UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. 2-80070
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CASS INFORMATION SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1265338
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
13001 Hollenberg Drive 63044
Bridgeton, Missouri (Zip Code)
(Address of principal executive offices)
(314) 506-5500
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one) Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller Reporting Company |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of registrant's only class of stock as of
August 3, 2009: Common stock, par value $.50 per share - 9,228,065 shares
outstanding.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 2009 (unaudited) and December 31, 2008 ............... 3
Consolidated Statements of Income
Three and Six months ended June 30, 2009 and 2008 (unaudited) . 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2009 and 2008 (unaudited) ........... 5
Notes to Consolidated Financial Statements (unaudited) .......... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 28
Item 4. CONTROLS AND PROCEDURES ......................................... 28
PART II - Other Information - Items 1. - 6. ................................. 29
SIGNATURES ............................................................... 30
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Although we believe that, in making any such statements, our
expectations are based on reasonable assumptions, forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other
factors beyond our control, which may cause future performance to be materially
different from expected performance summarized in the forward-looking
statements. These risks, uncertainties and other factors are discussed in the
section Part I, Item 1A, "Risk Factors" of the Company's 2008 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission ("SEC"), which may
be updated from time to time in our future filings with the SEC. We undertake no
obligation to publicly update or revise any forward-looking statements to
reflect changed assumptions, the occurrence of anticipated or unanticipated
events, or changes to future results over time.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)
June 30,
2009 December 31,
(Unaudited) 2008
----------- -----------
Assets
Cash and due from banks $ 9,919 $ 10,043
Federal funds sold and other short-term investments 71,770 19,442
----------- -----------
Cash and cash equivalents 81,689 29,485
----------- -----------
Securities available-for-sale, at fair value 181,687 193,865
Loans 610,769 591,976
Less: Allowance for loan losses 6,975 6,451
----------- -----------
Loans, net 603,794 585,525
----------- -----------
Premises and equipment, net 11,029 11,617
Investment in bank-owned life insurance 13,364 13,093
Payments in excess of funding 18,923 21,865
Goodwill 7,471 7,471
Other intangible assets, net 457 597
Other assets 20,144 21,710
----------- -----------
Total assets $ 938,558 $ 885,228
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 100,610 $ 103,300
Interest-bearing 260,550 174,241
----------- -----------
Total deposits 361,160 277,541
----------- -----------
Accounts and drafts payable 437,196 479,025
Subordinated convertible debentures 2,991 2,991
Short-term borrowings 9 305
Other liabilities 21,128 19,125
----------- -----------
Total liabilities 822,484 778,987
----------- -----------
Shareholders' Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued -- --
Common Stock, par value $.50 per share;
20,000,000 shares authorized and 9,949,324
shares issued at June 30, 2009 and
December 31, 2008 4,975 4,975
Additional paid-in capital 45,452 45,746
Retained earnings 86,384 81,197
Common shares in treasury, at cost (723,484 shares at
June 30, 2009 and 775,288 shares at December 31, 2008) (17,066) (18,264)
Accumulated other comprehensive loss (3,671) (7,413)
----------- -----------
Total shareholders' equity 116,074 106,241
----------- -----------
Total liabilities and shareholders' equity $ 938,558 $ 885,228
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2009 2008 2009 2008
- -------------------------------------------------------------------------------------------------
Fee Revenue and Other Income:
Information services payment and processing revenue $12,036 $12,744 $23,980 $24,791
Bank service fees 341 345 745 676
Gains on sales of securities 83 -- 202 --
Other 138 215 273 448
------- ------- ------- -------
Total fee revenue and other income 12,598 13,304 25,200 25,915
------- ------- ------- -------
Interest Income:
Interest and fees on loans 8,919 8,532 17,536 16,807
Interest and dividends on securities:
Taxable 16 22 18 50
Exempt from federal income taxes 1,761 1,994 3,619 3,695
Interest on federal funds sold and
other short-term investments 28 229 44 1,225
------- ------- ------- -------
Total interest income 10,724 10,777 21,217 21,777
------- ------- ------- -------
Interest Expense:
Interest on deposits 1,235 657 2,169 1,842
Interest on short-term borrowings 5 13 23 13
Interest on subordinated convertible debentures 40 43 79 95
------- ------- ------- -------
Total interest expense 1,280 713 2,271 1,950
------- ------- ------- -------
Net interest income 9,444 10,064 18,946 19,827
Provision for loan losses 300 650 700 1,100
------- ------- ------- -------
Net interest income after provision for loan
losses 9,144 9,414 18,246 18,727
------- ------- ------- -------
Total net revenue 21,742 22,718 43,446 44,642
Operating Expense:
Salaries and employee benefits 12,730 12,496 25,179 24,933
Occupancy 571 560 1,186 1,100
Equipment 833 872 1,674 1,696
Amortization of intangible assets 70 70 140 140
Other operating 2,593 2,510 4,908 4,999
------- ------- ------- -------
Total operating expense 16,797 16,508 33,087 32,868
------- ------- ------- -------
Income before income tax expense 4,945 6,210 10,359 11,774
Income tax expense 1,284 1,644 2,775 3,189
------- ------- ------- -------
Net Income $ 3,661 $ 4,566 $ 7,584 $ 8,585
======= ======= ======= =======
Basic Earnings Per Share .40 .50 .83 .94
Diluted Earnings Per Share .39 .48 .81 .91
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
-------------------------
2009 2008
---------- ----------
Cash Flows From Operating Activities:
Net income $ 7,584 $ 8,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,044 2,127
Gains on sales of securities (202) --
Provision for loan losses 700 1,100
Stock-based compensation expense 886 491
(Decrease) increase in income tax liability (831) 493
Increase in pension liability 442 988
Other operating activities, net 1,672 (78)
---------- ----------
Net cash provided by operating activities 12,295 13,706
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 14,591 --
Proceeds from maturities of securities available-for-sale 5,655 6,106
Purchase of securities available-for-sale (2,877) (42,553)
Net increase in loans (18,969) (73,249)
Decrease (increase) in payments in excess of funding 2,942 (7,443)
Purchases of premises and equipment, net (548) (750)
---------- ----------
Net cash provided by (used in) investing activities 794 (117,889)
---------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in noninterest-bearing demand deposits (2,690) 3,718
Net increase in interest-bearing demand and savings deposits 22,011 304
Net increase (decrease) in time deposits 64,298 (40,782)
Net (decrease) increase in accounts and drafts payable (41,829) 34,294
Net decrease in short-term borrowings (296) (198)
Purchase of common shares for treasury -- (3,984)
Cash dividends paid (2,397) (2,208)
Other financing activities, net 18 18
---------- ----------
Net cash provided by (used in) financing activities 39,115 (8,838)
---------- ----------
Net increase (decrease) in cash and cash equivalents 52,204 (113,021)
Cash and cash equivalents at beginning of period 29,485 176,070
---------- ----------
Cash and cash equivalents at end of period $ 81,689 $ 63,049
========== ==========
Supplemental information:
Cash paid for interest $ 2,043 $ 2,168
Cash paid for income taxes 3,642 2,789
See accompanying notes to unaudited consolidated financial statements.
-5-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Certain amounts in the 2008 consolidated financial statements
have been reclassified to conform to the 2009 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. For further information, refer to the audited consolidated
financial statements and related footnotes included in Cass Information System,
Inc.'s ("the Company" or "Cass") Annual Report on Form 10-K for the year ended
December 31, 2008.
Note 2 - Intangible Assets
The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standard ("SFAS") No.142 ("SFAS No. 142"), "Goodwill and
Other Intangible Assets," which requires that intangibles with indefinite useful
lives be tested annually for impairment and those with finite useful lives be
amortized over their useful lives. Intangible assets for the periods ended June
30, 2009 and December 31, 2008 are as follows:
June 30, 2009 December 31, 2008
======================================================================================================
Gross Carrying Accumulated Gross Carrying Accumulated
(In thousands) Amount Amortization Amount Amortization
======================================================================================================
Assets eligible for amortization:
Software $ 862 $ (833) $ 862 $ (747)
Customer List 750 (322) 750 (268)
- ------------------------------------------------------------------------------------------------------
Total 1,612 (1,155) 1,612 (1,015)
- ------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,698 (227)* 7,698 (227)*
- ------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,698 (227) 7,698 (227)
- ------------------------------------------------------------------------------------------------------
Total intangible assets $ 9,310 $ (1,382) $ 9,310 $ (1,242)
- ------------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS No. 142.
Software is amortized over four to five years and the customer list is amortized
over seven years. Amortization of intangible assets amounted to $140,000 for the
six-month periods ended June 30, 2009 and 2008, respectively. Estimated
amortization of intangibles over the next five years is as follows: $222,000 in
2009, $107,000 in 2010, 2011 and 2012 and $54,000 in 2013.
Note 3 - Equity Investments in Non-Marketable Securities
Non-marketable equity investments in low-income housing projects are included in
other assets on the Company's consolidated balance sheets. The total balance of
these investments at June 30, 2009 and December 31, 2008 were $562,000 and
$605,000, respectively.
Note 4 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding. The calculations of basic and
diluted earnings per share for the periods ended June 30, 2009 and 2008 are as
follows:
-6-
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
(Dollars in thousands except per share data) 2009 2008 2009 2008
- -------------------------------------------------------------------------------------------------------------------
Basic
Net income $ 3,661 $ 4,566 $ 7,584 $ 8,585
Weighted-average common shares outstanding 9,140,944 9,165,262 9,138,150 9,169,839
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .40 $ .50 $ .83 $ .94
- -------------------------------------------------------------------------------------------------------------------
Diluted
Basic net income $ 3,661 $ 4,566 $ 7,584 $ 8,585
Net income effect of 5.33% convertible
debentures 21 25 41 50
- -------------------------------------------------------------------------------------------------------------------
Diluted net income 3,682 4,591 7,625 8,635
- -------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 9,140,944 9,165,262 9,138,150 9,169,839
Effect of dilutive restricted stock, stock 141,168 106,760 115,671 106,410
options and SARs
Effect of convertible debentures 153,630 181,553 153,630 183,343
- -------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding
assuming dilution 9,435,742 9,453,575 9,407,451 9,459,592
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .39 $ .48 $ .81 $ .91
- -------------------------------------------------------------------------------------------------------------------
Note 5 - Stock Repurchases
The Company maintains a treasury stock buyback program pursuant to which the
Board of Directors has authorized the repurchase of up to 300,000 shares of the
Company's Common Stock. The Company did not repurchase any shares during the
six-month period ended June 30, 2009 and repurchased 120,000 during the
six-month period ended June 30, 2008. As of June 30, 2009, 180,000 shares
remained available for repurchase under the program. Repurchases are made in the
open market or through negotiated transactions from time to time depending on
market conditions.
Note 6 - Comprehensive Income
For the three and six-month periods ended June 30, 2009 and 2008, unrealized
gains and losses on securities available-for-sale and reclassification
adjustments for gains included in net income were the Company's other
comprehensive income components. Comprehensive income for the three and
six-month periods ended June 30, 2009 and 2008 is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
(In thousands) 2009 2008 2009 2008
- ---------------------------------------------------------------------------------------------------
Net income $ 3,661 $ 4,566 $ 7,584 $ 8,585
Other comprehensive income:
Reclassification adjustments for gains (54) -- (131) --
included in net income, net of tax
Net unrealized gain (loss) on securities
available-for-sale, net of tax (855) (1,865) 3,873 (181)
- ---------------------------------------------------------------------------------------------------
Total comprehensive income $ 2,752 $ 2,701 $ 11,326 $ 8,404
- ---------------------------------------------------------------------------------------------------
Note 7 - Industry Segment Information
The services provided by the Company are classified into two reportable
segments: Information Services and Banking Services. Each of these segments
provides distinct services that are marketed through different channels. They
are managed separately due to their unique service, processing and capital
requirements.
-7-
The Information Services segment provides freight, utility and telecommunication
invoice processing and payment services to large corporations. The Banking
Services segment provides banking services primarily to privately-held
businesses and churches.
The Company's accounting policies for segments are the same as those described
in the summary of significant accounting policies in the Company's Annual Report
on Form 10-K for the year ended December 31, 2008. Management evaluates segment
performance based on net income after allocations for corporate expenses and
income taxes. Transactions between segments are accounted for at what management
believes to be market value.
All revenue originates from and all long-lived assets are located within the
United States, and no revenue from any customer of any segment exceeds 10% of
the Company's consolidated revenue.
Summarized information about the Company's operations in each industry segment
for the three and six-month periods ended June 30, 2009 and 2008 is as follows:
Corporate,
Information Banking Eliminations
(In thousands) Services Services and Other Total
====================================================================================
Quarter Ended June 30, 2009
Total Revenues:
Revenue from customers $ 16,991 $ 4,751 $ -- $ 21,742
Intersegment revenue 1,732 389 (2,121) --
Net income 2,431 1,230 -- 3,661
Total assets 531,935 410,090 (3,467) 938,558
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 457 -- -- 457
Quarter Ended June 30, 2008
Total Revenues:
Revenue from customers $ 19,081 $ 3,637 $ -- $ 22,718
Intersegment revenue 1,398 222 (1,620) --
Net income 3,912 654 -- 4,566
Total assets 640,896 333,857 (69,037) 905,716
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 737 -- -- 737
- ------------------------------------------------------------------------------------
Six Months Ended June 30, 2009
Total Revenues:
Revenue from customers $ 34,374 $ 9,072 $ -- $ 43,446
Intersegment revenue 3,347 746 (4,093) --
Net income 5,265 2,319 -- 7,584
Total assets 531,935 410,090 (3,467) 938,558
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 457 -- -- 457
Six Months Ended June 30, 2008
Total Revenues:
Revenue from customers $ 37,543 $ 7,099 $ -- $ 44,642
Intersegment revenue 2,632 428 (3,060) --
Net income 7,369 1,216 -- 8,585
Total assets 640,896 333,857 (69,037) 905,716
Goodwill 7,335 136 -- 7,471
Other intangible assets, net 737 -- -- 737
- ------------------------------------------------------------------------------------
Note 8 - Loans by Type
(In thousands) June 30, 2009 December 31, 2008
===============================================================================
Commercial and industrial $ 111,949 $ 118,044
Real estate: (Commercial and church)
Mortgage 430,485 412,788
Construction 64,321 56,221
Industrial revenue bonds 3,091 3,363
Other 923 1,560
- -------------------------------------------------------------------------------
Total loans $ 610,769 $ 591,976
===============================================================================
-8-
Note 9 - Commitments and Contingencies
In the normal course of business, the Company is party to activities that
contain credit, market and operational risks that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating and capital leases. These financial instruments
include commitments to extend credit, commercial letters of credit and standby
letters of credit. The Company's maximum potential exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, commercial letters of credit and standby letters
of credit is represented by the contractual amounts of those instruments. At
December 31, 2008 and June 30, 2009, no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commercial
and standby letters of credit are conditional commitments issued by the Company
or its subsidiaries to guarantee the performance of a customer to a third party.
These off-balance sheet financial instruments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. At June 30,
2009 the balance of unused loan commitments, standby and commercial letters of
credit were $29,707,000, $16,424,000 and $2,381,000, respectively. Since some of
the financial instruments may expire without being drawn upon, the total amounts
do not necessarily represent future cash requirements. Commitments to extend
credit and letters of credit are subject to the same underwriting standards as
those financial instruments included on the consolidated balance sheets. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of the credit,
is based on management's credit evaluation of the borrower. Collateral held
varies, but is generally accounts receivable, inventory, residential or
income-producing commercial property or equipment. In the event of
nonperformance, the Company or its subsidiaries may obtain and liquidate the
collateral to recover amounts paid under its guarantees on these financial
instruments.
The following table summarizes contractual cash obligations of the Company
related to operating lease commitments, time deposits and convertible
subordinated debentures at June 30, 2009:
Amount of Commitment Expiration per Period
========================================================
Less than 1=3 3=5 Over 5
(In thousands) Total 1 Year Years Years Years
================================================================================================
Operating lease commitments $ 3,384 $ 844 $ 1,173 $ 708 $ 659
Time deposits 133,946 120,753 12,233 960 --
Convertible subordinated debentures* 2,991 -- -- -- 2,991
- ------------------------------------------------------------------------------------------------
Total $140,321 $121,597 $ 13,406 $ 1,668 $ 3,650
================================================================================================
* Includes principal payments only.
The Company and its subsidiaries are involved in various pending legal actions
and proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate resolution of these legal
actions and proceedings will not have a material effect upon the Company's
consolidated financial position or results of operations.
Note 10 - Stock-Based Compensation
In 2007, the Board and the Company's shareholders approved the 2007 Omnibus
Incentive Stock Plan (the "Omnibus Plan"). The Omnibus Plan permits the issuance
of up to 880,000 shares of the Company's common stock in the form of stock
options, stock appreciation rights ("SARs"), restricted stock, restricted stock
units and performance awards. The Company issues shares out of treasury stock
for these awards. During the six months ended June 30, 2009, 38,636 restricted
shares and 121,943 SARs were granted under the Omnibus Plan.
The Company also continues to maintain its other stock-based incentive plans for
the restricted common stock previously awarded and the options previously issued
and still outstanding. These plans have been superseded by the Omnibus Plan and
accordingly, any available restricted stock and stock option grants not yet
issued have been cancelled.
Restricted Stock
Restricted shares are amortized to expense over the three-year vesting period.
As of June 30, 2009, the total unrecognized compensation expense related to
non-vested common stock was $1,738,000 and the related weighted-average period
over which it is expected to be recognized is approximately 1.2 years.
-9-
Following is a summary of the activity of the restricted stock during the
six-month period ended June 30, 2009:
Six Months Ended
June 30, 2009
Shares Fair Value
===============================================================================
Balance at January 1, 2009 68,564 $ 30.72
Granted 38,636 27.30
Vested (31,235) 29.50
Forfeited -- --
- -------------------------------------------------------------------------------
Balance at June 30, 2009 75,965 $ 28.72
- -------------------------------------------------------------------------------
Stock Options
Stock options vest and expire over a period not to exceed seven years. As of
June 30, 2009, the total unrecognized compensation expense related to non-vested
stock options was $77,000, and the related weighted-average period over which it
is expected to be recognized is approximately 2.8 years. Following is a summary
of the activity of the stock options during the six-month period ended June 30,
2009:
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years (In thousands)
---------------------------------------------------------------------
Outstanding at January 1, 2009 69,536 $ 15.24
Granted -- --
Exercised (16,712) 14.57
Forfeited or expired -- --
-------------- --------------
Outstanding at June 30, 2009 52,824 16.35 2.5 $ 866
---------------------------------------------------------------------
Exercisable at June 30, 2009 25,238 $ 14.14 1.9 $ 469
---------------------------------------------------------------------
The total intrinsic value of options exercised was $279,000 and $509,000 for the
six-month periods ended June 30, 2009 and 2008, respectively. Following is a
summary of the activity of the non-vested stock options during the six-month
period ended June 30, 2009:
Weighted-
Average
Grant Date
Shares Fair Value
- -------------------------------------------------------------------------------
Nonvested at January 1, 2009 56,520 $ 2.46
Granted -- --
Vested (28,934) 2.14
Forfeited -- --
- -------------------------------------------------------------------------------
Nonvested at June 30, 2009 27,586 $ 2.81
- -------------------------------------------------------------------------------
SARs
SARs vest over a three-year period with 1/3 of the shares vesting and becoming
exercisable each year on the anniversary date of the grant and they expire 10
years from the original grant date. As of June 30, 2009, the total unrecognized
compensation expense was $1,279,000 and the related weighted-average period over
which it is expected to be recognized is two years. Following is a summary of
the activity of the Company's SARs program for the six-month period ended June
30, 2009:
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years (In thousands)
=====================================================================
Outstanding at January 1, 2009 109,755 $ 28.41
Granted 121,943 25.77
Exercised (436) 28.41
Forfeited or expired -- --
-------------- --------------
Outstanding at June 30, 2009 231,262 27.02 9.2 $ 1,323
=====================================================================
Exercisable at June 30, 2009 36,143 $ 28.41 8.7 $ 157
=====================================================================
-10-
Following is a summary of the activity of the nonvested SARs during the
six-month period ended June 30, 2009:
Weighted-
Average
Grant Date
Shares Fair Value
- --------------------------------------------------------------------------------
Nonvested at January 1, 2009 109,755 $ 7.65
Granted 121,943 6.20
Vested (36,579) 7.65
Forfeited -- --
- --------------------------------------------------------------------------------
Nonvested at June 30, 2009 195,119 $ 6.74
================================================================================
The Company uses the Black-Scholes pricing model to determine the fair value of
the SARs at the date of grant. Following are the assumptions used to estimate
the per share fair value of SARs granted during the six-month periods ended June
30, 2009 and 2008, respectively:
Six Months Ended June 30,
2009 2008
- --------------------------------------------------------------------------------
Risk-free interest rate 1.94% 3.01%
Expected life 7 yrs. 7 yrs.
Expected volatility 27.00% 26.00%
Expected dividend yield 2.02% 1.69%
- --------------------------------------------------------------------------------
The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for
the period equal to the expected life of the SARs at the time of the grant. The
expected life was derived using the historical exercise activity. The Company
uses historical volatility for a period equal to the expected life of the rights
using average monthly closing market prices of the Company's stock as reported
on The Nasdaq Global Market. The expected dividend yield is based on the
Company's current rate of annual dividends.
Note 11 - Defined Pension Plans
The Company has a noncontributory defined benefit pension plan, which covers
most of its employees. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit
with service proration method to amortize prior service costs arising from
improvements in pension benefits and qualifying service prior to the
establishment of the plan over a period of approximately 30 years. Disclosure
information is based on a measurement date of December 31 of the corresponding
year.
The following table represents the components of the net periodic pension costs
for 2008 and an estimate for 2009:
Estimated Actual
(In thousands) 2009 2008
===============================================================================
Service cost - benefits earned during the year $ 1,606 $ 1,523
Interest cost on projected benefit obligation 2,080 1,947
Expected return on plan assets (1,880) (2,108)
Net amortization 873 66
- -------------------------------------------------------------------------------
Net periodic pension cost $ 2,679 $ 1,428
- -------------------------------------------------------------------------------
Pension costs recorded to expense were $670,000 and $357,000 for the three-month
periods ended June 30, 2009 and 2008, respectively, and totaled $1,341,000 and
$715,000 for the six-month periods ended June 30, 2009 and 2008, respectively.
The Company made a contribution of $450,000 to the plan during the three-month
period ended June 30, 2009, for a total of $900,000 for the six-month period
ending June 30, 2009 and expects to contribute at least an additional $900,000
in 2009.
In addition to the above funded benefit plan, the Company has an unfunded
supplemental executive retirement plan which covers key executives of the
Company. This is a noncontributory plan in which the Company and its
subsidiaries make accruals designed to fund normal service costs on a current
basis using the same method and criteria as its defined benefit plan. The
following table represents the components of the net periodic pension costs for
2008 and an estimate for 2009:
-11-
Estimated Actual
(In thousands) 2009 2008
================================================================================
Service cost - benefits earned during the year $ 33 $ 59
Interest cost on projected benefit obligation 278 267
Net amortization 130 170
- --------------------------------------------------------------------------------
Net periodic pension cost $ 441 $ 496
- --------------------------------------------------------------------------------
Pension costs recorded to expense were $113,000 and $146,000 for the three-month
periods ended June 30, 2009 and 2008, respectively, and were $227,000 and
$293,000 for the six-month periods ended June 30, 2009 and 2008, respectively.
Note 12 - Income Taxes
As of December 31, 2008, the Company had unrecognized tax benefits totaling
approximately $1,399,000, of which $1,170,000 would, if recognized, affect the
Company's effective tax rate. During the six months ended June 30, 2009, the
Company recorded additional unrecognized tax benefits totaling $173,000.
The Company recognizes interest and penalties related to uncertain tax positions
in income tax expense. At December 31, 2008, before any tax benefits, the
Company had accrued $114,000 in interest relating to unrecognized tax benefits,
and additional interest of $32,000 was accrued during the six months ended June
30, 2009. There were no penalties for unrecognized tax benefits accrued at
December 31, 2008 or June 30, 2009.
During the next twelve months, the Company may realize a reduction of its
unrecognized tax benefits of approximately $195,000 due to the lapse of federal
and state statutes of limitations.
The Company is subject to income tax in the U.S. federal jurisdiction and
numerous state jurisdictions. U.S. federal income tax returns for tax years 2006
through 2008 remain subject to examination by the Internal Revenue Service. In
addition, the Company is subject to state tax examinations for the tax years
2004 through 2008.
Note 13 - Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted SFAS No. 157 "Fair Value
Measurements" ("SFAS No. 157") and SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities." Following is a summary of the
carrying amounts and fair values of the Company's financial instruments at June
30, 2009 and December 31, 2008:
June 30, 2009 December 31, 2008
--------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------
Balance sheet assets:
Cash and cash equivalents $ 81,689 $ 81,689 $ 29,485 $ 29,485
Investment securities 181,687 181,687 193,865 193,865
Loans, net 603,794 603,534 585,525 588,991
Accrued interest receivable 4,494 4,494 4,836 4,836
- ----------------------------------------------------------------------------------------
Total $871,664 $871,404 $813,711 $817,177
========================================================================================
Balance sheet liabilities:
Deposits $361,160 $361,160 $277,541 $277,541
Accounts and drafts payable 437,196 437,196 479,025 479,025
Short-term borrowings 9 9 305 305
Subordinated convertible debentures 2,991 3,214 2,991 3,116
Accrued interest payable 528 528 302 302
- ----------------------------------------------------------------------------------------
Total $801,884 $802,107 $760,164 $760,289
========================================================================================
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.
-12-
Investment Securities Available for Sale - Investment securities
available-for-sale are recorded at fair value on a recurring basis. The
Company's investment securities available-for-sale are measured at fair value
using Level 2 valuations. The market evaluation utilizes several sources which
include observable inputs rather than "significant unobservable inputs" and
therefore falls into the Level 2 category. The amortized cost, gross unrealized
gains, gross unrealized losses and fair value of investment securities at June
30, 2009 and December 31, 2008 are summarized as follows:
June 30, 2009
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
State and political subdivisions $169,316 $ 8,955 $ 9 $178,262
Stock in Federal Reserve Bank and
Federal Home Loan Bank 3,425 -- -- 3,425
- --------------------------------------------------------------------------------
Total $172,741 $ 8,955 $ 9 $181,687
================================================================================
December 31, 2008
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 200 $ -- $ -- $ 200
State and political subdivisions 189,729 3,790 601 192,918
- --------------------------------------------------------------------------------
Total investment securities 189,929 3,790 601 193,118
Stock in Federal Reserve Bank and
Federal Home Loan Bank 747 -- -- 747
- --------------------------------------------------------------------------------
Total $190,676 $ 3,790 $ 601 $193,865
================================================================================
The fair values of securities with unrealized losses at June 30, 2009 and
December 31, 2008 are as follows:
June 30, 2009
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
- ---------------------------------------------------------------------------------------------------------------------
State and political subdivisions $ 520 $ 9 $ -- $ -- $ 520 $ 9
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2008
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
- ---------------------------------------------------------------------------------------------------------------------
State and political subdivisions $ 41,813 $ 601 $ -- $ -- $ 41,813 $ 601
- ---------------------------------------------------------------------------------------------------------------------
There was one security not greater than 12 months in an unrealized loss position
as of June 30, 2009. All unrealized losses are reviewed to determine whether the
losses are other than temporary. Management believes that this unrealized loss
is temporary and the Company has the ability and intent to hold this security
until maturity.
There were 45 securities (none greater than 12 months) in an unrealized loss
position as of December 31, 2008. All unrealized losses were reviewed to
determine whether the losses were other than temporary. Management believed that
all unrealized losses were temporary since they were market driven and the
Company had the ability and intent to hold these securities until maturity.
-13-
The amortized cost and fair value of investment securities at June 30, 2009, 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.
Amortized Cost Fair Value
-------------- ----------
Due in 1 year or less $ 1,198 $ 1,233
Due after 1 year through 5 years 43,499 46,015
Due after 5 years through 10 years 78,710 83,173
Due after 10 years 45,909 47,841
No stated maturity 3,425 3,425
- --------------------------------------------------------------------------------
Total $ 172,741 $ 181,687
================================================================================
The amortized cost of investment securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes at June
30, 2009 were $18,379,000.
Proceeds from sales of investment securities classified as available for sale
were $10,314,000 for the Second Quarter of 2009 and $14,591,000 for the First
Half of 2009. Gross realized gains were $83,000 for the Second Quarter of 2009
and $202,000 for the First Half of 2009.
Loans - The Company does not record loans at fair value on a recurring basis
other than loans that are considered impaired. Once a loan is identified as
impaired, management measures impairment in accordance with SFAS No.114,
"Accounting by Creditors for Impairment of a Loan." At June 30, 2009, all
impaired loans were evaluated based on the fair value of the collateral. The
fair value of the collateral is based upon an observable market price or current
appraised value and therefore, the Company classifies these assets as
nonrecurring Level 2. The total of impaired loans measured at fair value at June
30, 2009 was $1,530,000. The fair value of loans in the above table 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 is estimated by discounting
the projected future cash flows using estimated current rates for similar
borrowings.
Note 14 - Subsequent Events
In accordance with FASB Statement No. 165, "Subsequent Events," the Company has
evaluated subsequent events after the consolidated balance sheet date of June
30, 2009 through August 6, 2009, the date the financial statements were issued,
and there were no events identified that would require additional disclosures to
prevent the Company's consolidated financial statements from being misleading.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Cass provides payment and information processing services to large
manufacturing, distribution and retail enterprises from its processing centers
in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South
Carolina and Wellington, Kansas. The Company's services include freight invoice
rating, payment processing, auditing, and the generation of accounting and
transportation information. Cass also processes and pays utility invoices, which
includes electricity, gas and telecommunications expenses and is a provider of
telecom expense management solutions. Cass extracts, stores and presents
information from freight, utility and telecommunication invoices, assisting its
customers' transportation, energy and information technology managers in making
decisions that will enable them to improve operating performance. The Company
receives data from multiple sources, electronic and otherwise, and processes the
data to accomplish the specific operating requirements of its customers. It then
provides the data in a central repository for access and archiving. The data is
finally transformed into information through the Company's databases that allow
client interaction as required and provides Internet-based tools for analytical
processing. The Company also, through Cass Commercial Bank, its St. Louis,
Missouri based bank subsidiary (the "Bank"), provides banking services in the
St. Louis metropolitan area, Orange County, California and other selected cities
in the United States. In addition to supporting the Company's payment
operations, the Bank provides banking services to its target markets, which
include privately-owned businesses and churches and church-related ministries.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's requirements, which
can vary greatly. In addition, the degree of automation such as electronic data
interchange, imaging, and web-based solutions varies greatly among customers and
industries. These factors combine so that pricing varies greatly among the
customer base. In general, however, Cass is compensated for its processing
services through service fees and investment of account balances 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 and other
borrowings. The Bank also assesses fees on other services such as cash
management services.
Industry-wide factors that impact the Company include the willingness of large
corporations to outsource key business functions such as freight, utility and
telecommunication payment and audit. The benefits that can be achieved by
outsourcing transaction processing and the management information generated by
Cass' systems can be influenced by factors such as the competitive pressures
within industries to improve profitability, the general level of transportation
costs, deregulation of energy costs and consolidation of telecommunication
providers. Economic factors that impact the Company include the general level of
economic activity that can affect the volume and size of invoices processed, the
ability to hire and retain qualified staff and the growth and quality of the
loan portfolio. As lower levels of economic activity are encountered, such as
those experienced in the second half of 2008 and continuing into the first half
of 2009, the number and total dollar amount of transactions processed by the
Company may decline thereby reducing fee revenue, interest income, and possibly
liquidity. The general level of interest rates also has a significant effect on
the revenue of the Company. As discussed in greater detail in Item 7A,
"Quantitative and Qualitative Disclosures about Market Risk," in the Company's
2008 Annual Report on Form 10K, a decline in the general level of interest rates
can have a negative impact on net interest income.
Currently, management views Cass' major opportunity as the continued expansion
of its payment and information processing service offering and customer base.
While the current economic slow-down may reduce the short-term growth rate,
management remains optimistic about the long-term prospects for growth.
-15-
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP"). In preparing the consolidated financial statements in accordance with
U.S. GAAP, management makes estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. These estimates have been
generally accurate in the past, have been consistent and have not required any
material changes. There can be no assurances that actual results will not differ
from those estimates. Certain accounting policies that require significant
management estimates and are deemed critical to our results of operations or
financial position have been discussed with the Audit Committee of the Board of
Directors and are described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed
reviews of its loan portfolio to assess overall collectability. The level of the
allowance for loan losses reflects management's estimate of the collectability
of the loan portfolio. Although these estimates are based on established
methodologies for determining allowance requirements, actual results can differ
significantly from estimated results. These policies affect both segments of the
Company. The impact and associated risks related to these policies on the
Company's business operations are discussed in the "Provision and Allowance for
Loan Losses" section of this report.
Impairment of Assets. The Company periodically evaluates certain long-term
assets such as intangible assets including goodwill, foreclosed assets and
investments in private equity securities and assets held for sale for
impairment. Generally, these assets are initially recorded at cost, and
recognition of impairment is required when events and circumstances indicate
that the carrying amounts of these assets will not be recoverable in the future.
If impairment occurs, various methods of measuring impairment may be called for
depending on the circumstances and type of asset, including quoted market
prices, estimates based on similar assets, and estimates based on valuation
techniques such as discounted projected cash flows. Assets held for sale are
carried at the lower of cost or fair value less costs to sell. These policies
affect both segments of the Company and require significant management
assumptions and estimates that could result in materially different results if
conditions or underlying circumstances change.
Income Taxes. The objectives of accounting for income taxes are to recognize the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in addressing the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns such as the
realization of deferred tax assets, changes in tax laws or interpretations
thereof. In addition, the Company is subject to the continuous examination of
its income tax returns by the Internal Revenue Service and other taxing
authorities. In accordance with FIN 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109," the Company has
unrecognized tax benefits related to tax positions taken or expected to be
taken. See Note 12 to the financial statements.
Pension Plans. The amounts recognized in the consolidated financial statements
related to pension plans are determined from actuarial valuations. Inherent in
these valuations are assumptions including expected return on plan assets,
discount rates at which the liabilities could be settled at December 31, 2008,
rate of increase in future compensation levels and mortality rates. These
assumptions are updated annually and are disclosed in Note 12 to the
consolidated financial statements filed with the Company's Annual Report on Form
10-K for the year ended December 31, 2008. Pursuant to SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans," the
Company has recognized the funded status of its defined benefit postretirement
plan in its statement of financial position and has recognized changes in that
funded status through comprehensive income. The funded status is measured as the
difference between the fair value of the plan assets and the benefit obligation
as of the date of its fiscal year-end.
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended June 30, 2009
("Second Quarter of 2009") compared to the three-month period ended June 30,
2008 ("Second Quarter of 2008") and the six-month period ended June 30, 2009
("First Half of 2009") compared to the six-month period ended June 30, 2008
("First Half of 2008"). The following discussion and analysis should be read in
conjunction with the consolidated financial statements and related notes and
with the statistical information and financial data appearing in this report as
well as the Company's 2008 Annual Report on Form 10-K. Results of operations for
the Second Quarter of 2009 are not necessarily indicative of the results to be
attained for any other period.
-16-
Net Income
The following table summarizes the Company's operating results:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
(Dollars in thousands % %
except per share data) 2009 2008 Change 2009 2008 Change
- --------------------------------------------------------------------------------- -------------------------------------
Net income $ 3,661 $ 4,566 (19.8)% $ 7,584 $ 8,585 (11.7)%
Diluted earnings per share $ .39 $ .48 (18.8)% $ .81 $ .91 (11.0)%
Return on average assets 1.61% 2.05% -- 1.70% 1.94% --
Return on average equity 12.74% 17.60% -- 13.52% 16.81% --
- ----------------------------------------------------------------------------------------------------------------------------
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility processing
and payment fees. As the Company provides its processing and payment services,
it is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the three and six-month
periods ended June 30, 2009 and 2008 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
% %
(In thousands) 2009 2008 Change 2009 2008 Change
- ------------------------------------------------------------------------------------- --------------------------------------
Freight Core Invoice Transaction Volume* 5,716 6,765 (15.5)% 11,111 12,737 (12.8)%
Freight Invoice Dollar Volume $3,391,822 $4,355,522 (22.1)% $6,778,562 $8,213,095 (17.5)%
Utility Transaction Volume 2,823 2,618 7.8% 5,653 5,150 9.8%
Utility Transaction Dollar Volume $2,263,404 $2,257,471 .3% $4,759,101 $4,493,361 5.9%
Payment and Processing Fees $ 12,036 $ 12,744 (5.6)% $ 23,980 $ 24,791 (3.3)%
- ---------------------------------------------------------------------------------------------------------------------------------
*Core invoices exclude parcel shipments.
Second Quarter of 2009 compared to Second Quarter of 2008:
New transportation customer implementations helped offset a 22% decline in base
customer volumes as the global economic slowdown impacted the transportation
industry. As a result, freight invoice volume was down 16% and dollar volume was
down 22%. New business helped boost utility transaction volume by 8% and dollar
volume by .3% to partially offset the drop in the freight business. Overall,
payment and processing fees decreased 6% compared to the year-earlier period.
Bank service fees were approximately the same in both periods. Other income
decreased $77,000, or 36%. There were gains of $83,000 on sales of securities in
the Second Quarter of 2009.
First Half of 2009 compared to First Half of 2008:
New transportation customers helped offset a 22% decline in base customer
volumes causing freight invoice volume to decline 13% and dollar volume to
decline 18% as a result of the impact of the economic recession on the
transportation industry. Conversely, utility transaction volume was up 10% while
dollar volume increased 6% for the First Half of 2009. The net effect was a 3%
decrease in overall payment and processing fees compared to the First Half of
2008.
Bank service fees increased $69,000, or 10%, due to an increase in account
analysis fees in the first quarter of 2009. Other income decreased $175,000, or
39%. There were gains of $202,000 on sales of securities in the First Half of
2009.
-17-
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the three and six-month periods ended June 30,
2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------- -------------------------------------------
% %
(Dollars in thousands) 2009 2008 Change 2009 2008 Change
- ---------------------------------------------------------------------------------- -------------------------------------------
Average earnings assets $ 831,669 $ 803,611 3.5% $ 817,884 $ 801,903 2.0%
Average interest-bearing liabilities 254,383 142,797 78.1% 228,881 152,546 50.0%
Net interest income* 10,410 11,163 (6.7)% 20,932 21,865 (4.3%)
Net interest margin* 5.02% 5.59% -- 5.16% 5.48% --
Yield on earning assets* 5.64% 5.94% -- 5.72% 5.97% --
Rate on interest bearing liabilities 2.02% 2.00% -- 2.00% 2.56% --
- ---------------------------------------------------------------------------------- -------------------------------------------
*Presented on a tax-equivalent basis assuming a tax rate of 35%.
Second Quarter of 2009 compared to Second Quarter of 2008:
Second Quarter 2009 average earning assets increased 4% compared to the same
period in the prior year (see discussion in the following paragraphs). The yield
on earning assets and the tax equivalent net interest margin both decreased in
2009 as the general level of interest rates declined and there was a less
favorable mix of funding sources, resulting in a decrease in net interest income
of 7%.
Total average loans increased $52,420,000, or 9%, to $609,826,000 for the Second
Quarter of 2009 as compared to the Second Quarter of 2008. This increase was
attributable to the successful implementation of new marketing efforts by the
Company's lending staff and the negative impact the credit crisis had on many of
the Company's competitors which resulted in attractive loan growth
opportunities. Average investment securities decreased $25,725,000, or 13%, to
$179,578,000.
Total average interest-bearing deposits for the Second Quarter of 2009 increased
$108,610,000, or 79%, to $246,734,000 compared to the Second Quarter of 2008.
This increase along with increases in average short-term borrowings and average
noninterest-bearing demand deposits of $3,534,000 and $9,883,000, respectively,
were the primary sources utilized to offset the decline in average accounts and
drafts payable of $119,073,000, or 22%, to $431,942,000 for the Second Quarter
of 2009 as compared to the same period last year. The decline in accounts and
drafts payable was primarily the result of lower levels of freight payment
processing activities as the Company's customers dealt with the global economic
slowdown.
First Half of 2009 compared to First Half of 2008:
First Half 2009 average earning assets increased 2% compared to the same period
in the prior year (see discussion in the following paragraphs). The yield on
earning assets, the rate paid on deposits and tax equivalent net interest margin
all decreased in 2009 as the general level of interest rates declined and there
was a less favorable mix of funding sources, resulting in a decrease in net
interest income of 4%.
Total average loans increased $70,276,000, or 13%, to $601,078,000 for the First
Half of 2009 as compared to the First Half of 2008. This increase was
attributable to the successful implementation of new marketing efforts by the
Company's lending staff and the negative impact the credit crisis had on many of
the Company's competitors which resulted in attractive loan growth
opportunities. This increase in average loans was part of the Company's strategy
to redeploy assets in the face of a declining interest rate environment. The
primary offset to the previously mentioned increase was a decrease in average
federal funds sold and other short-term investments of $47,973,000, or 61%, to
$31,182,000 for the First Half of 2009 as compared to the First Half of 2008. In
effect, this strategy of replacing short-term relatively low yielding assets
with longer term relatively higher yielding assets has allowed the Company to
reduce its interest rate sensitivity and protect its source of revenue from net
interest income.
-18-
Total average interest-bearing deposits for the First Half of 2009 increased
$69,989,000, or 47%, to $218,355,000 compared to the First Half of 2008. This
increase along with increases in average short-term borrowings and average
noninterest-bearing demand deposits of $6,938,000 and $7,944,000, respectively,
were the primary sources utilized to offset the decline in average accounts and
drafts payable of $89,356,000, or 17%, to $446,774,000 for the First Half of
2009 as compared to the same period last year. The decline in accounts and
drafts payable was primarily the result of lower levels of freight payment
processing activities as the Company's customers dealt with the global economic
slowdown.
For more information on the changes in net interest income, please refer to the
tables that follow.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and
Interest Differential
The following table shows the condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported.
-19-
Second Quarter of 2009 Second Quarter of 2008
========================================== ==========================================
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
===================================================================================================================================
Assets (1)
Earning assets:
Loans (2,3):
Taxable $ 606,645 $ 8,884 5.87% $ 553,453 $ 8,488 6.17%
Tax-exempt (4) 3,181 54 6.81 3,953 69 7.02
Debt and equity securities (5):
Taxable 3,489 16 1.84 2,857 22 3.10
Tax-exempt (4) 176,089 2,708 6.17 202,446 3,068 6.10
Federal funds sold and other
short-term investments 42,265 28 .27 40,902 229 2.25
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 831,669 11,690 5.64 803,611 11,876 5.94
Nonearning assets:
Cash and due from banks 24,747 22,579
Premises and equipment, net 11,300 12,590
Bank owned life insurance 13,303 12,726
Goodwill and other intangibles 7,969 8,251
Other assets 32,303 41,331
Allowance for loan losses (6,761) (6,210)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 914,530 $ 894,878
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 98,379 $ 380 1.55% $ 76,792 $ 241 1.26%
Savings deposits 20,104 69 1.38 18,238 52 1.15
Time deposits of
$100 or more 41,543 276 2.66 27,899 235 3.39
Other time deposits 86,708 510 2.36 15,195 129 3.41
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 246,734 1,235 2.01 138,124 657 1.91
Short-term borrowings & other 4,658 5 .43 1,124 13 4.65
Subordinated debentures 2,991 40 5.36 3,549 43 4.87
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 254,383 1,280 2.02 142,797 713 2.00
Noninterest-bearing liabilities:
Demand deposits 93,977 84,094
Accounts and drafts payable 431,942 551,015
Other liabilities 18,965 12,648
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 799,267 790,554
Shareholders' equity 115,263 104,324
Total liabilities and `
shareholders' equity $ 914,530 $ 894,878
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,410 $ 11,163
Interest spread 3.62% 3.94%
Net interest margin 5.02 5.59
===================================================================================================================================
1. Balances shown are daily averages.
2. For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding. Interest on nonaccrual loans is recorded
when received as discussed further in Note 1 to the Company's 2008
consolidated financial statements, filed with the Company's 2008 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $131,000 and $64,000
for the Second Quarter of 2009 and 2008, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $966,000 and
$1,099,000 for the Second Quarter of 2009 and 2008, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
-20-
First Half of 2009 First Half of 2008
==================================== ====================================
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
=========================================================================================================================
Assets (1)
Earning assets:
Loans (2,3):
Taxable $ 597,827 $ 17,464 5.89% $ 526,775 $ 16,715 6.38%
Tax-exempt (4) 3,251 111 6.89 4,027 141 7.04
Debt and equity securities (5):
Taxable 3,524 18 1.03 3,263 50 3.08
Tax-exempt (4) 182,100 5,566 6.16 188,683 5,684 6.06
Federal funds sold and other
short-term investments 31,182 44 .28 79,155 1,225 3.11
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 817,884 23,203 5.72 801,903 23,815 5.97
Nonearning assets:
Cash and due from banks 23,663 22,345
Premises and equipment, net 11,488 12,625
Bank owned life insurance 13,235 12,659
Goodwill and other intangibles 8,004 8,287
Other assets 33,822 38,427
Allowance for loan losses (6,666) (6,275)
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 901,430 $ 889,971
- -------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand deposits $ 90,277 $ 682 1.52% $ 76,359 $ 619 1.63%
Savings deposits 20,192 138 1.38 18,619 148 1.60
Time deposits of
$100 or more 41,529 563 2.73 34,099 672 3.96
Other time deposits 66,357 786 2.39 19,289 403 4.20
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 218,355 2,169 2.00 148,366 1,842 2.50
Short-term borrowings & other 7,535 23 .62 597 13 4.38
Subordinated debentures 2,991 79 5.33 3,583 95 4.68
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 228,881 2,271 2.00 152,546 1,950 2.56
Noninterest-bearing liabilities:
Demand deposits 93,722 85,778
Accounts and drafts payable 446,774 536,130
Other liabilities 18,965 12,790
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 788,342 787,244
Shareholders' equity 113,088 102,727
Total liabilities and
shareholders' equity $ 901,430 $ 889,971
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,932 $ 21,865
Interest spread 3.72% 3.41%
Net interest margin 5.16 5.48
=========================================================================================================================
1. Balances shown are daily averages.
2. For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding. Interest on nonaccrual loans is recorded
when received as discussed further in Note 1 to the Company's 2008
consolidated financial statements, filed with the Company's 2008 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $267,000 and $118,000
for the First Half of 2009 and 2008, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $1,986,000 and
$2,038,000 for the First Half of 2009 and 2008, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
-21-
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
Second Quarter of
2009 Over 2008
============================
(In thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 806 $ (410) $ 396
Tax-exempt (3) (13) (2) (15)
Debt and equity securities:
Taxable 4 (10) (6)
Tax-exempt (3) (397) 37 (360)
Federal funds sold and other
short-term investments 7 (208) (201)
- -------------------------------------------------------------------------------
Total interest income 407 (593) (186)
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 77 62 139
Savings deposits 6 11 17
Time deposits of $100 or more 98 (57) 41
Other time deposits 432 (51) 381
Short-term borrowings & other 12 (20) (8)
Subordinated debentures (7) 4 (3)
----------------------------
Total interest expense 618 (51) 567
- -------------------------------------------------------------------------------
Net interest income $ (211) $ (542) $ (753)
===============================================================================
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%.
First Half of
2009 Over 2008
===============================
(In thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 2,104 $(1,355) $ 749
Tax-exempt (3) (27) (3) (30)
Debt and equity securities:
Taxable 4 (36) (32)
Tax-exempt (3) (210) 92 (118)
Federal funds sold and other
short-term investments (473) (708) (1,181)
- -------------------------------------------------------------------------------
Total interest income 1,398 (2,010) (612)
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 106 (43) 63
Savings deposits 12 (22) (10)
Time deposits of $100 or more 126 (235) (109)
Other time deposits 619 (236) 383
Short-term borrowings & other 30 (20) 10
Subordinated debentures (16) 0 (16)
-------------------------------
Total interest expense 877 (556) 321
- -------------------------------------------------------------------------------
Net interest income $ 521 $(1,454) $ (933)
===============================================================================
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%.
-22-
Provision and Allowance for Loan Losses
A significant determinant of the Company's operating results is the provision
for loan losses and the level of loans charged off. There was a $300,000 and
$650,000 provision for loan losses during the Second Quarter of 2009 and the
Second Quarter of 2008, respectively. There was a $700,000 and $1,100,000
provision for loan losses during the First Half of 2009 and the First Half of
2008, respectively. As discussed below, the Company continually analyzes the
outstanding loan portfolio based on the performance, financial condition and
collateralization of the credits. There were net loan recoveries of $44,000 in
the Second Quarter of 2009 compared to net loan charge-offs of $817,000 for the
same period in 2008. There were $176,000 net loan charge-offs in the First Half
of 2009 and $1,290,000 in the First Half of 2008.
The allowance for loan losses at June 30, 2009 was $6,975,000 and at December
31, 2008 was $6,451,000. The ratio of allowance for loan losses to total loans
outstanding at June 30, 2009 was 1.14% compared to 1.09% at December 31, 2008.
Nonperforming loans were $1,967,000, or .32%, of total loans at June 30, 2009
compared to $1,219,000, or .21%, of total loans at December 31, 2008.
At June 30, 2009, nonperforming loans, which are also considered impaired,
consisted of $1,411,000 in non-accrual loans as shown in the following table.
This total consists of seven loans to borrowers with businesses in financial
trouble or in the process of liquidation. Nonperforming loans at December 31,
2008 consisted of $1,178,000 in non-accrual loans related to five borrowers.
Total nonperforming loans decreased $1,298,000 from June 30, 2008 to June 30,
2009. This decrease was primarily due to the charge-off of four loans. There was
also one loan that was renegotiated in the Second Quarter of 2009 that, although
current under the new terms of the contract, management believes, due to the
financial conditions of the borrower, there still remains risk as to the
collectability of all amounts under the loan agreement.
In addition to the nonperforming loans discussed above, at June 30, 2009, one
loan of $359,000 not included in the table below was identified by management as
having potential credit problems. This loan is excluded from the table due to
the fact that it is current under the original terms of the loan, however
circumstances have raised doubts as to the ability of the borrower to comply
with the current loan repayment terms. This loan is closely monitored by
management.
The allowance for loan losses has been established and is maintained to absorb
probable losses in the loan portfolio. An ongoing assessment of risk of loss is
performed to determine if the current balance of the allowance is adequate to
cover probable losses in the portfolio. A charge or credit is made to expense to
cover any deficiency or reduce any excess. The current methodology employed to
determine the appropriate allowance consists of two components, specific and
general. The Company develops specific valuation allowances on commercial, real
estate, and construction loans that are impaired 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 indicating credit
deterioration 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 in the banking industry in general, 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.
-23-
Summary of Asset Quality
The following table presents information as of and for the Second Quarter of
2009 and Second Quarter of 2008 and for the First Half of 2009 and First Half of
2008 pertaining to the Company's provision for loan losses and analysis of the
allowance for loan losses.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
(Dollars in thousands) 2009 2008 2009 2008
- ----------------------------------------------------------------------------------------------------------------
Allowance at beginning of period $ 6,631 $ 6,257 $ 6,451 $ 6,280
Provision charged to expense 300 650 700 1,100
Loans charged off 0 844 254 1,335
Recoveries on loans previously charged off 44 27 78 45
- ----------------------------------------------------------------------------------------------------------------
Net loans (recovered) charged-off (44) 817 176 1,290
Allowance at end of period $ 6,975 $ 6,090 $ 6,975 $ 6,090
- ----------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 609,826 $ 557,406 $ 601,078 $ 530,802
June 30 610,769 570,414 610,769 570,414
Ratio of allowance for loan losses to loans outstanding:
Average 1.14% 1.09% 1.16% 1.15%
June 30 1.14 1.07 1.14 1.07
Nonperforming loans:
Nonaccrual loans $ 1,411 $ 2,919 $ 1,411 $ 2,919
Loans past due 90 days or more -- 346 -- 346
Renegotiated loans 556 -- 556 --
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,967 $ 3,265 $ 1,967 $ 3,265
Foreclosed assets 2,177 1,388 2,177 1,388
- ----------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .32% .59% .33% .62%
- ----------------------------------------------------------------------------------------------------------------
The Company had no sub-prime mortgage loans or residential development loans in
its portfolio as of June 30, 2009. The Bank had two properties carried as other
real estate owned of $2,177,000 as of June 30, 2009, and one property of
$1,388,000 as of June 30, 2008.
Operating Expense from Continuing Operations
Total operating expenses for the Second Quarter of 2009 were up 2%, or $289,000
compared to the Second Quarter of 2008. However, after factoring a $407,000
increase in Federal Deposit Insurance Corporation ("FDIC") insurance expense and
a $313,000 increase in pension costs, operating expenses in the Second Quarter
of 2009 dropped $431,000, or 3%, as the Company realized savings from on-going
cost control initiatives. Total operating expenses for the First Half of 2009
were up 0.7%, or $219,000, from the First Half of 2008. However, after factoring
a $480,000 increase in FDIC insurance expense and a $626,000 increase in pension
costs, operating expenses for the First Half of 2009 were $887,000, or 3%, lower
due to cost control measures implemented by the Company.
Salaries and benefits expense for the Second Quarter of 2009 increased $234,000,
or 2%, to $12,730,000 compared to the Second Quarter of 2008 and increased
$246,000, or 1%, to $25,179,000 for the First Half of 2009 compared to the First
Half of 2008 primarily due to higher pension and health insurance costs offset
by the decrease in bonuses related to lower earnings and a reduction in
headcount.
Occupancy expense for the Second Quarter of 2009 increased $11,000, or 2%, to
$571,000 from the Second Quarter of 2008 and increased $86,000, or 8%, from the
First Half of 2008 due to additional rent expense related to additional space in
Ohio leased in the Second Quarter of 2008.
Equipment expense for the Second Quarter of 2009 decreased $39,000, or less than
5%, compared to the Second Quarter of 2008 and decreased $22,000, or 1%, from
the First Half of 2008.
Amortization of intangible assets was $70,000 for the Second Quarter of 2009 and
2008 and $140,000 for the First Half of 2009 and 2008.
-24-
Other operating expenses for the Second Quarter of 2009 increased $83,000, or
3%, compared to the Second Quarter of 2008. During this period, the Bank had to
absorb a significant increase in FDIC insurance due to an increase in the rate,
compounded by higher balances of insured deposits plus a special assessment of
$205,000 to cover the cost of recently failed banks. Decreases in postage and
delivery, promotional and supplies expenses offset the additional insurance
expense. Other operating expense decreased $91,000 for the First Half of 2009
compared to the First Half of 2008. Reductions in postage and delivery,
promotional and supplies expenses offset the impact of the FDIC insurance
expense for the First Half of 2009.
Income tax expense for the Second Quarter of 2009 decreased $360,000, or 22%,
compared to the Second Quarter of 2008 and decreased $414,000 for the First Half
of 2009 compared to the First Half of 2008. The effective tax rate was 26.0% and
26.5% for the Second Quarters of 2009 and 2008, respectively, and was 26.8% and
27.1% for the First Halves of 2009 and 2008, respectively. The decreases reflect
the impact of the increase in interest income from tax-exempt securities as a
percentage of income before income tax expense.
Financial Condition
Total assets at June 30, 2009 were $938,558,000, an increase of $53,330,000, or
6%, from December 31, 2008. The most significant changes in asset balances
during this period were an increase of $52,328,000, or 269%, in federal funds
sold and other short-term investments and a decrease of $12,178,000 and increase
of $18,793,000 in securities available for sale and loans, respectively. Changes
in federal funds sold and other short-term investments reflect the Company's
daily liquidity position and are affected by the changes in the other asset
balances and changes in deposit and accounts and drafts payable balances.
Total liabilities at June 30, 2009 were $822,484,000, an increase of
$43,497,000, or 6%, from December 31, 2008. Total deposits at June 30, 2009 were
$361,160,000, an increase of $83,619,000, or 30%, from December 31, 2008.
Accounts and drafts payable at June 30, 2009 were $437,196,000, a decrease of
$41,829,000, or 9%, from December 31, 2008. Total shareholders' equity at June
30, 2009 was $116,074,000, a $9,833,000, or 9%, increase from December 31, 2008.
Accounts and drafts payable will fluctuate from period-end to period-end due to
the payment processing cycle, which results in lower balances on days when
checks clear and higher balances on days when checks are issued. For this
reason, average balances are a more meaningful measure of accounts and drafts
payable (for average balances refer to the tables under the "Distribution of
Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest
Differential" section of this report).
The increase in total shareholders' equity resulted from net income of
$7,584,000, $886,000 from stock-based compensation expense, a decrease in other
comprehensive loss of $3,742,000 and other miscellaneous activity of $18,000,
offset by dividends paid of $2,397,000 ($.13 per share).
Liquidity and Capital Resources
The balance of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold and money market funds, and
was $81,689,000 at June 30, 2009, an increase of $52,204,000, or 177%, from
December 31, 2008. At June 30, 2009, these assets represented 9% of total
assets. These funds are the Company's and its subsidiaries' primary source of
liquidity to meet future expected and unexpected loan demand, depositor
withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing
lines. Total investment in securities was $181,687,000 at June 30, 2009, a
decrease of $12,178,000 from December 31, 2008. These assets represented 19% of
total assets at June 30, 2009. Of this total, 100% were state and political
subdivision securities. Of the total portfolio, 1% mature in one year, 23%
mature in one to five years, and 76% mature in five or more years.
The Bank has unsecured lines of credit at correspondent banks to purchase
federal funds up to a maximum of $56,000,000. Additionally, the Bank maintains a
line of credit at unaffiliated financial institutions in the maximum amount of
$114,831,000 collateralized by U.S. Treasury securities and commercial mortgage
loans.
The deposits of the Company's banking subsidiary have historically been stable,
consisting of a sizable volume of core deposits related to customers that
utilize other commercial products of the Bank. The accounts and drafts payable
generated by the Company has also historically been a stable source of funds.
The Company is part of the Certificate of Deposit Account Registry Service
("CDARS"). Time deposits include $70,941,000 of CDARS deposits which offer the
Bank's customers the ability to receive FDIC insurance on deposits up to
$250,000. The Company uses this program to retain or attract deposits from
existing customers.
-25-
Net cash flows provided by operating activities were $12,295,000 for the First
Half of 2009 compared with $13,706,000 for the First Half of 2008. This decrease
is attributable to the decreases in net income of $1,001,000, depreciation and
amortization of $83,000, provision for loan losses of $400,000, the income taxes
deferred and payable of $1,324,000, pension liability of $546,000 offset by
stock-based compensation expense of $395,000, and the other normal fluctuations
in asset and liability accounts. Net cash flows from investing and financing
activities fluctuate greatly as the Company actively manages its investment and
loan portfolios and customer activity influences changes in deposit and accounts
and drafts payable balances. Other causes for the changes in these account
balances are discussed earlier in this report. Due to the daily fluctuations in
these account balances, the analysis of changes in average balances, also
discussed earlier in this report, can be more indicative of underlying activity
than the period-end balances used in the statements of cash flows. Management
anticipates that cash and cash equivalents, maturing investments and cash from
operations will continue to be sufficient to fund the Company's operations and
capital expenditures in 2009.
The Company faces market risk to the extent that its net interest income and
fair market value of equity are affected by changes in market interest rates.
For information regarding the market risk of the Company's financial
instruments, see Item 3, "Quantitative and Qualitative Disclosures about Market
Risk."
Risk-based capital guidelines require the Company to meet a minimum total
capital ratio of 8.0%, of which at least 4.0% must consist of Tier 1 capital.
Tier 1 capital generally consists of (a) common shareholders' equity (excluding
the unrealized market value adjustments on the available-for-sale securities),
(b) qualifying perpetual preferred stock and related surplus subject to certain
limitations specified by the FDIC, (c) minority interests in the equity accounts
of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights
within certain limits, and (f) any other intangible assets and investments in
subsidiaries that the FDIC determines should be deducted from Tier 1 capital.
The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of
Tier 1 capital less purchased mortgage servicing rights to total assets, for
banking organizations deemed the strongest and most highly rated by banking
regulators. A higher minimum leverage ratio is required of less highly rated
banking organizations. Total capital, a measure of capital adequacy, includes
Tier 1 capital, allowance for loan losses, and debt considered equity for
regulatory capital purposes.
The Company and the Bank continue to exceed all regulatory capital requirements,
as evidenced by the following capital amounts and ratios at June 30, 2009 and
December 31, 2008:
June 30, 2009 (Dollars in thousands) Amount Ratio
- --------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 121,783 16.30%
Cass Commercial Bank 46,981 11.24
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 111,817 14.97%
Cass Commercial Bank 42,101 10.08
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 111,817 12.33%
Cass Commercial Bank 42,101 9.92
- --------------------------------------------------------------------------------
December 31, 2008 (Dollars in thousands) Amount Ratio
- --------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 115,028 15.93%
Cass Commercial Bank 44,187 11.39
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $ 105,586 14.62%
Cass Commercial Bank 39,782 10.26
Tier I capital (to average assets)
Cass Information Systems, Inc. $ 105,586 11.26%
Cass Commercial Bank 39,782 10.35
- --------------------------------------------------------------------------------
Inflation
The Company's assets and liabilities are primarily monetary, consisting of cash,
cash equivalents, securities, loans, payables and deposits. Monetary assets and
liabilities are those that can be converted into a fixed number of dollars. The
Company's consolidated balance sheet reflects a net positive monetary position
(monetary assets exceed monetary liabilities). During periods of inflation, the
holding of a net positive monetary position will result in an overall decline in
the purchasing power of a company. Management believes that replacement costs of
equipment, furniture, and leasehold improvements will not materially affect
operations. The rate of inflation does affect certain expenses, such as those
for employee compensation, which may not be readily recoverable in the price of
the Company's services.
-26-
Impact of New and Not Yet Adopted Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS
No. 141(R)"). SFAS No. 141(R) significantly changes how entities apply the
acquisition method to business combinations. The most significant changes
include: (a) the acquisition date will be the date the acquirer obtains control;
(b) all (and only) identifiable assets acquired, liabilities assumed, and
noncontrolling interests in the acquiree will be stated at fair value on the
acquisition date; (c) assets or liabilities arising from noncontractual
contingencies will be measured at their acquisition date fair value only if it
is more likely than not that they meet the definition of an asset or liability
on the acquisition date; (d) adjustments subsequently made to the provisional
amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; (e) acquisition-related restructuring
costs that do not meet the criteria in SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" will be expensed as incurred; (f)
transaction costs will be expensed as incurred; (g) reversals of deferred income
tax valuation allowances and income tax contingencies will be recognized in
earnings subsequent to the measurement period; and (h) the allowance for loan
losses of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS No. 141(R) requires new and modified disclosures surrounding
subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward. SFAS No. 141(R) is effective for all business
combinations completed on or after January 1, 2009. For business combinations in
which the acquisition date was before the effective date, the provisions of SFAS
No. 141(R) apply to the subsequent accounting for deferred income tax valuation
allowances and income tax contingencies and require any changes in those amounts
to be recorded in earnings. SFAS No. 141(R) did not have an impact on our
financial condition, results of operations and the disclosures that are
presented in the consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position, or FSP, SFAS 157-4
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." FSP SFAS 157-4 affirms that the objective of fair value when the
market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction, and clarifies and includes additional
factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not active. FSP SFAS
157-4 requires an entity to base its conclusion about whether a transaction was
not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS No.
157, "Fair Value Measurements," to expand certain disclosure requirements. FSP
SFAS 157-4 was adopted during the Second Quarter of 2009 and did not
significantly impact the consolidated financial statements as shown in Footnote
No. 13.
In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments." FSP SFAS 115-2 and SFAS 124-2
(i) changes existing guidance for determining whether an impairment is other
than temporary to debt securities and (ii) replaces the existing requirement
that the entity's management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is more likely
than not it will not have to sell the security before recovery of its cost
basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
FSP SFAS 115-2 and SFAS 124-2 were adopted during the Second Quarter of 2009 and
did not significantly impact the consolidated financial statements as shown in
Footnote No. 13.
In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board,
or APB, Opinion 28-1 "Interim Disclosures about Fair Value of Financial
Instruments." FSP SFAS 107-1 and APB Opinion 28-1 amend SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," to require an entity to
provide disclosures about fair value of financial instruments in interim
financial information and amends APB Opinion No. 28, "Interim Financial
Reporting," to require those disclosures in summarized financial information at
interim reporting periods. Under FSP SFAS 107-1 and APB Opinion 28-1, a publicly
traded company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, entities must disclose, in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by SFAS No. 107. FSP SFAS 107-1 and APB Opinion 28-1 were
adopted during the Second Quarter of 2009 and did not significantly impact the
consolidated financial statements as shown in Footnote No. 13.
-27-
In July 2009, the FASB launched its Accounting Standards Codification (ASC).
Pursuant to FASB Statement No. 168, "The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles," the Codification
will become the sole source of authoritative U.S. GAAP for interim and annual
periods ending after September 15, 2009, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC
registrants. The Company will include the new Codification references in the
third quarter of 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2008, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at June 30, 2009 has changed materially from that at December 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide
reasonable assurance that the information it is required to disclose in the
reports it files with the SEC is recorded, processed, summarized and reported to
management, including the Chief Executive Officer and Principal Financial
Officer, within the time periods specified in the rules of the SEC. The
Company's Chief Executive Officer and Principal Financial Officer have evaluated
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June
30, 2009 and based on their evaluation, believe that, as of June 30, 2009, these
controls and procedures were effective at the reasonable assurance level to
ensure that the Company is able to collect, process and disclose the information
it is required to disclose in the reports it files with the SEC within the
required time periods.
There were no changes in the Second Quarter of 2009 in the Company's internal
control over financial reporting identified by the Chief Executive Officer and
Principal Financial Officer in connection with their evaluation that materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended).
-28-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to its
businesses. Management believes none of these proceedings, if
determined adversely, would have a material effect on the business or
financial conditions of the Company or its subsidiaries.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on
Form 10-K for the year ended December 31, 2008, a description of
certain risks and uncertainties that could affect the Company's
business, future performance or financial condition (the "Risk
Factors"). There are no material changes to the Risk Factors as
disclosed in the Company's 2008 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders of Cass Information Systems,
Inc. held on April 20, 2009, the following proposals were voted on and
approved:
The following is a summary of votes cast. No broker non-votes were
received.
Proposal to elect four directors for a term of three years ending 2012:
For Withheld Authority
--- ------------------
Robert A. Ebel 7,979,607 59,502
John L. Gillis, Jr. 7,978,127 60,982
Randall L. Schilling 7,766,621 272,488
Franklin D. Wicks, Jr., Ph.D. 7,931,997 107,112
Proposal to ratify KPMG LLP as the Company's independent registered
public accounting firm for 2009:
For Against Abstain
--- ------- -------
8,023,565 12,662 2,880
ITEM 5. OTHER INFORMATION
(a) None
(b) There have been no material changes to the procedures by which
security holders may recommend nominees to the Company's Board
of Directors implemented in the Second Quarter of 2009.
ITEM 6. EXHIBITS
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: August 6, 2009 By /s/ Eric H. Brunngraber
--------------------------------------------
Eric H. Brunngraber
President and Chief Executive Officer
DATE: August 6, 2009 By /s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
-30-
Exhibit 31.1
CERTIFICATIONS
I, Eric H. Brunngraber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the 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(s) 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(s) 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 the
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: August 6, 2009 /s/ Eric H. Brunngraber
-------------------------------------
Eric H. Brunngraber
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, P. Stephen Appelbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the 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(s) 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(s) 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 the
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: August 6, 2009 /s/ P. Stephen Appelbaum
--------------------------------------------
P. Stephen Appelbaum
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended June 30, 2009 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric H.
Brunngraber, President 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/ Eric H. Brunngraber
-------------------------------------
Eric H. Brunngraber
President and Chief Executive Officer
August 6, 2009
A signed original of this written statement required by Section 906 has been
provided to Cass Information Systems, Inc. and will be retained by Cass
Information Systems, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. ("the
Company") on Form 10-Q for the period ended June 30, 2009 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)
August 6, 2009
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.