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 March 31, 2002
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 April 30, 2002: Common stock, par value $.50 per share - 3,203,722
shares outstanding.
- --------------------------------------------------------------------------------
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income
Three months ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II - OTHER INFORMATION - Items 1. - 6. 18
SIGNATURES 19
FORWARD-LOOKING STATEMENTS - FACTORS THAT MAY AFFECT FUTURE RESULTS
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties, and other factors, including those set forth in
this paragraph. Important factors that could cause our actual results,
performance, or achievements to be materially different from any future results,
performance, or achievements expressed or implied by those statements include,
but are not limited to: the failure to successfully execute our corporate plan,
the loss of key personnel or inability to attract additional qualified
personnel, the loss of key customers, increasing competition, the inability to
remain current with rapid technological change, risks related to acquisitions,
risks associated with business cycles, utility and system interruptions or
processing errors, rules and regulations governing financial institutions and
changes in such rules and regulations, credit risk related to borrowers' ability
to repay loans, concentration of loans to commercial enterprises, churches and
loans in the St. Louis Metropolitan area which creates risks associated with
adverse factors that may affect these groups, risks associated with fluctuations
in interest rates, and volatility of the price of our common stock. We undertake
no obligation to publicly update or revise any forward-looking statements to
reflect changed assumptions, the occurrence of anticipated or unanticipated
events, or changes to future results over time.
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands except Per Share Data)
MARCH 31 DECEMBER 31
2002 2001
ASSETS
Cash and due from banks $ 17,782 $ 31,915
Federal funds sold and other short-term investments 24,484 67,940
-------- ---------
Cash and cash equivalents 42,266 99,855
-------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 124,045 92,330
Loans 383,946 381,452
Less: Allowance for loan losses 5,006 4,906
-------- ---------
Loans, net 378,940 376,546
-------- ---------
Premises and equipment, net 16,177 16,798
Accrued interest receivable 3,160 2,627
Investment in unconsolidated subsidiary 5,102 5,110
Other assets 8,070 7,609
-------- ---------
Total assets $577,760 $ 600,875
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 98,411 $ 117,351
Interest-bearing 128,967 130,627
-------- ---------
Total deposits 227,378 247,978
Accounts and drafts payable 288,697 291,794
Short-term borrowings 200 200
Other liabilities 5,606 5,383
-------- ---------
Total liabilities 521,881 545,355
-------- ---------
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
Additional paid-in capital 4,843 4,997
Retained earnings 64,328 63,623
Accumulated other comprehensive income 17 522
Common shares in treasury, at cost (797,178 shares
at March 31, 2002 and 818,185 shares at
December 31, 2001) (15,292) (15,597)
Unamortized stock bonus awards (17) (25)
--------- ---------
Total shareholders' equity 55,879 55,520
-------- ---------
Total liabilities and shareholders' equity $577,760 $600,875
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
THREE MONTHS ENDED
MARCH 31
=====================
2002 2001
INTEREST INCOME:
Interest and fees on loans $ 6,227 $ 7,547
Interest and dividends on debt and equity securities:
Taxable 1,195 972
Exempt from federal income taxes 337 14
Interest on federal funds sold and
other short-term investments 160 915
------- --------
Total interest income 7,919 9,448
------- --------
INTEREST EXPENSE:
Interest on deposits 548 1,446
Interest on short-term borrowings 3 --
------- --------
Total interest expense 551 1,446
------- --------
Net interest income 7,368 8,002
Provision for loan losses 90 --
------- --------
Net interest income after provision
for loan losses 7,278 8,002
------- --------
NONINTEREST INCOME:
Payment and processing fees 5,551 5,312
Bank service fees 412 316
Other 41 112
------- --------
Total noninterest income 6,004 5,740
------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 7,606 7,722
Occupancy expense 364 461
Equipment expense 1,089 814
Other 2,265 2,091
------- --------
Total noninterest expense 11,324 11,088
------- --------
Income before income tax expense 1,958 2,654
Income tax expense 612 904
------- --------
Net income $ 1,346 $ 1,750
======= ========
Earnings per share:
Basic $.42 $.53
Diluted $.42 $.53
Weighted average shares outstanding:
Basic 3,200,500 3,293,614
Effect of stock options and awards 20,880 43,407
Diluted 3,221,380 3,337,021
See accompanying notes to unaudited consolidated financial statements.
4
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31
==========================
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,346 $ 1,750
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 961 625
Provision for loan losses 90 --
Amortization of stock bonus awards 8 21
(Increase) decrease in accrued interest receivable (533) 353
Increase in deferred income 19 83
Increase in deferred income tax asset (260) (554)
Increase in income tax liability 405 1,028
Change in other assets (193) (1,403)
Change in other liabilities 4 396
Other operating activities, net 246 (285)
-------- ----------
Net cash provided by operating activities 2,093 2,014
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale
debt and equity securities 6,848 12,001
Purchase of available-for-sale debt and equity securities (39,388) --
Net increase in loans (2,484) (5,430)
Purchases of premises and equipment, net (285) (2,864)
--------- ----------
Net cash (used in) provided by investing activities (35,309) 3,707
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing demand deposits (18,940) (21,984)
Net (decrease) increase in interest-bearing demand and savings deposits (4,244) 3,422
Net increase in time deposits 2,584 2,321
Net decrease in accounts and drafts payable (3,097) (21,770)
Net increase in short-term borrowings -- 25
Cash proceeds from exercise of stock options 348 11
Cash dividends paid (641) (656)
Purchase of common shares for treasury (383) (1,131)
--------- ---------
Net cash used in financing activities (24,373) (39,762)
--------- ----------
Net decrease in cash and cash equivalents (57,589) (34,041)
Cash and cash equivalents at beginning of period 99,855 115,931
-------- ---------
Cash and cash equivalents at end of period $ 42,266 $ 81,890
======== =========
Supplemental information:
Cash paid for interest $ 546 $ 1,404
Cash paid for income taxes 12 411
Transfer of securites from held-to-maturity to available-for-sale -- 6,650
Transfer of loans to foreclosed assets -- 4,205
See accompanying notes to unaudited consolidated financial statements.
5
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and related footnotes included in the Cass Information System, Inc.'s
("the Company") Annual Report on Form 10-K for the year ended December 31, 2001.
Note 2 - Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", 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 SFAS 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 SFAS 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.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", that supersedes Accounting Principles Board (APB) Opinion No. 17. Under
SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are to be reviewed at least annually for impairment under
impairment guidelines established in the statement. SFAS 142 also changes the
amortization methodology in intangible assets that are deemed to have finite
lives. Finally, SFAS 142 adds to required disclosures regarding goodwill and
intangible assets. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 142 on January 1, 2002 did not have a
material impact on the consolidated financial statements. In addition,
amortization of goodwill previously reported in net income is not material.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that superseded SFAS 121 and APB
Opinion No. 30. SFAS 144 provides guidance on differentiating between assets
held and used, held for sale, and held for disposal other than by sale, and the
required valuation of such assets. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 on January 1, 2002
did not have a material impact on the consolidated financial statements.
6
Note 3 - Loans by Type
(IN THOUSANDS) MARCH 31, 2002 DECEMBER 31, 2001
================================================================================
Commercial and industrial $106,431 $115,316
Real estate:
Mortgage 140,309 128,651
Mortgage - Churches & Related 83,070 86,853
Construction 14,349 16,041
Construction - Churches & Related 21,004 16,674
Industrial revenue bonds 6,114 6,155
Installment 1,757 1,787
Other 10,912 9,975
- --------------------------------------------------------------------------------
Total loans $383,946 $381,452
================================================================================
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 277,874
shares. The Company repurchased 15,664 shares for $383,000 and repurchased
58,500 shares for $1,131,000 for the quarters ended March 31, 2002 and 2001,
respectively. 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-month periods ended March 31, 2002 and 2001, unrealized
gains and losses on debt and equity securities available-for-sale were the
Company's only other comprehensive income component. Comprehensive income for
the three-month periods ended March 31, 2002 and 2001 is summarized as follows:
THREE MONTHS ENDED
MARCH 31
=======================
(IN THOUSANDS) 2002 2001
==============================================================================
Net Income $ 1,346 $ 1,750
Other comprehensive income:
Net unrealized gain (loss) on debt and equity
securities available-for-sale, net of tax (505) 391
- ------------------------------------------------------------------------------
Total comprehensive income $ 841 $ 2,141
==============================================================================
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.
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, 2001. Management
evaluates segment performance based on net income after allocations for
corporate expenses
7
and income taxes. Transactions between segments are accounted
for at what management believes to be market value.
All three segments market their services within the United States and
no revenue from any customer of any segment exceeds 10% of the Company's
consolidated revenue.
Summarized information about the Company's operations in each industry
segment for the three-month periods ended March 31, 2002 and 2001, is as
follows:
TRANSPORTATION UTILITY
INFORMATION INFORMATION BANKING ELIM-
(IN THOUSANDS) SERVICES SERVICES SERVICES CORPORATE INATIONS TOTAL
================================================================================================================
Quarter Ended March 31, 2002
Total Revenues $ 7,553 $ 2,204 $ 3,669 $ 553 $ (697) $ 13,282
Net Income 219 120 1,007 -- -- 1,346
Quarter Ended March 31, 2001
Total Revenues $ 8,704 $ 1,774 $ 3,377 $ 478 $ (591) $ 13,742
Net Income 960 (2) 804 (12) -- 1,750
- ----------------------------------------------------------------------------------------------------------------
Note 7 - Investment in Unconsolidated Subsidiary
On January 2, 2001, the Company's bank subsidiary foreclosed on certain
operating assets relating to one borrower to protect the financial interest in
that borrower. The bank subsidiary is currently in the process of stabilizing
this business and will continue to operate the business as an unconsolidated
subsidiary until it can be merged into another entity or sold. It is accounted
for as a foreclosed asset that is held for sale. At March 31, 2002 the
investment in this subsidiary was $5,102,000.
Note 8 - Commitments and Contingencies
The Company provides customers with off-balance sheet credit support
through unused loan commitments to extend credit, standby letters of credit and
commercial letters of credit. At March 31, 2002 conditional commitments to
extend credit, commercial letters of credit and standby letters of credit
totaled approximately $26,282,000, $114,000 and $5,671,000, respectively. Since
many of the unused commitments are expected to expire or be only partially used,
the total amount of commitments does not necessarily represent future cash
requirements.
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 9 - Reclassifications
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform with the 2002 presentation. Such reclassifications have
no effect on previously reported net income or shareholder's equity.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 ("the Bank"), Banking Services.
The Company is a payment processing and information services company, whose
operations include the processing and payment of freight and utility invoices,
preparation of management information, auditing and rating of invoices and other
payment-related activities for customers located throughout the United States.
The Bank provides specialized banking services to privately-held 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 acquired substantially all the utility
payment and processing assets of "The Utility Navigator(R)", a division of
privately-held InSITE Services, Inc., for $750,000. 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.
CRITICAL ACCOUNTING POLICIES
The Company has prepared all of the consolidated financial information
in this report in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP). In preparing the consolidated
financial statements in accordance with U.S. GAAP, management makes estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurances that actual results will not
differ from those estimates.
Management has identified the accounting policy related to the
allowance for loan losses as critical to the understanding of the Company's
results of operations, since the application of this policy requires significant
management assumptions and estimates that could result in materially different
amounts to be reported if conditions or underlying circumstances were to change.
The impact and any associated risks related to these policies on our business
operations are discussed in the " Allowance and Provision for Loan Losses"
section of this report.
In addition, management evaluates certain long-term assets such as
premises and equipment, goodwill, and foreclosed assets for impairment.
Generally, 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. The
application of this policy also requires significant management assumptions and
estimates that could result in materially different results if conditions or
underlying circumstances change.
RESULTS OF OPERATIONS
The following paragraphs more fully discuss the results of operations
and changes in financial condition for the three-month period ended March 31,
2002 (the "First Quarter of 2002") compared to the three-month period ended
March 31, 2001 (the "First Quarter of 2001"). 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 2001 Annual Report on
Form 10-K. Results of operations for the First Quarter of 2002 are not
necessarily indicative of the results to be attained for any other period.
NET INCOME
The Company's net income was $1,346,000 for the First Quarter of 2002,
a $404,000 or 23.0% decrease compared to net income of $1,750,000 for the First
Quarter of 2001. Diluted earnings per share was $.42 for the First Quarter of
2002, a 20.8% decrease compared to $.53 for the First Quarter of 2001. The
decrease in net income
9
was primarily a result of the dramatic decrease in
interest rates and national freight activity compared to last year. Return on
average assets for the First Quarter of 2002 was .93% compared to 1.30% for the
First Quarter of 2001. Return on average equity for the First Quarter of 2002
was 9.85% compared to 13.11% for the First Quarter of 2001.
NET INTEREST INCOME
First Quarter of 2002 compared to First Quarter of 2001:
The Company's tax-equivalent net interest income decreased 6.7% or
$546,000 from $8,125,000 to $7,579,000. Average earning assets increased 6.7% or
$33,977,000 from $503,677,000 to $537,654,000. The tax-equivalent net interest
margin decreased from 6.56% to 5.72%. The average tax-equivalent yield on
earning assets decreased from 7.73% to 6.13%. The average rate paid on
interest-bearing liabilities decreased from 4.76% to 1.67%.
The average balances of loans increased $11,729,000 from $371,664,000
to $383,393,000, investment in debt and equity securities increased $53,373,000
from $63,360,000 to $116,733,000, and federal funds sold and other short-term
investments decreased $31,125,000 from $68,653,000 to $37,528,000. The average
balance of noninterest-bearing demand deposit accounts increased $22,736,000
from $81,642,000 to $104,378,000, accounts and drafts payable increased
$7,489,000 from $279,365,000 to $286,854,000, and interest-bearing liabilities
increased $10,794,000 from $123,615,000 to $134,409,000.
The increase in average loan balances during this period was primarily
attributable to the Bank's marketing efforts, both in the commercial and church
and church-related areas. The increase in debt and equity securities and
decrease 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 demand and interest-bearing liabilities have increased due
to the fact that customers maintain higher noninterest-bearing balances to
compensate the Bank for services and to avoid higher services fees in a lower
rate environment and the Bank's marketing efforts to attract more deposits. The
increase in average accounts and drafts payable relates to increases in utility
dollar volume processed and a lengthening of the time the Company has funds
available to complete payment of freight invoices.
The decreases experienced during the First Quarter of 2002 in net
interest income and the net interest margin was due primarily to the decline in
the general level of interest rates. The Company was able to partially mitigate
the effects of this decline by adjusting the allocation of assets in its
portfolio to longer-term, higher-yielding assets, increasing the size of the
loan portfolio and increasing earning assets by increasing deposits and accounts
and drafts payable. Nonetheless, the dramatic decline in interest rates
adversely affected the Company's net interest income and margin. 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.
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 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.
FIRST QUARTER 2002 FIRST QUARTER 2001
================================== ====================================
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 $ 377,260 $ 6,151 6.61% $ 355,960 $ 7,322 8.37%
Tax-exempt 4 6,133 115 7.60 15,704 341 8.83
Debt and equity securities 5:
Taxable 87,041 1,195 5.57 62,228 972 6.35
Tax-exempt 4 29,692 509 6.95 1,132 21 7.54
Federal funds sold and other
short-term investments 37,528 160 1.73 68,653 915 5.42
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 537,654 8,130 6.13 503,677 9,571 7.73
Nonearning assets:
Cash and due from banks 23,073 18,375
Premises and equipment, net 16,596 14,488
Investment in unconsolidated
subsidiary 4,807 4,466
Other assets 9,216 10,664
Allowance for loan losses (4,941) (4,898)
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 586,405 $ 546,772
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 59,892 $ 178 1.21% $ 51,117 $ 522 4.15%
Savings deposits 45,447 156 1.40 64,451 814 5.14
Time deposits of
$100 or more 23,605 166 2.85 4,105 59 5.84
Other time deposits 4,849 48 4.01 3,923 51 5.29
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 133,793 548 1.66 123,596 1,446 4.76
Short-term borrowings 616 3 1.98 19 -- --
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 134,409 551 1.67 123,615 1,446 4.76
Noninterest-bearing liabilities:
Demand deposits 104,378 81,642
Accounts and drafts payable 286,854 279,365
Other liabilities 5,371 8,010
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 531,012 492,632
Shareholders' equity 55,393 54,140
Total liabilities and
shareholders' equity $ 586,405 $ 546,772
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 7,579 $ 8,125
Interest spread 4.46% 2.97%
Net interest margin 5.72% 6.56%
================================================================================================================
1. Balances shown are daily averages.
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 2001
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $56,000 and $4,000 for
the First Quarter of 2002 and 2001, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $211,000 and
$123,000 for the First Quarter of 2002 and 2001, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investment securities.
ANALYSIS OF NET INTEREST INCOME CHANGES
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
FIRST QUARTER
2002 OVER 2001
=============================
(DOLLARS IN THOUSANDS) VOLUME1 RATE1 TOTAL
================================================================================
Increase (decrease) in interest income:
Loans 2,3:
Taxable $ 418 $(1,589) $(1,171)
Tax-exempt 4 (185) (41) (226)
Debt and equity securities:
Taxable 352 (129) 223
Tax-exempt 4 490 (2) 488
Federal funds sold and other
short-term investments (302) (453) (755)
- --------------------------------------------------------------------------------
Total interest income 773 (2,214) (1,441)
- --------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 77 (421) (344)
Savings deposits (190) (468) (658)
Time deposits of $100 or more 151 (44) 107
Other time deposits 11 (14) (3)
Short-term borrowings -- 3 3
- --------------------------------------------------------------------------------
Total interest expense 49 (944) (895)
- --------------------------------------------------------------------------------
Net interest income $ 724 $(1,270) $ (546)
================================================================================
1. The change in interest due to both volume and rate has been allocated
proportionately.
2. Average balances include nonaccrual loans.
3. Interest income includes net loan fees.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
A significant determinant of the Company's operating results is the
provision for loan losses and the level of loans charged off. There was a
$90,000 provision made for loan losses during the First Quarter of 2002 compared
with no provision made during the First Quarter of 2001. Net loan recoveries for
the First Quarter of 2002 were $10,000 compared to $3,000 for the First Quarter
of 2001. The provision for loan losses varies over time based on an ongoing
assessment of the adequacy of the allowance for loan losses.
The allowance for loan losses at March 31, 2002 was $5,006,000 and at
December 31, 2001 was $4,906,000. The ratio of allowance for loan losses to
total loans outstanding at March 31, 2002 was 1.30% compared to 1.29% at
December 31, 2001. Nonperforming loans were $1,353,000 or .35% of average loans
at March 31, 2002 compared to $472,000 or .13% of average loans at December 31,
2001.
12
At March 31, 2002, impaired loans totaled $6,012,000 which included
$513,000 of nonaccrual loans compared with impaired loans at December 31, 2001
of $525,000 which included $454,000 of nonaccrual loans. The allowance for loan
losses on impaired loans was $665,000 at March 31, 2002. The increase in
impaired loans from December 31, 2001 relates to three borrowers, the largest
with an outstanding balance of $4,139,000. The loans relating to this borrower
are currently performing, but payments have been consistently sixty days late.
The loans to this borrower are collateralized by real estate. Another loan in
the amount of $822,200 is a SBA guaranteed loan and also secured by real estate
and is currently over ninety days past due with a payment that was due January
1, 2002.
The allowance for loan losses has been established and is maintained to
absorb losses inherent in the loan portfolio. An ongoing assessment of risk of
loss is performed to determine if the current balance of the allowance is
adequate to cover potential losses in the portfolio. A charge or credit is made
to the provision for loan losses 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 specific component includes a
review of each loan on the Company's classified or watch list in terms of
collateral and possible loss exposure based on existing circumstances known to
management and under current economic conditions. The general component relates
to all other loans which are evaluated based on the loan grade assigned to the
credit with a percentage of each grade allocated to the allowance for loan
losses. The percentages are based on historical standards. The loan grades
assigned to each credit are evaluated on an annual basis, unless circumstances
require interim evaluation. Finally, a portion is added to the general reserve
to take into account other factors including national and local economic
conditions, downturns in specific industries including loss in collateral value,
trends in credit quality at the Company and the banking industry, and trends in
risk rating changes.
SUMMARY OF ASSET QUALITY
The following table presents information as of and for the three month
periods ended March 31, 2002 and 2001 pertaining to the Company's provision for
loan losses and analysis of the allowance for loan losses.
THREE MONTHS ENDED
MARCH 31
=============================
(Dollars in Thousands) 2002 2001
=================================================================================================
Allowance at beginning of period $ 4,906 $ 4,897
Provision charged to expense 90 --
Loans charged off -- --
Recoveries on loans previously charged off 10 3
- -------------------------------------------------------------------------------------------------
Net loan recoveries 10 3
Allowance at end of period $ 5,006 $ 4,900
- -------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 383,393 $ 371,664
March 31 383,946 373,448
Ratio of allowance for loan losses to loans outstanding:
Average 1.31% 1.32%
March 31 1.30% 1.31%
Nonperforming loans:
Nonaccrual loans $ 513 $ 1,441
Loans past due 90 days or more 840 47
- -------------------------------------------------------------------------------------------------
Total nonperforming loans 1,353 1,488
- -------------------------------------------------------------------------------------------------
Foreclosed assets 5,690 4,505
- -------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,043 $ 5,993
- -------------------------------------------------------------------------------------------------
Nonperforming loans to total loans .35% .40%
- -------------------------------------------------------------------------------------------------
Nonperforming assets to total assets 1.22% 1.00%
=================================================================================================
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. The Bank is currently in the process of stabilizing this business
and will continue to operate the business as an unconsolidated subsidiary until
it can be merged into another entity or sold. This subsidiary, Government
e-Management Solutions, Inc., is a software company that
13
provides the public sector with integrated financial, property and human
resource management systems. At March 31, 2002, the Bank's investment in this
company was $5,102,000. Based on unaudited financial statements, this company
generated $1,233,000 in revenues and incurred $1,248,000 in operating expenses
during the First Quarter of 2002. The $15,000 pre-tax loss for the quarter
includes $72,000 of depreciation and amortization.
On August 8, 2001, the Bank foreclosed on a loan to one borrower and is
now carrying the property as other real estate owned at what management believes
to be the fair value less cost to sell of the property of $588,000. The
remaining balance of the loan was $110,000, which was charged against the
allowance for loan losses at the time of foreclosure.
NONINTEREST INCOME
Noninterest income is principally derived from payment and processing
fees. Processing volumes related to these fees for the three-month periods ended
March 31, 2002 and 2001 are as follows:
THREE MONTHS ENDED
MARCH 31
====================================
%
(IN THOUSANDS) 2002 2001 CHANGE
==================================================================================================
Transportation Information Services:
Invoice Bill Volume 4,959 4,858 2.1%
Invoice Dollar Volume $1,841,637 $1,858,633 (.9%)
Utility Information Services:
Invoice Bill Volume 711 660 7.7%
Invoice Dollar Volume $449,248 $443,783 1.2%
Total noninterest income for the First Quarter of 2002 was $6,004,000,
a $264,000 or 4.6% increase compared with the First Quarter of 2001. The
Company's payment and processing revenue for the First Quarter of 2002 was
$5,551,000, a $239,000 or 4.5% increase compared to the First Quarter of 2001.
This increase was primarily derived from the growth in fee income from the
utility processing segment. Freight fees decreased $194,000 or 4.4% primarily
due to a decrease in shipments resulting from a slowing of the economy. The Cass
Freight Index, a leading measure of national freight activity, posed a 10%
decline in shipment activity and 11% decrease in expenditures from the First
Quarter of 2001. Utility fees increased $433,000 or 44.0% primarily due to the
addition of new customers from marketing efforts and through the acquisition of
"The Utility Navigator(R)".
Bank service fees for the First Quarter of 2002 were $412,000, a
$96,000 or 30.4% increase compared to the First Quarter of 2001. This increase
is due to the fact that service fees increase as the value of
noninterest-bearing deposits, used to compensate the Bank, decrease as the
general level of interest rates decrease and an expansion of the Bank's customer
base.
NONINTEREST EXPENSE
Total noninterest expense for the First Quarter of 2002 was
$11,324,000, a $236,000 or 2.1% increase compared to the First Quarter of 2001.
Salaries and benefits expense for the First Quarter of 2002 was
$7,606,000, a $116,000 or 1.5% decrease compared to the First Quarter of 2001.
Salaries decreased $173,000 due to many factors. First, there was a decrease in
Freight operations salaries due to a decrease in volume and the outsourcing of
data entry work. Second, there was an decrease in the Company's bonus expense
due to the decline in profits. These decreases were partially offset by
increases in Freight marketing salaries, increased salaries in the Utility
division relating to increased volume, and annual salary increases. Benefits
increased $57,000 due to increases in health insurance and pension expenses.
Occupancy expense for the First Quarter of 2002 was $364,000, a $97,000
or 21.0% decrease compared to the First Quarter of 2001. This decrease relates
primarily to a decrease in rent expense the Company experienced after moving its
Columbus operations from leased space to a newly acquired building.
14
Equipment expense for the First Quarter of 2002 was $1,089,000, an
increase of $275,000 or 33.8% compared to the First Quarter of 2001. This
increase was due primarily to increased investments in information technology.
Other noninterest expense for the First Quarter of 2002 was $2,265,000,
an increase of $174,000 or 8.3% compared to the First Quarter of 2001. This
increase was due primarily to increases in postage expense and outside service
fees.
FINANCIAL CONDITION
Total assets at March 31, 2002 were $577,760,000, a decrease of
$23,115,000 or 3.8% from December 31, 2001. Loans, net of the allowance for loan
losses, at March 31, 2002 were $378,940,000, an increase of $2,394,000 or .6%
from December 31, 2001. Total investments in debt and equity securities at March
31, 2002 were $124,045,000, a $31,715,000 or 34.3% increase from December 31,
2001. Federal funds sold and other short-term investments at March 31, 2002 were
$24,484,000 a $43,456,000 or 64.0% decrease from December 31, 2001.
Total deposits at March 31, 2002 were $227,378,000, a $20,600,000 or
8.3% decrease from December 31, 2001. Accounts and drafts payable were
$288,697,000, a $3,097,000 or 1.1% decrease from December 31, 2001. Total
shareholders' equity at March 31, 2002 was $55,879,000, a $359,000 or .6%
increase from December 31, 2001.
The decrease in federal funds sold and other short-term investments
relate to the increase in investments in debt and equity securities as funds
were shifted to longer-term higher-yielding investments. The decrease in
deposits and accounts and drafts payable 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 (for average balances refer to the tables
on page 11). The increase in total shareholders' equity resulted from net income
of $1,346,000; cash received from the exercise of stock options of $348,000; the
amortization of the stock bonus plan of $8,000 and the tax benefit received from
the exercise of stock awards of $186,000; offset by dividends paid of $641,000
($.20 per share); the purchase of treasury shares for $383,000 (15,664 shares)
and a decrease in other comprehensive income of $505,000.
LIQUIDITY AND CAPITAL RESOURCES
The balances of liquid assets consists of cash and cash equivalents,
which include cash and due from banks, federal funds sold, and money market
funds were $42,266,000 at March 31, 2002, a decrease of $57,589,000 or 57.7%
from December 31, 2001. At March 31, 2002 these assets represented 7.3% of total
assets. These funds are the Company's and its subsidiaries' primary source of
liquidity to meet future expected and unexpected loan demand, depositor
withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and
borrowing lines. Total investment in debt and equity securities was $124,045,000
at March 31, 2002, an increase of $31,715,000 or 34.3% from December 31, 2001.
These assets represented 21.5% of total assets at March 31, 2002. Of this total,
40% were mortgage-backed securities, 33% were state and municipal securities,
18% were U.S. government agencies, 8% were U.S. treasury securities and 2% were
other securities. Of the total portfolio, 13% matures in one year, 14% matures
in one to five years, and 73% 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 repurchase lines of credit.
The Bank has unsecured lines at correspondent banks to purchase federal
funds up to a maximum of $20,341,000. Additionally, The Company maintains a line
of credit at an unaffiliated financial institution in the maximum amount of
$60,000,000 collateralized by securities sold under repurchase agreements.
15
The deposits of the Company's banking subsidiary have historically been
stable, consisting of a sizable volume of core deposits related to customers
that utilize many other commercial products of the bank. The accounts and drafts
payable generated by the Company has also historically been a stable source of
funds.
Net cash provided by operating activities totaled $2,093,000 for the
First Quarter of 2002, compared to $2,014,000 for the First Quarter of 2001. Net
cash used in investing activities was $35,309,000 for the First Quarter of 2002,
compared with net cash provided of $3,707,000 for the First Quarter of 2001. Net
cash used in financing activities for the First Quarter of 2002 was $24,373,000,
compared with $39,762,000 for the First Quarter of 2001. The increase in net
cash used in investing activities relates primarily to the purchase of more debt
and equity securities in the First Quarter of 2002. The decrease in net cash
used in financing activities relates primarily to a smaller decrease in accounts
and drafts payable during the First Quarter of 2002.
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 significantly exceed all
regulatory capital requirements, as evidenced by the following capital amounts
and ratios at March 31, 2002 and December 31, 2001:
MARCH 31, 2002 AMOUNT RATIO
================================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $55,528,000 12.42%
Cass Commercial Bank 25,941,000 11.92
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $50,522,000 11.30%
Cass Commercial Bank 23,223,000 10.67
Tier I capital (to average assets)
Cass Information Systems, Inc. $50,522,000 8.69%
Cass Commercial Bank 23,233,000 8.78
================================================================================
DECEMBER 31, 2001 AMOUNT RATIO
================================================================================
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $54,537,000 12.22%
Cass Commercial Bank 25,363,000 11.41
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $49,631,000 11.12%
Cass Commercial Bank 22,608,000 10.17
Tier I capital (to average assets)
Cass Information Systems, Inc. $49,631,000 8.75%
Cass Commercial Bank 22,608,000 9.20
================================================================================
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
16
number of dollars. The Company's consolidated balance sheet reflects a net
positive monetary position (monetary assets exceed monetary liabilities). During
periods of inflation, the holding of a net positive monetary position will
result in an overall decline in the purchasing power of a company. Management
believes that replacement costs of equipment, furniture, and leasehold
improvements will not materially affect operations. The rate of inflation does
affect certain expenses, such as those for employee compensation, which may not
be readily
recoverable in the price of the Company's services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at March 31, 2002 has changed materially from that at December 31, 2001.
17
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
None
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 March 31, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: May 3, 2002 By /s/ Lawrence A. Collett
--------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: May 3, 2002 By /s/ Eric H. Brunngraber
--------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
19