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 quarterly period ended September 30, 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
November 11, 2004: Common stock, par value $.50 per share - 3,687,248 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
September 30, 2004 (unaudited) and December 31, 2003 (unaudited) ...... 3
Consolidated Statements of Income
Three and nine months ended September 30, 2004 and 2003 (unaudited) ... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 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 ............................................. 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............. 24
Item 4. CONTROLS AND PROCEDURES ................................................. 24
PART II - Other Information - Items 1. - 6. ........................................... 25
SIGNATURES ...................................................................... 26
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)
September 30 December 31
2004 2003
Assets
Cash and due from banks $ 27,332 $ 17,754
Federal funds sold and other short-term investments 68,798 44,613
--------- ---------
Cash and cash equivalents 96,130 62,367
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 93,027 69,147
Loans 496,027 469,032
Less: Allowance for loan losses 6,021 5,506
--------- ---------
Loans, net 490,006 463,526
--------- ---------
Premises and equipment, net 12,299 13,538
Bank owned life insurance 10,975 10,709
Payments in excess of funding 8,474 6,220
Goodwill 7,247 3,150
Other intangible assets, net 2,494 1,940
Other assets 17,044 15,319
--------- ---------
Total assets $ 737,696 $ 645,916
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 106,995 $ 114,634
Interest-bearing 185,170 157,794
--------- ---------
Total deposits 292,165 272,428
Accounts and drafts payable 364,396 299,989
Short-term borrowings 103 123
Subordinated convertible debentures 3,700 --
Other liabilities 8,574 8,584
--------- ---------
Total liabilities 668,938 581,124
--------- ---------
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 September 30, 2004 and
December 31, 2003, respectively 2,247 2,080
Additional paid-in capital 18,370 8,466
Retained earnings 62,974 69,695
Common shares in treasury, at cost (807,262 shares at
September 30, 2004 and 824,598 shares at December 31, 2003) (16,096) (16,442)
Unamortized stock bonus awards (185) (129)
Accumulated other comprehensive income 1,448 1,122
--------- ---------
Total shareholders' equity 68,758 64,792
--------- ---------
Total liabilities and shareholders' equity $ 737,696 $ 645,916
========= =========
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
------------------------ ------------------------
2004 2003 2004 2003
Fee Revenue and Other Income:
Freight and utility payment and processing revenue $ 7,654 $ 7,308 $ 22,873 $ 21,147
Software revenue 1,433 2,221 3,746 5,871
Bank service fees 392 464 1,236 1,355
Gains on sales of investment securities, net -- 92 441 1,454
Other 127 215 439 480
---------- ---------- ---------- ----------
Total fee revenue and other income 9,606 10,300 28,735 30,307
---------- ---------- ---------- ----------
Interest Income:
Interest and fees on loans 6,843 6,403 19,729 19,138
Interest and dividends on debt and equity securities:
Taxable 122 91 335 412
Exempt from federal income taxes 605 282 1,497 1,068
Interest on federal funds sold and
other short-term investments 305 187 666 413
---------- ---------- ---------- ----------
Total interest income 7,875 6,963 22,227 21,031
---------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 810 449 2,115 1,339
Interest on short-term borrowings -- -- -- 14
Interest on subordinated convertible debentures 18 -- 18 --
---------- ---------- ---------- ----------
Total interest expense 828 449 2,133 1,353
---------- ---------- ---------- ----------
Net interest income 7,047 6,514 20,094 19,678
Provision for loan losses 150 -- 500 90
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 6,897 6,514 19,594 19,588
---------- ---------- ---------- ----------
Operating Expense:
Salaries and employee benefits 9,579 9,274 28,037 28,026
Occupancy expense 460 447 1,354 1,340
Equipment expense 877 1,068 2,888 3,350
Amortization of intangible assets 91 78 246 233
Other operating 2,789 2,990 8,066 8,599
---------- ---------- ---------- ----------
Total operating expense 13,796 13,857 40,591 41,548
---------- ---------- ---------- ----------
Income before income tax expense 2,707 2,957 7,738 8,347
Income tax expense 734 935 2,218 2,568
---------- ---------- ---------- ----------
Net income $ 1,973 $ 2,022 $ 5,520 $ 5,779
========== ========== ========== ==========
Earnings per share:
Basic $ .53 $ .56 $ 1.50 $ 1.58
Diluted $ .53 $ .55 $ 1.48 $ 1.56
Weighted average shares outstanding:
Basic 3,677,475 3,660,788 3,673,441 3,682,598
Diluted 3,758,918 3,699,329 3,729,461 3,718,955
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
---------------------
2004 2003
Cash Flows From Operating Activities:
Net income $ 5,520 $ 5,779
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,032 3,495
Provision for loan losses 500 90
Amortization of stock bonus awards 71 41
Tax benefit from exercise of stock option and bonus awards 114 176
Increase in accrued interest receivable (486) (326)
(Decrease) increase in deferred income (266) 1,565
Deferred income tax benefit (441) (757)
(Decrease) increase in income tax liability (922) 1,154
Increase in pension liability 1,015 959
Gains on sales of investment securities, net (441) (1,454)
Change in other assets (781) 234
Change in other liabilities (76) (1,605)
Other operating activities, net (5) 8
-------- --------
Net cash provided by operating activities 6,834 9,359
-------- --------
Cash Flows From Investing Activities:
Proceeds from sales of debt securities available-for-sale 12,052 37,831
Proceeds from maturities of debt and equity securities
available-for-sale 16,200 15,145
Purchase of debt and equity securities available-for-sale (51,607) (39,813)
Net increase in loans (27,355) (18,272)
Increase in payments in excess of funding (2,254) (1,620)
Payment for business acquisitions, net of cash acquired (1,098) --
Purchases of premises and equipment, net (1,073) (1,625)
-------- --------
Net cash used in investing activities (55,135) (8,354)
-------- --------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (7,639) (1,012)
Net increase in interest-bearing demand and savings deposits 16,852 669
Net increase in time deposits 10,524 26,454
Net increase in accounts and drafts payable 64,407 73,705
Net decrease in short-term borrowings (20) (37,431)
Cash proceeds from exercise of stock options 190 260
Cash dividends paid (2,250) (2,114)
Purchase of common shares for treasury -- (1,764)
-------- --------
Net cash provided by financing activities 82,064 58,767
-------- --------
Net increase in cash and cash equivalents 33,763 59,772
Cash and cash equivalents at beginning of period 62,367 30,006
-------- --------
Cash and cash equivalents at end of period $ 96,130 $ 89,778
======== ========
Supplemental information:
Cash paid for interest $ 2,031 $ 1,349
Cash paid for income taxes 3,483 1,652
Transfer of loans to other real estate owned 375 --
Transfer of loans to other equity investments -- 2,000
Issuance of subordinated convertible debentures 3,700 --
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. 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, 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 have been restated to reflect the 10% stock dividend
issued in March 2004.
Note 2 - Acquisitions
On August 24, 2004 the Company acquired substantially all of the operating
assets of PROFITLAB, Inc., a provider of telecom auditing and application
services based in Greenville, S.C. Consideration for the acquisition included
cash in the amount of $1,098,000 and the issuance of $3,700,000 of 5.33%
subordinated convertible debentures. The debentures are convertible, per a
schedule, into approximately 76,763 shares of the Company's common stock at a
price of $48.20 per share. The securities mature ten years after the date of
issuance. The debentures may be called by the Company without penalty after
August 24, 2010. Total cost of the acquisition was approximately $4,950,000
which included $800,000 in acquired software and $4,098,000 in goodwill based on
the Company's preliminary purchase price allocation.
On August 11, 2004 the Company filed with the Federal Reserve Bank and other
regulators for permission to acquire and merge with Franklin Bancorp, Orange,
California and its subsidiary bank, Franklin Bank of California. The purpose of
the proposed acquisition and merger is to establish a branch in California to
serve existing customers and prospects. It is expected that these transactions
will occur in the fourth quarter of 2004. Total assets of these entities are
approximately $2,000,000.
Note 3 - 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 September 30, 2004 and December 31, 2003 are as follows:
September 30, 2004 December 31, 2003
=====================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
=====================================================================================================
Amortized intangible assets:
Customer list $ 823 $ (96) $ 823 $ (55)
Acquired software 1,824 (461) 1,024 (256)
- -----------------------------------------------------------------------------------------------------
Total amortized intangibles 2,647 (557) 1,847 (311)
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Unamortized intangible assets:
Goodwill 7,474 (227)* 3,377 (227)*
Minimum pension liability 404 -- 404 --
- -----------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,878 (227) 3,781 (227)
- -----------------------------------------------------------------------------------------------------
Total intangible assets $10,525 $ (784) $ 5,628 $ (538)
- -----------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS 142.
-6-
Customer list and software are amortized over 15 years and 4-5 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.
On August 24, 2004 the Company purchased substantially all of the operating
assets of PROFITLAB, Inc. This acquisition generated $4,098,000 of goodwill and
included $800,000 of acquired software based on the Company's preliminary
purchase price allocation. Amortization of the acquired software, which has an
estimated useful life of five years, was $13,000 for the three and nine month
periods ended September 30, 2004.
Amortization of intangible assets amounted to $91,000 and $78,000 for the three
month periods ended September 30, 2004 and 2003, respectively and $246,000 and
$233,000 for the nine month periods ended September 30, 2004 and 2003,
respectively. Estimated amortization of intangibles over the next five years is
as follows: $364,000 in 2004 and $471,000 for 2005 and 2006 and $215,000 in 2007
and 2008.
Note 4 - Equity Investments in Non-Marketable Securities
During 2003, the Company converted a $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 investing an additional $1,100,000 when
certain conditions were met. This additional commitment has funded and the total
investment of the Company in this entity was $3,100,000 at September 30, 2004
and $2,908,000 at December 31, 2003. At September 30, 2004 the Company had a
19.99% ownership interest in this entity and the Chairman and CEO of the Company
was a member of the entity's Board of Directors. In addition, the Company has
extended a $2,400,000 line of credit for working capital purposes to this
entity, with a 50% interest sold to a new non-affiliated majority owner. As of
September 30, 2004 the Company's interest in this line amounted to $1,200,000
and all payments are current.
This business has performed poorly during the past few years and received an
additional $3,000,000 equity investment from the new majority owner. The new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. However, should this business fail to meet
its objectives, the Company's investment could be subject to future impairment.
This investment, along with $531,000 of other investments in non-marketable
securities, is included in other assets on the Company's consolidated balance
sheets.
Note 5 - Subordinated Convertible Debentures
On August 24, 2004 the Company issued to PROFITLAB, Inc. $3,700,000 of 5.33%
subordinated convertible debentures in partial consideration for the acquisition
of the assets of PROFITLAB, Inc. Interest is payable annually on the anniversary
date of the acquisition. The holders of the debentures can convert up to 20% of
the principal amount into fully paid and non-assessable shares of the Common
Stock of the Company at a rate per share of $48.20 from and after the third
anniversary of the issuance date. From and after the fourth anniversary date an
additional 30% can be converted under the same terms. From and after the fifth
anniversary date, 100% can be converted under the same terms. The securities
mature ten years after the date of issuance. The debentures may be called by the
Company without penalty after August 24, 2010.
Note 6 - Earning Per Share
In March 2004, the Company issued a 10% stock dividend. Previously reported
share and per share amounts have been restated to reflect this dividend. 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, 2004 and 2003 are as follows:
-7-
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
(Dollars In Thousands) 2004 2003 2004 2003
===============================================================================================================================
Calculation of basic earnings per share:
Net income $ 1,973 $ 2,022 $ 5,520 $ 5,779
Weighted-average number of common shares outstanding 3,677,475 3,660,788 3,673,441 3,682,598
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .53 $ .56 $ 1.50 $ 1.58
===============================================================================================================================
Calculation of diluted earnings per share:
Net income $ 1,973 $ 2,022 $ 5,520 $ 5,779
Net income effect of 5.33% convertible debentures 10 -- 10 --
- -------------------------------------------------------------------------------------------------------------------------------
Net income assuming dilution $ 1,983 $ 2,022 $ 5,530 $ 5,779
- -------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares outstanding 3,677,475 3,660,788 3,673,441 3,682,598
Effect of dilutive stock options and awards 49,737 38,541 45,374 36,357
Effect of 5.33% convertible debentures 31,706 -- 10,646 --
- -------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares
assuming dilution 3,758,918 3,699,329 3,729,461 3,718,955
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earning per share $ .53 $ .55 $ 1.48 $ 1.56
===============================================================================================================================
Note 7 - Stock Repurchases
The Company maintains a treasury stock buyback program and as of September 30,
2004 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 nine
months ended September 30, 2004 and repurchased 59,237 shares for $1,764,000
during the nine months ended September 30, 2003. Repurchases are made in the
open market or through negotiated transactions from time to time depending on
market conditions.
Note 8 - Comprehensive Income
For the three and nine month periods ended September 30, 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 and nine month periods ended September 30, 2004 and 2003 is
summarized as follows:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
(In Thousands) 2004 2003 2004 2003
=============================================================================================================================
Net Income $ 1,973 $ 2,022 $ 5,520 $ 5,779
Other comprehensive income:
Net unrealized gain (loss) on debt and equity
securities available-for-sale, net of tax 1,644 (280) 617 391
Less: reclassification adjustment for realized gains on
sales of debt and equity securities, available-for-sale,
included in net income, net of tax -- (61) (291) (960)
- -----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 1,644 (341) 326 (569)
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 3,617 $ 1,681 $ 5,846 $ 5,210
- -----------------------------------------------------------------------------------------------------------------------------
Note 9 - 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
-8-
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.
All four 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 and nine month periods ended September 30, 2004 and 2003, is as
follows:
Transportation Utility Government Corporate,
Information Information Banking Software Eliminations
(In Thousands) Services Services Services Services and Other Total
==========================================================================================================================
Quarter Ended September 30, 2004
Total Revenues:
Revenue from customers $ 8,177 $ 3,403 $ 3,369 $ 1,433 $ 121 $ 16,503
Intersegment revenue 12 3 338 -- (353) --
Net income (loss) 884 572 982 (371) (94) 1,973
Total assets 320,513 80,535 326,151 5,466 5,031 737,696
Goodwill 223 -- -- 2,927 4,097 7,247
Other intangible assets, net -- -- -- 1,303 1,191 2,494
Quarter Ended September 30, 2003
Total Revenues:
Revenue from customers $ 8,072 $ 3,282 $ 3,239 $ 2,221 $ -- $ 16,814
Intersegment revenue 7 4 369 -- (380) --
Net income 518 499 903 102 -- 2,022
Total assets 267,618 68,845 302,461 7,134 (3,338) 642,720
Goodwill 223 -- -- 2,927 -- 3,150
Other intangible assets, net -- -- -- 1,613 379 1,992
- --------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2004
Total Revenues:
Revenue from customers $ 24,452 $ 10,378 $ 9,632 $ 3,746 $ 121 $ 48,329
Intersegment revenue 34 9 1,048 -- (1,091) --
Net income (loss) 2,352 2,007 2,703 (1,448) (94) 5,520
Nine Months Ended September 30, 2003
Total Revenues:
Revenue from customers $ 24,632 $ 9,225 $ 10,167 $ 5,871 $ -- $ 49,895
Intersegment revenue 111 30 989 -- (1,130) --
Net income 1,507 1,200 2,944 128 -- 5,779
- --------------------------------------------------------------------------------------------------------------------------
Note 10 - Loans by Type
(In Thousands) September 30, 2004 December 31, 2003
================================================================================
Commercial and industrial $117,631 $103,638
Real estate:
Mortgage 179,706 184,221
Mortgage - churches & related 164,195 145,929
Construction 19,019 2,920
Construction - churches & related 6,213 16,378
Industrial revenue bonds 5,237 5,373
Installment 1,242 1,911
Other 2,784 8,662
- --------------------------------------------------------------------------------
Total loans $496,027 $469,032
================================================================================
-9-
Note 11 - 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 and capital leases. These financial instruments
include commitments to extend credit, commercial letters of credit and standby
letters of credit. The Company's maximum potential exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, commercial letters of credit and standby letters
of credit is represented by the contractual amounts of those instruments. At
September 30, 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
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. 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 or
its subsidiaries 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 lease commitments at September 30, 2004
are as follows:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3
(In Thousands) Total 1 year Years
==========================================================================
Unused loan commitments $19,075 $18,638 $ 437
Standby letters of credit 3,701 3,248 453
Commercial letters of credit 537 537 --
Operating lease commitments 474 381 93
Capital lease commitments 33 21 12
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 12 - 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 1,500 options granted in the Third
Quarter of 2004 and no grants in the Third Quarter of 2003. For the First Nine
Months of 2004 and 2003 there were 10,130 and 15,543 options granted,
respectively. The following table represents the effect on basic and diluted
earnings per share and weighted average assumptions used for the periods ended
September 30, 2004 and 2003:
-10-
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
(In Thousands, except per share data) 2004 2003 2004 2003
====================================================================================================================
Net income:
As reported $ 1,973 $ 2,022 $ 5,520 $ 5,779
Add: Stock based compensation expense
included in reported net income, net of tax 18 11 47 27
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (30) (28) (81) (77)
- --------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 1,961 $ 2,005 $ 5,486 $ 5,729
- --------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ .53 $ .56 $ 1.50 $ 1.58
Basic, proforma .53 .55 1.49 1.55
Diluted, as reported .53 .55 1.48 1.56
Diluted, proforma .52 .54 1.47 1.54
- --------------------------------------------------------------------------------------------------------------------
Weighted average assumptions:
Risk-free interest rate 3.88% -- 3.61% 3.23%
Expected life 7 yrs. -- 7 yrs. 7 yrs.
Expected volatility 15% -- 15% 15%
Dividend yield 2.21% -- 2.42% 3.32%
- --------------------------------------------------------------------------------------------------------------------
Note 13 - 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 2003 and an estimate for 2004:
Estimated Actual
(In Thousands, except per share data) 2004 2003
==========================================================================
Service cost - benefits earned during the year $ 1,186 $ 979
Interest cost on projected benefit obligation 1,238 1,105
Expected return on plan assets (1,234) (1,055)
Net amortization 60 13
--------------------------------------------------------------------------
Net periodic pension cost $ 1,250 $ 1,042
--------------------------------------------------------------------------
Pension costs recorded to expense were $312,000 and $349,000 for the Third
Quarter of 2004 and 2003, respectively. Pension costs recorded to expense were
$937,000 and $823,000 for the First Nine Months of 2004 and 2003, respectively.
The Company has not made any contribution to the plan during the nine month
period ended September 30, 2004, but is expecting to contribute approximately
$1,083,000 during the fourth quarter of 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 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
of the unfunded plan for 2003 and an estimate for 2004:
Estimated Actual
(In Thousands, except per share data) 2004 2003
==========================================================================
Service cost - benefits earned during the year $ (57) $ (24)
Interest cost on projected benefit obligation 116 107
Net amortization 50 62
--------------------------------------------------------------------------
Net periodic pension cost $ 109 $ 145
--------------------------------------------------------------------------
-11-
Pension costs recorded to expense were $9,000 and $32,000 for the Third Quarter
of 2004 and 2003, respectively and were $82,000 and $125,000 for the First Nine
Months 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
with the data 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
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 for its depository and 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 the 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 Cass'
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 during 2004 and beyond. In addition, management is
exploring possible strategic alliances and potential acquisitions to accelerate
this growth. On August 24, 2004 the Company purchased substantially all the
-12-
operating assets of PROFITLAB, Inc. (PROFITLAB). PROFITLAB is a provider of
telecom auditing and application services. This acquisition should further
strengthen and expand Cass' payment and data analysis services and tools for
Fortune 1000 customers. The initial impact on the Company's earnings will be
negative. Based on recent performance, the annualized after tax loss of
PROFITLAB is anticipated to be in the area of $500,000 to $650,000 or $.13 to
$.17 diluted earnings per share. While benefits are expected to occur from
integrating certain operational areas, it may take some time before such
benefits are achieved.
The low level of interest rates has had a significant negative impact on net
income during the past few years. Although management doesn't anticipate when
and how quickly these rates may increase, the Company is positioned to take
advantage of rising rates should they occur. Management had been pleased with
the growth in software revenue generated by GEMS during the last three years,
but is disappointed with software sales this year. It appears that lack of
activity in the marketplace has negatively impacted sales but active interest,
as measured by the number of requests for proposals received, seems to be
improving.
Critical Accounting Policies
The Company has prepared 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, 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.
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,
2004 (the "Third Quarter of 2004") compared to the three month period ended
September 30, 2003 (the "Third Quarter of 2003") and the nine month period ended
September 30, 2004 (the "First Nine Months of 2004") compared to the nine month
period ended September 30, 2003 (the "First Nine Months 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 Third Quarter of 2004 are not
necessarily indicative of the results to be attained for any other period.
-13-
Net Income
The following table summarizes the Company's operating results:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------- ----------------------------------------
% %
2004 2003 Change 2004 2003 Change
======================================================================== ========================================
Net income (In thousands) $ 1,973 $ 2,022 (2.4%) $ 5,520 $ 5,779 (4.5%)
Diluted earnings per share $ .53 $ .55 (3.6%) $ 1.48 $ 1.56 (5.1%)
Return on average assets 1.06% 1.25% -- 1.06% 1.26% --
Return on average equity 11.94% 13.11% -- 11.36% 12.67% --
The decrease in net income in the Third Quarter of 2004 over the Third Quarter
of 2003 was due to a decline in software revenue, which was partially offset by
an increase in payment and processing revenue. The decrease in net income in the
First Nine Months of 2004 from 2003 was due to a decrease in software revenue
and lower gains recognized on the sale of investment securities, partially
offset by increased revenue from payment and processing fees and a decrease in
operating expenses.
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 and nine
month periods ended September 30, 2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------- -------------------------------------
% %
(In Thousands) 2004 2003 Change 2004 2003 Change
=============================================================================== =====================================
Transportation Information Services:
Invoice Bill Volume 6,104 5,882 3.8% 17,454 17,358 0.6%
Invoice Dollar Volume $2,535,799 $2,208,878 14.8% $7,173,613 $6,417,046 11.2%
Payment and Processing Fees $ 4,970 $ 4,886 1.7% $ 14,965 $ 14,525 3.0%
Utility Information Services:
Invoice Transaction Volume 1,304 1,218 7.1% 3,874 3,367 15.1%
Invoice Dollar Volume $ 985,369 $ 878,998 12.1% $2,815,462 $2,493,073 12.9%
Payment and Processing Fees $ 2,545 $ 2,422 5.1% $ 7,769 $ 6,622 17.3%
Third Quarter of 2004 compared to Third Quarter of 2003:
Transaction volume from the Transportation Information Services division for the
Third Quarter of 2004 increased mainly due to increased activity from existing
clients. Total dollar volume processed from this division also increased during
this period due to increased activity from existing clients and larger average
freight charges. Fees for the period grew due to the increased volume and
additional services provided. The increase in volume and fees from the Utility
Information Services division increased primarily due to new customers as the
growth of this segment continues. The acquisition of PROFITLAB contributed
$139,000 of payment and processing fees for the Third Quarter of 2004. Software
revenue was down $788,000 or 35% from the Third 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 this year to date. Demand for software in the governmental sector
appears to have softened from last year. At this time management feels that this
is a temporary condition. Bank service fees decreased $72,000 or 16% due to a
decrease in deposit account service charges and miscellaneous services provided
to other banks. Net gains of $92,000 were recognized on the sales of securities
during the Third Quarter of 2003 with no gains recognized in the Third Quarter
of 2004. Other income decreased $88,000 or 41% primarily due to a decrease in
the amount earned from company owned life insurance.
First Nine Months of 2004 compared to First Nine Months of 2003:
Transportation transaction volume and fee revenue for the First Nine Months of
2004 increased slightly from 2003 due to an increase of activity from existing
clients. Dollar volume increased by a significantly larger percentage than
transaction volume, due primarily to larger average freight charges. Utility
-14-
volume and fees increased due to new customers as this segment continues to
grow. The acquisition of PROFITLAB contributed $139,000 of payment and
processing revenue in the First Nine Months of 2004. Software revenue from GEMS
was down $2,125,000 or 36% during the First Nine Months of 2004 due to the same
factors discussed above for the third quarter. Bank service fees decreased
$119,000 or 9% due to the same factors discussed above for the quarter. Gains on
the sales of securities for the First Nine Months of 2004 were $441,000 compared
to gains of $1,454,000 for the First Nine Months of 2003. Other income decreased
$41,000 or 9% due to a decrease in income recognized on company owned life
insurance, which was offset by death proceeds received on this insurance in the
First Nine Months of 2003.
Net Interest Income
The following table summarizes the changes in net interest income and related
factors for the three and nine month periods ended September 30, 2004 compared
with September 30, 2003:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
% %
(Dollars In Thousands) 2004 2003 Change 2004 2003 Change
========================================================================== =================================
Average earning assets $665,105 $576,037 15.5% $630,719 $548,540 15.0%
Net interest income 7,390 6,694 10.4% 20,965 20,333 3.1%
Net interest margin 4.42% 4.61% -- 4.44% 4.96% --
Yield on earning assets 4.92% 4.92% -- 4.89% 5.29% --
Rate on interest bearing liabilities 1.66% 1.14% -- 1.54% 1.24% --
Third Quarter of 2004 compared to Third Quarter of 2003:
The increase in net interest income was caused by the significant increase in
earning assets that exceeded the decline in net interest margin. The decrease in
net interest margin was due to an increase in rates paid on interest bearing
liabilities, which increased from 1.14% in the Third Quarter of 2003 to 1.66% in
2004. This increase had an even larger impact on net interest income due to the
fact that average interest-bearing liabilities increased $40,348,000 from the
Third Quarter of 2003 to the Third Quarter of 2004. The yield on earning assets
did not change from last year, but the interest from these assets increased
$1,075,000 due to an increase in average earning assets of $89,068,000 or 16%.
This increase was funded by both an increase in accounts and drafts payable due
to the increase in dollar volume processed and an increase in bank deposits due
to the expansion of the Banks' customer base.
Total average loans increased $35,151,000 or 8% to $483,563,000. This increase
was attributable to new business relationships and was funded by the increase in
accounts and drafts payable and growth in bank deposits. Total average
investment in debt and equity securities increased $42,904,000 or 93% to
$89,002,000 as the Company invested part of the increase in deposits and
payables. Total average federal funds sold and other short-term investments
increased $11,013,000 or 14% to $92,540,000. This increase provides additional
liquidity to the Company. For more information on the changes in net interest
income please refer to the tables on the pages that follow.
First Nine Months of 2004 compared to First Nine Months of 2003:
The increase in net interest income was caused by the significant increase in
earning assets that exceeded the decline in net interest margin. This increase
in earning assets was funded by both an increase in accounts and drafts payable
due to the increased dollars processed and an increase in bank deposits due to
the expansion of the Banks' customer base. The decrease in margin was caused by
the general decline in market interest rates during the past few years, which
affected the yield on earning assets combined with an increase in interest rates
paid on deposits as the Bank increased its marketing efforts to generate
deposits.
Total average loans increased $32,108,000 or 7% to $471,482,000. This increase
was attributable to new business relationships. Loans have 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 increased $20,098,000 or 36% to
$75,652,000 as the Company invested part of the increase in deposits and
payables. Total average federal funds sold and other short-term investments
-15-
increased $29,973,000 or 56% to $83,585,000. This increase was also funded by an
increase in accounts and drafts payable and growth in bank deposits and provides
the Company with additional liquidity.
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.
For more information on the changes in net interest income please refer to the
tables on the pages that follow.
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.
Third Quarter 2004 Third 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 $ 478,307 $ 6,781 5.64% $ 442,753 $ 6,332 5.67%
Tax-exempt (4) 5,256 94 7.11 5,659 107 7.50
Debt and equity securities (5):
Taxable 27,297 122 1.78 19,598 91 1.84
Tax-exempt (4) 61,705 916 5.91 26,500 426 6.38
Federal funds sold and other
short-term investments 92,540 305 1.31 81,527 187 .91
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 665,105 8,218 4.92 576,037 7,143 4.92
Nonearning assets:
Cash and due from banks 24,931 20,133
Premises and equipment, net 12,650 14,639
Bank owned life insurance 10,900 10,489
Payments in excess of funding 7,249 5,070
Goodwill and other intangibles, net 6,918 5,194
Other assets 15,424 14,117
Allowance for loan losses (5,919) (5,397)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 737,258 $ 640,282
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 84,757 254 1.19% $ 51,348 $ 74 .57%
Savings deposits 29,793 80 1.07 36,985 61 .65
Time deposits of
$100 or more 48,405 295 2.42 45,835 191 1.65
Other time deposits 33,572 181 2.14 22,011 123 2.22
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 196,527 810 1.64 156,179 449 1.14
Short-term borrowings 55 -- -- -- -- --
Subordinated Debentures 1,528 18 4.69 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 198,110 828 1.66 156,179 449 1.14
Noninterest-bearing liabilities:
Demand deposits 104,297 103,459
Accounts and drafts payable 360,324 310,904
Other liabilities 8,785 8,545
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 671,516 579,087
Shareholders' equity 65,742 61,195
Total liabilities and
shareholders' equity $ 737,258 $ 640,282
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,390 $ 6,694
Interest spread 3.26% 3.78%
Net interest margin 4.42% 4.61%
=================================================================================================================================
-16-
1. Balances shown are daily averages.
2. For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding. Interest on nonaccrual loans is recorded
when received as discussed further in Note 1 to the Company's 2003
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $39,000 and $26,000 for
the Third 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 $344,000 and
$180,000 for the Third 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.
First Nine Months of 2004 First Nine Months of 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 $ 466,181 $ 19,534 5.60% $ 433,670 $ 18,925 5.83%
Tax-exempt (4) 5,301 296 7.46 5,704 323 7.57
Debt and equity securities (5):
Taxable 25,906 335 1.73 22,971 412 2.40
Tax-exempt (4) 49,746 2,267 6.09 32,583 1,613 6.62
Federal funds sold and other
short-term investments 83,585 666 1.06 53,612 413 1.03
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets 630,719 23,098 4.89 548,540 21,686 5.29
Nonearning assets:
Cash and due from banks 21,635 19,840
Premises and equipment, net 13,076 15,232
Bank owned life insurance 10,827 10,347
Payments in excess of funding 6,594 4,586
Goodwill and other intangibles, net 5,660 5,271
Other assets 15,125 13,037
Allowance for loan losses (5,749) (5,372)
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 697,887 $ 611,481
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 68,766 $ 498 .97% $ 52,367 $ 295 .75%
Savings deposits 29,895 208 .93 36,244 224 .83
Time deposits of
$100 or more 50,639 866 2.28 43,824 607 1.85
Other time deposits 35,152 543 2.06 12,022 213 2.37
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 184,452 2,115 1.53 144,457 1,339 1.24
Short-term borrowings 89 -- -- 1,215 14 1.54
Subordinated debentures 513 18 4.69 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 185,054 2,133 1.54 145,672 1,353 1.24
Noninterest-bearing liabilities:
Demand deposits 103,219 97,951
Accounts and drafts payable 336,189 299,217
Other liabilities 8,517 7,670
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 632,979 550,510
Shareholders' equity 64,908 60,971
Total liabilities and
shareholders' equity $ 697,887 $ 611,481
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,965 $ 20,333
Interest spread 3.35% 4.05%
Net interest margin 4.44% 4.96%
===============================================================================================================================
-17-
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 $129,000 and $61,000
for the First Nine Months 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 $871,000 and
$655,000 for the First Nine Months 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.
Third Quarter
2004 Over 2003
---------------------------------
(In Thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 488 (39) $ 449
Tax-exempt (3) (8) (5) (13)
Debt and equity securities:
Taxable 34 (3) 31
Tax-exempt (3) 524 (34) 490
Federal funds sold and other
short-term investments 28 90 118
- -------------------------------------------------------------------------------
Total interest income 1,066 9 1,075
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 67 113 180
Savings deposits (14) 33 19
Time deposits of $100 or more 11 93 104
Other time deposits 62 (4) 58
Short-term borrowings -- -- --
Subordinated debentures 9 9 18
- -------------------------------------------------------------------------------
Total interest expense 135 244 379
- -------------------------------------------------------------------------------
Net interest income $ 931 $ (235) $ 696
===============================================================================
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%.
-18-
First Nine Months
2004 Over 2003
---------------------------------
(In Thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 1,397 $ (788) $ 609
Tax-exempt (3) (22) (5) (27)
Debt and equity securities:
Taxable 48 (125) (77)
Tax-exempt (3) 793 (139) 654
Federal funds sold and other
short-term investments 239 14 253
- -------------------------------------------------------------------------------
Total interest income 2,455 (1,043) 1,412
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 106 97 203
Savings deposits (42) 26 (16)
Time deposits of $100 or more 104 155 259
Other time deposits 361 (31) 330
Short-term borrowings (7) (7) (14)
Subordinated debentures 9 9 18
- -------------------------------------------------------------------------------
Total interest expense 531 249 780
- -------------------------------------------------------------------------------
Net interest income $ 1,924 $(1,292) $ 632
===============================================================================
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%.
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 $150,000
provision made for loan losses during the Third Quarter of 2004 and no provision
made in the Third Quarter of 2003. There was a $500,000 provision made for the
First Nine Months of 2004 compared with a $90,000 provision for the First Nine
Months of 2003. As discussed below, the Company continually analyzes the
outstanding loan portfolio based on the performance, financial condition and
collateralization of the credits. As a result, the Company has increased its
provision in 2004 reflecting the evaluation of credit risk. Net loans recovered
for both the Third Quarter of 2004 and 2003 were $6,000. Net loans recovered for
the First Nine Months of 2004 were $15,000 compared to $16,000 for the First
Nine Months of 2003.
The allowance for loan losses at September 30, 2004 was $6,021,000 and at
December 31, 2003 was $5,506,000. The ratio of allowance for loan losses to
total loans outstanding at September 30, 2004 was 1.21% compared to 1.17% at
December 31, 2003. Nonperforming loans were $1,289,000 or .26% of total loans at
September 30, 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 the decrease in
renegotiated loans. At December 31, 2003 renegotiated loans totaled $2,721,000
compared with $169,000 at September 30, 2004. Renegotiated loans consisted of
two loans at December 31, 2003; 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 $2,240,000 that was renegotiated in the Second Quarter of 2003
and is now also current under the new terms of the agreement. At December 31,
2003 there was also a nonaccrual loan for $376,000 that was foreclosed on during
the First Quarter of 2004 and is now being carried in other assets as other real
estate owned.
At September 30, 2004, impaired loans totaled $3,621,000, which included
$1,120,000 of nonaccrual loans, $169,000 of renegotiated loans and one loan with
a balance of $2,180,000, that although performing is still considered impaired
by management due to the financial condition of the borrower, compared with
impaired loans at December 31, 2003 of $4,393,000, which included $1,525,000 of
nonaccrual loans and $2,721,000 of renegotiated loans. The allowance for loan
losses on impaired loans was $1,014,000 at September 30, 2004 and there were no
impaired loans without an allowance for loan losses. The decrease in impaired
loans from December 31, 2003 relates primarily to the decrease in nonperforming
loans as explained in the previous paragraph.
-19-
Total impaired loans decreased $4,729,000 from September 30, 2003 to September
30, 2004. Of this decrease $1,380,000 relates to other impaired loans primarily
due to two loans totaling $5,457,000 at September 30, 2003, the largest of which
was renegotiated in 2002 and is now currently performing. This decrease was
partially offset by a loan with a balance of $2,180,000 at September 30, 2004
mentioned in the previous paragraph. The balance of nonaccrual loans at
September 30, 2004 consists of five loans, one with a balance of $692,000 that
is collateralized by real estate and has a SBA guarantee, a second loan with a
balance of $259,000 that relates to a business that is no longer operating
although payments are being made as the inventory of the business is being sold
and three smaller loans totaling $169,000.
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 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 and nine month
periods ended September 30, 2004 and 2003 pertaining to the Company's provision
for loan losses and analysis of the allowance for loan losses.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
(Dollars in Thousands) 2004 2003 2004 2003
======================================================================================================================
Allowance at beginning of period $ 5,865 $ 5,393 $ 5,506 $ 5,293
Provision charged to expense 150 -- 500 90
Loans charged off -- -- 1 2
Recoveries on loans previously charged off 6 6 16 18
- ----------------------------------------------------------------------------------------------------------------------
Net loans recovered (6) (6) (15) (16)
Allowance at end of period $ 6,021 $ 5,399 $ 6,021 $ 5,399
- ----------------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 483,563 $ 448,412 $ 471,482 $ 439,374
September 30 496,027 450,977 496,027 450,977
Ratio of allowance for loan losses to loans outstanding:
Average 1.25% 1.20% 1.28% 1.23%
September 30 1.21 1.20 1.21 1.20
Nonperforming loans:
Nonaccrual loans $ 1,120 $ 1,462 $ 1,120 $ 1,462
Loans past due 90 days or more -- -- -- --
Renegotiated loans 169 481 169 481
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,289 $ 1,943 $ 1,289 $ 1,943
Other impaired loans $ 2,332 $ 6,407 $ 2,332 $ 6,407
Foreclosed assets $ 1,234 $ 1,154 $ 1,234 $ 1,154
- ----------------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .27% .43% .27% .44%
======================================================================================================================
-20-
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 Third Quarter of 2004 decreased $61,000 or less
than 1% to $13,796,000 compared to the Third Quarter of 2003. Total operating
expense for the First Nine Months of 2004 decreased $957,000 or 2% to
$40,591,000 from the First Nine Months of 2003.
Salaries and benefits expense increased $305,000 or 3% to $9,579,000 in the
Third Quarter of 2004 compared with the Third Quarter of 2003 and increased
$11,000 or less than 1% to $28,037,000 for the First Nine Months of 2004
compared with the First Nine Months of 2003. Salaries and benefits expense
related to PROFITLAB was $186,000 for the quarter and nine months. The remaining
increase for the Third Quarter of 2004 was due to an increase in overtime pay
and expenses related to employee relocations. The increase in the First Nine
Months of 2004 is primarily related to employee relocation expenses, annual
salary increases and an increase in benefits expense related to pension costs
which was largely offset by a reduction in the number of employees attributable
to a series of technology initiatives put into place by the Information Services
divisions.
Occupancy expense for the Third Quarter of 2004 increased $13,000 or 3% to
$460,000 from the Third Quarter of 2003 and increased $14,000 in the First Nine
Months of 2004 compared with the First Nine Months of 2003. Occupancy expenses
related to PROFITLAB were $6,000 for the quarter and nine months.
Equipment expense for the Third Quarter of 2004 decreased $191,000 or 18%
compared to the Third Quarter of 2003 and decreased $462,000 or 14% for the
First Nine Months of 2004 compared with the First Nine Months of 2003. Equipment
expense related to PROFITLAB was $5,000 for the quarter and nine months. The
decreases relate primarily to a decrease in software amortization, hardware
depreciation and computer equipment maintenance expense from the consolidation
of equipment within the Information Services divisions.
Amortization of intangible assets for the Third Quarter of 2004 and First Nine
Months of 2004 increased $13,000 compared to the same periods of 2003. This
increase relates to the software acquired from the acquisition of PROFITLAB.
Other operating expense for the Third Quarter of 2004 decreased $201,000 or 7%
compared to the Third Quarter of 2003 and decreased $533,000 or 6% for the First
Nine Months of 2004 compared with the First Nine Months of 2003. Other operating
expense related to PROFITLAB were $41,000 for the quarter and nine months. The
decreases for the quarter and nine months were primarily from decreases in
postage and supply expense in the Transportation Information Services division
related to technology initiatives put into place over the past two years and a
decrease in promotional expenses.
Income tax expense for the Third Quarter of 2004 decreased $201,000 or 21%
compared to the Third Quarter of 2003 and decreased $350,000 or 14% for the
First Nine Months of 2004 compared with the First Nine Months of 2003. The
effective tax rate for the Third Quarter of 2004 was 27% compared with 32% in
the Third Quarter of 2003 and was 29% for the First Nine Months of 2004 compared
with 31% in 2003. The decrease in the effective tax rate was due to higher
balances of tax-exempt investments in 2004.
Financial Condition
Total assets at September 30, 2004 increased $91,780,000 or 14% from December
31, 2003. The majority of this increase relates to the Company's earning assets
that experienced an increase of $24,185,000 or 54% in federal funds sold and
other short-term investments, $23,880,000 or 35% increase in investments in debt
and equity securities and $26,480,000 or 6% increase in loans, net of the
allowance for loan losses.
Total liabilities were $668,938,000, an increase of $87,814,000 or 15% from
December 31, 2003. Total deposits at September 30, 2004 were $292,165,000, an
increase of $19,737,000 or 7%. Accounts and drafts payable were $364,396,000, an
increase of $64,407,000 or 21%. Total shareholders' equity at September 30, 2004
was $68,758,000 a $3,966,000 or 6% increase from December 31, 2003.
The increase in loans relates to new business. The increase in debt and equity
securities relates to the purchases of $51,607,000 in securities, primarily of
tax-exempt municipal securities. These purchases were partially offset by the
-21-
sale of securities earlier in the year and the normal maturity of securities
throughout the year. Federal funds sold and other short-term investments
increased due to the increase in deposits and accounts and drafts payable from
December 31, 2003 to September 30, 2004. The increase in deposits reflects the
Bank's ongoing marketing efforts to attract deposits and increase in accounts
and drafts payable was due to the increase in the dollar volume of invoices
processed.
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
$5,520,000; an increase in other comprehensive income of $326,000; cash received
on the exercise of stock options of $190,000; a $114,000 tax benefit on stock
awards and the amortization of the stock bonus plan of $71,000; offset by
dividends paid of $2,250,000 ($.61 per share) and other items totaling $5,000.
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 $96,130,000 at September 30, 2004, an increase of $33,763,000 or 54% from
December 31, 2003. At September 30, 2004 these assets represented 13% 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 $93,027,000 at
September 30, 2004, an increase of $23,880,000 from December 31, 2003. These
assets represented 13% of total assets at September 30, 2004. Of this total, 69%
were state and political subdivision securities, 24% were U.S. Treasury
securities, 6% were U.S. government agencies and 1% were other securities. Of
the total portfolio, 21% mature in one year, 16% matures in one to five years,
and 63% matures in five or more years. During the year the Company sold
securities with a market value of $12,052,000 and these funds were reinvested in
U.S. Treasury and tax-exempt municipal securities.
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $29,000,000. Additionally, the Bank maintains a line of credit
at unaffiliated financial institutions in the maximum amount of $78,352,000
collateralized by U.S. Treasury and agency securities and commercial and
residential mortgage loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize other commercial products of the Bank. The accounts and drafts payable
generated by the Company has also historically been a stable source of funds.
Net cash flows provided by operating activities were $6,834,000 for the First
Nine Months of 2004 compared with $9,359,000 for the First Nine Months of 2003.
This decrease is attributable to an additional $1,831,000 paid in corporate
income taxes, a $266,000 decrease in deferred income versus a $1,565,000
increase in the First Nine Months of 2003 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
-22-
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 September 30, 2004
and December 31, 2003:
September 30, 2004 Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $67,684,000 11.72%
Cass Commercial Bank 33,412,000 11.20
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $57,963,000 10.04%
Cass Commercial Bank 29,678,000 9.95
Tier I capital (to average assets)
Cass Information Systems, Inc. $57,963,000 7.96%
Cass Commercial Bank 29,678,000 9.52
===============================================================================
December 31, 2003 Amount Ratio
===============================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $64,480,000 11.93%
Cass Commercial Bank 31,741,000 11.18
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $58,974,000 10.91%
Cass Commercial Bank 28,190,000 9.93
Tier I capital (to average assets)
Cass Information Systems, Inc. $58,974,000 8.59%
Cass Commercial Bank 28,190,000 9.34
===============================================================================
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 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 the adoption of FIN 46R did not have a material impact on
its consolidated financial statements.
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
-23-
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) are included in
Note 13 of this report.
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 September 30, 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 Principal Financial Officer, within the time periods
specified in the rules of the SEC. The Company's Chief Executive and Principal
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 September 30, 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 third quarter of 2004 in the Company's internal
controls identified by the Chief Executive and Principal 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).
-24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to its
businesses. Management believes none of these proceedings, if determined
adversely, would have a material effect on the business or financial
condition of the Company or its subsidiaries.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company maintains a treasury stock buyback program and as of September
30, 2004 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 nine months ended September 30, 2004 and repurchased
59,237 shares for $1,764,000 during the first nine months ended September
30, 2003. Repurchases are made in the open market or through negotiated
transactions from time to time depending on market conditions.
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
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.
-25-
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 12, 2004 By /s/ Lawrence A. Collett
--------------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: November 12, 2004 By /s/ Eric H. Brunngraber
--------------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Principal Financial and Accounting Officer)
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 and material weaknesses 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
November 12, 2004
Exhibit 31.2
CERTIFICATION
I, Eric H. Brunngraber, Principal 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 and material weaknesses 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
(Principal Financial and Accounting Officer)
November 12, 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 September 30, 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
November 12, 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 September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric H.
Brunngraber, Principal 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
Principal Financial and Accounting Officer
November 12, 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.