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, 2008
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
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CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1265338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one) Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller Reporting Company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of registrant's only class of stock as of
May 2, 2008: Common stock, par value $.50 per share - 9,261,432 shares
outstanding.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2008 (unaudited) and December 31, 2007 ............ 3
Consolidated Statements of Income
Three months ended March 31, 2008 and 2007 (unaudited) ...... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2008 and 2007 (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. Although we believe that, in making any such statements, our
expectations are based on reasonable assumptions, forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other
factors beyond our control, which may cause future performance to be materially
different from expected performance summarized in the forward-looking
statements. These risks, uncertainties and other factors are discussed in the
section Part I, Item 1A, "Risk Factors" of the Company's 2007 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission. 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,
2008 2007
----------- -----------
Assets
Cash and due from banks $ 30,491 $ 26,719
Federal funds sold and other short-term investments 11,284 149,351
----------- -----------
Cash and cash equivalents 41,775 176,070
----------- -----------
Securities available-for-sale, at fair value 208,178 171,706
Loans 541,944 498,455
Less: Allowance for loan losses 6,257 6,280
----------- -----------
Loans, net 535,687 492,175
----------- -----------
Premises and equipment, net 12,513 12,771
Investment in bank-owned life insurance 12,678 12,544
Payments in excess of funding 20,309 11,664
Goodwill 7,471 7,471
Other intangible assets, net 807 877
Other assets 18,100 17,762
----------- -----------
Total assets $ 857,518 $ 903,040
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 86,322 $ 93,190
Interest-bearing 136,010 180,406
----------- -----------
Total deposits 222,332 273,596
Accounts and drafts payable 515,743 513,734
Subordinated convertible debentures 3,605 3,688
Other liabilities 11,470 12,570
----------- -----------
Total liabilities 753,150 803,588
----------- -----------
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: 9,949,324
shares issued at March 31, 2008 and
December 31, 2007 4,975 4,975
Additional paid-in capital 45,140 45,837
Retained earnings 69,598 66,690
Common shares in treasury, at cost (690,592 shares at
March 31, 2008 and 740,642 shares at December 31, 2007) (15,097) (16,118)
Accumulated other comprehensive loss (248) (1,932)
----------- -----------
Total shareholders' equity 104,368 99,452
----------- -----------
Total liabilities and shareholders' equity $ 857,518 $ 903,040
=========== ===========
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)
For The Three Months Ended
March 31,
--------------------------
2008 2007
Fee Revenue and Other Income:
Information services payment and processing revenue $12,047 $11,249
Bank service fees 331 393
Other 233 221
------- -------
Total fee revenue and other income 12,611 11,863
------- -------
Interest Income:
Interest and fees on loans 8,275 8,988
Interest and dividends on securities:
Taxable 28 243
Exempt from federal income taxes 1,701 910
Interest on federal funds sold and
other short-term investments 996 1,855
------- -------
Total interest income 11,000 11,996
------- -------
Interest Expense:
Interest on deposits 1,185 1,960
Interest on short-term borrowings -- 2
Interest on subordinated convertible debentures 52 49
------- -------
Total interest expense 1,237 2,011
------- -------
Net interest income 9,763 9,985
Provision for loan losses 450 225
------- -------
Net interest income after provision for loan losses 9,313 9,760
------- -------
Operating Expense:
Salaries and employee benefits 12,437 11,539
Occupancy 540 490
Equipment 824 812
Amortization of intangible assets 70 70
Other operating 2,489 2,422
------- -------
Total operating expense 16,360 15,333
------- -------
Income before income tax expense 5,564 6,290
Income tax expense 1,545 2,104
------- -------
Net income $ 4,019 $ 4,186
======= =======
Basic earnings per share $ .44 $ .45
Diluted earnings per share .43 .45
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
--------------------------
2008 2007
Cash Flows From Operating Activities:
Net income $ 4,019 $ 4,186
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,036 645
Provision for loan losses 450 225
Stock-based compensation expense 227 139
Deferred income tax expense 9 986
(Decrease) increase in income tax liability (1,258) 972
Increase in pension liability 494 479
Other operating activities, net (1,528) (1,430)
--------- ---------
Net cash provided by operating activities 3,449 6,202
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of securities available-for-sale 4,106 17,000
Purchase of securities available-for-sale (38,367) (44,904)
Net increase in loans (43,962) (26,479)
Increase in payments in excess of funding (8,645) (3,192)
Purchases of premises and equipment, net (329) (248)
--------- ---------
Net cash used in investing activities (87,197) (57,823)
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (6,868) (15,806)
Net decrease in interest-bearing demand and savings deposits (7,425) (12,777)
Net (decrease) increase in time deposits (36,971) 12,189
Net increase in accounts and drafts payable 2,009 15,619
Net decrease in short-term borrowings (195) (154)
Cash dividends paid (1,111) (1,005)
Other financing activities, net 14 37
--------- ---------
Net cash used in financing activities (50,547) (1,897)
--------- ---------
Net decrease in cash and cash equivalents (134,295) (53,518)
Cash and cash equivalents at beginning of period 176,070 196,504
--------- ---------
Cash and cash equivalents at end of period $ 41,775 $ 142,986
========= =========
Supplemental information:
Cash paid for interest $ 1,425 $ 1,939
Cash paid for income taxes 736 186
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 2007 consolidated financial statements
have been reclassified to conform to the 2008 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. The Company issued a 10% stock dividend on December 17,
2007 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, 2007.
Note 2 - Intangible Assets
The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
("SFAS No. 142") 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, 2008
and December 31, 2007 are as follows:
March 31, 2008 December 31, 2007
======================================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
======================================================================================================================
Assets eligible for amortization:
Software $ 862 $ (618) $ 862 $ (574)
Customer List 750 (187) 750 (161)
- ----------------------------------------------------------------------------------------------------------------------
Total 1,612 (805) 1,612 (735)
- ----------------------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,698 (227)* 7,698 (227)*
- ----------------------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,698 (227) 7,698 (227)
- ----------------------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $(1,032) $ 9,310 $ (962)
- ----------------------------------------------------------------------------------------------------------------------
* 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 for the
three-month periods ended March 31, 2008 and 2007. Estimated amortization of
intangibles over the next five years is as follows: $280,000 in 2008, $222,000
in 2009 and $107,000 in 2010, 2011 and 2012.
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, 2008 was $457,000.
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, 2008 and 2007 are as
follows:
-6-
Three Months Ended
March 31
-------------------------
(Dollars in thousands, except per share data) 2008 2007
======================================================================================================================
Basic
Net income $ 4,019 $ 4,186
Weighted-average common shares outstanding 9,174,415 9,140,021
-----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .44 $ .45
-----------------------------------------------------------------------------------------------------------------
Diluted
Net income $ 4,019 $ 4,186
Net income effect of 5.33% convertible debentures 25 27
-----------------------------------------------------------------------------------------------------------------
Net income 4,044 4,213
-----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,174,415 9,140,021
Effect of dilutive stock options and awards 108,025 103,115
Effect of 5.33% convertible debentures 185,134 189,989
-----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding assuming dilution 9,467,574 9,433,125
-----------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .43 $ .45
-----------------------------------------------------------------------------------------------------------------
Share and per share data for 2007 in the schedule above have been restated for
the 10% stock dividend issued on December 17, 2007.
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 300,000 shares of the
Company's Common Stock. The Company did not repurchase any shares during the
three-month periods ended March 31, 2008 and 2007. As of March 31, 2008, 300,000
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, 2008 and 2007, unrealized gains and
losses on securities available-for-sale were the Company's only other
comprehensive income component. Comprehensive income for the three-month periods
ended March 31, 2008 and 2007 is summarized as follows:
Three Months Ended
March 31,
--------------------
(In Thousands) 2008 2007
==========================================================================
Net income $ 4,019 $ 4,186
Other comprehensive income:
Net unrealized gain (loss) on securities
available-for-sale, net of tax 1,684 (133)
--------------------------------------------------------------------------
Total comprehensive income $ 5,703 $ 4,053
--------------------------------------------------------------------------
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, 2007. 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, 2008 and 2007, is as follows:
Corporate,
Information Banking Eliminations
(In Thousands) Services Services and Other Total
================================================================================
Quarter Ended March 31, 2008
Total Revenues:
Revenue from customers $ 18,462 $ 3,462 $ -- $ 21,924
Intersegment revenue 1,234 206 (1,440) --
Net income 3,456 563 -- 4,019
Total assets 594,457 316,348 (53,287) 857,518
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 807 -- -- 807
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
Note 8 - Loans by Type
(In Thousands) March 31, 2008 December 31, 2007
================================================================================
Commercial and industrial $124,185 $100,827
Mortgage 374,359 360,907
Construction 38,000 31,082
Industrial revenue bonds 4,062 4,149
Other 1,338 1,490
- --------------------------------------------------------------------------------
Total loans $541,944 $498,455
================================================================================
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, 2008, 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, 2008, the balance of unused loan commitments, standby and commercial letters
of credit were $27,315,000, $6,861,000 and $3,538,000, respectively. Since some
of the financial instruments may expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. Commitments to
extend credit and letters of credit are subject to the same underwriting
standards as those financial instruments included on the consolidated balance
sheets. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary upon
extension of the credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but is generally accounts receivable,
inventory, residential or income-producing commercial property or equipment. In
the event of nonperformance, the Company or its subsidiaries may obtain and
liquidate the collateral to recover amounts paid under its guarantees on these
financial instruments.
-8-
The following table summarizes contractual cash obligations of the Company
related to operating lease commitments, time deposits and convertible
subordinated debentures at March 31, 2008:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(In Thousands) Total 1 Year Years Years Years
======================================================================================================
Operating lease commitments $ 3,592 $ 717 $ 951 $ 852 $ 1,072
Time deposits 45,655 42,219 2,251 1,185 --
Convertible subordinated debentures* 3,605 -- -- -- 3,605
- ------------------------------------------------------------------------------------------------------
Total $52,852 $42,936 $ 3,202 $ 2,037 $ 4,677
======================================================================================================
* 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
In 2007, the Board and the Company's shareholders approved the 2007 Omnibus
Incentive Stock Plan (the "Omnibus Plan"). The Omnibus Plan permits the issuance
of up to 880,000 shares of the Company's common stock in the form of stock
options, stock appreciation rights, restricted stock, restricted stock units and
performance awards. During the quarter ended March 31, 2008, 29,554 restricted
stock shares and 109,755 stock appreciation rights were granted under the
Omnibus Plan.
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options previously issued
and still outstanding. These plans have been superseded by the Omnibus Plan and
accordingly, any available restricted stock and stock option grants not yet
issued have been cancelled.
Restricted shares are amortized to expense over the three-year vesting period.
As of March 31, 2008, the total unrecognized compensation expense related to
non-vested common stock was $1,905,000 and the related weighted-average period
over which it is expected to be recognized is approximately 1.4 years.
Changes in restricted shares outstanding were as follows:
Shares Fair Value
---------------------------------------------------------------------
Balance at December 31, 2007 60,349 $31.28
Granted 29,554 28.41
Vested (18,814) 30.41
Forfeited -- --
---------------------------------------------------------------------
Balance at March 31, 2008 71,089 $30.23
---------------------------------------------------------------------
Stock options vest and expire over a period not to exceed seven years. The
Company issues shares out of treasury stock for restricted shares and option
exercises. There were no stock options granted under the old plan during the
three-month periods ended March 31, 2008 and 2007. As of March 31, 2008, the
total unrecognized compensation expense related to non-vested stock options was
$94,000 and the related weighted-average period over which it is expected to be
recognized is approximately 3.8 years.
A summary of the Company's stock option program for the three-month period ended
March 31, 2008 is shown below.
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years ($000)
======================================================
Outstanding at January 1, 2008 95,329 $ 13.99
Granted -- --
Exercised (24,116) 10.44
Forfeited or expired -- --
------- ---------
Outstanding at March 31, 2008 71,213 15.19 3.31 $ 1,165
======================================================
Exercisable at March 31, 2008 14,693 $ 11.53 2.31 $ 294
======================================================
-9-
The total intrinsic value of options exercised was $509,000 and $5,000 for the
three-month periods ended March 31, 2008 and 2007, respectively.
A summary of the activity of the non-vested stock options during the three-month
period ended March 31, 2008 is shown below.
Weighted- Average
Grant Date
Shares Fair Value
- -----------------------------------------------------------------------
Nonvested at January 1, 2008 77,076 $2.29
Granted -- --
Vested (20,556) 1.80
Forfeited -- --
- -----------------------------------------------------------------------
Nonvested at March 31, 2008 56,520 $2.46
=======================================================================
There were 109,755 stock appreciation rights granted during the three-month
period ended March 31, 2008. As of March 31, 2008, the total unrecognized
compensation expense related to stock appreciation rights was $820,000 and the
related weighted-average period over which it is expected to be recognized is
6.8 years. Following are the assumptions used to estimate the $7.65 per share
fair value of stock appreciation rights granted during the three-month period
ended March 31, 2008:
Three Months Ended
March 31,
2008
----------------------------------------------------------------
Risk-free interest rate 3.01%
Expected life 7 yrs.
Expected volatility 26.00%
Expected dividend yield 1.69%
----------------------------------------------------------------
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 rights using average monthly closing market prices of the Company's stock as
reported on the Nasdaq Global Market. The expected dividend yield is based on
the Company's current rate of annual dividends.
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 2007 and an estimate for 2008:
Estimated Actual
(In Thousands) 2008 2007
----------------------------------------------------------------------
Service cost - benefits earned during the year $ 1,562 $ 1,622
Interest cost on projected benefit obligation 1,932 1,771
Expected return on plan assets (2,110) (1,865)
Net amortization 47 197
----------------------------------------------------------------------
Net periodic pension cost $ 1,431 $ 1,725
----------------------------------------------------------------------
Pension costs recorded to expense were $358,000 and $403,000 for the three-month
periods ended March 31, 2008 and 2007, respectively. The Company has not made
any contribution to the plan during the three-month period ended March 31, 2008,
but expects to contribute at least $1,800,000 in 2008.
-10-
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
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
2007 and an estimate for 2008:
Estimated Actual
(In Thousands) 2008 2007
-----------------------------------------------------------------------
Service cost - benefits earned during the year $ 73 $ 44
Interest cost on projected benefit obligation 268 233
Net amortization 235 249
-----------------------------------------------------------------------
Net periodic pension cost $ 576 $ 526
-----------------------------------------------------------------------
Pension costs recorded to expense were $147,000 and $86,000 for the three-month
periods ended March 31, 2008 and 2007, respectively.
Note 12 - Income Taxes
The Company adopted Financial Accounting Standards Board ("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 $1,033,000 as of
December 31, 2007. The total amount of federal and state unrecognized tax
benefits at December 31, 2007 that, if recognized, would affect the effective
tax rate was $806,000, net of federal tax benefit. There have been no material
changes to the unrecognized tax benefits during the three months ended March 31,
2008. The Company may realize a reduction of its unrecognized tax benefits in
the next twelve months due to a potential lapse of federal and state statutes of
limitations. The amount of such a potential reduction is not material.
The Company recognizes interest and penalties related to uncertain tax positions
in income tax expense. The amount of interest accrued for unrecognized tax
benefits as of December 31, 2007 was immaterial and the amount of interest
recognized during the three months ended March 31, 2008 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 2006
and 2007 remain subject to examination by the Internal Revenue Service. In
addition, the Company is subject to state tax examinations for the tax years
2004 through 2007.
Note 13 - Fair Value of Assets
Effective January 1, 2008, the Company adopted SFAS No. 157 "Fair Value
Measurements" ("SFAS No. 157") and SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). In accordance with
the FASB Staff Position 157-2, "Effective Date of SFAS No. 157," the Company has
not applied the provisions of SFAS No. 157 to nonfinancial assets and
nonfinancial liabilities such as real estate owned and goodwill. The Company
uses fair value measurements to determine fair value disclosures.
The following is a description of valuation methodologies used for assets
recorded at fair value:
Investment Securities Available for Sale - Investment securities
available-for-sale are recorded at fair value on a recurring basis. The
Company's securities available-for sale are measured at fair value using Level 2
valuations. The market evaluation utilizes several sources which include
observable inputs rather than "significant unobservable inputs" and therefore
fall into the Level 2 category. The table below presents the balances of
securities available-for-sale measured at fair value on a recurring basis:
March 31, 2008
--------------
Treasury Securities $ 1,996
State and Municipal Securities 206,182
---------
$ 208,178
=========
Loans - The Company does not record loans at fair value on a recurring basis
other than loans that are considered impaired. Once a loan is identified as
impaired, management measures impairment in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." At March 31, 2008, all
impaired loans were evaluated based on the fair value of the collateral. The
fair value of the collateral is based upon an observable market price or current
appraised value and therefore, the Company classifies these assets as
nonrecurring Level 2. The total principal balance of impaired loans measured at
fair value at March 31, 2008 was $1,947,000.
-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, imaging, and web-based solutions varies greatly among customers and
industries. These factors combine so that pricing varies 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 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.
Currently, management views Cass's major opportunity as the continued expansion
of its payment and information processing service offering and customer base.
While the current economic slow down may reduce the short-term growth rate,
management remains optimistic about the long-term prospects for growth. With the
recent significant drop in short-term interest rates, the major challenge faced
by Cass is the prudent management of earning assets and interest bearing
liabilities. Management actively monitors Cass's balance sheet and has already
taken a number of actions to reduce the interest rate sensitivity of its earning
assets and lower the cost of its interest bearing liabilities in an effort to
mute the effect the lower interest rate environment has on Cass.
-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 the
Company's 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, 2007, rate of
increase in future compensation levels and mortality rates. These assumptions
are updated annually and are disclosed in Note 12 to the consolidated financial
statements filed with the Company's annual report on Form 10-K for the year
ended December 31, 2007. Pursuant to Statement of Financial Accounting Standards
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS No. 158"), the Company has recognized the funded
status of its defined benefit postretirement plan in its statement of financial
position and has recognized changes in that funded status through comprehensive
income. The funded status is measured as the difference between the fair value
of the plan assets and the benefit obligation as of the date of its fiscal
year-end.
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, 2008
("First Quarter of 2008") compared to the three-month period ended March 31,
2007 ("First Quarter of 2007"). 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 2007 Annual Report on Form 10-K. Results of operations
for the First Quarter of 2008 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) 2008 2007 Change
=============================================================================================
Net income $ 4,019 $ 4,186 (4.0)%
Diluted earnings per share $ .43 $ .45 (4.4)%
Return on average assets 1.84% 1.97% --
Return on average equity 16.12% 20.12% --
---------------------------------------------------------------------------------------------
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility payment and
processing fees. As the Company provides its processing and payment services, it
is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the First Quarter of 2008
and First Quarter of 2007 were as follows:
Three Months Ended
March 31
------------------------------------
%
(In Thousands) 2008 2007 Change
======================================================================================
Freight Core Invoice Transaction Volume* 5,972 5,657 5.6%
Freight Invoice Dollar Volume $3,857,573 $3,411,394 13.1%
Utility Transaction Volume 2,532 2,240 13.0%
Utility Transaction Dollar Volume $2,235,890 $1,774,004 26.0%
Payment and Processing Revenue $ 12,047 $ 11,249 7.1%
--------------------------------------------------------------------------------------
*Core invoices exclude parcel shipments.
Freight transaction volume and invoice dollar volume for the First Quarter of
2008 increased moderately compared to the same period in 2007 due to new
customers. 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 revenue.
Bank service fees decreased $62,000 or 16%. This decrease was due primarily to a
reduction in check processing volume. Other income increased $12,000 in the
First Quarter of 2008.
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 2008 and First Quarter of
2007:
Three Months Ended
March 31,
----------------------------------------
(Dollars In Thousands) 2008 2007 Change
========================================================================================
Average earning assets $800,191 $779,623 2.6%
Net interest income* 10,704 10,515 1.8%
Net interest margin* 5.37% 5.47% --
Yield on earning assets* 5.99% 6.52% --
Rate on interest bearing liabilities 3.05% 4.29% --
----------------------------------------------------------------------------------------
*Presented on a tax-equivalent basis assuming a tax rate of 35% in 2008 and 2007.
The increase in tax equivalent net interest income was due to a modest increase
in average earning assets combined with a shift in the balances of earning
assets from the relatively lower yielding federal funds sold and other
short-term investments to longer term and relatively higher yielding non-taxable
state and municipal securities. Yields on earning assets and rates paid on
deposit accounts both decreased as the general level of interest rates
decreased.
-14-
Total average loans decreased $12,513,000 or 2% to $504,192,000 for the First
Quarter of 2008 as compared to the First Quarter of 2007. This decrease was
attributable to the repayment of several commercial loans. Average investment in
securities increased $61,786,000 or 53% to $178,590,000 and average federal
funds sold and other short-term investments decreased $28,705,000 or 20% to
$117,409,000 for the First Quarter of 2008 as compared to the First Quarter of
2007, as the Company redeployed assets in the face of a declining interest rate
environment. Total average interest-bearing deposits for the First Quarter of
2008 declined $27,796,000 or 15% to $158,609,000 compared to the First Quarter
of 2007, as higher cost time deposits were reduced to help counter the negative
effects of the lower interest rates faced by the Company in the First Quarter of
2008. For more information on the changes in net interest income, please refer
to the tables that follow.
The Company is negatively affected by decreases in the level of interest rates
due to the fact that its rate-sensitive assets 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 of 2008 First Quarter of 2007
-------------------------------------- --------------------------------------
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 $ 500,091 $ 8,228 6.60% 510,465 $ 8,916 7.08%
Tax-exempt (4) 4,101 72 7.04 6,240 112 7.31
Securities (5):
Taxable 3,670 28 3.06 20,549 243 4.80
Tax-exempt (4) 174,920 2,617 6.00 96,255 1,399 5.90
Federal funds sold and other
short-term investments 117,409 996 3.40 146,114 1,856 5.15
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 800,191 11,941 5.99 779,623 12,526 6.52
Nonearning assets:
Cash and due from banks 22,111 25,386
Premises and equipment, net 12,660 12,843
Bank-owned life insurance 12,591 12,069
Goodwill and other intangibles, net 8,323 8,593
Other assets 35,529 28,181
Allowance for loan losses (6,341) (6,672)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 885,064 $ 860,023
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 75,927 $ 377 1.99% $ 64,669 $ 518 3.25%
Savings deposits 19,001 96 2.03 22,978 194 3.42
Time deposits of
$100 or more 40,298 438 4.36 69,282 890 5.21
Other time deposits 23,383 274 4.70 29,476 358 4.94
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 158,609 1,185 3.00 186,405 1,960 4.27
Short-term borrowings 71 0 0.00 175 2 5.11
Subordinated Debentures 3,618 52 5.76 3,700 49 5.37
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 162,298 1,237 3.06 190,280 2,011 4.29
Noninterest-bearing liabilities:
Demand deposits 87,462 96,306
Accounts and drafts payable 521,245 476,275
Other liabilities 12,929 12,775
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 783,934 775,636
Shareholders' equity 101,130 84,387
Total liabilities and
shareholders' equity $ 885,064 $ 860,023
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,704 $ 10,515
Net interest margin 5.37% 5.47%
Interest spread 2.93% 2.23%
==================================================================================================================================
-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 2007
consolidated financial statements, filed with the Company's 2007 annual
report on Form 10-K.
3. Interest income on loans includes net loan fees of $54,000 and $46,000 for
the First Quarter of 2008 and 2007, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2007 and 2008. The tax-equivalent adjustment was approximately
$941,000 and $530,000 for the First Quarter of 2008 and 2007,
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 of
2008 Over 2007
--------------------------------
(In Thousands) Volume Rate Total
============================================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ (158) $ (530) $ (688)
Tax-exempt (3) (36) (4) (40)
Securities:
Taxable (149) (66) (215)
Tax-exempt (3) 1,192 26 1,218
Federal funds sold and other
short-term investments (316) (544) (860)
- --------------------------------------------------------------------------------------------
Total interest income 533 (1,118) (585)
- --------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 82 (223) (141)
Savings deposits (29) (69) (98)
Time deposits of $100 or more (325) (127) (452)
Other time deposits (68) (16) (84)
Short-term borrowings (1) (1) (2)
Subordinated debentures 5 (2) 3
- --------------------------------------------------------------------------------------------
Total interest expense $ (336) $ (438) $ (774)
- --------------------------------------------------------------------------------------------
Net interest income $ 869 $ (680) $ 189
============================================================================================
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 2008 and 2007.
Provision and Allowance for Loan Losses
A significant determinant of the Company's operating results is the provision
for loan losses and the amount of loans charged off. Provisions for loan losses
of $450,000 and $225,000 were recorded during the First Quarter of 2008 and the
First Quarter of 2007, 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 $473,000 of net loan
charge-offs in the First Quarter of 2008 and $5,000 of net loan recoveries in
the First Quarter of 2007.
-16-
The allowance for loan losses at March 31, 2008 was $6,257,000 and at December
31, 2007 was $6,280,000. The ratio of allowance for loan losses to total loans
outstanding at March 31, 2008 was 1.15% compared to 1.26% at December 31, 2007.
Nonperforming loans were $2,443,000 or .45% of total loans at March 31, 2008
compared to $2,481,000 or .50% of total loans at December 31, 2007.
At March 31, 2008, nonperforming loans, which are also considered impaired,
consisted of $1,947,000 in non-accrual loans as shown in the table below. This
total consists of six loans that relate to businesses that are in bankruptcy,
financial trouble or are in process of liquidation. Nonperforming loans at
December 31, 2007 consisted of $1,985,000 in non-accrual loans and relate to
five of the same borrowers. Total nonperforming loans increased $83,000 from
March 31, 2007 to March 31, 2008. This increase was primarily due to the
addition of four loans offset by two loan charge-offs.
In addition to the nonperforming loans discussed above, at March 31, 2008,
approximately $4,370,000 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 $2,564,000
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 reserves established for the estimated
loss exposure as part of the allowance analysis.
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 First Quarter of 2008
and First Quarter of 2007 pertaining to the Company's provision for loan losses
and analysis of the allowance for loan losses.
First Quarter of
------------------------
(Dollars in Thousands) 2008 2007
=============================================================================================
Allowance at beginning of period $ 6,280 $ 6,592
Provision charged to expense 450 225
Loans charged off (491) --
Recoveries on loans previously charged off 18 5
- ---------------------------------------------------------------------------------------------
Net loan recoveries (charge-offs) (473) 5
Allowance at end of period $ 6,257 $ 6,822
- ---------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 504,192 $ 516,705
March 31 541,944 530,609
Ratio of allowance for loan losses to loans outstanding:
Average 1.24% 1.32%
March 31 1.15% 1.29%
Nonperforming loans:
Nonaccrual loans 1,947 $ 764
Loans past due 90 days or more 496 --
Renegotiated loans -- --
- ---------------------------------------------------------------------------------------------
Total non performing loans $ 2,443 $ 764
Foreclosed assets 1,388 --
- ---------------------------------------------------------------------------------------------
Nonperforming loans as a percent of average loans .48% .15%
=============================================================================================
-17-
The Company had no sub-prime mortgage loans or residential development loans in
its portfolio as of March 31, 2008. The Bank had one property carried as other
real estate owned of $1,388,000, as of March 31, 2008 and December 31, 2007. The
Bank had no properties carried as other real estate owned as of March 31, 2007.
Operating Expense
Total operating expense for the First Quarter of 2008 increased $1,027,000 or 7%
to $16,360,000 compared to the First Quarter of 2007 due primarily to expenses
related to the 7% growth in processing activity.
Salaries and benefits expense increased $898,000 or 8% to $12,437,000 in the
First Quarter of 2008 compared with the First Quarter of 2007 primarily due to
merit increases and additional headcount to service new transaction business.
Occupancy expense for the First Quarter of 2008 increased $50,000 or 10% to
$540,000 from the First Quarter of 2007 primarily due to additional maintenance
and repairs.
Equipment expense for the First Quarter of 2008 increased $12,000 or 1% compared
to the First Quarter of 2007.
Amortization of intangible assets remained the same at $70,000 for the First
Quarter of 2008 compared to the First Quarter of 2007.
Other operating expenses increased $67,000 to $2,489,000 for the First Quarter
of 2008 compared to the First Quarter of 2007.
Income tax expense for the First Quarter of 2008 decreased $559,000 or 27%
compared to the First Quarter of 2007. The effective tax rate for the First
Quarter of 2008 declined to 27.8% compared with 33.4% in the First Quarter of
2007 primarily due to the increase in tax-exempt municipal securities held and
related tax-exempt income.
Financial Condition
Total assets at March 31, 2008 decreased $45,522,000 or 5% from December 31,
2007. The most significant change in asset balances during this period was a
decrease of $138,067,000 or 92% in federal funds sold and other short-term
investments. Most of this decrease was offset by increases in longer term state
and municipal securities and loans. This redeployment of assets was done to
offset the negative impact the declining interest rate environment has on the
Company.
Total liabilities at March 31, 2008 were $753,150,000, compared to the balance
of $803,588,000 at December 31, 2007. Total deposits at March 31, 2008 were
$222,332,000, a decrease of $51,264,000 or 19% compared to December 31, 2007 as
higher cost time deposits were reduced to help counter the negative effects of
the lower interest rate environment. Accounts and drafts payable at March 31,
2008 were $515,743,000, an increase of $2,009,000 or less than 1% compared to
December 31, 2007. Total shareholders' equity at March 31, 2008 was
$104,368,000, a $4,916,000 or 5% increase from December 31, 2007.
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
$4,019,000, $227,000 from stock-based compensation expense, other miscellaneous
activity of $97,000, a decrease of $1,684,000 in other comprehensive loss,
offset by dividends paid of $1,111,000 ($.12 per share).
-18-
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 $41,775,000 at March 31, 2008, a decrease of $134,295,000 or 76% from
December 31, 2007. At March 31, 2008, these assets represented 5% 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 $208,178,000 at March 31, 2008, an
increase of $36,472,000 from December 31, 2007. These assets represented 24% of
total assets at March 31, 2008. Of this total, 99% were state and political
subdivision securities and 1% were U.S. Treasury securities. Of the total
portfolio, 2% mature in one year, 22% mature in one to five years, and 76%
mature in five or more years. During the First Quarter of 2008 the Company did
not sell any securities.
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $39,000,000. Additionally, the Bank maintains a line of credit
at unaffiliated financial institutions in the maximum amount of $61,995,000
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 $3,449,000 for the First
Quarter of 2008 compared with $6,202,000 for the First Quarter of 2007. This
decrease is attributable to the decrease in net income of $167,000, the net
change in income taxes deferred and payable of $3,207,000 plus the other normal
fluctuations in asset and liability accounts. 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 2008.
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
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, 2008 and
December 31, 2007:
March 31, 2008 (In Thousands) Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $102,704 15.32%
Cass Commercial Bank 42,244 13.73
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 92,842 13.85%
Cass Commercial Bank 38,389 12.48
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 92,842 10.59%
Cass Commercial Bank 38,389 12.14
===============================================================================
-19-
December 31, 2007 (In Thousands) Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 99,508 15.58%
Cass Commercial Bank 41,441 14.39
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 89,540 14.02%
Cass Commercial Bank 37,827 13.13
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 89,540 9.76%
Cass Commercial Bank 37,827 11.46
===============================================================================
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 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. The Company adopted this statement as of January 1, 2008 and
there was no effect 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. The Company adopted this statement as of January 1, 2008 and
there was no effect on the Company's consolidated financial statements.
-20-
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, 2007, 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, 2008 has changed materially from that at December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide
reasonable assurance 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, 2008 and based on their
evaluation, believe that, as of March 31, 2008, 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 2008 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, 2007, 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 2007 Annual Report on Form 10-K.
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
(a) None
(b) 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.
-21-
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.
-22-
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 9, 2008 By /s/ Lawrence A. Collett
--------------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: May 9, 2008 By /s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
-23-
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 9, 2008
/s/ Lawrence A. Collett
------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
(Principal 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 9, 2008
/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, 2008 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 9, 2008
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, 2008 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 9, 2008
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.