UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 2-80070
CASS INFORMATION SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Missouri 43-1265338
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13001 Hollenberg Drive, Bridgeton, Missouri 63044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 506-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.50
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(Title of Class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," "non-accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
one)
Large accelerated filer: |_| Accelerated filer: |X|
Non-accelerated filer: |_| Smaller reporting company: |_|
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the common stock held by non-affiliates of the
Registrant was approximately $248,315,000 based on the closing price of the
common stock of $32.96 on June 30, 2007, as reported by The Nasdaq Global
National Market.
As of March 7, 2008, the Registrant had 9,258,732 shares outstanding of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by
reference to the Registrant's Proxy Statement for the 2008 Annual Meeting of
Shareholders.
CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
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Item 1. BUSINESS....................................................................... 1
Item 1A. RISK FACTORS................................................................... 3
Item 1B. UNRESOLVED STAFF COMMENTS...................................................... 7
Item 2. PROPERTIES..................................................................... 7
Item 3. LEGAL PROCEEDINGS.............................................................. 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 7
PART II.
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.................. 8
Item 6. SELECTED FINANCIAL DATA........................................................ 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................... 10
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................... 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 56
Item 9A. CONTROLS AND PROCEDURES........................................................ 56
Item 9B. OTHER INFORMATION.............................................................. 57
PART III.
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Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE......................... 57
Item 11. EXECUTIVE COMPENSATION......................................................... 57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................................ 57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE...... 57
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES......................................... 57
PART IV.
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Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..................................... 57
SIGNATURES..................................................................... 59
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties and other factors which may cause future
performance to vary from expected performance summarized in the forward-looking
statements, including those set forth in this paragraph and in the "Risk
Factors" section of this report. 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.
PART I.
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ITEM 1. BUSINESS
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Description of Business
Cass Information Systems, Inc. ("Cass" or "the Company") is a leading provider
of payment and information processing services to large manufacturing,
distribution and retail enterprises across the United States. The Company
provides freight invoice rating, payment, audit, accounting and transportation
information to many of the nation's largest companies. It is also a processor
and payer of utility invoices, including electricity, gas, and other facility
related expenses. Additionally, Cass competes in the telecommunications expense
management market which includes bill processing, audit and payment services for
telephone, data line, cellular and communication equipment expense. Also the
Company, through its wholly owned bank subsidiary, Cass Commercial Bank ("the
Bank"), provides commercial banking services. The Bank's primary focus is to
support the Company's payment operations and provide banking services to its
target markets, which include privately owned businesses and churches and
church-related ministries. Services include commercial and commercial real
estate, checking, savings and time deposit accounts and other cash management
services. The principal offices of the Company are at 13001Hollenberg Drive,
Bridgeton, Missouri 63044. Other operating locations are in Columbus, Ohio,
Boston, Massachusetts, Greenville, South Carolina and Wellington, Kansas. The
Bank's headquarters are also located at the Bridgeton location and the Bank
operates five other branches, four in the St. Louis metropolitan area and one in
southern California.
Company Strategy and Core Competencies
Cass is an information services company with a primary focus on processing
payables and payables-related transactions for large corporations located in the
United States. Cass possesses four core competencies that encompass most of its
processing services.
Data acquisition - This refers to the gathering of data elements from diverse,
heterogeneous sources and the building of complete databases for our customers.
Data is the raw material of the information economy. Cass gathers vital data
from complex and diverse input documents, electronic media, proprietary
databases and data feeds, including data acquired from vendor invoices as well
as customer procurement and sales systems. Through its numerous methods of
obtaining streams and pieces of raw data, Cass is able to assemble vital data
into centralized data management systems and warehouses, thus producing an
engine to create the power of information for managing critical corporate
functions and processing systems.
Data management - Once data is assembled, Cass is able to utilize the power from
derived information to produce significant savings and benefits for its clients.
This information is integrated into customers' unique financial and accounting
systems, eliminating the need for internal accounting processing and to provide
internal and external support for these critical systems. Information is also
used to produce management and exception reporting for operational control,
feedback, planning assistance and performance measurement.
Information delivery - Receiving information in the right place at the right
time and in the required format is paramount for business survival. Cass'
information delivery solutions provide reports, digital images, data files and
retrieval capabilities through the Internet or directly into customer internal
systems. Cass' proprietary Internet management delivery system is the foundation
for driving these critical functions. Transaction, operational, control, status
and processing exception information are all delivered through this system
creating an efficient, accessible and highly reliable asset for Cass customers.
Financial exchange - Since Cass is unique among its competition in that it owns
a commercial bank, it is also able to manage the movement of funds from its
customers to their suppliers. This is a distinguishing factor, which clearly
requires the processing capability, operating systems and financial integrity of
a banking organization. Cass provides immediate, accurate, controlled and
protected funds management and transfer system capabilities for all of its
customers. Old and costly check processing and delivery mechanisms are replaced
with more efficient electronic cash management and funds transfer systems.
Cass' core competencies allow it to perform the highest levels of transaction
processing in an integrated, efficient and systematic approach. Not only is Cass
able to process the transaction, it is also able to collect the data defining
the transaction and effect the financial payment governing its terms.
Cass' shared business processes - Accounting, Human Resources and Technology -
support its core competencies. Cass' accounting function provides the internal
control systems to ensure the highest levels of accountability and protection
for customers. Cass' human resources department provides experienced people
dedicated to streamlining business procedures and reducing expenses. Cass'
technology is proven and reliable. The need to safeguard data and secure the
efficiency, speed and timeliness that govern its business is a priority within
the organization. The ability to
1
leverage technology over its strategic units allows Cass the advantage of
deploying technology in a proven and reliable manner without hindering clients'
strategic business and system requirements.
These core competencies, enhanced through shared business processes, drive Cass'
strategic business units. Building upon these foundations, Cass continues to
explore new business opportunities that leverage these competencies and
processes.
Marketing, Customers and Competition
The Company, through its Transportation Information Services business unit, is
one of the largest firms in the freight bill processing and payment industry in
the United States based on the total dollars of freight bills paid and items
processed. Competition consists of a few primary competitors and numerous small
freight bill audit firms located throughout the United States. While offering
freight payment services, few of these audit firms compete on a national basis.
These competitors compete mainly on price, functionality and service levels. The
Company, through its Utility Information Services business unit, also competes
with other companies, located throughout the United States, that pay utility
bills and provide management reporting. Available data indicates that the
Company is one of the largest providers of utility information processing and
payment services. Cass' Utility Information Services is unique among these
competitors in that it is not exclusively affiliated with any one energy service
provider ("ESP"). The ESPs market the Company's services adding value with their
unique auditing, consulting and technological capabilities. Many of Cass'
services are customized for the ESPs, providing a full-featured solution without
any development costs to the ESP. Also the Company, through its Telecom
Information Services business unit, is a leader in the growing telecom expense
management market, and competes with other companies located throughout the
United States in this market.
The Bank is organized as a Missouri trust company with banking powers and was
founded in 1906. Due to its ownership of a federally insured commercial bank,
the Company is a bank holding corporation and was originally organized in 1982
as Cass Commercial Corporation under the laws of Missouri. It was approved by
the Board of Governors of the Federal Reserve System in February 1983. The
Company changed its name to Cass Information Systems, Inc. in January 2001. The
Company's bank subsidiary encounters competition from numerous banks and
financial institutions located throughout the St. Louis, Missouri metropolitan
area and other areas in which the Bank competes. The Bank's principal
competitors, however, are large bank holding companies that are able to offer a
wide range of banking and related services through extensive branch networks.
The Bank targets its services to privately held businesses located in the St.
Louis, Missouri area and church and church-related institutions located in St.
Louis, Missouri, Orange County, California and other selected cities located
throughout the United States. The Bank has not financed, and does not currently
finance, sub-prime mortgage loans.
The Company holds several trademarks for the payment and rating services it
provides. These include: FreightPay(R), Transdata(R), TransInq(R), Ratemaker(R),
Rate Advice(R), First Rate(R), Best Rate(R), Rate Exchange(R) and CassPort(R).
The Company and its subsidiaries are not dependent on any one customer for a
significant portion of their businesses. The Company and its subsidiaries have a
varied client base with no individual client exceeding 10% of total revenue.
Employees
The Company and its subsidiaries had 723 full-time and 241 part-time employees
as of December 31, 2007. Of these employees, the Bank had 61 full-time and 4
part-time employees.
Supervision and Regulation
The Company and its bank subsidiary are extensively regulated under federal and
state law. These laws and regulations are intended to protect depositors, not
shareholders. The Bank is subject to regulation and supervision by the Missouri
Division of Finance, the Federal Reserve Bank (the "FRB") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Company is a bank holding
company within the meaning of the Bank Holding Company Act of 1956, as amended,
and as such, it is subject to regulation, supervision and examination by the
FRB. The Company is required to file quarterly and annual reports with the FRB
and to provide to the FRB such additional information as the FRB may require,
and it is subject to regular inspections by the FRB. Bank regulatory agencies
use Capital Adequacy Guidelines in their examination and regulation of bank
holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the agencies may force certain remedial action
to be taken. The Capital Adequacy Guidelines are of several types and include
risk-based capital guidelines, which are designed to make capital requirements
more sensitive to various risk profiles and account for off-balance sheet
exposure; guidelines which consider market risk, which is the risk of loss due
to change in value of assets and liabilities due to changes in interest rates;
and guidelines that use a leverage ratio which places a constraint on the
maximum degree of risk to which a bank holding company may leverage its equity
capital base. For further discussion of the capital adequacy guidelines and
ratios, please refer to Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8, Note 3 of this
report.
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The FRB also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law or regulations or for unsafe or
unsound practices. Both the FRB and Missouri Division of Finance also have
restrictions on the amount of dividends that banks and bank holding companies
may pay.
As a bank holding company, the Company must obtain prior approval from the FRB
before acquiring ownership or control of more than 5% of the voting shares of
another bank or bank holding company or acquiring all or substantially all of
the assets of such a company. In many cases, prior approval is also required for
the Company to engage in similar acquisitions involving a non-bank company or to
engage in new non-bank activities. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company.
Website Availability of SEC Reports
Cass files annual, quarterly and current reports with the Securities and
Exchange Commission (the "SEC"). Cass will, as soon as reasonably practicable
after they are electronically filed with or furnished to the SEC, make available
free of charge on its website each of its Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports of Form 8-K, all amendments to those
reports, and its definitive proxy statements. The address of Cass' website is:
www.cassinfo.com. All reports filed with the SEC are available for reading and
copying at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC
20549-0213 or for more information call the Public Reference Room at
1-800-SEC-0330. The SEC also makes all filed reports, proxy statements and
information statements available on its website at www.sec.gov.
The reference to our website address does not constitute incorporation by
reference of the information contained on the website and should not be
considered part of this report.
Financial Information about Segments
The revenues from external customers, net income and total assets by segment as
of and for the three years ended December 31, 2007, are set forth in Item 8,
Note 18 of this report.
Statistical Disclosure by Bank Holding Companies
For the statistical disclosure by bank holding companies refer to Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 1A. RISK FACTORS
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This section highlights specific risks that could affect the Company's business.
Although this section attempts to highlight key factors, please be aware that
other risks may prove to be important in the future. New risks may emerge at any
time and Cass cannot predict such risks or estimate the extent to which they may
affect the Company's financial performance. In addition to the factors discussed
elsewhere or incorporated by reference in this report, the identified risks that
could cause actual results to differ materially include the following:
Unfavorable developments concerning customer credit quality could affect Cass'
financial results.
Although the Company regularly reviews credit exposure related to its customers
and various industry sectors in which it has business relationships, default
risk may arise from events or circumstances that are difficult to detect or
foresee. Under such circumstances, the Company could experience an increase in
the level of provision for credit losses, nonperforming assets, net charge-offs
and allowance for credit losses.
The Company has lending concentrations, including, but not limited to, churches
and church-related entities located in selected cities and privately-held
businesses located in or near St. Louis, Missouri, that could suffer a
significant decline which could adversely affect the Company.
Cass' customer base consists, in part, of lending concentrations in several
segments and geographical areas. In the event of a downturn in the economy or
general decline in any one of these segments or areas, the Company could
experience increased credit losses, and its business could be adversely
affected.
Fluctuations in interest rates could affect Cass' net interest income and
balance sheet.
3
The operations of financial institutions such as the Company are dependent to a
large degree on net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
borrowings. Prevailing economic conditions, the fiscal and monetary policies of
the federal government and the policies of various regulatory agencies all
affect market rates of interest, which in turn significantly affect financial
institutions' net interest income. Fluctuations in interest rates affect Cass'
financial statements, as they do for all financial institutions. Volatility in
interest rates can also result in disintermediation, which is the flow of funds
away from financial institutions into direct investments, such as federal
government and corporate securities and other investment vehicles, which,
because of the absence of federal insurance premiums and reserve requirements,
generally pay higher rates of return than financial institutions.
Customer borrowing, repayment, investment and deposit practices generally may be
different than anticipated.
The Company uses a variety of financial tools, models and other methods to
anticipate customer behavior as a part of its strategic planning and to meet
certain regulatory requirements. Individual, economic, political,
industry-specific conditions and other factors outside of Cass' control could
alter predicted customer borrowing, repayment, investment and deposit practices.
Such a change in these practices could adversely affect Cass' ability to
anticipate business needs and meet regulatory requirements.
Operational difficulties or security problems could damage Cass' reputation and
business.
The Company depends on the reliable operation of its computer operations and
network connections from its clients to its systems. Any operational problems or
outages in these systems would cause Cass to be unable to process transactions
for its clients, resulting in decreased revenues. In addition, any system
delays, failures or loss of data, whatever the cause, could reduce client
satisfaction with the Company's products and services and harm Cass' financial
results. Cass also depends on the security of its systems. Company networks may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. A material security problem affecting Cass could damage its
reputation, deter prospects from purchasing its products, deter customers from
using its products or result in liability to Cass.
Cass must respond to rapid technological changes and these changes may be more
difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies,
or if new industry standards and practices emerge, the Company's existing
product and service offerings, technology and systems may become obsolete.
Further, if Cass fails to adopt or develop new technologies or to adapt its
products and services to emerging industry standards, Cass may lose current and
future customers, which could have a material adverse effect on its business,
financial condition and results of operations. The payment processing and
financial services industries are changing rapidly and in order to remain
competitive, Cass must continue to enhance and improve the functionality and
features of its products, services and technologies. These changes may be more
difficult or expensive than the Company anticipates.
Competitive product and pricing pressure within Cass' markets may change.
The Company operates in a very competitive environment, which is characterized
by competition from a number of other vendors and financial institutions in each
market in which it operates. The Company competes with large payment processors
and national and regional financial institutions and also smaller auditing
companies and banks in terms of products and pricing. If the Company is unable
to compete effectively in products and pricing in its markets, business could
decline.
Management's ability to maintain and expand customer relationships may differ
from expectations.
The industries in which the Company operates are very competitive. The Company
not only competes for business opportunities with new customers, but also
competes to maintain and expand the relationships it has with its existing
customers. While management believes that it can continue to grow many of these
relationships, the Company will continue to experience pressures to maintain
these relationships as its competitors attempt to capture its customers.
The introductions, withdrawal, success and timing of business initiatives and
strategies, including, but not limited to, the expansion of payment and
processing activities to new markets, the expansion of products and services to
existing markets and opening of new bank branches, may be less successful or may
be different than anticipated. Such a result could adversely affect Cass'
business.
The Company makes certain projections and develops plans and strategies for its
payment processing and banking products. If the Company does not accurately
determine demand for its products and services, it could result in the
4
Company incurring significant expenses without the anticipated increases in
revenue, which could result in an adverse effect on its earnings.
Management's ability to retain key officers and employees may change.
Cass' future operating results depend substantially upon the continued service
of Cass' executive officers and key personnel. Cass' future operating results
also depend in significant part upon Cass' ability to attract and retain
qualified management, financial, technical, marketing, sales and support
personnel. Competition for qualified personnel is intense, and the Company
cannot ensure success in attracting or retaining qualified personnel. There may
be only a limited number of persons with the requisite skills to serve in these
positions, and it may be increasingly difficult for the Company to hire
personnel over time. Cass' business, financial condition and results of
operations could be materially adversely affected by the loss of any of its key
employees, by the failure of any key employee to perform in his or her current
position, or by Cass' inability to attract and retain skilled employees.
Methods of reducing risk exposures might not be effective.
Instruments, systems and strategies used to hedge or otherwise manage exposure
to various types of credit, interest rate, market and liquidity, operational,
compliance, business risks and enterprise-wide risks could be less effective
than anticipated. As a result, the Company may not be able to effectively
mitigate its risk exposures in particular market environments or against
particular types of risk.
Changes in regulation or oversight may have a material adverse impact on Cass'
operations.
The Company is subject to extensive regulation, supervision and examination by
the Missouri Division of Finance, the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System, the SEC and other regulatory
bodies. Such regulation and supervision governs the activities in which the
Company may engage. Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on Cass' operations, investigations and limitations related to Cass' securities,
the classification of Cass' assets and determination of the level of Cass'
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, legislation or supervisory
action, may have a material adverse impact on Cass' operations.
The Company's accounting policies and methods are the basis of how Cass reports
its financial condition and results of operations, and they may require
management to make estimates about matters that are inherently uncertain. In
addition, changes in accounting policies and practices, as may be adopted by the
regulatory agencies, the Financial Accounting Standards Board, or other
authoritative bodies, could materially impact Cass' financial statements.
The Company's accounting policies and methods are fundamental to how Cass
records and reports its financial condition and results of operations.
Management must exercise judgment in selecting and applying many of these
accounting policies and methods in order to ensure that they comply with
generally accepted accounting principles and reflect management's judgment as to
the most appropriate manner in which to record and report Cass' financial
condition and results of operations. In some cases, management must select the
accounting policy or method to apply from two or more alternatives, any of which
might be reasonable under the circumstances yet might result in the Company
reporting materially different amounts than would have been reported under a
different alternative.
Cass has identified four accounting policies as being "critical" to the
presentation of its financial condition and results of operations because they
require management to make particularly subjective and/or complex judgments
about matters that are inherently uncertain and because of the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. More information on Cass' critical accounting
policies is contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
From time to time, the regulatory agencies, the Financial Accounting Standards
Board, and other authoritative bodies change the financial accounting and
reporting standards that govern the preparation of the Company's financial
statements. These changes can be hard to predict and can materially impact how
management records and reports the Company's financial condition and results of
operations.
Legal and regulatory proceedings and related matters with respect to the
financial services industry, including those directly involving the Company and
its subsidiaries, could adversely affect Cass or the financial services industry
in general.
5
The Company has been, and may in the future be, subject to various legal and
regulatory proceedings. It is inherently difficult to assess the outcome of
these matters, and there can be no assurance that the Company will prevail in
any proceeding or litigation. Any such matter could result in substantial cost
and diversion of Cass' efforts, which by itself could have a material adverse
effect on Cass' financial condition and operating results. Further, adverse
determinations in such matters could result in actions by Cass' regulators that
could materially adversely affect Cass' business, financial condition or results
of operations.
Cass is subject to examinations and challenges by tax authorities, which, if not
resolved in the Company's favor, could adversely affect the Company's financial
condition and results of operations.
In the normal course of business, Cass and its affiliates are routinely subject
to examinations and challenges from federal and state tax authorities regarding
the amount of taxes due in connection with investments it has made and the
businesses in which it is engaged. Recently, federal and state taxing
authorities have become increasingly aggressive in challenging tax positions
taken by financial institutions. These tax positions may relate to tax
compliance, sales and use, franchise, gross receipts, payroll, property and
income tax issues, including tax base, apportionment and tax credit planning.
The challenges made by tax authorities may result in adjustments to the timing
or amount of taxable income or deductions or the allocation of income among tax
jurisdictions. If any such challenges are made and are not resolved in the
Company's favor, they could have an adverse effect on Cass' financial condition
and results of operations.
Cass' stock price can become volatile and fluctuate widely in response to a
variety of factors.
The Company's stock price can fluctuate based on factors that can include actual
or anticipated variations in Cass' quarterly results; new technology or services
by competitors; unanticipated losses or gains due to unexpected events,
including losses or gains on securities held for investment purposes;
significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving the Company or its competitors;
changes in accounting policies or practices; failure to integrate acquisitions
or realize anticipated benefits from acquisitions; or changes in government
regulations.
General market fluctuations, industry factors and general economic and political
conditions, such as economic slowdowns or recessions, interest rate changes,
credit loss trends, low trading volume or currency fluctuations also could cause
Cass' stock price to decrease regardless of the Company's operating results.
There could be terrorist activities or other hostilities, which may adversely
affect the general economy, financial and capital markets, specific industries,
and the Company.
The terrorist attacks in September 2001 in the United States and ensuing events,
as well as the resulting decline in consumer confidence, has had a material
adverse effect on the economy. Any similar future events may disrupt Cass'
operations or those of its customers. In addition, these events have had and may
continue to have an adverse impact on the U.S. and world economy in general and
consumer confidence and spending in particular, which could harm Cass'
operations. Any of these events could increase volatility in the U.S. and world
financial markets, which could harm Cass' stock price and may limit the capital
resources available to its customers and the Company. This could have a
significant impact on Cass' operating results, revenues and costs and may result
in increased volatility in the market price of Cass' common stock.
There could be natural disasters, including, but not limited to, hurricanes,
tornadoes, earthquakes, fires and floods, which may adversely affect the general
economy, financial and capital markets, specific industries, and the Company.
The Company has significant operations and customer base in Missouri,
California, Ohio, Massachusetts, South Carolina, and other regions where natural
disasters may occur. These regions are known for being vulnerable to natural
disasters and other risks, such as tornadoes, hurricanes, earthquakes, fires and
floods. These types of natural disasters at times have disrupted the local
economy, Cass' business and customers and have posed physical risks to Cass'
property. A significant natural disaster could materially affect Cass' operating
results.
General political, economic or industry conditions may be less favorable than
expected.
Local, domestic, and international economic, political and industry-specific
conditions and governmental monetary and fiscal policies affect the industries
in which the Company competes, directly and indirectly. Conditions such as
inflation, recession, unemployment, volatile interest rates, tight money supply,
real estate values, international conflicts and other factors outside of Cass'
control may adversely affect the Company. Economic downturns could result in the
delinquency of outstanding loans, which could have a material adverse impact on
Cass' earnings.
6
ITEM 1B. UNRESOLVED STAFF COMMENTS
-------------------------
None.
ITEM 2. PROPERTIES
----------
The Company's headquarters are located at 13001 Hollenberg Drive, Bridgeton,
Missouri. This location is owned by the Company, and includes a building with
approximately 61,500 square feet of office space. The Company also owns a
production facility of approximately 45,500 square feet located at 2675
Corporate Exchange Drive, Columbus, Ohio. Additional production facilities are
located in Lowell, Massachusetts where approximately 25,800 square feet of
office space is leased through March 2009, Greenville, South Carolina where
approximately 8,500 square feet of office space is leased through November 2013
and Wellington, Kansas where approximately 2,000 square feet of office space is
leased through July 2011.
The Bank's headquarters are also located at 13001 Hollenberg Drive, Bridgeton,
Missouri. The Bank occupies approximately 20,500 square feet of the 61,500
square foot building. In addition, the Bank owns a banking facility near
downtown St. Louis, Missouri that consists of approximately 1,750 square feet
with adjoining drive-up facilities. The Bank has additional leased facilities in
Maryland Heights, Missouri (2,500 square feet), Fenton, Missouri (2,000 square
feet), Chesterfield, Missouri (2,850 square feet) and Santa Ana, California
(3,400 square feet).
Management believes that these facilities are suitable and adequate for the
Company's operations.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and its subsidiaries are not involved in any pending proceedings
other than ordinary routine litigation incidental to their businesses.
Management believes none of these proceedings, if determined adversely, would
have a material effect on the businesses or financial conditions of the Company
or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 2007.
7
PART II.
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Company's common stock is quoted on The Nasdaq Global Market(R) under the
symbol "CASS". As of March 3, 2008, there were 228 holders of record of the
Company's common stock. High and low sale prices, as reported by Nasdaq for each
quarter of 2007 and 2006 were as follows:
2007 2006
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $ 35.41 $ 29.34 $ 21.63 $ 18.79
2nd Quarter 34.35 28.28 32.28 22.03
3rd Quarter 34.77 28.90 33.62 24.90
4th Quarter 40.55 30.00 35.86 28.27
Cash dividends paid per share, restated for stock dividends, by the Company
during the two most recent fiscal years were as follows:
2007 2006
---- ----
March 15 $ .109 $ .097
June 15 .109 .096
September 15 .109 .097
December 15 .120 .109
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 300,000 shares of the
Company's common stock. This repurchase plan was updated by the Board of
Directors on January 22, 2008 and replaced the Company's previous plan under
which 120,000 shares had remained available for repurchase. The Company did not
repurchase any shares during 2007 and repurchased 30,000 shares for $870,000 in
2006. As of December 31, 2007, 120,000 shares remained available for repurchase
under the program. A portion of the repurchased shares may be used for the
Company's employee benefit plans, and the balance will be available for other
general corporate purposes. The stock repurchase authorization does not have an
expiration date and the pace of repurchase activity will depend on factors such
as levels of cash generation from operations, cash requirements for investments,
repayment of debt, current stock price, and other factors. The Company may
repurchase shares from time to time on the open market or in private
transactions, including structured transactions. The stock repurchase program
may be modified or discontinued at any time.
Securities Authorized for Issuance under Equity Compensation Plans
The following information is as of December 31, 2007:
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 155,678 (1) $20.69 -- (1)
approved by security holders - (2) - 880,000 (2)
Equity compensation plans not _ _ _
approved by security holders
Total 155,678 $20.69 880,000
Note: All share information has been restated to reflect the 10% stock dividend
issued on December 17, 2007.
8
(1) These plans are the Company's 1995 Performance-Based Stock Option Plan and
1995 Restricted Stock Bonus Plan. There will be no more shares or options
granted under these plans.
(2) Represents the total shares available for issuance under the 2007 Omnibus
Incentive Stock Plan.
Refer to Note 12 to the consolidated financial statements for information
concerning stock options and bonus plans.
Performance Quoted on The Nasdaq Stock Market for the last Five Fiscal Years
- -----------------------------------------------------------------------------
The following graph compares the cumulative total returns over the last five
fiscal years of a hypothetical investment of $100 in shares of common stock of
the Company with a hypothetical investment of $100 in the Nasdaq stock market
(US) and in the index of Nasdaq computer and data processing stocks. The graph
assumes $100 was invested on December 31, 2002, with dividends reinvested.
Returns are based on period end prices.
[THE FOLLOWING DATA IS A REPRESENTATION OF A LINE CHART IN THE PRINTED MATERIAL]
Cass Information Nasdaq Stock Nasdaq Computer and
Date Systems, Inc. Market (US) Data Processing Stocks
12/31/2002 $100 $100 $100
1/31/2003 $103 $ 99 $ 98
2/28/2003 $108 $100 $ 97
3/31/2003 $108 $101 $ 97
4/30/2003 $133 $110 $105
5/30/2003 $108 $119 $111
6/30/2003 $123 $121 $113
7/31/2003 $120 $130 $117
8/29/2003 $129 $135 $122
9/30/2003 $137 $134 $123
10/31/2003 $129 $144 $127
11/28/2003 $125 $146 $127
12/31/2003 $139 $150 $132
1/30/2004 $139 $154 $135
2/27/2004 $144 $151 $130
3/31/2004 $158 $148 $123
4/30/2004 $165 $144 $121
5/28/2004 $180 $148 $126
6/30/2004 $185 $153 $134
7/30/2004 $187 $141 $124
8/31/2004 $175 $138 $119
9/30/2004 $173 $142 $125
10/29/2004 $173 $148 $132
11/30/2004 $165 $157 $141
12/31/2004 $165 $163 $145
1/31/2005 $168 $154 $140
2/28/2005 $173 $153 $135
3/31/2005 $182 $149 $131
4/29/2005 $180 $144 $130
5/31/2005 $189 $155 $140
6/30/2005 $195 $155 $137
7/29/2005 $211 $164 $142
8/31/2005 $263 $162 $144
9/30/2005 $224 $162 $144
10/31/2005 $237 $160 $146
11/30/2005 $229 $169 $153
12/30/2005 $239 $166 $150
1/31/2006 $239 $174 $157
2/28/2006 $241 $172 $150
3/31/2006 $258 $176 $154
4/28/2006 $325 $175 $151
5/31/2006 $362 $164 $140
6/30/2006 $354 $164 $145
7/31/2006 $363 $158 $141
8/31/2006 $387 $165 $149
9/29/2006 $362 $171 $158
10/31/2006 $409 $179 $166
11/30/2006 $422 $184 $172
12/29/2006 $397 $183 $169
1/31/2007 $412 $186 $174
2/28/2007 $370 $182 $166
3/30/2007 $371 $183 $169
4/30/2007 $361 $191 $176
5/31/2007 $365 $197 $183
6/29/2007 $400 $196 $181
7/31/2007 $369 $191 $176
8/31/2007 $375 $195 $178
9/28/2007 $396 $202 $188
10/31/2007 $399 $213 $216
11/30/2007 $456 $198 $200
12/31/2007 $408 $198 $206
9
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table presents selected financial information for each of the five
years ended December 31. The selected financial data should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes included in Item 8 of this report.
(Dollars in thousands, except per share data) 2007 2006 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Fee revenue and other income $48,200 $ 42,821 $ 38,653 $ 34,047 $ 32,371
Interest income on loans (1) 36,288 36,164 32,214 27,055 25,601
Interest income on debt and equity securities 5,531 3,627 2,441 2,558 2,033
Other interest income 7,527 7,262 3,596 1,120 609
Total interest income 49,346 47,053 38,251 30,733 28,243
Interest expense on deposits 7,728 6,414 4,486 3,024 1,847
Interest expense on short-term borrowings 6 7 5 1 14
Interest on debentures and other 230 198 196 70 --
Total interest expense 7,964 6,619 4,687 3,095 1,861
Net interest income 41,382 40,434 33,564 27,638 26,382
Provision for loan losses 900 1,150 775 550 190
Net interest income after provision 40,482 39,284 32,789 27,088 26,192
Operating expense 62,739 58,277 55,216 47,045 47,383
Income before income tax expense 25,943 23,828 16,226 14,090 11,180
Income tax expense 8,148 8,367 4,982 4,209 3,385
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $17,795 $ 15,461 $ 11,244 $ 9,881 $ 7,795
Net (loss) income from discontinued operations -- (395) (298) (1,876) 107
Net income 17,795 15,066 10,946 8,005 7,902
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share from
continuing operations $ 1.90 $ 1.65 $ 1.21 $ 1.06 $ .85
Diluted earnings per share 1.90 1.61 1.17 .86 .86
Dividends per share .447 .400 .352 .332 .308
Dividend payout ratio 23.53% 24.84% 29.24% 37.79% 35.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Average total assets $ 891,734 $ 839,208 $776,899 $709,518 $626,451
Average net loans 508,621 516,164 506,898 471,412 438,072
Average debt and equity securities 141,363 91,555 71,037 78,745 57,729
Average total deposits 279,831 278,546 290,555 292,379 249,951
Average subordinated convertible debentures 3,699 3,700 3,700 1,314 --
Average total shareholders' equity 89,427 79,736 71,892 65,804 61,346
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average total assets 2.00% 1.80% 1.41% 1.13% 1.26%
Return on average equity 19.90 18.89 15.23 12.16 12.88
Average equity to assets ratio 10.03 9.50 9.25 9.27 9.79
Equity to assets ratio at year-end 11.01 9.78 9.20 9.71 10.03
Net interest margin 5.45 5.50 4.95 4.48 4.85
Allowance for loan losses to loans at year-end 1.26 1.31 1.19 1.21 1.17
Nonperforming assets to loans and foreclosed
assets .77 .16 .28 .18 1.12
Net loan charge-offs (recoveries) to average
loans outstanding .24 .16 .10 - (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
1. Interest income on loans includes net loan fees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis provides information about the financial
condition and results of operations of the Company for the years ended December
31, 2007, 2006 and 2005. All share and per share data have been restated to give
effect to the 10%, 50%, 50% and 10% stock dividends issued on March 15, 2004,
September 15, 2005, September 15, 2006 and December 17, 2007, respectively. This
discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and accompanying notes and other selected
financial data presented elsewhere in this report.
10
Executive Overview
Cass Information Systems, Inc. provides payment and information processing
services to large manufacturing, distribution and retail enterprises from its
processing centers in St. Louis, Missouri, Columbus, Ohio, Boston,
Massachusetts, Greenville, South Carolina and Wellington, Kansas. The Company's
services include freight invoice rating, payment processing, auditing, and the
generation of accounting and transportation information. Cass also processes and
pays utility invoices, which includes electricity, gas and telecommunications
expenses and is a provider of telecom expense management solutions. Cass
extracts, stores and presents information from freight, utility and
telecommunication invoices, assisting its customers' transportation, energy and
information technology managers in making decisions that will enable them to
improve operating performance. The Company receives data from multiple sources,
electronic and otherwise, and processes the data to accomplish the specific
operating requirements of its customers. It then provides the data in a central
repository for access and archiving. The data is finally transformed into
information through the Company's databases that allow client interaction as
required and provide Internet-based tools for analytical processing. The Company
also, through Cass Commercial Bank, its St. Louis, Missouri based bank
subsidiary, provides banking services in the St. Louis metropolitan area, Orange
County, California and other selected cities in the United States. In addition
to supporting the Company's payment operations, the Bank provides banking
services to its target markets, which include privately owned businesses and
churches and church-related ministries.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's requirements, which
can vary greatly. In addition, the degree of automation such as electronic data
interchange ("EDI"), imaging, and web-based solutions varies greatly among
customers and industries. These factors combine so that pricing varies greatly
among the customer base. In general, however, Cass is compensated for its
processing services through service fees and account balances that are generated
during the payment process. The amount, type and calculation of service fees
vary greatly by service offering, but generally follow the volume of
transactions processed. Interest income from the balances generated during the
payment processing cycle is affected by the amount of time Cass holds the funds
prior to payment and the dollar volume processed. Both the number of
transactions processed and the dollar volume processed are therefore key metrics
followed by management. Other factors will also influence revenue and
profitability, such as changes in the general level of interest rates, which
have a significant effect on net interest income. The funds generated by these
processing activities are invested in overnight investments, investment grade
securities and loans generated by the Bank. The Bank earns most of its revenue
from net interest income, or the difference between the interest earned on its
loans and investments and the interest paid on its deposits. The Bank also
assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the acceptance by large
corporations of the outsourcing of key business functions such as freight,
utility and telecommunication payment and audit. The benefits that can be
achieved by outsourcing transaction processing and the management information
generated by Cass' systems can be influenced by factors such as the competitive
pressures within industries to improve profitability, the general level of
transportation costs, deregulation of energy costs and consolidation of
telecommunication providers. Economic factors that impact the Company include
the general level of economic activity that can affect the volume and size of
invoices processed, the ability to hire and retain qualified staff and the
growth and quality of the loan portfolio. The general level of interest rates
also has a significant effect on the revenue of the Company.
On December 30, 2005, the Company's bank subsidiary sold the operating assets of
its wholly owned subsidiary, Government e-Management Solutions, Inc. ("GEMS").
The assets, liabilities and operating results of GEMS have been presented as
discontinued operations for all periods.
In the fourth quarter 2005, the Company recognized a $3,100,000 impairment
charge on its investment in a private imaging company. As of December 31, 2007,
the Company had no remaining financial interest in this entity.
On July 7, 2006, the Company acquired 100% of the stock of NTransit, Inc., a
company whose service provides auditing and expense management of parcel
shipments. While this acquisition did not meet the Regulation S-X criteria of a
significant business combination, it positioned the Company to expand its
offerings in the specialized service and expertise in parcel shipping, which is
a unique segment of the transportation industry that has experienced tremendous
growth in recent years.
Total fee revenue and other income from continuing operations in 2007 increased
$5,379,000 or 13% and net interest income increased $1,198,000 or 3% while total
operating expenses increased $4,462,000 or 8%. These results were driven by a
3,581,000 or 12% increase in items processed, $2,313,908,000 or 12% increase in
dollars processed and strong expense control combined with a rise in the general
level of interest rates. The asset quality of the Company's loans and
investments remains strong.
11
Currently, management views Cass' major opportunity and challenge as the
continued expansion of its payment and information processing service offerings
and customer base. Management intends to accomplish this by maintaining the
Company's lead in applied technology, which, when combined with the security and
processing controls of the Bank, makes Cass unique in the industry.
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP"). In preparing the consolidated financial statements in accordance with
U.S. GAAP, management makes estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. These estimates have been
generally accurate in the past, have been consistent and have not required any
material changes. There can be no assurances that actual results will not differ
from those estimates. Certain accounting policies that require significant
management estimates and are deemed critical to our results of operations or
financial position have been discussed with the Audit Committee of the Board of
Directors and are described below.
Impairment of Assets. The Company periodically evaluates certain long-term
assets such as intangible assets including goodwill, foreclosed assets,
internally developed software and investments in private equity securities for
impairment. Generally, these assets are initially recorded at cost, and
recognition of impairment is required when events and circumstances indicate
that the carrying amounts of these assets will not be recoverable in the future.
If impairment occurs, various methods of measuring impairment may be called for
depending on the circumstances and type of asset, including quoted market
prices, estimates based on similar assets, and estimates based on valuation
techniques such as discounted projected cash flows. Assets held for sale are
carried at the lower of cost or fair value less costs to sell. These policies
affect both segments of the Company and require significant management
assumptions and estimates that could result in materially different results if
conditions or underlying circumstances change.
Pension Plans. The amounts recognized in the consolidated financial statements
related to pension are determined from actuarial valuations. Inherent in these
valuations are assumptions including expected return on plan assets, discount
rates at which the liabilities could be settled at December 31, 2007, rate of
increase in future compensation levels and mortality rates. These assumptions
are updated annually and are disclosed in Note 12 to the consolidated financial
statements. The Company adopted Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158") on
December 31, 2006. SFAS No. 158 requires companies to recognize the overfunded
or underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. The funded status is measured as the difference between the fair value
of the plan assets and the benefit obligation as of the date of its fiscal
year-end.
Income Taxes. The objectives of accounting for income taxes are to recognize the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in addressing the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns such as the
realization of deferred tax assets, changes in tax laws or interpretations
thereof. In addition, the Company is subject to the continuous examination of
its income tax returns by the Internal Revenue Service and other taxing
authorities. Effective January 1, 2007, the Company adopted FIN No. 48,
"Accounting for Uncertainty in Income Taxes." FIN No. 48 provides guidance for
the recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. See Note 15 to the consolidated financial statements.
Allowance for Loan Losses. The Company performs periodic and systematic detailed
reviews of its loan portfolio to assess overall collectability. The level of the
allowance for loan losses reflects management's estimate of the collectability
of the loan portfolio. Although these estimates are based on established
methodologies for determining allowance requirements, actual results can differ
significantly from estimated results. These policies affect both segments of the
Company. The impact and associated risks related to these policies on the
Company's business operations are discussed in the "Provision and Allowance for
Loan Losses" section of this report.
12
Summary of Results
December 31, % Change
---------------------------------------- ----------------------------
(In thousands, except per share data) 2007 2006 2005 2007 v 2006 2006 v 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Total Processing Volume 34,466 30,885 28,003 11.6% 10.3%
Total Processing Dollars $22,185,189 $19,871,281 $16,372,097 11.6% 21.4%
Payment and Processing Fees $45,642 $40,343 $35,901 13.1% 12.4%
Net Investment Income $40,482 $39,284 $32,789 3.0% 19.8%
Total Net Revenues $88,682 $82,105 $71,442 8.0% 14.9%
Average Earning Assets $809,739 $762,397 $697,285 6.2% 9.3%
Net Interest Margin* 5.45% 5.50% 4.95% (.9)% 11.1%
Impairment of Equity Investment -- -- $3,100 N/A N/A
Net Income from Continuing Operations $17,795 $15,461 $11,244 15.1% 37.5%
Diluted EPS from Continuing Operations $1.90 $1.65 $1.21 15.2% 36.4%
Net Income $17,795 $15,066 $10,946 18.1% 37.6%
Diluted Earnings per Share $1.90 $1.61 $1.17 18.0% 37.6%
Return on Average Assets 2.00% 1.80% 1.41%
Return on Average Equity 19.90% 18.89% 15.23%
- ------------------------------------------------------------------------------------------------------------------------------------
* Presented on a tax-equivalent basis
The results of 2007 compared to 2006 include the following significant items:
Payment and processing fee revenue from continuing operations increased as
the number of transactions processed increased. This increase was driven
mainly by Utility Information Services processing activity which added a
significant amount of new business during 2007. Transportation Information
Services also achieved record levels of processing during 2007 and record
levels of new customers added.
Net interest income after provision for loan losses increased $1,198,000
due to an increase in average earning assets. The net interest margin on a
tax equivalent basis was 5.45% in 2007 compared to 5.50% in 2006. The
growth in average earning assets was funded mainly by increases in accounts
and drafts payable due to the increase in dollars processed.
There were no gains from the sale of securities in 2007 and 2006. Bank
service fees increased $57,000 or 4% to $1,682,000. Other income from
continuing operations remained fairly constant, $876,000 in 2007 and
$853,000 in 2006. Operating expenses from continuing operations increased
$4,462,000 or 8% due mainly to expenses relating to the increase in
processing activity.
The results of 2006 compared to 2005 include the following significant items:
Payment and processing fee revenue from continuing operations increased as
the number of transactions processed increased. This increase was driven
mainly by the expansion of the Company's customer base and number of
services offered. It is the Company's strategy to expand processing revenue
by 1) actively marketing the Company's existing product lines in freight,
utility, and telecom payment and processing, 2) expanding the Company's
service offerings to the markets currently served and 3) expanding into new
markets by leveraging its payment and processing capabilities. The July
2006 acquisition of NTransit, Inc. was part of this strategy.
Net interest income after provision for loan losses increased $6,495,000
due to an increase in the general level of interest rates and a $65,112,000
increase in average earning assets. The net interest margin on a tax
equivalent basis was 5.50% in 2006 compared to 4.95% in 2005. The growth in
average earning assets was funded mainly by increases in accounts and
drafts payable due to the increase in dollars processed.
There were no gains from the sale of securities in 2006 compared to gains
of $547,000 in 2005. Bank service fees increased $90,000 or 6% to
$1,625,000. Other income from continuing operations remained fairly
constant, $853,000 in 2006 and $670,000 in 2005. Operating expenses from
continuing operations increased $3,061,000 due mainly to expenses relating
to the increase in processing activity.
13
Fee Revenue and Other Income from Continuing Operations
The Company's fee revenue is derived mainly from freight and utility payment and
processing fees. As the Company provides its processing and payment services, it
is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes, fee
revenue and other income for the years ended December 31, 2007, 2006 and 2005
were as follows:
December 31, % Change
----------------------------------------- --------------------------------
(In thousands) 2007 2006 2005 2007 v 2006 2006 v 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Freight Invoice Transaction Volume 25,206 24,220 22,348 4.1% 8.4%
Freight Invoice Dollar Volume $14,519,906 $14,199,389 $11,949,052 2.3% 18.8%
Utility Transaction Volume 9,260 6,665 5,655 38.9% 17.9%
Utility Transaction Dollar Volume $7,665,283 $5,671,892 $4,423,045 35.1% 28.2%
Payment and processing revenue $45,642 $40,343 $35,901 13.1% 12.4%
Bank service fees $1,682 $1,625 $1,535 3.5% 5.9%
Gains on sales of investment securities -- -- $547 N/A N/A
Other $876 $853 $670 2.7% 27.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Fee revenue and other income in 2007 compared to 2006 include the following
significant pre-tax components:
Freight volume increased by 986,000 transactions during the past year. This
increase was due mainly to new business in 2007. Utility volume experienced
significant growth, adding more than 2,595,000 transactions in 2007. This growth
was due mainly to new business. These transaction volume increases drove most of
the $5,299,000 increase in payment and processing revenue.
Fee revenue and other income in 2006 compared to 2005 include the following
significant pre-tax components:
Freight volume increased by 1,872,000 transactions during the past year. This
increase was due mainly to a significant amount of new business in 2006. In
addition to these factors, higher dollar volume during the last three years has
been affected by higher dollars processed per shipment due to escalating fuel
costs and an increase in general economic activity. Utility volume also
experienced solid growth, adding more than 1,010,000 transactions in 2006. This
growth was due mainly to new business. These transaction volume increases drove
most of the $4,442,000 increase in payment and processing revenue.
14
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in tax-equivalent
net interest income and related factors for the three periods ended December 31,
2007, 2006 and 2005:
% Change % Change
(In Thousands) 2007 2006 2005 2007 v. 2006 2006 v. 2005
- -------------------------------------------------------------------------------------------------------------------
Average earning assets $809,739 $762,397 $697,285 6.2% 9.3%
Net interest income 44,115 41,950 34,534 5.2% 21.4%
Net interest margin* 5.45% 5.50% 4.95% (.9)% 11.1%
Yield on earning assets 6.43% 6.37% 5.62% .9% 13.3%
Rate on interest bearing liabilities 4.20% 3.62% 2.45% 16.0% 47.8%
- ------------------------------------------------------------------------------------------------------------------
* Presented on a tax-equivalent basis
Net interest income in 2007 compared to 2006:
The increase in net interest income was caused by the increase in
earning assets partially offset by a slight decrease in net interest
margin. The increase in earning assets was funded mainly by the
increase in accounts and drafts payable due to the increased dollars
processed. The decrease in net interest margin was due mainly to the
reduction in the general level of interest rates. The Company is
negatively affected by decreases in the level of interest rates.
Conversely, the Company is positively affected by increases in the
level of interest rates due to the fact that its rate sensitive assets
significantly exceed its rate sensitive liabilities. This is primarily
due to the non-interest-bearing liabilities generated by the Company in
the form of accounts and drafts payable. More information is contained
in the tables below and in Item 7A of this report.
Total average loans decreased $7,244,000 or 1% to $515,123,000. 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 securities increased $49,808,000 or 54% to
$141,363,000. The investment portfolio will expand and contract over
time as the interest rate environment changes and the Company manages
its liquidity and interest rate position. The increase in 2007 was due
to the purchase of state and political subdivision securities with AA
or better credit ratings and maturities approaching ten years. With the
expectations of a declining interest rate environment, the Company made
these purchases to reduce the level of short-term rate sensitive
assets. All purchases were made in accordance with the Company's
investment policy. Total average federal funds sold and other
short-term investments increased $4,778,000 or 3% to $153,253,000. This
increase was funded by the increase in accounts and drafts payable.
The Bank's average interest-bearing deposits remained relatively flat
with a $6,450,000 or 4% increase compared to the prior year. Average
demand deposits decreased $5,165,000 or 5% as customers moved their
deposited funds into higher yielding off-balance sheet investment
products. Average rates paid on interest-bearing liabilities increased
from 3.62% to 4.20% as a result of increased rate competition for
savings deposits and certificates of deposit in the markets served by
the Bank.
Net interest income in 2006 compared to 2005:
The increase in net interest income was caused by the combination of a
significant increase in earning assets combined with a significant
increase in net interest margin. The increase in earning assets was
funded mainly by the increase in accounts and drafts payable due to the
increased dollars processed. The increase in net interest margin was
due mainly to the rise in the general level of interest rates and also
the increase in the amount of earning assets. The Company is positively
affected by increases in the level of interest rates due to the fact
that its rate sensitive assets significantly exceed its rate sensitive
liabilities. Conversely, the Company is negatively affected by
decreases in the level of interest rates. This is primarily due to the
non-interest-bearing liabilities generated by the Company in the form
of accounts and drafts payable. More information is contained in the
tables below and in Item 7A of this report.
Total average loans increased $9,401,000 or 2% to $522,367,000. 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 securities decreased $20,518,000 or 29% to
$91,555,000. The investment portfolio will expand and contract over
time as the interest rate environment changes and the Company manages
its liquidity and interest rate position. Total average federal funds
sold and other short-term
15
investments increased $35,193,000 or 31% to $148,475,000. This
increase was funded by the increase in accounts and drafts payable.
The Bank's average interest-bearing deposits remained relatively flat
with a $8,027,000 or 4% decrease compared to the prior year due to the
Company's increase in liquidity and resulting decreased need for
higher-cost funding. Average demand deposits decreased $3,982,000 or 4%
due to the fact that balances and service fees associated with these
deposits decrease as the credit allowance for non-interest bearing
deposits increases due to the general level of interest rate increases.
Average rates paid on interest-bearing liabilities increased from 2.45%
to 3.62% as the general level of interest rates increased. This
represents increased rate competition for savings deposits and
certificates of deposit in the markets served by the Bank.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table contains condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported:
2007 2006 2005
------------------------- ------------------------ ------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
Assets(1)
Earning assets:
Loans (2,3):
Taxable $509,409 $36,021 7.07% $516,958 $35,923 6.95% $508,151 $32,012 6.30%
Tax-exempt (4) 5,714 411 7.19 5,409 371 6.86 4,815 310 6.44
Securities (5):
Taxable 15,309 722 4.72 24,506 1,052 4.29 28,610 831 2.90
Tax-exempt (4) 126,054 7,398 5.87 67,049 3,961 5.91 42,427 2,472 5.83
Federal funds sold
and other short-term
investments 153,253 7,527 4.91 148,475 7,262 4.89 113,282 3,596 3.17
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 809,739 52,079 6.43 762,397 48,569 6.37 697,285 39,221 5.62
Nonearning assets:
Cash and due from banks 24,313 28,645 28,874
Premises and equipment,
net 12,915 12,641 11,269
Bank owned life insurance 12,261 11,763 11,298
Goodwill and other
intangibles, net 8,495 6,167 5,499
Other assets 30,513 23,531 22,541
Assets related to
discontinued operations -- 267 6,201
Allowance for loan losses (6,502) (6,203) (6,068)
- --------------------------------------------------------------------------------------------------------------------
Total assets $891,734 $839,208 $ 776,899
- --------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $67,719 $2,122 3.13% $ 71,043 $1,831 2.58% $ 80,976 $ 1,485 1.83%
Savings deposits 23,859 795 3.33 25,113 730 2.91 26,622 458 1.72
Time deposits of
$100 or more 65,127 3,357 5.15 53,550 2,556 4.77 43,967 1,401 3.19
Other time deposits 28,962 1,454 5.02 29,511 1,297 4.40 35,679 1,142 3.20
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing 185,667 7,728 4.16 179,217 6,414 3.58 187,244 4,486 2.40
deposits
Short-term borrowings 138 6 4.35 161 7 4.46 165 5 3.03
Subordinated convertible
debentures 3,699 230 5.33 3,700 198 5.35 3,700 196 5.30
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 189,504 7,964 4.20 183,078 6,619 3.62 191,109 4,687 2.45
Noninterest-bearing
liabilities:
Demand deposits 94,164 99,329 103,311
Accounts and drafts
payable 504,678 468,303 401,258
Other liabilities 13,961 8,107 7,472
Liabilities related to
discontinued operations -- 655 1,857
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 802,307 759,472 705,007
Shareholders' equity 89,427 79,736 71,892
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $891,734 $839,208 $776,899
- --------------------------------------------------------------------------------------------------------------------
16
Net interest income $44,115 $41,950 $34,534
Net interest margin 5.45% 5.50% 4.95%
Interest spread 2.23% 2.75% 3.17%
- --------------------------------------------------------------------------------------------------------------------
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 Item 8, Note 1 of this report.
3. Interest income on loans includes net loan fees of $202,000, $213,000 and
$161,000 for 2007, 2006 and 2005, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% for 2007, 2006 and 2005. The tax-equivalent adjustment was
approximately $2,733,000, $1,516,000 and $970,000 for 2007, 2006 and 2005,
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
years due to changes in volume and interest rates.
2007 Over 2006 2006 Over 2005
----------------------------- -----------------------------
(Dollars in thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (2,3):
Taxable $(527) $625 $98 $563 $3,348 $3,911
Tax-exempt (4) 22 18 40 40 21 61
Securities:
Taxable (426) 96 (330) (132) 352 220
Tax-exempt (4) 3,464 (27) 3,437 1,454 36 1,490
Federal funds sold and other
short-term investments 234 31 265 1,338 2,328 3,666
- -------------------------------------------------------------------------------------------------------------------------
Total interest income $2,767 $743 $3,510 $3,263 $6,085 $9,348
- -------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (89) 380 291 (199) 545 346
Savings deposits (36) 101 65 (27) 299 272
Time deposits of $100 or more 585 216 801 352 803 1,155
Other time deposits (24) 181 157 (220) 375 155
Short-term borrowings (1) -- (1) - 2 2
Subordinated convertible debenture 6 26 32 - 2 2
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 441 904 1,345 (94) 2,026 1,932
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $2,326 $(161) $2,165 $3,357 $4,059 $7,416
- -------------------------------------------------------------------------------------------------------------------------
1. The change in interest due to the combined rate/volume variance has been
allocated in proportion to the absolute dollar amounts of the change in
each.
2. Average balances include nonaccrual loans.
3. Interest income includes net loan fees.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% for 2007, 2006 and 2005.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the
Company. The loan portfolio was $498,455,000 and represented 55% of the
Company's total assets as of December 31, 2007 and generated $36,288,000 in
revenue during the year then ended. The Company had no sub-prime mortgage loans
or residential development loans in its portfolio as of December 31, 2007. The
following tables show the composition of the loan portfolio at the end of the
periods indicated and remaining maturities for loans as of December 31, 2007.
Loans by Type
(At December 31)
(Dollars in thousands) 2007 2006 2005 2004 2003
Commercial and industrial $100,827 $113,162 $146,892 $117,777 $103,638
Real estate: (Commercial and Church)
Mortgage 360,907 352,044 348,554 346,711 330,150
Construction 31,082 29,779 28,170 25,838 19,298
Industrial revenue bonds 4,149 6,293 4,514 4,955 5,373
Installment -- - 107 1,741 1,911
Other 1,490 2,847 1,069 3,426 8,662
- ------------------------------------------------------------------------------------------------------------------------------------
17
Total loans $498,455 $504,125 $529,306 $500,448 $439,032
- ------------------------------------------------------------------------------------------------------------------------------------
Loans by Maturity
(At December 31, 2007)
One Year Over 1 Year Over
Or Less Through 5 Years 5 Years
Fixed Floating Fixed Floating Fixed Floating
(Dollars in thousands) Rate Rate(1) Rate Rate(1) Rate Rate(1) Total
- --------------------------------------------------------------------------------------------------------------------
Commercial and industrial $ 16,641 $ 60,294 $ 20,122 $ 3,770 - $ - $ 100,827
Real estate: (Commercial
and Church)
Mortgage 57,230 23,370 265,349 14,246 712 - 360,907
Construction 11,536 7,887 11,659 - - - 31,082
Industrial revenue bonds 136 - 2,053 - 1,960 - 4,149
Other 8 734 693 55 - - 1,490
- --------------------------------------------------------------------------------------------------------------------
Total loans $ 85,551 $ 92,285 $ 299,876 $ 18,071 2,672 $ - $ 498,455
- --------------------------------------------------------------------------------------------------------------------
(1)Loans have been classified as having "floating" interest rates if the rate
specified in the loan varies with the prime commercial rate of interest.
The Company has no concentrations of loans exceeding 10% of total loans, which
are not otherwise disclosed in the loan portfolio composition table and
discussed in Item 8, Note 5 of this report. As can be seen in the loan
composition table above and discussed in Item 8, Note 5, the Company's primary
market niche for banking services is privately held businesses and churches and
church-related ministries.
Loans to commercial entities are generally secured by the business assets of the
borrower, including accounts receivable, inventory, machinery and equipment, and
the real estate from which the borrower operates. Operating lines of credit to
these companies generally are secured by accounts receivable and inventory, with
specific percentages of each determined on a customer-by-customer basis based on
various factors including the type of business. Intermediate term credit for
machinery and equipment is generally provided at some percentage of the value of
the equipment purchased, depending on the type of machinery or equipment
purchased by the entity. Loans secured exclusively by real estate to businesses
and churches are generally made with a maximum 80% loan to value ratio,
depending upon the Company's estimate of the resale value and ability of the
property to generate cash. The Company's loan policy requires an independent
appraisal for all loans over $250,000 secured by real estate. Company management
monitors the local economy in an attempt to determine whether it has had a
significant deteriorating effect on such real estate credits. When problems are
identified, appraised values are updated on a continual basis, either internally
or through an updated external appraisal.
Loan portfolio changes from December 31, 2006 to December 31, 2007:
Total loans decreased $5,670,000 or 1% to $498,455,000. This decrease
was due mainly to the reduction in commercial and industrial loans as
loans were paid down. At year-end, church and church-related real
estate and construction credits totaled $253,626,000, which represents
a 12% increase over 2006. Additional details regarding the types and
maturities of loans in the loan portfolio are contained in the tables
above and in Item 8, Note 5.
Loan portfolio changes from December 31, 2005 to December 31, 2006:
Total loans decreased $25,181,000 or 5% to $504,125,000. This decrease
was due mainly to the reduction in commercial and industrial loans as
loans were paid down. At year-end, church and church-related real
estate and construction credits totaled $226,664,000, which represents
a 14% increase over 2005. Additional details regarding the types and
maturities of loans in the loan portfolio are contained in the tables
above and in Item 8, Note 5.
Provision and Allowance for Loan Losses
The Company recorded a provision for loan losses of $900,000 in 2007, $1,150,000
in 2006 and $775,000 in 2005. The amount of the provisions for loan losses was
derived from the Company's quarterly analysis of the allowance for loan losses
in relation to probable losses in the loan portfolio. The amount of the
provision will fluctuate as determined by these quarterly analyses. The Company
had net loan charge-offs of $1,212,000, $842,000 and $528,000 in 2007, 2006 and
2005, respectively. The allowance for loan losses was $6,280,000 at December 31,
2007 compared to $6,592,000 at December 31, 2006 and compared to $6,284,000 at
December 31, 2005. The year-end 2007 allowance represented 1.26% of outstanding
loans, compared to 1.31% at year-end 2006 and 1.19% at year-end
18
2005. From December 31, 2006 to December 31, 2007, the level of nonperforming
loans increased $1,686,000 from $795,000 to $2,481,000, which represents .5% of
outstanding loans. Nonperforming loans are more fully explained in the section
entitled "Nonperforming Assets".
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. Charges or credits are made to expense
to cover any deficiency or reduce any excess, as required. 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 an estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and collection options available. The general component relates to all other
loans, which are evaluated based on loan grade. The loan grade assigned to each
loan is typically evaluated on an annual basis, unless circumstances require
interim evaluation. The Company assigns a reserve amount consistent with each
loan's rating category. The reserve amount is based on derived loss experience
over prescribed periods. In addition to the amounts derived from the loan
grades, a portion is added to the general reserve to take into account other
factors including national and local economic conditions, downturns in specific
industries including loss in collateral value, trends in credit quality at the
Company and the banking industry, and trends in risk rating changes. As part of
their examination process, federal and state agencies review the Company's
methodology for maintaining the allowance for loan losses and the balance in the
account. These agencies may require the Company to increase the allowance for
loan losses based on their judgments and interpretations about information
available to them at the time of their examination.
Summary of Loan Loss Experience
December 31,
------------------------------------------------------------
(Dollars in thousands) 2007 2006 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 6,592 $ 6,284 $ 6,037 $ 5,506 $ 5,293
- ------------------------------------------------------------------------------------------------------------------------------
Loans charged-off:
Commercial and industrial loans and
industrial revenue bonds ("IRB's") 337 864 532 -- --
Real estate: (Commercial and Church)
Mortgage 1,038 -- 22 48 --
Other -- -- 1 -- 2
- ------------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,375 864 555 48 2
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial, industrial and IRB's 159 22 10 29 25
Real estate: (Commercial and Church)
Mortgage 4 - 13 -- --
Installment -- -- 4 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 163 22 27 29 25
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net loans charged-off (recovered) 1,212 842 528 19 (23)
Provision charged to expense 900 1,150 775 550 190
- ------------------------------------------------------------------------------------------------------------------------------
Allowance at end of year $ 6,280 $6,592 $ 6,284 $ 6,037 $ 5,506
- ------------------------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $515,123 $522,367 $512,966 $477,234 $443,452
December 31 498,455 504,125 529,306 500,448 469,032
Ratio of allowance for loan losses to loans outstanding:
Average 1.22% 1.26% 1.23% 1.26% 1.24%
December 31 1.26% 1.31% 1.19% 1.21% 1.17%
Ratio of net charge-offs (recoveries) to
average loans outstanding .24% .16% .10% -- (.01)%
- ------------------------------------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses(1):
Commercial, industrial and IRB's $ 3,380 $ 3,507 $ 3,419 $ 3,066 $ 2,575
Real estate: (Commercial and Church)
Mortgage 2,564 2,723 2,645 2,742 2,761
Construction 318 271 200 207 152
Other loans 18 91 20 22 18
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 6,280 $ 6,592 $ 6,284 $ 6,037 $ 5,506
- ------------------------------------------------------------------------------------------------------------------------------
Percent of categories to total loans:
Commercial and industrial and IRB's 21.1% 22.5% 28.6% 24.5% 23.2%
19
Real estate: (Commercial and Church)
Mortgage 72.4 69.8 65.9 69.3 70.4
Construction 6.2 5.9 5.3 5.2 4.1
Other .3 1.8 .2 1.0 2.3
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
(1)Although specific allocations exist, the entire allowance is available to
absorb losses in any particular loan category.
Nonperforming Assets
It is the policy of the Company to continually monitor its loan portfolio and to
discontinue the accrual of interest on any loan on which payment of principal or
interest in a timely manner in the normal course of business, is doubtful.
Subsequent payments received on such loans are applied to principal if there is
any doubt as to the collectability of such principal; otherwise, these receipts
are recorded as interest income. Interest on nonaccrual and renegotiated loans,
which would have been recorded under the original terms of the loans, was
approximately $163,000 for the year ended December 31, 2007. Of this amount,
approximately $149,000 was actually recorded as interest income on such loans.
Total nonaccrual loans at December 31, 2007 consists of five loans totaling
$1,985,000 that relate to businesses that have weak financial positions and/or
collateral deficiencies. Allocations of the allowance for loan losses have been
established for the estimated loss exposure.
Foreclosed assets and accruing loans 90 days or more past due were $1,388,000
and $496,000, respectively, at December 31, 2007. The foreclosed asset relates
to the foreclosure of one loan which was secured by a commercial real estate
building in St. Louis County, Missouri. The building is currently listed for
sale and has been recorded at its estimated fair value less costs to sell. The
increase in accruing loans 90 days or more past due is primarily related to one
loan that is past maturity date; however, full payment is expected.
At December 31, 2007, approximately $5,139,000 of loans not included in the
table below was identified by management as having potential credit problems.
These loans are excluded from the table due to the fact they are current under
the original terms of the loans, however circumstances have raised doubts as to
the ability of the borrowers to comply with the current loan repayment terms.
Included in this balance is $3,085,000 related to one borrower that was
renegotiated in 2003 and, although current under the new terms of the contract,
management believes, due to the financial condition of the borrower, there still
remains risk as to the collectability of all amounts under the loan agreement.
The remaining loans are closely monitored by management and have specific
reserves established for the estimated loss exposure.
The Company does not have any foreign loans. The Company's loan portfolio does
not include a significant amount of single family real estate mortgages as the
Company does not market its services to retail customers. Also, the Company had
no sub-prime mortgage loans or residential development loans in its portfolio as
of December 31, 2007.
The Company does not have any other interest-earning assets which would have
been included in nonaccrual, past due or restructured loans if such assets were
loans.
Summary of Nonperforming Assets
December 31,
-------------------------------------------------------------------
(Dollars in thousands) 2007 2006 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Commercial, industrial and IRB's:
Nonaccrual $ 1,277 $ 795 $ 983 $ 297 $ 318
Contractually past due 90 days
or more and still accruing 496 -- -- -- --
Renegotiated loans -- -- -- -- 2,240
Real estate-mortgage:
Nonaccrual 708 -- -- 69 1,207
Contractually past due 90 days
or more and still accruing -- -- 481 4 147
Renegotiated loans -- -- -- 168 481
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,481 795 1,464 538 4,393
- ----------------------------------------------------------------------------------------------------------------------------
Total foreclosed assets 1,388 -- -- 375 859
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,869 $ 795 $1,464 $ 913 $ 5,252
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 2007, the Bank had one property which it was carrying as other
real estate owned. The property was foreclosed on July 31, 2007 at which time
the Company charged off $823,000. The property is recorded at $1,388,000, which
management estimates to be fair value less costs of disposition.
20
Operating Expenses from Continuing Operations
Operating expenses from continuing operations in 2007 compared to 2006 include
the following significant pre-tax components:
Salaries and employees benefits expense increased $4,289,000 or 10% to
$46,965,000. This is mainly attributable to additional staff related to
the increase in processing volume, annual salary increases and the
associated increase in benefit expenses.
Occupancy expense increased $127,000 or 6% to $2,106,000.
Equipment expense increased $428,000 or 15% to $3,356,000. This
increase is primarily due to depreciation related to capital
expenditures in 2006 and 2007.
Amortization of intangibles increased $54,000 or 24% to $280,000 due to
the intangible assets acquired in the acquisition of NTransit in July
2006.
Other operating expense decreased $436,000 or 4% to $10,032,000 due to
reductions in outside imaging and legal expenses.
Operating expenses from continuing operations in 2006 compared to 2005 include
the following significant pre-tax components:
Salaries and employees benefits expense increased $4,632,000 or 12% to
$42,676,000. This is mainly attributable to additional staff related to
the increase in processing volume, annual salary increases and the
associated increase in benefit expenses.
Occupancy expense increased $38,000 or 2% to $1,979,000.
Equipment expense increased $133,000 or 5% to $2,928,000. This increase
is primarily due to depreciation related to capital expenditures in
2005 and 2006.
Amortization of intangibles increased $54,000 or 31% to $226,000 due to
the intangible assets acquired in the acquisition of NTransit in July
2006.
Other operating expense increased $1,304,000 or 14% to $10,468,000.
This increase related to several factors including a $443,000 increase
in advertising and business development expense as the Company expanded
its marketing efforts and a $402,000 increase in outside services,
which reflects higher auditing and legal activities. In addition,
promotional expense increased $262,000 because of the Company's 100th
year anniversary activities and increases in charitable contributions.
Postage and delivery expense increased $178,000 due to increased
processing volume. More details on the components of other operating
expenses are contained in Item 8, Note 14 of this report.
Income Tax Expense
Income tax expense from continuing operations in 2007 totaled $8,148,000
compared to $8,367,000 in 2006, and compared to $4,982,000 in 2005. When
measured as a percent of income before income taxes and discontinued operations,
the Company's effective tax rate was 31% in 2007, 35% in 2006 and 31% in 2005.
The effective tax rate varies from year-to-year primarily due to changes in the
Company's amount of investment in tax-exempt municipal bonds and income
recognized on bank owned life insurance. The Company's income tax (benefit)
expense from discontinued operations was $0, ($280,000) and $557,000 with
effective rates of 0%, 41%, and 215% for the years 2007, 2006 and 2005,
respectively.
Investment Portfolio
Investment portfolio changes from December 31, 2006 to December 31, 2007:
U.S. Treasury securities decreased $14,828,000 or 88% to $1,996,000.
U.S. government-sponsored corporation and agency securities decreased
$1,486,000 or 50% to $1,499,000. State and political subdivision
securities increased $85,271,000 or 104% to $167,478,000. The
investment portfolio provides the Company with a significant source of
earnings, secondary source of liquidity, and mechanisms to manage the
effects of changes in loan demand and interest rates. Therefore, the
size, asset allocation and maturity distribution of the investment
portfolio will vary over time depending on management's assessment of
current
21
and future interest rates, changes in loan demand, changes in the
Company's sources of funds and the economic outlook. During this
period the size of the investment portfolio increased as the Company
purchased state and political subdivision securities. These securities
all had AA or better credit ratings and maturities approaching ten
years. With the additional liquidity provided by the increase in
accounts and drafts payables and the expectation of a declining rate
environment, the Company made these purchases to reduce the level of
short-term rate sensitive assets. All purchases were made in
accordance with the Company's investment policy. As of December 31,
2007, the Company had no mortgage-backed securities in its portfolio.
Investment portfolio changes from December 31, 2005 to December 31, 2006:
U.S. Treasury securities decreased $6,006,000 or 26% to $16,824,000.
U.S. government-sponsored corporation and agency securities decreased
$1,993,000 or 40% to $2,985,000. State and political subdivision
securities increased $15,886,000 or 24% to $82,207,000. The investment
portfolio provides the Company with a significant source of earnings,
secondary source of liquidity, and mechanisms to manage the effects of
changes in loan demand and interest rates. Therefore, the size, asset
allocation and maturity distribution of the investment portfolio will
vary over time depending on management's assessment of current and
future interest rates, changes in loan demand, changes in the Company's
sources of funds and the economic outlook. During this period the size
of the investment portfolio increased as the Company employed a portion
of the increase in accounts and drafts payable. The changes in asset
mix reflect the relative interest rates of the alternative investments
and management's liquidity and interest rate forecasts at the time
funds became available for investment.
There was no single issuer of securities in the investment portfolio at December
31, 2007 for which the aggregate amortized cost exceeded 10% of total
shareholders' equity.
Investments by Type
December 31,
-------------------------------------------
(Dollars in thousands) 2007 2006 2005
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 1,996 $ 16,824 $ 22,830
U.S. government-sponsored corporations and agencies 1,499 2,985 4,978
State and political subdivisions 167,478 82,207 66,321
Stock of the Federal Home Loan Bank 451 451 448
Stock of the Federal Reserve Bank 282 282 282
- -----------------------------------------------------------------------------------------------------------------------
Total investments $ 171,706 $ 102,749 $ 94,859
- -----------------------------------------------------------------------------------------------------------------------
Investment in Debt Securities by Maturity
(At December 31, 2007)
Within 1 Over 1 to Over 5 to Over
(Dollars in thousands) Year 5 Years 10 Years 10 Years Yield
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 1,996 $ -- $ -- $ -- 3.91%
U.S. government-sponsored corporations and
agencies -- 1,499 -- -- 4.00%
State and political subdivisions(1) 1,621 49,980 70,906 44,971 5.89%
- -----------------------------------------------------------------------------------------------------------------------
Total investment in debt securities $ 3,617 $ 51,479 $ 70,906 $ 44,971
- -----------------------------------------------------------------------------------------------------------------------
Weighted average yield 2.16% 5.28% 6.10% 6.42% 5.85%
- -----------------------------------------------------------------------------------------------------------------------
1. Weighted average yield is presented on a tax-equivalent basis assuming a tax
rate of 35%.
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits decreased $13,397,000 or 13% from December
31, 2006 to $93,190,000 at December 31, 2007. The average balances of these
deposits decreased $5,165,000 or 5% from 2006 to $94,164,000 in 2007. The
decrease in ending balances relates mainly to normal daily fluctuations in these
accounts. These balances are mainly maintained by commercial customers and
churches and can fluctuate significantly on a daily basis. Therefore, management
believes that average balances are a more meaningful measure of deposit trends.
Interest-bearing deposits decreased $2,901,000 or 2% from December 31, 2006 to
$180,406,000 at December 31, 2007. The average balances of these deposits
increased to $185,667,000 in 2007 from $179,217,000 in 2006.
Accounts and drafts payable generated by the Company in its payment processing
operations increased $45,341,000 or 10% from December 31, 2006 to $513,734,000
at December 31, 2007. The average balances of these funds increased $36,375,000
or 8% from 2006 to $504,678,000 in 2007. These increases relate to the increase
in dollars processed.
22
Due to the Company's payment processing cycle, average balances are much more
indicative of the underlying activity than period-end balances since
point-in-time comparisons can be misleading if the comparison dates fall on
different days of the week.
The composition of average deposits and the average rates paid on those deposits
is represented in the table entitled "Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rate and Interest Differential" which is included
earlier in this discussion. The Company does not have any significant deposits
from foreign depositors.
Maturities of Certificates of Deposits of $100,000 or More
(At December 31, 2007)
(Dollars in thousands)
- -------------------------------------------------------------------------------
Three months or less $ 33,135
Three to six months 17,259
Six to twelve months 4,031
Over twelve months 1,293
---------
Total $ 55,718
- --------------------------------------------------------------------------------
Subordinated Convertible Debentures
Total subordinated convertible debentures at December 31, 2007 and 2006 were
$3,688,000 and $3,700,000, respectively and the average balances of these funds
were and $3,699,000 and $3,700,000, respectively, for the year. The debentures
were issued on August 24, 2004 as part of the Company's purchase of its telecom
group. For more information on these debentures please refer to Item 8, Note 10
of this report.
Liquidity
The discipline of liquidity management as practiced by the Company seeks to
ensure that funds are available to fulfill all payment obligations relating to
invoices processed as they become due, meet depositor withdrawal requests and
borrower credit demands while at the same time maximizing profitability. This is
accomplished by balancing changes in demand for funds with changes in supply of
funds. Primary liquidity to meet demand is provided by short-term liquid assets
that can be converted to cash, maturing securities and the ability to obtain
funds from external sources. The Company's Asset/Liability Committee ("ALCO")
has direct oversight responsibility for the Company's liquidity position and
profile. Management considers both on-balance sheet and off-balance sheet items
in its evaluation of liquidity.
The balances of liquid assets consist of cash and cash equivalents, which
include cash and due from banks, federal funds sold, and money market funds, and
were $176,070,000 at December 31, 2007, a decrease of $20,434,000 or 10% from
December 31, 2006. At December 31, 2007 these assets represented 19% 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 securities available-for-sale at fair value was
$171,706,000 at December 31, 2007, an increase of $68,957,000 or 67% from
December 31, 2006. These assets represented 19% of total assets at December 31,
2007. Of this total, 98% were state and political subdivision securities, 1%
were U.S. Treasury securities and 1% were U.S. government agencies. Of the total
portfolio, 2% mature in one year, 27% mature after one year through five years
and 71% mature after five years. The Company did not sell any securities
available-for-sale during 2007.
The Bank has unsecured lines of credit at correspondent banks to purchase
federal funds up to a maximum of $39,000,000. Additionally, the Bank maintains
lines of credit at unaffiliated financial institutions in the maximum amount of
$62,806,000 collateralized by U.S. Treasury and agency securities and commercial
mortgage loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize many other commercial products of the Bank. The accounts and drafts
payable generated by the Company have also historically been a stable source of
funds.
Net cash flows provided by operating activities of continuing operations for the
years 2007, 2006 and 2005 were $23,652,000, $17,031,000 and $13,420,000
respectively. Net income plus the adjustment for depreciation and amortization
accounts for most of the operating cash provided. 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, management believes that the
analysis of changes in average balances, also discussed earlier in this report,
can be more indicative of underlying
23
activity than the period-end balances used in the statements of cash flows.
Management anticipates that cash and cash equivalents, maturing investments and
cash from operations will continue to be sufficient to fund the Company's
operations and capital expenditures in 2008.
Capital Resources
One of management's primary objectives is to maintain a strong capital base to
warrant the confidence of customers, shareholders, and bank regulatory agencies.
A strong capital base is needed to take advantage of profitable growth
opportunities that arise and to provide assurance to depositors and creditors.
The Company and its banking subsidiary continue to exceed all regulatory capital
requirements, as evidenced by the capital ratios at December 31, 2007 as shown
in Item 8, Note 3 of this report.
In 2007, cash dividends paid were $.447 per share for a total of $4,118,000, a
12% increase over the prior year, which is attributable to an increase in the
per share amount paid and additional shares outstanding. On October 15, 2007,
the company declared a 10% stock dividend payable to holders of record on
December 3, 2007. On July 18, 2006, the Company declared a 50% stock dividend
payable to holders of record on September 1, 2006. On August 16, 2005, the
Company declared a 50% stock dividend payable to holders of record on September
2, 2005.
Shareholders' equity was $99,452,000, or 11% of total assets, at December 31,
2007, an increase of $15,531,000 over the balance at December 31, 2006. This
increase resulted from net income of $17,795,000, proceeds from the exercise of
stock options of $15,000, a decrease in other comprehensive loss of $1,184,000
and other items of $801,000 related to the stock dividend and stock bonuses,
which were offset by cash dividends paid of $4,118,000 and the pension
adjustment per SFAS No. 158 of $146,000.
Dividends from the Bank are a source of funds for payment of dividends by the
Company to its shareholders. The only restrictions on dividends are those
dictated by regulatory capital requirements and prudent and sound banking
principles. As of December 31, 2007, unappropriated retained earnings of
$822,000 were available at the Bank for the declaration of dividends to the
Company without prior approval from regulatory authorities.
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 300,000 shares of the
Company's common stock. This repurchase plan was updated by the Board of
Directors on January 22, 2008 and replaced the Company's previous plan under
which 120,000 shares had remained available for repurchase. The Company did not
repurchase any shares during 2007 and repurchased 30,000 shares for $870,000 in
2006. As of December 31, 2007, 120,000 shares remained available for repurchase
under the program. A portion of the repurchased shares may be used for the
Company's employee benefit plans, and the balance will be available for other
general corporate purposes. The stock repurchase authorization does not have an
expiration date and the pace of repurchase activity will depend on factors such
as levels of cash generation from operations, cash requirements for investments,
repayment of debt, current stock price, and other factors. The Company may
repurchase shares from time to time on the open market or in private
transactions, including structured transactions. The stock repurchase program
may be modified or discontinued at any time.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
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
December 31, 2007, no amounts have been accrued for any estimated losses for
these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
or its subsidiaries to guarantee the performance of a customer to a third party.
These off-balance sheet financial instruments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. At December
31, 2007, the balance of loan commitments, standby and commercial letters of
credit were $29,036,000, $5,999,000 and $4,147,000, respectively. Since some of
the financial instruments may expire without being drawn upon, the total amounts
do not necessarily represent future cash requirements. Commitments to extend
credit and letters of credit are subject to the same underwriting standards as
those financial instruments included on the consolidated balance sheets. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of the credit,
is based on management's credit evaluation of the borrower. Collateral held
varies, but is generally accounts receivable, inventory, residential or
income-producing commercial property or equipment. In the event of
nonperformance, the Company or its
24
subsidiaries may obtain and liquidate the collateral to recover amounts paid
under its guarantees on these financial instruments.
On August 24, 2004 the Company issued $3,700,000 in subordinated convertible
debentures as part of the Company's acquisition of the Cass telecom group.
Interest, at a rate of 5.33%, is payable annually on the anniversary date of the
acquisition. The holders of the debentures can convert the principal amount into
fully paid and non-assessable shares of the common stock of the Company at a
rate per share of $19.47 at various amounts over a 10-year period, at which time
the securities mature. The debentures may be called by the Company without
penalty after August 24, 2010. For more information please refer to Item 8, Note
10 of this report.
The following table summarizes contractual cash obligations of the Company
related to operating and capital lease commitments, time deposits and
convertible subordinated debentures at December 31, 2007:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(Dollars in thousands at December 31, 2007) Total 1 Year Years Years Years
- --------------------------------------------------------------------------------------------------------------------
Operating lease commitments $ 3,769 $ 715 $ 1,009 $ 874 $ 1,171
Time deposits* 82,626 79,472 2,534 620 --
Convertible subordinated debentures * 3,688 -- -- -- 3,688
- --------------------------------------------------------------------------------------------------------------------
Total $ 90,083 $ 80,187 $ 3,543 $ 1,494 $ 4,859
- --------------------------------------------------------------------------------------------------------------------
* Includes principal payments only.
During 2007, the Company contributed $3,200,000 to its noncontributory defined
benefit pension plan. The contribution had no significant effect on the
Company's overall liquidity. In determining pension expense, the Company makes
several assumptions, including the discount rate and long-term rate of return on
assets. These assumptions are determined at the beginning of the plan year based
on interest rate levels and financial market performance. For 2007 these
assumptions were as follows:
----------------------------------------------------------------------
Weighted average discount rate 6.00%
Rate of increase in compensation levels 4.25%
Expected long-term rate of return on assets 7.25%
----------------------------------------------------------------------
Impact of New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes", an Interpretation of SFAS No. 109 "Accounting for
Income Taxes". FASB Interpretation No. 48 clarifies the accounting for
uncertainty in income taxes in financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken. The Interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The FASB
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company implemented FASB Interpretation No. 48 on January 1, 2007, which did
not have a material impact on the Company's consolidated financial statements.
See Note 15.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement in the first quarter of 2008 is not expected to have
a material effect on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires
companies to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The funded status is measured as the
difference between the fair value of the plan assets and the projected benefit
obligation as of the date of its fiscal year-end. The Company adopted the
standard on December 31, 2006 and has recognized the required changes and
disclosures in its consolidated 2007 and 2006 financial statements.
25
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The adoption of this statement in the first quarter of 2008
is not expected to have a material effect on the Company's consolidated
financial statements.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Interest Rate Sensitivity
The Company faces market risk to the extent that its net interest income and its
fair market value of equity are affected by changes in market interest rates.
The asset/liability management discipline as applied by the Company seeks to
limit the volatility, to the extent possible, of both net interest income and
the fair market value of equity that can result from changes in market interest
rates. This is accomplished by limiting the maturities of fixed rate
investments, loans, and deposits; matching fixed rate assets and liabilities to
the extent possible; and optimizing the mix of fees and net interest income.
However, as discussed below, the Company's asset/liability position differs
significantly from most other bank holding companies with significant positive
cumulative "gaps" shown for each time horizon presented. This asset sensitive
position is caused primarily by the operations of the Company, which generate
large balances of accounts and drafts payable. These balances, which are
noninterest bearing, contribute to the Company's historical high net interest
margin but cause the Company to become susceptible to changes in interest rates,
with a decreasing net interest margin and fair market value of equity in periods
of declining interest rates and an increasing net interest margin and fair
market value of equity in periods of rising interest rates.
The Company's Asset/Liability Committee ("ALCO") measures the Company's interest
rate risk sensitivity on a quarterly basis to monitor and manage the variability
of earnings and fair market value of equity in various interest rate
environments. The ALCO evaluates the Company's risk position to determine
whether the level of exposure is significant enough to hedge a potential decline
in earnings and value or whether the Company can safely increase risk to enhance
returns. The ALCO uses gap reports, twelve-month net interest income
simulations, and fair market value of equity analyses as its main analytical
tools to provide management with insight into the Company's exposure to changing
interest rates.
Management uses a gap report to review any significant mismatch between the
re-pricing points of the Company's rate sensitive assets and liabilities in
certain time horizons. A negative gap indicates that more liabilities re-price
in that particular time frame and, if rates rise, these liabilities will
re-price faster than the assets. A positive gap would indicate the opposite. Gap
reports can be misleading in that they capture only the re-pricing timing within
the balance sheet, and fail to capture other significant risks such as basis
risk and embedded options risk. Basis risk involves the potential for the spread
relationship between rates to change under different rate environments and
embedded options risk relates to the potential for the alteration of the level
and/or timing of cash flows given changes in rates.
Another measurement tool used by management is net interest income simulation,
which forecasts net interest income during the coming twelve months under
different interest rate scenarios in order to quantify potential changes in
short term accounting income. Management has set policy limits specifying
acceptable levels of interest rate risk given multiple simulated rate movements.
These simulations are more informative than gap reports because they are able to
capture more of the dynamics within the balance sheet, such as basis risk and
embedded options risk. A table containing simulation results as of December 31,
2007, from an immediate and sustained parallel change in interest rates is shown
below.
While net interest income simulations do an adequate job of capturing interest
rate risk to short term earnings, they do not capture risk within the current
balance sheet beyond twelve months. The Company uses fair market value of equity
analyses to help identify longer-term risk that may reside on the current
balance sheet. The fair market value of equity is represented by the present
value of all future income streams generated by the current balance sheet. The
Company measures the fair market value of equity as the net present value of all
asset and liability cash flows discounted at forward rates suggested by the
current Treasury curve plus appropriate credit spreads. This representation of
the change in the fair market value of equity under different rate scenarios
gives insight into the magnitude of risk to future earnings due to rate changes.
Management has set policy limits relating to declines in the market value of
equity. The table below contains the analysis, which illustrates the effects of
an immediate and sustained parallel change in interest rates as of December 31,
2007:
% Change in % Change in Fair
Change in Interest Rates Net Interest Income Market Value of Equity
--------------------------------------------------------------------------------------------
+200 basis points 12% 11%
+100 basis points 6% 6%
Stable Rates ---- ----
-100 basis points (7%) (7%)
-200 basis points (14%) (16%)
27
Interest Rate Sensitivity Position
The following table presents the Company's gap or interest rate risk position at
December 31, 2007 for the various time periods indicated.
Variable 0-90 91-180 181-364 1-5 Over
(Dollars in thousands) Rate Days Days Years Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans:
Taxable $ 109,359 $ 48,051 $ 57,465 $ 54,410 $ 219,411 $ 5,610 $ 494,306
Tax-exempt -- 6 -- 129 2,053 1,961 4,149
Debt and equity securities(1):
Taxable -- 1,995 -- -- 1,500 -- 3,495
Tax-exempt -- -- -- 1,011 44,379 119,682 165,072
Other 733 -- -- -- -- -- 733
Federal funds sold and other
Short-term investments 149,351 -- -- -- -- -- 149,351
- -----------------------------------------------------------------------------------------------------------------------
Total earning assets $ 259,443 $ 50,052 $ 57,465 $ 55,550 $ 267,343 $ 127,253 $ 817,106
- -----------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
Money market accounts $ 52,617 $ -- $ -- $ -- $ -- $ -- $ 52,617
Now accounts 22,633 -- -- -- -- -- 22,633
Savings deposits 22,530 -- -- -- -- -- 22,530
Time deposits:
$100K and more -- 33,135 17,259 4,031 1,293 -- 55,718
Less than $100K -- 17,979 5,249 1,820 1,860 -- 26,908
Federal funds purchased and other
Short-term borrowing 219 -- -- -- -- -- 219
Subordinated convertible debentures -- -- -- -- -- 3,688 3,688
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 97,999 $ 51,114 $ 22,508 $ 5,851 $ 3,153 $ 3,688 $ 184,313
- -----------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap:
Periodic $ 161,444 $ (1,062) $ 34,957 $ 49,699 $ 264,190 $ 123,565 $ 632,793
Cumulative 161,444 160,382 195,339 245,038 509,228 632,793 632,793
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic 2.65 0.98 2.55 9.49 84.79 34.50 4.43
Cumulative 2.65 2.08 2.14 2.38 3.82 4.43 4.43
- -----------------------------------------------------------------------------------------------------------------------
(1)Balances shown reflect earliest re-pricing date.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
(In thousands, except share and per share data) 2007 2006
- ----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 26,719 $ 26,995
Federal funds sold and other short-term investments 149,351 169,509
---------- ----------
Cash and cash equivalents 176,070 196,504
---------- ----------
Securities available-for-sale, at fair value 171,706 102,749
Loans 498,455 504,125
Less: Allowance for loan losses 6,280 6,592
---------- ----------
Loans, net 492,175 497,533
---------- ----------
Premises and equipment, net 12,771 12,898
Investment in bank owned life insurance 12,544 12,024
Payments in excess of funding 11,664 9,333
Goodwill 7,471 7,471
Other intangible assets, net 877 1,156
Other assets 17,762 18,803
---------- ----------
Total assets $903,040 $ 858,471
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
- ------------
Deposits:
Noninterest-bearing $ 93,190 $ 106,587
Interest-bearing 180,406 183,307
---------- ----------
Total deposits 273,596 289,894
Accounts and drafts payable 513,734 468,393
Subordinated convertible debentures 3,688 3,700
Liabilities related to discontinued operations -- 277
Other liabilities 12,570 12,286
---------- ----------
Total liabilities 803,588 774,550
---------- ----------
Shareholders' Equity:
- ---------------------
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common stock, par value $.50 per share;
20,000,000 shares authorized: 9,949,324 and 9,112,484
shares issued at December 31, 2007 and 2006, respectively 4,975 4,556
Additional paid-in capital 45,837 17,896
Retained earnings 66,690 81,516
Common shares in treasury, at cost (740,642 and 784,773
shares at December 31, 2007 and 2006, respectively) (16,118) (17,077)
Accumulated other comprehensive loss (1,932) (2,970)
---------- ----------
Total shareholders' equity 99,452 83,921
---------- ----------
Total liabilities and shareholders' equity $ 903,040 $ 858,471
========== ==========
See accompanying notes to consolidated financial statements.
29
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
---------------------------------------------
(In thousands, except share and per share data) 2007 2006 2005
- ------------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
- -----------------------------
Information services payment and processing revenue $ 45,642 $ 40,343 $ 35,901
Bank service fees 1,682 1,625 1,535
Gains on sales of investment securities -- - 547
Other 876 853 670
---------- ---------- ----------
Total fee revenue and other income 48,200 42,821 38,653
---------- ---------- ----------
Interest Income:
- ----------------
Interest and fees on loans 36,288 36,164 32,214
Interest and dividends on securities:
Taxable 722 1,052 831
Exempt from federal income taxes 4,809 2,575 1,610
Interest on federal funds sold and
other short-term investments 7,527 7,262 3,596
---------- ---------- ----------
Total interest income 49,346 47,053 38,251
---------- ---------- ----------
Interest Expense:
- -----------------
Interest on deposits 7,728 6,414 4,486
Interest on short-term borrowings 6 7 5
Interest on subordinated convertible debentures and other 230 198 196
---------- ---------- ----------
Total interest expense 7,964 6,619 4,687
---------- ---------- ----------
Net interest income 41,382 40,434 33,564
Provision for loan losses 900 1,150 775
---------- ----------- ----------
Net interest income after provision
for loan losses 40,482 39,284 32,789
---------- ---------- ----------
Operating Expense:
- ------------------
Salaries and employee benefits 46,965 42,676 38,044
Occupancy 2,106 1,979 1,941
Equipment 3,356 2,928 2,795
Amortization of intangible assets 280 226 172
Impairment of equity investment -- - 3,100
Other operating 10,032 10,468 9,164
---------- ---------- ----------
Total operating expense 62,739 58,277 55,216
---------- ---------- ----------
Income before income tax expense and discontinued
operations 25,943 23,828 16,226
Income tax expense 8,148 8,367 4,982
---------- ---------- ----------
Net income from continuing operations 17,795 15,461 11,244
---------- ---------- ----------
Income (loss) from discontinued operations
before income tax expense -- (675) 259
Income tax (benefit) expense -- (280) 557
---------- ----------- ----------
Net loss from discontinued operations -- (395) (298)
Net income $ 17,795 $ 15,066 $ 10,946
========== ========== ==========
Basic Earnings Per Share:
From continuing operations $ 1.95 $ 1.69 $ 1.24
From discontinued operations -- (.04) (.03)
Basic earnings per share 1.95 1.65 1.21
Diluted Earnings Per Share:
From continuing operations $ 1.90 $ 1.65 $ 1.21
From discontinued operations -- (.04) (.04)
Diluted earnings per share 1.90 1.61 1.17
See accompanying notes to consolidated financial statements.
30
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------
(Dollars in thousands) 2007 2006 2005
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
- -------------------------------------
Net income from continuing operations $ 17,795 $ 15,461 $ 11,244
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 3,186 2,049 2,073
Gains on sales of investment securities -- - (547)
Stock-based compensation expense 678 227 134
Provision for loan losses 900 1,150 775
Deferred income tax expense (benefit) 1,409 (289) (921)
Increase (decrease) in income tax liability 743 1,628 (181)
Impairment of equity investment -- - 3,100
Other operating activities, net (1,059) (3,195) (2,257)
Operating activities of discontinued operations -- (1,536) (967)
---------- ---------- ----------
Net cash provided by operating activities 23,652 15,495 12,453
---------- ---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
From continuing operations:
Proceeds from sales of securities available-for-sale -- - 12,950
Proceeds from maturities of securities available-for-sale 52,500 83,510 77,150
Purchase of securities available-for-sale (120,304) (90,326) (108,545)
Net decrease (increase) in loans 3,158 24,339 (29,386)
Increase in payments in excess of funding (2,331) (1,668) (667)
Purchases of premises and equipment, net (2,112) (2,953) (2,582)
Payment for business acquisitions, net of cash acquired -- (3,172) -
Proceeds from sale of discontinued operations -- 205 6,600
Investing activities of discontinued operations -- - (98)
---------- ---------- ----------
Net cash provided by (used in) investing activities (69,089) 9,935 (44,578)
---------- ---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
From continuing operations:
Net (decrease) increase in noninterest-bearing deposits (13,397) (9,809) 20,034
Net increase (decrease) in interest-bearing demand
and savings deposits 3,269 (9,038) (87)
Net (decrease) increase in time deposits (6,170) 21,743 (8,578)
Net increase in accounts and drafts payable 45,341 22,582 87,338
Cash proceeds from exercise of stock options 15 327 144
Cash dividends paid (4,118) (3,666) (3,201)
Purchase of common shares for treasury -- (870) (1,434)
Other financing activities, net 63 113 58
---------- ---------- ---------
Net cash provided by financing activities 25,003 21,382 94,274
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (20,434) 46,812 62,149
Cash and cash equivalents at beginning of year 196,504 149,692 87,543
---------- ---------- ---------
Cash and cash equivalents at end of year $ 176,070 $ 196,504 $ 149,692
========== ========== =========
Supplemental information:
Cash paid for interest $ 8,119 $ 6,171 $ 4,618
Cash paid for income taxes 6,258 8,136 6,792
Noncash transactions:
Other real estate transferred from loans $ 1,300 $ -- $ -
See accompanying notes to consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive Comprehensive
(In thousands, except per share data) Stock Capital Earnings Stock Income (Loss) Total Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $2,247 $18,210 $64,685 $(16,096) $543 $ 69,589
Net income 10,946 10,946 $10,946
Cash dividends ($.352 per share) (3,201) (3,201)
50% common stock dividend 921 (924) (3)
Purchase of 42,665 common shares (1,434) (1,434)
Other comprehensive income (loss):
Net unrealized loss on debt securities (510) (510) (510)
available-for-sale, net of tax
Reclassification adjustment for gains
on sales of investment securities, (361) (361) (361)
available-for-sale, net of tax
Minimum pension liability (78) (78) (78)
adjustment, net of tax
Issuance of 8,238 common shares
pursuant to Stock Bonus Plan (70) 70 --
Amortization of Stock Bonus Plan awards 134 134
Exercise of stock options (3) 147 144
Tax benefit of stock awards 55 55
---------------------------------------------------------------------------------------
Balance, December 31, 2005 3,168 18,326 71,506 (17,313) (406) 75,281
---------------------------------------------------------------------------------------
Comprehensive income for 2005 9,997
=====
Net income 15,066 15,066 15,066
Cash dividends ($.400 per share) (3,666) (3,666)
50% common stock dividend 1,388 (1,390) (2)
Purchase of 30,000 common shares (870) (870)
Other comprehensive income (loss):
Net unrealized gain on debt securities 550 550 550
available-for-sale, net of tax
Adoption of SFAS 158 (3,114) (3,114) 162
Issuance of 15,010 common shares
pursuant to Stock Bonus Plan (198) 198 --
Exercise of stock options (581) 908 327
Tax benefit of stock awards 122 122
Stock-based compensation expense 227 227
---------------------------------------------------------------------------------------
Balance, December 31, 2006 4,556 17,896 81,516 (17,077) (2,970) 83,921
---------------------------------------------------------------------------------------
Comprehensive income for 2006 15,778
======
Net income 17,795 17,795 17,795
Cash dividends ($.447 per share) (4,118) (4,118)
10% common stock dividend 419 28,159 (28,590) (12)
Other comprehensive income (loss):
Net unrealized gain on debt securities
available-for-sale, net of tax 1,184 1,184 1,184
SFAS 158 adjustment (146) (146) (146)
FIN 48 adjustment 87 87
Issuance of 47,432 common shares
pursuant to Stock Bonus Plan (938) 938 --
Exercise of stock options 6 9 15
Tax benefit of stock awards 36 36
Stock-based compensation expense 678 678
Subordinated debenture conversion 12 12
---------------------------------------------------------------------------------------
Balance, December 31, 2007 $4,975 $45,837 $66,690 $(16,118) $(1,932) $ 99,452
---------------------------------------------------------------------------------------
Comprehensive income for 2007 $18,833
=======
See accompanying notes to consolidated financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations The Company provides payment and information services,
which include processing and payment of freight, utility and telecommunications
invoices. These services include the acquisition and management of data,
information delivery and financial exchange. The consolidated balance sheet
captions, "Accounts and drafts payable" and "Payments in excess of funding,"
consist of obligations related to the payment services that are performed for
customers. The Company also provides a full range of banking services to
individual, corporate and institutional customers through its wholly owned bank
subsidiary.
Basis of Presentation The accounting and reporting policies of the Company and
its subsidiaries conform to U.S. generally accepted accounting principles. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries after elimination of intercompany transactions.
Certain amounts in the 2006 and 2005 consolidated financial statements have been
reclassified to conform to the 2007 presentation. Such reclassifications have no
effect on previously reported net income or shareholders' equity. The Company's
bank subsidiary sold the assets of GEMS, its wholly owned subsidiary, on
December 30, 2005. The assets, liabilities and results of operations of GEMS
have been presented as discontinued operations. See Note 2 for more details. The
Company issued a 10% stock dividend on December 17, 2007 and 50% stock dividends
on September 15, 2006 and on September 15, 2005. The share and per share
information have been restated for all periods presented in the accompanying
consolidated financial statements.
Use of Estimates In preparing the consolidated financial statements, Company
management is required to make estimates and assumptions which significantly
affect the reported amounts in the consolidated financial statements. A
significant estimate, which is particularly susceptible to change in a short
period of time, is the determination of the allowance for loan losses.
Cash and Cash Equivalents For purposes of the consolidated statements of cash
flows, the Company considers cash and due from banks, federal funds sold and
other short-term investments as segregated in the accompanying consolidated
balance sheets to be cash equivalents.
Investment in Debt and Equity Securities The Company classifies its debt and
marketable equity securities as available-for-sale. Securities classified as
available-for-sale are carried at fair value. Unrealized gains and losses, net
of the related tax effect, are excluded from earnings and reported in
accumulated other comprehensive income, a component of shareholders' equity. A
decline in the fair value of any available-for-sale security below cost that is
deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security. To determine whether
impairment is other than temporary, the Company considers whether it has the
ability and intent to hold the investment until a marketplace recovery and
considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment
includes the reasons for impairment, the severity and duration of the
impairment, changes in value subsequent to year-end and forecasted performance
of the investee. Premiums and discounts are amortized or accreted to interest
income over the estimated lives of the securities using the level-yield method.
Interest income is recognized when earned. Gains and losses are calculated using
the specific identification method.
Allowance for Loan Losses The allowance for loan losses is increased by
provisions charged to expense and is available to absorb charge-offs, net of
recoveries. Management utilizes a systematic, documented approach in determining
the appropriate level of the allowance for loan losses. Management's approach,
which provides for general and specific allowances, is based on current economic
conditions, past losses, collection experience, risk characteristics of the
portfolio, assessments of collateral values by obtaining independent appraisals
for significant properties, and such other factors which, in management's
judgment, deserve current recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio. While management uses all available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such 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.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the assets, or the respective lease terms for
leasehold
33
improvements, using straight-line and accelerated methods. Estimated useful
lives do not exceed 40 years for buildings, the lesser of 10 years or the life
of the lease for leasehold improvements and range from 3 to 7 years for
software, equipment, furniture and fixtures. Maintenance and repairs are charged
to expense as incurred.
Intangible Assets Cost in excess of fair value of net assets acquired has
resulted from business acquisitions, which were accounted for using the purchase
method. Goodwill and intangible assets with indefinite useful lives are not
amortized, but instead are tested for impairment at least annually. Intangible
assets with definite useful lives are amortized over their respective estimated
useful lives.
Periodically, the Company reviews intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable. Based on those reviews, adjustments of recorded amounts have not
been required.
Non-marketable Equity Investments The Company accounts for non-marketable equity
investments, in which it holds less than a 20% ownership, under the cost method.
Under the cost method of accounting, investments are carried at cost and are
adjusted only for other than temporary declines in fair value, distributions of
earnings and additional investments. The Company periodically evaluates whether
any declines in fair value of its investments are other than temporary. In
performing this evaluation, the Company considers various factors including any
decline in market price, where available, the investee's financial condition,
results of operations, operating trends and other financial ratios.
Non-marketable equity investments are included in other assets on the
consolidated balance sheets.
Foreclosed Assets Other real estate, included in other assets in the
accompanying consolidated balance sheets, is recorded at the lower of cost or
fair value less costs to sell. If the fair value of other real estate declines
subsequent to foreclosure, the difference is recorded as a valuation allowance
through a charge to expense. Subsequent increases in fair value are recorded
through reversal of the valuation allowance. Expenses incurred in maintaining
the properties are charged to expense.
Treasury Stock Purchases of the Company's common stock are recorded at cost.
Upon reissuance, treasury stock is reduced based upon the average cost basis of
shares held.
Comprehensive Income Comprehensive income consists of net income, changes in net
unrealized gains (losses) on available-for-sale securities and pension liability
adjustments and is presented in the accompanying consolidated statements of
shareholders' equity and comprehensive income.
Interest on Loans Interest on loans is recognized based upon the principal
amounts outstanding. It is the Company's policy to discontinue the accrual of
interest when there is reasonable doubt as to the collectability of principal or
interest. Subsequent payments received on such loans are applied to principal if
there is any doubt as to the collectability of such principal; otherwise, these
receipts are recorded as interest income. The accrual of interest on a loan is
resumed when the loan is current as to payment of both principal and interest
and/or the borrower demonstrates the ability to pay and remain current.
Impairment of Loans A loan is considered impaired when it is probable that a
creditor will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are discounted at
the loan's effective interest rate. Alternatively, impairment could be measured
by reference to an observable market price, if one exists, or the fair value of
the collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, the Company measures impairment based on the fair value
of the collateral when the Company determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement. The Company uses its nonaccrual methods
as discussed above for recognizing interest on impaired loans.
Information Services Revenue A majority of the Company's revenues are
attributable to fees for providing services. These services include freight
invoice rating, payment processing, auditing, and the generation of accounting
and transportation information. The Company also processes, pays and generates
management information from electric, gas, telecommunications and other
invoices. The specific payment and information processing services provided to
each customer are developed individually to meet each customer's specific
requirements. The Company enters into service agreements with customers
typically for fixed fees per transaction that are invoiced monthly. Revenues are
recognized in the period services are rendered and earned under the service
agreements, as long as collection is reasonably assured.
Income Taxes Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reduced if necessary, by a deferred tax asset valuation allowance. In the event
that management determines it will not be able to realize all or
34
part of net deferred tax assets in the future, the Company adjusts the recorded
value of deferred tax assets, which would result in a direct charge to income
tax expense in the period that such determination is made. Likewise, the Company
will reverse the valuation allowance when realization of the deferred tax asset
is expected. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Earnings Per Share Basic earnings per share is computed by dividing net income
by the weighted-average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income, adjusted for the net income effect
of the interest expense on the outstanding convertible debentures, by the sum of
the weighted-average number of common shares outstanding and the
weighted-average number of potential common shares outstanding.
Stock-Based Compensation The Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123") in 2000. As provided by SFAS No. 123, the
Company applied the intrinsic value-based method, as outlined in Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, in accounting for stock options and
restricted stock awards. Under the intrinsic value-based method, no compensation
expense was recognized if the exercise price of the Company's employee stock
options equaled the market price of the underlying stock on the date of the
grant. Accordingly, no compensation cost was recognized for stock options
granted to employees, since all options granted under the Company's share
incentive programs had an exercise price equal to the market value of the
underlying common stock on the date of the grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R ("SFAS No. 123R") "Share-based Payment." This statement
supersedes SFAS No. 123. SFAS No. 123R requires that all stock-based
compensation be recognized as an expense in the financial statements and that
such cost be measured at the fair value of the award. This statement was adopted
using the modified prospective method of application, which requires the Company
to recognize compensation expense on a prospective basis. Therefore, prior
period financial statements have not been restated. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining service period of awards that had
been included in pro forma disclosures required by SFAS No. 123 in prior
periods. SFAS No. 123R also requires that excess tax benefits related to stock
option exercises and restricted stock awards be reflected as financing cash
inflows instead of operating cash inflows.
The pro forma disclosure for 2005 required by SFAS No. 123 is provided in the
table below.
(In thousands, except per share data) 2005
- -------------------------------------------------------------------------------------
Net income from continuing operations:
As reported $ 11,244
Add: Stock based compensation expense
included in reported net income, net of tax 86
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (105)
- -------------------------------------------------------------------------------------
Pro forma net income from continuing operations $ 11,225
Net income effect of subordinated convertible
debentures 108
- -------------------------------------------------------------------------------------
Proforma net income from continuing operations
assuming dilution $11,333
- -------------------------------------------------------------------------------------
Net income from continuing operations per common share: (1)
Basic, as reported $ 1.24
Basic, proforma 1.24
Diluted, as reported 1.21
Diluted, proforma 1.20
- -------------------------------------------------------------------------------------
(1) Per share data for 2005 has been restated for the 50% stock dividends paid
on September 15, 2006 and 2005 and also for the 10% stock dividend paid on
December 17, 2007.
Pension Plans The amounts recognized in the consolidated financial statements
related to pension are determined from actuarial valuations. Inherent in these
valuations are assumptions including expected return on plan assets, discount
rates at which the liabilities could be settled at December 31, 2007, rate of
increase in future compensation levels and mortality rates. These assumptions
are updated annually and are disclosed in Note 12. The Company adopted Statement
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS No. 158") on December 31, 2006. SFAS No. 158
requires companies to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position
35
and to recognize changes in that funded status in the year in which the changes
occur through comprehensive income. The funded status is measured as the
difference between the fair value of the plan assets and the projected benefit
obligation as of the date of its fiscal year-end.
Impact of New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes", an Interpretation of SFAS No. 109 "Accounting for
Income Taxes". FASB Interpretation No. 48 clarifies the accounting for
uncertainty in income taxes in financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken. The Interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The FASB
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company implemented FASB Interpretation No. 48 on January 1, 2007, which did
not have a material impact on the Company's consolidated financial statements.
See Note 15.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement in the first quarter of 2008 is not expected to have
a material effect on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires
companies to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The funded status is measured as the
difference between the fair value of the plan assets and the projected benefit
obligation as of the date of its fiscal year-end. The Company adopted the
standard on December 31, 2006 and has recognized the required changes and
disclosures in its consolidated 2007 and 2006 financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The adoption of this statement in the first quarter of 2008
is not expected to have a material effect on the Company's consolidated
financial statements.
Note 2
Acquisitions and Dispositions
On July 7, 2006, the Company acquired 100% of the common stock of NTransit,
Inc., a company whose service provides auditing and expense management of parcel
shipments. While this acquisition does not meet the Regulation S-X criteria of a
significant business combination, it positions the Company to expand its
offerings in the specialized service and expertise in parcel shipping, which is
a unique segment of the transportation industry that has experienced tremendous
growth in recent years. Pro forma results, assuming the NTransit, Inc.
acquisition had been consummated January 1, 2005, would not be significantly
different than reported.
On December 30, 2005, the Company's bank subsidiary sold the operating assets of
its wholly-owned subsidiary, Government e-Management Solutions, Inc. ("GEMS").
In accordance with FASB Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" the assets, liabilities and operating results of
GEMS, including the gain on sale in 2005, have been presented as discontinued
operations for all periods.
Note 3
Capital Requirements And Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as
36
calculated under regulatory accounting practices. The Company and the Bank's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets, and of Tier I capital to average
assets. Management believes that as of December 31, 2007 and 2006, the Company
and the Bank met all capital adequacy requirements to which they are subject.
The Bank is also subject to the regulatory framework for prompt corrective
action. As of December 31, 2007, the most recent notification from the
regulatory agencies categorized the Bank as well capitalized. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
Subsidiary dividends are a significant source of funds for payment of dividends
by the Company to its shareholders. At December 31, 2007, unappropriated
retained earnings of $822,000 were available at the Bank for the declaration of
dividends to the Company without prior approval from regulatory authorities.
However, dividends paid by the Bank to the Company would be prohibited if the
effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
Restricted funds on deposit used to meet regulatory reserve requirements
amounted to approximately $500,000 and $1,000,000 at December 31, 2007 and 2006,
respectively.
The Company's and the Bank's actual and required capital amounts and ratios as
of December 31, 2007 and 2006 are as follows:
Requirement
Capital to be well
Actual requirements capitalized
---------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
At December 31, 2007
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $ 99,508 15.58% $51,105 8.00% $ N/A $ N/A
Cass Commercial Bank 41,441 14.39 23,044 8.00 28,805 10.00%
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. 89,540 14.02 25,552 4.00 N/A N/A
Cass Commercial Bank 37,827 13.13 11,522 4.00 17,283 6.0%
Tier I capital (to average assets):
Cass Information Systems, Inc. 89,540 9.76 27,525 3.00 N/A N/A
Cass Commercial Bank 37,827 11.46 9,903 3.00 16,505 5.00%
At December 31, 2006
Total capital (to risk-weighted assets):
Cass Information Systems, Inc. $85,205 13.64% $49,978 8.00% $ N/A $ N/A
Cass Commercial Bank 42,242 14.19 23,815 8.00 29,769 10.00%
Tier I capital (to risk-weighted assets):
Cass Information Systems, Inc. 74,913 11.99 24,989 4.00 N/A N/A
Cass Commercial Bank 38,511 12.94 11,908 4.00 17,861 6.00%
Tier I capital (to average assets):
Cass Information Systems, Inc. 74,913 8.65 26,248 3.00 N/A N/A
Cass Commercial Bank 38,511 11.25 10,273 3.00 17,122 5.00%
Note 4
Investment in Debt and Equity Securities
Debt and marketable equity securities have been classified in the consolidated
balance sheets as available for sale according to management's intent. The
amortized cost, gross unrealized gains, gross unrealized losses and fair value
of debt and equity securities at December 31, 2007 and 2006 are summarized as
follows:
2007
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 1,995 $ 1 $ -- $ 1,996
37
Obligations of U.S. government-sponsored
corporations and agencies 1,500 -- 1 1,499
State and political subdivisions 165,072 2,509 103 167,478
------------------------------------------------------------------------------------------------
Total debt securities 168,567 2,510 104 170,973
Stock in Federal Reserve Bank and
Federal Home Loan Bank 733 -- -- 733
------------------------------------------------------------------------------------------------
Total $169,300 $2,510 $ 104 $ 171,706
------------------------------------------------------------------------------------------------
2006
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 16,849 $ -- $ 25 $ 16,824
Obligations of U.S. government-sponsored
corporations and agencies 3,022 -- 37 2,985
State and political subdivisions 81,559 862 214 82,207
-------------------------------------------------------------------------------------------------
Total debt securities 101,430 862 276 102,016
Stock in Federal Reserve Bank and
Federal Home Loan Bank 733 -- -- 733
-------------------------------------------------------------------------------------------------
Total $ 102,163 $ 862 $ 276 $ 102,749
-------------------------------------------------------------------------------------------------
The fair values of securities with unrealized losses at December 31, 2007 and
2006 are as follows:
2007
---------------------------------------------------------------------------------
Less than 12 months 12 months or more Total
---------------------------------------------------------------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In thousands) fair value losses fair value losses Fair value losses
- ----------------------------------------------------------------------------------------------------------------------
U. S. Treasury securities $ -- $ -- $ -- $ -- $ -- $ --
Obligations of U.S.
government-sponsored
corporations and agencies -- -- 1,000 1 1,000 1
State and political subdivisions 8,882 35 6,931 68 15,813 103
- ----------------------------------------------------------------------------------------------------------------------
Total $ 8,882 $ 35 $ 7,931 $ 69 $ 16,813 $ 104
- ----------------------------------------------------------------------------------------------------------------------
2006
---------------------------------------------------------------------------------
Less than 12 months 12 months or more Total
---------------------------------------------------------------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In thousands) fair value losses fair value losses Fair value losses
- ----------------------------------------------------------------------------------------------------------------------
U. S. Treasury securities $ 16,824 $ 25 $ -- $ -- $ 16,824 $ 25
Obligations of U.S.
government-sponsored
corporations and agencies -- -- 2,985 37 2,985 37
State and political subdivisions 11,729 37 10,622 177 22,351 214
- ----------------------------------------------------------------------------------------------------------------------
Total $ 28,553 $ 62 $ 13,607 $ 214 $ 42,160 $ 276
- ----------------------------------------------------------------------------------------------------------------------
There were 21 securities (11 greater than 12 months) in an unrealized loss
position as of December 31, 2007. All unrealized losses are reviewed to
determine whether the losses are other than temporary. Management believes that
all unrealized losses are temporary since they are market driven and the Company
has the ability and intent to hold these securities until maturity.
There were 38 securities (17 greater than 12 months) in an unrealized loss
position as of December 31, 2006. All unrealized losses are reviewed to
determine whether the losses are other than temporary. Management believes that
all unrealized losses are temporary since they are market driven and the Company
has the ability and intent to hold these securities until maturity.
The amortized cost and fair value of debt and equity securities at December 31,
2007, by contractual maturity, are shown in the following table. Expected
maturities may differ from contractual maturities because borrowers have the
right to prepay obligations with or without prepayment penalties.
(Dollars in thousands) 2007
-------------------------------------------------------------------------------------------------
Amortized Cost Fair Value
Due in 1 year or less $ 3,006 $ 3,617
Due after 1 year through 5 years 45,879 51,479
Due after 5 years through 10 years 74,185 70,906
38
Due after 10 years 45,497 44,971
No stated maturity 733 733
- -------------------------------------------------------------------------------------------------
Total $169,300 $ 171,706
- -------------------------------------------------------------------------------------------------
The amortized cost of debt securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes at
December 31, 2007 and 2006 were $3,495,000 and $5,006,000, respectively.
Proceeds from sales of debt securities classified as available-for-sale were $0
in 2007 and 2006 and $12,950,000 in 2005. Gross realized gains and losses on the
sales were $0 in 2007 and 2006 and $547,000 in 2005.
Note 5
Loans
A summary of loan categories at December 31, 2007 and 2006 is as follows:
(Dollars in thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Commercial and industrial $ 100,827 $ 113,162
Real estate:
Mortgage - Commercial 122,397 140,095
Mortgage - Church & related 238,510 211,949
Construction 16,035 15,064
Construction - Church & related 15,047 14,715
Industrial revenue bonds 4,149 6,293
Other 1,490 2,847
-------------------------------------------------------------------------------------------------
Total $ 498,455 $ 504,125
-------------------------------------------------------------------------------------------------
The Company originates commercial, industrial and real estate loans to
businesses, churches and consumers throughout the metropolitan St. Louis,
Missouri area, Orange County, California and other selected cities in the United
States. The Company does not have any particular concentration of credit in any
one economic sector; however, a substantial portion of the commercial and
industrial loans are extended to privately-held commercial companies in this
market area, and are generally secured by the assets of the business. The
Company also has a substantial portion of real estate loans secured by mortgages
that are extended to churches in its market area and selected cities throughout
the United States.
Loan transactions involving executive officers and directors of the Company and
its subsidiaries and loans to affiliates of executive officers and directors for
the year ended December 31, 2007, are summarized below. Such loans were made in
the normal course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectability.
(In thousands)
------------------------------------------------------------------------------
Aggregate balance, January 1, 2007 $ 961
New loans 200
Payments 220
------------------------------------------------------------------------------
Aggregate balance, December 31, 2007 $ 941
------------------------------------------------------------------------------
A summary of the activity in the allowance for loan losses for 2007, 2006 and
2005 is as follows:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Balance, January 1 $ 6,592 $ 6,284 $ 6,037
Provision charged to expense 900 1,150 775
Loans charged off (1,375) (864) (555)
Recoveries of loans previously
charged off 163 22 27
-------------------------------------------------------------------------------------------------
Net loan charge-offs (1,212) (842) (528)
-------------------------------------------------------------------------------------------------
Balance, December 31 $ 6,280 $ 6,592 $ 6,284
-------------------------------------------------------------------------------------------------
The following is a summary of information pertaining to impaired loans at
December 31, 2007 and 2006:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Impaired loans without a valuation allowance $ 496 $ --
Impaired loans with a valuation allowance 1,985 795
Allowance for loan losses related to impaired loans 1,078 395
-------------------------------------------------------------------------------------------------
39
Impaired loans consist primarily of renegotiated loans, nonaccrual loans and
loans greater than 90 days past due and still accruing interest. There was one
impaired loan continuing to accrue interest at December 31, 2007. Nonaccrual
loans were $1,985,000 and $795,000 at December 31, 2007 and 2006, respectively.
Loans delinquent 90 days or more and still accruing interest totaled $496,000 at
December 31, 2007 and $481,000 at December 31, 2005. The average balances of
impaired loans during 2007, 2006 and 2005 were $2,227,000, $1,177,000 and
$3,103,000, respectively. Income that would have been recognized on non-accrual
loans under the original terms of the contract was $163,000, $152,000 and
$114,000 for 2007, 2006 and 2005, respectively. Income that was recognized on
non-accrual loans was $149,000, $25,000 and $32,000 for 2007, 2006 and 2005,
respectively. There is one foreclosed loan with a book value of $1,388,000 which
has been reclassified as other real estate owned (included in other assets) as
of December 31, 2007.
Note 6
Premises and Equipment
A summary of premises and equipment at December 31, 2007 and 2006, is as
follows:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Land $ 873 $ 873
Buildings 10,468 10,453
Leasehold improvements 2,013 2,013
Furniture, fixtures and equipment 14,164 18,312
Purchased software 4,887 4,672
Internally developed software 4,037 4,037
-------------------------------------------------------------------------------------------------
36,442 40,360
Less accumulated depreciation and amortization 23,671 27,462
-------------------------------------------------------------------------------------------------
Total $ 12,771 $ 12,898
-------------------------------------------------------------------------------------------------
Total depreciation and amortization charged to expense in 2007, 2006 and 2005
amounted to $2,239,000, $2,042,000 and $1,971,000, respectively.
The Company and its subsidiaries lease various premises and equipment under
operating lease agreements, which expire at various dates through 2020. Rental
expense for 2007, 2006 and 2005 was $646,000, $614,000 and $552,000,
respectively. The following is a schedule, by year, of future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2007:
(In thousands) Amount
-----------------------------------------------------------------------------
2008 $ 715
2009 531
2010 479
2011 470
2012 404
2013 and after 1,170
-----------------------------------------------------------------------------
Total $ 3,769
-----------------------------------------------------------------------------
Note 7
Equity Investments in Non-Marketable Securities
Non-marketable equity investments in low-income housing projects are included in
other assets on the Company's consolidated balance sheets. The total balances of
these investments at December 31, 2007 and 2006 were $475,000 and $329,000,
respectively.
Note 8
Acquired Intangible Assets
The Company accounts for intangible assets in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," which requires that intangibles with
indefinite useful lives be tested annually for impairment and those with finite
useful lives be amortized over their useful lives. Details of the Company's
intangible assets as of December 31, 2007 and 2006 are as follows:
December 31, 2007 December 31, 2006
--------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------------------------------------
Assets eligible for amortization:
40
Software $ 862 $ (574) $ 862 $ (402)
Customer List 750 (161) 750 (54)
- -------------------------------------------------------------------------------------------------------------------
Total 1,612 (735) 1,612 (456)
- -------------------------------------------------------------------------------------------------------------------
Assets not eligible for amortization:
Goodwill 7,698 (227)* 7,698 (227)*
- -------------------------------------------------------------------------------------------------------------------
Total 7,698 (227) 7,698 (227)
- -------------------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $ (962) $ 9,310 $ (683)
- -------------------------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS No. 142.
Software is amortized over 4-5 years and the customer list that was acquired in
the NTransit purchase is amortized over seven years on a straight-line basis.
Goodwill includes $3,073,000 acquired in 2006 in the NTransit purchase. The
weighted average remaining amortization period at December 31, 2007 was five
years for all amortized intangible assets combined. Amortization of intangible
assets amounted to $280,000, $226,000 and $172,000 for the years ended December
31, 2007, 2006 and 2005 respectively. Estimated future amortization of
intangibles is as follows: $280,000 in 2008, $222,000 in 2009, $107,000 in 2010,
2011 and 2012.
Note 9
Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 2007 and
2006:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
NOW and money market deposit accounts $ 75,250 $ 66,588
Savings deposits 22,530 27,923
Time deposits:
Less than $100 26,908 27,653
$100 or more 55,718 61,143
-------------------------------------------------------------------------------------------------
Total $ 180,406 $ 183,307
-------------------------------------------------------------------------------------------------
Interest on deposits consists of the following for 2007, 2006 and 2005:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
NOW and money market deposit accounts $ 2,122 $ 1,831 $ 1,485
Savings deposits 795 730 458
Time deposits:
Less than $100 1,454 1,297 1,142
$100 or more 3,357 2,556 1,401
-------------------------------------------------------------------------------------------------
Total $ 7,728 $ 6,414 $ 4,486
-------------------------------------------------------------------------------------------------
The scheduled maturities of time deposits at December 31, 2007 and 2006 are
summarized as follows:
2007 2006
-----------------------------------------------------
Percent Percent
(In thousands) Amount of Total Amount of Total
-------------------------------------------------------------------------------------------------
Due within:
One year $79,472 96.2% $84,928 95.6%
Two years 1,171 1.4% 2,262 2.5%
Three years 1,363 1.6% 227 .3%
Four years 60 .1% 1,235 1.4%
Five years 560 .7% 144 .2%
-------------------------------------------------------------------------------------------------
Total $82,626 100.0% $88,796 100.0%
-------------------------------------------------------------------------------------------------
Note 10
Subordinated Convertible Debentures and Unused Available Lines of Credit
On August 24, 2004, the Company issued $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 $19.47 after the third anniversary of the
issuance date. After the fourth anniversary date an additional 30% can be
converted under the same terms. After the fifth anniversary date, 100% can be
converted under the same terms. The securities mature 10 years after the date of
issuance. The debentures may be called by the Company without penalty after
August 24, 2010. In
41
December, 2007, one debtholder converted $12,000 of the principal balance into
532 shares of the Company's common stock in accordance with the conversion
provisions, resulting in an ending principal balance of $3,688,000.
The Bank has unsecured lines of credit at correspondent banks to purchase
federal funds up to a maximum of $39,000,000. Additionally, the Bank maintains
lines of credit at unaffiliated financial institutions in the maximum amount of
$62,806,000 collateralized by U.S. Treasury and agency securities and commercial
mortgage loans. There were no outstanding borrowings under these arrangements at
December 31, 2007 or 2006.
Note 11
Common Stock and Earnings Per Share
The table below shows activity in the outstanding shares of the Company's common
stock during 2007.
----------------------------------------------------------------------------------
Shares outstanding at January 1, 2007 8,327,711
Issuance of common stock:
10% stock dividend, issued December 17, 2007 836,840
Issued under Stock Bonus Plan* 42,520
Stock options exercised* 1,079
Subordinated debt conversion 532
Stock repurchased* -
----------------------------------------------------------------------------------
Shares outstanding at December 31, 2007 9,208,682
----------------------------------------------------------------------------------
*Not restated for stock dividend, issued December 17, 2007.
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. Under the treasury stock method,
outstanding stock options are dilutive when the average market price of the
Company's common stock, combined with the effect of any unamortized compensation
expense, exceeds the option price during a period. In addition, proceeds from
the assumed exercise of dilutive options along with the related tax benefit are
assumed to be used to repurchase common shares at the average market price of
such stock during the period. Anti-dilutive shares are those option shares with
exercise prices in excess of the current market value.
The calculations of basic and diluted earnings per share for the periods ended
December 31, 2007, 2006 and 2005 are as follows:
(Dollars in thousands, except per share data) 2007 2006 2005
- ----------------------------------------------------------------------------------------------------------------
Basic
Net income from continuing operations $ 17,795 $ 15,461 $ 11,244
Net loss from discontinued operations -- (395) (298)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 17,795 $ 15,066 $ 10,946
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 9,145,499 9,141,188 9,088,984
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share from continuing operations $ 1.95 $ 1.69 $ 1.24
Basic earnings per share from discontinued operations -- (.04) (.03)
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.95 $ 1.65 $ 1.21
- ----------------------------------------------------------------------------------------------------------------
Diluted
Net income from continuing operations $ 17,795 $ 15,461 $ 11,244
Net income effect of 5.33% convertible debentures 109 109 108
- ----------------------------------------------------------------------------------------------------------------
Net income, assuming dilution, from continuing operations 17,904 15,570 11,352
Net loss from discontinued operations - (395) (298)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 17,904 $ 15,175 $ 11,054
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,145,499 9,141,188 9,088,984
Effect of dilutive stock options and awards 111,119 74,613 129,989
Effect of 5.33% convertible debentures 189,940 189,989 189,989
- ----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding assuming dilution 9,446,558 9,405,790 9,408,962
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share from continuing operations $ 1.90 $ 1.65 $ 1.21
Diluted earnings per share from discontinued operations - (.04) (.04)
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.90 $ 1.61 $ 1.17
- ----------------------------------------------------------------------------------------------------------------
42
Share and per share data in the schedule above have been restated for the 10%
stock dividend on December 17, 2007 and the 50% stock dividends on September 15,
2006 and 2005.
Note 12
Employee Benefit Plans
The Company has a noncontributory defined-benefit pension plan (the 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.
The Company also has an unfunded supplemental executive retirement plan (SERP)
which covers key executives of the Company. The SERP is a noncontributory plan
in which the Company's subsidiaries make accruals designed to fund normal
service costs on a current basis using the same method and criteria as the Plan.
On December 31, 2006, the Company adopted the provisions of SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans". SFAS No. 158 requires recognition of the overfunded or underfunded
status through comprehensive income in the year in which they occur. SFAS No.
158 was adopted on a prospective basis as required. Prior years' amounts were
not restated.
A summary of the activity in the Plan's projected benefit obligation, assets,
funded status and amounts recognized in the Company's consolidated balance
sheets at December 31, 2007 and 2006 is as follows:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Projected benefit obligation:
Balance, January 1 $ 28,977 $ 26,535
Service cost 1,622 1,554
Interest cost 1,771 1,565
Actuarial loss (1,493) (99)
Benefits paid (666) (578)
-------------------------------------------------------------------------------------------------
Balance, December 31 $ 30,211 $ 28,977
-------------------------------------------------------------------------------------------------
Plan assets:
Fair value, January 1 $ 25,193 $ 20,702
Actual return 963 1,869
Employer contribution 3,200 3,200
Benefits paid (666) (578)
-------------------------------------------------------------------------------------------------
Fair value, December 31 $ 28,690 $ 25,193
-------------------------------------------------------------------------------------------------
Funded status:
Accrued pension liability $ (1,521) $ (3,784)
========= ========
The following represent the major assumptions used to determine the projected
benefit obligation of the Plan. The Plan's expected benefit cash flows are
discounted using the Citibank Pension Discount Curve rates.
2007 2006 2005
- ------------------------------------------------------------------------------------------
Weighted average discount rate 6.50% 6.00% 5.75%
Rate of increase in compensation levels 4.25% 4.00% 4.00%
The accumulated benefit obligation was $23,898,000 and $23,092,000 as of
December 31, 2007 and 2006, respectively. The Company expects to contribute
approximately $1,800,000 to the Plan in 2008. The following pension benefit
payments, which reflect expected future service, as appropriate, are expected to
be paid by the Plan:
2008 $ 977
2009 1,050
2010 1,162
2011 1,171
2012 1,310
2013-2017 8,747
43
The Plan's pension cost for 2007, 2006 and 2005 was $1,725,000, $1,786,000 and
$1,473,000, respectively, and included the following components:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $1,622 $ 1,554 $ 1,292
Interest cost on projected benefit obligations 1,771 1,565 1,384
Expected return on plan assets (1,865) (1,603) (1,312)
Net amortization and deferral 197 270 109
-------------------------------------------------------------------------------------------------
Net periodic pension cost $1,725 $ 1,786 $ 1,473
-------------------------------------------------------------------------------------------------
The following represent the major assumptions used to determine the net pension
cost of the Plan:
2007 2006 2005
-------------------------------------------------------------------------------------------------
Weighted average discount rate 6.00% 5.75% 6.00%
Rate of increase in compensation levels 4.25% 4.00% 4.00%
Expected long-term rate of return on assets 7.25% 7.50% 7.50%
The asset allocation for the Plan as of the measurement date, by asset category,
is as follows:
Percentage of
Plan Assets
-------------------------------------------------------------------------------------------------
Asset Class 2007 2006
-------------------------------------------------------------------------------------------------
Equity securities 45.0% 43.8%
Debt securities 54.6% 55.8%
Cash and cash equivalents .4% 0.4%
-------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
-------------------------------------------------------------------------------------------------
The investment objective for the Plan is to maximize total return with a
tolerance for average risk. Asset allocation strongly favors fixed income
investments, with a target allocation of approximately 67% fixed income, 33%
equities, and 0% cash. Due to volatility in the market, this target allocation
is not always desirable and asset allocations can fluctuate between acceptable
ranges. The fixed income component is invested in pooled investment grade
securities. The equity component is invested in pooled large cap stocks. More
aggressive or volatile sectors, although currently not employed, can be
represented in the asset mix to pursue higher returns with proper
diversification. The assumed long-term rate of return on assets, which falls
within the expected range, is 7.25% as derived below:
Expected Long-Term Contribution to
Asset Class Return on Class X Allocation = Assumption
-------------------------------------------------------------------------------------------------
Equity securities 7 - 9% 45% 3.2% - 4.1%
Fixed income 5 - 7% 55% 2.8% - 3.9%
-------------------------------------------------------------------------------------------------
6.0% - 8.0%
A summary of the activity in the SERP's projected benefit obligation, funded
status and amounts recognized in the Company's consolidated balance sheets at
December 31, 2007 and 2006, is as follows:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Benefit obligation:
Balance, January 1 $ 2,745 $ 2,888
Service cost (benefit) 44 43
Interest cost 233 150
Actuarial loss (gain) 1,241 (336)
-------------------------------------------------------------------------------------------------
Balance, December 31 $ 4,263 $ 2,745
-------------------------------------------------------------------------------------------------
The SERP's pension cost for 2007, 2006 and 2005 was $526,000, $304,000, and
$191,000, respectively, and included the following components:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 44 $ 43 $ (34)
Interest cost on projected benefit obligations 233 150 161
Net amortization and deferral 249 111 64
-------------------------------------------------------------------------------------------------
Net periodic pension cost $ 526 $ 304 $ 191
-------------------------------------------------------------------------------------------------
44
The accumulated benefit obligation was $3,147,000 and $2,107,000 as of December
31, 2007 and 2006, respectively. Since this is an unfunded plan there are no
plan assets. Benefits paid were $32,000 in 2007, $32,000 in 2006 and $20,000 in
2005. Expected future benefits payable by the Company over the next 10 years are
as follows:
2008 $268,000
2009 268,000
2010 267,000
2011 267,000
2012 266,000
2013 - 2017 1,329,000
The major assumptions used to determine the projected benefit obligation and net
benefit cost are the same as those in the Plan explained above.
The pre-tax amounts in accumulated other comprehensive income (loss) as of
December 31 were as follows:
The Plan SERP
---------------------------- ------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(In thousands)
Prior service cost $ 57 $ 66 $ 202 $ 252
Net actuarial loss 3,465 4,245 1,829 755
------------ ------------ ------------ -------------
Total $ 3,522 $ 4,311 $ 2,031 $ 1,007
============ ============ ============ =============
The estimated pre-tax prior service cost and net actuarial loss in accumulated
other comprehensive income (loss) at December 31, 2007 expected to be recognized
as components of net periodic benefit cost in 2008 for the Plan were $8,000 and
$39,000 respectively. The estimated pre-tax prior service cost and net actuarial
loss in accumulated other comprehensive income (loss) at December 31, 2007,
expected to be recognized as components of net periodic benefit cost in 2008 for
SERP are $50,000 and $184,000 respectively.
The Company also maintains a noncontributory profit sharing plan, which covers
most of its employees. Employer contributions are calculated based upon formulas
which relate to current operating results and other factors. Profit sharing
expense recognized in the consolidated statements of income in 2007, 2006 and
2005 was $4,097,000, $3,524,000 and $2,543,000, respectively.
The Company also sponsors a defined contribution 401(k) plan to provide
additional retirement benefits to substantially all employees. Contributions
under the 401(k) plan for 2007, 2006 and 2005 were $430,000, $349,000 and
$334,000, respectively.
Note 13
Stock Bonus and Option Plans
All shares and per share amounts have been restated for the 10% stock dividend
issued December 17, 2007 and the 50% stock dividends issued September 15, 2006
and September 15, 2005.
On January 16, 2007, the Board approved, and on April 16, 2007, the Company's
shareholders approved, the 2007 Omnibus Incentive Stock Plan ("the Omnibus
Plan") to provide incentive opportunities for key employees and non-employee
directors and to align the personal financial interests of such individuals with
those of the Company's shareholders. The Omnibus Plan permits the issuance of up
to 880,000 shares of the Company's common stock in the form of stock options,
stock appreciation rights, restricted stock, restricted stock units and
performance awards. As of December 31 2007, no awards have been granted under
the Omnibus Plan.
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options previously issued
and outstanding. Restricted shares are amortized to expense over the three-year
vesting period. Options currently vest and expire over a period not to exceed
seven years. The plans authorize the grant of awards in the form of options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code, options that do not qualify (non-statutory stock options) and
grants of restricted shares of common stock. The Company issues shares out of
treasury stock for restricted shares and option exercises. These plans have been
superseded by the Omnibus Plan and accordingly, all remaining unissued shares
under these plans have been cancelled.
As of December 31, 2007, the total unrecognized compensation expense related to
non-vested restricted stock awards was $1,276,000 and the related
weighted-average period over which it is expected to be recognized is
approximately 1.0 years. Changes in restricted shares outstanding for the year
ended December 31 2007 were as follows:
45
Year Ended December 31
--------------------------------
Shares Fair Value
---------------------------------------------------------------------------------------------
Balance at December 31, 2006 24,729 $20.80
Granted 47,432 33.66
Vested (11,152) 18.63
Forfeited (660) 27.22
---------------------------------------------------------------------------------------------
Balance at December 31, 2007 60,349 $31.28
---------------------------------------------------------------------------------------------
During 2007, 2006 and 2005, 47,432 shares, 16,511 shares and 9,309 shares,
respectively, were granted with weighted average per share market values at date
of grant of $33.66 in 2007, $24.16 in 2006 and $14.86 in 2005. The fair value of
such shares, which is based on the market price on the date of grant, is
amortized to expense over the three-year vesting period. Amortization of the
restricted stock bonus awards totaled $648,000 for 2007, $197,000 for 2006 and
$134,000 for 2005.
As of December 31 2007, the total unrecognized compensation expense related to
non-vested stock options was $102,000 and the related weighted-average period
over which it is expected to be recognized is approximately 4.0 years. For the
year ended December 31, 2007, there were no non-qualified options exercised that
generated a tax benefit and 1,256 were incentive stock options that did not
generate any excess tax benefits for the Company. During 2007, the Company
recognized stock option expense of $30,000.
The following table summarizes stock options outstanding as of December 31,
2007:
Weighted Average
Exercise Options Remaining
Price Outstanding Contractual Life
- ----------------------------------------------------------------------------------------
$ 8.83 470 1.01
9.09 29,700 2.01
10.00 4,172 2.01
12.23 14,530 3.01
14.51 4,451 3.01
15.36 2,942 3.01
14.44 4,787 4.01
14.75 7,964 4.01
20.67 26,313 5.01
------
95,329
======
Changes in options outstanding were as follows:
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 259,459 $ 9.11
Granted 14,565 14.61
Exercised (30,435) 8.45
Forfeited (12,753) 9.23
-------------------------------------------------------------------------------------------------
Balance at December 31, 2005 230,836 9.70
Granted 27,750 20.66
Exercised (154,252) 8.83
Forfeited (7,749) 13.25
-------------------------------------------------------------------------------------------------
Balance at December 31, 2006 96,585 14.00
-------------------------------------------------------------------------------------------------
Granted -- --
Exercised (1,256) 15.03
Forfeited -- --
-------------------------------------------------------------------------------------------------
Balance at December 31, 2007 95,329 $13.99
-------------------------------------------------------------------------------------------------
Exercisable at December 31, 2007 18,253 $10.20
-------------------------------------------------------------------------------------------------
The total intrinsic value of options exercised during 2007 was $21,000. The
total intrinsic value of options exercised during 2006 was $1,728,000. The
average remaining contractual term for options exercisable as of December 31,
2007 was 2.3 years and the aggregate intrinsic value was $424,000.
46
A summary of the activity of the non-vested options during 2007 is shown below.
Weighted-
Average
Grant Date
Shares Fair Value
- ------------------------------------------------------------------
Non-vested at December 31, 2006 93,946 $2.16
Granted -- --
Vested (16,870) 1.59
Forfeited -- --
- ------------------------------------------------------------------
Non-vested at December 31, 2007 77,076 $2.29
- ------------------------------------------------------------------
The Company uses the Black-Scholes option-pricing model to determine the fair
value of the stock options at the date of grant. Following are the assumptions
used to estimate the fair value of option grants during the years ended December
31, 2007 and 2006:
- --------------------------------------------------------------------------------
2007 2006
Risk-free interest rate -- 4.37%
Expected life -- 7 yrs.
Expected volatility -- 5.00%
Expected dividend yield -- 1.88%
- --------------------------------------------------------------------------------
The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for
the period equal to the expected life of the options at the time of the grant.
The expected life was derived using the historical exercise activity. The
Company uses historical volatility for a period equal to the expected life of
the options using average monthly closing market prices of the Company's stock.
The expected dividend yield is determined based on the Company's current rate of
annual dividends.
Note 14
Other Operating Expense
Details of other operating expense for 2007, 2006 and 2005 are as follows:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Postage and supplies $ 2,830 $ 2,502 $ 2,310
Promotional Expense 1,629 1,552 1,289
Professional fees 2,018 1,997 1,750
Outside service fees 1,432 2,088 1,946
Data processing services 272 232 220
Telecommunications 585 578 522
Other 1,266 1,519 1,127
-------------------------------------------------------------------------------------------------
Total other operating expense $ 10,032 $ 10,468 $ 9,164
-------------------------------------------------------------------------------------------------
Note 15
Income Taxes
The components of income tax expense (benefit) from continuing operations for
2007, 2006 and 2005 are as follows:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Current:
Federal $ 5,258 $ 7,196 $ 5,171
State 1,481 1,460 732
Deferred 1,409 (289) (921)
-------------------------------------------------------------------------------------------------
Total income tax expense $ 8,148 $ 8,367 $ 4,982
-------------------------------------------------------------------------------------------------
A reconciliation of expected income tax expense (benefit), computed by applying
the effective federal statutory rate of 35% for 2007, 2006 and 2005 to income
from continuing operations before income tax expense, to reported income tax
expense is as follows:
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------------------------
Expected income tax expense: $ 9,080 $ 8,340 $ 5,517
(Reductions) increases resulting from
47
Tax-exempt income (1,952) (1,151) (769)
State taxes, net of federal benefit 963 949 483
Other, net 57 229 (249)
-------------------------------------------------------------------------------------------------
Total income tax expense $ 8,148 $ 8,367 $ 4,982
-------------------------------------------------------------------------------------------------
The tax effects of temporary differences which give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2007 and
2006, are presented below:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 2,394 $ 2,513
SFAS No. 158 pension funding liability 2,057 2,416
Security impairment write-down -- 1,152
Net operating loss carry forward(1) 540 582
Deferred revenue 37 53
Stock compensation 230 65
Supplemental executive retirement plan accrual 91 --
Other 68 65
--------------------------------------------------------------------------------------------
Total deferred tax assets $ 5,417 $ 6,846
-------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment (13) (3)
Intangible/assets (477) (427)
Unrealized gain on investment in securities available-for-sale (842) (205)
Other (147) (154)
--------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,479) (789)
-------------------------------------------------------------------------------------------------
Net deferred tax assets $ 3,938 $ 6,057
-------------------------------------------------------------------------------------------------
1. As of December 31, 2007, the Company had approximately $1,600,000
of net operating loss carryforwards as a result of the
acquisition of Franklin Bancorp. The utilization of the net
operating loss carryforward is subject to Section 382 of the
Internal Revenue Code and limits the Company's use to
approximately $120,000 per year during the carryforward period,
which expires in 2019.
A valuation allowance would be provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized. The
Company has not established a valuation allowance at December 31, 2007 or 2006,
due to management's belief that all criteria for recognition have been met,
including the existence of a history of taxes paid sufficient to support the
realization of deferred tax assets.
The Company's income tax (benefit) expense from discontinued operations was
$(280,000) and $557,000 with effective rates of 41% and 215% for the years 2006
and 2005, respectively. There was no income (loss) from discontinued operations
in 2007.
The Company adopted FASB Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes" effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes in financial statements and
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken. The implementation of FIN 48 resulted in the recognition of a cumulative
effect of change in accounting principle of $87,000, which was recorded as an
increase to beginning retained earnings.
The following table presents a reconciliation of the total amounts of
unrecognized tax benefits at the beginning and end of 2007 (in thousands):
Balance at January 1, 2007 $ 655
Changes in unrecognized tax benefits as a result of tax positions taken during a
prior year (55)
Changes in unrecognized tax benefits as a result of tax position taken during the
current year 465
Decreases in unrecognized tax benefits relating to settlements with taxing
authorities --
Reductions to unrecognized tax benefits as a result of a lapse of the applicable
statute of limitations (32)
-----
Balance at December 31, 2007 $ 1,033
=====
The total amount of federal and state unrecognized tax benefits at December 31,
2007 that, if recognized, would affect the effective tax rate was $806,000, net
of federal tax benefit.
48
The Company expects a reduction (increase) of $64,000 in unrecognized tax
benefits during the following year ending December 31, 2008 as a result of the
lapse of federal and state statutes of limitations. The unrecognized tax
benefits relate primarily to apportionment of taxable income among various state
tax jurisdictions.
The Company's policy is to record interest and penalties related to unrecognized
tax benefits as a component of income tax expense. The amount of interest
recognized during the year ended December 31, 2007 was $6,000. The amount of
interest recognized for all tax years subject to examination was $24,000. There
were no penalties for unrecognized tax benefits accrued at December 31, 2007 or
January 1, 2007, nor did the Company recognize any expense for penalties during
2007.
The Company is subject to income tax in the U. S. federal jurisdiction and
numerous state jurisdictions. The Company's federal income tax returns for 2004
and 2005 have been examined by the Internal Revenue Service. U.S. federal income
tax returns for tax year 2006 and 2007 remain subject to examination by the
Internal Revenue Service ("IRS"). In addition, the Company is subject to state
tax examinations for the tax years 2004 through 2007.
Note 16
Contingencies
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 17
Disclosures About Financial Instruments
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial letters
of credit and standby letters of credit. The Company's maximum potential
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, commercial letters of
credit and standby letters of credit is represented by the contractual amounts
of those instruments. At December 31, 2007, no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These off-balance
sheet financial instruments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The approximate remaining
term of commercial and standby letters of credit range from less than 1 to 5
years. Since these financial instruments may expire without being drawn upon,
the total amounts do not necessarily represent future cash requirements.
Commitments to extend credit and letters of credit are subject to the same
underwriting standards as those financial instruments included on the
consolidated balance sheets. The Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of the credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but is generally accounts
receivable, inventory, residential or income-producing commercial property or
equipment. In the event of nonperformance, the Company may obtain and liquidate
the collateral to recover amounts paid under its guarantees on these financial
instruments.
The following table shows conditional commitments to extend credit, standby
letters of credit and commercial letters at December 31, 2007 and 2006:
(In thousands) 2007 2006
-------------------------------------------------------------------------------------------------
Conditional commitments to extend credit $ 29,036 $ 22,506
Standby letters of credit 5,999 6,417
Commercial letters of credit 4,147 2,650
-------------------------------------------------------------------------------------------------
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2007 and 2006:
2007 2006
-----------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------------------------------------------------------------------------------------------------
Balance sheet assets:
Cash and cash equivalents $ 176,070 $ 176,070 $ 196,504 $ 196,504
Investment in debt and equity securities 171,706 171,706 102,749 102,749
Loans, net 492,175 495,335 497,533 494,735
Accrued interest receivable 4,710 4,710 4,140 4,140
- ---------------------------------------------------------------------------------------------------------
Total $ 844,661 $ 847,821 $ 800,926 $ 798,128
------------------------------------------------------------------------------------------------
49
Balance sheet liabilities:
Deposits $ 273,596 $ 273,596 $ 289,894 $ 289,894
Accounts and drafts payable 513,734 513,734 468,393 468,393
Short-term borrowings 219 219 181 181
Subordinated convertible debentures 3,688 3,786 3,700 3,110
Accrued interest payable 588 588 744 744
------------------------------------------------------------------------------------------------
Total $ 791,825 $ 791,923 $ 762,912 $ 762,322
------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Other Short-term Instruments For cash and cash equivalents, accrued
interest receivable, accounts and drafts payable, short-term borrowings and
accrued interest payable, the carrying amount is a reasonable estimate of fair
value because of the demand nature or short maturities of these instruments.
Investment in Debt and Equity Securities Fair values are based on quoted market
prices or dealer quotes.
Loans The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits The fair value of demand deposits, savings deposits and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market nor the benefit derived from the customer relationship
inherent in existing deposits.
Subordinated Convertible Debentures The fair value of convertible subordinated
debentures is estimated by discounting the projected future cash flows using
estimated current rates for similar borrowings.
Commitments to Extend Credit and Standby Letters of Credit The fair value of
commitments to extend credit and standby letters of credit is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the likelihood of the counterparties
drawing on such financial instruments and the present credit-worthiness of such
counterparties. The Company believes such commitments have been made at terms
which are competitive in the markets in which it operates; however, no premium
or discount is offered thereon.
Limitations Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets or liabilities that are not
considered financial assets or liabilities include premises and equipment and
the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market (core deposit
intangible). In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Note 18
Industry Segment Information
The services provided by the Company are classified into two reportable
segments: Information Services and Banking Services. Each of these segments
provides distinct services that are marketed through different channels. They
are managed separately due to their unique service, processing and capital
requirements.
The Information Services segment provides freight, utility and telecommunication
invoice processing and payment services to large corporations. The Banking
Services segment provides banking services primarily to privately held
businesses and churches.
The Company's accounting policies for segments are the same as those described
in Note 1 of this report. 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.
50
All revenue originates from and all long-lived assets are located within the
United States and no revenue from any customer of any segment exceeds 10% of the
Company's consolidated revenue.
Summarized information about the Company's operations in each industry segment
for the years ended December 31, 2007, 2006 and 2005, is as follows:
Corporate
Information Banking and
(In thousands) Services Services Eliminations Total
- -------------------------------------------------------------------------------------------------------------------
2007
Fee revenue and other income:
Income from customers $ 46,498 $ 1,702 $ -- $ 48,200
Intersegment income (expense) 5,155 1,752 (6,907) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 27,103 13,379 -- 40,482
Intersegment interest 278 (278) -- --
Depreciation and amortization 2,118 385 16 2,519
Income taxes 5,852 2,296 -- 8,148
Net income from continuing operations 14,363 3,432 -- 17,795
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 877 -- -- 877
Total assets $ 588,408 $ 345,750 $ (31,118) $ 903,040
- ------------------------------------------------------------------------------------------------------------------
2006
Fee revenue and other income:
Income from customers $ 41,180 $ 1,641 $ -- $ 42,821
Intersegment income (expense) 1,487 1,741 (3,228) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 25,500 13,784 -- 39,284
Intersegment interest 349 (349) -- --
Depreciation and amortization 1,889 379 -- 2,268
Income taxes 5,431 2,936 -- 8,367
Net income from continuing operations 11,151 4,310 -- 15,461
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 1,156 -- -- 1,156
Total assets $ 527,227 $ 333,454 $ (2,210) $ 858,471
- ------------------------------------------------------------------------------------------------------------------
2005
Fee revenue and other income:
Income from customers $ 35,901 $ 2,752 $ -- $ 38,653
Intersegment income (expense) 1,323 1,597 (2,920) --
Net interest income (expense) after
provision for loan losses:
Interest from customers 19,436 13,353 -- 32,789
Intersegment interest 163 (163) -- --
Depreciation and amortization 1,865 278 -- 2,143
Income taxes 2,615 2,367 -- 4,982
Net income from continuing operations 6,499 4,745 -- 11,244
Goodwill 4,262 136 -- 4,398
Other intangible assets, net 935 -- -- 935
Assets related to discontinued operations -- -- 400 400
Total assets $ 489,857 $338,107 $ (9,266) $818,698
- ------------------------------------------------------------------------------------------------------------------
51
Note 19
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only)
as of December 31, 2007 and 2006, and the related condensed statements of income
and cash flows for each of the years in the three-year period ended December 31,
2007.
Condensed Balance Sheets
December 31
--------------------------------
(In thousands) 2007 2006
- ----------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 15,895 $ 10,472
Short-term investments 101,886 127,419
Securities available for sale,
at fair value 168,978 98,519
Loans, net 245,898 234,718
Investment in subsidiary 37,963 38,641
Premises and equipment, net 11,480 11,574
Other assets 44,270 44,525
- ----------------------------------------------------------------------------------------------------------
Total assets $ 626,370 $ 565,868
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Accounts and drafts payable $ 513,734 $ 468,393
Subordinated convertible debentures 3,688 3,700
Other liabilities 9,496 9,854
- ----------------------------------------------------------------------------------------------------------
Total liabilities 526,918 481,947
Total shareholders' equity 99,452 83,921
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 626,370 $ 565,868
- ----------------------------------------------------------------------------------------------------------
Condensed Statements of Income
For the Years Ended December 31,
---------------------------------------------
(In thousands) 2007 2006 2005
- ----------------------------------------------------------------------------------------------------------
Income from subsidiary:
Dividends $ 4,117 $ 3,655 $ 3,200
Interest 347 422 197
Management fees 1,722 1,487 1,323
- ----------------------------------------------------------------------------------------------------------
Income from subsidiary 6,186 5,564 4,720
Information services revenue 45,642 40,343 35,901
Net interest income after provision 25,711 23,401 18,189
Gains on sales of investment securities -- - 547
Other income 857 838 608
- ----------------------------------------------------------------------------------------------------------
Total income $ 78,396 $ 70,146 $ 59,965
- ----------------------------------------------------------------------------------------------------------
Expenses:
Salaries and employee benefits $ 41,845 $ 37,479 $ 33,337
Other expenses 12,219 12,430 14,315
- ----------------------------------------------------------------------------------------------------------
Total expenses $ 54,064 $ 49,909 $ 47,652
- ----------------------------------------------------------------------------------------------------------
Income before income tax and equity in
undistributed income of subsidiary 24,332 20,237 12,313
Income tax expense 5,852 5,431 2,614
- ----------------------------------------------------------------------------------------------------------
Income before undistributed income
of subsidiary 18,480 14,806 9,699
(Excess of dividends over) equity in undistributed
Income of subsidiary (685) 260 1,247
- ----------------------------------------------------------------------------------------------------
Net income $ 17,795 $ 15,066 $10,946
- ----------------------------------------------------------------------------------------------------------
52
Condensed Statements of Cash Flows
For the Years Ended December 31,
---------------------------------------------
(In thousands) 2007 2006 2005
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 17,795 $ 15,066 $ 10,946
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income
of subsidiary 685 (260) (1,247)
Net change in other assets (514) (6,288) 41
Net change in other liabilities (322) 2,457 (1,350)
Amortization of stock bonus awards 648 196 134
Other, net 2,073 1,889 1,743
- ----------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 20,365 13,060 10,267
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in securities (68,648) (8,065) (18,975)
Net increase (decrease) in loans (11,180) 35,861 (53,753)
Payment for business acquisitions, net of
cash acquired -- (3,172) --
Purchases of premises and equipment, net (1,904) (2,188) (1,344)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities(81,732) 22,436 (74,072)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in accounts
and drafts payable 45,341 22,582 87,338
Cash dividends paid (4,118) (3,666) (3,201)
Purchases of common shares for treasury -- (870) (1,434)
Other financing activities 34 325 136
- ----------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 41,257 18,371 82,839
- ----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (20,110) 53,867 19,034
Cash and cash equivalents at beginning of year 137,891 84,024 64,990
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 117,781 $ 137,891 $ 84,024
- ----------------------------------------------------------------------------------------------------------
53
Note 20
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter YTD
- -------------------------------------------------------------------------------------------------------------------------------
2007
Fee revenue and other income $11,863 $ 12,051 $ 12,070 $12,216 $ 48,200
Interest income 11,996 12,282 12,718 12,350 49,346
Interest expense 2,011 2,037 2,043 1,873 7,964
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,985 10,245 10,675 10,477 41,382
Provision for loan losses 225 225 225 225 900
Operating expenses 15,333 15,932 15,664 15,810 62,739
Income tax expense 2,104 1,947 2,179 1,918 8,148
- -------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 4,186 4,192 4,677 4,740 17,795
Net income $ 4,186 $ 4,192 $ 4,677 $ 4,740 $ 17,795
===============================================================================================================================
Net income per share:
Basic earnings per share from
continuing operations $ .45 $ .46 $ .51 $ .53 $ 1.95
Basic earnings per share .45 .46 .51 .53 1.95
Diluted earnings per share from
continuing operations .45 .45 .50 .50 1.90
Diluted earnings per share .45 .45 .50 .50 1.90
2006
Fee revenue and other income $10,466 $ 10,354 $ 10,928 $11,073 $ 42,821
Interest income 10,956 11,374 12,251 12,472 47,053
Interest expense 1,315 1,514 1,781 2,009 6,619
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,641 9,860 10,470 10,463 40,434
Provision for loan losses 150 150 200 650 1,150
Operating expense 13,869 14,284 15,021 15,103 58,277
Income tax expense 2,136 2,056 2,205 1,970 8,367
- -------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 3,952 3,724 3,972 3,813 15,461
Net loss from discontinued
operations before income taxes -- (325) (150) (200) (675)
Provision for income taxes -- 136 62 82 280
- -------------------------------------------------------------------------------------------------------------------------------
Net loss from discontinued operations -- (189) (88) (118) (395)
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,952 $ 3,535 $ 3,884 $ 3,695 $ 15,066
- -------------------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic earnings per share from
continuing operations $ .43 $ .41 $ .43 $ .42 $ 1.69
Basic earnings per share from
discontinued operations -- (.02) -- (.02) (0.04)
Basic earnings per share .43 .39 .43 .40 1.65
Diluted earnings per share from
continuing operations .43 .39 .43 0.40 1.65
Diluted earnings per share from
discontinued operations -- (.02) (.01) (.01) (0.04)
Diluted earnings per share .43 .37 .42 .39 1.61
- -------------------------------------------------------------------------------------------------------------------------------
54
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Cass Information
Systems, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of income, cash flows, and shareholders'
equity and comprehensive income for each of the years in the three-year period
ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2007 and 2006, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
As discussed in notes 1 and 12 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, as of
December 31, 2006.
We also have audited, in accordance with the standards of the PCAOB, the
Company's internal control over financial reporting as of December 31, 2007
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 11, 2008 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2008
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
-------------------
NONE
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as of December 31, 2007. Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that our disclosure controls and procedures were effective as of December 31,
2007.
There have not been changes in our internal control over financial reporting
that occurred during our fourth fiscal quarter that have materially affected or
are reasonably likely to materially affect our internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting
55
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentations.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under this framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2007.
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
We have audited Cass Information Systems, Inc.'s (the Company) internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2007 and 2006, and the related consolidated
statements of income, cash flows, and shareholders' equity and comprehensive
income for each of the years in the three-year period ended December 31, 2007,
and our report dated March 11, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2008
56
ITEM 9B. OTHER INFORMATION
-----------------
NONE
PART III.
----------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
-------------------------------------------------------------
REGISTRANT
----------
Information required by this Item 10 is incorporated herein by reference from
the following sections of the Company's definitive Proxy Statement for its 2008
Annual Meeting of Shareholders ("2008 Proxy Statement"), a copy of which will be
filed with the Securities and Exchange Commission (SEC) no later than 120 days
after the close of the fiscal year: "Election of Directors" and "Executive
Officers" (please note that "Section 16(a) Beneficial Ownership Reporting
Compliance" is within the "Executive Officers" section).
The Company has adopted a Code of Conduct and Business Ethics policy, applicable
to all Company directors, executive officers and employees. The policy is
publicly available and can be viewed on the Company's website at
www.cassinfo.com. The Company intends to satisfy the disclosure requirement
under Item 5.05 of Form 8-K regarding the amendment to, or a waiver of, a
provision of this policy that applies to the Company's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions and that relates to any
element of the code of ethics definition enumerated in Item 406(b) of Regulation
S-K by posting such information on its website.
There have been no material changes to the procedures by which stockholders may
recommend nominees to the Board.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required pursuant to this Item 11 is incorporated herein by
reference from the sections entitled "Executive Officers" and "Election of
Directors" of the Company's 2008 Proxy Statement, a copy of which will be filed
with the SEC no later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
Information required pursuant to this Item 12 is incorporated herein by
reference from the section entitled "Executive Officers" of the Company's 2008
Proxy Statement, a copy of which will be filed with the SEC no later than 120
days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
-----------------------------------------------------------
INDEPENDENCE
------------
Information required by this Item 13 is incorporated herein by reference from
the section entitled "Election of Directors" of the Company's 2008 Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days
after the close of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
Information concerning our principal accountant's fees and services is
incorporated herein by reference from the section "Ratification of Appointment
of Independent Registered Public Accounting Firm" of the Company's 2008 Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days
after the close of the fiscal year.
PART IV.
--------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
------------------------------------------
(a) The following documents are incorporated by reference in or filed
as an exhibit to this Report:
(1) and (2) Financial Statements and Financial Statement
Schedules
57
Included in Item 8 of this report.
(3) Exhibits listed under (b) of this Item 15.
(b) Exhibits
--------
2.1 GEMS Asset Purchase Agreement, incorporated by reference to
the current report on Form 8-K, filed with the SEC on
January 4, 2006 (File No 333 - 44497).
3.1 Restated Articles of Incorporation of Registrant,
incorporated by reference to Exhibit 4.1 to Form S-8
Registration Statement No. 333-44499, filed with the SEC on
January 20, 1998.
3.2 Articles of Merger of Cass Commercial Corporation,
incorporated by reference to Exhibit 3.1 to the quarterly
report on Form 10-Q for the quarter ended September 30, 2006
(File No. 333 - 44497).
3.3 Second Amended and Restated Bylaws of Registrant,
incorporated by reference to Exhibit 3.1 to the current
report on Form 8-K, filed with the SEC on April 18, 2007
(File No. 333 - 44497).
10.1 1995 Restricted Stock Bonus Plan, as amended to January 19,
1999, including form of Restriction Agreement, incorporated
by reference to Exhibit 4.3 to Post-Effective Amendment No.
2 to Form S-8 Registration Statement No. 33-91456, filed
with the SEC on February 16, 1999.
10.2 1995 Performance-Based Stock Option Plan, as amended to
January 19, 1999, including forms of Option Agreements,
incorporated by reference to Exhibit 4.3 to Post-Effective
Amendment No. 2 to Form S-8 Registration Statement No.
33-91568, filed with the SEC on February 16, 1999.
10.3 Form of Directors' Indemnification Agreement, incorporated
by reference to Exhibit 10.1 to the quarterly report on Form
10-Q for the quarter ended March 31, 2003 (File No 333 -
44497).
10.4 Amended and Restated 2007 Omnibus Incentive Stock Plan,
incorporated by reference to Exhibit 10.1 to the quarterly
report on Form 10-Q for the quarter ended September 30, 2007
(File No. 333-44497).
10.5 Amendment and Restatement of the Supplemental Executive
Retirement Plan, incorporated by reference to Exhibit 10.2
to the quarterly report on Form 10-Q for the quarter ended
September 30, 2007 (File No 333 - 44497).
10.6 Form of Restricted Stock Agreement Award Agreement,
incorporated by reference to Exhibit 10.3 to the quarterly
report on Form 10-Q for the quarter ended September 30, 2007
(File No 333 - 44497).
10.7 Form of Stock Appreciation Rights Award Agreement,
incorporated by reference to Exhibit 10.4 to the quarterly
report on Form 10-Q for the quarter ended September 30, 2007
(File No 333 - 44497).
21 Subsidiaries of registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(c) None
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
Date: March 11, 2008 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 11, 2008 By /s/ P. Stephen Appelbaum
----------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on the dates indicated by the following
persons on behalf of the Company and in their capacity as a member of the Board
of Directors of the Company.
Date: March 11, 2008 By /s/ K. Dane Brooksher
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K. Dane Brooksher
Date: March 11, 2008 By /s/ Eric H. Brunngraber
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Eric H. Brunngraber
Date: March 11, 2008 By /s/ Bryan S. Chapell
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Bryan S. Chapell
Date: March 11, 2008 By /s/ Lawrence A. Collett
--------------------------------------------
Lawrence A. Collett
Date: March 11, 2008 By /s/ Robert A. Ebel
--------------------------------------------
Robert A. Ebel
Date: March 11, 2008 By /s/ Benjamin F. Edwards, IV
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Benjamin F. Edwards, IV
Date: March 11, 2008 By /s/ John L. Gillis, Jr.
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John L. Gillis, Jr.
Date: March 11, 2008 By /s/ Wayne J. Grace
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Wayne J. Grace
Date: March 11, 2008 By /s/ Harry J. Krieg
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Harry J. Krieg
Date: March 11 2008 By /s/ James J. Lindemann
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James J. Lindemann
Date: March 11, 2008 By /s/ A. J. Signorelli
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A. J. Signorelli
Date: March 11, 2008 By /s/ Franklin D. Wicks, Jr.
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Franklin D. Wicks, Jr.
59
Exhibit 21
SUBSIDIARIES OF CASS INFORMATION SYSTEMS, INC.*
Name & Address State of Incorporation
- -------------- ----------------------
Cass Commercial Bank Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
Cass Information Systems, Inc. Missouri
13001 Hollenberg Drive
Bridgeton, Missouri 63044
* Pursuant to Item 601(b)(21)(ii), the names of particular subsidiaries may
be omitted if the unnamed subsidiaries, considered in the aggregate as a
single subsidiary, would not constitute a significant subsidiary (as such
term is defined in Rule 1-02(1.C.) of Regulation S-X) as of the end of the
year covered by this annual report on Form 10-K.
60
Exhibit 23
Consent of Independent Registered Public Accounting Firm
--------------------------------------------------------
The Board of Directors
Cass Information Systems, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-44499, 033-91456, 033-91568, 333-44497 and 333-143411) on Form S-8 of
Cass Information Systems, Inc. (the Company) of our reports dated March 11,
2008, with respect to the consolidated balance sheets of the Company as of
December 31, 2007 and 2006, and the related consolidated statements of income,
cash flows, and shareholders' equity and comprehensive income for each of the
years in the three-year period ended December 31, 2007, and the effectiveness of
internal control over financial reporting as of December 31, 2007, which reports
appear in the December 31, 2007 annual report on Form 10-K of Cass Information
Systems, Inc.
As discussed in notes 1 and 12 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, as of
December 31, 2006.
/s/ KPMG LLP
St. Louis, Missouri
March 11, 2008
61
Exhibit 31.1
CERTIFICATIONS
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this annual report on Form 10-K 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 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) 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
(d) 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 functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control 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.
Date: March 11, 2008
/s/ Lawrence A. Collett
-------------------------------
Lawrence A. Collett
Chairman and Chief Executive
Officer
62
Exhibit 31.2
CERTIFICATIONS
I, P. Stephen Appelbaum, Chief Financial Officer of Cass Information Systems,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K 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 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) 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
(d) 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 functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control 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.
Date: March 11, 2008
/s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
63
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 Annual Report of Cass Information Systems, Inc. ("the
Company") on Form 10-K for the period ended December 31, 2007, 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 results of operations
of the Company.
/s/ Lawrence A.Collett
------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
March 11, 2008
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.
64
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 Annual Report of Cass Information Systems, Inc. ("the
Company") on Form 10-K for the period ended December 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, P.
Stephen Appelbaum, Chief Financial 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 results of operations
of the Company.
/s/ P. Stephen Appelbaum
-------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 11, 2008
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.
65