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, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission File No. 2-80070
----------------
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1265338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13001 Hollenberg Drive
Bridgeton, Missouri 63044
(Address of principal executive offices) (Zip Code)
(314) 506-5500
(Registrant's telephone number, including area code)
-----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one) Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller Reporting Company |_|
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 3, 2008: Common stock, par value $.50 per share - 9,168,782 shares
outstanding.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2008 (unaudited) and December 31, 2007 .................. 3
Consolidated Statements of Income
Three and Nine months ended September 30, 2008 and 2007 (unaudited) ... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2008 and 2007 (unaudited) ............. 5
Notes to Consolidated Financial Statements (unaudited) .................. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................. 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............. 25
Item 4. CONTROLS AND PROCEDURES ................................................. 25
PART II - Other Information - Items 1. - 6. ........................................ 26
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. Although we believe that, in making any such statements, our
expectations are based on reasonable assumptions, forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other
factors beyond our control, which may cause future performance to be materially
different from expected performance summarized in the forward-looking
statements. These risks, uncertainties and other factors are discussed in the
section Part I, Item 1A, "Risk Factors" of the Company's 2007 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect changed assumptions, the occurrence of anticipated or unanticipated
events, or changes to future results over time.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)
September 30 December 31
2008 2007
Assets (Unaudited)
Cash and due from banks $ 23,314 $ 26,719
Federal funds sold and other short-term investments 82,135 149,351
---------- ----------
Cash and cash equivalents 105,449 176,070
---------- ----------
Securities available-for-sale, at fair value 201,305 171,706
Loans 575,118 498,455
Less: Allowance for loan losses 6,269 6,280
---------- ----------
Loans, net 568,849 492,175
---------- ----------
Premises and equipment, net 12,082 12,771
Investment in bank-owned life insurance 12,954 12,544
Payments in excess of funding 29,903 11,664
Goodwill 7,471 7,471
Other intangible assets, net 667 877
Other assets 18,299 17,762
---------- ----------
Total assets $ 956,979 $ 903,040
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 96,964 $ 93,190
Interest-bearing 149,137 180,406
---------- ----------
Total deposits 246,101 273,596
Accounts and drafts payable 588,663 513,734
Subordinated convertible debentures 3,219 3,688
Other liabilities 11,567 12,570
---------- ----------
Total liabilities 849,550 803,588
---------- ----------
Shareholders' Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common Stock, par value $.50 per share;
20,000,000 shares authorized and 9,949,324
shares issued at September 30, 2008 and
December 31, 2007, respectively 4,975 4,975
Additional paid-in capital 45,544 45,837
Retained earnings 77,197 66,690
Common shares in treasury, at cost (787,774 shares at
September 30, 2008 and 740,642 shares at December 31, 2007) (18,556) (16,118)
Accumulated other comprehensive loss (1,731) (1,932)
---------- ----------
Total shareholders' equity 107,429 99,452
---------- ----------
Total liabilities and shareholders' equity $ 956,979 $ 903,040
========== ==========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
Information services payment and processing revenue $ 13,116 $ 11,441 $ 37,907 $ 34,089
Bank service fees 332 416 1,008 1,237
Gain on sale of securities 209 -- 209 --
Other 236 213 684 658
------------ ------------ ------------ ------------
Total fee revenue and other income 13,893 12,070 39,808 35,984
------------ ------------ ------------ ------------
Interest Income:
Interest and fees on loans 8,764 9,224 25,571 27,539
Interest and dividends on securities:
Taxable 13 212 63 681
Exempt from federal income taxes 1,972 1,252 5,667 3,212
Interest on federal funds sold and
other short-term investments 466 2,030 1,691 5,564
------------ ------------ ------------ ------------
Total interest income 11,215 12,718 32,992 36,996
------------ ------------ ------------ ------------
Interest Expense:
Interest on deposits 646 1,986 2,488 5,911
Interest on short-term borrowings and other -- 7 13 32
Interest on subordinated convertible debentures 46 50 141 148
------------ ------------ ------------ ------------
Total interest expense 692 2,043 2,642 6,091
------------ ------------ ------------ ------------
Net interest income 10,523 10,675 30,350 30,905
Provision for loan losses 500 225 1,600 675
------------ ------------ ------------ ------------
Net interest income after provision for loan
losses 10,023 10,450 28,750 30,230
------------ ------------ ------------ ------------
Operating Expense:
Salaries and employee benefits 12,468 11,700 37,401 35,135
Occupancy 576 550 1,676 1,572
Equipment 825 876 2,521 2,565
Amortization of intangible assets 70 70 210 210
Other operating expense 2,540 2,468 7,539 7,447
------------ ------------ ------------ ------------
Total operating expense 16,479 15,664 49,347 46,929
------------ ------------ ------------ ------------
Income before income tax expense 7,437 6,856 19,211 19,285
Income tax expense 2,209 2,179 5,398 6,230
------------ ------------ ------------ ------------
Net Income $ 5,228 $ 4,677 $ 13,813 $ 13,055
============ ============ ============ ============
Basic Earnings Per Share .57 .51 1.51 1.42
Diluted Earnings Per Share .56 .50 1.47 1.40
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
-----------------------------
2008 2007
Cash Flows From Operating Activities:
Net income $ 13,813 $ 13,055
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,235 2,179
Gain on sale of investment securities (209) --
Provision for loan losses 1,600 675
Stock-based compensation expense 763 499
Deferred income tax (benefit) expense (1,000) 1,115
Increase in income tax liability 1,230 578
(Decrease) increase in pension liability (1,281) 1,593
Other operating activities, net (669) (2,091)
------------ ------------
Net cash provided by operating activities 17,482 17,603
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of securities available for sale 6,126 --
Proceeds from maturities of securities available-for-sale 8,106 51,000
Purchase of securities available-for-sale (44,546) (111,295)
Net increase in loans (78,274) (9,604)
Net increase in payments in excess of funding (18,239) (6,632)
Purchases of premises and equipment, net (1,313) (1,940)
------------ ------------
Net cash used in investing activities (128,140) (78,471)
------------ ------------
Cash Flows From Financing Activities:
Net increase (decrease) in noninterest-bearing demand deposits 3,774 (20,425)
Net increase (decrease) in interest-bearing demand and savings deposits 1,037 (4,921)
Net (decrease) increase in time deposits (32,306) 3,817
Net increase in accounts and drafts payable 74,929 84,444
Net (decrease) increase in short-term borrowings (128) 29
Cash dividends paid (3,306) (3,013)
Purchase of common shares for treasury (3,984) --
Other financing activities 21 52
------------ ------------
Net cash provided by financing activities 40,037 59,983
------------ ------------
Net decrease in cash and cash equivalents (70,621) (885)
Cash and cash equivalents at beginning of period 176,070 196,504
------------ ------------
Cash and cash equivalents at end of period $ 105,449 $ 195,619
============ ============
Supplemental information:
Cash paid for interest $ 3,015 $ 6,092
Cash paid for income taxes 3,252 4,500
Transfer of loans to foreclosed assets 788 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 2007 consolidated financial statements
have been reclassified to conform to the 2008 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. The Company issued a 10% stock dividend on December 17,
2007 and the share and per share information have been restated for all periods
presented in the accompanying consolidated financial statements. For further
information, refer to the audited consolidated financial statements and related
footnotes included in Cass Information System, Inc.'s ("the Company" or "Cass")
Annual Report on Form 10-K for the year ended December 31, 2007.
Note 2 - Intangible Assets
The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standard No.142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets," which requires that intangibles with indefinite useful lives
be tested annually for impairment and those with finite useful lives be
amortized over their useful lives. Intangible assets for the periods ended
September 30, 2008 and December 31, 2007 are as follows:
September 30, 2008 December 31, 2007
============================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
============================================================================================================
Assets eligible for amortization:
Software $ 862 $ (704) $ 862 $ (574)
Customer List 750 (241) 750 (161)
------------------------------------------------------------------------------------------------------------
Total 1,612 (945) 1,612 (735)
Unamortized intangible assets:
Goodwill 7,698 (227)* 7,698 (227)*
------------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,698 (227) 7,698 (227)
------------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $ (1,172) $ 9,310 $ (962)
------------------------------------------------------------------------------------------------------------
* Amortization through December 31, 2001 prior to adoption of SFAS No. 142.
Software is amortized over four to five years and the customer list is amortized
over seven years. Amortization of intangible assets amounted to $210,000 for the
nine-month periods ended September 30, 2008 and 2007. Estimated amortization of
intangibles over the next five years is as follows: $298,000 in 2008, $222,000
in 2009, $107,000 in 2010, 2011 and in 2012.
Note 3 - Equity Investments in Non-Marketable Securities
Non-marketable equity investments in low-income housing projects are included in
other assets on the Company's consolidated balance sheets. The total balance of
these investments at December 31, 2007 and September 30, 2008 was $475,000 and
$422,000, 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 September 30, 2008 and 2007 are
as follows:
-6-
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ----------------------------
(Dollars in Thousands except Per Share data) 2008 2007 2008 2007
--------------------------------------------------------------------------------------------------------------------------
Basic
--------------------------------------------------------------------------------------------------------------------------
Net income $ 5,228 $ 4,677 $ 13,813 $ 13,055
--------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,136,098 9,147,961 9,158,509 9,144,620
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .57 $ .51 $ 1.51 $ 1.42
--------------------------------------------------------------------------------------------------------------------------
Diluted
--------------------------------------------------------------------------------------------------------------------------
Net income $ 5,252 $ 4,704 $ 13,887 $ 13,136
--------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,136,098 9,147,961 9,158,509 9,144,620
Effect of dilutive stock options and awards 108,443 113,279 107,088 109,849
Effect of convertible debentures 174,958 189,989 180,549 189,989
--------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding
assuming dilution 9,419,499 9,451,229 9,446,146 9,444,458
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .56 $ .50 $ 1.47 $ 1.40
--------------------------------------------------------------------------------------------------------------------------
Share and per share data for 2007 in the schedule above have been restated for
the 10% stock dividend issued on December 17, 2007.
Note 5 - Stock Repurchases
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 300,000 shares of the
Company's Common Stock. The Company repurchased 0 and 120,000 shares during the
three and nine-month periods ended September 30, 2008, respectively. The Company
did not repurchase any shares during the nine-month period ended September 30,
2007. As of September 30, 2008, 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 and nine-month periods ended September 30, 2008 and 2007,
unrealized gains and losses on debt and equity securities available-for-sale and
reclassification adjustments for realized gains were the other comprehensive
income components. Comprehensive income for the three and nine month periods
ended September 30, 2008 and 2007 is summarized as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
(In Thousands) 2008 2007 2008 2007
---------------------------------------------------------------------------------------------------------------------
Net income $ 5,228 $ 4,677 $ 13,813 $ 13,055
Other comprehensive income:
Less: Reclassification adjustments for gains
included in net income, net of tax 136 -- 136 --
Add: Net unrealized gain (loss) on securities
available-for-sale, net of tax 518 1,068 337 (235)
---------------------------------------------------------------------------------------------------------------------
Total comprehensive income from continuing
operations $ 5,610 $ 5,745 $ 14,014 $ 12,820
---------------------------------------------------------------------------------------------------------------------
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.
-7-
The Company's accounting policies for segments are the same as those described
in the summary of significant accounting policies in the Company's Annual Report
on Form 10-K for the year ended December 31, 2007. Management evaluates segment
performance based on net income after allocations for corporate expenses and
income taxes. Transactions between segments are accounted for at what management
believes to be market value. 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, 2008 and 2007, is as
follows:
Corporate,
Information Banking Eliminations
(In Thousands) Services Services and Other Total
============================================================================================================
Quarter Ended September 30, 2008
Total Revenues:
Revenue from customers $ 19,929 $ 3,987 $ -- $ 23,916
Intersegment revenue 1,545 230 (1,775) --
Net income 4,378 850 -- 5,228
Total assets 668,076 404,308 (115,405) 956,979
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 667 -- -- 667
Quarter Ended September 30, 2007
Total Revenues:
Revenue from customers $ 18,675 $ 3,845 $ -- $ 22,520
Intersegment revenue 474 387 (861) --
Net income 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
------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2008
Total Revenues:
Revenue from customers $ 57,472 $ 11,086 $ -- $ 68,558
Intersegment revenue 4,177 658 (4,835) --
Net income 11,747 2,066 -- 13,813
Total assets 668,076 404,308 (115,405) 956,979
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 667 -- -- 667
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 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
------------------------------------------------------------------------------------------------------------
Note 8 - Loans by Type
(In Thousands) September 30, 2008 December 31, 2007
=============================================================================================
Commercial and industrial $ 118,164 $ 100,827
Real estate: (Commercial and church)
Mortgage 400,520 360,907
Construction 51,327 31,082
Industrial revenue bonds 3,705 4,149
Other 1,402 1,490
---------------------------------------------------------------------------------------------
Total loans $ 575,118 $ 498,455
---------------------------------------------------------------------------------------------
-8-
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
December 31, 2007 and September 30, 2008 no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
or its subsidiaries to guarantee the performance of a customer to a third party.
These off-balance sheet financial instruments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. At December
31, 2007 the balances of unused loan commitments, standby and commercial letters
of credit were $29,036,000, $5,999,000 and $4,147,000, respectively. At
September 30, 2008 the balances of unused loan commitments, standby and
commercial letters of credit were $26,354,000, $6,837,000 and $3,332,000,
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, 2008.
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 $ 3,352 $ 695 $ 968 $ 814 $ 875
Time deposits 50,320 46,660 2,532 1,128 --
Convertible subordinated debentures* 3,219 -- -- -- 3,219
-----------------------------------------------------------------------------------------------------
Total $ 56,891 $ 47,355 $3,500 $1,942 $ 4,094
=====================================================================================================
* Includes principal payments only.
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 10 - Stock-Based Compensation
In 2007, the Board and the Company's shareholders approved the 2007 Omnibus
Incentive Stock Plan (the "Omnibus Plan"). The Omnibus Plan permits the issuance
of up to 880,000 shares of the Company's common stock in the form of stock
options, stock appreciation rights, restricted stock, restricted stock units and
performance awards. During the quarter ended September 30, 2008 no restricted
shares and no stock appreciation rights were granted under the Omnibus Plan.
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options previously issued
and still outstanding. These plans have been superseded by the Omnibus Plan and
accordingly, any available restricted stock and stock option grants not yet
issued have been cancelled.
Restricted shares are amortized to expense over the three-year vesting period.
As of September 30, 2008, the total unrecognized compensation expense related to
non-vested common stock was $1,503,000 and the related weighted-average period
over which it is expected to be recognized is approximately 1.1 years.
-9-
Changes in restricted shares outstanding were as follows:
Nine Months Ended September 30
------------------------------
Shares Fair Value
=============================================================================
Balance at December 31, 2007 60,349 $31.28
Granted 32,254 29.18
Vested (23,709) 26.17
Forfeited (330) 27.22
-----------------------------------------------------------------------------
Balance at September 30, 2008 68,564 $30.72
-----------------------------------------------------------------------------
Stock options vest and expire over a period not to exceed seven years. The
Company issues shares out of treasury stock for restricted shares and option
exercises. There were no stock options granted under the old plan during the
nine-month periods ended September 30, 2008 and 2007. As of September 30, 2008,
the total unrecognized compensation expense related to non-vested stock options
was $79,000, and the related weighted-average period over which it is expected
to be recognized is approximately 3.4 years.
A summary of the Company's stock option program for the nine-month period ended
September 30, 2008 is shown below.
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years ($000)
----------------------------------------------------------
Outstanding at January 1, 2008 95,329 $13.99
Granted - -
Exercised (24,747) 10.57
Forfeited or expired - -
------- ------
Outstanding at September 30, 2008 70,582 15.19 2.82 $20,66
==========================================================
Exercisable at September 30, 2008 14,062 $11.36 1.80 $24.49
==========================================================
The total intrinsic value of options exercised was $13,000 and $0 for the
three-month periods ended September 30, 2008 and 2007, respectively, and was
$522,000 and $16,000 for the nine-month periods ended September 30, 2008 and
2007, respectively.
There was no non-vested option activity during the three-month period ended
September 30, 2008. A summary of the activity of the non-vested options during
the nine-month period ended September 30, 2008 is shown below.
Weighted-
Average
Grant Date
Shares Fair Value
---------------------------------------------------------------
Nonvested at January 1, 2008 77,076 $2.29
Granted - -
Vested (20,556) 1.80
Forfeited - -
---------------------------------------------------------------
Nonvested at September 30, 2008 56,520 $2.46
---------------------------------------------------------------
There were 0 and 109,755 stock appreciation rights granted during the three and
nine-month periods ended September 30, 2008, respectively. As of September 30,
2008, the total unrecognized compensation expense related to stock appreciation
rights was $760,000 and the related weighted-average period over which it is
expected to be recognized is 6.3 years. Following are the assumptions used to
estimate the $7.65 per share fair value of stock appreciation rights granted
during the nine-month period ended September 30, 2008:
Nine Months Ended
September 30, 2008
-----------------------------------------------------------------------------
Risk-free interest rate 3.01%
Expected life 7 yrs.
Expected volatility 26.00%
Expected dividend yield 1.69%
-----------------------------------------------------------------------------
-10-
The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for
the period equal to the expected life of the options at the time of the grant.
The expected life was derived using the historical exercise activity. The
Company uses historical volatility for a period equal to the expected life of
the rights using average monthly closing market prices of the Company's stock as
reported on The Nasdaq Global Market. The expected dividend yield is based on
the Company's current rate of annual dividends.
Note 11 - Defined Pension Plans
The Company has a noncontributory defined benefit pension plan, which covers
most of its employees. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit
with service proration method to amortize prior service costs arising from
improvements in pension benefits and qualifying service prior to the
establishment of the plan over a period of approximately 30 years. Disclosure
information is based on a measurement date of December 31 of the corresponding
year.
The following table represents the components of the net periodic pension costs
for 2007 and an estimate for 2008:
Estimated Actual
(In Thousands) 2008 2007
============================================================================
Service cost - benefits earned during the year $ 1,523 $ 1,622
Interest cost on projected benefit obligation 1,947 1,771
Expected return on plan assets (2,108) (1,865)
Net amortization 66 197
----------------------------------------------------------------------------
Net periodic pension cost $ 1,428 $ 1,725
----------------------------------------------------------------------------
Pension costs recorded to expense were $356,000 and $431,000 for the three-month
periods ended September 30, 2008 and 2007, respectively, and were $1,071,000 and
$1,263,000 for the nine-month periods ended September 30, 2008 and 2007,
respectively. The Company made a contribution of $2,700,000 to the plan during
the nine-month period ended September 30, 2008. Given the current turbulent
market conditions, the Company will evaluate any additional contribution
required in 2008 to assure the ongoing adequate funded status of the plan.
In addition to the above funded benefit plan, the Company has an unfunded
supplemental executive retirement plan which covers key executives of the
Company. This is a noncontributory plan in which the Company and its
subsidiaries make accruals designed to fund normal service costs on a current
basis using the same method and criteria as its defined benefit plan. The
following table represents the components of the net periodic pension costs for
2007 and an estimate for 2008:
Estimated Actual
(In Thousands) 2008 2007
=============================================================================
Service cost - benefits earned during the year $ 59 $ 44
Interest cost on projected benefit obligation 267 233
Net amortization 170 249
-----------------------------------------------------------------------------
Net periodic pension cost $ 496 $ 526
-----------------------------------------------------------------------------
Pension costs recorded to expense were $87,000 and $134,000 for the three-month
periods ended September 30, 2008 and 2007, respectively, and were $380,000 and
$361,000 for the nine-month periods ended September 30, 2008 and 2007,
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.
-11-
The Company had unrecognized tax benefits of approximately $1,033,000 as of
December 31, 2007. The total amount of federal and state unrecognized tax
benefits at December 31, 2007 that, if recognized, would affect the effective
tax rate was $806,000, net of federal tax benefit. There have been no
significant changes to the unrecognized tax benefits during the three and nine
month periods ended September 30, 2008. The Company may realize a reduction of
its unrecognized tax benefits in the next twelve months due to a potential lapse
of federal and state statues of limitations. The amount of such a potential
reduction is not material.
The Company recognizes interest and penalties related to uncertain tax positions
in income tax expense. The amount of interest accrued for unrecognized tax
benefits as of December 31, 2007 was immaterial and the amount of interest
recognized during the three and nine-month periods ended September 30, 2008 was
immaterial.
The Company is subject to income tax in the U. S. federal jurisdiction and
numerous state jurisdictions. U.S. federal income tax returns for tax years 2006
and 2007 remain subject to examination by the Internal Revenue Service. In
addition, the Company is subject to state tax examinations for the tax years
2004 through 2007.
Note 13 - Fair Value of Assets
Effective January 1, 2008, the Company adopted SFAS No. 157 "Fair Value
Measurements" ("SFAS No. 157") and SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). In accordance with
the FASB Staff Position 157-2, "Effective Date of SFAS No. 157," the Company has
not applied the provisions of SFAS No. 157 to nonfinancial assets and
nonfinancial liabilities such as real estate owned and goodwill. The Company
uses fair value measurements to determine fair value disclosures.
The following is a description of valuation methodologies used for assets
recorded at fair value:
Investment Securities Available for Sales - Investment securities
available-for-sale are recorded at fair value on a recurring basis. The
Company's securities available-for-sale are measured at fair value using Level 2
valuations. The market evaluation utilizes several sources which include
observable inputs rather than "significant unobservable inputs" and therefore
fall into the Level 2 category. The table below presents the balances of
securities available-for-sale measured at fair value on a recurring basis:
(In Thousands) September 30, 2008
------------------
Treasury Securities $ 1,997
State and Municipal Securities 199,308
--------------
Total $ 201,305
==============
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 September 30, 2008, all
impaired loans were evaluated based on the fair value of the collateral. The
fair value of the collateral is based upon an observable market price or current
appraised value and therefore, the Company classifies these assets as
nonrecurring Level 2. The total principal balance of impaired loans measured at
fair value at September 30, 2008 was $848,000.
-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 Orange County, California and other selected cities in the United States.
In addition to supporting the Company's payment operations, the Bank provides
banking services to its target markets, which include privately-owned businesses
and churches and church-related ministries.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's requirements, which
can vary greatly. In addition, the degree of automation such as electronic data
interchange ("EDI"), imaging, and web-based solutions varies greatly among
customers and industries. These factors combine so that pricing varies greatly
among the customer base. In general, however, Cass is compensated for its
processing services through service fees and account balances that are generated
during the payment process. The amount, type and calculation of service fees
vary greatly by service offering, but generally follow the volume of
transactions processed. Interest income from the balances generated during the
payment processing cycle is affected by the amount of time Cass holds the funds
prior to payment and the dollar volume processed. Both the number of
transactions processed and the dollar volume processed are therefore key metrics
followed by management. Other factors will also influence revenue and
profitability, such as changes in the general level of interest rates, which
have a significant effect on net interest income. The funds generated by these
processing activities are invested in overnight investments, investment grade
securities and loans generated by the Bank. The Bank earns most of its revenue
from net interest income, or the difference between the interest earned on its
loans and investments and the interest paid on its deposits. The Bank also
assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the acceptance by large
corporations of the outsourcing of key business functions such as freight,
utility and telecommunication payment and audit. Acquisition and merger activity
involving our customers, business partners, and competitors can also impact the
Company. The benefits that can be achieved by outsourcing transaction processing
and the management information generated by Cass' systems can be influenced by
factors such as the competitive pressures within industries to improve
profitability, the general level of transportation costs, deregulation of energy
costs and consolidation of telecommunication providers. Economic factors that
impact the Company include the general level of economic activity that can
affect the volume and size of invoices processed, the ability to hire and retain
qualified staff and the growth and quality of the loan portfolio. The general
level of interest rates also has a significant effect on the revenue of the
Company.
Currently, management views Cass' major opportunity as the continued expansion
of its payment and information processing service offering and customer base.
While the current turmoil in the credit markets and the related 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' 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 that the
lower interest rate environment has on Cass.
-13-
Recent Developments
The U. S. and global economies have experienced and are experiencing significant
stress and disruptions in the financial sector. In response to the financial
crisis, in October 2008, the Emergency Economic Stabilization Act of 2008 (the
"EESA") was signed into law. In addition, the U.S. Treasury announced that it
has been authorized to purchase equity stakes in U. S. financial institutions.
Under this program, known as the Troubled Asset Relief Program Capital Purchase
Program (the "TARP Capital Purchase Program"), the U.S. Treasury will make $250
billion of capital available to U. S. financial institutions in the form of
preferred stock.
Further, after receiving a recommendation from the boards of the Federal Deposit
Insurance Corporation ("the FDIC") and the Federal Reserve System ("the Federal
Reserve"), the U.S. Treasury signed the systemic risk exception to the FDIC Act,
enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of
all FDIC-insured institutions and their holding companies, as well as
non-interest bearing transaction deposit accounts under a Temporary Liquidity
Guarantee Program.
The Company is currently assessing its participation in both the TARP Capital
Purchase Program and the Temporary Liquidity Guarantee Program.
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. 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.
-14-
Pension Plans. The amounts recognized in the consolidated financial statements
related to pension are determined from actuarial valuations. Inherent in these
valuations are assumptions including expected return on plan assets, discount
rates at which the liabilities could be settled at December 31, 2007, rate of
increase in future compensation levels and mortality rates. These assumptions
are updated annually and are disclosed in Note 12 to the consolidated financial
statements filed with the Company's annual report on Form 10-K for the year
ended December 31, 2007. Pursuant to Statement of Financial Accounting Standards
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS No. 158"), the Company has recognized the funded
status of its defined benefit postretirement plan in its statement of financial
position and has recognized changes in that funded status through comprehensive
income. The funded status is measured as the difference between the fair value
of the plan assets and the benefit obligation as of the date of its fiscal
year-end.
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended September 30,
2008 ("Third Quarter of 2008") compared to the three-month period ended
September 30, 2007 ("Third Quarter of 2007") and the nine-month period ended
September 30, 2008 ("First Nine Months of 2008") compared to the nine-month
period ended September 30, 2007 ("First Nine Months of 2007"). The following
discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes and with the statistical information and
financial data appearing in this report as well as the Company's 2007 annual
report on Form 10-K. Results of operations for the Third Quarter of 2008 are not
necessarily indicative of the results to be attained for any other period.
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) 2008 2007 Change 2008 2007 Change
---------------------------------------------------------------------------------------------------------------------
Net income $ 5,228 $ 4,677 11.8% $ 13,813 $ 13,055 5.8%
Diluted earnings per share $ .56 $ .50 12.0% $ 1.47 $ 1.40 5.0%
Return on average assets 2.16% 2.04% -- 2.02% 1.98% --
Return on average equity 19.90% 20.51% -- 17.86% 19.94% --
---------------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income
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, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ ----------------------------------
% %
(In Thousands) 2008 2007 Change 2008 2007 Change
---------------------------------------------------------------------------------------------------------------------
Freight Core Invoice Transaction Volume* 6,772 5,976 13.3% 19,509 17,659 10.5%
Freight Invoice Dollar Volume $ 4,936,507 $ 3,669,117 34.5% $13,149,602 $10,764,558 22.2%
Utility Transaction Volume 2,702 2,361 14.4% 7,852 6,872 14.3%
Utility Transaction Dollar Volume $ 2,633,438 $ 2,081,529 26.5% $ 7,126,799 $ 5,687,627 25.3%
Payment and Processing Fees $ 13,116 $ 11,441 14.6% $ 37,907 $ 34,089 11.2%
---------------------------------------------------------------------------------------------------------------------
* Core invoices exclude parcel shipments.
Third Quarter of 2008 compared to Third Quarter of 2007:
Freight transaction volume and invoice dollar volume for the Third Quarter of
2008 increased compared to the same period in 2007. The increase in transaction
and dollar volume was primarily due to new customers and growth in activity from
existing customers. The dollar volume also increased due to higher average bills
because of fuel surcharges.
Bank service fees decreased $84,000 or 20% primarily due to the elimination of
correspondent banking services which was completed in the fiscal quarter ended
June 30, 2008. There were gains of $209,000 on the sales of securities in the
Third Quarter of 2008. Other income increased $23,000 in the Third Quarter of
2008.
First Nine Months of 2008 compared to First Nine Months of 2007:
-15-
Freight and utility transaction volume and dollar volume increased for the First
Nine Months of 2008 compared to 2007 due to the same factors discussed above for
the Third Quarter of 2008.
Bank service fees decreased $229,000 or 19%. This decrease was due to a penalty
charged for the early withdrawal of a certificate of deposit by one large
customer in the first quarter of 2007 and to the elimination of correspondent
banking discussed above. There were gains of $209,000 on the sales of securities
in the First Nine Months of 2008. Other income increased $26,000 in the First
Nine Months of 2008.
-16-
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, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ ----------------------------------
% %
(Dollars in Thousands) 2008 2007 Change 2008 2007 Change
---------------------------------------------------------------------------------------------------------------------
Average earnings assets $864,685 $827,757 4.5% $822,980 $799,144 3.0%
Net interest income* 11,608 11,385 2.0% 33,473 32,747 2.2%
Net interest margin* 5.34% 5.46% -- 5.43% 5.48% --
Yield on earning assets* 5.66% 6.44% -- 5.86% 6.50% --
Rate on interest bearing liabilities 1.83% 4.26% -- 2.32% 4.30% --
* Presented on a tax-equivalent basis assuming a tax rate of 35%.
Third Quarter of 2008 compared to Third Quarter of 2007:
The increase in tax equivalent net interest income was due to an increase in
average earning assets combined with a shift in the balances of earning assets
from the relatively lower yielding federal funds sold and other short-term
investments to longer term and relatively higher yielding loans and non-taxable
state and municipal securities. Yields on earning assets and rates paid on
deposit accounts both decreased as the general level of interest rates
decreased.
Total average loans increased $52,917,000 or 10%, to $570,367,000. Total average
investment in debt and equity securities increased $54,939,000 or 37% to
$203,715,000 as the Company invested the increase in payables. Total average
federal funds sold and other short-term investments decreased $70,926,000 or 44%
to $90,603,000. For more information on the changes in net interest income
please refer to the tables that follow.
First Nine Months of 2008 compared to First Nine Months of 2007:
The increase in tax equivalent net interest income was due to an increase in
average earning assets combined with a shift in the balances of earning assets
from the relatively lower yielding federal funds sold and other short-term
investments to longer term and relatively higher yielding loans and non-taxable
state and municipal securities. Yields on earning assets and rates paid on
deposit accounts both decreased as the general level of interest rates
decreased.
Total average loans increased $23,322,000 or 4% to $544,083,000. Total average
investment in debt and equity securities increased $63,784,000 or 48% to
$195,898,000 as the Company invested the increase in payables. Total average
federal funds sold and other short-term investments decreased $63,270,000 or 43%
to $82,999,000. For more information on the changes in net interest income
please refer to the tables that follow.
The Company is negatively affected by decreases in the level of interest rates
due to the fact that its rate-sensitive assets exceed its rate-sensitive
liabilities. This is primarily due to the noninterest-bearing liabilities
generated by the Company in the form of accounts and drafts payable. Changes in
interest rates will affect some earning assets such as federal funds sold and
floating rate loans immediately and some earning assets, such as fixed rate
loans and municipal bonds, over time.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table shows the condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported.
-17-
Third Quarter 2008 Third Quarter 2007
---------------------------------- -----------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate
=======================================================================================================================
Assets (1)
Earning assets:
Loans (2,3):
Taxable $ 566,571 $ 8,721 6.12% $ 511,826 $ 9,158 7.10%
Tax-exempt (4) 3,796 66 6.92 5,624 102 7.20
Debt and equity securities (5):
Taxable 2,785 13 1.86 17,831 212 4.72
Tax-exempt (4) 200,930 3,034 6.01 130,945 1,926 5.84
Federal funds sold and other
short-term investments 90,603 466 2.05 161,529 2,030 4.99
-----------------------------------------------------------------------------------------------------------------------
Total earning assets 864,685 12,300 5.66 827,755 13,428 6.44
Nonearning assets:
Cash and due from banks 23,931 23,063
Premises and equipment, net 12,368 12,937
Bank owned life insurance 12,864 12,321
Goodwill and other intangibles 8,181 8,463
Other assets 47,275 30,960
Allowance for loan losses (6,029) (6,292)
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 963,275 $ 909,207
-----------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 78,659 $ 245 1.24% $ 67,696 $ 555 3.25%
Savings deposits 21,584 66 1.22 24,433 213 3.46
Time deposits of
$100 or more 28,399 204 2.86 65,596 857 5.18
Other time deposits 18,458 131 2.82 28,338 361 5.05
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 147,100 646 1.75 186,063 1,986 4.23
Short-term borrowings & other 103 0 0.00 611 7 4.55
Subordinated debentures 3,464 46 5.28 3,700 50 5.36
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 150,667 692 1.83 190,374 2,043 4.26
Noninterest-bearing liabilities:
Demand deposits 90,279 92,405
Accounts and drafts payable 604,491 521,989
Other liabilities 13,338 13,974
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 858,775 818,742
Shareholders' equity 104,500 90,465
Total liabilities and
shareholders' equity $ 963,275 $ 909,207
-----------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,608 $ 11,385
Interest spread 3.83% 2.18%
Net interest margin 5.34 5.46
=======================================================================================================================
1. Balances shown are daily averages.
2. For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding. Interest on nonaccrual loans is recorded
when received as discussed further in Note 1 to the Company's 2007
Consolidated Financial Statements, filed with the Company's 2007 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $104,000 and $56,000
for the Third Quarter of 2008 and 2007, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $1,085,000 and
$710,000 for the Third Quarter of 2008 and 2007, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
-18-
First Nine Months of 2008 First Nine Months of 2007
---------------------------------- -----------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate
=======================================================================================================================
Assets (1)
Earning assets:
Loans (2,3):
Taxable $540,134 $ 25,436 6.29% $ 514,813 $ 27,330 7.10%
Tax-exempt (4) 3,949 207 7.00 5,948 322 7.24
Debt and equity securities (5):
Taxable 3,103 63 2.71 19,130 681 4.76
Tax-exempt (4) 192,795 8,718 6.04 112,984 4,941 5.85
Federal funds sold and other
short-term investments 82,999 1,691 2.72 146,269 5,564 5.09
-----------------------------------------------------------------------------------------------------------------------
Total earning assets 822,980 36,115 5.86 799,144 38,838 6.50
Nonearning assets:
Cash and due from banks 22,903 24,604
Premises and equipment, net 12,584 12,880
Bank owned life insurance 12,728 12,195
Goodwill and other intangibles 8,252 8,529
Other assets 41,355 29,538
Allowance for loan losses (6,192) (6,622)
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 914,610 $ 880,268
-----------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand deposits $ 77,131 $ 864 1.50% $ 65,597 $ 1,592 3.24%
Savings deposits 19,615 214 1.46 23,235 596 3.43
Time deposits of
$100 or more 32,185 876 3.64 67,285 2,620 5.21
Other time deposits 19,010 534 3.75 29,401 1,103 5.02
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 147,941 2,488 2.25 185,518 5,911 4.26
Short-term borrowings & other 431 13 4.03 301 32 14.21
Subordinated debentures 3,875 141 5.35 3,700 148 5.35
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 152,247 2,642 2.32 189,519 6,091 4.30
Noninterest-bearing liabilities:
Demand deposits 87,290 94,376
Accounts and drafts payable 559,109 495,350
Other liabilities 12,642 13,493
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 811,288 792,738
Shareholders' equity 103,322 87,530
Total liabilities and
shareholders' equity $ 914,610 $ 880,268
-----------------------------------------------------------------------------------------------------------------------
Net interest income $ 33,473 $ 32,747
Interest spread 3.54% 2.20%
Net interest margin 5.43 5.48
=======================================================================================================================
1. Balances shown are daily averages.
2. For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding. Interest on nonaccrual loans is recorded
when received as discussed further in Note 1 to the Company's 2007
Consolidated Financial Statements, filed with the Company's 2007 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $222,000 and $150,000
for the First Nine Months of 2008 and 2007, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $3,123,000 and
$1,842,000 for the First Nine Months of 2008 and 2007, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
--------------------------------------------------------------------------------
-19-
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
2008 Over 2007
---------------------------
(In Thousands) Volume Rate Total
=================================================================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 910 $(1,347) $ (437)
Tax-exempt (3) (32) (4) (36)
Debt and equity securities:
Taxable (116) (83) (199)
Tax-exempt (3) 1,050 58 1,108
Federal funds sold and other
short-term investments (668) (896) (1,564)
-----------------------------------------------------------------------------------------------------------------
Total interest income 1,144 (2,272) (1,128)
-----------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 78 (388) (310)
Savings deposits (22) (125) (147)
Time deposits of $100 or more (365) (288) (653)
Other time deposits (102) (128) (230)
Short-term borrowings & other (3) (4) (7)
Subordinated debentures (3) (1) (4)
---------------------------
Total interest expense (417) (934) (1,351)
-----------------------------------------------------------------------------------------------------------------
Net interest income $ 1,561 $(1,338) $ 223
=================================================================================================================
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
2008 Over 2007
---------------------------
(In Thousands) Volume Rate Total
=================================================================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 1,298 $(3,192) $(1,894)
Tax-exempt (3) (105) (10) (115)
Debt and equity securities:
Taxable (408) (210) (618)
Tax-exempt (3) 3,604 173 3,777
Federal funds sold and other
short-term investments (1,868) (2,005) (3,873)
-----------------------------------------------------------------------------------------------------------------
Total interest income 2,521 (5,244) (2,723)
-----------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 243 (971) (728)
Savings deposits (81) (301) (382)
Time deposits of $100 or more (1,106) (638) (1,744)
Other time deposits (333) (236) (569)
Short-term borrowings & other 10 (29) (19)
Subordinated debentures 7 (14) (7)
---------------------------
Total interest expense (1,260) (2,189) (3,449)
-----------------------------------------------------------------------------------------------------------------
Net interest income $ 3,781 $(3,055) $ 726
=================================================================================================================
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%.
-20-
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
$500,000 and $225,000 recorded for loan losses during the Third Quarter of 2008
and the Third Quarter of 2007, respectively. There were provisions of $1,600,000
and $675,000 recorded for loan losses during the First Nine Months of 2008 and
the First Nine Months of 2007, respectively. The higher provisions were in part
due to the growth in the loan portfolio. As discussed below, the Company
continually analyzes the outstanding loan portfolio based on the performance,
financial condition and collateralization of the credits. There were $321,000
and $1,023,000 of net loan charge-offs in the Third Quarter of 2008 and 2007,
respectively. There were $1,611,000 of net loan charge-offs in the First Nine
Months of 2008 and $1,222,000 in the First Nine Months 2007.
The allowance for loan losses at September 30, 2008 was $6,269,000 and at
December 31, 2007 was $6,280,000. The ratio of allowance for loan losses to
total loans outstanding at September 30, 2008 was 1.09% compared to 1.26% at
December 31, 2007. Nonperforming loans were $1,732,000 or .30% of total loans at
September 30, 2008 compared to $2,481,000 or .50% as of December 31, 2007.
At September 30, 2008, nonperforming loans, which are also considered impaired,
included nonaccrual loans of $1,672,000 as shown in the following table. This
total consists of seven loans to borrowers with businesses in financial trouble
or in the process of liquidation. Nonperforming loans at December 31, 2007
included five nonaccrual loans of $1,985,000, four of which are included in the
September 30, 2008 total. One of those loans was charged off in the Second
Quarter of 2008. Total nonperforming loans increased $1,422,000 from September
30, 2007 to September 30, 2008. This increase was primarily due to the addition
of five commercial loans to borrowers that are in financial trouble.
In addition to the nonperforming loans discussed above, at September 30, 2008,
approximately $1,118,000 of loans not included in the table below was 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. These loans are closely monitored by management and have
specific reserves established for the estimated loss exposure.
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on impaired
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, the general
reserve also includes a 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.
-21-
Summary of Asset Quality
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ---------------------
(Dollars in Thousands) 2008 2007 2008 2007
===================================================================================================================
Allowance at beginning of period $ 6,090 $ 6,843 $ 6,280 $ 6,592
Provision charged to expense 500 225 1,600 675
Loans charged off 397 1,065 1,732 1,350
Recoveries on loans previously charged off 76 42 121 128
-------------------------------------------------------------------------------------------------------------------
Net loans charged-off 321 1,023 1,611 1,222
-------------------------------------------------------------------------------------------------------------------
Allowance at end of period $ 6,269 $ 6,045 $ 6,269 $ 6,045
-------------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $570,367 $517,450 $544,083 $520,761
September 30 575,118 511,207 575,118 511,207
Ratio of allowance for loan losses to loans outstanding:
Average 1.10% 1.17% 1.15% 1.16%
September 30 1.09 1.18 1.09% 1.18
Nonperforming loans:
Nonaccrual loans $ 1,672 $ 310 $ 1,672 $ 310
Renegotiated loans -- -- -- --
-------------------------------------------------------------------------------------------------------------------
Total non performing loans $ 1,672 $ 310 $ 1,672 $ 310
Foreclosed assets 2,177 1,300 2,177 1,300
-------------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .29% .06% .31% .06%
-------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days or more past due $ 60 $ 1,902 $ 60 $ 1,902
-------------------------------------------------------------------------------------------------------------------
The Company had no sub-prime mortgage loans or residential development loans in
its portfolio as of September 30, 2008. The Bank had two properties carried as
other real estate owned of $2,177,000 as of September 30, 2008. The Bank had one
property carried as other real estate owned of $1,388,000 and $1,300,000 as of
December 31, 2007 and September 30, 2007, respectively.
Operating Expense from Continuing Operations
Total operating expense for the Third Quarter of 2008 increased $815,000 or 5%
to $16,479,000 compared to the Third Quarter of 2007 due primarily to expenses
related to the growth in processing activity. Total operating expense for the
First Nine Months of 2008 increased $2,418,000 or 5% to $49,347,000 compared to
the First Nine Months of 2007 also due to expenses related to the growth in
processing activity.
Salaries and benefits expense for the Third Quarter of 2008 increased $768,000
or 7% to $12,468,000 compared to the Third Quarter of 2007 and increased
$2,266,000 or 6% to $37,401,000 for the First Nine Months of 2008 compared to
the First Nine Months of 2007 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 2008 increased $26,000 or 5% to
$576,000 from the Third Quarter of 2007 and increased $104,000 or 7% from the
First Nine Months of 2007 compared to the First Nine Months of 2008 primarily
due to the rent on one additional payment processing facility.
Equipment expense for the Third Quarter of 2008 decreased $51,000 or 6% compared
to the Third Quarter of 2007 and decreased $44,000 or 2% from the First Nine
Months of 2007 compared to the First Nine Months of 2008 due to a reduction in
computer equipment and system contact maintenance expense.
Amortization of intangible assets was $70,000 for the Third Quarter of 2008 and
in 2007 and $210,000 for the First Nine Months of 2008 and 2007.
Other operating expense for the Third Quarter of 2008 increased $72,000, or 3%
compared to the Third Quarter of 2007 and increased $92,000, or 1% from the
First Nine Months of 2007 compared to the First Nine Months of 2008.
Income tax expense for the Third Quarter of 2008 increased $30,000 or 1%
compared to the Third Quarter of 2007 and decreased $832,000 or 13% for the
First Nine Months of 2008 compared to the First Nine Months of 2007. The
effective tax rate was 29.7% and 31.8% for the Third Quarters of 2008 and 2007,
respectively and was 28.1% and 32.3% for the First Nine Months of 2008 and 2007,
respectively. The lower effective rates reflect the impact of the increase in
tax-exempt securities.
-22-
Financial Condition
Total assets at September 30, 2008 were $956,979,000, an increase of
$53,939,000, or 6% from December 31, 2007. The most significant changes in asset
balances during this period were a decrease of $67,216,000 or 45% in federal
funds sold and other short-term investments and increases of $76,663,000 or 15%
in loans and $29,599,000 or 17% 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 drafts payable balances.
Total liabilities at September 30, 2008 were $849,550,000, an increase of
$45,962,000, or 6% from December 31, 2007. Total deposits at September 30, 2008
were $246,101,000, a decrease of $27,495,000 or 10% from December 31, 2007.
Accounts and drafts payable at September 30, 2008 were $588,663,000, an increase
of $74,929,000 or 15%. Total shareholders' equity at September 30, 2008 was
$107,429,000, a $7,977,000 or 8% increase from December 31, 2007.
Accounts and drafts payable will fluctuate from period-end to period-end due to
the payment processing cycle, which results in lower balances on days when
checks clear and higher balances on days when checks are issued. For this
reason, average balances are a more meaningful measure of accounts and drafts
payable (for average balances refer to the tables under the "Distribution of
Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest
Differential" section of this report).
The increase in total shareholders' equity resulted from net income of
$13,813,000, $763,000 from stock-based compensation expense, $470,000 related to
the conversion of subordinated debentures, a decrease of $201,000 in other
comprehensive loss offset by dividends paid of $3,306,000 ($.12 per share), the
repurchase of treasury shares of $3,984,000, and other miscellaneous activity of
$20,000.
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 $105,449,000 at September 30, 2008, a decrease of $70,621,000 or 40% from
December 31, 2007. At September 30, 2008 these assets represented 11% 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 $201,305,000 at September 30, 2008, an
increase of $29,599,000 from December 31, 2007. These assets represented 21% of
total assets at September 30, 2008. Of this total, 99% were state and political
subdivision securities and 1% was U.S. treasury securities. Of the total
portfolio, 5% mature in one year, 22% mature in one to five years, and 73%
mature in five or more years. During the Third Quarter of 2008 the Company sold
securities with a market value of $6,126,000.
The Bank has unsecured lines of credit at correspondent banks to purchase
federal funds up to a maximum of $50,000,000. Additionally, the Bank maintains a
line of credit at an unaffiliated financial institution in the maximum amount of
$78,387,000 collateralized by 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 have also historically been a stable source of funds.
Net cash flows provided by operating activities were $17,482,000 for the First
Nine Months of 2008 compared with $17,603,000 for the First Nine Months of 2007.
This decrease is attributable to the decrease in pension liability of $2,874,000
offset by the increase in net income of $758,000, the decrease in deferred and
current taxes of $1,463,000, 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 2008.
-23-
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, 2008
and December 31, 2007:
September 30, 2008 (In Thousands) Amount Ratio
================================================================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 107,013 14.79%
Cass Commercial Bank 44,199 12.83
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 97,525 13.48%
Cass Commercial Bank 39,892 11.58
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 97,525 10.21%
Cass Commercial Bank 39,892 11.50
================================================================================================================
December 31, 2007 (In Thousands) Amount Ratio
================================================================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 99,508 15.58%
Cass Commercial Bank 41,441 14.39
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 89,540 14.02%
Cass Commercial Bank 37,827 13.13
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 89,540 9.76%
Cass Commercial Bank 37,827 11.46
================================================================================================================
Inflation
The Company's assets and liabilities are primarily monetary, consisting of cash,
cash equivalents, securities, loans, payables and deposits. Monetary assets and
liabilities are those that can be converted into a fixed number of dollars. The
Company's consolidated balance sheet reflects a net positive monetary position
(monetary assets exceed monetary liabilities). During periods of inflation, the
holding of a net positive monetary position will result in an overall decline in
the purchasing power of a company. Management believes that replacement costs of
equipment, furniture, and leasehold improvements will not materially affect
operations. The rate of inflation does affect certain expenses, such as those
for employee compensation, which may not be readily recoverable in the price of
the Company's services.
Impact of New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The Company adopted this statement as of January 1, 2008 and
there was no effect on the Company's consolidated financial statements.
-24-
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. The Company adopted this statement as of January 1, 2008 and
there was no effect on the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company's annual report on Form 10-K for the year ended
December 31, 2007, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at September 30, 2008 has changed materially from that at December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide
reasonable assurance that the information it is required to disclose in the
reports it files with the Securities and Exchange Commission ("SEC") is
recorded, processed, summarized and reported to management, including the Chief
Executive Officer and Principal Financial Officer, within the time periods
specified in the rules of the SEC. The Company's Chief Executive Officer and
Principal Financial Officer have evaluated the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of September 30, 2008 and based on their
evaluation, believe that, as of September 30, 2008, these controls and
procedures were effective at the reasonable assurance level to ensure that the
Company is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.
There were no changes in the third quarter of 2008 in the Company's internal
control over financial reporting identified by the Chief Executive Officer and
Principal Financial Officer in connection with their evaluation that materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended).
-25-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to its
businesses. Management believes none of these proceedings, if
determined adversely, would have a material effect on the business
or financial conditions of the Company or its subsidiaries.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its annual report on
Form 10-K for the year ended December 31, 2007, a description of
certain risks and uncertainties that could affect the Company's
business, future performance or financial condition (the "Risk
Factors"). There are no material changes to the Risk Factors as
disclosed in the Company's 2007 annual report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. This repurchase plan
was updated by the Board of Directors on January 22, 2008 and
replaced the Company's previous plan under which 120,000 shares had
remained available for repurchase. The stock repurchase program may
be modified or discontinued at any time. There were no shares
purchased during the three months ended September 30, 2008. There
were 180,000 shares that may yet be purchased under the program as
of September 30, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
(b) None
ITEM 6. EXHIBITS
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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 6, 2008 By /s/ Eric H. Brunngraber
-------------------------------------------
Eric H. Brunngraber
President and Chief Executive Officer
DATE: November 6, 2008 By /s/ P. Stephen Appelbaum
-------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
-27-