UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. 2-80070
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CASS INFORMATION SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1265338
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
13001 Hollenberg Drive 63044
Bridgeton, Missouri (Zip Code)
(Address of principal executive offices)
(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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one) Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller Reporting Company |_|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of registrant's only class of stock as of
May 1, 2009: Common stock, par value $.50 per share - 9,222,542 shares
outstanding.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2009 (unaudited) and December 31, 2008 3
Consolidated Statements of Income
Three months ended March 31, 2009 and 2008 (unaudited) 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2009 and 2008 (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 22
Item 4. CONTROLS AND PROCEDURES 22
PART II - Other Information - Items 1. - 6. 23
SIGNATURES 24
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Although we believe that, in making any such statements, our
expectations are based on reasonable assumptions, forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other
factors beyond our control, which may cause future performance to be materially
different from expected performance summarized in the forward-looking
statements. These risks, uncertainties and other factors are discussed in the
section Part I, Item 1A, "Risk Factors" of the Company's 2008 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission ("SEC"), which may
be updated from time to time in our future filings with the SEC. 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
(Dollars in Thousands except Share and Per Share Data)
March 31,
2009 December 31,
(Unaudited) 2008
----------- -----------
Assets
Cash and due from banks $ 10,806 $ 10,043
Federal funds sold and other short-term investments 10,543 19,442
----------- -----------
Cash and cash equivalents 21,349 29,485
----------- -----------
Securities available-for-sale, at fair value 196,654 193,865
Loans 601,170 591,976
Less: Allowance for loan losses 6,631 6,451
----------- -----------
Loans, net 594,539 585,525
----------- -----------
Premises and equipment, net 11,434 11,617
Investment in bank-owned life insurance 13,228 13,093
Payments in excess of funding 22,880 21,865
Goodwill 7,471 7,471
Other intangible assets, net 527 597
Other assets 19,188 21,710
----------- -----------
Total assets $ 887,270 $ 885,228
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 94,917 $ 103,300
Interest-bearing 215,927 174,241
----------- -----------
Total deposits 310,844 277,541
Accounts and drafts payable 426,938 479,025
Subordinated convertible debentures 2,991 2,991
Short-term borrowings 13,162 305
Other liabilities 19,392 19,125
----------- -----------
Total liabilities 773,327 778,987
----------- -----------
Shareholders' Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common Stock, par value $.50 per share;
20,000,000 shares authorized:
9,949,324 shares issued at March 31, 2009 and
December 31, 2008 4,975 4,975
Additional paid-in capital 45,159 45,746
Retained earnings 83,921 81,197
Common shares in treasury, at cost (736,082 shares at
March 31, 2009 and 775,288 shares at December 31, 2008) (17,350) (18,264)
Accumulated other comprehensive loss (2,762) (7,413)
----------- -----------
Total shareholders' equity 113,943 106,241
----------- -----------
Total liabilities and shareholders' equity $ 887,270 $ 885,228
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
For The Three Months Ended
March 31,
--------------------------
2009 2008
--------- ---------
Fee Revenue and Other Income:
Information services payment and processing revenue $ 11,944 $ 12,047
Bank service fees 404 331
Gains on sales of securities 119 --
Other 135 233
--------- ---------
Total fee revenue and other income 12,602 12,611
--------- ---------
Interest Income:
Interest and fees on loans 8,617 8,275
Interest and dividends on securities:
Taxable 2 28
Exempt from federal income taxes 1,858 1,701
Interest on federal funds sold and
other short-term investments 16 996
--------- ---------
Total interest income 10,493 11,000
--------- ---------
Interest Expense:
Interest on deposits 934 1,185
Interest on short-term borrowings 18 --
Interest on subordinated convertible debentures 39 52
--------- ---------
Total interest expense 991 1,237
--------- ---------
Net interest income 9,502 9,763
Provision for loan losses 400 450
--------- ---------
Net interest income after provision for loan losses 9,102 9,313
--------- ---------
Total net revenue 21,704 21,924
--------- ---------
Operating Expense:
Salaries and employee benefits 12,449 12,437
Occupancy 615 540
Equipment 841 824
Amortization of intangible assets 70 70
Other operating 2,315 2,489
--------- ---------
Total operating expense 16,290 16,360
--------- ---------
Income before income tax expense 5,414 5,564
Income tax expense 1,491 1,545
--------- ---------
Net income $ 3,923 $ 4,019
========= =========
Basic earnings per share $ .43 $ .44
Diluted earnings per share .42 .43
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
--------------------------
2009 2008
--------- ---------
Cash Flows From Operating Activities:
Net income $ 3,923 $ 4,019
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,055 1,036
Gains on sales of securities (119) --
Provision for loan losses 400 450
Stock-based compensation expense 308 227
Deferred income tax (benefit) expense (19) 9
Increase (decrease) in income tax liability 494 (1,258)
Increase in pension liability 186 494
Other operating activities, net (512) (1,528)
--------- ---------
Net cash provided by operating activities 5,716 3,449
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 4,277 --
Proceeds from maturities of securities available-for-sale 2,680 4,106
Purchase of securities available-for-sale (2,877) (38,367)
Net increase in loans (9,414) (43,962)
Increase in payments in excess of funding (1,015) (8,645)
Purchases of premises and equipment, net (396) (329)
--------- ---------
Net cash used in investing activities (6,745) (87,197)
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (8,383) (6,868)
Net increase (decrease) in interest-bearing demand and savings deposits 2,006 (7,425)
Net increase (decrease) in time deposits 39,680 (36,971)
Net (decrease) increase in accounts and drafts payable (52,087) 2,009
Net increase (decrease) in short-term borrowings 12,857 (195)
Cash dividends paid (1,199) (1,111)
Other financing activities, net 19 14
--------- ---------
Net cash used in financing activities (7,107) (50,547)
--------- ---------
Net decrease in cash and cash equivalents (8,136) (134,295)
Cash and cash equivalents at beginning of period 29,485 176,070
--------- ---------
Cash and cash equivalents at end of period $ 21,349 $ 41,775
========= =========
Supplemental information:
Cash paid for interest $ 910 $ 1,425
Cash paid for income taxes 1,030 736
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 2008 consolidated financial statements
have been reclassified to conform to the 2009 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. 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, 2008.
Note 2 - Intangible Assets
The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," ("SFAS No. 142") which requires that intangibles with indefinite useful
lives be tested annually for impairment and those with finite useful lives be
amortized over their useful lives. Intangible assets for the periods ended March
31, 2009 and December 31, 2008 are as follows:
March 31, 2009 December 31, 2008
======================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
======================================================================================================
Assets eligible for amortization:
Software $ 862 $ (790) $ 862 $ (747)
Customer List 750 (295) 750 (268)
------------------------------------------------------------------------------------------------------
Total 1,612 (1,085) 1,612 (1,015)
------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,698 (227)* 7,698 (227)*
------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,698 (227) 7,698 (227)
------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $ (1,312) $ 9,310 $ (1,242)
------------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS No. 142.
Software is amortized over four to five years and the customer list is amortized
over seven years. Amortization of intangible assets amounted to $70,000 for the
three-month periods ended March 31, 2009 and 2008, respectively. Estimated
amortization of intangibles over the next five years is as follows: $222,000 in
2009, $107,000 in 2010, 2011, and 2012 and $54,000 in 2013.
Note 3 - Equity Investments in Non-Marketable Securities
Non-marketable equity investments in low-income housing projects are included in
other assets on the Company's consolidated balance sheets. The total balance of
these investments at March 31, 2009 and December 31, 2008 were $584,000 and
$605,000, respectively.
Note 4 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding. The calculations of basic and
diluted earnings per share for the periods ended March 31, 2009 and 2008 are as
follows:
Three Months Ended
March 31,
==========================
(Dollars in thousands, except per share data) 2009 2008
==============================================================================================
Basic
Net income $ 3,923 $ 4,019
Weighted-average common shares outstanding 9,135,326 9,174,415
----------------------------------------------------------------------------------------------
Basic earnings per share $ .43 $ .44
----------------------------------------------------------------------------------------------
Diluted
----------------------------------------------------------------------------------------------
Net income $ 3,923 $ 4,019
Net income effect of 5.33% convertible debentures 20 25
----------------------------------------------------------------------------------------------
Net income 3,943 4,044
----------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,135,326 9,174,415
Effect of dilutive stock options and awards 89,889 108,025
Effect of 5.33% convertible debentures 153,630 185,134
----------------------------------------------------------------------------------------------
Weighted-average common shares outstanding assuming dilution 9,378,845 9,467,574
----------------------------------------------------------------------------------------------
Diluted earnings per share $ .42 $ .43
----------------------------------------------------------------------------------------------
-6-
Note 5 - Stock Repurchases
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 300,000 shares of the
Company's Common Stock. The Company did not repurchase any shares during the
three-month periods ended March 31, 2009 and 2008. As of March 31, 2009, 180,000
shares remained available for repurchase under the program. Repurchases are made
in the open market or through negotiated transactions from time to time
depending on market conditions.
Note 6 - Comprehensive Income
For the three-month periods ended March 31, 2009 and 2008, unrealized gains and
losses on securities available-for-sale were the Company's only other
comprehensive income component. Comprehensive income for the three-month periods
ended March 31, 2009 and 2008 is summarized as follows:
Three Months Ended
March 31,
==================
(In thousands) 2009 2008
====================================================================
Net income $3,923 $4,019
Other comprehensive income:
Less: Reclassification adjustments for gains
included in net income, net of tax 77 --
Add: Net unrealized gain on securities
available-for-sale, net of tax 4,728 1,684
--------------------------------------------------------------------
Total comprehensive income $8,574 $5,703
--------------------------------------------------------------------
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, 2008. Management evaluates segment
performance based on net income after allocations for corporate expenses and
income taxes. Transactions between segments are accounted for at what management
believes to be market value.
All 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.
-7-
Summarized information about the Company's operations in each industry segment
for the three-month periods ended March 31, 2009 and 2008, is as follows:
Corporate,
Information Banking Eliminations
(In thousands) Services Services and Other Total
====================================================================================
Quarter Ended March 31, 2009
Total Revenues:
Revenue from customers $ 17,383 $ 4,321 $ -- $ 21,704
Intersegment revenue 1,615 357 (1,972) --
Net income 2,834 1,089 -- 3,923
Total assets 556,709 419,592 (89,031) 887,270
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 527 -- -- 527
Quarter Ended March 31, 2008
Total Revenues:
Revenue from customers $ 18,462 $ 3,462 $ -- $ 21,924
Intersegment revenue 1,234 206 (1,440) --
Net income 3,456 563 -- 4,019
Total assets 594,457 316,348 (53,287) 857,518
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 807 -- -- 807
Note 8 - Loans by Type
(In thousands) March 31, 2009 December 31, 2008
================================================================================
Commercial and industrial $ 116,896 $ 118,044
Real estate (Commercial and church):
Mortgage 425,544 412,788
Construction 54,486 56,221
Industrial revenue bonds 3,291 3,363
Other 953 1,560
--------------------------------------------------------------------------------
Total loans $ 601,170 $ 591,976
================================================================================
Note 9 - Commitments and Contingencies
In the normal course of business, the Company is party to activities that
contain credit, market and operational risks that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating and capital leases. These financial instruments
include commitments to extend credit, commercial letters of credit and standby
letters of credit. The Company's maximum potential exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, commercial letters of credit and standby letters
of credit is represented by the contractual amounts of those instruments. At
March 31, 2009, no amounts have been accrued for any estimated losses for these
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
or its subsidiaries to guarantee the performance of a customer to a third party.
These off-balance sheet financial instruments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. At March
31, 2009, the balance of unused loan commitments, standby and commercial letters
of credit were $33,076,000, $8,948,000 and $2,298,000, respectively. Since some
of the financial instruments may expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. Commitments to
extend credit and letters of credit are subject to the same underwriting
standards as those financial instruments included on the consolidated balance
sheets. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary upon
extension of the credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but is generally accounts receivable,
inventory, residential or income-producing commercial property or equipment. In
the event of nonperformance, the Company or its subsidiaries may obtain and
liquidate the collateral to recover amounts paid under its guarantees on these
financial instruments.
-8-
The following table summarizes contractual cash obligations of the Company at
March 31, 2009:
Amount of Commitment Expiration per Period
=================================================================================
Less than 1-3 3-5 Over 5
(In thousands) Total 1 Year Years Years Years
=========================================================================================================================
Operating lease commitments $ 3,607 $ 862 $ 1,280 $ 742 $ 723
Time deposits 109,328 100,546 7,534 1,248 --
Convertible subordinated debentures* 2,991 -- -- -- 2,991
-------------------------------------------------------------------------------------------------------------------------
Total $ 115,926 $ 101,408 $ 8,814 $ 1,990 $ 3,714
=========================================================================================================================
* Includes principal payments only.
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 10 - Stock-Based Compensation
In 2007, the Board and the Company's shareholders approved the 2007 Omnibus
Incentive Stock Plan (the "Omnibus Plan"). The Omnibus Plan permits the issuance
of up to 880,000 shares of the Company's common stock in the form of stock
options, stock appreciation rights ("SARs"), restricted stock, restricted stock
units and performance awards. The Company issues shares out of treasury stock
for these awards. During the quarter ended March 31, 2009, 29,336 restricted
stock shares and 121,943 SARs were granted under the Omnibus Plan.
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options previously issued
and still outstanding. These plans have been superseded by the Omnibus Plan and
accordingly, any available restricted stock and stock option grants not yet
issued have been cancelled.
Restricted Stock
Restricted shares are amortized to expense over the three-year vesting period.
As of March 31, 2009, the total unrecognized compensation expense related to
non-vested common stock was $1,751,000 and the related weighted-average period
over which it is expected to be recognized is approximately 1.3 years.
Following is a summary of the activity of the restricted stock during the
three-month period ended March 31, 2009:
Shares Fair Value
-------------------------------------------------------
Balance at January 1, 2009 68,564 $ 30.72
Granted 29,336 25.77
Vested (27,255) 29.88
Forfeited -- --
-------------------------------------------------------
Balance at March 31, 2009 70,645 $ 28.61
-------------------------------------------------------
Stock Options
Stock options vest and expire over a period not to exceed seven years. As of
March 31, 2009, the total unrecognized compensation expense related to
non-vested stock options was $77,000 and the related weighted-average period
over which it is expected to be recognized is approximately 3.2 years. Following
is a summary of the activity of the stock options during the three-month period
ended March 31, 2009:
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years (In thousands)
=========================================================
Outstanding at January 1, 2009 69,536 $ 15.24
Granted -- --
Exercised (12,300) 19.75
Forfeited or expired -- --
----------- -----------
Outstanding at March 31, 2009 57,236 15.79 2.5 $ 952,000
=========================================================
Exercisable at March 31, 2009 29,649 $ 13.39 1.9 $ 564,000
=========================================================
-9-
The total intrinsic value of options exercised was $243,000 and $509,000 for the
three-month periods ended March 31, 2009 and 2008, respectively. Following is a
summary of the activity of the non-vested stock options during the three-month
period ended March 31, 2009:
Weighted-
Average
Grant Date
Shares Fair Value
---------------------------------------------------------
Nonvested at January 1, 2009 56,520 $ 2.46
Granted -- --
Vested (28,933) 2.14
Forfeited -- --
---------------------------------------------------------
Nonvested at March 31, 2009 27,587 $ 2.81
=========================================================
SARs
SARs vest over a three-year period with 1/3 of the shares vesting and becoming
exercisable each year on the anniversary of the date of grant and they expire 10
years from the original grant date. As of March 31, 2009, the total unrecognized
compensation expense was $1,438,000 and the related weighted-average period over
which it is expected to be recognized is 2.2 years. Following is a summary of
the Company's SARs program for the three-month period ended March 31, 2009:
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years (In thousands)
========================================================
Outstanding at January 1, 2009 109,755 $ 28.41
Granted 121,943 25.77
Exercised -- --
Forfeited or expired -- --
----------- -----------
Outstanding at March 31, 2009 231,698 27.02 9.3 $ 1,253,000
========================================================
Exercisable at March 31, 2009 36,579 $ 28.41 8.8 $ 147,000
========================================================
Following is a summary of the activity of the nonvested SARs during the
three-month period ended March 31, 2009:
Weighted-
Average
Grant Date
Shares Fair Value
---------------------------------------------------------
Nonvested at January 1, 2009 109,755 $ 7.65
Granted 121,943 6.20
Vested (36,579) 7.65
Forfeited -- --
---------------------------------------------------------
Nonvested at March 31, 2009 195,119 $ 6.74
=========================================================
The Company uses the Black-Scholes pricing model to determine the fair value of
the SARs at the date of grant. Following are the assumptions used to estimate
the per share fair value of SARs granted during the three-month periods ended
March 31, 2009 and 2008, respectively:
Three Months Ended March 31,
2009 2008
================================================================================
Risk-free interest rate 1.94% 3.01%
Expected life 7 yrs. 7 yrs.
Expected volatility 27.00% 26.00%
Expected dividend yield 2.02% 1.69%
--------------------------------------------------------------------------------
The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for
the period equal to the expected life of the options at the time of the grant.
The expected life was derived using the historical exercise activity. The
Company uses historical volatility for a period equal to the expected life of
the rights using average monthly closing market prices of the Company's stock as
reported on The Nasdaq Global Market. The expected dividend yield is based on
the Company's current rate of annual dividends.
-10-
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 2008 and an estimate for 2009:
Estimated Actual
(In thousands) 2009 2008
===============================================================================
Service cost - benefits earned during the year $ 1,578 $ 1,523
Interest cost on projected benefit obligation 2,099 1,947
Expected return on plan assets (1,882) (2,108)
Net amortization 888 66
-------------------------------------------------------------------------------
Net periodic pension cost $ 2,683 $ 1,428
-------------------------------------------------------------------------------
Pension costs recorded to expense were $671,000 and $358,000 for the three-month
periods ended March 31, 2009 and 2008, respectively. The increase in pension
costs resulted from the decline in the equity market during 2008. The Company
made a contribution of $450,000 to the plan during the three-month period ended
March 31, 2009, and expects to contribute at least an additional $1,350,000 in
2009.
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
2008 and an estimate for 2009:
Estimated Actual
(In thousands) 2009 2008
================================================================================
Service cost - benefits earned during the year $ 38 $ 59
Interest cost on projected benefit obligation 285 267
Net amortization 133 170
--------------------------------------------------------------------------------
Net periodic pension cost $ 456 $ 496
--------------------------------------------------------------------------------
Pension costs recorded to expense were $114,000 and $147,000 for the three-month
periods ended March 31, 2009 and 2008, respectively.
Note 12 - Income Taxes
The Company adopted Financial Accounting Standards Board ("FASB") Interpretation
No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," effective
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
in financial statements and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken.
During the first quarter of 2009, unrecognized tax benefits increased by $86,000
and accrued interest increased by $16,000. As of December 31, 2008, the
Company's unrecognized tax benefits were approximately $1,399,000, of which
$1,170,000 would, if recognized, affect the Company's effective tax rate.
The Company recognizes interest and penalties related to uncertain tax positions
in income tax expense. At December 31, 2008, before any tax benefits, the
Company had $114,000 of accrued interest on unrecognized tax benefits. There
were no penalties for unrecognized tax benefits accrued at December 31, 2008.
The Company is subject to income tax in the U.S. federal jurisdiction and
numerous state jurisdictions. U.S. federal income tax returns for tax years 2006
through 2008 remain subject to examination by the Internal Revenue Service. In
addition, the Company is subject to state tax examinations for the tax years
2004 through 2008.
-11-
Note 13 - Fair Value of Assets
Effective January 1, 2008, the Company adopted SFAS No. 157 "Fair Value
Measurements" ("SFAS No. 157") and SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities". The Company has not applied the
provisions of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities
such as real estate owned and goodwill. The Company uses fair value measurements
to determine fair value disclosures.
The following is a description of valuation methodologies used for assets
recorded at fair value:
Investment Securities Available for Sale - Investment securities
available-for-sale are recorded at fair value on a recurring basis. The
Company's securities available-for sale are measured at fair value using Level 2
valuations. The market valuation utilizes several sources which include
observable inputs rather than "significant unobservable inputs" and therefore
fall into the Level 2 category. The table below presents the balances of
securities available-for-sale measured at fair value on a recurring basis:
March 31, 2009
Treasury Securities $ 200
State and Municipal Securities 193,030
Other 3,424
--------------
$ 196,654
==============
Loans - The Company does not record loans at fair value on a recurring basis
other than loans that are considered impaired. Once a loan is identified as
impaired, management measures impairment in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." At March 31, 2009, all
impaired loans were evaluated based on the fair value of the collateral. The
fair value of the collateral is based upon an observable market price or current
appraised value and therefore, the Company classifies these assets as
nonrecurring Level 2. The total principal balance of impaired loans measured at
fair value at March 31, 2009 was $914,000.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Cass provides payment and information processing services to large
manufacturing, distribution and retail enterprises from its processing centers
in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South
Carolina and Wellington, Kansas. The Company's services include freight invoice
rating, payment processing, auditing, and the generation of accounting and
transportation information. Cass also processes and pays utility invoices, which
includes electricity, gas and telecommunications expenses and is a provider of
telecom expense management solutions. Cass extracts, stores and presents
information from freight, utility and telecommunication invoices, assisting its
customers' transportation, energy and information technology managers in making
decisions that will enable them to improve operating performance. The Company
receives data from multiple sources, electronic and otherwise, and processes the
data to accomplish the specific operating requirements of its customers. It then
provides the data in a central repository for access and archiving. The data is
finally transformed into information through the Company's databases that allow
client interaction as required and provide Internet-based tools for analytical
processing. The Company also, through Cass Commercial Bank, its St. Louis,
Missouri based bank subsidiary (the "Bank"), provides banking services in the
St. Louis metropolitan area, Orange County, California and other selected cities
in the United States. In addition to supporting the Company's payment
operations, the Bank provides banking services to its target markets, which
include privately owned businesses and churches and church-related ministries.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's requirements, which
can vary greatly. In addition, the degree of automation such as electronic data
interchange, imaging, and web-based solutions varies greatly among customers and
industries. These factors combine so that pricing varies among the customer
base. In general, however, Cass is compensated for its processing services
through service fees and account balances that are generated during the payment
process. The amount, type and calculation of service fees vary by service
offering, but generally follow the volume of transactions processed. Interest
income from the balances generated during the payment processing cycle is
affected by the amount of time Cass holds the funds prior to payment and the
dollar volume processed. Both the number of transactions processed and the
dollar volume processed are therefore key metrics followed by management. Other
factors will also influence revenue and profitability, such as changes in the
general level of interest rates, which have a significant effect on net interest
income. The funds generated by these processing activities are invested in
overnight investments, investment grade securities and loans generated by the
Bank. The Bank earns most of its revenue from net interest income, or the
difference between the interest earned on its loans and investments and the
interest paid on its deposits and other borrowings. The Bank also assesses fees
on other services such as cash management services.
Industry-wide factors that impact the Company include the willingness of large
corporations to outsource 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. As lower levels of economic activity are encountered, such as
those experienced in the second half of 2008 and continuing into the first
quarter of 2009, the number and total dollar amount of transactions processed by
the Company may decline thereby reducing fee revenue, interest income, and
possibly liquidity. The general level of interest rates also has a significant
effect on the revenue of the Company. As discussed in greater detail in Item 7A,
"Quantitative and Qualitative Disclosures about Market Risk," in the Company's
2008 Annual Report on Form 10K, a decline in the general level of interest rates
can have a negative impact on net interest income.
Currently, management views Cass's major opportunity as the continued expansion
of its payment and information processing service offering and customer base.
While the current economic slow-down may reduce the short-term growth rate,
management remains optimistic about the long-term prospects for growth. With the
recent significant drop in short-term interest rates, the major challenge faced
by Cass is the prudent management of earning assets and interest bearing
liabilities. Management actively monitors Cass's balance sheet and has already
taken a number of actions to reduce the interest rate sensitivity of its earning
assets and lower the cost of its interest bearing liabilities in an effort to
mute the effect the lower interest rate environment has on Cass.
-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, 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. In accordance with FIN 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109," the Company has
unrecognized tax benefits related to tax positions taken or expected to be
taken. See Note 12 to the financial statements.
Pension Plans. The amounts recognized in the consolidated financial statements
related to pension plans 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, 2008,
rate of increase in future compensation levels and mortality rates. These
assumptions are updated annually and are disclosed in Note 12 to the
consolidated financial statements filed with the Company's Annual Report on Form
10-K for the year ended December 31, 2008. Pursuant to Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans," the Company has recognized the funded status of
its defined benefit postretirement plan in its statement of financial position
and has recognized changes in that funded status through comprehensive income.
The funded status is measured as the difference between the fair value of the
plan assets and the benefit obligation as of the date of its fiscal year-end.
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended March 31, 2009
("First Quarter of 2009") compared to the three-month period ended March 31,
2008 ("First Quarter of 2008"). 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 2008 Annual Report on Form 10-K. Results of operations
for the First Quarter of 2009 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
March 31,
===================================
%
(Dollars in thousands, except per share data) 2009 2008 Change
====================================================================================
Net income $ 3,923 $ 4,019 (2.4) %
Diluted earnings per share $ .42 $ .43 (2.3) %
Return on average assets 1.79% 1.84% --
Return on average equity 14.35% 16.12% --
------------------------------------------------------------------------------------
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility payment and
processing fees. As the Company provides its processing and payment services, it
is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the First Quarter of 2009
and First Quarter of 2008 were as follows:
Three Months Ended
March 31,
======================================
%
(In thousands) 2009 2008 Change
==================================================================================
Freight Core Invoice Transaction Volume* 5,395 5,972 (9.7)%
Freight Invoice Dollar Volume $3,386,740 $3,857,573 (12.2)%
Utility Transaction Volume 2,830 2,532 11.8%
Utility Transaction Dollar Volume $2,495,697 $2,235,890 11.6%
Payment and Processing Revenue $ 11,944 $ 12,047 (.9)%
----------------------------------------------------------------------------------
*Core invoices exclude parcel shipments.
New transportation customer implementations helped off-set a 21% decline in base
customer volumes as the global economic slowdown impacted the transportation
industry. As a result, freight invoice volume was down 10% and dollar volume was
down 12%. Utility transaction volume and dollar volume were up 12% primarily due
to new business, partially offsetting the lower volumes in the freight business.
The net effect was overall payment and processing fees decreased less than 1%
compared to the year-earlier period.
Bank service fees increased $73,000, or 22%, due to an increase in account
analysis fees. Other income decreased $98,000, or 42%, because of a decline in
freight disbursement processing fees. There were gains of $119,000 on sales of
securities in the First Quarter of 2009.
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the First Quarter of 2009 and First Quarter of
2008:
Three Months Ended
March 31,
======================================
(Dollars in thousands) 2009 2008 Change
==============================================================================
Average earning assets $ 803,943 $ 800,191 .5%
Net interest income* 10,522 10,704 (1.7)%
Net interest margin* 5.31% 5.37% --
Yield on earning assets* 5.81% 5.99% --
Rate on interest bearing liabilities 1.98% 3.05% --
------------------------------------------------------------------------------
*Presented on a tax-equivalent basis assuming a tax rate of 35% in 2009 and
2008.
First Quarter 2009 average earning assets, tax equivalent net interest income,
and tax equivalent net interest margin all remained relatively consistent with
levels for the same period in the prior year (see discussion in the following
paragraphs). The yield on earning assets and the rate paid on deposits both
decreased in 2009 as the general level of interest rates declined.
-15-
Total average loans increased $88,041,000, or 17%, to $592,233,000 for the First
Quarter of 2009 as compared to the First Quarter of 2008. This increase was
attributable to the successful implementation of new marketing efforts by the
Company's lending staff and the negative impact the credit crisis had on many of
the Company's competitors which resulted in attractive loan growth
opportunities. This increase in average loans along with the increase in average
investment securities of $13,147,000, or 7%, to $191,737,000 were part of the
Company's strategy to redeploy assets in the face of a declining interest rate
environment. The primary offset to the previously mentioned increases was a
decrease in average federal funds sold and other short-term investments of
$97,436,000, or 83%, to $19,973,000 for the First Quarter of 2009 as compared to
the First Quarter of 2008. In effect, this strategy of replacing short-term
relatively low yielding assets with longer term relatively higher yielding
assets has allowed the Company to reduce its interest rate sensitivity and
protect its source of revenue from net interest income.
Total average interest-bearing deposits for the First Quarter of 2009 increased
$31,052,000, or 20%, to $189,661,000 compared to the First Quarter of 2008. This
increase along with increases in average short-term borrowings and average
noninterest-bearing demand deposits of $10,372,000 and $6,002,000, respectively,
were the primary sources utilized to offset the decline in average accounts and
drafts payable of $59,475,000, or 11%, to $461,770,000 for the First Quarter of
2009 as compared to the same period last year. The decline in accounts and
drafts payable was primarily the result of lower levels of freight payment
processing activities as the Company's customers dealt with the global economic
slowdown.
For more information on the changes in net interest income, please refer to the
tables that follow.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and
Interest Differential
The following table shows the condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported.
First Quarter of 2009 First Quarter of 2008
==================================== =====================================
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 $ 588,912 $ 8,580 5.91% $ 500,091 $ 8,228 6.60%
Tax-exempt (4) 3,321 57 6.91 4,101 72 7.04
Securities (5):
Taxable 3,559 2 .22 3,670 28 3.06
Tax-exempt (4) 188,178 2,858 6.16 174,920 2,617 6.00
Federal funds sold and other
short-term investments 19,973 16 .34 117,409 996 3.40
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets 803,943 11,513 5.81 800,191 11,941 5.99
Nonearning assets:
Cash and due from banks 9,067 22,111
Premises and equipment, net 11,678 12,660
Bank-owned life insurance 13,168 12,591
Goodwill and other intangibles, net 8,039 8,323
Other assets 48,856 35,529
Allowance for loan losses (6,569) (6,341)
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 888,182 $ 885,064
-------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 82,085 $ 302 1.49% $ 75,927 $ 377 1.99%
Savings deposits 20,281 69 1.38 19,001 96 2.03
Time deposits of
$100 or more 41,516 287 2.80 40,298 438 4.36
Other time deposits 45,779 276 2.45 23,383 274 4.70
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 189,661 934 2.00 158,609 1,185 3.00
Short-term borrowings 10,443 18 .69 71 0 0.00
Subordinated Debentures 2,991 39 5.33 3,618 52 5.76
-------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 203,095 991 1.98 162,298 1,237 3.06
Noninterest-bearing liabilities:
Demand deposits 93,464 87,462
Accounts and drafts payable 461,770 521,245
Other liabilities 18,963 12,929
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities 777,292 783,934
Shareholders' equity 110,890 101,130
Total liabilities and
shareholders' equity $ 888,182 $ 885,064
-------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,522 $ 10,704
Interest spread 3.83% 2.93%
Net interest margin 5.31% 5.37%
===============================================================================================================================
-16-
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 2008
consolidated financial statements, filed with the Company's 2008 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $136,000 and $54,000
for the First Quarter of 2009 and 2008, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2009 and 2008. The tax-equivalent adjustment was approximately
$1,020,000 and $941,000 for the First Quarter of 2009 and 2008,
respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
--------------------------------------------------------------------------------
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
First Quarter of 2009
Over First Quarter of 2008
===============================
(In thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 1,307 $ (955) $ 352
Tax-exempt (3) (14) (1) (15)
Securities:
Taxable (1) (25) (26)
Tax-exempt (3) 183 58 241
Federal funds sold and other
short-term investments (469) (511) (980)
-------------------------------------------------------------------------------
Total interest income 1,006 (1,434) (428)
-------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 28 (103) (75)
Savings deposits 6 (33) (27)
Time deposits of $100 or more 12 (163) (151)
Other time deposits 175 (173) 2
Short-term borrowings 0 18 18
Subordinated debentures (13) -- (13)
-------------------------------------------------------------------------------
Total interest expense $ 208 $ (454) $ (246)
-------------------------------------------------------------------------------
Net interest income $ 798 $ (980) $ (182)
===============================================================================
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2009 and 2008.
-17-
Provision and Allowance for Loan Losses
A significant determinant of the Company's operating results is the provision
for loan losses and the amount of loans charged off. Provisions for loan losses
of $400,000 and $450,000 were recorded during the First Quarter of 2009 and the
First Quarter of 2008, respectively. As discussed below, the Company continually
analyzes the outstanding loan portfolio based on the performance, financial
condition and collateralization of the credits. There was $220,000 of net loan
charge-offs in the First Quarter of 2009 and $473,000 of net loan charge-offs in
the First Quarter of 2008.
The allowance for loan losses at March 31, 2009 was $6,631,000 and at December
31, 2008 was $6,451,000. The ratio of allowance for loan losses to total loans
outstanding at March 31, 2009 was 1.10% compared to 1.09% at December 31, 2008.
Nonperforming loans were $914,000, or .15%, of total loans at March 31, 2009
compared to $1,219,000, or .21%, of total loans at December 31, 2008.
At March 31, 2009 the nonperforming loans, which are also considered impaired,
consisted of five loans that relate to businesses that are in financial trouble.
Nonperforming loans at December 31, 2008 consisted of $1,178,000 in non-accrual
loans related to five borrowers and one loan of $41,000 contractually past due
more than 90 days. Total nonperforming loans decreased $1,529,000 from March 31,
2008 to March 31, 2009. This decrease was due to the payment in entirety of one
loan past due 90 days and the write-off of two nonaccrual loans.
In addition to the nonperforming loans discussed above, at March 31, 2009, one
loan of $378,000 not included in the table below was identified by management as
having potential credit problems. This loan is excluded from the table due to
the fact it is current under the original terms of the loan, however
circumstances have raised doubts as to the ability of the borrower to comply
with the current loan repayment terms. This loan is closely monitored by
management.
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial, real
estate, and construction loans based on individual review of these loans and an
estimate of the borrower's ability to repay the loan given the availability of
collateral, other sources of cash flow and collection options available. The
general component relates to all other loans, which are evaluated based on loan
grade. The loan grade assigned to each loan is typically evaluated on an annual
basis, unless circumstances require interim evaluation. The Company assigns a
reserve amount consistent with each loan's rating category. The reserve amount
is based on derived loss experience over prescribed periods. In addition to the
amounts derived from the loan grades, a portion is added to the general reserve
to take into account other factors including national and local economic
conditions, downturns in specific industries including loss in collateral value,
trends in credit quality at the Company and the banking industry, and trends in
risk rating changes. As part of their examination process, federal and state
agencies review the Company's methodology for maintaining the allowance for loan
losses and the balance in the account. These agencies may require the Company to
increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
Summary of Asset Quality
The following table presents information as of and for the First Quarter of 2009
and First Quarter of 2008 pertaining to the Company's provision for loan losses
and analysis of the allowance for loan losses.
First Quarter of
========================
(Dollars in thousands) 2009 2008
====================================================================================
Allowance at beginning of period $ 6,451 $ 6,280
Provision charged to expense 400 450
Loans charged off (254) (491)
Recoveries on loans previously charged off 34 18
------------------------------------------------------------------------------------
Net loan charge-offs (220) (473)
Allowance at end of period $ 6,631 $ 6,257
------------------------------------------------------------------------------------
Loans outstanding:
Average $ 592,233 $ 504,192
March 31 601,170 541,944
Ratio of allowance for loan losses to loans outstanding:
Average 1.12% 1.24%
March 31 1.10% 1.15%
Nonperforming loans:
Nonaccrual loans $ 914 $ 1,947
Loans past due 90 days or more -- 496
Renegotiated loans -- --
------------------------------------------------------------------------------------
Total non performing loans $ 914 $ 2,443
Foreclosed assets 2,177 1,388
------------------------------------------------------------------------------------
Nonperforming loans as a percent of average loans .15% .48%
====================================================================================
-18-
The Company had no sub-prime mortgage loans or residential development loans in
its portfolio as of March 31, 2009. The Bank had two properties carried as other
real estate owned of $2,177,000 as of March 31, 2009 and one property for
$1,388,000 at March 31, 2008.
Operating Expense
Total operating expense for the First Quarter of 2009 decreased $70,000, or .4%,
to $16,290,000 compared to the First Quarter of 2008 as the Company implemented
cost control measures during a difficult economic environment.
Salaries and benefits expense increased $12,000, or less than 1%, to $12,449,000
in the First Quarter of 2009 compared with the First Quarter of 2008 reflecting
increased pension costs of $313,000 offset by headcount reductions.
Occupancy expense for the First Quarter of 2009 increased $75,000, or 14%, to
$615,000 from the First Quarter of 2008 primarily due to additional maintenance
and repairs and rent expense related to additional space in Ohio.
Equipment expense for the First Quarter of 2009 increased $17,000, or 2%, to
$841,000 from the First Quarter of 2008 primarily due to additional software
license fees.
Amortization of intangible assets remained the same at $70,000 for the First
Quarter of 2009 compared to the First Quarter of 2008.
Other operating expenses decreased $174,000, or 7%, to $2,315,000 for the First
Quarter of 2009 compared to the First Quarter of 2008 because other real estate
owned expense and postage expense were lower.
Income tax expense for the First Quarter of 2009 decreased $54,000, or 3%,
compared to the First Quarter of 2008. The effective tax rate for the First
Quarter of 2009 declined slightly to 27.5% compared to 27.8% in the First
Quarter of 2008.
Financial Condition
Total assets at March 31, 2009 increased $2,042,000, or less than 1%, from
December 31, 2008. The most significant change in asset balances during this
period was a decrease of $8,899,000, or 46%, in federal funds sold and other
short-term investments. Most of this decrease was offset by increases in longer
term state and municipal securities and loans. As mentioned earlier, this
redeployment of assets was done to offset the negative impact the declining
interest rate environment has on the Company.
Total liabilities at March 31, 2009 were $773,327,000, compared to the balance
of $778,987,000 at December 31, 2008. Total deposits at March 31, 2009 were
$310,844,000, an increase of $33,303,000, or 12%, compared to December 31, 2008.
Additionally, short-term borrowings increased $12,857,000 from $305,000 at
December 31, 2008 to $13,162,000 at March 31, 2009. The increases in deposits
and short-term borrowings were the primary sources utilized to offset the
$52,087,000, or 11%, decline in accounts and drafts payable which totalled
$426,938,000 at March 31, 2009. Total shareholders' equity at March 31, 2009 was
$113,943,000, a $7,702,000, or 7%, increase from December 31, 2008.
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 Shareholders' Equity; Interest Rate and Interest
Differential" section of this report).
The increase in total shareholders' equity resulted from net income of
$3,923,000, $308,000 from stock-based compensation expense, other miscellaneous
activity of $19,000 and a decrease of $4,651,000 in other comprehensive loss,
offset by dividends paid of $1,199,000 ($.13 per share).
-19-
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 $21,349,000 at March 31, 2009, a decrease of $8,136,000, or 28%, from
December 31, 2008. At March 31, 2009, these assets represented 2% 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 $196,654,000 at March 31, 2009, an
increase of $2,789,000 from December 31, 2008. These assets represented 22% of
total assets at March 31, 2009. Of this total, 98% were state and political
subdivision securities, and U.S. Treasury securities were less than 1%. Of the
total portfolio, 7% mature in one year, 22% mature in one to five years, and 71%
mature in five or more years. During the First Quarter of 2009, the Company sold
securities with a market value of $4,277,000.
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $56,000,000. Additionally, the Bank maintains a line of credit
at unaffiliated financial institutions in the maximum amount of $123,560,000
collateralized by U.S. Treasury securities and commercial mortgage loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize other commercial products of the Bank. The accounts and drafts payable
generated by the Company has also historically been a stable source of funds.
Net cash flows provided by operating activities were $5,716,000 for the First
Quarter of 2009 compared with $3,449,000 for the First Quarter of 2008. This
increase is primarily due to the net change in income taxes deferred and payable
of $1,724,000 plus the other normal fluctuations in asset and liability
accounts. Net cash flows from investing and financing activities fluctuate
greatly as the Company actively manages its investment and loan portfolios and
customer activity influences changes in deposit and accounts and drafts payable
balances. Other causes for the changes in these account balances are discussed
earlier in this report. Due to the daily fluctuations in these account balances,
the analysis of changes in average balances, also discussed earlier in this
report, can be more indicative of underlying activity than the period-end
balances used in the statements of cash flows. Management anticipates that cash
and cash equivalents, maturing investments and cash from operations will
continue to be sufficient to fund the Company's operations and capital
expenditures in 2009.
The Company faces market risk to the extent that its net interest income and
fair market value of equity are affected by changes in market interest rates.
For information regarding the market risk of the Company's financial
instruments, see Item 3. "Quantitative and Qualitative Disclosures about Market
Risk."
Risk-based capital guidelines require the Company to meet a minimum total
capital ratio of 8.0%, of which at least 4.0% must consist of Tier 1 capital.
Tier 1 capital generally consists of (a) common shareholders' equity (excluding
the unrealized market value adjustments on the available-for-sale securities),
(b) qualifying perpetual preferred stock and related surplus subject to certain
limitations specified by the Federal Deposit Insurance Corporation ("FDIC"), (c)
minority interests in the equity accounts of consolidated subsidiaries less (d)
goodwill, (e) mortgage servicing rights within certain limits, and (f) any other
intangible assets and investments in subsidiaries that the FDIC determines
should be deducted from Tier 1 capital. The FDIC also requires a minimum
leverage ratio of 3.0%, defined as the ratio of Tier 1 capital less purchased
mortgage servicing rights to total assets, for banking organizations deemed the
strongest and most highly rated by banking regulators. A higher minimum leverage
ratio is required of less highly rated banking organizations. Total capital, a
measure of capital adequacy, includes Tier 1 capital, allowance for loan losses,
and debt considered equity for regulatory capital purposes.
The Company and the Bank continue to exceed all regulatory capital requirements,
as evidenced by the following capital amounts and ratios at March 31, 2009 and
December 31, 2008:
March 31, 2009 (In thousands) Amount Ratio
-------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $118,329 16.24%
Cass Commercial Bank 45,457 11.38
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $108,707 14.92%
Cass Commercial Bank 40,871 10.23
Tier I capital (to average assets)
Cass Information Systems, Inc. $108,707 12.35%
Cass Commercial Bank 40,871 10.35
-------------------------------------------------------------------------------
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December 31, 2008 (In thousands) Amount Ratio
-------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $115,028 15.93%
Cass Commercial Bank 44,187 11.39
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $105,586 14.62%
Cass Commercial Bank 39,782 10.26
Tier I capital (to average assets)
Cass Information Systems, Inc. $105,586 11.26%
Cass Commercial Bank 39,782 10.35
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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 and Not Yet Adopted Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS
No. 141(R)"). SFAS No. 141(R) significantly changes how entities apply the
acquisition method to business combinations. The most significant changes
include: (a) the acquisition date will be the date the acquirer obtains control;
(b) all (and only) identifiable assets acquired, liabilities assumed, and
noncontrolling interests in the acquiree will be stated at fair value on the
acquisition date; (c) assets or liabilities arising from noncontractual
contingencies will be measured at their acquisition date fair value only if it
is more likely than not that they meet the definition of an asset or liability
on the acquisition date; (d) adjustments subsequently made to the provisional
amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; (e) acquisition-related restructuring
costs that do not meet the criteria in SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" will be expensed as incurred; (f)
transaction costs will be expensed as incurred; (g) reversals of deferred income
tax valuation allowances and income tax contingencies will be recognized in
earnings subsequent to the measurement period; and (h) the allowance for loan
losses of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS No. 141(R) requires new and modified disclosures surrounding
subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward. SFAS No. 141(R) is effective for all business
combinations completed on or after January 1, 2009. For business combinations in
which the acquisition date was before the effective date, the provisions of SFAS
No. 141(R) apply to the subsequent accounting for deferred income tax valuation
allowances and income tax contingencies and require any changes in those amounts
to be recorded in earnings. SFAS No. 141(R) did not have an impact on our
financial condition, results of operations and the disclosures that are
presented in the consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position, or FSP, SFAS 157-4
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." FSP SFAS 157-4 affirms that the objective of fair value when the
market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction, and clarifies and includes additional
factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not active. FSP SFAS
157-4 requires an entity to base its conclusion about whether a transaction was
not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS No.
157, "Fair Value Measurements," to expand certain disclosure requirements. FSP
SFAS 157-4 is effective for interim and annual periods ending after June 15,
2009 and is applied prospectively. We will adopt the provisions of FSP SFAS
157-4 during the second quarter of 2009 which are not expected to significantly
impact the consolidated financial statements.
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In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments." FSP SFAS 115-2 and SFAS 124-2
(i) changes existing guidance for determining whether an impairment is other
than temporary to debt securities and (ii) replaces the existing requirement
that the entity's management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is more likely
than not it will not have to sell the security before recovery of its cost
basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
FSP SFAS 115-2 and SFAS 124-2 are effective for interim and annual periods
ending after June 15, 2009 and are applied prospectively. We will adopt the
provisions of FSP 157-4 and SFAS 124-2 during the second quarter of 2009 which
are not expected to significantly impact the consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board,
or APB, Opinion 28-1 "Interim Disclosures about Fair Value of Financial
Instruments." FSP SFAS 107-1 and APB Opinion 28-1 amend SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," to require an entity to
provide disclosures about fair value of financial instruments in interim
financial information and amends APB Opinion No. 28, "Interim Financial
Reporting," to require those disclosures in summarized financial information at
interim reporting periods. Under FSP SFAS 107-1 and APB Opinion 28-1, a publicly
traded company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, entities must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by SFAS No. 107. The new interim disclosures required by
FSP SFAS 107-1 and APB Opinion 28-1 will be included in the interim financial
statements beginning with the second quarter of 2009.
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, 2008, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at March 31, 2009 has changed materially from that at December 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide
reasonable assurance that the information it is required to disclose in the
reports it files with the SEC is recorded, processed, summarized and reported to
management, including the Chief Executive Officer and Principal Financial
Officer, within the time periods specified in the rules of the SEC. The
Company's Chief Executive Officer and Principal Financial Officer have evaluated
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March
31, 2009 and based on their evaluation, believe that, as of March 31, 2009,
these controls and procedures were effective at the reasonable assurance level
to ensure that the Company is able to collect, process and disclose the
information it is required to disclose in the reports it files with the SEC
within the required time periods.
There were no changes in the first quarter of 2009 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).
-22-
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, 2008, 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 2008 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 implemented during the first quarter of 2009.
ITEM 6. EXHIBITS
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: May 6, 2009 By /s/ Eric H. Brunngraber
--------------------------------------------
Eric H. Brunngraber
President and Chief Executive Officer
DATE: May 6, 2009 By /s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
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