UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 2004
Commission File No. 2-80070
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CASS INFORMATION SYSTEMS, INC.
Incorporated under the laws of MISSOURI
I.R.S. Employer Identification No. 43-1265338
13001 HOLLENBERG DRIVE, BRIDGETON, MISSOURI 63044
Telephone: (314) 506-5500
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Indicate by check mark whether the registrant 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, and has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (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
April 30, 2004: Common stock, par value $.50 per share - 3,683,272 shares
outstanding.
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This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2004 (unaudited) and December 31, 2003 ................................ 3
Consolidated Statements of Income
Three months ended March 31, 2004 and 2003 (unaudited) .......................... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003 (unaudited) .......................... 5
Notes to Consolidated Financial Statements (unaudited) ............................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ....................................................... 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................ 20
Item 4. CONTROLS AND PROCEDURES ........................................................... 20
PART II - Other Information - Items 1. - 6. ..................................................... 21
SIGNATURES ................................................................................ 22
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties, and other factors which may cause future
performance to vary from expected performance summarized in the forward-looking
statements, including those set forth in this paragraph. Important factors that
could cause our actual results, performance, or achievements to be materially
different from any future results, performance, or achievements expressed or
implied by those statements include, but are not limited to: the failure to
successfully execute our corporate plan, the loss of key personnel or inability
to attract additional qualified personnel, the loss of key customers, increased
competition, the inability to remain current with rapid technological change,
risks related to acquisitions, risks associated with business cycles and
fluctuations in interest rates, utility and system interruptions or processing
errors, rules and regulations governing financial institutions and changes in
such rules and regulations, credit risk related to borrowers' ability to repay
loans, concentration of loans to certain segments such as commercial
enterprises, churches and borrowers in the St. Louis area which creates risks
associated with adverse factors that may affect these groups and volatility of
the price of our common stock. We undertake no obligation to publicly update or
revise any forward-looking statements to reflect changed assumptions, the
occurrence of anticipated or unanticipated events, or changes to future results
over time.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands except Per Share Data)
March 31 December 31
2004 2003
Assets
Cash and due from banks $ 14,045 $ 17,754
Federal funds sold and other short-term investments 25,075 44,613
--------- ---------
Cash and cash equivalents 39,120 62,367
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 65,023 69,147
Loans 460,110 469,032
Less: Allowance for loan losses 5,709 5,506
--------- ---------
Loans, net 454,401 463,526
--------- ---------
Premises and equipment, net 13,256 13,538
Bank owned life insurance 10,831 10,709
Goodwill 3,150 3,150
Other intangible assets, net 1,862 1,940
Other assets 16,140 15,319
--------- ---------
Total assets $ 603,783 $ 639,696
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 98,059 $ 114,634
Interest-bearing 170,636 157,794
--------- ---------
Total deposits 268,695 272,428
Accounts and drafts payable 259,626 293,769
Short-term borrowings 107 123
Other liabilities 8,946 8,584
--------- ---------
Total liabilities 537,374 574,904
--------- ---------
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 4,494,510 and
4,160,110 shares issued at March 31, 2004 and
December 31, 2003, respectively 2,247 2,080
Additional paid-in capital 19,314 8,466
Retained earnings 59,850 69,695
Common shares in treasury, at cost (813,058 shares at
March 31, 2004 and 824,598 shares at December 31, 2003) (16,214) (16,442)
Unamortized stock bonus awards (171) (129)
Accumulated other comprehensive income 1,383 1,122
--------- ---------
Total shareholders' equity 66,409 64,792
--------- ---------
Total liabilities and shareholders' equity $ 603,783 $ 639,696
========= =========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended
March 31
------------------------
2004 2003
Fee Revenue and Other Income:
Freight and utility payment and processing revenue $ 7,598 $ 6,969
Software revenue 1,179 1,796
Bank service fees 414 426
Gains on sales of investment securities 441 --
Other 135 129
---------- ----------
Total fee revenue and other income 9,767 9,320
---------- ----------
Interest Income:
Interest and fees on loans 6,454 6,416
Interest and dividends on debt and equity securities:
Taxable 97 188
Exempt from federal income taxes 427 435
Interest on federal funds sold and
other short-term investments 162 100
---------- ----------
Total interest income 7,140 7,139
---------- ----------
Interest Expense:
Interest on deposits 567 451
Interest on short-term borrowings -- 9
---------- ----------
Total interest expense 567 460
---------- ----------
Net interest income 6,573 6,679
Provision for loan losses 200 90
---------- ----------
Net interest income after provision for loan losses 6,373 6,589
---------- ----------
Operating Expense:
Salaries and employee benefits 9,157 9,352
Occupancy 458 436
Equipment 1,025 1,161
Other operating 2,842 2,846
---------- ----------
Total operating expense 13,482 13,795
---------- ----------
Income before income tax expense 2,658 2,114
Income tax expense 811 596
---------- ----------
Net income $ 1,847 $ 1,518
========== ==========
Earnings per share*:
Basic $ .50 $ .41
Diluted $ .50 $ .41
Weighted average shares outstanding*:
Basic 3,668,393 3,698,252
Effect of stock options and awards 40,026 37,134
Diluted 3,708,419 3,735,386
* Earnings per share and weighted average shares outstanding for three
months ended March 31, 2003 have been restated to reflect the 10% stock
dividend issued in March 2004.
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31
---------------------
2004 2003
Cash Flows From Operating Activities:
Net income $ 1,847 $ 1,518
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,046 1,191
Gains on sales of investment securities (441) --
Provision for loan losses 200 90
Amortization of stock bonus awards 20 10
Tax benefit from exercise of stock options and bonuses 85 --
Decrease in accrued interest receivable 27 129
Deferred income tax benefit (474) (46)
Increase in pension liability 296 292
Increase in income tax liability 662 275
Change in other assets (268) 63
Change in other liabilities (583) (299)
Other operating activities, net -- 8
-------- --------
Net cash provided by operating activities 2,417 3,231
-------- --------
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available-for-sale 12,052 --
Proceeds from maturities of debt and equity securities
available-for-sale 3,200 3,144
Purchase of debt and equity securities available-for-sale (10,407) --
Net decrease in loans 8,550 2,609
Purchases of premises and equipment, net (571) (1,039)
-------- --------
Net cash provided by investing activities 12,824 4,714
-------- --------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (16,575) (17,232)
Net (decrease) increase in interest-bearing demand and savings deposits (7,128) 758
Net increase in time deposits 19,970 890
Net (decrease) increase in accounts and drafts payable (34,143) 40,583
Net decrease in short-term borrowings (16) (27,429)
Cash proceeds from exercise of stock options 111 --
Cash paid for stock dividend fractional shares (4) --
Cash dividends paid (703) (707)
-------- --------
Net cash used in financing activities (38,488) (3,137)
-------- --------
Net (decrease) increase in cash and cash equivalents (23,247) 4,808
Cash and cash equivalents at beginning of period 62,367 30,006
-------- --------
Cash and cash equivalents at end of period $ 39,120 $ 34,814
======== ========
Supplemental information:
Cash paid for interest $ 513 $ 440
Cash paid for income taxes 660 182
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 accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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. Operating results for the period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the consolidated financial
statements and related footnotes included in the Cass Information System, Inc.'s
("the Company") Annual Report on Form 10-K for the year ended December 31, 2003.
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation. Such reclassifications have no
effect on previously reported net income or shareholders' equity. All share and
per share data for 2003 has been restated to reflect the 10% stock dividend
issued in March 2004.
Note 2 - Impact of New Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" (FIN 46R), which addresses
how a business enterprise should evaluate whether it has controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," issued in January 2003. Companies are required to apply FIN 46R to
variable interest entities (VIEs) created after December 31, 2003. For variable
interest in VIEs created before January 1, 2004, FIN 46R will be applied
beginning on January 1, 2005. The Company is currently not a primary beneficiary
of a VIE and therefore adoption of FIN 46R did not have a material impact on its
consolidated financial statements.
In November 2003, the Emerging Issues Task Force (EITF) reached a
consensus on certain disclosure requirements under EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The new disclosure requirements apply to investments in debt and
marketable equity securities that are accounted under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," and SFAS 124, "Accounting
for Certain Investments Held by Not-for-Profit Organizations." Effective for
fiscal years ending after December 15, 2003 companies are required to disclose
information about debt or marketable equity securities with market values below
carrying values. The Company currently only has one security in an unrealized
loss position with a fair value of $2,009,000 and an unrealized loss of $1,000.
This security is a U.S. Treasury security that was purchased in the second half
of 2003 and therefore has been in an unrealized loss position for less than one
year and the loss is considered temporary.
In December 2003, the FASB issued SFAS 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which increases
the disclosure requirements of the original statement by requiring more details
about pension plan assets, benefit obligations, cash flows, benefit costs and
related information and also requires companies to disclose various elements of
pension and postretirement benefit costs in interim-period financial statements
for quarters beginning after December 15, 2003. Additional disclosures
pertaining to benefit payments are required for fiscal years ending after June
30, 2004. The disclosure requirements of SFAS 132 (Revised 2003) that are
required for quarters beginning after December 15, 2003 are included in Note 11
of this report.
-6-
Note 3 - Loans by Type
(In Thousands) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Commercial and industrial $104,398 $103,638
Real estate:
Mortgage 178,231 184,221
Mortgage - Churches & Related 142,079 145,929
Construction 5,085 2,920
Construction - Churches & Related 18,816 16,378
Industrial revenue bonds 5,328 5,373
Installment 1,954 1,911
Other 4,219 8,662
- --------------------------------------------------------------------------------
Total loans $460,110 $469,032
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Note 4 - Stock Repurchases
The Company maintains a treasury stock buyback program and as of September
30, 2003 was authorized by the Board of Directors to repurchase up to 100,000
shares of its common stock. The Company did not repurchase any stock during the
First Quarter of 2004 or 2003. Repurchases are made in the open market or
through negotiated transactions from time to time depending on market
conditions.
Note 5 - Comprehensive Income
For the three-month periods ended March 31, 2004 and 2003, unrealized
gains and losses on debt and equity securities available-for-sale were the
Company's only other comprehensive income component. Comprehensive income for
the three-month periods ended March 31, 2004 and 2003 is summarized as follows:
Three Months Ended
March 31
-------------------
(In Thousands) 2004 2003
- --------------------------------------------------------------------------------------
Net income $ 1,847 $ 1,518
Other comprehensive income:
Net unrealized gain on debt and equity
securities available-for-sale, net of tax 552 96
Less: reclassification adjustment for realized gains on
sales of debt and equity securities, available-for-sale,
included in net income, net of tax (291) --
- --------------------------------------------------------------------------------------
Total other comprehensive income 261 96
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Total comprehensive income $ 2,108 $ 1,614
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Note 6 - Industry Segment Information
The services provided by the Company are classified into four reportable
segments: Transportation Information Services, Utility Information Services,
Banking Services and Government Software 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 Transportation Information Services segment provides freight invoice
rating, payment, auditing, cost accounting and transportation information
services to large corporate shippers. The Utility Information Services segment
processes and pays utility invoices, including electricity, gas, water and
telecommunications, for large corporate entities that have many locations or are
heavy users of energy. The Banking Services segment provides banking services
primarily to privately-held businesses and churches. The Government Software
Services segment provides the public sector with integrated financial, property
and human resource management systems through the Bank's wholly-owned
subsidiary, Government e-Management Solutions, Inc. (GEMS).
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, 2003. 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 fair value.
-7-
All three segments market their services within the United States and no
revenue from any customer of any segment exceeds 10% of the Company's
consolidated revenue.
Summarized information about the Company's operations in each industry
segment for the three month periods ended March, 2004 and 2003, is as follows:
Transportation Utility Governmental Corporate
Information Information Banking Software and Elim-
(In Thousands) Services Services Services Services inations Total
- ------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 2004
Total Revenues:
Revenue from customers $ 8,170 $ 3,621 $ 3,170 $ 1,179 $ -- $ 16,140
Intersegment revenue 13 6 355 -- (374) --
Net Income (Loss) 630 784 859 (426) -- 1,847
Total Assets 237,494 64,362 301,670 6,175 (5,918) 603,783
Goodwill 223 -- -- 2,927 -- 3,150
Other intangible assets, net -- -- -- 1,458 404 1,862
Quarter Ended March 31, 2003
Total Revenues:
Revenue from customers $ 7,898 $ 2,757 $ 3,458 $ 1,796 $ -- $ 15,909
Intersegment revenue 58 15 295 -- (368) --
Net Income 177 262 1,047 32 -- 1,518
Total Assets 238,373 59,593 278,538 6,878 (12,415) 570,967
Goodwill 223 -- -- 2,927 -- 3,150
Other intangible assets, net -- -- -- 1,769 379 2,148
- ------------------------------------------------------------------------------------------------------------
Note 7 - Intangible Assets
The Company accounts for intangible assets in accordance with SFAS 142,
"Goodwill and Other Intangible Assets," which requires that intangibles with
indefinite useful lives be tested annually for impairment and those with finite
useful lives be amortized over their useful lives. Intangible assets for the
periods ended March 31, 2004 and December 31, 2003 are as follows:
(In Thousands) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Goodwill $3,150 $3,150
Customer list 754 768
Software 704 768
Minimum pension liability 404 404
- --------------------------------------------------------------------------------
Other intangible assets, net 1,862 1,940
- --------------------------------------------------------------------------------
Total intangible assets $5,012 $5,090
- --------------------------------------------------------------------------------
Customer list and software are amortized over 15 years and 4 years,
respectively. The minimum pension liability was recorded in accordance with SFAS
87, "Employers' Accounting for Pensions", which requires the Company to record
an additional minimum pension liability by the amount of which the accumulated
benefit obligation exceeds the sum of the fair value of plan assets and accrued
amount previously recorded and offset this liability by an intangible asset to
the extent of previously unrecognized prior service costs. The liability and
corresponding intangible asset are adjusted annually.
Amortization of intangible assets amounted to $78,000 for both the
three-month periods ended March 31, 2004 and 2003. Estimated amortization of
intangibles over the next five years is as follows: $311,000 in 2004, 2005 and
2006 and $55,000 in 2007 and 2008.
-8-
Note 8 - Equity Investments in Non-Marketable Securities
During 2003, the Company converted its $2,000,000 investment in a private
imaging company from a convertible debenture into common stock. As part of the
conversion, the Company committed to invest an additional $1,100,000 if certain
conditions were met. The total investment of the Company in this entity was
$3,100,000 at March 31, 2004 and $2,908,000 at December 31, 2003. At March 31,
2004 the Company had a 19.93% ownership interest in this entity and the Chairman
and CEO of the Company was a member of the entity's Board of Directors. No
business has been transacted between the companies during the year.
The Company made its initial investment in this entity in 2001 through a
convertible debenture. The business has since performed poorly and during 2003
received a commitment of an additional $3,000,000 from a new non-affiliated
majority owner, in addition to the Company's additional commitment. The new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. Should this business fail to meet its
objectives, the Company's investment could be subject to future impairment. If
the sales goals of this business are significantly exceeded, an additional
investment may also be required.
This investment, along with $355,000 of other investments in
non-marketable securities, is included in other assets on the Company's
consolidated balance sheets.
Note 9 - Commitments and Contingencies
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk 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 leases. These financial instruments include
commitments to extend credit, commercial letters of credit and standby letters
of credit. The Company's maximum potential exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for commitments
to extend credit, commercial letters of credit and standby letters of credit is
represented by the contractual amounts of those instruments. At March 31, 2004,
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 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. The approximate
remaining term of commercial and standby letters of credit range from less than
1 to 3 years. 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 may obtain and liquidate
the collateral to recover amounts paid under its guarantees on these financial
instruments.
Summarized credit-related financial instruments, including both
commitments to extend credit and letters of credit and operating lease
commitments at March 31, 2004 are as follows:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3
(In Thousands) Total 1 year Years
------------------------------------------------------------------------
Unused loan commitments $23,967 $21,949 $ 2,018
Standby letters of credit 4,062 360 3,702
Commercial letters of credit 814 814 --
Operating lease commitments 620 413 207
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.
-9-
Note 10 - Stock-Based Compensation
The Company maintains two stock-based compensation plans, a stock bonus
plan and a stock option plan. Upon issuance of shares in the stock bonus plan a
contra shareholders' equity amount is recorded for the fair value of the shares
at the time of issuance and this amount is amortized to expense over the
three-year vesting period. The stock option plan is accounted for under APB 25,
"Accounting for Stock Issued to Employees", and accordingly the Company
recognizes no compensation expense as the price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
The Company elected not to adopt the recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation", as amended by SFAS 148. An entity
that continues to apply APB 25 shall disclose certain pro forma information as
if the fair value-based accounting method in SFAS 123 had been used to account
for stock-based compensation costs. The required disclosure provisions of SFAS
123, as amended by SFAS 148, are provided in the table below. The Company uses
the Black-Scholes option-pricing model to determine the fair value of the stock
options at the date of grant. There were 5,871 and 12,000 options granted in the
First Quarter of 2004 and 2003, respectively. The following table represents the
effect on basic and diluted earnings per share and weighted average assumptions
used for the periods ended March 31, 2004 and 2003:
Three Months Ended
March 31
-----------------------
(In Thousands, except per share data) 2004 2003
-------------------------------------------------------------------------
Net income:
As reported $ 1,847 $ 1,518
Add: Stock based compensation expense
included in reported net income, net of tax 13 7
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (20) (18)
-------------------------------------------------------------------------
Pro forma net income $ 1,840 $ 1,507
-------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ .50 $ .41
Basic, pro forma .50 .41
Diluted, as reported .50 .41
Diluted, pro forma .50 .40
-------------------------------------------------------------------------
Weighted average assumptions:
Risk-free interest rate 3.31% 3.34%
Expected life 7 yrs. 7 yrs.
Expected volatility 15% 15%
Dividend yield 2.52% 3.39%
-------------------------------------------------------------------------
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 the three-month periods ended March 31, 2004 and 2003:
Estimated Actual
(In Thousands, except per share data) 2004 2003
---------------------------------------------------------------------
Service cost - benefits earned during the year $ 1,126 $ 979
Interest cost on projected benefit obligation 1,245 1,105
Expected return on plan assets (1,234) (1,055)
Net amortization 68 13
---------------------------------------------------------------------
Net periodic pension cost - annual 1,205 1,042
---------------------------------------------------------------------
Net periodic pension cost - three months
ended March 31 $ 301 $ 261
---------------------------------------------------------------------
-10-
Pension costs recorded to expense were $260,000 and $237,000 for the First
Quarter of 2004 and 2003, respectively. The Company has not made any
contribution to the plan for the three-month period ended March 31, 2004, but is
expecting to contribute approximately $1,038,000 in 2004.
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's 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 of the unfunded plan for the three-month periods ended March 31, 2004 and
2003:
Estimated Actual
(In Thousands, except per share data) 2004 2003
----------------------------------------------------------------------
Service cost - benefits earned during the year $ -- $ (24)
Interest cost on projected benefit obligation 110 107
Net amortization 62 62
----------------------------------------------------------------------
Net periodic pension cost - annual 172 145
----------------------------------------------------------------------
Net periodic pension cost - three months
ended March 31 $ 43 $ 36
----------------------------------------------------------------------
Pension costs recorded to expense were $36,000 and $47,000 for the First
Quarter of 2004 and 2003, respectively.
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 national manufacturing, distribution and retail enterprises from its
processing centers in St. Louis, Missouri, Columbus, Ohio, and Boston,
Massachusetts. The Company's services include freight invoice rating, payment
processing, auditing, and the generation of cost accounting and transportation
information. Cass also processes and pays utility invoices, including
electricity, gas and telecommunications. Cass extracts, stores and presents
information from freight and utility invoices, assisting our customers'
transportation and energy managers in making decisions that will enable them to
improve their 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 its St. Louis, Missouri based bank subsidiary, provides
banking services in the St. Louis metropolitan area and other selected cities in
the United States. In addition to supporting the Company's payment operations,
it also provides banking services to its target markets, which include privately
owned businesses and churches. The Company, through the Bank's subsidiary,
Government e-Management Solutions, Inc. (GEMS), also develops and licenses
integrated financial, property and human resource management systems to the
public sector.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's specific
requirements. These requirements can vary greatly from customer to customer. In
addition, the degree of automation such as electronic data interchange (EDI),
imaging, and web-enhanced 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 have a significant influence on revenue and profitability however, such
as changes in the general level of interest rates which has a significant affect
-11-
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 expense on its deposits. The Bank also assesses
fees on other services such as cash management services. GEMS earns its revenue
from the license of its enterprise software solutions and fees for its
installation and maintenance.
Industry-wide factors that impact the Company include the acceptance by
large corporations of the outsourcing of key business functions such as freight
and utility payment. 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 and the
deregulation of energy costs. 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 our loan portfolio. The general level of interest rates
has a significant affect on the revenue of the Company. Finally, the general
fiscal condition of the counties and municipalities that can benefit from GEMS'
enterprise software can impact licenses sold and related revenue.
Currently, management views Cass' major opportunity and challenge as the
continued expansion of its payment and information processing service offerings
and customer base. Management intends to accomplish this by maintaining our lead
in applied technology, which, when combined with the security and processing
controls of the Company's Bank, makes Cass unique in the industry. This trend
has been positive over the past years and management anticipates that this
should continue in 2004. The low level of interest rates has had a significant
negative impact on net income over the past few years. While management doesn't
anticipate that these rates will rise in the near term, the Company is well
positioned to take advantage of rising rates when they occur. Management has
been pleased with the growth in software revenue generated by GEMS during the
past three years and is making additional investments to continue this trend.
Management intends to continue to refine risk management practices, monitor and
manage the quality of the loan portfolio and maintain a strong financial and
liquidity position.
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in
this report in accordance with accounting principles generally accepted in the
United States of America (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, they
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 all segments of the
Company with the exception of governmental software services. The impact and
associated risks related to these policies on our business operations are
discussed in the " Allowance and Provision for Loan Losses" section of this
report.
Impairment of Assets. Management periodically evaluates certain long-term assets
such as intangible assets including goodwill, foreclosed assets, internally
developed software and investments in private equity securities for impairment.
Generally, these assets are initially recorded at cost, and recognition of
impairment is required when events and circumstances indicate that the carrying
amounts of these assets will not be recoverable in the future. If impairment
occurs, various methods of measuring impairment may be called for depending on
the circumstances and type of asset, including quoted market prices, estimates
based on similar assets, and estimates based on valuation techniques such as
discounted projected cash flows. Assets held for sale are carried at the lower
of cost or fair value less costs to sell. These policies affect all segments of
the Company and require significant management assumptions and estimates that
could result in materially different results if conditions or underlying
circumstances change.
-12-
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended March 31, 2004
(the "First Quarter of 2004") compared to the three-month period ended March 31,
2003 (the "First Quarter of 2003"). 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 2003 Annual Report on Form 10-K. Results of
operations for the First Quarter of 2004 are not necessarily indicative of the
results to be attained for any other period.
Net Income
The Company's net income was $1,847,000 for the First Quarter of 2004, a
$329,000 or 22% increase compared to net income of $1,518,000 for the First
Quarter of 2003. Diluted earnings per share were $.50 for the First Quarter of
2004, a 22.0% increase compared to $.41 for the First Quarter of 2003. The
increase in net income in the First Quarter of 2004 over the First Quarter of
2003 was primarily a result of an increase in payment and processing revenue,
gains on the sales of investment securities and a decrease in operating
expenses. This was partially offset by a decrease in net interest income, due to
lower interest rates and a decrease in software revenues. Return on average
assets for the First Quarter of 2004 was 1.13% compared to 1.04% for the First
Quarter of 2003. Return on average equity for the First Quarter of 2004 was
11.52% compared to 10.13% for the First Quarter of 2003.
Fee Revenue and Other Income
Fee revenue is principally derived from freight and utility payment and
processing fees. Processing volumes related to these fees for the three-month
periods ended March 31, 2004 and 2003 are as follows:
Three Months Ended
March 31
----------------------------------
%
(In Thousands) 2004 2003 Change
--------------------------------------------------------------------------
Transportation Information Services:
Invoice Bill Volume 5,429 5,666 (4.2%)
Invoice Dollar Volume $2,221,646 $2,053,912 8.2%
Payment and Processing Fees $ 4,946 $ 4,969 (.5%)
Utility Information Services:
Invoice Bill Volume 1,284 1,033 24.3%
Invoice Dollar Volume $ 934,361 $ 825,361 13.2%
Payment and Processing Fees $ 2,652 $ 2,000 32.6%
Fees from the Transportation Information Services remained relatively
flat. The decrease in transactions (invoice bill volume) exceeded the decrease
in payment and processing fees due to a change in the mix of invoices processed
over the same period last year. The percentage of small dollar, electronic
transactions decreased and was replaced by larger dollar transactions that
required a higher level of processing and produced greater fees. The increase in
volumes and fees from the Utility Information Services division increased
primarily due to new customers as the growth of this relatively new segment
continues. Software revenue is down $617,000 or 34% from the First Quarter of
2003 primarily due to reduced license fee revenue generated from new customers.
Although revenue generated by GEMS increased in each of the past three years,
sales were off significantly in the First Quarter of 2004. Demand for software
in the governmental sector has softened from last year. At this time management
feels that this is a temporary condition. Bank service fees for the First
Quarter of 2004 decreased a modest $12,000 or 3% compared to the First Quarter
of 2003. Net gains of $441,000 were recognized on the sales of securities with
proceeds of $12,052,000 during the First Quarter of 2004 and no gains were
recognized in the First Quarter of 2003. Other income increased $6,000 in the
First Quarter of 2004 compared with the First Quarter of 2003.
-13-
Net Interest Income
First Quarter of 2004 compared to First Quarter of 2003:
The Company's tax-equivalent net interest income decreased 2% or $113,000
from $6,939,000 to $6,826,000. The tax-equivalent net interest margin decreased
from 5.27% to 4.58%. The decline in the general level of interest rates from a
prime rate of 9.50% at the beginning of 2001 to the current rate of 4.00%
continues to have an impact on the Company's net interest income and margin. The
average yield on earning assets decreased to 4.96% in the First Quarter of 2004
from 5.62% in 2003. The Company is negatively affected by decreases in the level
of interest rates due to the fact that its rate sensitive assets significantly
exceed its rate sensitive liabilities. Conversely, the Company is positively
affected by increases in the level of interest rates. 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.
The Company partially offset the decrease in net interest income through
an increase in earning assets. Total average earning assets increased
$64,911,000 or 12% to $599,227,000. This increase was funded by both an increase
in accounts and drafts payable due to the increase in payments processed and an
increase in bank deposits due to the expansion of the Banks' customer base.
Total average loans increased $29,360,000 or 7% to $463,461,000. This
increase was attributable to new business relationships and was funded by the
increase in accounts and drafts payable and growth in bank deposits. Although
not enough to offset the decline in the level of interest rates, this increase
in loans had a positive effect on interest income and the net interest margin
due to the fact that loans are one of the Company's highest yielding earning
assets for any given maturity.
Total average investment in debt and equity securities decreased
$1,506,000 or 2% to $64,638,000. Total average federal funds sold and other
short-term investments increased $37,057,000 or 109% to $71,128,000. This
increase provides additional liquidity and positions the Company to take
advantage of higher interest rates should they occur. For more information on
the changes in net interest income please refer to the tables on pages 14 and
15.
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 interest income and expense on each category of
interest-earning assets and interest-bearing liabilities, and the average yield
on such categories of interest-earning assets and the average rates paid on such
categories of interest-bearing liabilities for each of the periods reported.
First Quarter 2004 First Quarter 2003
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 $ 458,116 $6,387 5.61% $ 428,352 $ 6,345 6.01%
Tax-exempt (4) 5,345 101 7.60 5,749 108 7.62
Debt and equity securities (5):
Taxable 23,785 97 1.64 26,584 188 2.87
Tax-exempt (4) 40,853 646 6.36 39,560 658 6.75
Federal funds sold and other
short-term investments 71,128 162 .92 34,071 100 1.19
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 599,227 7,393 4.96 534,316 7,399 5.62
Nonearning assets:
Cash and due from banks 18,857 18,976
Premises and equipment, net 13,474 15,833
Intangible assets 5,063 5,349
Other assets 26,016 22,141
Allowance for loan losses (5,560) (5,327)
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 657,077 $ 591,288
- ----------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits 56,611 79 .56% $ 54,777 $ 117 .87%
Savings deposits 30,387 51 .68 35,772 82 .93
Time deposits of
$100 or more 48,454 267 2.22 42,666 213 2.02
Other time deposits 34,672 170 1.97 5,715 39 2.77
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 170,124 567 1.34 138,930 451 1.32
Short-term borrowings 118 -- -- 2,574 9 1.42
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 170,242 567 1.34 141,504 460 1.32
Noninterest-bearing liabilities:
Demand deposits 100,436 94,893
Accounts and drafts payable 313,593 287,700
Other liabilities 8,343 6,401
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 592,614 530,498
Shareholders' equity 64,463 60,790
Total liabilities and
shareholders' equity $ 657,077 $ 591,288
- ----------------------------------------------------------------------------------------------------------------
Net interest income $6,826 $ 6,939
Interest spread 3.62% 4.30%
Net interest margin 4.58% 5.27%
- ----------------------------------------------------------------------------------------------------------------
-14-
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 2003
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $41,000 and $11,000 for
the First Quarter of 2004 and 2003, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $253,000 and
$260,000 for the First Quarter of 2004 and 2003, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
First Quarter
2004 Over 2003
-------------------------
(In Thousands) Volume Rate Total
- -------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (1),(2):
Taxable $ 458 $(416) $ 42
Tax-exempt (3) (7) -- (7)
Debt and equity securities:
Taxable (18) (73) (91)
Tax-exempt (3) 23 (35) (12)
Federal funds sold and other
short-term investments 90 (28) 62
- -------------------------------------------------------------------------------
Total interest income 546 (552) (6)
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 4 (42) (38)
Savings deposits (11) (20) (31)
Time deposits of $100 or more 32 22 54
Other time deposits 145 (14) 131
Short-term borrowings (4) (5) (9)
- -------------------------------------------------------------------------------
Total interest expense 166 (59) 107
- -------------------------------------------------------------------------------
Net interest income $ 380 $(493) $(113)
- -------------------------------------------------------------------------------
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 34%.
-15-
Allowance and Provision for Loan Losses
A significant determinant of the Company's operating results is the
provision for loan losses and the level of loans charged off. There was a
$200,000 provision made for loan losses during the First Quarter of 2004
compared with $90,000 in the First Quarter of 2003. Net loans recovered for the
First Quarter of 2004 were $3,000 compared to $4,000 for the First Quarter of
2003. The provision for loan losses can vary over time based on an ongoing
assessment of the adequacy of the allowance for loan losses.
The allowance for loan losses at March 31, 2004 was $5,709,000 and at
December 31, 2003 was $5,506,000. The ratio of allowance for loan losses to
total loans outstanding at March 31, 2004 was 1.24% compared to 1.17% at
December 31, 2003. Nonperforming loans were $3,451,000 or .75% of total loans at
March 31, 2004 compared to $4,393,000 or .94% of total loans at December 31,
2003. The decrease from December 31, 2003 is primarily due to two loans; one for
$481,000 that was renegotiated in First Quarter of 2003 and is now current under
the new terms of the agreement and a second loan for $376,000 that was
foreclosed in the First Quarter of 2004 and is now being carried as other real
estate owned.
At March 31, 2004, impaired loans totaled $3,617,000, which included
$1,041,000 of nonaccrual loans compared with impaired loans at December 31, 2003
of $4,393,000, which included $1,525,000 of nonaccrual loans. The allowance for
loan losses on impaired loans was $966,000 at March 31, 2004 and there were no
impaired loans without an allowance. The decrease in impaired loans from
December 31, 2003 relates primarily to the decrease in nonperforming loans as
explained in the previous paragraph.
Total impaired loans decreased $4,395,000 from March 31, 2003 to March 31,
2004. A decrease of $4,482,000 in other impaired loans relates primarily to two
loans totaling $4,252,000 that were renegotiated in 2002. These loans have been
current under the terms of the agreement for over one year and are considered
performing by management at March 31, 2004. The decrease of $2,834,000 in loans
past due 90 days or more relates primarily to one loan with a balance of
$2,000,000 at March 31, 2003 that was a convertible debenture, which the Company
converted to common stock, as explained in Note 8 of this report. A second loan,
with a balance of $791,000 at March 31, 2003, is included in nonaccrual loans at
March 31, 2004 with a balance of $731,000. There was one loan with a balance of
$481,000 that was classified as renegotiated in the First Quarter of 2003 that
is current under the new terms of the loan and considered performing. These
decreases were offset by an increase in nonaccrual loans of $992,000 relating
primarily to two loans, the largest with a balance of $731,000 that is
collateralized by real estate and has a SBA guarantee. There has been some
delinquency in loan payments of this loan due to slower than expected lease-up
of real estate property. The second loan, with a balance of $270,000, relates to
a business that is no longer operating, although payments are being made as the
inventory of the business is being sold. The current balance of $2,410,000 of
loans renegotiated as of March 31, 2004 relates to two borrowers and although
currently performing, are still considered impaired by management.
The allowance for loan losses has been established and is maintained to
absorb losses inherent in the loan portfolio. An ongoing assessment of risk of
loss is performed to determine if the current balance of the allowance is
adequate to cover probable losses in the portfolio. A charge or credit is made
to expense to cover any deficiency or reduce any excess. The current methodology
employed to determine the appropriate allowance consists of two components,
specific and general. The Company develops specific valuation allowances on
commercial, commercial real estate, and construction loans based on individual
review of these loans and our estimate of the borrower's ability to repay the
loan given the availability of collateral, other sources of cash flow and
collection options available to us. The general component relates to all other
loans, which are evaluated based on loan grade. The loan grade assigned to each
-16-
loan is typically evaluated on an annual basis, unless circumstances require
interim evaluation. The Company assigns a reserve amount consistent with each
loan's rating category. The reserve amount is based on derived loss experience
over prescribed periods. In addition to the amounts derived from the loan
grades, a portion is added to the general reserve to take into account other
factors including national and local economic conditions, downturns in specific
industries including loss in collateral value, trends in credit quality at the
Company and the banking industry, and trends in risk rating changes. As part of
their examination process, federal and state agencies review the Company's
methodology for maintaining the allowance for loan losses and the balance in the
account. These agencies may require the Company to increase the allowance for
loan losses based on their judgments and interpretations about information
available to them at the time of their examination.
Summary of Asset Quality
The following table presents information as of and for the three month
periods ended March 31, 2004 and 2003 pertaining to the Company's provision for
loan losses and analysis of the allowance for loan losses.
Three Months Ended
March 31
------------------------
(Dollars in Thousands) 2004 2003
- ------------------------------------------------------------------------------------
Allowance at beginning of period $ 5,506 $ 5,293
Provision charged to expense 200 90
Loans charged off (1) (2)
Recoveries on loans previously charged off 4 6
- ------------------------------------------------------------------------------------
Net loan recoveries 3 4
Allowance at end of period $ 5,709 $ 5,387
- ------------------------------------------------------------------------------------
Loans outstanding:
Average $ 463,461 $ 434,101
March 31 460,110 432,084
Ratio of allowance for loan losses to loans outstanding:
Average 1.23% 1.24%
March 31 1.24% 1.25%
Nonperforming loans:
Nonaccrual loans $ 1,041 $ 49
Loans past due 90 days or more -- 2,834
Renegotiated loans 2,410 481
- ------------------------------------------------------------------------------------
Total non performing loans $ 3,451 $ 3,364
Other impaired loans $ 166 $ 4,648
Foreclosed assets $ 1,234 $ 1,112
- ------------------------------------------------------------------------------------
Nonperforming loans as a percent of average loans .74% .77%
- ------------------------------------------------------------------------------------
The Bank currently has two properties which it is carrying as other real
estate owned at what management believes to be fair value less cost to sell. The
first property was foreclosed on August 8, 2001 and is recorded at $859,000 and
the second property was foreclosed on March 2, 2004 and is recorded at $375,000.
Operating Expense
Total operating expense for the First Quarter of 2004 decreased $295,000
or 2% to $13,482,000 compared to the First Quarter of 2003.
Salaries and benefits expense decreased $195,000 or 2% to $9,157,000 in
the First Quarter of 2004 compared with the First Quarter of 2003. This decrease
is primarily related to a reduction in the number of employees attributable to a
series of technology initiatives put into place by the Information Services
divisions. The decrease in salaries was partially offset by an increase in
benefits expenses related to pension contribution and health insurance costs.
Occupancy expense for the First Quarter of 2004 increased $22,000 or 5% to
$458,000 from the First Quarter of 2003. This increase relates primarily to
increases in both utility expense and building expenses related to leased
property.
-17-
Equipment expense for the First Quarter of 2004 decreased $136,000 or 12%
compared to the First Quarter of 2003. This decrease is primarily due to a
decrease in hardware and software depreciation and amortization and a decrease
in computer equipment maintenance from the consolidation of equipment within the
transportation processing division.
Other operating expense for the First Quarter of 2004 decreased $4,000
compared to the First Quarter of 2003. There was an increase in outsourced
services of $133,000, which was mostly offset by a decrease in postage and
supplies expense from the Company's Transportation Information Services
division.
Income tax expense for the First Quarter of 2004 was $811,000, an increase
of $215,000 or 36% compared to the First Quarter of 2003. The effective tax rate
for the First Quarter of 2004 was 31% compared with 28% in the First Quarter of
2003 due primarily to the lower proportion of income generated from tax-exempt
investments in the First Quarter of 2004.
Financial Condition
Total assets at March 31, 2004 decreased $35,913,000 or 6% from December
31, 2003. Of this decrease $19,538,000 relates to a 44% decrease in federal
funds sold and other short-term investments and $9,125,000 relates to a 2%
decrease in loans, net of the allowance for loan losses. There was also a
decrease of $4,124,000 in investments in debt and equity securities and
$3,709,000 in cash and due from banks.
Total liabilities were $537,374,000, a decrease of $37,530,000 or 7% from
December 31, 2003. Total deposits at March 31, 2004 were $268,695,000, a
decrease of $3,733,000 or 1%. Accounts and drafts payable were $259,626,000, a
decrease of $34,143,000 or 12%. Total shareholders' equity at March 31, 2004 was
$66,409,000, a $1,617,000 or 2% increase from December 31, 2003.
The decrease in loans relates to the normal fluctuations in the loan
portfolio that result from new advances, amortization of principal and payoffs.
The Bank also participated loans to an unaffiliated bank as part of its risk
management process. The decrease in debt and equity securities relates to the
sale of $12,052,000 in securities and $3,200,000 in securities that matured that
was offset by the purchase of $10,407,000 of additional securities. Federal
funds sold and other short-term investments decreased due to a decrease in
deposits and accounts and drafts payable from December 31, 2003 to March 31,
2004. The decrease in deposits reflects normal daily and seasonal fluctuations
and the decrease in accounts and drafts payable was due primarily to the fact
that these balances 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 table on pages 14 and 15). The increase in
total shareholders' equity resulted from net income of $1,847,000; an increase
of $261,000 in other comprehensive income; cash received on the exercise of
stock options of $111,000; an $85,000 tax benefit on stock awards and the
amortization of the stock bonus plan of $20,000; offset by dividends paid of
$703,000 ($.21 per share) and $4,000 of cash paid for stock dividend fractional
shares.
Liquidity and Capital Resources
The balances of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold and money market funds, and
were $39,120,000 at March 31, 2004, a decrease of $23,247,000 or 37% from
December 31, 2003. At March 31, 2004 these assets represented 6% 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 debt and equity securities was $65,023,000
at March 31, 2004, a decrease of $4,124,000 from December 31, 2003. These assets
represented 11% of total assets at March 31, 2004. Of this total, 59% were state
and political subdivision securities, 31% were U.S. Treasury securities, 9% were
U.S. government agencies and 1% were other securities. Of the total portfolio,
26% mature in one year, 13% matures in one to five years, and 61% matures in
five or more years. During the year the Company sold securities with a market
value of $12,052,000 and a portion of these funds were reinvested in U.S.
Treasury and agency securities.
The Bank has unsecured lines at correspondent banks to purchase federal
funds up to a maximum of $33,000,000. Additionally, the Bank maintains a line of
credit at an unaffiliated financial institution in the maximum amount of
$85,418,000 collateralized by securities sold under repurchase agreements.
-18-
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 many other commercial products of the Bank. The accounts and drafts
payable generated by the Company has also historically been a stable source of
funds.
Net cash flows provided by operating activities were $2,417,000 for the
First Quarter of 2004 compared with $3,231,000 for the First Quarter of 2003.
This decrease is attributable to an additional $478,000 paid in corporate income
taxes, the $441,000 gain on the sales of securities and other normal
fluctuations in other 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. Further analysis of
the changes in these account balances is 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 2004.
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 FDIC, (c) minority interests in the equity accounts
of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights
within certain limits, and (f) any other intangible assets and investments in
subsidiaries that the FDIC determines should be deducted from Tier 1 capital.
The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of
Tier 1 capital less purchased mortgage servicing rights to total assets, for
banking organizations deemed the strongest and most highly rated by banking
regulators. A higher minimum leverage ratio is required of less highly rated
banking organizations. Total capital, a measure of capital adequacy, includes
Tier 1 capital, allowance for loan losses, and debt considered equity for
regulatory capital purposes.
The Company and the Bank continue to exceed all regulatory capital
requirements, as evidenced by the following capital amounts and ratios at March
31, 2004 and December 31, 2003:
March 31, 2004 Amount Ratio
- -------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $66,117,000 12.78%
Cass Commercial Bank 32,214,000 11.47
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $60,408,000 11.68%
Cass Commercial Bank 28,700,000 10.22
Tier I capital (to average assets)
Cass Information Systems, Inc. $60,408,000 9.26%
Cass Commercial Bank 28,700,000 9.14
- -------------------------------------------------------------------------------
December 31, 2003 Amount Ratio
- -------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $64,480,000 12.07%
Cass Commercial Bank 31,741,000 11.17
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $58,974,000 11.04%
Cass Commercial Bank 28,190,000 9.92
Tier I capital (to average assets)
Cass Information Systems, Inc. $58,974,000 9.57%
Cass Commercial Bank 28,190,000 9.49
- -------------------------------------------------------------------------------
-19-
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.
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, 2003, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at March 31, 2004 has changed materially from that at December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that the information it is required to disclose in the reports it files
with the SEC is recorded, processed, summarized and reported to management,
including the Chief Executive Officer and Chief Financial Officer, within the
time periods specified in the rules of the SEC. The Company's Chief Executive
and Chief Financial Officers have reviewed and evaluated the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of March 31, 2004 and based on their evaluation
believe that these procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
There were no changes in the first quarter of 2004 in the Company's
internal controls identified by the Chief Executive and Chief Financial Officers
in connection with their evaluation that materially affected or are reasonably
likely to materially affect the Company's internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
-20-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.2 Amended and Restated Bylaws of Registrant.
Exhibit 10.1 Form of Directors' Indemnification Agreement.
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports of Form 8-K
The Company filed a report on Form 8-K under Items 7 and 12 dated
January 29, 2004, reporting the announcement of the Company's
earnings for the fourth quarter of 2004.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: May 7, 2004 By /s/ Lawrence A. Collett
-------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: May 7, 2004 By /s/ Eric H. Brunngraber
-------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
-22-
Exhibit 31.1
CERTIFICATION
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure, controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Lawrence A. Collett
- -------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
May 7, 2004
Exhibit 31.2
CERTIFICATION
I, Eric H. Brunngraber, Chief Financial and Accounting Officer of Cass
Information Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the consolidated financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure, controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls over financial reporting are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Eric H. Brunngraber
- -----------------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
May 7, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Lawrence A. Collett, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Lawrence A. Collett
- ------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
May 7, 2004
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric H.
Brunngraber, Chief Financial and Accounting Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Eric H. Brunngraber
- ----------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
May 7, 2004
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
