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 September 30, 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 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, 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
November 2, 2007: Common stock, par value $.50 per share - 8,371,189 shares
outstanding.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2007 (unaudited) and December 31, 2006 ........................ 3
Consolidated Statements of Income
Three and Nine months ended September 30, 2007 and 2006 (unaudited) ......... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 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 .................................................... 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................... 24
Item 4. CONTROLS AND PROCEDURES ....................................................... 24
PART II - Other Information - Items 1. - 6. .............................................. 25
SIGNATURES ............................................................................ 27
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)
September 30 December 31
2007 2006
Assets
Cash and due from banks $ 18,056 $ 26,995
Federal funds sold and other short-term investments 177,563 169,509
--------- ---------
Cash and cash equivalents 195,619 196,504
--------- ---------
Securities available-for-sale, at fair value 162,379 102,749
Loans 511,207 504,125
Less: Allowance for loan losses 6,045 6,592
--------- ---------
Loans, net 505,162 497,533
--------- ---------
Premises and equipment, net 12,962 12,898
Investment in bank-owned life insurance 12,407 12,024
Payments in excess of funding 15,965 9,333
Goodwill 7,471 7,471
Other intangible assets, net 946 1,156
Other assets 20,249 18,803
--------- ---------
Total assets $ 933,160 $ 858,471
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 86,162 $ 106,587
Interest-bearing 182,203 183,307
--------- ---------
Total deposits 268,365 289,894
Accounts and drafts payable 552,837 468,393
Short-term borrowings 210 181
Subordinated convertible debentures 3,700 3,700
Liabilities related to discontinued operations -- 277
Other liabilities 13,682 12,105
--------- ---------
Total liabilities 838,794 774,550
--------- ---------
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 September 30, 2007 and
December 31, 2006, respectively 4,556 4,556
Additional paid-in capital 17,501 17,896
Retained earnings 91,645 81,516
Common shares in treasury, at cost (741,295 shares at
September 30, 2007 and 784,773 shares at December 31, 2006) (16,131) (17,077)
Accumulated other comprehensive loss (3,205) (2,970)
--------- ---------
Total shareholders' equity 94,366 83,921
--------- ---------
Total liabilities and shareholders' equity $ 933,160 $ 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 Nine Months Ended
September 30 September 30
-------------------- --------------------
2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
Information services payment and processing revenue $ 11,441 $ 10,359 $ 34,089 $ 29,853
Bank service fees 416 341 1,237 1,266
Other 213 228 658 629
-------- -------- -------- --------
Total fee revenue and other income 12,070 10,928 35,984 31,748
-------- -------- -------- --------
Interest Income:
Interest and fees on loans 9,224 9,331 27,539 27,169
Interest and dividends on securities:
Taxable 212 262 681 800
Exempt from federal income taxes 1,252 636 3,212 1,910
Interest on federal funds sold and
other short-term investments 2,030 2,022 5,564 4,702
-------- -------- -------- --------
Total interest income 12,718 12,251 36,996 34,581
-------- -------- -------- --------
Interest Expense:
Interest on deposits 1,986 1,729 5,911 4,457
Interest on short-term borrowings and other 7 2 32 5
Interest on subordinated convertible debentures 50 50 148 148
-------- -------- -------- --------
Total interest expense 2,043 1,781 6,091 4,610
-------- -------- -------- --------
Net interest income 10,675 10,470 30,905 29,971
Provision for loan losses 225 200 675 500
-------- -------- -------- --------
Net interest income after provision for loan
losses 10,450 10,270 30,230 29,471
-------- -------- -------- --------
Operating Expense:
Salaries and employee benefits 11,700 11,136 35,135 31,673
Occupancy 550 522 1,572 1,462
Equipment 876 732 2,565 2,128
Amortization of intangible assets 70 70 210 156
Other operating expense 2,468 2,561 7,447 7,755
-------- -------- -------- --------
Total operating expense 15,664 15,021 46,929 43,174
-------- -------- -------- --------
Income before taxes and discontinued
operations 6,856 6,177 19,285 18,045
Income tax expense 2,179 2,205 6,230 6,397
-------- -------- -------- --------
Net income from continuing operations 4,677 3,972 13,055 11,648
-------- -------- -------- --------
Loss from discontinued operations
before income tax expense -- (150) -- (475)
Income tax benefit -- 62 -- 198
-------- -------- -------- --------
Net loss from discontinued operations -- (88) -- (277)
-------- -------- -------- --------
Net Income $ 4,677 $ 3,884 $ 13,055 $ 11,371
======== ======== ======== ========
Basic Earnings Per Share:
From continuing operations $ .56 $ .48 $ 1.57 $ 1.40
From discontinued operations -- (.01) -- (.03)
Basic earnings per share .56 .47 1.57 1.37
Diluted Earnings Per Share:
From continuing operations $ .55 $ .47 $ 1.53 $ 1.37
From discontinued operations -- (.01) -- (.03)
Diluted earnings per share .55 .46 1.53 1.34
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30
-----------------------
2007 2006
Cash Flows From Operating Activities:
Net income from continuing operations $ 13,055 $ 11,648
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,179 1,484
Provision for loan losses 675 500
Stock-based compensation expense 499 159
Deferred income tax expense (benefit) 1,115 (1,031)
Increase in income tax liability 578 354
Increase in pension liability 1,593 1,566
Other operating activities, net (2,091) (248)
Operating activities of discontinued operations -- (1,562)
--------- ---------
Net cash provided by operating activities 17,603 12,870
--------- ---------
Cash Flows From Investing Activities:
Proceeds from maturities of securities available-for-sale 51,000 65,510
Purchase of securities available-for-sale (111,295) (57,860)
Net (increase) decrease in loans (9,604) 7,703
Increase in payments in excess of funding (6,632) (5,745)
Purchases of premises and equipment, net (1,940) (2,547)
Purchase of NTransit, Inc. -- (3,172)
--------- ---------
Net cash (used in) provided by investing activities (78,471) 3,889
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (20,425) (16,261)
Net decrease in interest-bearing demand and savings deposits (4,921) (15,829)
Net increase in time deposits 3,817 20,280
Net increase in accounts and drafts payable 84,444 68,382
Net increase (decrease) in short-term borrowings 29 (38)
Cash proceeds from exercise of stock options 16 330
Tax benefit on stock awards 36 64
Cash dividends paid (3,013) (2,669)
Purchase of common shares for treasury -- (870)
--------- ---------
Net cash provided by financing activities 59,983 53,389
--------- ---------
Net (decrease) increase in cash and cash equivalents (885) 70,148
Cash and cash equivalents at beginning of period 196,504 149,692
--------- ---------
Cash and cash equivalents at end of period $ 195,619 $ 219,840
========= =========
Supplemental information:
Cash paid for interest $ 6,092 $ 4,287
Cash paid for income taxes 4,500 6,103
Transfer of loans to foreclosed assets 1,300 --
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 nine-month
period ended September 30, 2007. 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 s("SFAS") 142, "Goodwill and Other Intangible
Assets," which requires that intangibles with indefinite useful lives be tested
annually for impairment and those with finite useful lives be amortized over
their useful lives. Intangible assets for the periods ended September 30, 2007
and December 31, 2006 are as follows:
September 30, 2007 December 31, 2006
===========================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
===========================================================================================================
Amortized intangible assets:
Software $ 862 $ (532) $ 862 $ (402)
Customer List 750 (134) 750 (54)
-----------------------------------------------------------------------------------------------------------
Total 1,612 (666) 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 $ (893) $9,310 $ (683)
-----------------------------------------------------------------------------------------------------------
* Amortization through December 31, 2001 prior to adoption of SFAS 142.
Software is amortized over four to five years and the customer list is amortized
over seven years. Amortization of intangible assets amounted to $210,000 and
$156,000 for the nine-month periods ended September 30, 2007 and 2006,
respectively. Estimated amortization of intangibles over the next five years is
as follows: $301,000 in 2007, $280,000 in 2008, $223,000 in 2009, and $107,000
in 2010 and in 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 September 30, 2007 was $ 281,000.
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 September 30, 2007 and 2006 are
as follows:
-6-
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
(Dollars in Thousands except Per Share data) 2007 2006 2007 2006
------------------------------------------------------------------------------------------------------------------
Basic
Net income from continuing operations $ 4,677 $ 3,972 $ 13,055 $ 11,648
Net loss from discontinued operations -- (88) -- (277)
------------------------------------------------------------------------------------------------------------------
Net income $ 4,677 $ 3,884 $ 13,055 $ 11,371
------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,316,328 8,304,441 8,313,291 8,311,861
------------------------------------------------------------------------------------------------------------------
Basic earnings per share from continuing
operations $ .56 $ .48 $ 1.57 $ 1.40
Basic earnings per share from discontinued
operations -- (.01) -- (.03)
------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .56 $ .47 $ 1.57 $ 1.37
------------------------------------------------------------------------------------------------------------------
Diluted
Net income from continuing operations $ 4,677 $ 3,972 $ 13,055 $ 11,648
Net income effect of 5.33% convertible
debentures 27 28 81 82
------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 4,704 4,000 13,136 11,730
Net loss from discontinued operations -- (88) -- (277)
------------------------------------------------------------------------------------------------------------------
Net income $ 4,704 $ 3,912 $ 13,136 $ 11,453
------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 8,316,328 8,304,441 8,313,291 8,311,861
Effect of dilutive stock options and awards 102,981 72,504 99,863 65,923
Effect of 5.33% convertible debentures 172,717 172,717 172,717 172,717
------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding
assuming dilution 8,592,026 8,549,662 8,585,871 8,550,501
------------------------------------------------------------------------------------------------------------------
Diluted earnings per share from continuing
operations $ .55 $ .47 $ 1.53 $ 1.37
Diluted earnings per share from discontinued
operations -- (.01) -- (.03)
------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .55 $ .46 $ 1.53 $ 1.34
------------------------------------------------------------------------------------------------------------------
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
nine-month period ended September 30, 2007 and repurchased 30,000 shares in the
comparable period in 2006. As of September 30, 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 nine-month periods ended September 30, 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
and nine month periods ended September 30, 2007 and 2006 is summarized as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
(In Thousands) 2007 2006 2007 2006
------------------------------------------------------------------------------------------------------------------
Net income from continuing operations $ 4,677 $ 3,972 $ 13,055 $ 11,648
Other comprehensive income:
Net unrealized gain (loss) on securities
available-for-sale, net of tax 1,068 793 (235) 307
------------------------------------------------------------------------------------------------------------------
Total comprehensive income from continuing
operations $ 5,745 $ 4,765 $ 12,820 $ 11,955
------------------------------------------------------------------------------------------------------------------
-7-
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. Information for prior periods has been restated to
reflect changes in the composition of the Company's segments.
All revenue originates from and all long-lived assets are located within the
United States and no revenue from any customer of any segment exceeds 10% of the
Company's consolidated revenue.
Summarized information about the Company's operations in each industry segment
for the three and nine-month periods ended September 30, 2007 and 2006, is as
follows:
Corporate,
Information Banking Eliminations
(In Thousands) Services Services and Other Total
==================================================================================================================
Quarter Ended September 30, 2007
Total Revenues:
Revenue from customers $ 18,675 $ 3,845 $ -- $ 22,520
Intersegment revenue 474 387 (861) --
Net income from continuing operations 3,738 939 -- 4,677
Total assets 623,070 319,640 (9,550) 933,160
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 947 -- -- 947
Assets related to discontinued operations -- -- -- --
Quarter Ended September 30, 2006
Total Revenues:
Revenue from customers $ 17,593 $ 3,605 $ -- $ 21,198
Intersegment revenue (109) 921 (812) --
Net income from continuing operations 2,837 1,135 -- 3,972
Total assets 569,760 318,136 (1,482) 886,414
Goodwill 7,035 136 -- 7,171
Other intangible assets, net 1,529 -- -- 1,529
Assets related to discontinued operations -- -- 225 225
------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2007
Total Revenues:
Revenue from customers $ 54,754 $ 11,460 $ -- $ 66,214
Intersegment revenue 1,446 1,141 (2,587) --
Net income from continuing operations 10,370 2,685 -- 13,055
Total assets 623,070 319,640 (9,550) 933,160
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 947 -- -- 947
Assets related to discontinued operations -- -- -- --
Nine Months Ended September 30, 2006
Total Revenues:
Revenue from customers $ 49,469 $ 11,750 $ -- $ 61,219
Intersegment revenue 778 1,633 (2,411) --
Net income from continuing operations 8,267 3,381 -- 11,648
Total assets 569,760 318,136 (1,482) 886,414
Goodwill 7,035 136 -- 7,171
Other intangible assets, net 1,529 -- -- 1,529
Assets related to discontinued operations -- -- 225 225
------------------------------------------------------------------------------------------------------------------
-8-
Note 8 - Loans by Type
(In Thousands) September 30, 2007 December 31, 2006
================================================================================
Commercial and industrial $ 113,863 $ 113,162
Real estate: (Commercial and church)
Mortgage 361,834 352,044
Construction 28,680 29,779
Industrial revenue bonds 5,514 6,293
Other 1,316 2,847
--------------------------------------------------------------------------------
Total loans $ 511,207 $ 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
September 30, 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
September 30, 2007 the balances of unused loan commitments, standby and
commercial letters of credit were $24,000,000, $6,130,000 and $4,310,000,
respectively. Since some of the financial instruments may expire without being
drawn upon, the total amounts do not necessarily represent future cash
requirements. Commitments to extend credit and letters of credit are subject to
the same underwriting standards as those financial instruments included on the
consolidated balance sheets. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of the credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but is generally accounts
receivable, inventory, residential or income-producing commercial property or
equipment. In the event of nonperformance, the Company or its subsidiaries may
obtain and liquidate the collateral to recover amounts paid under its guarantees
on these financial instruments.
The following table summarizes contractual cash obligations of the Company
related to operating lease commitments, time deposits and convertible
subordinated debentures at September 30, 2007:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(Dollars in Thousands) Total 1 Year Years Years Years
========================================================================================================
Operating lease commitments $ 3,947 $ 713 $ 1,069 $ 896 $ 1,269
Time deposits 92,613 89,532 2,491 590 --
Convertible subordinated debentures* 3,700 -- -- -- 3,700
--------------------------------------------------------------------------------------------------------
Total $100,260 $ 90,245 $ 3,560 $ 1,486 $ 4,969
========================================================================================================
* 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
On January 16, 2007, the Board approved, and on April 16, 2007, the Company's
shareholders approved, the 2007 Omnibus Incentive Stock Plan ("the Omnibus
Plan") to provide incentive opportunities for key employees and non-employee
directors and to align the personal financial interests of such individuals with
those of the Company's shareholders. The Omnibus Plan permits the issuance of up
to 800,000 shares of the Company's common stock in the form of stock options,
stock appreciation rights, restricted stock, restricted stock units and
performance awards. As of September 30, 2007, no awards have been granted under
the Omnibus Plan.
-9-
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options issued and
outstanding. 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. 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.
As of September 30, 2007, the total unrecognized compensation expense related to
non-vested stock awards was $1,452,000 and the related weighted-average period
over which it is expected to be recognized is approximately 2.2 years. There
were no grants, vestings or forfeitures of stock awards during the three-month
period ending September 30, 2007. Changes in restricted shares outstanding for
the nine months ended September 30, 2007 were as follows:
Nine Months Ended
September 30
------------------------
Shares Fair Value
=================================================================
Balance at December 31, 2006 22,481 $22.88
Granted 43,120 37.03
Vested (10,327) 20.49
Forfeited (600) 29.94
-----------------------------------------------------------------
Balance at September 30, 2007 54,674 $34.41
-----------------------------------------------------------------
As of September 30, 2007, the total unrecognized compensation expense related to
non-vested stock options was $110,000 and the related weighted-average period
over which it is expected to be recognized is approximately 4.2 years.
No stock options were granted, exercised or forfeited during the three month
period ended September 30, 2007. A summary of the Company's stock option program
for the nine-month period ended September 30, 2007 is shown below.
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years ($000)
--------------------------------------------------
Outstanding at December 31, 2006 87,805 $15.40
Granted -- --
Exercised (958) 16.64
Forfeited or expired -- --
Outstanding at September 30, 2007 86,847 15.39 3.58 $ 1,770
==================================================
Exercisable at September 30, 2007 16,777 $11.27 2.54 $ 411
==================================================
The total intrinsic value of options exercised was $0 and $105,000 for the
three-month periods ended September 30, 2007 and 2006, respectively, and was
$16,000 and $1,728,000 for the nine-month periods ended September 30, 2007 and
2006, respectively.
There was no non-vested option activity during the three-month period ended
September 30, 2007. A summary of the activity of the non-vested options during
the nine-month period ended September 30, 2007 is shown below.
-10-
Weighted-
Average
Grant Date
Shares Fair Value
--------------------------------------------------------------
Nonvested at December 31, 2006 85,406 $ 2.38
Granted -- --
Vested (15,336) 1.75
Forfeited -- --
--------------------------------------------------------------
Nonvested at September 30, 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 $ 1,622 $ 1,554
Interest cost on projected benefit obligation 1,771 1,565
Expected return on plan assets (1,865) (1,603)
Net amortization 197 270
-------------------------------------------------------------------------
Net periodic pension cost $ 1,725 $ 1,786
-------------------------------------------------------------------------
Pension costs recorded to expense were $431,000 and $586,000 for the three-month
periods ended September 30, 2007 and 2006, respectively, and were $1,263,000 and
$1,339,000 for the nine-month periods ended September 30, 2007 and 2006,
respectively. The Company has not made any contribution to the plan during the
nine-month period ended September 30, 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
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 $ 44 $ 43
Interest cost on projected benefit obligation 233 150
Net amortization 249 111
-------------------------------------------------------------------------
Net periodic pension cost $ 526 $ 304
-------------------------------------------------------------------------
Pension costs recorded to expense were $134,000 and $163,000 for the three-month
periods ended September 30, 2007 and 2006, respectively, and were $361,000 and
$258,000 for the nine-month periods ended September 30, 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
-11-
the unrecognized tax benefits during the three and nine month periods ended
September 30, 2007. The Company expects a reduction of $31,000 in unrecognized
tax benefits during the remaining three-month period ending December 31, 2007 as
a result of the lapse of federal and state statutes of limitations.
Interest and penalties were 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 and nine-month
periods ended September 30, 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 year 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.
-12-
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 and Orange County, California. 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.
-13-
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, 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 September 30,
2007 ("Third Quarter of 2007") compared to the three-month period ended
September 30, 2006 ("Third Quarter of 2006") and the nine-month period ended
September 30, 2007 ("First Nine Months of 2007") compared to the nine-month
period ended September 30, 2006 ("First Nine Months 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 Third Quarter of 2007 are not
necessarily indicative of the results to be attained for any other period.
-14-
Net Income
The following table summarizes the Company's operating results:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------------
(Dollars in Thousands except Per Share % %
Data) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------------- -----------------------------------------
Net income $ 4,677 $ 3,884 20.4% $ 13,055 $ 11,371 14.8%
Net income from continuing operations $ 4,677 $ 3,972 17.7% $ 13,055 $ 11,648 12.1%
Diluted earnings per share $ .55 $ .46 19.6% $ 1.53 $ 1.34 14.2%
Diluted earnings per share from
continuing operations $ .55 $ .47 17.0% $ 1.53 $ 1.37 11.7%
Return on average assets 2.04% 1.80% -- 1.98% 1.84% --
Return on average equity 20.51% 19.12% -- 19.94% 19.45% --
-------------------------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income from Continuing Operations
The Company's fee revenue is derived mainly from freight and utility processing
and payment 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 three and nine-month
periods ended September 30, 2007 and 2006 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------------
% %
(In Thousands) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------------- -----------------------------------------
Freight Core Invoice Transaction Volume* 6,470 6,154 5.1% 18,996 18,311 3.7%
Freight Invoice Dollar Volume $ 3,669,117 $ 3,648,694 .6% $10,764,558 $10,722,944 .4%
Utility Transaction Volume 2,361 1,701 38.8% 6,872 4,797 43.3%
Utility Transaction Dollar Volume $ 2,081,529 $ 1,538,628 35.3% $ 5,687,627 $ 4,188,578 35.8%
Payment and Processing Fees $ 11,441 $ 10,359 10.4% $ 34,089 $ 29,853 14.2%
-------------------------------------------------------------------------------------------------------------------------------
* Core invoices exclude parcel shipments.
Third Quarter of 2007 compared to Third Quarter of 2006:
Freight transaction volume and invoice dollar volume for the Third Quarter of
2007 increased slightly compared to the same period in 2006 despite 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 and heightened
activity from existing 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 increased $75,000 or 22% primarily due to higher commercial
account fees and check processing volume. Other income decreased $15,000 in the
Third Quarter of 2007.
First Nine Months of 2007 compared to First Nine Months of 2006:
Freight and utility transaction volume and dollar volume increased for the First
Nine Months of 2007 compared to 2006 due to the same factors discussed above for
the Third Quarter of 2007.
Bank service fees decreased $29,000 or 2%. This decrease was due primarily to a
penalty charged for the early withdrawal of a certificate of deposit by one
large customer in the first quarter of 2006. Other income increased $29,000 in
the First Nine Months of 2007.
-15-
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the three and nine-month periods ended September
30, 2007 and 2006:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------------
% %
(Dollars in Thousands) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------------- -----------------------------------------
Average earnings assets $ 827,757 $ 774,293 6.9% $ 799,144 $ 751,769 6.3%
Net interest income* 11,385 10,842 5.0% 32,747 31,093 5.3%
Net interest margin* 5.46% 5.56% -- 5.48% 5.53% --
Yield on earning assets* 6.44% 6.47% -- 6.50% 6.35% --
Rate on interest bearing liabilities 4.26% 3.83% -- 4.30% 3.44% --
* Presented on a tax-equivalent basis assuming a tax rate of 35%.
Third Quarter of 2007 compared to Third Quarter of 2006:
The increase in net interest income was primarily due to an increase in earning
assets that exceeded the counteracting effect of increases in rates paid on
deposit accounts. There was an increase of $64,811,000 or 98% in tax-exempt
municipal securities. The increase in earning assets was funded by an increase
in accounts and drafts payable due to the increase in dollar volume processed.
Yields on earning assets decreased slightly and rates paid on deposit accounts
increased. However, as the balances of earning assets greatly exceeded the
balances of interest-bearing deposits, the net effect on net interest income was
positive.
Total average loans decreased $10,334,000 or 2%, to $517,450,000. Total average
investment in debt and equity securities increased $60,042,000 or 68% to
$148,776,000 as the Company invested a portion of the increase in payables.
Total average federal funds sold and other short-term investments increased
$3,754,000 or 2% to $161,529,000. 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.
First Nine Months of 2007 compared to First Nine Months of 2006:
The increase in net interest income was primarily due to an 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. There was
an increase of $46,818,000 or 71% in tax-exempt municipal securities. The
increase in earning assets was funded by an increase in accounts and drafts
payable due to the increase in dollar volume processed. 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
exceeded the balances of interest-bearing deposits, the net effect on net
interest income was positive.
Total average loans decreased $7,489,000 or 1% to $520,761,000. Total average
investment in debt and equity securities increased $40,442,000 or 44% to
$132,114,000 as the Company invested a portion of the increase in payables.
Total average federal funds sold and other short-term investments increased
$14,422,000 or 11% to $146,269,000. 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.
-16-
Third Quarter 2007 Third 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 $ 511,826 $ 9,158 7.10% $ 522,439 $ 9,273 7.04%
Tax-exempt (4) 5,624 102 7.20 5,345 88 6.53
Debt and equity securities (5):
Taxable 17,831 212 4.72 22,600 263 4.62
Tax-exempt (4) 130,945 1,926 5.84 66,134 978 5.87
Federal funds sold and other
short-term investments 161,529 2,030 4.99 157,775 2,022 5.08
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 827,755 13,428 6.44 774,293 12,624 6.47
Nonearning assets:
Cash and due from banks 23,063 29,914
Premises and equipment, net 12,937 12,886
Bank owned life insurance 12,321 11,818
Goodwill and other intangibles 8,463 5,269
Other assets 30,960 26,355
Assets related to discontinued
operations -- 396
Allowance for loan losses (6,292) (6,313)
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 909,207 $ 854,618
------------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 67,696 $ 555 3.25% $ 63,845 $ 429 2.67%
Savings deposits 24,433 213 3.46 26,338 201 3.03
Time deposits of
$100 or more 65,596 857 5.18 61,631 762 4.91
Other time deposits 28,338 361 5.05 28,845 338 4.65
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 186,063 1,986 4.23 180,659 1,730 3.80
Short-term borrowings & other 611 7 4.55 197 2 4.03
Subordinated debentures 3,700 50 5.36 3,700 50 5.36
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 190,374 2,043 4.26 184,556 1,782 3.83
Noninterest-bearing liabilities:
Demand deposits 92,405 98,542
Accounts and drafts payable 521,989 481,988
Other liabilities 13,974 8,664
Liabilities related to discontinued
operations -- 242
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 818,742 773,992
Shareholders' equity 90,465 80,626
Total liabilities and
shareholders' equity $ 909,207 $ 854,618
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,385 $ 10,842
Interest spread 2.18% 2.64%
Net interest margin 5.46 5.56
====================================================================================================================================
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 $56,000 and $55,000 for
the Third Quarter of 2007 and 2006, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $710,000 and
$373,000 for the Third 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.
-17-
First Nine Months of 2007 First Nine Months of 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 $ 514,813 $ 27,330 7.10% $ 522,940 $ 26,994 6.90%
Tax-exempt (4) 5,948 322 7.24 5,310 268 6.75
Debt and equity securities (5):
Taxable 19,130 681 4.76 25,506 800 4.19
Tax-exempt (4) 112,984 4,941 5.85 66,166 2,939 5.94
Federal funds sold and other
short-term investments 146,269 5,564 5.09 131,847 4,702 4.77
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 799,144 38,838 6.50 751,769 35,703 6.35
Nonearning assets:
Cash and due from banks 24,604 28,921
Premises and equipment, net 12,880 12,506
Bank owned life insurance 12,195 11,702
Goodwill and other intangibles 8,529 5,287
Other assets 29,538 23,067
Assets related to discontinued
operations -- 233
Allowance for loan losses (6,622) (6,265)
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 880,268 $ 827,220
------------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand deposits $ 65,597 $ 1,592 3.24% $ 71,612 $ 1,282 2.39%
Savings deposits 23,235 596 3.43 22,444 420 2.50
Time deposits of
$100 or more 67,285 2,620 5.21 50,909 1,778 4.67
Other time deposits 29,401 1,103 5.02 30,551 977 4.28
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 185,518 5,911 4.26 175,516 4,457 3.40
Short-term borrowings & other 301 32 14.21 166 5 4.03
Subordinated debentures 3,700 148 5.35 3,700 148 5.35
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 189,519 6,091 4.30 179,382 4,610 3.44
Noninterest-bearing liabilities:
Demand deposits 94,376 99,104
Accounts and drafts payable 495,350 462,314
Other liabilities 13,493 7,575
Liabilities related to discontinued
operations -- 662
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 792,738 749,037
Shareholders' equity 87,530 78,183
Total liabilities and
shareholders' equity $ 880,268 $ 827,220
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 32,747 $ 31,093
Interest spread 2.20% 2.91%
Net interest margin 5.48 5.53
====================================================================================================================================
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 $150,000 and $164,000
for the First Nine Months of 2007 and 2006, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $1,842,000 and
$1,122,000 for the First Nine Months 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.
-18-
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.
Third Quarter
2007 Over 2006
--------------------------
(In Thousands) Volume Rate Total
================================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $(189) $ 74 $(115)
Tax-exempt (3) 5 9 14
Debt and equity securities:
Taxable (57) 6 (51)
Tax-exempt (3) 953 (5) 948
Federal funds sold and other
short-term investments 48 (40) 8
--------------------------------------------------------------------------------
Total interest income 760 44 804
--------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 27 99 126
Savings deposits (15) 27 12
Time deposits of $100 or more 51 44 95
Other time deposits (6) 29 23
Short-term borrowings & other 5 0 5
Subordinated debentures -- -- --
Total interest expense 62 199 261
--------------------------------------------------------------------------------
Net interest income $ 698 $(155) $ 543
================================================================================
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%.
First Nine Months
2007 Over 2006
--------------------------
(In Thousands) Volume Rate Total
================================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $(424) $ 760 $ 336
Tax-exempt (3) 34 20 54
Debt and equity securities:
Taxable (218) 99 (119)
Tax-exempt (3) 2,048 (46) 2,002
Federal funds sold and other
short-term investments 536 326 862
--------------------------------------------------------------------------------
Total interest income 1,976 1,159 3,135
--------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (115) 425 310
Savings deposits 15 161 176
Time deposits of $100 or more 620 222 842
Other time deposits (38) 164 126
Short-term borrowings & other 7 20 27
Subordinated debentures -- -- --
Total interest expense 489 992 1,481
--------------------------------------------------------------------------------
Net interest income $1,487 $ 167 $1,654
================================================================================
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%.
-19-
Provision and Allowance for Loan Losses
An important determinant of the Company's operating results is the provision for
loan losses and the level of loans charged off. There were provisions of
$225,000 and $200,000 made for loan losses during the Third Quarter of 2007 and
the Third Quarter of 2006, respectively. There were provisions of $675,000 and
$500,000 made for loan losses during the First Nine Months of 2007 and the First
Nine Months 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 were $1,023,000 and
$583,000 of net loan charge-offs in the Third Quarter of 2007 and 2006,
respectively. There were $1,222,000 of net loan charge-offs in the First Nine
Months of 2007 and $855,000 in the First Nine Months 2006.
The allowance for loan losses at September 30, 2007 was $6,045,000 and at
December 31, 2006 was $6,592,000. The ratio of allowance for loan losses to
total loans outstanding at September 30, 2007 was 1.18% compared to 1.31% at
December 31, 2006. At September 30, 2007, nonperforming loans, which are also
considered impaired, consisted of $310,000 in non-accrual loans as shown in the
following table. This total consists of three loans, two of which relate to
businesses that have collateral deficiencies. Nonperforming loans at December
31, 2006 consisted of $795,000 in non-accrual loans and relate to one of the
same borrowers. Total nonperforming loans decreased $644,000 from September 30,
2006 to September 30, 2007. This decrease was primarily due to the charge-off of
two of the loans.
In addition to the nonperforming loans discussed above, at September 30, 2007,
approximately $6,060,000 of loans not included in the table below have been
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 $2,765,000
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.
Foreclosed assets and accruing loans 90 days or more past due aggregated
$1,300,000 and $1,902,000, respectively, at September 30, 2007. The increase in
foreclosed assets and net charge-offs in the three-month period ended September
30, 2007, primarily relates to the foreclosure of one loan which was secured by
a commercial real estate building in St. Louis County, Missouri. The increase in
accruing loans 90 days or more past due is primarily related to one loan that is
past maturity due to an administrative issue with the renewal process. All
contractual payments on that loan have been made as required by the loan's terms
and management expects it to be renewed in the normal course.
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.
-20-
Summary of Asset Quality
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
(Dollars in Thousands) 2007 2006 2007 2006
===================================================================================================================
Allowance at beginning of period $ 6,843 $ 6,312 $ 6,592 $ 6,284
Provision charged to expense 225 200 675 500
Loans charged off 1,065 586 1,350 864
Recoveries on loans previously charged off 42 3 128 9
-------------------------------------------------------------------------------------------------------------------
Net loans charged-off 1,023 583 1,222 855
Allowance at end of period $ 6,045 $ 5,929 $ 6,045 $ 5,929
-------------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $517,450 $527,784 $520,761 $528,250
September 30 511,207 520,748 511,207 520,748
Ratio of allowance for loan losses to loans outstanding:
Average 1.17% 1.12% 1.16% 1.12%
September 30 1.18 1.14 1.18% 1.14
Nonperforming loans:
Nonaccrual loans $ 310 $ 954 $ 310 $ 954
Loans past due 90 days or more -- -- -- --
Renegotiated loans -- -- -- --
-------------------------------------------------------------------------------------------------------------------
Total non performing loans $ 310 $ 954 $ 310 $ 954
Foreclosed assets 1,300 -- -- --
-------------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .06% .18% .06% .18%
-------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $ 1,902 -- -- --
-------------------------------------------------------------------------------------------------------------------
As of September 30, 2007, the Bank had one property which it was carrying as
other real estate owned at what management believes to be fair value less cost
to sell. The property was foreclosed on July 31, 2007 and is recorded at
$1,300,000. Nonperforming loans do not include accruing loans 90 days or more
past due.
Operating Expense from Continuing Operations
Total operating expense for the Third Quarter of 2007 increased $643,000 or 4%
to $15,664,000 compared to the Third Quarter of 2006 due primarily to expenses
related to the growth in processing activity. Total operating expense for the
First Nine Months of 2007 increased $3,755,000 or 9% to $46,929,000 compared to
the First Nine Months of 2006 also due to expenses related to the growth in
processing activity.
Salaries and benefits expense for the Third Quarter of 2007 increased $564,000
or 5% to $11,700,000 compared to the Third Quarter of 2006 and increased
$3,462,000 or 11% to $35,135,000 for the First Nine Months of 2007 compared to
the First Nine Months 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 Third Quarter of 2007 increased $28,000 or 5% to
$550,000 from the Third Quarter of 2006 and increased $110,000 or 8% from the
First Nine Months of 2006 compared to the First Nine Months of 2007.
Equipment expense for the Third Quarter of 2007 increased $144,000 or 20%
compared to the Third Quarter of 2006 due to additional depreciation on asset
purchases and increased $437,000 or 21% from the First Nine Months of 2006
compared to the First Nine Months of 2007 also due to asset purchases and
additional software licenses.
Amortization of intangible assets was $70,000 for the Third Quarter of 2007 and
in 2006 and $210,000 for the First Nine Months of 2007 compared to $156,000 in
2006. The increase was related to the customer list acquired with the NTransit
purchase in July 2006.
Other operating expense for the Third Quarter of 2007 decreased $93,000, or 4%
compared to the Third Quarter of 2006 and decreased $308,000 from the First Nine
Months of 2006 compared to the First Nine Months of 2007. The decreases were due
to lower legal and outside services expenses.
Income tax expense for the Third Quarter of 2007 decreased $26,000 or 1%
compared to the Third Quarter of 2006 and decreased $167,000 for the First Nine
Months of 2007 compared to the First Nine Months of 2006. The effective tax rate
was 31.8% and 35.7% for the Third Quarters of 2007 and 2006, respectively and
was 32.3% and 35.5% for the First Nine Months of 2007 and 2006, respectively.
The decreases reflect the impact of the increase in tax-exempt securities.
-21-
Financial Condition
Total assets at September 30, 2007 were $933,160,000, an increase of
$74,689,000, or 9% from December 31, 2006. The most significant changes in asset
balances during this period were an increase of $8,054,000 or 5% in federal
funds sold and other short-term investments and an increase of $59,630,000 in
securities available for sale. 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.
Total liabilities at September 30, 2007 were $838,794,000, an increase of
$64,244,000, or 8% from December 31, 2006. Total deposits at September 30, 2007
were $268,365,000, a decrease of $21,529,000 or 7% from December 31, 2006.
Accounts and drafts payable at September 30, 2007 were $552,837,000, an increase
of $84,444,000 or 18%. Total shareholders' equity at September 30, 2007 was
$94,366,000, a $10,445,000 or 12% increase from December 31, 2006.
Deposits in the First Nine Months of 2007 decreased as customers moved funds
into other higher-yielding investments. 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
$13,055,000, cash received on the exercise of stock options of $16,000, $36,000
tax benefit on stock and option awards, $499,000 from stock-based compensation
expense and the FIN 48 tax adjustment of $87,000 offset by dividends paid of
$3,013,000 ($.12 per share) and an increase in other comprehensive loss of
$235,000.
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 $195,619,000 at September 30, 2007, a decrease of $885,000 or less than 1%
from December 31, 2006. At September 30, 2007 these assets represented 21% 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 $162,379,000 at September 30, 2007, an
increase of $59,630,000 from December 31, 2006. These assets represented 17% of
total assets at September 30, 2007. Of this total, 98% were state and political
subdivision securities and 2% were U.S. government agencies. Of the total
portfolio, 1% mature in one year, 26% mature in one to five years, and 73%
mature in five or more years. During the Third Quarter of 2007 the Company did
not sell any securities.
The Bank has unsecured lines of credit 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
$63,137,000 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 have also historically been a stable source of funds.
Net cash flows provided by operating activities were $17,603,000 for the First
Nine Months of 2007 compared with $12,870,000 for the First Nine Months of 2006.
This increase is attributable to the increase in net income of $1,407,000, the
increase in taxes deferred and payable of $2,370,000, the absence of a loss of
$1,562,000 in operating activities related to discontinued operations and 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 2007.
-22-
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 September 30, 2007
and December 31, 2006:
September 30, 2007 (In Thousands) Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 95,547 14.50%
Cass Commercial Bank 41,755 14.66
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 85,802 13.02%
Cass Commercial Bank 38,184 13.41
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 85,802 9.53%
Cass Commercial Bank 38,184 11.69
===============================================================================
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.
-23-
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
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 September 30, 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 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 September 30, 2007 and based on their
evaluation, believe that, as of September 30, 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 third 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).
-24-
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.
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) There have been no material changes to the procedures by which
security holders may recommend nominees to the Company's Board
of Directors since the filing of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30,
2007.
-25-
ITEM 6. EXHIBITS
Exhibit 10.1 Amended and Restated 2007 Omnibus Incentive Stock Plan.
Exhibit 10.2 Amendment and Restatement of the Supplemental Executive
Retirement Plan
Exhibit 10.3 Form of Restricted Stock Agreement Award Agreement
Exhibit 10.4 Form of Stock Appreciation Rights Award Agreement
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.
-26-
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: November 7, 2007 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: November 7, 2007 By /s/ P. Stephen Appelbaum
----------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
-27-