UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File No. 2-80070
----------------
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1265338
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
13001 Hollenberg Drive
Bridgeton, Missouri 63044
(Address of principal executive offices) (Zip Code)
(314) 506-5500
(Registrant's telephone number, including area code)
-----------------
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 whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one)
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of registrant's only class of stock as of
May 7, 2007: Common stock, par value $.50 per share - 8,371,089 shares
outstanding.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2007 (unaudited) and December 31, 2006 .............. 3
Consolidated Statements of Income
Three months ended March 31, 2007 and 2006 (unaudited) ........ 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2007 and 2006 (unaudited) ........ 5
Notes to Consolidated Financial Statements (unaudited) .......... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 21
Item 4. CONTROLS AND PROCEDURES ......................................... 21
PART II - Other Information - Items 1. - 6. ................................. 21
SIGNATURES ............................................................... 23
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 forward-looking
statements, including those set forth in this paragraph and in the "Risk
Factors" section of the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission. 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.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands except Share and Per Share Data)
March 31 December 31
2007 2006
Assets
Cash and due from banks $ 22,818 $ 26,995
Federal funds sold and other short-term investments 120,168 169,509
--------- ---------
Cash and cash equivalents 142,986 196,504
--------- ---------
Securities available-for-sale, at fair value 130,401 102,749
Loans 530,609 504,125
Less: Allowance for loan losses 6,822 6,592
--------- ---------
Loans, net 523,787 497,533
--------- ---------
Premises and equipment, net 12,618 12,898
Investment in bank-owned life insurance 12,156 12,024
Payments in excess of funding 12,525 9,333
Goodwill 7,471 7,471
Other intangible assets, net 1,086 1,156
Other assets 18,656 18,803
--------- ---------
Total assets $ 861,686 $ 858,471
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 90,781 $ 106,587
Interest-bearing 182,720 183,307
--------- ---------
Total deposits 273,501 289,894
Accounts and drafts payable 484,013 468,393
Short-term borrowings 27 181
Subordinated convertible debentures 3,700 3,700
Liabilities related to discontinued operations -- 277
Other liabilities 13,300 12,105
--------- ---------
Total liabilities 774,541 774,550
--------- ---------
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 9,112,484
shares issued at March 31, 2007 and
December 31, 2006, respectively 4,556 4,556
Additional paid-in capital 17,206 17,896
Retained earnings 84,697 81,516
Common shares in treasury, at cost
(744,995 shares at March 31, 2007 and
784,773 shares at December 31, 2006) (16,211) (17,077)
Accumulated other comprehensive loss (3,103) (2,970)
--------- ---------
Total shareholders' equity 87,145 83,921
--------- ---------
Total liabilities and shareholders' equity $ 861,686 $ 858,471
========= =========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended
March 31
------------------
2007 2006
Fee Revenue and Other Income:
Information services payment and processing revenue $11,249 $ 9,688
Bank service fees 393 577
Other 221 201
------- -------
Total fee revenue and other income 11,863 10,466
------- -------
Interest Income:
Interest and fees on loans 8,988 8,782
Interest and dividends on securities:
Taxable 243 266
Exempt from federal income taxes 910 636
Interest on federal funds sold and
other short-term investments 1,855 1,272
------- -------
Total interest income 11,996 10,956
------- -------
Interest Expense:
Interest on deposits 1,960 1,264
Interest on short-term borrowings 2 2
Interest on subordinated convertible debentures 49 49
------- -------
Total interest expense 2,011 1,315
------- -------
Net interest income 9,985 9,641
Provision for loan losses 225 150
------- -------
Net interest income after provision for loan losses 9,760 9,491
------- -------
Operating Expense:
Salaries and employee benefits 11,539 10,270
Occupancy 490 455
Equipment 812 653
Amortization of intangible assets 70 43
Other operating 2,422 2,448
------- -------
Total operating expense 15,333 13,869
------- -------
Income before income tax expense 6,290 6,088
Income tax expense 2,104 2,136
------- -------
Net income $ 4,186 $ 3,952
======= =======
Basic earnings per share $ .50 $ .47
Diluted earnings per share .49 .47
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31
----------------------
2007 2006
Cash Flows From Operating Activities:
Net income $ 4,186 $ 3,952
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 645 471
Provision for loan losses 225 150
Stock-based compensation expense 139 48
Deferred income tax expense (benefit) 986 (1,031)
Increase in income tax liability 972 3,551
Increase in pension liability 479 375
Other operating activities, net (1,430) (996)
Operating activities of discontinued operations -- (1,327)
--------- ---------
Net cash provided by operating activities 6,202 5,193
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of securities available-for-sale 17,000 21,510
Purchase of securities available-for-sale (44,904) (21,290)
Net (increase) decrease in loans (26,479) 2,040
Increase in payments in excess of funding (3,192) (909)
Purchases of premises and equipment, net (248) (605)
--------- ---------
Net cash (used in) provided by investing activities (57,823) 746
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (15,806) (13,387)
Net decrease in interest-bearing demand and savings deposits (12,777) (4,337)
Net increase in time deposits 12,189 8,648
Net increase (decrease) in accounts and drafts payable 15,619 (4,418)
Net decrease in short-term borrowings (154) (161)
Cash proceeds from exercise of stock options 4 322
Cash dividends paid (1,005) (890)
Tax benefits on stock awards 33 24
--------- ---------
Net cash used in financing activities (1,897) (14,199)
--------- ---------
Net decrease in cash and cash equivalents (53,518) (8,260)
Cash and cash equivalents at beginning of period 196,504 149,692
--------- ---------
Cash and cash equivalents at end of period $ 142,986 $ 141,432
========= =========
Supplemental information:
Cash paid for interest $ 1,939 $ 1,154
Cash paid (received) for income taxes 186 (406)
See accompanying notes to unaudited consolidated financial statements.
-5-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Certain amounts in the 2006 consolidated financial statements
have been reclassified to conform to the 2007 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. The Company's bank subsidiary sold the assets of
Government e-Management Solutions, Inc. ("GEMS"), its wholly owned subsidiary,
on December 30, 2005. The assets, liabilities and results of operations of GEMS
were presented in the 2006 consolidated financial statements as discontinued
operations. There was no discontinued operations activity in the three-month
periods ended March 31, 2007 or 2006. The Company issued a 50% stock dividend on
September 15, 2006 and the share and per share information have been restated
for all periods presented in the accompanying consolidated financial statements.
For further information, refer to the audited consolidated financial statements
and related footnotes included in Cass Information System, Inc.'s ("the Company"
or "Cass") Annual Report on Form 10-K for the year ended December 31, 2006.
Note 2 - Intangible Assets
The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 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. Intangible assets for the periods ended March 31, 2007 and
December 31, 2006 are as follows:
March 31, 2007 December 31, 2006
=========================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
=========================================================================================================
Assets eligible for amortization:
Software 862 (445) 862 (402)
Customer List 750 (81) 750 (54)
- ---------------------------------------------------------------------------------------------------------
Total 1,612 (526) 1,612 (456)
- ---------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,698 (227)* 7,698 (227)*
- ---------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,698 (227) 7,698 (227)
- ---------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $ (753) $ 9,310 $ (683)
- ---------------------------------------------------------------------------------------------------------
* Amortization through December 31, 2001 prior to adoption of SFAS No. 142.
Software is amortized over four to five years and the customer list is amortized
over seven years. Amortization of intangible assets amounted to $70,000 and
$43,000 for the three-month periods ended March 31, 2007 and 2006, respectively.
Estimated amortization of intangibles over the next five years is as follows:
$280,000 in 2007 and 2008, $222,000 in 2009 and $107,000 in 2010 and 2011.
Note 3 - Equity Investments in Non-Marketable Securities
Non-marketable equity investments in low-income housing projects are included in
other assets on the Company's consolidated balance sheets. The total balance of
these investments at March 31, 2007 was $302,000.
Note 4 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding. The calculations of basic and
diluted earnings per share for the periods ended March 31, 2007 and 2006 are as
follows:
-6-
Three Months Ended
March 31
------------------------
(Dollars in thousands, except per share data) 2007 2006
- --------------------------------------------------------------------------------------------------------
Basic
Net income $ 4,186 $ 3,952
Weighted average common shares outstanding 8,309,110 8,323,370
---------------------------------------------------------------------------------------------------
Basic earnings per share $ .50 $ 0.47
---------------------------------------------------------------------------------------------------
Diluted
Net income $ 4,186 $ 3,952
Net income effect of 5.33% convertible debentures 27 27
---------------------------------------------------------------------------------------------------
Net income 4,213 3,979
---------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,309,110 8,323,370
Effect of dilutive stock options and awards 93,741 53,850
Effect of 5.33% convertible debentures 172,717 172,717
---------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding assuming dilution 8,575,568 8,549,937
---------------------------------------------------------------------------------------------------
Diluted earnings per share $ .49 $ .47
---------------------------------------------------------------------------------------------------
Share and per share data for 2006 in the schedule above have been restated for
the 50% stock dividend issued on September 15, 2006.
Note 5 - Stock Repurchases
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 150,000 shares of the
Company's Common Stock. The Company did not repurchase any shares during the
three-month periods ended March 31, 2007 and 2006. As of March 31, 2007, 120,000
shares remained available for repurchase under the program. Repurchases are made
in the open market or through negotiated transactions from time to time
depending on market conditions.
Note 6 - Comprehensive Income
For the three-month periods ended March 31, 2007 and 2006, unrealized gains and
losses on debt and equity securities available-for-sale were the Company's only
other comprehensive income component. Comprehensive income for the three-month
periods ended March 31, 2007 and 2006 is summarized as follows:
Three Months Ended
March 31
------------------
(In Thousands) 2007 2006
-----------------------------------------------------------------------
Net income $ 4,186 $ 3,952
Other comprehensive income:
Net unrealized (loss) gain on debt and equity
securities available-for-sale, net of tax (133) 98
-----------------------------------------------------------------------
Total comprehensive income $ 4,053 $ 4,050
-----------------------------------------------------------------------
Note 7 - Industry Segment Information
The services provided by the Company are classified into two reportable
segments: Information Services and Banking Services. Each of these segments
provides distinct services that are marketed through different channels. They
are managed separately due to their unique service, processing and capital
requirements.
The Information Services segment provides freight, utility and telecommunication
invoice processing and payment services to large corporations. The Banking
Services segment provides banking services primarily to privately-held
businesses and churches.
The Company's accounting policies for segments are the same as those described
in the summary of significant accounting policies in the Company's Annual Report
on Form 10-K for the year ended December 31, 2006. 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.
-7-
All revenue originates from and all long-lived assets are located within the
United States and no revenue from any customer of any segment exceeds 10% of the
Company's consolidated revenue.
Summarized information about the Company's operations in each industry segment
for the three-month periods ended March 31, 2007 and 2006, is as follows:
Corporate,
Information Banking Eliminations
(In Thousands) Services Services and Other Total
==============================================================================================================
Quarter Ended March 31, 2007
Total Revenues:
Revenue from customers $ 17,743 $ 3,880 $ -- $ 21,623
Intersegment revenue 487 348 (835) --
Net income 3,194 992 -- 4,186
Total assets 546,245 324,686 (9,245) 861,686
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 1,086 -- -- 1,086
Quarter Ended March 31, 2006
Total Revenues:
Revenue from customers $ 15,826 $ 4,131 $ -- $ 19,957
Intersegment revenue 354 405 (759) --
Net income 2,761 1,191 -- 3,952
Total assets 505,962 317,864 (12,928) 810,898
Goodwill 4,262 136 -- 4,398
Other intangible assets, net 892 -- -- 892
Assets related to discontinued operations -- -- 326 326
Note 8 - Loans by Type
(In Thousands) March 31, 2007 December 31, 2006
==============================================================================================================
Commercial and industrial $ 123,165 $ 113,162
Real estate (Commercial and church):
Mortgage 368,645 352,044
Construction 29,852 29,779
Industrial revenue bonds 6,196 6,293
Other 2,751 2,847
- --------------------------------------------------------------------------------------------------------------
Total loans $ 530,609 $ 504,125
==============================================================================================================
Note 9 - Commitments and Contingencies
In the normal course of business, the Company is party to activities that
contain credit, market and operational risks that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating and capital leases. These financial instruments
include commitments to extend credit, commercial letters of credit and standby
letters of credit. The Company's maximum potential exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, commercial letters of credit and standby letters
of credit is represented by the contractual amounts of those instruments. At
March 31, 2007, no amounts have been accrued for any estimated losses for these
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
or its subsidiaries to guarantee the performance of a customer to a third party.
These off-balance sheet financial instruments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. At March
31, 2007 the balance of unused loan commitments, standby and commercial letters
of credit were $28,745,000, $5,643,000 and $2,998,000, respectively. Since some
of the financial instruments may expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. Commitments to
extend credit and letters of credit are subject to the same underwriting
standards as those financial instruments included on the consolidated balance
sheets. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary upon
extension of the credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but is generally accounts receivable,
-8-
inventory, residential or income-producing commercial property or equipment. In
the event of nonperformance, the Company or its subsidiaries may obtain and
liquidate the collateral to recover amounts paid under its guarantees on these
financial instruments.
The following table summarizes contractual cash obligations of the Company
related to operating and capital lease commitments, time deposits and
convertible subordinated debentures at March 31, 2007:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(Dollars in thousands at March 31, 2007) Total 1 Year Years Years Years
================================================================================================================
Operating lease commitments $ 4,301 $ 709 $1,187 $ 939 $ 1,466
Time deposits 100,986 97,263 2,291 1,432 --
Convertible subordinated debentures* 3,700 -- -- -- 3,700
- ----------------------------------------------------------------------------------------------------------------
Total $ 108,987 $ 97,972 $3,478 $2,371 $ 5,166
================================================================================================================
* Includes principal payments only.
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 10 - Stock-Based Compensation
The Company maintains stock-based incentive plans, which permit the awards of up
to 259,875 shares of restricted common stock and the granting of options to
acquire up to 1,039,000 shares of common stock. Restricted shares are amortized
to expense over the three-year vesting period. Options currently vest and expire
over a period not to exceed seven years. The plans authorize the grant of awards
in the form of options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code, options that do not qualify
(non-statutory stock options) and grants of restricted shares of common stock.
The Company issues shares out of treasury stock for restricted shares and option
exercises.
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share based
Payment." As of March 31, 2007, the total unrecognized compensation expense
related to non-vested stock options was $126,000 and the related
weighted-average period over which it is expected to be recognized is
approximately 4.6 years. As of March 31, 2007, the total unrecognized
compensation expense related to non-vested stock awards was $1,692,000 and the
related weighted-average period over which it is expected to be recognized is
approximately 2.3 years.
Changes in restricted shares outstanding were as follows:
Shares Fair Value
-----------------------------------------------------------------------
Balance at December 31, 2006 22,481 22.88
Granted 39,520 37.30
Vested (5,416) 18.64
Forfeited -- --
-----------------------------------------------------------------------
Balance at March 31, 2007 56,585 33.36
-----------------------------------------------------------------------
There were no stock options granted during the three-month period ended March
31, 2007. Following are the assumptions used to estimate the fair value of
option grants during the three-month period ended March 31, 2006:
Three Months Ended
March 31
----------------------------------------------------------------------
2007 2006
Risk-free interest rate -- 4.37%
Expected life -- 7 yrs.
Expected volatility -- 5.00%
Expected dividend yield -- 1.88%
----------------------------------------------------------------------
The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for
the period equal to the expected life of the options at the time of the grant.
The expected life was derived using the historical exercise activity. The
Company uses historical volatility for a period equal to the expected life of
the options using average monthly closing market prices of the Company's stock.
The expected dividend yield is determined based on the Company's current rate of
annual dividends.
-9-
Under the treasury stock method, outstanding stock options are dilutive when the
average market price of the Company's common stock, when combined with the
effect of any unamortized compensation expense, exceeds the option price during
a period. In addition, proceeds from the assumed exercise of dilutive options
along with the related tax benefit are assumed to be used to repurchase common
shares at the average market price of such stock during the period.
Anti-dilutive shares are those option shares with exercise prices in excess of
the current market value.
A summary of the Company's stock option program for the three-month period ended
March 31, 2007 is shown below.
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years ($000)
============================================================
Outstanding at January 1, 2007 87,805 $ 15.40
Granted -- --
Exercised (258) 15.96
Forfeited or expired -- --
--------- --------
Outstanding at March 31, 2007 87,547 15.40 4.09 $ 1,607
=============================================================
Exercisable at March 31, 2007 17,477 $ 11.49 3.07 $ 389
=============================================================
The total intrinsic value of options exercised was $5,000 and $1,623,000 for the
three-month periods ended March 31, 2007 and 2006, respectively.
A summary of the activity of the non-vested options during the three-month
period ended March 31, 2007 is shown below.
Weighted-
Average
Grant Date
Shares Fair Value
- --------------------------------------------------------------------------------
Nonvested at January 1, 2007 85,406 $ 2.38
Granted -- $ --
Vested (15,336) $ 1.75
Forfeited -- --
- --------------------------------------------------------------------------------
Nonvested at March 31, 2007 70,070 $ 2.52
================================================================================
Note 11 - Defined Pension Plans
The Company has a noncontributory defined benefit pension plan, which covers
most of its employees. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit
with service proration method to amortize prior service costs arising from
improvements in pension benefits and qualifying service prior to the
establishment of the plan over a period of approximately 30 years. Disclosure
information is based on a measurement date of December 31 of the corresponding
year.
The following table represents the components of the net periodic pension costs
for 2006 and an estimate for 2007:
Estimated Actual
(In Thousands) 2007 2006
=========================================================================
Service cost - benefits earned during the year $ 1,565 $ 1,554
Interest cost on projected benefit obligation 1,721 1,565
Expected return on plan assets (1,871) (1,603)
Net amortization 125 270
-------------------------------------------------------------------------
Net periodic pension cost $ 1,540 $ 1,786
-------------------------------------------------------------------------
Pension costs recorded to expense were $403,000 and $338,000 for the three-month
periods ended March 31, 2007 and 2006, respectively. The Company has not made
any contribution to the plan during the three-month period ended March 31, 2007,
but expects to contribute at least $1,800,000 in 2007.
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 and its
-10-
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
following table represents the components of the net periodic pension costs for
2006 and an estimate for 2007:
Estimated Actual
(In Thousands) 2007 2006
===========================================================================
Service cost - benefits earned during the year $ 43 $ 43
Interest cost on projected benefit obligation 164 150
Net amortization 100 111
---------------------------------------------------------------------------
Net periodic pension cost $ 307 $ 304
---------------------------------------------------------------------------
Pension costs recorded to expense were $86,000 and $48,000 for the three-month
periods ended March 31, 2007 and 2006, respectively.
Note 12 - Income Taxes
The Company adopted FASB Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes" effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes in financial statements and
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken.
The Company had unrecognized tax benefits of approximately $655,000 as of
January 1, 2007. The total amount of federal and state unrecognized tax benefits
at January 1, 2007 that, if recognized, would affect the effective tax rate was
$488,000, net of federal tax benefit. There have been no significant changes to
the unrecognized tax benefits during the three months ended March 31, 2007. The
company expects a reduction of $31,000 in unrecognized tax benefits during the
remaining nine-month period ending December 31, 2007 as a result of the lapse of
federal and state statutes of limitations.
Interest and penalties are immaterial at the date of adoption. The company
recognizes interest and penalties related to uncertain tax positions in income
tax expense. The amount of interest recognized during the three months ended
March 31, 2007 was immaterial.
The Company is subject to income tax in the U. S. federal jurisdiction and
numerous state jurisdictions. U.S. federal income tax returns for tax years 2003
and 2006 remain subject to examination by the Internal Revenue Service ("IRS").
In addition, the Company is subject to state tax examinations for the tax years
2003 through 2006.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Cass Information Systems, Inc. provides payment and information processing
services to large manufacturing, distribution and retail enterprises from its
processing centers in St. Louis, Missouri, Columbus, Ohio, Boston,
Massachusetts, Greenville, South Carolina and Wellington, Kansas. The Company's
services include freight invoice rating, payment processing, auditing, and the
generation of accounting and transportation information. Cass also processes and
pays utility invoices, which includes electricity, gas and telecommunications
expenses and is a provider of telecom expense management solutions. Cass
extracts, stores and presents information from freight, utility and
telecommunication invoices, assisting its customers' transportation, energy and
information technology managers in making decisions that will enable them to
improve operating performance. The Company receives data from multiple sources,
electronic and otherwise, and processes the data to accomplish the specific
operating requirements of its customers. It then provides the data in a central
repository for access and archiving. The data is finally transformed into
information through the Company's databases that allow client interaction as
required and provide Internet-based tools for analytical processing. The Company
also, through Cass Commercial Bank, its St. Louis, Missouri based bank
subsidiary (the "Bank"), provides banking services in the St. Louis metropolitan
area, Orange County, California and other selected cities in the United States.
In addition to supporting the Company's payment operations, the Bank provides
banking services to its target markets, which include privately owned businesses
and churches and church-related ministries.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's requirements, which
can vary greatly. In addition, the degree of automation such as electronic data
interchange ("EDI"), imaging, and web-based solutions varies greatly among
customers and industries. These factors combine so that pricing varies greatly
among the customer base. In general, however, Cass is compensated for its
processing services through service fees and account balances that are generated
during the payment process. The amount, type and calculation of service fees
vary greatly by service offering, but generally follow the volume of
transactions processed. Interest income from the balances generated during the
payment processing cycle is affected by the amount of time Cass holds the funds
prior to payment and the dollar volume processed. Both the number of
transactions processed and the dollar volume processed are therefore key metrics
followed by management. Other factors will also influence revenue and
profitability, such as changes in the general level of interest rates, which
have a significant effect on net interest income. The funds generated by these
processing activities are invested in overnight investments, investment grade
securities and loans generated by the Bank. The Bank earns most of its revenue
from net interest income, or the difference between the interest earned on its
loans and investments and the interest paid on its deposits. The Bank also
assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the acceptance by large
corporations of the outsourcing of key business functions such as freight,
utility and telecommunication payment and audit. The benefits that can be
achieved by outsourcing transaction processing and the management information
generated by Cass' systems can be influenced by factors such as the competitive
pressures within industries to improve profitability, the general level of
transportation costs, deregulation of energy costs and consolidation of
telecommunication providers. Economic factors that impact the Company include
the general level of economic activity that can affect the volume and size of
invoices processed, the ability to hire and retain qualified staff and the
growth and quality of the loan portfolio. The general level of interest rates
also has a significant effect on the revenue of the Company.
On July 7, 2006, the Company acquired 100% of the stock of NTransit, Inc., a
company whose service provides auditing and expense management of parcel
shipments. While this acquisition did not meet the Regulation S-X criteria of a
significant business combination, it positioned the Company to expand its
offerings in the specialized service and expertise in parcel shipping, which is
a unique segment of the transportation industry that has experienced tremendous
growth in recent years.
Currently, management views Cass' major opportunity and challenge as the
continued expansion of its payment and information processing service offerings
and customer base. Management intends to accomplish this by maintaining the
Company's lead in applied technology, which, when combined with the security and
processing controls of the Bank, makes Cass unique in the industry.
-12-
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP"). In preparing the consolidated financial statements in accordance with
U.S. GAAP, management makes estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. These estimates have been
generally accurate in the past, have been consistent and have not required any
material changes. There can be no assurances that actual results will not differ
from those estimates. Certain accounting policies that require significant
management estimates and are deemed critical to 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 both segments of the
Company. The impact and associated risks related to these policies on our
business operations are discussed in the "Provision and Allowance for Loan
Losses" section of this report.
Impairment of Assets. The Company 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 both segments of the Company and require significant management
assumptions and estimates that could result in materially different results if
conditions or underlying circumstances change.
Income Taxes. The objectives of accounting for income taxes are to recognize the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in addressing the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns such as the
realization of deferred tax assets, changes in tax laws or interpretations
thereof. In addition, the Company is subject to the continuous examination of
its income tax returns by the Internal Revenue Service and other taxing
authorities. Effective January 1, 2007, the Company adopted FIN No. 48,
"Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement
No. 109." FIN No. 48 provides guidance for the recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. See Note 12 to the
financial statements.
Pension Plans. The amounts recognized in the consolidated financial statements
related to pension are determined from actuarial valuations. Inherent in these
valuations are assumptions including expected return on plan assets, discount
rates at which the liabilities could be settled at December 31, 2006, rate of
increase in future compensation levels and mortality rates. These assumptions
are updated annually and are disclosed in Note 13 to the consolidated financial
statements filed with the Company's annual report on Form 10-K for the year
ended December 31, 2006. In September 2006, the FASB issued Statement No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS No.
158"). SFAS No. 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. The funded status is measured as the difference between the fair value
of the plan assets and the benefit obligation as of the date of its fiscal
year-end. The Company recognized the required changes and disclosures in its
consolidated 2006 financial statements.
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended March 31, 2007
("First Quarter of 2007") compared to the three-month period ended March 31,
2006 ("First Quarter of 2006"). The following discussion and analysis should be
read in conjunction with the consolidated financial statements and related notes
and with the statistical information and financial data appearing in this report
as well as the Company's 2006 annual report on Form 10-K. Results of operations
for the First Quarter of 2007 are not necessarily indicative of the results to
be attained for any other period.
-13-
Net Income
The following table summarizes the Company's operating results:
Three Months Ended
March 31
--------------------------------------
%
(Dollars in thousands, except per share data) 2007 2006 Change
=============================================================================================
Net income $ 4,186 $ 3,952 5.9%
Diluted earnings per share $ .49 $ .47 4.3%
Return on average assets 1.97% 1.97% --
Return on average equity 20.12% 21.03% --
---------------------------------------------------------------------------------------------
Fee Revenue and Other Income from Continuing Operations
The Company's fee revenue is derived mainly from freight and utility payment and
processing fees. As the Company provides its processing and payment services, it
is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the First Quarter of 2007
and First Quarter of 2006 were as follows:
Three Months Ended
March 31
--------------------------------------
%
(In Thousands) 2007 2006 Change
=========================================================================================
Freight Core Invoice Transaction Volume* 6,064 5,994 1.2%
Freight Invoice Dollar Volume $ 3,411,394 $ 3,450,076 (1.1)%
Utility Transaction Volume 2,240 1,503 49.0%
Utility Transaction Dollar Volume $ 1,774,004 $ 1,374,215 29.1%
Payment and Processing Fees $ 11,249 $ 9,688 16.1%
-----------------------------------------------------------------------------------------
* Core invoices exclude parcel shipments.
Freight transaction volume and invoice dollar volume for the First Quarter of
2007 remained consistent with the same period in 2006. This is reflective of the
lack of growth in shipping activity in the United States, particularly in the
large manufacturing segments. The increase in transaction and dollar volume from
utility transactions increased primarily due to new customers as the growth of
this division continues. The increase in utility transaction volume drove the
increase in payment and processing fees.
Bank service fees decreased $184,000 or 32%. This decrease was due primarily to
a penalty charged for the early withdrawal of a certificate of deposit by one
large bank customer in 2006. Other income increased $20,000 in the First Quarter
of 2007.
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the First Quarter of 2007 and First Quarter of
2006:
Three Months Ended
March 31
--------------------------------------
(Dollars In Thousands) 2007 2006 Change
=========================================================================================
Average earning assets $779,623 $743,472 4.9%
Net interest income* 10,515 10,015 5.0%
Net interest margin* 5.47% 5.46% --
Yield on earning assets* 6.52% 6.18% --
Rate on interest bearing liabilities 4.13% 3.03% --
-----------------------------------------------------------------------------------------
* Presented on a tax-equivalent basis assuming a tax rate of 35% in 2007
and 2006.
The increase in net interest income was primarily due to a significant increase
in earning assets and an increase in yields on earning assets that exceeded the
counteracting effect of increases in rates paid on deposit accounts. The
increase in earning assets was funded by an increase in accounts and drafts
payable due to the increase in dollar volume processed that exceeded a decrease
in bank deposits. This decrease was caused mainly by management's decision to
-14-
reduce the balances of higher-cost funding. Yields on earning assets and rates
paid on deposit accounts both increased as the general level of interest rates
increased. However, as the balances of earning assets greatly exceed the
balances of interest-bearing deposits, the net effect on net interest margin was
positive.
Total average loans decreased $12,433,000 or 2.3% to $516,705,000. This decrease
was attributable to the repayment of several commercial loans. Total average
investment in debt and equity securities increased $22,011,000 or 23% to
$116,804,000 as the Company invested a portion of the increase in payables.
Total average federal funds sold and other short-term investments increased
$26,573,000 or 22% to $146,114,000. This increase provides additional liquidity
to the Company. For more information on the changes in net interest income
please refer to the tables that follow.
The Company is positively affected by increases in the level of interest rates
due to the fact that its rate-sensitive assets significantly exceed its
rate-sensitive liabilities. 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.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table shows the 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.
First Quarter 2007 First Quarter 2006
------------------------------------- --------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
====================================================================================================================================
Assets (1)
Earning assets:
Loans (2,3):
Taxable $ 510,465 $ 8,916 7.08% $ 524,121 $ 8,725 6.75%
Tax-exempt (4) 6,240 112 7.31 5,017 89 7.19
Debt and equity securities (5):
Taxable 20,549 243 4.80 28,649 266 3.77
Tax-exempt (4) 96,255 1,399 5.90 66,144 978 6.00
Federal funds sold and other
short-term investments 146,114 1,856 5.15 119,541 1,272 4.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 779,623 12,526 6.52 743,472 11,330 6.18
Nonearning assets:
Cash and due from banks 25,386 28,947
Premises and equipment, net 12,843 12,049
Bank-owned life insurance 12,069 11,587
Goodwill and other intangibles, net 8,593 5,318
Other assets 28,181 20,530
Assets related to discontinued
operations -- --
Allowance for loan losses (6,672) (6,255)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 860,023 $ 815,648
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 64,669 $ 518 3.25% $ 83,112 $ 471 2.30%
Savings deposits 22,978 194 3.42 19,845 103 2.10
Time deposits of
$100 or more 69,282 890 5.21 37,144 382 4.17
Other time deposits 29,476 358 4.94 31,996 308 3.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 186,405 1,960 4.27 172,097 1,264 2.98
Short-term borrowings 175 2 5.11 164 2 4.95
Subordinated Debentures 3,700 49 5.37 3,700 49 5.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 190,280 2,011 4.29 175,961 1,315 3.03
-15-
Noninterest-bearing liabilities:
Demand deposits 96,306 100,932
Accounts and drafts payable 476,275 455,834
Other liabilities 12,775 5,461
Liabilities related to
discontinued operations -- 1,258
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 775,636 739,446
Shareholders' equity 84,387 76,202
Total liabilities and
shareholders' equity $ 860,023 $ 815,648
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,515 $ 10,015
Net interest margin 5.47% 5.46%
Interest spread 2.23% 3.15%
====================================================================================================================================
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 Note 1 to the Company's 2006
consolidated financial statements, filed with the Company's 2006 annual
report on Form 10-K.
3. Interest income on loans includes net loan fees of $46,000 and $72,000 for
the First Quarter of 2007 and 2006, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2007 and 2006. The tax-equivalent adjustment was approximately
$530,000 and $374,000 for the First Quarter of 2007 and 2006,
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
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
First Quarter
2007 Over 2006
--------------------------
(In Thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ (231) $ 422 $ 191
Tax-exempt (3) 22 1 23
Debt and equity securities:
Taxable (86) 63 (23)
Tax-exempt (3) 438 (17) 421
Federal funds sold and other
short-term investments 312 272 584
- -------------------------------------------------------------------------------
Total interest income 455 741 1,196
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (119) 166 47
Savings deposits 19 72 91
Time deposits of $100 or more 394 114 508
Other time deposits (27) 77 50
Short-term borrowings -- -- --
Subordinated debentures -- -- --
Total interest expense $ 267 $ 429 $ 696
- -------------------------------------------------------------------------------
Net interest income $ 188 $ 312 $ 500
===============================================================================
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2007 and 2006.
Provision and Allowance for Loan Losses
A significant determinant of the Company's operating results is the provision
for loan losses and the level of loans charged off. Provisions of $225,000 and
$150,000 were made for loan losses during the First Quarter of 2007 and the
-16-
First Quarter of 2006, respectively. As discussed below, the Company continually
analyzes the outstanding loan portfolio based on the performance, financial
condition and collateralization of the credits. There was $5,000 of net loan
recoveries in the First Quarter of 2007 and $221,000 of net loan charge-offs in
the First Quarter 2006.
The allowance for loan losses at March 31, 2007 was $6,822,000 and at December
31, 2006 was $6,592,000. The ratio of allowance for loan losses to total loans
outstanding at March 31, 2007 was 1.29% compared to 1.31% at December 31, 2006.
Nonperforming loans were $764,000 or .14% of total loans at March 31, 2007
compared to $795,000 or .16% of total loans at December 31, 2006.
At March 31, 2007, nonperforming loans, which are also considered impaired,
consisted of $764,000 in non-accrual loans as shown in the following table. This
total consists of three loans that relate to businesses that are in bankruptcy,
financial trouble or are in process of liquidation. Nonperforming loans at
December 31, 2006 consisted of $795,000 in non-accrual loans and relate to these
three borrowers. Total nonperforming loans decreased $621,000 from March 31,
2006 to March 31, 2007. This decrease was primarily due to the collection of one
loan, charge-offs of three other loans and a reduction in principal balance of
the other nonperforming loan.
In addition to the nonperforming loans discussed above, at March 31, 2007,
approximately $5,178,000 of loans not included in the table below were
identified by management as having potential credit problems. They may also be
classified for regulatory purposes. These loans are excluded from the table due
to the fact they are current under the original terms of the loans, however
circumstances have raised doubts as to the ability of the borrowers to comply
with the current loan repayment terms. Included in this balance is $3,220,000
related to one borrower that was renegotiated several years ago and although
current under the new terms of the contract, management believes, due to the
financial condition of the borrower, there still remains risk as to the
collectability of all amounts under the loan agreement. The remaining loans are
closely monitored by management and have specific reserves established for the
estimated loss exposure.
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial, real
estate, and construction loans based on individual review of these loans and an
estimate of the borrower's ability to repay the loan given the availability of
collateral, other sources of cash flow and collection options available. The
general component relates to all other loans, which are evaluated based on loan
grade. The loan grade assigned to each loan is typically evaluated on an annual
basis, unless circumstances require interim evaluation. The Company assigns a
reserve amount consistent with each loan's rating category. The reserve amount
is based on derived loss experience over prescribed periods. In addition to the
amounts derived from the loan grades, a portion is added to the general reserve
to take into account other factors including national and local economic
conditions, downturns in specific industries including loss in collateral value,
trends in credit quality at the Company and the banking industry, and trends in
risk rating changes. As part of their examination process, federal and state
agencies review the Company's methodology for maintaining the allowance for loan
losses and the balance in the account. These agencies may require the Company to
increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
Summary of Asset Quality
The following table presents information as of and for the three-month periods
ended March 31, 2007 and 2006 pertaining to the Company's provision for loan
losses and analysis of the allowance for loan losses.
-17-
Three Months Ended
March 31
----------------------------
(Dollars in Thousands) 2007 2006
=========================================================================================
Allowance at beginning of period $ 6,592 $ 6,284
Provision charged to expense 225 150
Loans charged off -- (224)
Recoveries on loans previously charged off 5 3
- -----------------------------------------------------------------------------------------
Net loan recoveries (charge-offs) 5 (221)
Allowance at end of period $ 6,822 $ 6,213
- -----------------------------------------------------------------------------------------
Loans outstanding:
Average $ 516,705 $ 529,138
March 31 530,609 527,045
Ratio of allowance for loan losses to loans outstanding:
Average 1.32% 1.17%
March 31 1.29% 1.18%
Nonperforming loans:
Nonaccrual loans 764 $ 1,385
Loans past due 90 days or more -- --
Renegotiated loans -- --
- -----------------------------------------------------------------------------------------
Total non performing loans $ 764 $ 1,385
Foreclosed assets -- --
- -----------------------------------------------------------------------------------------
Nonperforming loans as a percent of average loans .15% .26%
=========================================================================================
The Bank had no properties carried as other real estate owned as of March 31,
2007 and 2006 and December 31, 2006.
Operating Expense
Total operating expense for the First Quarter of 2007 increased $1,464,000 or
11% to $15,333,000 compared to the First Quarter of 2006 due primarily to
expenses related to the 16% growth in processing activity.
Salaries and benefits expense increased $1,269,000 or 12% to $11,539,000 in the
First Quarter of 2007 compared with the First Quarter of 2006 primarily due to
additional headcount to service new transaction business and an increase in
bonuses related to the earnings increase over the comparable period last year.
Occupancy expense for the First Quarter of 2007 increased $35,000 or 8% to
$490,000 from the First Quarter of 2006 primarily due to additional maintenance
and repairs.
Equipment expense for the First Quarter of 2007 increased $159,000 or 24%
compared to the First Quarter of 2006 due to additional contract maintenance and
software licenses.
Amortization of intangible assets increased $27,000 to $70,000 for the First
Quarter of 2007 due to the customer list purchased with the NTransit, Inc.
acquisition in July 2006.
Other operating expenses decreased $26,000 to $2,422,000 for the First Quarter
of 2007.
Income tax expense for the First Quarter of 2007 decreased $32,000 or 2%
compared to the First Quarter of 2006. The effective tax rate for the First
Quarter of 2007 declined to 33.4% compared with 35.1% in the First Quarter of
2006 due to the increase in tax-exempt municipal securities held.
Financial Condition
Total assets at March 31, 2007 increased $3,215,000, less than 1% from December
31, 2006. The most significant changes in asset balances during this period was
a decrease of $49,341,000 or 29% in federal funds sold and other short-term
investments. Changes in federal funds sold and other short-term investments
reflect the Company's daily liquidity position and are affected by the changes
in the other asset balances and changes in deposit and accounts and draft
payable balances.
-18-
Total liabilities were $774,541,000, approximately the same as the balance of
$774,550,000 at December 31, 2006. Total deposits at March 31, 2007 were
$273,501,000, a decrease of $16,393,000 or 6%. Accounts and drafts payable were
$484,013,000, an increase of $15,620,000 or 3%. Total shareholders' equity at
March 31, 2007 was $87,145,000, a $3,224,000 or 4% increase from December 31,
2006.
The decrease in deposits in the First Quarter of 2007 mainly reflects a seasonal
reduction of demand deposits by customers due to typical cash flow requirements
such as payments for taxes and bonuses. Accounts and drafts payable will
fluctuate from period-end to period-end due to the payment processing cycle,
which results in lower balances on days when checks clear and higher balances on
days when checks are issued. For this reason, average balances are a more
meaningful measure of accounts and drafts payable (for average balances refer to
the tables under the "Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rate and Interest Differential" section of this report).
The increase in total shareholders' equity resulted from net income of
$4,186,000, cash received on the exercise of stock options of $4,000, $33,000
tax benefit on stock awards, $139,000 from stock-based compensation expense,
offset by dividends paid of $1,005,000 ($.12 per share), and an increase of
$133,000 in other comprehensive loss.
Liquidity and Capital Resources
The balance of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold and money market funds, and
was $142,986,000 at March 31, 2007, a decrease of $53,518,000 or 27% from
December 31, 2006. At March 31, 2007 these assets represented 17% 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 securities was $130,401,000 at March 31, 2007, an
increase of $27,652,000 from December 31, 2006. These assets represented 15% of
total assets at March 31, 2007. Of this total, 85% were state and political
subdivision securities, 13% were U.S. Treasury securities and 2% were U.S.
government agencies. Of the total portfolio, 14% mature in one year, 28% mature
in one to five years, and 58% mature in five or more years. During the First
Quarter of 2007 the Company did not sell any securities.
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $29,000,000. Additionally, the Bank maintains a line of credit
at unaffiliated financial institutions in the maximum amount of $69,295,000
collateralized by U.S. Treasury and agency securities and commercial and
residential mortgage loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize 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 were $6,202,000 for the First
Quarter of 2007 compared with $5,193,000 for the First Quarter of 2006. This
increase is attributable to the increase in net income of $234,000, the absence
of $1,327,000 in operating activities used by discontinued operations, the other
normal fluctuations in asset and liability accounts, offset by the net change in
income taxes deferred and payable of $562,000. 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. Other causes for the changes
in these account balances are 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 2007.
The Company faces market risk to the extent that its net interest income and
fair market value of equity are affected by changes in market interest rates.
For information regarding the market risk of the Company's financial
instruments, see Item 3. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK".
Risk-based capital guidelines require the Company to meet a minimum total
capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital.
Tier 1 capital generally consists of (a) common shareholders' equity (excluding
the unrealized market value adjustments on the available-for-sale securities),
(b) qualifying perpetual preferred stock and related surplus subject to certain
limitations specified by the Federal Deposit Insurance Corporation ("FDIC"), (c)
minority interests in the equity accounts of consolidated subsidiaries less (d)
goodwill, (e) mortgage servicing rights within certain limits, and (f) any other
intangible assets and investments in subsidiaries that the FDIC determines
should be deducted from Tier 1 capital. The FDIC also requires a minimum
leverage ratio of 3.0%, defined as the ratio of Tier 1 capital less purchased
-19-
mortgage servicing rights to total assets, for banking organizations deemed the
strongest and most highly rated by banking regulators. A higher minimum leverage
ratio is required of less highly rated banking organizations. Total capital, a
measure of capital adequacy, includes Tier 1 capital, allowance for loan losses,
and debt considered equity for regulatory capital purposes.
The Company and the Bank continue to exceed all regulatory capital requirements,
as evidenced by the following capital amounts and ratios at March 31, 2007 and
December 31, 2006:
March 31, 2007 (In Thousands) Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 88,862 13.66%
Cass Commercial Bank 42,027 14.95
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 78,340 12.04%
Cass Commercial Bank 38,499 13.69
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 78,340 9.20%
Cass Commercial Bank 38,499 11.60
===============================================================================
December 31, 2006 (In Thousands) Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 85,205 13.64%
Cass Commercial Bank 42,242 14.19
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 74,913 11.99%
Cass Commercial Bank 38,511 12.94
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 74,913 8.65%
Cass Commercial Bank 38,511 11.25
===============================================================================
Inflation
The Company's assets and liabilities are primarily monetary, consisting of cash,
cash equivalents, securities, loans, payables and deposits. Monetary assets and
liabilities are those that can be converted into a fixed number of dollars. The
Company's consolidated balance sheet reflects a net positive monetary position
(monetary assets exceed monetary liabilities). During periods of inflation, the
holding of a net positive monetary position will result in an overall decline in
the purchasing power of a company. Management believes that replacement costs of
equipment, furniture, and leasehold improvements will not materially affect
operations. The rate of inflation does affect certain expenses, such as those
for employee compensation, which may not be readily recoverable in the price of
the Company's services.
Impact of New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes", an Interpretation of SFAS No. 109 "Accounting for
Income Taxes". FASB Interpretation No. 48 clarifies the accounting for
uncertainty in income taxes in financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken. The Interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The FASB
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company implemented FASB Interpretation No. 48 on January 1, 2007, which did
not have a material impact on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires
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companies to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The funded status is measured as the
difference between the fair value of the plan assets and the projected benefit
obligation as of the date of its fiscal year-end. The Company recognized the
required changes and disclosures in its consolidated 2006 financial statements.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. This statement
is effective for fiscal years ending after November 15, 2006. This bulletin did
not have an impact on the Company's consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is currently assessing the impact of SFAS No.
159 on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company's annual report on Form 10-K for the year ended
December 31, 2006, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at March 31, 2007 has changed materially from that at December 31, 2006.
ITEM 4. 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
Securities and Exchange Commission ("SEC") is recorded, processed, summarized
and reported to management, including the Chief Executive Officer and Principal
Financial Officer, within the time periods specified in the rules of the SEC.
The Company's Chief Executive Officer and Principal Financial Officer have
evaluated the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of March 31, 2007 and based on their evaluation, believe that, as of March
31, 2007, these controls and procedures were effective at the reasonable
assurance level 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 first quarter of 2007 in the Company's internal
control over financial reporting identified by the Chief Executive Officer and
Principal Financial Officer in connection with their evaluation that materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to its
businesses. Management believes none of these proceedings, if
determined adversely, would have a material effect on the business
or financial conditions of the Company or its subsidiaries.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its annual report on
Form 10-K for the year ended December 31, 2006, a description of
certain risks and uncertainties that could affect the Company's
business, future performance or financial condition (the "Risk
Factors"). There are no material changes to the Risk Factors as
disclosed in the Company's 2006 annual report on Form 10-K.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: May 7, 2007 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: May 7, 2007 By /s/ P. Stephen Appelbaum
----------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit 31.1
CERTIFICATIONS
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) 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 the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2007
/s/ Lawrence A. Collett
----------------------------
Lawrence A. Collett
Chairman and Chief Executive
Officer
Exhibit 31.2
CERTIFICATIONS
I, P. Stephen Appelbaum, Chief Financial Officer of Cass Information Systems,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) 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 the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2007
/s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended March 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Lawrence A. Collett, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Lawrence A. Collett
------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
(Principal Executive Officer)
May 7, 2007
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended March 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, P.
Stephen Appelbaum, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
May 7, 2007
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.