 231
---------- ---------- ----------
Total fee revenue and other income 40,067 28,030 23,243
---------- ---------- ----------
Interest Income:
Interest and fees on loans 25,601 26,197 29,069
Interest and dividends on debt and equity securities:
Taxable 499 2,839 4,276
Exempt from federal income taxes 1,534 1,894 47
Interest on federal funds sold and
other short-term investments 609 687 2,790
---------- ---------- ----------
Total interest income 28,243 31,617 36,182
---------- ---------- ----------
Interest Expense:
Interest on deposits 1,847 2,240 3,863
Interest on short-term borrowings 14 33 9
---------- ---------- ----------
Total interest expense 1,861 2,273 3,872
---------- ---------- ----------
Net interest income 26,382 29,344 32,310
Provision for loan losses 190 500 60
---------- ---------- ----------
Net interest income after provision
for loan losses 26,192 28,844 32,250
---------- ---------- ----------
Operating Expense:
Salaries and employee benefits 37,152 31,405 30,469
Occupancy 1,782 1,500 1,658
Equipment 4,478 4,310 3,831
Other operating 11,492 9,360 8,771
---------- ---------- ----------
Total operating expense 54,904 46,575 44,729
---------- ---------- ----------
Income before income tax expense 11,355 10,299 10,764
Income tax expense 3,453 2,987 3,739
---------- ---------- ----------
Net income $ 7,902 $ 7,312 $ 7,025
========== ========== ==========
Earnings per share*:
Basic $ 2.15 $ 1.98 $ 1.88
Diluted $ 2.13 $ 1.96 $ 1.86
Weighted average shares outstanding*:
Basic 3,677,314 3,697,788 3,729,039
Dilutive effect of stock options and awards 37,239 23,502 48,236
Diluted 3,714,553 3,721,290 3,777,275
*Earnings per share and weighted average shares outstanding have been restated
to reflect the 10% stock dividend declared in February 2004.
See accompanying notes to consolidated financial statements.
24
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
-------------------------------------
(Dollars in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 7,902 $ 7,312 $ 7,025
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,580 3,978 3,276
Gains on sales of investment securities (1,454) (1,477) --
Amortization of stock bonus awards 57 22 80
Tax benefit from exercise of stock options and bonuses 176 186 29
Provision for loan losses 190 500 60
Increase in accounts receivable (1,462) (400) (260)
Deferred income tax (benefit) expense (599) (315) 761
Increase (decrease) in income tax liability 1,115 164 (845)
Decrease in accrued interest receivable 308 88 901
Increase (decrease) in pension liability 335 (53) 292
Change in other assets 542 (1,521) (3,213)
Change in other liabilities 428 665 616
Other operating activities, net 13 (171) (930)
--------- --------- ---------
Net cash provided by operating activities 12,131 8,978 7,792
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available-for-sale 38,454 63,945 --
Proceeds from maturities of debt and equity securities
available-for-sale 15,522 40,878 38,993
Purchase of debt and equity securities available-for-sale (52,970) (79,761) (61,497)
Net increase in loans (36,320) (53,613) (14,088)
Purchases of premises and equipment, net (1,881) (2,216) (5,944)
Purchase of bank owned life insurance -- (10,000) --
--------- --------- ---------
Net cash used in investing activities (37,195) (40,767) (42,536)
--------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in noninterest-bearing deposits 5,282 (7,999) 17,410
Net increase (decrease) in interest-bearing demand
and savings deposits 342 (18,079) (1,307)
Net increase in time deposits 23,286 21,618 19,209
Net increase (decrease) in accounts and drafts payable 70,148 (68,173) (11,046)
Net (decrease) increase in short-term borrowings (37,315) 37,238 200
Cash proceeds from exercise of stock options 260 348 60
Cash paid for stock dividend for fractional shares -- (2) --
Cash dividends paid (2,814) (2,628) (2,579)
Purchase of common shares for treasury (1,764) (383) (3,279)
--------- --------- ---------
Net cash provided by (used in) financing activities 57,425 (38,060) 18,668
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 32,361 (69,849) (16,076)
Cash and cash equivalents at beginning of year 30,006 99,855 115,931
--------- --------- ---------
Cash and cash equivalents at end of year $ 62,367 $ 30,006 $ 99,855
========= ========= =========
Supplemental information:
Cash paid for interest $ 1,802 $ 2,270 $ 3,877
Cash paid for income taxes 2,513 3,155 3,352
Noncash transactions:
Transfer of loans to other equity investments $ 2,000 $ -- $ --
Foreclosed assets transferred from loans -- -- 4,205
Other real estate transferred from loans -- 263 600
Transfer of securities from held-to-maturity to available-for-sale -- -- 6,682
See accompanying notes to consolidated financial statements.
25
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, 2000 $ 2,000 $ 5,059 $ 59,177 $(12,480) $ (94) $ 159 $ 53,821
Net income 7,025 7,025 $ 7,025
Cash dividends ($.693 per share)* (2,579) (2,579)
Purchase of 161,700 common shares
for treasury (3,279) (3,279)
Other comprehensive income (loss):
Net unrealized gain on debt securities
available-for-sale, net of tax 397 397 397
Minimum pension liability
adjustment, net of tax (34) (34) (34)
Issuance of 693 common shares
pursuant to Stock Bonus Plan* 11 (11)
Amortization of Stock Bonus Plan awards 80 80
Exercise of stock options (91) 151 60
Tax benefit on stock awards 29 29
------------------------------------------------------------------------------------------
Balance, December 31, 2001 2,000 4,997 63,623 (15,597) (25) 522 55,520
Comprehensive income for 2001 $ 7,388
=========
Net income 7,312 7,312 7,312
Cash dividends ($.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
=========
*Share and per share data has been restated to reflect the 10% stock dividend
declared in February 2004.
See accompanying notes to consolidated financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations The Company provides payment and information services,
which include processing and payment of freight and utility invoices,
preparation of transportation management reports, auditing of freight charges
and rating of freight shipments. The consolidated balance sheet caption,
"Accounts and Drafts Payable," consists of obligations related to the payment
services that are performed for customers. The Company also provides a full
range of banking services to individual, corporate and institutional customers
through its wholly-owned bank subsidiary and enterprise software solutions to
governmental entities through its software subsidiary.
On January 9, 2001 the Company's subsidiary, Cass Information Systems, Inc. was
merged into the parent company, Cass Commercial Corporation, and the parent's
name was subsequently changed to Cass Information Systems, Inc.
Basis of Presentation The accounting and reporting policies of the Company and
its subsidiaries conform to accounting policies generally accepted in the United
States of America. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of intercompany
transactions. Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform to the 2003 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity.
Use of Estimates In preparing the consolidated financial statements, Company
management is required to make estimates and assumptions which significantly
affect the reported amounts in the consolidated financial statements. A
significant estimate, which is particularly susceptible to change in a short
period of time, is the determination of the allowance for loan losses.
Investment in Debt and Equity Securities The Company classifies its debt and
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.
Non-marketable Equity Investments The Company accounts for 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. Non-marketable equity investments are
included in other assets on the consolidated balance sheets.
Interest on Loans Interest on loans is recognized based upon the principal
amounts outstanding. It is the Company's policy to discontinue the accrual of
interest when there is reasonable doubt as to the collectibility of principal or
interest. Subsequent payments received on such loans are applied to principal if
there is any doubt as to the collectibility of such principal; otherwise, these
receipts are recorded as interest income. The accrual of interest on a loan is
resumed when the loan is current as to payment of both principal and interest
and/or the borrower demonstrates the ability to pay and remain current.
Impairment of Loans A loan is considered impaired when it is probable a creditor
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are discounted at
the loan's effective interest rate. Alternatively, impairment could be measured
by reference to an observable market price, if one exists, or the fair value of
27
the collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, the Company measures impairment based on the fair value
of the collateral when the Company determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement. The Company uses its nonaccrual methods
as discussed above for recognizing interest on impaired loans.
Allowance for Loan Losses The allowance for loan losses is increased by
provisions charged to expense and reduced by net charge-offs. The provisions
charged to expense are based on economic conditions, past losses, collection
experience, risk characteristics of the portfolio and such other factors which,
in management's judgment, deserve current recognition.
Management believes the allowance for loan losses is adequate to absorb losses
in the loan portfolio. While management uses all available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
Information Services Revenue Revenue from freight and utility payment related
services is recognized when 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.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the assets, or the respective lease terms for
leasehold improvements, using straight-line and accelerated methods. Estimated
useful lives do not exceed 40 years for buildings, 10 years for leasehold
improvements and range from 3 to 7 years for software, equipment, furniture and
fixtures. Maintenance and repairs are charged to expense as incurred.
Foreclosed assets On January 2, 2001, the Bank subsidiary foreclosed on certain
operating assets of one borrower in order to protect the financial interest in
that borrower. The Bank sold these assets to a wholly-owned subsidiary and
invested in and stabilized this business. From the date of foreclosure through
December 31, 2002, these assets had been accounted for as a foreclosed asset
that is held for sale. At December 31, 2002 other assets includes $7,108,000 and
other liabilities includes $1,810,000 related to this business.
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective January 1, 2002. SFAS 144 requires that if certain
criteria are not met for long-lived asset (disposal) groups classified as held
for sale by the end of the fiscal year in which SFAS 144 is initially applied,
the related long-lived assets shall be reclassified as held and used. Therefore,
as of January 1, 2003, the Company reclassified these foreclosed assets as held
and used and consolidated its operations into those of the Company.
Other real estate, included in other assets in the accompanying consolidated
balance sheets, is recorded at fair value less estimated selling costs. If the
fair value of other real estate declines subsequent to foreclosure, the
difference is recorded as a valuation allowance through a charge to expense.
Subsequent increases in fair value are recorded through reversal of the
valuation allowance. Expenses incurred in maintaining the properties are charged
to expense.
Intangible Assets Cost in excess of fair value of net assets acquired and fair
value in excess of cost of net assets acquired have resulted from business
acquisitions which were accounted for using the purchase method. The Company
adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets",
effective January 1, 2002 which requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS 144. Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over 15 years. The disclosure requirements of SFAS 142 are
included in Item 8, Note 7 of this report.
28
Periodically, the Company reviews intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable. Based on those reviews, adjustments of recorded amounts have not
been required.
Income Taxes Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Cash and Cash Equivalents For purposes of the consolidated statements of cash
flows, the Company considers cash and due from banks, federal funds sold and
other short-term investments as segregated in the accompanying consolidated
balance sheets to be cash equivalents.
Earnings Per Share Basic earnings per share (EPS) is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of common shares adjusted for the dilutive effect of outstanding stock
options and awards. All per share data has been restated to reflect the 10%
stock dividend declared in February 2004.
Stock Options The Company accounts for stock-based compensation under the stock
option plan in accordance with APB 25, "Accounting for Stock Issued to
Employees," and accordingly 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 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 15,543 options granted in
2003, 6,930 options granted in 2002 and no options were granted in 2001. The
required disclosure provisions of SFAS 123, as amended by SFAS 148, are provided
in the table below.
(In thousands, except per share data) 2003 2002 2001
--------------------------------------------------------------------------------------------
Net income:
As reported $ 7,902 $ 7,312 $ 7,025
Add: Stock based compensation expense
included in reported net income, net of tax 38 15 53
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (81) (60) (126)
--------------------------------------------------------------------------------------------
Pro forma net income $ 7,859 $ 7,267 $ 6,952
--------------------------------------------------------------------------------------------
Net income per common share*:
Basic, as reported $ 2.15 $ 1.98 $ 1.88
Basic, proforma 2.14 1.97 1.86
Diluted, as reported 2.13 1.96 1.86
Diluted, proforma 2.12 1.95 1.84
--------------------------------------------------------------------------------------------
Weighted average assumptions:
Risk-free interest rate 3.22% 3.54% N/A
Expected life 7 yrs 7 yrs N/A
Expected volatility 15% 15% N/A
Expected dividend yield 3.32% 3.52% N/A
--------------------------------------------------------------------------------------------
*All share and per share amounts in this section have been adjusted to reflect
the 10% stock dividend declared in February 2004.
Comprehensive Income Comprehensive income consists of net income, changes in net
unrealized gains (losses) on available-for-sale securities and minimum pension
liability adjustments and is presented in the accompanying consolidated
statements of shareholders' equity and comprehensive income.
Recent and Prospective Accounting Pronouncements In November 2002, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
financial statements about its obligation under guarantees issued. The
29
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's consolidated
financial statements. The disclosure requirements are effective for financial
statements of periods ending after December 15, 2002 and are included in Item 7
and Item 8, Note 14 of this report.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123." This statement amends SFAS
123 "Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both the
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included
above.
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 replaces FIN 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," 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 adoption of FIN 46R is not expected to have a material
impact on the consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of derivative. The amendments set forth in SFAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The provisions of SFAS 149 did not
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement requires that an
issuer classify a financial instrument that is within its scope, which may have
previously been reported as equity, as a liability (or an asset in some
circumstances). This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic companies. The Company currently
does not have any instruments that fall within the scope of SFAS 150 and
therefore the adoption of SFAS 150 did not have a material impact on its
consolidated financial statements.
In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on
certain disclosure requirements under EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
new disclosure requirements apply to investments in debt and marketable equity
securities that are accounted under SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," and SFAS 124, "Accounting for
Certain Investments Held by Not-for-Profit Organizations." Effective for fiscal
years ending after December 15, 2003 companies are required to disclosure
information about debt or marketable equity securities with market values below
carrying values. The Company has adopted the disclosure requirements of EITF
Issue No. 03-1 and they are included in Item 8, Note 3 of this report.
In December 2003, the FASB issued SFAS 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," 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 requirement of SFAS 132 (Revised 2003) that is required
for fiscal years ending after December 15, 2003 are included in Item 8, Note 10
of this report.
30
Note 2
Capital Requirements And Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company and the Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulators to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets, and of Tier I capital to average
assets. Management believes as of December 31, 2003 and 2002, 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, 2003 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, 2003, unappropriated
retained earnings of $8,922,000 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 $663,000 and $707,000 at December 31, 2003 and 2002,
respectively.
The Company and the Bank's actual and required capital amounts and ratios as of
December 31, 2003 and 2002 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, 2003
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $64,480 12.07% $42,748 8.00% $ N/A N/A%
Cass Commercial Bank 31,741 11.17 22,722 8.00 28,403 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $58,974 11.04% $21,374 4.00% $ N/A N/A%
Cass Commercial Bank 28,190 9.92 11,361 4.00 17,042 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $58,974 9.57% $18,483 3.00% $ N/A N/A%
Cass Commercial Bank 28,190 9.49 8,908 3.00 14,846 5.00
At December 31, 2002
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $59,625 12.07% $39,513 8.00% $ N/A N/A%
Cass Commercial Bank 27,425 10.94 20,052 8.00 25,064 10.00
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. $54,332 11.00% $19,756 4.00% $ N/A N/A%
Cass Commercial Bank 24,412 9.74 10,026 4.00 15,039 6.00
Tier I capital (to average assets):
Cass Information Systems, Inc. $54,332 9.16% $17,791 3.00% $ N/A N/A%
Cass Commercial Bank 24,412 8.98 8,157 3.00 13,595 5.00
31
Note 3
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, 2003 and 2002, are summarized as follows:
2003
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------
U.S. Government treasuries $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
=================================================================================
2002
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------
Obligations of U.S. Government
corporations and agencies $26,791 $ 456 $ -- $27,247
State and political subdivisions 39,571 1,352 -- 40,923
---------------------------------------------------------------------------------
Total debt securities 66,362 1,808 -- 68,170
Stock in Federal Reserve Bank and
Federal Home Loan Bank 1,201 -- -- 1,201
---------------------------------------------------------------------------------
Total $67,563 $ 1,808 $ -- $69,371
=================================================================================
The fair value of securities with unrealized losses at December 31, 2003 are as
follows:
Fair Unrealized
(In thousands) Value Losses
--------------------------------------------------------------------------
U. S. Government treasuries $4,009 $ 1
Obligations of U.S. Government
Corporations and agencies 1,994 11
State and political subdivisions 150 2
--------------------------------------------------------------------------
Total $6,153 $ 14
==========================================================================
All the unrealized losses included in the table above 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,
2003, 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.
2003
-------------------
Amortized Fair
(In thousands) Cost Value
--------------------------------------------------------------------------
Due in 1 year or less $14,097 $14,104
Due after 1 year through 5 years 8,656 8,776
Due after 5 years through 10 years 13,805 14,427
Due after 10 years 30,297 31,263
No stated maturity 577 577
--------------------------------------------------------------------------
Total $67,432 $69,147
==========================================================================
32
The amortized cost of debt securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes at
December 31, 2003 were $3,599,000 and there were no securities pledged at
December 31, 2002.
Proceeds from sales of debt securities classified as available-for-sale were
$38,454,000 and $63,945,000 for 2003 and 2002, respectively and there were no
sales of debt and equity securities in 2001. Gross gains realized on the sales
in 2003 were $1,454,000 and in 2002 gross realized gains were $1,501,000 and
gross losses realized were $24,000.
Note 4
Loans
A summary of loan categories at December 31, 2003 and 2002, is as follows:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Commercial and industrial $103,638 $101,116
Real estate:
Mortgage 184,221 176,667
Mortgage - Church & related 145,929 105,458
Construction 2,920 3,101
Construction - Church & related 16,378 36,074
Industrial revenue bonds 5,373 5,773
Installment 1,911 1,918
Other 8,662 4,582
--------------------------------------------------------------------------
Total $469,032 $434,689
==========================================================================
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, 2003, 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, 2003 $3,374
New loans --
Payments 89
--------------------------------------------------------------------------
Aggregate balance, December 31, 2003 $3,285
==========================================================================
A summary of the activity in the allowance for loan losses for 2003, 2002 and
2001 is as follows:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
Balance, January 1 $ 5,293 $ 4,906 $ 4,897
Provision charged to expense 190 500 60
Loans charged off (2) (152) (110)
Recoveries of loans previously
charged off 25 39 59
--------------------------------------------------------------------------
Net loan recoveries (charge-offs) 23 (113) (51)
--------------------------------------------------------------------------
Balance, December 31 $ 5,506 $ 5,293 $ 4,906
==========================================================================
33
The following is a summary of information pertaining to impaired loans at
December 31, 2003 and 2002:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 4,393 10,369
Allowance for loan losses related to impaired loans 627 431
--------------------------------------------------------------------------
Impaired loans consist primarily of renegotiated loans, nonaccrual loans and
loans 90 days past due and still accruing interest. Impaired loans continuing to
accrue interest were $2,868,000 and $10,319,000 at December 31, 2003 and 2002,
respectively. Of these, loans delinquent 90 days or more and still accruing
interest at December 31, 2003 and 2002 totaled $147,000 and $4,891,000,
respectively. The average balance of impaired loans during 2003 and 2002 was
$5,736,000 and $6,626,000, respectively. Income that would have been recognized
on non-accrual and renegotiated loans under the original terms of the contract
was $272,000, $346,000 and $65,000 for 2003, 2002 and 2001, respectively. Income
that was recognized on non-accrual and renegotiated loans was $164,000, $328,000
and $9,000 for 2003, 2002 and 2001, respectively.
Note 5
Premises and Equipment
A summary of premises and equipment at December 31, 2003 and 2002, is as
follows:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Land $ 873 $ 873
Buildings 10,374 10,288
Leasehold improvements 968 968
Furniture, fixtures and equipment 18,125 16,799
Purchased software 3,383 3,105
Internally developed software 4,474 4,130
--------------------------------------------------------------------------
38,197 36,163
Less accumulated depreciation and amortization 24,659 20,804
--------------------------------------------------------------------------
Total $13,538 $15,359
==========================================================================
Depreciation and amortization charged to expense in 2003, 2002 and 2001 amounted
to $3,689,000, $3,638,000 and $3,085,000, respectively.
The Company and its subsidiaries lease various premises and equipment under
operating lease agreements, which expire at various dates through 2007. The
following is a schedule, by year, of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2003:
(In thousands)
--------------------------------------------------------------------------
2004 $461
2005 226
2006 42
2007 7
--------------------------------------------------------------------------
Total $736
==========================================================================
Rental expense for 2003, 2002 and 2001 was $686,000, $604,000 and $761,000,
respectively.
Note 6
Equity Investments in Non-Marketable Securities
During 2003, the Company converted its $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 invest an additional $1,100,000 if certain
conditions were met. As of December 31, 2003, the total investment of the
Company in this entity was $2,908,000 and is included in other assets in the
accompanying consolidated balance sheets. At December 31, 2003 the Company had
an effective 19.93% ownership interest in this entity and the Chairman and CEO
of the Company was a member of the entity's Board of Directors. No business has
been transacted between the companies during the year.
34
The Company made its initial investment in this entity in 2001 through a
convertible debenture. The business has since performed poorly and during 2003
received a commitment of an additional $3,000,000 from a new non-affiliated
majority owner, in addition to the Company's additional commitment. The new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. The primary condition for any additional
investment by the Company is the amount of the new majority owner's actual
financial investment. Should this business fail to meet its objectives, the
Company's investment could be subject to future impairment.
This investment, along with $368,000 of other investments in non-marketable
securities, is included in other assets on the Company's consolidated balance
sheets.
Note 7
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, 2003 are as follows:
Gross Carrying Accumulated
(In thousands) Amount Amortization Net
- --------------------------------------------------------------------------------
Amortized intangible assets:
Customer list $ 823 $ (55) $ 768
Software 1,024 (256) 768
- --------------------------------------------------------------------------------
Total amortized intangible assets 1,847 (311) 1,536
- --------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 3,377 (227)* 3,150
Minimum pension liability 404 -- 404
- --------------------------------------------------------------------------------
Total unamortized intangible assets 3,781 (227) 3,554
- --------------------------------------------------------------------------------
Total intangible assets $5,628 $ (538) $5,090
- --------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS 142.
On January 1, 2003 the Company acquired $2,927,000 of goodwill, $823,000 of
customer list and $1,024,000 in software related to the consolidation of GEMS,
which is further discussed in Item 1 and 7 of this report. The customer list and
software are amortized over 15 years and 4 years, respectively. 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 amount previously
recorded and offset this liability by an intangible asset to the extent of
previously unrecognized prior service costs. The liability and corresponding
intangible asset are adjusted annually.
Amortization of intangible assets amounted to $311,000 and $91,000 for the years
ended December 31, 2003 and 2001, 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: $311,000 in 2004, 2005 and
2006 and $55,000 in 2007 and 2008.
Note 8
Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 2003 and
2002:
(In thousands) 2003 2002
--------------------------------------------------------------------------
NOW and Money Market Deposit Accounts $ 53,983 $ 53,543
Savings deposits 32,626 32,724
Time deposits:
Less than $100 27,909 5,611
$100 or more 43,276 42,288
--------------------------------------------------------------------------
Total $157,794 $134,166
==========================================================================
35
Interest on deposits consist of the following for 2003, 2002 and 2001:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
NOW and Money Market Deposit Accounts $ 371 $ 632 $1,544
Savings deposits 281 528 1,761
Time deposits:
Less than $100 351 178 195
$100 or more 844 902 363
--------------------------------------------------------------------------
Total $1,847 $2,240 $3,863
==========================================================================
The scheduled maturities of certificates of deposit at December 31, 2003 and
2002, are summarized as follows:
2003 2002
----------------------------------------
Percent Percent
(In thousands) Amount of Total Amount of Total
--------------------------------------------------------------------------
Due within:
One year $50,991 71.6% $42,678 89.1%
Two years 8,826 12.4 3,066 6.4
Three years 276 .4 920 1.9
Four years 1,265 1.8 10 --
Five years 9,827 13.8 1,225 2.6
--------------------------------------------------------------------------
Total $71,185 100.0% $47,899 100.0%
==========================================================================
Note 9
Short-Term Borrowings
Company short-term borrowings consist mainly of federal funds purchased and tax
deposits of the United States Treasury. At December 31, 2003 the bank subsidiary
had short-term borrowings of $123,000 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 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. At December 31, 2002 the bank subsidiary
borrowed $37,438,000 in federal funds at a year-end weighted average rate of
1.56%. Of this amount, $17,438,000 were unsecured borrowings and $20,000,000
were borrowings from the Federal Home Loan Bank secured by commercial and
residential mortgage loans. Average borrowings for 2002 were $1,485,000 with an
average rate of 2.22%. The borrowings for the month ended December 31, 2002 was
the maximum amount that was outstanding at the end of any month during the year.
Note 10
Employee Benefits
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, 2003 and 2002, is as follows:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 16,461 $ 14,166
Service cost 979 952
Interest cost 1,105 1,012
Actuarial loss 1,718 551
Benefits paid (237) (220)
--------------------------------------------------------------------------
Balance, December 31 $ 20,026 $ 16,461
==========================================================================
Plan assets:
Fair value, January 1 $ 12,797 $ 12,640
Actual return 1,622 (524)
Employer contribution 903 901
Benefits paid (237) (220)
--------------------------------------------------------------------------
Fair value, December 31 $ 15,085 $ 12,797
==========================================================================
Funded status:
Unfunded projected benefits obligation $ (4,941) $ (3,664)
Unrecognized prior service cost 90 103
Unrecognized net loss 2,614 1,463
--------------------------------------------------------------------------
Accrued pension cost $ (2,237) $ (2,098)
==========================================================================
36
The accumulated benefit obligation was $15,970,000 and $12,826,000 for the
periods ended December 31, 2003 and 2002, respectively. The Company expects to
contribute approximately $975,000 to the plan in 2004.
The following represent the major assumptions used to determine the benefit
obligation of the plan:
2003 2002 2001
--------------------------------------------------------------------------
Weighted average discount rate 6.25% 7.00% 7.25%
Rate of increase in compensation levels 4.00% 4.00% 4.00%
The pension cost for 2003, 2002 and 2001 was $1,042,000, $948,000 and $700,000,
respectively, and included the following components:
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 979 $ 952 $ 824
Interest cost on projected benefit obligations 1,105 1,012 898
Expected return on plan assets (1,055) (1,031) (960)
Net amortization and deferral 13 15 (62)
---------------------------------------------------------------------------------
Net periodic pension cost $ 1,042 $ 948 $ 700
=================================================================================
The following represent the major assumptions used to determine the net benefit
cost of the plan:
2003 2002 2001
--------------------------------------------------------------------------
Weighted average discount rate 7.00% 7.25% 7.50%
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 2003 2002
--------------------------------------------------------------------------
Equity securities 34.6% 25.6%
Debt securities 65.1% 73.7%
Cash and cash equivalents .3% .7%
--------------------------------------------------------------------------
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 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.
37
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 2003, 2002 and 2001 for the supplemental executive
retirement plan was $145,000, $177,000 and $220,000 respectively, and included
the following components:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
Service cost - benefits earned during the year $ (24) $ (13) $ 11
Interest cost on projected benefit obligations 107 124 120
Net amortization and deferral 62 66 89
--------------------------------------------------------------------------
Net periodic pension cost $ 145 $ 177 $ 220
==========================================================================
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, 2003 and 2002, is as follows:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 1,878 $ 1,787
Service cost (24) (13)
Interest cost 107 124
Actuarial gain (266) (20)
--------------------------------------------------------------------------
Balance, December 31 $ 1,695 $ 1,878
==========================================================================
Funded status:
Unfunded projected benefits obligation $(1,695) $(1,878)
Unrecognized prior service cost 404 454
Unrecognized actuarial loss 105 383
--------------------------------------------------------------------------
Accrued pension cost (1,186) (1,041)
Minimum liability adjustment (419) (379)
--------------------------------------------------------------------------
Accrued pension cost $(1,605) $(1,420)
==========================================================================
The accumulated benefit obligation was $1,605,000 and $1,420,000 for the periods
ended December 31, 2003 and 2002, respectively. Since this is an unfunded plan
there are no plan assets. 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 $419,000 and $379,000 at
December 31, 2003 and 2002, 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 $404,000 and $379,000 at December 31,
2003 and 2002, respectively, are included in other intangible assets on the
accompanying consolidated balance sheets. The remaining amount at December 31,
2003 of $15,000 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 2003, 2002 and
2001 was $1,755,000, $1,632,000 and $1,588,000, 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 2003, 2002 and 2001 were $333,000, $277,000 and $260,000,
respectively.
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 2003, 2002 and 2001, 6,501 shares, 1,040
shares and 693 shares, respectively, were granted with weighted average per
share market prices of $24.74 in 2003, $21.21 in 2002 and $16.97 in 2001. The
fair value of such shares, which is based on the market price on the date of
38
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 $57,000 for 2003, $22,000 for 2002 and $80,000 for 2001. At
December 31, 2003 the weighted-average grant date fair value and weighted
average contractual life for outstanding shares of restricted stock was $24.16
and 2.04 years, respectively.
A summary of restricted stock bonus share activity follows:
2003 2002 2001
-------------------------------------------------------------------------------
Awards available for grant beginning of year 65,142 66,182 66,875
Restricted shares awarded (6,501) (1,040) (693)
-------------------------------------------------------------------------------
Awards available for grant end of year 58,641 65,142 66,182
===============================================================================
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 vest over a period not to exceed seven years.
The following table summarizes stock options outstanding as of December 31,
2003:
Weighted Average
Exercise Options Remaining
Price Outstanding Contractual Life
---------------------------------------------------------------------
$ 8.94 8,428 1.00 years
17.63 6,930 1.88
19.91 4,042 2.00
21.33 2,310 2.00
21.86 65,084 2.00
22.04 8,731 1.11
22.50 12,000 6.00
24.75 3,543 6.00
Changes in options outstanding were as follows:
Weighted Average
Shares Exercise Price
--------------------------------------------------------------------------
Balance at December 31, 2000 186,439 $15.25
Exercised (12,017) 8.94
Forfeited (2,497) 17.91
--------------------------------------------------------------------------
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
==========================================================================
At December 31, 2003, 19,647 shares were exercisable with a weighted average
exercise price of $15.40.
*All share and per share amounts in this section have been restated to reflect a
10% stock dividend declared in February 2004.
Note 11
Other Operating Expense
Details of other operating expense for 2003, 2002 and 2001 are as follows:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
Postage, printing and supplies $ 2,886 $ 2,906 $ 2,662
Advertising and business development 1,929 1,382 1,280
Professional fees 2,268 1,964 1,740
Outside service fees 1,316 1,175 1,006
Data processing services 207 231 416
Telecommunications 561 510 605
Other 2,325 1,192 1,062
--------------------------------------------------------------------------
Total other operating expense $11,492 $ 9,360 $ 8,771
==========================================================================
39
Note 12
Income Taxes
The components of income tax expense for 2003, 2002 and 2001 are as follows:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
Current:
Federal $ 3,571 $ 2,883 $ 2,571
State 481 419 407
Deferred (599) (315) 761
--------------------------------------------------------------------------
Total income tax expense $ 3,453 $ 2,987 $ 3,739
==========================================================================
A reconciliation of expected income tax expense, computed by applying the
effective federal statutory rate of 34% for 2003, 2002 and 2001 to income before
income tax expense, to reported income tax expense is as follows:
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------
Expected income tax expense $ 3,861 $ 3,502 $ 3,660
(Reductions) increases resulting from:
Tax-exempt interest (793) (800) (229)
State taxes, net of federal benefit 317 277 269
Other, net 68 8 39
--------------------------------------------------------------------------
Total income tax expense $ 3,453 $ 2,987 $ 3,739
==========================================================================
The tax effects of temporary differences which give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002, are presented below:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,952 $ 1,452
Accrued pension cost 783 724
Deferred revenue 626 --
Other 491 459
--------------------------------------------------------------------------
Total deferred tax assets 3,852 2,635
--------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on investment in debt
and equity securities available-for-sale (583) (615)
Premises and equipment (641) (724)
Intangibles (532) --
Other (179) (237)
--------------------------------------------------------------------------
Total deferred tax liabilities (1,935) (1,576)
--------------------------------------------------------------------------
Net deferred tax assets $ 1,917 $ 1,059
==========================================================================
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, 2003 or 2002,
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 13
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.
40
Note 14
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, 2003, 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, 2003 and 2002:
(In thousands) 2003 2002
--------------------------------------------------------------------------
Conditional commitments to extend credit $20,941 $29,463
Standby letters of credit 4,516 5,663
Commercial letters of credit 347 100
--------------------------------------------------------------------------
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2003 and 2002:
2003 2002
--------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
--------------------------------------------------------------------------------
Balance sheet assets:
Cash and cash equivalents $ 62,367 $ 62,367 $ 30,006 $ 30,006
Investment in debt and
equity securities 69,147 69,147 69,371 69,371
Loans, net 463,526 464,502 429,396 434,208
Accrued interest receivable 2,231 2,231 2,539 2,539
--------------------------------------------------------------------------------
Total $597,271 $598,247 $531,312 $536,124
================================================================================
Balance sheet liabilities:
Deposits $272,428 $273,235 $243,518 $243,871
Accounts and drafts payable 293,769 293,769 223,621 223,621
Short-term borrowings 123 123 37,438 37,438
Accrued interest payable 150 150 91 91
--------------------------------------------------------------------------------
Total $566,470 $567,277 $504,668 $505,021
================================================================================
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Other Short-term Instruments For cash and cash equivalents, accrued
interest receivable, accounts and drafts payable, short-term borrowings and
accrued interest payable, the carrying amount is a reasonable estimate of fair
value because of the demand nature or short maturities of these instruments.
41
Investment in Debt and Equity Securities Fair values are based on quoted market
prices or dealer quotes.
Loans The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits The fair value of demand deposits, savings deposits and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market nor the benefit derived from the customer relationship
inherent in existing deposits.
Commitments to Extend Credit and Standby Letters of Credit The fair value of
commitments to extend credit and standby letters of credit are estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the likelihood of the counterparties
drawing on such financial instruments and the present credit-worthiness of such
counterparties. The Company believes such commitments have been made at terms
which are competitive in the markets in which it operates; however, no premium
or discount is offered thereon.
Limitations Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets or liabilities that are not
considered financial assets or liabilities include premises and equipment and
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market (core deposit
intangible). In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Note 15
Industry Segment Information
The services provided by the Company are classified into four reportable
segments: Transportation Information Services, Utility 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 Transportation Information Services segment provides freight invoice rating,
payment, auditing, cost accounting and transportation information services to
large corporate shippers. The Utility Information Services segment processes and
pays utility invoices, including electricity, gas, water and telecommunications,
for large corporate entities that have many locations or are heavy users of
energy. The Banking Services segment provides banking services primarily to
privately-held businesses and churches. The Government Software Services segment
provides the public sector with integrated financial, property and human
resource management systems through the Bank's wholly-owned subsidiary,
Government e-Management Solutions, Inc. (GEMS).
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.
All three segments market their services within the United States and no revenue
from any customer of any segment exceeds 10% of the Company's consolidated
revenue.
42
Summarized information about the Company's operations in each industry segment
for the periods ended December 31, 2003, 2002 and 2001, is as follows:
Transportation Utility Government Corporate
Information Information Banking Software and
(In thousands) Services Services Services Services Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
2003
Fee revenue and other income:
Income from customers $ 20,922 $ 9,532 $ 1,917 $ 7,696 $ -- $ 40,067
Intersegment income -- -- 1,512 -- (1,512) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 11,888 3,151 11,153 -- -- 26,192
Intersegment interest 123 32 (155) -- -- --
Depreciation and amortization 2,415 1,013 491 590 71 4,580
Income taxes 207 946 2,232 68 -- 3,453
Net income 2,237 1,853 3,705 107 -- 7,902
Goodwill 223 -- -- 2,927 -- 3,150
Other intangible assets, net -- -- -- 1,536 404 1,940
Total assets 260,490 69,245 328,412 7,488 (25,939) 639,696
- -----------------------------------------------------------------------------------------------------------------------------
2002
Fee revenue and other income:
Income from customers $ 19,275 $ 6,920 $ 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 14,117 3,127 11,600 N/A -- 28,844
Intersegment interest (87) (19) 106 N/A -- --
Depreciation and amortization 2,544 916 453 N/A 65 3,978
Income taxes 185 368 2,434 N/A -- 2,987
Net income 2,130 1,090 4,092 N/A -- 7,312
Goodwill 223 -- -- N/A -- 223
Other intangible assets, net -- -- -- N/A 379 379
Total assets 240,611 52,817 315,294 N/A (36,489) 572,233
- -----------------------------------------------------------------------------------------------------------------------------
2001
Fee income and other revenue:
Income from customers $ 17,262 $ 4,450 $ 1,531 N/A $ -- $ 23,243
Intersegment income -- -- 1,412 N/A (1,412) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 16,867 3,271 12,112 N/A -- 32,250
Intersegment interest 127 24 (151) N/A -- --
Depreciation and amortization 2,300 516 425 N/A 35 3,276
Income taxes 1,319 25 2,419 N/A (24) 3,739
Net income 2,945 34 4,095 N/A (49) 7,025
Goodwill 223 -- -- N/A -- 223
Other intangible assets, net -- -- -- N/A 587 587
Total assets 262,707 58,844 288,887 N/A (8,061) 602,377
- -----------------------------------------------------------------------------------------------------------------------------
Note 16
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only)
as of December 31, 2003 and 2002, and the related condensed statements of income
and cash flows for each of the years in the three-year period ended December 31,
2003.
43
Condensed Balance Sheets
December 31
------------------------
(In thousands) 2003 2002
--------------------------------------------------------------------------
Assets:
Cash and due from banks $ 346 $ 2,599
Short-term investments 26,666 --
Investment in debt and equity securities,
available-for-sale 63,679 54,854
Loans, net 207,134 205,240
Investment in subsidiary 32,709 29,910
Premises and equipment, net 11,879 14,354
Other assets 21,536 17,538
--------------------------------------------------------------------------
Total assets $363,949 $324,495
==========================================================================
Liabilities and Shareholders' Equity:
Accounts and drafts payable $293,769 $223,621
Borrowings from subsidiary -- 35,861
Other liabilities 5,388 3,967
--------------------------------------------------------------------------
Total liabilities 299,157 263,449
Total shareholders' equity 64,792 61,046
--------------------------------------------------------------------------
Total liabilities and shareholders' equity $363,949 $324,495
==========================================================================
Condensed Statements of Income
December 31
------------------------------
(In thousands) 2003 2002 2001
-----------------------------------------------------------------------------
Income from subsidiary:
Dividends $ 870 $ 2,100 $ --
Interest 163 41 253
Management fees 870 776 827
-----------------------------------------------------------------------------
Income from subsidiary 1,903 2,917 1,080
Information services revenue 28,440 24,622 21,490
Net interest income after provision 13,973 16,119 19,055
Gains on sales of investment securities 1,415 1,313 --
Other income 599 259 222
-----------------------------------------------------------------------------
Total income 46,330 45,230 41,847
-----------------------------------------------------------------------------
Expenses:
Salaries and employee benefits 28,397 26,884 26,080
Other expenses 11,820 12,474 11,517
-----------------------------------------------------------------------------
Total expenses 40,217 39,358 37,597
-----------------------------------------------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 6,113 5,872 4,250
Income tax expense 1,153 552 1,320
-----------------------------------------------------------------------------
Income before undistributed income
of subsidiary 4,960 5,320 2,930
Equity in undistributed income of subsidiary 2,942 1,992 4,095
-----------------------------------------------------------------------------
Net income $ 7,902 $ 7,312 $ 7,025
=============================================================================
44
Condensed Statements of Cash Flows
December 31
----------------------------------
(In thousands) 2003 2002 2001
-----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,902 $ 7,312 $ 7,025
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income
of subsidiary (2,942) (1,992) (4,095)
Net change in other assets (3,998) 3,249 3,452
Net change in other liabilities 1,421 (322) (2,234)
Amortization of stock bonus awards 57 22 80
Other, net 3,223 709 375
-----------------------------------------------------------------------------------------
Net cash provided by operating activities 5,663 8,978 4,603
-----------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in securities (8,825) 22,797 (25,603)
Net (increase) decrease in loans (1,894) (26,893) 7,629
Purchase of bank owned life insurance -- (10,000) --
Purchases of premises and equipment, net (605) (1,990) (5,625)
-----------------------------------------------------------------------------------------
Net cash used in investing activities (11,324) (16,086) (23,599)
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in accounts
and drafts payable 70,148 (68,173) (11,046)
Advances from subsidiary (35,861) 35,861 --
Cash dividends paid (2,814) (2,628) (2,579)
Purchases of common shares for treasury (1,764) (383) (3,279)
Other financing activities 365 368 60
-----------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 30,074 (34,955) (16,844)
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 24,413 (42,063) (35,840)
Cash and cash equivalents at beginning of year 2,599 44,662 80,502
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 27,012 $ 2,599 $ 44,662
=========================================================================================
Note 17
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter YTD
=======================================================================================================
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
=======================================================================================================
2002
Fee revenue and other income $ 6,004 $ 7,502 $ 6,756 $ 7,768 $28,030
Interest income 7,919 8,199 7,863 7,636 31,617
Interest expense 551 585 579 558 2,273
- -------------------------------------------------------------------------------------------------------
Net interest income 7,368 7,614 7,284 7,078 29,344
Provision for loan losses 90 180 90 140 500
Operating expense 11,324 11,713 11,493 12,045 46,575
Income tax expense 612 992 683 700 2,987
Net income $ 1,346 $ 2,231 $ 1,774 $ 1,961 $ 7,312
Net income per share:
Basic earnings per share* $ .36 $ .61 $ .48 $ .53 $ 1.98
Diluted earnings per share* .36 .60 .47 .53 1.96
=======================================================================================================
*Basic and diluted earnings per share have been adjusted to reflect the 10%
stock dividend declared in February 2004.
45
Independent Auditors' Report
The Board of Directors and Shareholders of Cass Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cass
Information Systems, Inc. and subsidiaries (the Company) as of December 31, 2003
and 2002, 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, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Cass
Information Systems, Inc. and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
February 27, 2004
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
the information it is required to disclose in the reports it files with the SEC
is recorded, processed, summarized and reported to management, including the
Chief Executive Officer and Chief Financial Officer within the time periods
specified in the rules of the SEC. The Company's Chief Executive and Chief
Financial Officers have reviewed and evaluated the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2003 and based on their evaluation believe that these
procedures are effective to ensure that the Company is able to collect, process
and disclose the information it is required to disclose in the reports it files
with the SEC within the required time periods.
There were no changes in the fourth quarter of 2003 in the Company's internal
controls identified by the Chief Executive and Chief Financial Officers in
connection with their evaluation that materially affected or are reasonably
likely to materially affect the Company's internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
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 2004 Annual Meeting of Shareholders, a copy of which will be filed with
the Securities and Exchange Commission (SEC) no later than 120 days after the
close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for its 2004 Annual
Meeting of Shareholders, a copy of which will be filed with the SEC no later
than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for its 2004 Annual Meeting of Shareholders, a copy of which
will be filed with the SEC no later than 120 days after the close of the fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for its 2004
Annual Meeting of Shareholders, a copy of which will be filed with the SEC no
later than 120 days after the close of the fiscal year.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning fees billed by the Company's principal accountant for
services is incorporated herein by reference from the Company's definitive Proxy
Statement for its 2004 Annual Meeting of Shareholders, a copy of which will be
filed with the SEC no later than 120 days after the close of the fiscal year.
47
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference in or filed as
an exhibit to this Report:
(1) and (2) Financial Statements and Financial Statement
Schedules
Submitted as a separate section of this report.
(3) Exhibits
3.1 Restated Articles of Incorporation of Registrant,
incorporated by reference to Exhibit 4.1 to Form
S-8 Registration Statement No. 333-44499, filed
with the SEC on January 20, 1998
3.2 Bylaws of Registrant, incorporated by reference to
Exhibit 4.2 to Form S-8 Registration Statement No.
333-44499, filed with the SEC on January 20, 1998
10.1 1995 Restricted Stock Bonus Plan, as amended to
January 19, 1999, including form of Restriction
Agreement, incorporated by reference to Exhibit
4.3 to Post-Effective Amendment No. 2 to Form S-8
Registration Statement No. 33-91456, filed with
the SEC on February 16, 1999
10.2 1995 Performance-Based Stock Option Plan, as
amended to January 19, 1999, including forms of
Option Agreements, incorporated by reference to
Exhibit 4.3 to Post-Effective Amendment No. 2 to
Form S-8 Registration Statement No. 33-91568,
filed with the SEC on February 16, 1999
21 Subsidiaries of registrant
23 Consent of KPMG LLP
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 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Items 7 and 9 dated
October 23, 2003, reporting the announcement of the Company's
earnings for the third quarter of 2003.
48
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 8, 2004 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
Date: March 8, 2004 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 8, 2004 By /s/ Robert J. Bodine
----------------------------------------
Robert J. Bodine
Date: March 8, 2004 By /s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Date: March 8, 2004 By /s/ Bryan S. Chapell
----------------------------------------
Bryan S. Chapell
Date: March 8, 2004 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Date: March 8, 2004 By /s/ Thomas J. Fucoloro
----------------------------------------
Thomas J. Fucoloro
Date: March 8, 2004 By /s/ Wayne J. Grace
----------------------------------------
Wayne J. Grace
Date: March 8, 2004 By /s/ Harry J. Krieg
----------------------------------------
Harry J. Krieg
Date: March 8, 2004 By /s/ Howard A. Kuehner
----------------------------------------
Howard A. Kuehner
Date: March 8, 2004 By /s/ Jake Nania
----------------------------------------
Jake Nania
Date: March 8, 2004 By /s/ Irving A. Shepard
----------------------------------------
Irving A. Shepard
Date: March 8, 2004 By /s/ A. J. Signorelli
----------------------------------------
A. J. Signorelli
Date: March 8, 2004 By /s/ Bruce E. Woodruff
----------------------------------------
Bruce E. Woodruff
49
Exhibit 21
SUBSIDIARIES OF CASS INFORMATION SYSTEMS, INC.
(f/k/a Cass Commercial Corporation(1))
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
Independent Auditors' Consent
The Board of Directors
Cass Information Systems, Inc.:
We consent to the incorporation by reference in the registration statements No.
33-91456, No. 33-91568, and No. 333-44499 on Form S-8 of Cass Information
Systems, Inc. (Cass) of our report dated February 27, 2004, relating to the
consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries
as of December 31, 2003 and 2002, 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, 2003, which report
appears in the December 31, 2003 annual report on Form 10-K of Cass.
/s/ KPMG LLP
St. Louis, Missouri
March 8, 2004
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 annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the consolidated 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)) 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) 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 function):
a) all significant deficiencies in the design or operation of internal
controls 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 8, 2004
Exhibit 31.2
CERTIFICATION
I, Eric H. Brunngraber, Chief Financial and Accounting Officer of Cass
Information Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cass Information
Systems, Inc.;
2. Based on my knowledge, this 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 consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
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)) 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) 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 function):
a) all significant deficiencies in the design or operation of internal
controls 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
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Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
March 8, 2004
Exhibit 32
CERTIFICATION PURSUANT TO
10 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, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we,
Lawrence A. Collett and Eric H. Brunngraber, Chairman and Chief Executive
Officer and Chief Financial and Accounting Officer, respectively, 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 result of operations
of the Company.
/s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
March 8, 2004
/s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
March 8, 2004
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.