1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NO. 2-80070 -------------------- CASS INFORMATION SYSTEMS, INC. INCORPORATED UNDER THE LAWS OF MISSOURI I.R.S. EMPLOYER IDENTIFICATION NO. 43-1265338 13001 HOLLENBERG DRIVE, BRIDGETON, MISSOURI 63044 TELEPHONE: (314) 506-5500 -------------------- Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of registrant's only class of stock as of July 31, 2001: Common stock, par value $.50 per share - 3,174,849 shares outstanding. - ------------------------------------------------------------------------------ This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. - ------------------------------------------------------------------------------
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Thousands except Per Share Data) JUNE 30 DECEMBER 31 2001 2000 ASSETS Cash and due from banks $ 24,454 $ 21,680 Federal funds sold and other short-term investments 80,637 94,251 -------- -------- Cash and cash equivalents 105,091 115,931 -------- -------- Investment in debt and equity securities: Held-to-maturity, fair value of $6,682 at December 31, 2000 -- 6,650 Available-for-sale, at fair value 44,416 62,675 -------- -------- Total investment in debt and equity securities 44,416 69,325 -------- -------- Loans 386,122 372,220 Less: Allowance for loan losses 4,947 4,897 -------- -------- Loans, net 381,175 367,323 -------- -------- Premises and equipment, net 17,133 13,914 Accrued interest receivable 2,527 3,528 Investment in unconsolidated subsidiary 5,355 -- Other assets 7,658 6,865 -------- -------- Total assets $563,355 $576,886 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: - ----------- Deposits: Noninterest-bearing $ 91,483 $ 99,941 Interest-bearing 111,332 112,725 -------- -------- Total deposits 202,815 212,666 Accounts and drafts payable 298,982 302,840 Short-term borrowings 25 -- Other liabilities 7,165 7,559 -------- -------- Total liabilities 508,987 523,065 -------- -------- Shareholders' Equity: - -------------------- Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued -- -- Common stock, par value $.50 per share; 20,000,000 shares authorized and 4,000,000 shares issued 2,000 2,000 Surplus 5,050 5,059 Retained earnings 61,393 59,177 Accumulated other comprehensive income 505 159 Common shares in treasury, at cost (763,951 shares at June 30, 2001 and 655,089 shares at December 31, 2000) (14,518) (12,480) Unamortized stock bonus awards (62) (94) -------- -------- Total shareholders' equity 54,368 53,821 -------- -------- Total liabilities and shareholders' equity $563,355 $576,886 ======== ======== See accompanying notes to unaudited consolidated financial statements. -2-
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 ====================== ====================== 2001 2000 2001 2000 INTEREST INCOME: Interest and fees on loans $ 7,395 $ 6,830 $14,942 $12,987 Interest and dividends on debt and equity securities: Taxable 770 1,385 1,742 2,756 Exempt from federal income taxes 13 15 27 30 Interest on federal funds sold and other short-term investments 873 714 1,788 1,576 ------- ------- ------- ------- Total interest income 9,051 8,944 18,499 17,349 ------- ------- ------- ------- INTEREST EXPENSE: Interest on deposits 951 1,071 2,397 2,025 Interest on short-term borrowings 1 5 1 7 ------- ------- ------- ------- Total interest expense 952 1,076 2,398 2,032 ------- ------- ------- ------- Net interest income 8,099 7,868 16,101 15,317 Provision for loan losses -- 150 -- 250 ------- ------- ------- ------- Net interest income after provision for loan losses 8,099 7,718 16,101 15,067 ------- ------- ------- ------- NONINTEREST INCOME: Freight and utility payment and processing revenue 5,154 4,849 10,466 10,185 Bank service fees 383 374 699 708 Other 118 38 230 123 ------- ------- ------- ------- Total noninterest income 5,655 5,261 11,395 11,016 ------- ------- ------- ------- NONINTEREST EXPENSE: Salaries and employee benefits 7,663 6,957 15,385 14,007 Occupancy expense 427 443 888 877 Equipment expense 904 767 1,718 1,519 Other 2,043 2,173 4,134 4,116 ------- ------- ------- ------- Total noninterest expense 11,037 10,340 22,125 20,519 ------- ------- ------- ------- Income before income tax expense 2,717 2,639 5,371 5,564 Income tax expense 942 919 1,846 1,988 ------- ------- ------- ------- Net income $ 1,775 $ 1,720 $ 3,525 $ 3,576 ======= ======= ======= ======= Earnings per share: Basic $.54 $.49 $1.08 $1.00 Diluted $.54 $.48 $1.06 $.99 Weighted average shares outstanding: Basic 3,259,510 3,501,084 3,276,468 3,572,344 Effect of stock options and awards 41,293 46,932 42,344 46,441 Diluted 3,300,803 3,548,016 3,318,812 3,618,785 See accompanying notes to unaudited consolidated financial statements. -3-
4 CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) SIX MONTHS ENDED JUNE 30 ======================== 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,525 $ 3,576 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,379 1,311 Provision for loan losses -- 250 Amortization of stock bonus awards 43 39 Decrease (increase) in accrued interest receivable 1,001 (143) Decrease in deferred income (41) (765) Deferred income tax expense (benefit) (376) 262 Increase (decrease) in income tax liability 236 (157) Change in other assets (1,615) 403 Change in other liabilities (589) (181) Other operating activities, net (203) 400 -------- -------- Net cash provided by operating activities 3,360 4,995 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of debt and equity securities: Held-to-maturity -- 11,167 Available-for-sale 25,410 4,498 Purchase of debt and equity securities available-for-sale -- (18,889) Net increase in loans (18,057) (49,959) Purchases of premises and equipment, net (4,502) (1,438) -------- -------- Net cash provided by (used in) investing activities 2,851 (54,621) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in noninterest-bearing demand deposits (8,458) (16,444) Net decrease in interest-bearing demand and savings deposits (4,163) (491) Net increase (decrease) in time deposits 2,770 (294) Net increase (decrease) in accounts and drafts payable (3,858) 33,281 Net increase (decrease) in short-term borrowings 25 (208) Cash proceeds from exercise of stock options 11 47 Cash dividends paid (1,309) (1,423) Purchase of common shares for treasury (2,069) (4,786) -------- -------- Net cash provided by (used in) financing activities (17,051) 9,682 -------- -------- Net decrease in cash and cash equivalents (10,840) (39,944) Cash and cash equivalents at beginning of period 115,931 124,217 -------- -------- Cash and cash equivalents at end of period $105,091 $ 84,273 ======== ======== Supplemental information: Cash paid for interest $ 2,425 $ 2,035 Cash paid for income taxes 2,137 2,662 Transfer of securities from held-to-maturity to available-for-sale 6,650 -- Transfer of loans to investment in unconsolidated subsidiary 4,205 -- See accompanying notes to unaudited consolidated financial statements. -4-
5 CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Note 2 - Impact of New Accounting Pronouncements In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company is required to adopt the provisions of SFAS 141 immediately and SFAS 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS 142. SFAS 141 will require upon adoption of SFAS 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $223,000 which will be subject to the transition provisions of SFAS 141 and 142. Amortization expense related to goodwill was $30,000 and $15,000 for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting SFAS 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) which establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued Statement of -5-
6 Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Financial Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which addresses certain issues causing implementation difficulties. The Company has adopted SFAS 133, as amended, effective January 1, 2001, but since the Company does not participate in any derivative or hedging activities, SFAS 133, as amended, had no impact on the Company's consolidated financial position and results of operations, except for the transfer of all held-to-maturity securities into available-for-sale securities as of January 1, 2001 as permitted by SFAS 133. At the time of the transfer the book value of the securities transferred was $6,650,000 and the fair value was $6,682,000. The difference was an unrealized gain recorded net of tax as other comprehensive income. Note 3 - Loans by Type (DOLLARS IN THOUSANDS) JUNE 30, 2001 DECEMBER 31, 2000 ============================================================================== Commercial and industrial $149,518 $136,482 Real estate: Mortgage 118,206 117,170 Mortgage - Churches & Related 72,570 65,368 Construction 11,699 9,877 Construction - Churches & Related 11,776 19,587 Industrial revenue bonds 15,438 15,804 Installment 2,542 2,533 Other 4,373 5,399 - ------------------------------------------------------------------------------ Total loans $386,122 $372,220 ============================================================================== Note 4 - Stock Repurchase Program On December 21, 1999 the Board of Directors authorized a stock repurchase program that would allow the repurchase of up to 200,000 shares of its common stock through December 31, 2000. On March 21, 2000 the Board of Directors authorized a 100,000 increase in the number of shares that can be purchased under the program. Along with the 300,000 shares authorized under the plan, the Board of Directors approved the repurchase of an additional 210,680 shares. During 2001 the Company repurchased 110,500 shares. Repurchases were made in the open market or through negotiated transactions from time to time depending on market conditions. Note 5 - Comprehensive Income For the three and six month periods ended June 30, 2001 and 2000, unrealized gains and losses on debt and equity securities available-for-sale were the Company's only other comprehensive income component. Comprehensive income for the three and six month periods ended June 30, 2001 and 2000 is summarized as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 =================== =================== (IN THOUSANDS) 2001 2000 2001 2000 ============================================================================================================= Net Income $1,775 $1,720 $3,525 $3,576 Other comprehensive income: Net unrealized gain (loss) on debt and equity securities available-for-sale, net of tax (45) 73 346 (79) - ------------------------------------------------------------------------------------------------------------- Total comprehensive income $1,730 $1,793 $3,871 $3,497 ============================================================================================================= Note 6 - Industry Segment Information The services provided by the Company are classified into three reportable segments: Transportation Information Services, Utility Information Services, and Banking Services. Each of these segments offers distinct services that are marketed through different channels. They are managed separately due to their unique service, processing and capital requirements. -6-
7 The Transportation Information Services unit provides freight invoice rating, payment, auditing, cost accounting and transportation information services to large corporate shippers. The Utility Information Services unit processes and pays utility invoices, including electricity, gas, water, telephone and refuse, for large corporate entities that have many locations or are heavy users of energy. The Banking Services unit 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, 2000. 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. The Company initiated the reporting of information relating to the Utility Information Services unit in 2001 due to its growth and formalization of its existence as an operating unit. Previous period information has been restated to reflect this addition. All three segments market their services within the United States and no revenue from any customer of any segment exceeds 10% of the Company's consolidated revenue. Summarized information about the Company's operations in each industry segment for the three and six month periods ended June 30, 2001 and 2000, is as follows: TRANSPORTATION UTILITY INFORMATION INFORMATION BANKING ELIM- (IN THOUSANDS) SERVICES SERVICES SERVICES CORPORATE INATIONS TOTAL ======================================================================================================================= Quarter Ended June 30, 2001 Total Revenues $ 8,251 $1,897 $3,690 $452 $ (536) $13,754 Net Income 784 45 958 (12) -- 1,775 Quarter Ended June 30, 2000 Total Revenues $ 8,816 $ 874 $3,352 $382 $ (445) $12,979 Net Income 1,191 (257) 811 (25) -- 1,720 - ----------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 2001 Total Revenues $16,955 $3,671 $7,067 $930 $(1,127) $27,496 Net Income 1,744 43 1,762 (24) -- 3,525 Six Months Ended June 30, 2000 Total Revenues $17,779 $1,747 $6,720 $770 $ (933) $26,083 Net Income 2,348 (408) 1,684 (48) -- 3,576 - ----------------------------------------------------------------------------------------------------------------------- Note 7 - Investment in Unconsolidated Subsidiary On January 2, 2001, the Company's Bank subsidiary foreclosed on certain operating assets relating to one borrower in order to protect the Bank's financial interest in that borrower. The Bank is currently stabilizing this business and operating it as Government e-Management Solutions, Inc. It is accounted for as an unconsolidated subsidiary. At June 30, 2001 the investment in this subsidiary was $5,355,000. Note 8 - Reclassifications Certain amounts in the 2000 consolidated financial statements have been reclassified to conform with the 2001 presentation. Such reclassifications have no effect on previously reported net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cass Information Systems, Inc. (the "Company") operates in three primary business segments: Transportation Information Services, Utility Information Services and through the Company's wholly owned subsidiary, Cass Commercial Bank ("Cass Bank"), Banking Services. The Company is a payment processing and information services company, whose operations include the processing and payment of freight and utility charges, preparation of management information, auditing and rating charges and other payment related activities for customers located throughout the United States. Cass Bank provides specialized banking services to privately held -7-
8 businesses located primarily in the St. Louis, Missouri metropolitan area and church and church-related entities located in the St. Louis metropolitan area and selected cities throughout the United States. On January 18, 2001 the Company announced that it acquired substantially all the utility payment and processing related assets of "The Utility Navigator(R)" a division of privately held InSITE Services, Inc. These assets include books and records relating to the business, customer and vendor lists, customer contracts, reporting history and databases, marketing and advertising materials, trademarks and other intellectual property, and a license to the software used to process and pay utility bills. The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended June 30, 2001 (the "Second Quarter of 2001") compared to the three-month period ended June 30, 2000 (the "Second Quarter of 2000") and the six-month period ended June 30, 2001 ("First Half of 2001") compared to the six-month period ended June 30, 2000 ("First Half of 2000"). 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 2000 Annual Report on Form 10-K. Results of operations for the First Half of 2001 are not necessarily indicative of the results to be attained for any other period. RESULTS OF OPERATIONS NET INCOME The Company's net income was $1,775,000 for the Second Quarter of 2001, a $55,000 or 3.2% increase compared to net income of $1,720,000 for the Second Quarter of 2000. The Company's net income was $3,525,000 for the First Half of 2001, a $51,000 or 1.4% decrease compared to net income of $3,576,000 for the First Half of 2000. Diluted earnings per share was $.54 for the Second Quarter of 2001, a 12.5% increase compared to $.48 for the Second Quarter of 2000. Diluted earnings per share was $1.06 for the First Half of 2001, a 7.1% increase compared to $.99 for the First Half of 2000. The increase in net income in the Second Quarter of 2001 over the Second Quarter of 2000 was primarily a result of strong loan demand and an increase in earning assets. The decrease in net income in the First Half of 2001 from the First Half of 2000 was due primarily to decreases in the general level of interest rates and increased expenses related to an increased staff at CIS to support expanded operations. Return on average assets for the Second Quarter of 2001 was 1.27% compared to 1.39% for the Second Quarter of 2000. Return on average assets for the First Half of 2001 was 1.28% compared to 1.44% for the First Half of 2000. Return on average equity for the Second Quarter of 2001 was 12.89% compared to 12.78% for the Second Quarter of 2000. Return on average equity for the First Half of 2001 was 13.01% compared to 13.05% for the First Half of 2000. NET INTEREST INCOME Second Quarter of 2001 compared to Second Quarter of 2000: The Company's tax-equivalent net interest income increased 3.4% or $270,000 from $7,946,000 to $8,216,000. Average earning assets increased 10.6% or $48,979,000 from $460,345,000 to $509,324,000. The tax-equivalent net interest margin decreased from 6.94% to 6.49%. The average tax-equivalent yield on earning assets decreased from 7.88% to 7.24%. The average rate paid on interest-bearing liabilities decreased from 4.60% to 3.22%. The average balance of loans increased $55,173,000 from $323,549,000 to $378,722,000, investment in debt and equity securities decreased $39,860,000 from $90,159,000 to $50,299,000, and federal funds sold and other short-term investments increased $33,666,000 from $46,637,000 to $80,303,000. The average balance of noninterest bearing demand deposit accounts increased $9,682,000 from $80,504,000 to $90,186,000, accounts and drafts payable increased $25,906,000 from $263,156,000 to $289,062,000, and interest bearing liabilities increased $24,745,000 from $94,130,000 to $118,875,000. The increase in average loans during this period was attributable to the Bank's marketing efforts, both in the commercial and church and church-related areas. The decrease in debt and equity securities and the increase in federal funds sold and other short term investments reflects management's asset allocation decisions given projected liquidity requirements, market interest rates and the attractiveness of alternative investments. Noninterest bearing -8-
9 demand and interest bearing liabilities have increased due to the Bank's increased marketing efforts to attract more deposits. The increase in average accounts and drafts payable relates to an increase in the dollar volume of transactions processed and lengthening of the payment cycle. The increases experienced during the Second Quarter of 2001 in net interest income was caused primarily by increases in the level of earning assets funded by the increase in accounts and drafts payable and interest-bearing liabilities and a shift in earning assets to higher yielding loans. The decrease in net interest margin was due primarily to a decline in the general level of interest rates. The Company is positively affected by increases in the level of interest rates due to the fact that its rate sensitive assets significantly exceed its rate sensitive liabilities. Conversely, the Company is adversely affected by decreases in the level of interest rates. This is primarily due to the noninterest-bearing liabilities generated by the Company in the form of accounts and drafts payable. For more information please refer to the table on page 10. First Half of 2001 compared to the First Half of 2000: The Company's tax-equivalent net interest income increased 5.9% or $907,000 from $15,434,000 to $16,341,000. Average earning assets increased 10.5% or $48,175,000 from $458,342,000 to $506,517,000. The tax-equivalent net interest margin decreased from 6.77% to 6.52%. The average tax-equivalent yield on earning assets decreased from 7.66% to 7.48%. The average rate paid on interest-bearing liabilities decreased from 4.24% to 4.00%. The average balance of loans increased $61,013,000 from $314,200,000 to $375,213,000, investment in debt and equity securities decreased $33,273,000 from $90,067,000 to $56,794,000, and federal funds sold and other short-term investments increased $20,435,000 from $54,075,000 to $74,510,000. The average balance of noninterest bearing demand deposit accounts increased $4,259,000 from $81,679,000 to $85,938,000, accounts and drafts payable increased $25,316,000 from $258,924,000 to $284,240,000, and interest-bearing liabilities increased $24,906,000 from $96,326,000 to $121,232,000. The increases and decreases experienced in account balances during the First Half of 2001 were attributable to the same factors as those described for the second quarter. The increases experienced during the First Half of 2001 in net interest income were also caused primarily by increases in the level of earning assets funded primarily by the increase in accounts and drafts payable and interest bearing liabilities and a shift in earning assets to higher yielding loans. The decrease in net interest margin was due primarily to a decline in the general level of interest rates. The Company is positively affected by increases in the level of interest rates due to the fact that its rate sensitive assets significantly exceed its rate sensitive liabilities. Conversely, the Company is adversely affected by decreases in the level of interest rates. This is primarily due to the noninterest-bearing liabilities generated by the Company in the form of accounts and drafts payable. For more information please refer to the table on page 11. -9-
10 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATE AND INTEREST DIFFERENTIAL The following table shows the condensed average balance sheets for each of the periods reported, the interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported. SECOND QUARTER 2001 SECOND QUARTER 2000 ======================================== ================================== 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 $363,270 $7,181 7.95% $316,393 $6,730 8.56% Tax-exempt 4 15,452 325 8.46 7,156 168 9.44 Debt and equity securities 5: Taxable 49,259 770 6.29 88,977 1,386 6.27 Tax-exempt 4 1,040 19 7.35 1,182 24 8.17 Federal funds sold and other short-term investments 80,303 873 4.37 46,637 714 6.16 - ------------------------------------------------------------------------------------------------------------------------- Total earning assets 509,324 9,168 7.24 460,345 9,022 7.88 Nonearning assets: Cash and due from banks 24,805 22,494 Premises and equipment, net 16,936 9,580 Other assets 15,596 9,977 Allowance for loan losses (4,910) (4,420) - ------------------------------------------------------------------------------------------------------------------------- Total assets $561,751 $497,976 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1 Interest-bearing liabilities: Interest-bearing demand deposits $ 57,093 $ 433 3.05% $ 42,367 $ 440 4.18% Savings deposits 52,278 397 3.05 45,290 556 4.94 Time deposits of $100 or more 5,827 72 4.97 2,424 32 5.31 Other time deposits 3,628 49 5.43 3,853 43 4.49 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 118,826 951 3.22 93,934 1,071 4.59 Short-term borrowings 49 1 8.21 196 5 10.26 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 118,875 952 3.22 94,130 1,076 4.60 Noninterest-bearing liabilities: Demand deposits 90,186 80,504 Accounts and drafts payable 289,062 263,156 Other liabilities 8,409 6,187 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 506,532 443,977 Shareholders' equity 55,219 53,999 Total liabilities and shareholders' equity $561,751 $497,976 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $8,216 $7,946 Interest spread 4.02% 3.28% Net interest margin 6.49% 6.94% =========================================================================================================================
1. Balances shown are daily averages. -10- FIRST HALF OF 2001 FIRST HALF OF 2000 ======================================== ================================== 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 $359,636 $14,503 8.15% $307,010 $12,788 8.38% Tax-exempt 4 15,577 666 8.65 7,190 301 8.42 Debt and equity securities 5: Taxable 55,708 1,742 6.32 88,862 2,757 6.24 Tax-exempt 4 1,086 40 7.45 1,205 44 7.34 Federal funds sold and other short-term investments 74,510 1,788 4.85 54,075 1,576 5.86 - ------------------------------------------------------------------------------------------------------------------------- Total earning assets 506,517 18,739 7.48 458,342 17,466 7.66 Nonearning assets: Cash and due from banks 21,608 24,695 Premises and equipment, net 15,719 9,510 Other assets 15,363 9,746 Allowance for loan losses (4,904) (4,372) - ------------------------------------------------------------------------------------------------------------------------- Total assets $554,303 $497,921 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1 Interest-bearing liabilities: Interest-bearing demand deposits $ 54,121 $ 955 3.57% $ 42,927 $ 823 3.86% Savings deposits 58,331 1,211 4.20 46,838 1,052 4.52 Time deposits of $100 or more 4,971 130 5.29 2,522 64 5.10 Other time deposits 3,775 101 5.41 3,841 86 4.50 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 121,198 2,397 4.00 96,128 2,025 4.24 Short-term borrowings 34 1 5.95 198 7 7.11 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 121,232 2,398 4.00 96,326 2,032 4.24 Noninterest-bearing liabilities: Demand deposits 85,938 81,679 Accounts and drafts payable 284,240 258,924 Other liabilities 8,262 6,032 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 499,672 442,961 Shareholders' equity 54,631 54,960 Total liabilities and shareholders' equity $554,303 $497,921 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $16,341 $15,434 Interest spread 3.48% 3.42% Net interest margin 6.52% 6.77% ========================================================================================================================= -11-
11 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 2000 Consolidated Financial Statements. 3. Interest income on loans includes net loan fees of $7,000 and $67,000 for the Second Quarter of 2001 and 2000, respectively. 4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34%. The tax-equivalent adjustment was approximately $117,000 and $78,000 for the Second Quarter of 2001 and 2000, 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.
12
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 2000 Consolidated Financial Statements. 3. Interest income on loans includes net loan fees of $11,000 and $79,000 for the First Half of 2001 and 2000, respectively. 4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34%. The tax-equivalent adjustment was approximately $240,000 and $117,000 for the First Half of 2001 and 2000, respectively. 5. For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments. ANALYSIS OF NET INTEREST INCOME CHANGES The following table presents the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each. SECOND QUARTER 2001 OVER 2000 ========================================== (DOLLARS IN THOUSANDS) VOLUME RATE TOTAL ========================================================================================================================= Increase (decrease) in interest income: Loans 1,2: Taxable $ 951 $(500) $ 451 Tax-exempt 3 176 (19) 157 Debt and equity securities: Taxable (621) 5 (616) Tax-exempt 3 (3) (2) (5) Federal funds sold and other short-term investments 410 (251) 159 - ------------------------------------------------------------------------------------------------------------------------- Total interest income 913 (767) 146 - ------------------------------------------------------------------------------------------------------------------------- Interest expense on: Interest-bearing demand deposits 130 (137) (7) Savings deposits 77 (236) (159) Time deposits of $100 or more 42 (2) 40 Other time deposits (3) 9 6 Short-term borrowings (3) (1) (4) - ------------------------------------------------------------------------------------------------------------------------- Total interest expense 243 (367) (124) - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 670 $(400) $ 270 =========================================================================================================================1. Average balances include nonaccrual loans. 2. Interest income includes net loan fees. 3. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34%. FIRST HALF 2001 OVER 2000 =========================================== (DOLLARS IN THOUSANDS) VOLUME RATE TOTAL ========================================================================================================================= Increase (decrease) in interest income: Loans 1,2: Taxable $ 2,038 $(323) $ 1,715 Tax-exempt 3 356 9 365 Debt and equity securities: Taxable (1,058) 43 (1,015) Tax-exempt 3 (5) 1 (4) Federal funds sold and other short-term investments 514 (302) 212 - ------------------------------------------------------------------------------------------------------------------------- Total interest income 1,845 (572) 1,273 - ------------------------------------------------------------------------------------------------------------------------- Interest expense on: Interest-bearing demand deposits 196 (64) 132 Savings deposits 236 (77) 159 Time deposits of $100 or more 63 3 66 Other time deposits (2) 17 15 Short-term borrowings (5) (1) (6) - ------------------------------------------------------------------------------------------------------------------------- Total interest expense 488 (122) 366 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 1,357 $(450) $ 907 =========================================================================================================================1. Average balances include nonaccrual loans. 2. Interest income includes net loan fees. 3. Interest income is presented on a tax-equivalent basis assuming a tax rate of 34%. -12-
13 ALLOWANCE AND PROVISION FOR LOAN LOSSES A significant determinant of the Company's operating results is the provision for loan losses and the level of loans charged off. There was no provision made for loan losses during the Second Quarter of 2001 compared with a $150,000 provision made during the Second Quarter of 2000. There was no provision made for loan losses during the First Half of 2001 compared with a $250,000 provision made during the First Half of 2000. Net loan recoveries for the Second Quarter of 2001 were $47,000 compared to net loans charged off of $79,000 for the Second Quarter of 2000. Net loan recoveries for the First Half of 2001 were $50,000 compared to net loans charged off of $52,000 for the First Half of 2000. This, along with a reduction in the balance of potential problem loans from December 31, 2000 to June 30, 2001, resulted in a decrease in the provision made during 2001. Potential problem loans consist of nonperforming loans and other impaired loans. The allowance for loan losses at June 30, 2001 was $4,947,000 and at December 31, 2000 was $4,897,000. The allowance for loan losses at June 30, 2001 represented 1.28% of total loans outstanding compared to 1.32% at December 31, 2000. Nonperforming loans were $1,757,000 or .47% of average loans at June 30, 2001 compared to $1,131,000 or .34% of average loans at December 31, 2000. At June 30, 2001, impaired loans totaled $1,815,000 which included $1,757,000 of nonaccrual loans compared with impaired loans at December 31, 2000 of $5,394,000 which included $1,127,000 of nonaccrual loans. The allowance for loan losses on impaired loans was $329,000 at June 30, 2001. Factors which influence management's determination of the adequacy of the allowance for loan losses, among other things, include: evaluation of each nonperforming and/or classified loan to determine the estimated loss exposure under existing circumstances known to management; evaluation of all potential problem loans identified in light of loss exposure based upon existing circumstances known to management; analysis of the loan portfolio with regard to future loss exposure on loans to specific customers and/or industries; current economic conditions; and, an overall review of the loan portfolio in light of past loan loss experience. In management's judgment, the allowance for loan losses is considered adequate to absorb probable losses in the loan portfolio. SUMMARY OF ASSET QUALITY The following table presents information as of and for the three and six month periods ended June 30, 2001 and 2000 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) 2001 2000 2001 2000 ======================================================================================================================= Allowance at beginning of period $ 4,900 $ 4,409 $ 4,897 $ 4,282 Provision charged to expense -- 150 -- 250 Loans charged off -- 82 -- 82 Recoveries on loans previously charged off 47 3 50 30 - ----------------------------------------------------------------------------------------------------------------------- Net loans charged-off (recovered) (47) 79 (50) 52 Allowance at end of period $ 4,947 $ 4,480 $ 4,947 $ 4,480 - ----------------------------------------------------------------------------------------------------------------------- Loans outstanding: Average $378,722 $323,549 $375,213 $314,200 June 30 386,122 328,250 386,122 328,250 Ratio of allowance for loan losses to loans outstanding: Average 1.31% 1.38% 1.32% 1.43% June 30 1.28 1.36 1.28 1.36 Nonperforming loans: Nonaccrual loans $ 1,757 $ 989 $ 1,757 $ 989 Loans past due 90 days or more -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Total $ 1,757 $ 989 $ 1,757 $ 989 - ----------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percent of average loans .46% .31% .47% .31% ======================================================================================================================= -13-
14 On January 2, 2001, the Bank foreclosed on certain operating assets relating to one borrower in order to protect the Bank's financial interest in that borrower. At the time of foreclosure, loans to this borrower amounted to $4,205,000. The Bank is currently stabilizing this business and operating it as Government e-Management Solutions. As of June 30, 2001 the investment in this subsidiary was $5,355,000. During the First Half of 2001, this subsidiary had a loss of $487,000, which includes depreciation and amortization of $738,000. NONINTEREST INCOME Noninterest income is principally derived from payment and processing fees. Processing volumes related to these fees for the three and six month periods ended June 30, 2001 and 2000 are as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ======================================== ======================================== % % (IN THOUSANDS) 2001 2000 CHANGE 2001 2000 CHANGE ================================================================================= ======================================== Transportation Information Services: Invoice Bill Volume 5,140 4,729 8.7% 9,998 9,603 4.1% Invoice Dollar Volume $1,808,533 $1,816,185 (.4%) $3,667,166 $3,618,123 1.4% Utility Information Services: Invoice Bill Volume 604 408 48.0% 1,235 799 54.6% Invoice Dollar Volume $ 387,949 $ 232,889 66.6% $ 830,429 $ 455,838 82.2% These figures exclude any volume related to history data loading. The Company believes the inclusion of such data distorts processing volumes since it relates to one-time, non-repetitive processing and does not involve payment of any invoices. Total noninterest income for the Second Quarter of 2001 was $5,655,000, a $394,000 or 7.5% increase compared with the Second Quarter of 2000. Total noninterest income for the First Half of 2001 was $11,395,000, a $379,000 or 3.4% increase compared to the First Half of 2000. CIS payment and processing revenue for the Second Quarter of 2001 was $5,154,000, a $305,000 or 6.3% increase compared to the Second Quarter of 2000. CIS payment and processing revenue for the First Half of 2001 was $10,466,000, a $281,000 or 2.8% increase compared to the First Half of 2000. These increases were primarily derived from the growth in fee income from utility payment services and were partially offset by decreases in freight payment services. The decrease in freight payment fees was due to a slowing of the economy and a change in the fee mix of items processed with a greater percentage of EDI (Electronic Data Interchange) transactions processed in 2001. EDI transactions have lower processing requirements and therefore lower fees. Freight rating services revenue also decreased due to a change in strategic direction from selling rating software to a new Internet-based delivery system of carrier rates that offers expanded features and capabilities. Bank service fees for the Second Quarter of 2001 were $383,000, a $9,000 or 2.4% increase compared to the Second Quarter of 2000. During the First Half of 2001 these fees were $699,000, a $9,000 or 1.3% decrease compared to the First Half of 2000. -14-
15 NONINTEREST EXPENSE Total noninterest expense for the Second Quarter of 2001 was $11,037,000, a $697,000 or 6.7% increase compared to the Second Quarter of 2000. Total noninterest expense for the First Half of 2001 was $22,125,000, a $1,606,000 or 7.8% increase compared to the First Half of 2000. Salaries and benefits expense for the Second Quarter of 2001 was $7,663,000, a $706,000 or 10.1% increase compared to the Second Quarter of 2000. Salaries and benefits expense for the First Half of 2001 was $15,385,000, a $1,378,000 or 9.8% increase compared to the First Half of 2000. These increases in expense were caused by annual pay increases and expenses related to an increased staff at the Company's new utility processing facility in Columbus, Ohio. Occupancy expense for the Second Quarter of 2001 was $427,000, a $16,000 or 3.6% decrease compared to the Second Quarter of 2000. Occupancy expense for the First Half of 2001 was $888,000, a $11,000 or 1.3% increase compared to the First Half of 2000. The decrease in the Second Quarter of 2001 relates primarily to a decrease in rent expense the Company experienced after moving its Columbus operations from leased space to a newly acquired building. The increase in the First Half of 2001 compared to the First Half of 2000 was primarily due to expenses related to moving the Columbus operations to the new building. Equipment expense for the Second Quarter of 2001 was $904,000, an increase of $137,000 or 17.9% compared to the Second Quarter of 2000. Equipment expense for the First Half of 2001 was $1,718,000, an increase of $199,000 or 13.1% compared to the First Half of 2000. These increases were due primarily to increased investments in information technology. Other noninterest expense for the Second Quarter of 2001 was $2,043,000, a decrease of $130,000 or 6.0% compared to the Second Quarter of 2000. Other noninterest expense for the First Half of 2001 was $4,134,000, a slight increase of $18,000 or .4% compared to the First Half of 2000. The decrease experienced in the Second Quarter of 2001 compared to the Second Quarter of 2000 was due primarily to decreases in consulting fees and telecommunication costs. FINANCIAL CONDITION Total assets at June 30, 2001 were $563,355,000, a decrease of $13,531,000 or 2.4% from December 31, 2000. Loans, net of the allowance for loan losses, at June 30, 2001 were $381,175,000, an increase of $13,852,000 or 3.8% from December 31, 2000. Total investments in debt and equity securities at June 30, 2001 were $44,416,000, a $24,909,000 or 35.9% decrease from December 31, 2000. Federal Funds sold and other short-term investments at June 30, 2001 were $80,637,000 a $13,614,000 or 14.4% decrease from December 31, 2000. Total deposits at June 30, 2001 were $202,815,000, a $9,851,000 or 4.6% decrease from December 31, 2000. Accounts and drafts payable were $298,982,000, a $3,858,000 or 1.3% decrease from December 31, 2000. Total shareholders' equity at June 30, 2001 was $54,368,000, a $547,000 or 1.0% increase from December 31, 2000. The increase in loans is related to the successful expansion of the church and church-related ministries unit and increases in loans to privately held businesses from Cass Bank's ongoing marketing efforts. The decrease in federal funds sold and other short-term investments relate to the increase in loans and decrease in deposits and accounts and drafts payable. The decrease in deposits reflects normal daily and seasonal fluctuations. The ending balances of 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. The increase in total shareholders' equity resulted from net income of $3,525,000; an increase in other comprehensive income of $346,000; the amortization of the stock bonus plan of $43,000; and cash received from the exercise of stock options of $11,000; offset by the purchase of treasury shares for $2,069,000 (100,500 shares); and dividends paid of $1,309,000 ($.40 per share). -15-
16 LIQUIDITY AND CAPITAL RESOURCES The balances of liquid assets consists of cash and cash equivalents, which include cash and due from banks, federal funds sold, and money market funds, and were $105,091,000 at June 30, 2001, a decrease of $10,840,000 or 9.4% from December 31, 2001. At June 30, 2001 these assets represented 18.7% of total assets. These funds are the Company's and its subsidiaries' primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable. Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in debt and equity securities were $44,416,000 at June 30, 2001, a decrease of $24,909,000 or 35.9% from December 31, 2001. These assets represented 7.9% of total assets at June 30, 2001. Of this total, 46% were U.S. treasury securities, 50% were U.S. government agencies, and 4% were other securities. Of the total portfolio, 41% matures in one year, 43% matures in one to five years, and 16% matures in five or more years. At January 1, 2001 the Company transferred the remaining balance of held-to-maturity securities into available-for-sale securities. The investment portfolio provides secondary liquidity through regularly scheduled maturities, the ability to sell securities out of the available-for-sale portfolio, and the ability to use these securities in conjunction with its reverse repurchase lines of credit. Cass Bank has unsecured lines at correspondent banks to purchase federal funds up to a maximum of $20,320,000. Additionally, Cass Bank has a line of credit at an unaffiliated financial institution in the maximum amount of $60,000,000 collateralized by securities sold under repurchase agreements. The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize many other commercial products of the bank. The accounts and drafts payable generated by CIS has also historically been a stable source of funds. Net cash provided by operating activities totaled $3,360,000 for the First Half of 2001, compared to $4,995,000 for the First Half of 2000. Net cash provided by investing activities was $2,851,000 for the First Half of 2001, compared with net cash used in investing activities of $54,621,000 for the First Half of 2000. Net cash used in financing activities for the First Half of 2001 was $17,051,000, compared with net cash provided in financing activities of $9,682,000 for the First Half of 2000. The increase in net cash provided by investing activities relates primarily to the maturity of available-for-sale debt securities in the First Half of 2001 and a greater increase in loans in the First Half of 2000. The increase in net cash used in financing activities relates primarily to the decrease in deposits and accounts and drafts payable along with the Company's repurchase of common shares for treasury. 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. -16-
17 The Company and the Bank continue to significantly exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios at June 30, 2001 and December 31, 2000: JUNE 30, 2001 AMOUNT RATIO ================================================================================================= Total capital (to risk-weighted assets) Cass Information Systems, Inc. $52,657,000 12.06% Cass Commercial Bank 22,446,000 11.59 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. $47,710,000 10.93% Cass Commercial Bank 20,030,000 10.34 Tier I capital (to average assets) Cass Information Systems, Inc. $47,710,000 8.70% Cass Commercial Bank 20,030,000 8.51 ================================================================================================= DECEMBER 31, 2000 AMOUNT RATIO ================================================================================================= Total capital (to risk-weighted assets) Cass Information Systems, Inc. $57,712,000 13.55% Cass Commercial Bank 26,064,000 13.38 Tier I capital (to risk-weighted assets) Cass Information Systems, Inc. $52,815,000 12.40% Cass Commercial Bank 23,624,000 12.13 Tier I capital (to average assets) Cass Information Systems, Inc. $52,815,000 10.26% Cass Commercial Bank 23,624,000 10.52 ================================================================================================= INFLATION Inflation can impact the financial position and results of the operations of banks and bank holding companies because these companies hold monetary assets and monetary liabilities. Monetary assets and liabilities are those which can be converted into a fixed number of dollars, and include cash, investments, loans and deposits. The Company's consolidated balance sheets, reflect a net positive monetary position (monetary assets exceeding 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. FORWARD-LOOKING STATEMENTS - FACTORS THAT MAY AFFECT FUTURE RESULTS Statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and the other sections of this Report that are not statements of historical fact are forward-looking statements. Such statements are subject to important risks and uncertainties which could cause the Company's actual results to differ materially from those expressed in any such forward-looking statements made herein. The aforesaid uncertainties include, but are not limited to: burdens imposed by federal and state regulators, credit risk related to borrowers' ability to repay loans, concentration of loans in the St. Louis Metropolitan area which subjects the Company to risks associated with changes in the local economy, risks associated with fluctuations in interest rates, competition from other banks and other financial institutions, some of which are not as heavily regulated as the Company and risks associated with breakdowns in data processing systems and competition from other providers of similar services. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As described in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, 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, 2001 has changed materially from that at December 31, 2000. -17-
18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS IN 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 16, 2001, the following proposals were voted on and approved: The following is a summary of votes cast. No broker non-votes were received. Withheld Authority / For Against Abstentions ---------------- ------------- ------------- 1. Proposal to elect three Directors for a term of three years ending 2004; Lawrence A. Collett 2,604,936 5,970 671,543 Irving A. Shepard 2,585,338 25,568 671,543 Andrew J. Signorelli 2,585,738 25,168 671,543 2. Proposal to ratify the selection of KPMG LLP as independent accountants for 2001. 2,560,367 1,953 720,129 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None (b) Cass Information Systems, Inc. did not file any reports on Form 8-K during the three-month period ended June 30, 2001. -18-
19 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 8, 2001 By Lawrence A. Collett --------------------------------------- Lawrence A. Collett Chairman and Chief Executive Officer DATE: August 8, 2001 By Eric H. Brunngraber --------------------------------------- Eric H. Brunngraber Vice President-Secretary (Chief Financial and Accounting Officer) -19-