UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 2002
Commission File No. 2-80070
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CASS INFORMATION SYSTEMS, INC.
Incorporated under the laws of MISSOURI
I.R.S. Employer Identification No. 43-1265338
13001 HOLLENBERG DRIVE, BRIDGETON, MISSOURI 63044
Telephone: (314) 506-5500
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Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of registrant's only class of stock as of
October 31, 2002: Common stock, par value $.50 per share - 3,203,722 shares
outstanding.
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This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001 ................ 3
Consolidated Statements of Income
Three and nine months ended September 30, 2002 and 2001 (unaudited) . 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 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 ....... 19
Item 4. DISCLOSURES AND CONTROLS ......................................... 19
PART II - Other Information - Items 1. - 6. ................................. 20
SIGNATURES ............................................................... 21
CERTIFICATIONS ........................................................... 22
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)
September 30 December 31
2002 2001
Assets
Cash and due from banks $ 32,220 $ 31,915
Federal funds sold and other short-term investments 15,116 67,940
--------- ---------
Cash and cash equivalents 47,336 99,855
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 88,255 92,330
Loans 416,473 381,452
Less: Allowance for loan losses 5,204 4,906
--------- ---------
Loans, net 411,269 376,546
--------- ---------
Premises and equipment, net 16,076 16,798
Accrued interest receivable 2,760 2,627
Foreclosed assets 5,911 5,710
Bank owned life insurance 10,066 --
Other assets 7,086 7,009
--------- ---------
Total assets $ 588,759 $ 600,875
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 100,329 $ 117,351
Interest-bearing 139,649 130,627
--------- ---------
Total deposits 239,978 247,978
Accounts and drafts payable 277,547 291,794
Short-term borrowings 5,000 200
Other liabilities 5,811 5,383
--------- ---------
Total liabilities 528,336 545,355
--------- ---------
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 4,848 4,997
Retained earnings 67,052 63,623
Accumulated other comprehensive income 1,827 522
Common shares in treasury, at cost (796,278 shares at
September 30, 2002 and 818,185 shares at December 31, 2001) (15,275) (15,597)
Unamortized stock bonus awards (29) (25)
--------- ---------
Total shareholders' equity 60,423 55,520
--------- ---------
Total liabilities and shareholders' equity $ 588,759 $ 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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2002 2001 2002 2001
Interest Income:
Interest and fees on loans $ 6,753 $ 7,303 $ 19,541 $ 22,245
Interest and dividends on debt and equity securities:
Taxable 377 1,186 2,580 2,928
Exempt from federal income taxes 527 12 1,375 39
Interest on federal funds sold and
other short-term investments 206 529 485 2,317
----------- ----------- ----------- -----------
Total interest income 7,863 9,030 23,981 27,529
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 575 821 1,686 3,218
Interest on short-term borrowings 4 4 29 5
----------- ----------- ----------- -----------
Total interest expense 579 825 1,715 3,223
----------- ----------- ----------- -----------
Net interest income 7,284 8,205 22,266 24,306
Provision for loan losses 90 60 360 60
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 7,194 8,145 21,906 24,246
----------- ----------- ----------- -----------
Noninterest Income:
Freight and utility payment and processing revenue 6,279 5,429 17,952 15,895
Bank service fees 403 412 1,239 1,111
Gains (losses) on sales of investment securities (2) -- 942 --
Other 76 45 129 275
----------- ----------- ----------- -----------
Total noninterest income 6,756 5,886 20,262 17,281
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries and employee benefits 7,847 7,514 23,350 22,899
Occupancy expense 367 420 1,115 1,308
Equipment expense 1,037 960 3,241 2,678
Other 2,242 2,206 6,824 6,340
----------- ----------- ----------- -----------
Total noninterest expense 11,493 11,100 34,530 33,225
----------- ----------- ----------- -----------
Income before income tax expense 2,457 2,931 7,638 8,302
Income tax expense 683 1,035 2,287 2,881
----------- ----------- ----------- -----------
Net income $ 1,774 $ 1,896 $ 5,351 $ 5,421
=========== =========== =========== ===========
Earnings per share:
Basic $ .55 $ .60 $ 1.67 $ 1.67
Diluted $ .55 $ .59 $ 1.66 $ 1.65
Weighted average shares outstanding:
Basic 3,202,022 3,184,804 3,201,458 3,245,577
Effect of dilutive stock options and awards 19,875 37,639 20,568 40,707
Diluted 3,221,897 3,222,443 3,222,026 3,286,284
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30
-----------------------
2002 2001
Cash Flows From Operating Activities:
Net income $ 5,351 $ 5,421
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,905 2,256
Provision for loan losses 360 60
Amortization of stock bonus awards 18 64
Tax benefit from exercise of stock options and bonuses 186 29
(Increase) decrease in accrued interest receivable (133) 623
Increase in accounts receivable (640) (2,086)
Deferred income tax expense (benefit) 1,104 (117)
(Decrease) increase in income tax liability (511) 633
Gains on sales of investment securities (942) --
Change in other assets (1,481) (1,224)
Change in other liabilities 1,005 (1,492)
Other operating activities, net (49) (433)
--------- ---------
Net cash provided by operating activities 7,173 3,734
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of debt securities available-for-sale 52,870 --
Proceeds from maturities of debt and equity securities
available-for-sale 27,786 26,040
Purchase of debt and equity securities available-for-sale (73,850) (50,461)
Net increase in loans (35,083) (2,953)
Purchases of premises and equipment, net (2,011) (5,572)
Purchase of bank owned life insurance (10,000) --
--------- ---------
Net cash used in investing activities (40,288) (32,946)
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (17,022) (1,603)
Net decrease in interest-bearing demand and savings deposits (18,283) (504)
Net increase in time deposits 27,305 6,367
Net (decrease) increase in accounts and drafts payable (14,247) 1,763
Net increase in short-term borrowings 4,800 1,000
Cash proceeds from exercise of stock options 348 61
Cash dividends paid (1,922) (1,944)
Purchase of common shares for treasury (383) (3,280)
--------- ---------
Net cash (used in) provided by financing activities (19,404) 1,860
--------- ---------
Net decrease in cash and cash equivalents (52,519) (27,352)
Cash and cash equivalents at beginning of period 99,855 115,931
--------- ---------
Cash and cash equivalents at end of period $ 47,336 $ 88,579
========= =========
Supplemental information:
Cash paid for interest $ 1,704 $ 3,200
Cash paid for income taxes 2,356 2,737
Transfer of securites from held-to-maturity to available-for-sale -- 6,682
Transfer of loans to foreclosed assets -- 4,805
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 September 30, 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, which was reported as an increase to
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 supersedes 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 provisions of SFAS 144 have been adopted by the Company
as of January 1, 2002 and will require that certain foreclosed assets of the
Company be reclassified from held for sale to held and used as of January 1,
2003 if certain conditions are not met.
-6-
Note 3 - Loans by Type
(In Thousands) September 30, 2002 December 31, 2001
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Commercial and industrial $99,145 $115,316
Real estate:
Mortgage 173,512 128,651
Mortgage - Churches & Related 92,385 86,853
Construction 2,702 16,041
Construction - Churches & Related 35,759 16,674
Industrial revenue bonds 6,031 6,155
Installment 1,828 1,787
Other 5,111 9,975
- --------------------------------------------------------------------------------
Total loans $416,473 $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. This program was subsequently expanded to
include the repurchase of an additional 377,874 shares. The Company repurchased
15,664 shares for $383,000 and repurchased 161,700 shares for $3,280,000 for the
nine months ended September 30, 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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 2002 and 2001 is
summarized as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -------------------
(In Thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net Income $ 1,774 $ 1,896 $ 5,351 $ 5,421
Other comprehensive income:
Net unrealized gain on debt and equity
securities available-for-sale, net of tax 1,067 504 1,928 850
Less: reclassification adjustment for realized gains on
sales of debt and equity securities, available-for-sale,
included in net income, net of tax -- -- (623) --
- ------------------------------------------------------------------------------------------------------------
Total other comprehensive income 1,067 504 1,305 850
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Total comprehensive income $ 2,841 $ 2,400 $ 6,656 $ 6,271
============================================================================================================
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.
-7-
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 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 and nine month periods ended September 30, 2002 and 2001,
is as follows:
Transportation Utility
Information Information Banking
(In Thousands) Services Services Services Corporate Eliminations Total
- --------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, 2002
Total Revenues $ 7,704 $ 2,556 $ 3,818 $ 543 $ (671) $13,950
Net Income 377 345 1,052 -- -- 1,774
Quarter Ended September 30, 2001
Total Revenues $ 8,335 $ 1,969 $ 3,828 $ 521 $ (622) $14,031
Net Income 816 33 1,060 (13) -- 1,896
- --------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2002
Total Revenues $23,853 $ 7,359 $11,360 $ 1,650 $(2,054) $42,168
Net Income 1,447 802 3,102 -- -- 5,351
Nine Months Ended September 30, 2001
Total Revenues $25,290 $ 5,640 $10,895 $ 1,451 $(1,749) $41,527
Net Income 2,560 76 2,822 (37) -- 5,421
- --------------------------------------------------------------------------------------------------------------------
Note 7 - Foreclosed assets
On January 2, 2001, the Company's bank subsidiary foreclosed on certain
operating assets relating to one borrower in order to protect the financial
interest in that borrower. It is accounted for as a foreclosed asset that is
held for sale. At September 30, 2002 the investment in this entity was
$5,315,000. As previously mentioned, the Company adopted the provisions of SFAS
144 on January 1, 2002. SFAS 144 requires that if certain criteria are not met
for long-lived asset (disposal) groups classified as held for sale by the end of
the fiscal year in which SFAS 144 is initially applied, the related long-lived
assets shall be reclassified as held and used. Therefore, as of January 1, 2003,
the Company would be required to reclassify these foreclosed assets as held and
used and consolidate its operations into those of the Company.
On August 8, 2001 the Company's bank subsidiary foreclosed on a real
estate loan to one borrower and is now carrying the property as a foreclosed
asset at what management believes to be fair value less cost to sell of
$596,000.
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 September 30, 2002 conditional commitments to
extend credit and standby letters of credit totaled approximately $26,671,000
and $6,135,000, 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 to the 2002 presentation. Such reclassifications have no
effect on previously reported net income or shareholders' 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 September 30,
2002 (the "Third Quarter of 2002") compared to the three-month period ended
September 30, 2001 (the "Third Quarter of 2001") and the nine-month period ended
September 30, 2002 ("First Nine Months of 2002") compared to the nine-month
period ended September 30, 2001 ("First Nine Months 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 Nine Months of 2002 are
not necessarily indicative of the results to be attained for any other period.
Net Income
The Company's net income was $1,774,000 for the Third Quarter of 2002, a
$122,000 or 6.4% decrease compared to net income of $1,896,000 for the Third
Quarter of 2001. The Company's net income was $5,351,000 for the First Nine
Months of 2002, a $70,000 or 1.3% decrease compared to net income of $5,421,000
for the First
-9-
Nine Months of 2001. Diluted earnings per share was $.55 for the Third Quarter
of 2002, an 6.8% decrease compared to $.59 for the Third Quarter of 2001.
Diluted earnings per share was $1.66 for the First Nine Months of 2002, a .6%
increase compared to $1.65 for the First Nine Months of 2001. The decrease in
net income in the Third Quarter of 2002 over the Third Quarter of 2001 was
primarily a result of a decline in interest income due to the decrease in the
general level of interest rates and increases in operating related expenses due
to an increase in freight and utility processing volume. These factors were
partially offset by an increase in freight and utility processing fee revenue
and a decrease in income tax expense due to the purchase of tax-exempt
securities. The decrease in net income in the First Nine Months of 2002 from the
First Nine Months of 2001 was due primarily to the same factors as the decreases
in the Third Quarter of 2002 from the Third Quarter of 2001, but the decrease
was also offset by gains on the sales of securities. Return on average assets
for the Third Quarter of 2002 was 1.18% compared to 1.31% for the Third Quarter
of 2001. Return on average assets for the First Nine Months of 2002 was 1.21%
compared to 1.29% for the First Nine Months of 2001. Return on average equity
for the Third Quarter of 2002 was 12.16% compared to 13.70% for the Third
Quarter of 2001. Return on average equity for the First Nine Months of 2002 was
12.68% compared to 13.24% for the First Nine Months of 2001.
Net Interest Income
Third Quarter of 2002 compared to Third Quarter of 2001:
The Company's tax-equivalent net interest income decreased 8.2% or
$680,000 from $8,273,000 to $7,593,000. Average earning assets increased 4.6% or
$23,659,000 from $519,270,000 to $542,929,000. The tax-equivalent net interest
margin decreased from 6.32% to 5.55%. The average tax-equivalent yield on
earning assets decreased from 6.95% to 5.97%. The average rate paid on
interest-bearing liabilities decreased from 2.73% to 1.61%.
The average balances of loans increased $34,986,000 from $379,392,000 to
$414,378,000, investment in debt and equity securities, at amortized cost,
decreased $134,000 from $80,716,000 to $80,582,000, and federal funds sold and
other short-term investments decreased $11,193,000 from $59,162,000 to
$47,969,000. The average balance of noninterest-bearing demand deposit accounts
increased $3,730,000 from $93,587,000 to $97,317,000, accounts and drafts
payable decreased $2,870,000 from $298,008,000 to $295,138,000, and
interest-bearing liabilities increased $22,476,000 from $119,828,000 to
$142,304,000.
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 decrease 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.
Although the average balance of securities did not change significantly there
was a shift in these investments from taxable securities to tax-exempt
securities. Noninterest-bearing demand deposits have increased due to the fact
that customers maintain higher noninterest-bearing balances to compensate the
Bank for services and to avoid higher service fees in a lower rate environment
and the Bank's marketing efforts to attract more deposits. Interest-bearing
liabilities increased due to increased deposits by existing customers and new
deposit accounts. The moderate decrease in average accounts and drafts payable
relates to normal fluctuations in these balances.
The decreases experienced during the Third 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 partially mitigated the effects of
this decline in interest rates by adjusting the allocation of assets in its
portfolio to longer-term, higher-yielding assets, including tax-exempt
securities, increasing the size of the loan portfolio and increasing earning
assets by increasing deposits. 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 tables on pages 11
and 13.
First Nine Months of 2002 compared to the First Nine Months of 2001:
The Company's tax-equivalent net interest income decreased 6.2% or
$1,528,000 from $24,614,000 to $23,086,000. Average earning assets increased
6.0% or $30,486,000 from $510,455,000 to $540,941,000. The tax-equivalent net
interest margin decreased from 6.45% to 5.71%. The average tax-equivalent yield
on earning assets
-10-
decreased from 7.29% to 6.13%. The average rate paid on interest-bearing
liabilities decreased from 3.57% to 1.63%.
The average balances of loans increased $21,725,000 from $376,621,000 to
$398,346,000, investment in debt and equity securities, at amortized cost,
increased $40,241,000 from $64,496,000 to $104,737,000, and federal funds sold
and other short-term investments decreased $31,480,000 from $69,338,000 to
$37,858,000. The average balance of noninterest bearing demand deposit accounts
increased $11,750,000 from $88,515,000 to $100,265,000, accounts and drafts
payable increased $574,000 from $288,880,000 to $289,454,000, and
interest-bearing liabilities increased $20,049,000 from $120,759,000 to
$140,808,000.
The increases and decreases experienced in account balances during the
First Nine Months of 2002 were mainly attributable to the same factors as those
described for the third quarter, although the average balance of accounts and
drafts payable and the investment in debt and equity securities increased.
The decreases experienced during the First Nine Months of 2002 in net
interest income and the net interest margin were also caused primarily by
decreases in the general level of interest rates. For more information please
refer to the tables on pages 12 and 14.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table shows the condensed average balance sheets for each of
the periods reported, the interest income and expense on each category of
interest-earning assets and interest-bearing liabilities, and the average yield
on such categories of interest-earning assets and the average rates paid on such
categories of interest-bearing liabilities for each of the periods reported.
Third Quarter 2002 Third 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 $ 408,329 $ 6,679 6.49% $ 370,721 $ 7,185 7.69%
Tax-exempt(4) 6,049 114 7.48 8,671 178 8.14
Debt and equity securities(5):
Taxable 33,709 377 4.44 79,676 1,187 5.91
Tax-exempt(4) 46,873 796 6.74 1,040 18 6.87
Federal funds sold and other
short-term investments 47,969 206 1.70 59,162 529 3.55
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 542,929 8,172 5.97 519,270 9,097 6.95
Nonearning assets:
Cash and due from banks 24,121 24,764
Premises and equipment, net 16,276 17,498
Foreclosed assets 5,623 5,647
Other assets 15,102 11,642
Allowance for loan losses (5,142) (4,921)
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 598,909 $ 573,900
- -----------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 51,047 $ 135 1.05% $ 58,593 $ 360 2.44%
Savings deposits 38,169 115 1.20 48,672 322 2.62
Time deposits of
$100 or more 46,776 282 2.39 7,955 92 4.59
Other time deposits 5,701 43 2.99 3,965 46 4.60
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 141,693 575 1.61 119,185 820 2.73
Short-term borrowings 611 4 2.60 643 4 2.47
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 142,304 579 1.61 119,828 824 2.73
Noninterest-bearing liabilities:
Demand deposits 97,317 93,587
Accounts and drafts payable 295,138 298,008
Other liabilities 6,257 7,553
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 541,016 518,976
Shareholders' equity 57,893 54,924
Total liabilities and
shareholders' equity $ 598,909 $ 573,900
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 7,593 $ 8,273
Interest spread 4.36% 4.22%
Net interest margin 5.55% 6.32%
================================================================================================================
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 2001
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $101,000 and $84,000
for the Third 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 $308,000 and
$67,000 for the Third 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
investments.
-11-
First Nine Months of 2002 First Nine Months of 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 $ 392,256 $ 19,315 6.58% $ 363,371 $ 21,688 7.98%
Tax-exempt(4) 6,090 344 7.55 13,250 844 8.52
Debt and equity securities(5):
Taxable 64,125 2,580 5.38 63,426 2,929 6.17
Tax-exempt(4) 40,612 2,077 6.84 1,070 58 7.25
Federal funds sold and other
short-term investments 37,858 485 1.71 69,338 2,317 4.47
- -------------------------------------------------------------------------------------------------------------------
Total earning assets 540,941 24,801 6.13 510,455 27,836 7.29
Nonearning assets:
Cash and due from banks 23,817 22,672
Premises and equipment, net 16,423 16,318
Foreclosed assets 5,507 5,127
Other assets 11,060 11,245
Allowance for loan losses (5,029) (4,910)
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 592,719 $ 560,907
- -------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 56,733 $ 479 1.13% $ 55,629 $ 1,315 3.16%
Savings deposits 43,314 422 1.30 55,076 1,533 3.72
Time deposits of
$100 or more 33,682 648 2.57 5,976 222 4.97
Other time deposits 5,367 137 3.41 3,839 147 5.12
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 139,096 1,686 1.62 120,520 3,217 3.57
Short-term borrowings 1,712 29 2.26 239 5 2.80
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 140,808 1,715 1.63 120,759 3,222 3.57
Noninterest-bearing liabilities:
Demand deposits 100,265 88,515
Accounts and drafts payable 289,454 288,880
Other liabilities 5,782 8,023
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 536,309 506,177
Shareholders' equity 56,410 54,730
Total liabilities and
shareholders' equity $ 592,719 $ 560,907
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 23,086 $ 24,614
Interest spread 4.50% 3.72%
Net interest margin 5.71% 6.45%
===================================================================================================================
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 2001
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $359,000 and $95,000
for the First Nine Months 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 $819,000 and
$307,000 for the First Nine Months 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
investments.
-12-
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
Third Quarter
2002 Over 2001
--------------------------------
(Dollars in thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans(1),(2):
Taxable $ 684 $(1,190) $ (506)
Tax-exempt(3) (50) (14) (64)
Debt and equity securities:
Taxable (566) (244) (810)
Tax-exempt(3) 778 -- 778
Federal funds sold and other
short-term investments (86) (237) (323)
- --------------------------------------------------------------------------------
Total interest income 760 (1,685) (925)
- --------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (41) (184) (225)
Savings deposits (59) (148) (207)
Time deposits of $100 or more 253 (63) 190
Other time deposits 16 (19) (3)
Short-term borrowings -- -- --
- --------------------------------------------------------------------------------
Total interest expense 169 (414) (245)
- --------------------------------------------------------------------------------
Net interest income $ 591 $(1,271) $ (680)
================================================================================
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%.
-13-
First Nine Months
2002 Over 2001
--------------------------------
(Dollars in thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans(1),(2):
Taxable $ 1,630 $(4,003) $(2,373)
Tax-exempt(3) (413) (87) (500)
Debt and equity securities:
Taxable 32 (381) (349)
Tax-exempt(3) 2,022 (3) 2,019
Federal funds sold and other
short-term investments (777) (1,055) (1,832)
- --------------------------------------------------------------------------------
Total interest income 2,494 (5,529) (3,035)
- --------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 26 (862) (836)
Savings deposits (275) (836) (1,111)
Time deposits of $100 or more 580 (154) 426
Other time deposits 48 (58) (10)
Short-term borrowings 25 (1) 24
- --------------------------------------------------------------------------------
Total interest expense 404 (1,911) (1,507)
- --------------------------------------------------------------------------------
Net interest income $ 2,090 $(3,618) $(1,528)
================================================================================
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
Allowance and Provision for Loan Losses
A significant determinant of the Company's operating results is the
provision for loan losses and the level of loans charged off. There was a
$90,000 provision made for loan losses during the Third Quarter of 2002 compared
with a $60,000 provision made during the Third Quarter of 2001. There was a
$360,000 provision made during the First Nine Months of 2002 compared with a
$60,000 provision made during the First Nine Months of 2001. Net loans recovered
for the Third Quarter of 2002 were $5,000 compared to net loans charged-off of
$106,000 for the Third Quarter of 2001. Net loans charged off during the First
Nine Months of 2002 were $62,000 compared with $56,000 during the First Nine
Months 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
increase in the provision made for loan losses during the Third Quarter and
First Nine Months of 2002 compared to the corresponding periods in 2001 were due
to many factors, the most significant being the increase in the amount of
nonperforming loans and the size of the loan portfolio.
The allowance for loan losses at September 30, 2002 was $5,204,000 and at
December 31, 2001 was $4,906,000. The ratio of allowance for loan losses to
total loans outstanding at September 30, 2002 was 1.25% compared to 1.29% at
December 31, 2001. Nonperforming loans were $2,361,000 or .57% of total loans at
September 30, 2002 compared to $472,000 or .12% of total loans at December 31,
2001.
At September 30, 2002, impaired loans totaled $7,484,000, which included
$450,000 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 $1,025,000 at September 30, 2002. The increase in
impaired loans from December 31, 2001 relates to several borrowers. The first is
a borrower with an outstanding balance of $4,081,000 which is collateralized by
real estate. This borrower is currently making payments, but the payments have
been consistently sixty days past due. A second borrower, with an outstanding
balance of $1,576,000 collateralized by all business assets, has been current on
all payments. This borrower has experienced financial difficulties due to
general economic conditions. Should its condition not improve, a shortfall in
collection of the full principal balance could result. The probable shortfall
has been specifically reserved for in the allowance for loan losses. A third
borrower has an outstanding balance of $809,000 collateralized by real estate
and with a SBA guarantee. There has been delinquency in loan payments due to
slower than expected lease-up of the real estate property. Two other loans
totalling $465,000 are secured by marketable securities and real estate,
respectively. The loan secured by marketable securities has a moderate shortfall
in collateral value which has been specifically reserved for in the allowance
for loan losses. There has been some delinquency in interest payments. The loan
secured by real estate has been restructured and is current under the new
contract terms.
-14-
The allowance for loan losses has been established and is maintained to
absorb losses inherent in the loan portfolio. An ongoing assessment of risk of
loss is performed to determine if the current balance of the allowance is
adequate to cover probable losses in the portfolio. A charge or credit is made
to 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 probable 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 experience. The loan grades
assigned to each credit are evaluated on an annual basis, unless circumstances
require interim evaluation. Finally, an amount 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 and nine
month periods ended September 30, 2002 and 2001 pertaining to the Company's
provision for loan losses and analysis of the allowance for loan losses.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
(Dollars in Thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Allowance at beginning of period $ 5,109 $ 4,947 $ 4,906 $ 4,897
Provision for loan losses 90 60 360 60
Loans charged off -- 110 95 110
Recoveries on loans previously charged off 5 4 33 54
- ----------------------------------------------------------------------------------------------------------------
Net loans (recovered) charged-off (5) 106 62 56
Allowance at end of period $ 5,204 $ 4,901 $ 5,204 $ 4,901
- ----------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 414,378 $ 379,392 $ 398,346 $ 376,621
September 30 416,473 370,912 416,473 370,912
Ratio of allowance for loan losses to loans outstanding:
Average 1.26% 1.29% 1.31% 1.30%
September 30 1.25 1.32 1.25 1.32
Nonperforming loans:
Nonaccrual loans $ 450 $ 790 $ 450 $ 790
Loans past due 90 days or more 1,911 46 1,911 46
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,361 836 2,361 836
Foreclosed assets 5,911 5,710 5,911 5,710
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 8,272 $ 6,546 $ 8,272 $ 6,546
- ----------------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans .57% .23% .57% .23%
Nonperforming assets to total assets 1.40% 1.12% 1.40% 1.12%
================================================================================================================
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 intends to operate the business until it can be merged into another entity
or sold. This entity, Government e-Management Solutions, Inc., is a software
company that provides the public sector with integrated financial, property and
human resource management systems. At September 30, 2002, the Bank's investment
in this entity was $5,315,000. This investment is included on the Company's
consolidated balance sheets as a component of foreclosed assets. Based on
unaudited financial statements, this company generated $1,474,000 in revenues
and incurred $1,470,000 in operating expenses during the Third Quarter of 2002.
The $4,000 pre-tax income for the Third Quarter of 2002 includes $75,000 of
depreciation and amortization. For the First Nine Months of 2002 revenues were
$3,986,000 and operating expenses were $4,065,000. The $79,000 pre-tax loss for
the First Nine Months of 2002 includes $219,000 of depreciation and
amortization. The value of this entity is predicated on its revenues, ability to
become profitable, or future prospects. Should one of these not occur, the
Company may face a charge against earnings representing a diminished value on
its investment. As explained earlier, under the provision of SFAS 144, if this
group of assets are still held on January 1, 2003 the Company will be required
to reclassify the assets as held and used and consolidate its operations into
those of the Company.
-15-
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 $596,000. The
remaining balance of the loan of $110,000 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 and nine-month
periods ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ----------------------------------
% %
(In Thousands) 2002 2001 Change 2002 2001 Change
- ---------------------------------------------------------------------------------------------------------------
Transportation Information Services:
Invoice Bill Volume 5,639 4,969 13.5% 15,914 14,967 6.3%
Invoice Dollar Volume $1,989,867 $1,808,261 10.0% $5,717,571 $5,475,427 4.4%
Utility Information Services:
Invoice Transaction Volume 870 669 30.0% 2,477 2,024 22.4%
Invoice Dollar Volume $ 725,695 $ 673,646 7.7% $1,919,357 $1,832,717 4.7%
Total noninterest income for the Third Quarter of 2002 was $6,756,000, a
$870,000 or 14.8% increase compared with the Third Quarter of 2001. Total
noninterest income for the First Nine Months of 2002 was $20,262,000, a
$2,981,000 or 17.3% increase compared with the First Nine Months of 2001. The
Company's payment and processing revenue for the Third Quarter of 2002 was
$6,279,000, a $850,000 or 15.7% increase compared to the Third Quarter of 2001.
Fees generated from the Transportation Information Services Division in the
Third Quarter of 2002 were $4,542,000, a $245,000 or 5.7% increase compared to
the Third Quarter of 2001. Processing fees from the Utility Information Services
Division in the Third Quarter of 2002 were $1,737,000, a $605,000 or 53.4%
increase compared to the Third Quarter of 2001. Payment and processing revenue
for the First Nine Months of 2002 was $17,952,000, a $2,057,000 or 12.9%
increase compared to the First Nine Months of 2001. Fees generated from the
Transportation Information Services Division for the First Nine Months of 2002
were $13,097,000, a $426,000 or 3.4% increase compared to the First Nine Months
of 2001. Processing fees from the Utility Information Services Division for the
First Nine Months of 2002 were $4,855,000, a $1,631,000 or 50.6% increase
compared to the First Nine Months of 2001. The increases in fees from the
Transportation Information Services Division during the Third Quarter of 2002
and the First Nine Months of 2002 were due to new customers and new services.
The new customers and services more than offset the effects of the drop in
national freight activity over last year's levels. The increases in fees from
the Utility Information Services Division were primarily due to the addition of
new customers from the marketing efforts of this new segment.
Bank service fees for the Third Quarter of 2002 were $403,000, a $9,000 or
2.2% decrease compared to the Third Quarter of 2001. Bank service fees for the
First Nine Months of 2002 were $1,239,000, a $128,000 or 11.5% increase compared
to the First Nine Months of 2001. The increase in the First Nine Months of 2002
over 2001 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 to an expansion of the Bank's
customer base.
In the First Nine Months of 2002 the Company recorded net gains of
$942,000 on the sales of securities with a fair value of $52,870,000. The sales
of securities were transacted to adjust the portfolio to reflect the changes in
the interest rate environment and growth in the loan portfolio during the past
year and to offset the loss in interest income due to the dramatic decline in
the general level of interest rates.
-16-
Noninterest Expense
Total noninterest expense for the Third Quarter of 2002 was $11,493,000, a
$393,000 or 3.5% increase compared to the Third Quarter of 2001. Total
noninterest expense for the First Nine Months of 2002 was $34,530,000, a
$1,305,000 or 3.9% increase compared to the First Nine Months of 2001.
Salaries and benefits expense for the Third Quarter of 2002 was
$7,847,000, a $333,000 or 4.4% increase compared to the Third Quarter of 2001.
Salaries and benefits expense for the First Nine Months of 2002 was $23,350,000,
a $451,000 or 2.0% increase compared to the Nine Months Half of 2001. These
increases were due to both an increased staff in the transportation and utility
processing divisions due to an increase in production and to increases in health
insurance and pension expense.
Occupancy expense for the Third Quarter of 2002 was $367,000, a $53,000 or
12.6% decrease compared to the Third Quarter of 2001. Occupancy expense for the
First Nine Months of 2002 was $1,115,000, a $193,000 or 14.8% decrease compared
to the First Nine Months of 2001. These decreases relate primarily to reduced
rent and related expenses from the closing of the Company's office in Chicago
and one of its bank branches located in St. Louis, Missouri. The decrease in the
First Nine Months of 2002 also included a decrease in rent expense the Company
experienced after moving its Columbus operations from leased space to a newly
acquired building.
Equipment expense for the Third Quarter of 2002 was $1,037,000, an
increase of $77,000 or 8.0% compared to the Third Quarter of 2001. Equipment
expense for the First Nine Months of 2002 was $3,241,000, an increase of
$563,000 or 21.0% compared to the First Nine Months of 2001. These increases
were due primarily to increased investments in information technology.
Other noninterest expense for the Third Quarter of 2002 was $2,242,000, an
increase of $36,000 or 1.6% compared to the Third Quarter of 2001. Other
noninterest expense for the First Nine Months of 2002 was $6,824,000, an
increase of $484,000 or 7.6% compared to the First Nine Months of 2001. The
increase in the First Nine Months of 2002 were due primarily to increases in
production expenses such as postage and outside service fees.
Income tax expense for the Third Quarter of 2002 was $683,000, a decrease
of $352,000 or 34.0% compared to the Third Quarter of 2001. Income tax expense
for the First Nine Months of 2002 was $2,287,000, a decrease of $594,000 or
20.6% compared with the First Nine Months of 2001. These decreases were
primarily due to a shift of investments in debt and equity securities from
taxable securities to tax-exempt securities and resulted in an effective tax
rate for the Third Quarter of 2002 of 28% compared with 35% in the Third Quarter
of 2001 and an effective rate of 30% for the First Nine Months of 2002 compared
with 35% for the First Nine Months of 2001.
Financial Condition
Total assets at September 30, 2002 were $588,759,000, a decrease of
$12,116,000 or 2.0% from December 31, 2001. Loans, net of the allowance for loan
losses, at September 30, 2002 were $411,269,000, an increase of $34,723,000 or
9.2% from December 31, 2001. Total investments in debt and equity securities at
September 30, 2002 were $88,255,000, a $4,075,000 or 4.4% decrease from December
31, 2001. Federal funds sold and other short-term investments at September 30,
2002 were $15,116,000 a $52,824,000 or 77.8% decrease from December 31, 2001.
Total deposits at September 30, 2002 were $239,978,000, a $8,000,000 or
3.2% decrease from December 31, 2001. Accounts and drafts payable were
$277,547,000, a $14,247,000 or 4.9% decrease from December 31, 2001. Total
shareholders' equity at September 30, 2002 was $60,423,000, a $4,903,000 or 8.8%
increase from December 31, 2001.
The increase in loans relates primarily to the Bank's marketing efforts,
both in the commercial and church and church-related areas. The decrease in debt
and equity securities relates to the maturities and sales securities in the
First Nine Months of 2002, which was mostly offset by the purchases made during
this period. A $10,000,000 investment in bank owned life insurance was made
during the Third Quarter of 2002, to offset the increasing cost of employee
benefits. The decrease in federal funds sold and other short-term investments
was used mainly to fund loan growth. The decrease in deposits reflects normal
daily and seasonal fluctuations. The ending balances of accounts and drafts
payable decreased due to the fact that these balances will fluctuate from
period-end to period-
-17-
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 to 13). The
increase in total shareholders' equity resulted from net income of $5,351,000;
cash received from the exercise of stock options of $348,000; the amortization
of the stock bonus plan of $18,000; the tax benefit received from the exercise
of stock awards of $186,000; and the increase in other comprehensive income of
$1,305,000; offset by dividends paid of $1,922,000 ($.60 per share) and the
purchase of treasury shares for $383,000 (15,664 shares).
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
$47,336,000 at September 30, 2002, a decrease of $52,519,000 or 52.6% from
December 31, 2001. At September 30, 2002 these assets represented 8.0% 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 $88,255,000
at September 30, 2002, a decrease of $4,075,000 or 4.4% from December 31, 2001.
These assets represented 15.0% of total assets at September 30, 2002. Of this
total, 57% were state and municipal securities, 25% were mortgage-backed
securities, 17% were U.S. government agencies and 1% were other securities. Of
the total portfolio, 41% matures in one to five years and 59% 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 $24,000,000. Additionally, the Company maintains
secured lines of credit at unaffiliated financial institutions in the maximum
amount of $40,000,000.
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 $7,173,000 for the First
Nine Months of 2002, compared to $3,734,000 for the First Nine Months of 2001.
Net cash used in investing activities was $40,288,000 for the First Nine Months
of 2002, compared with $32,946,000 for the First Nine Months of 2001. Net cash
used in financing activities for the First Nine Months of 2002 was $19,404,000,
compared with net cash provided of $1,860,000 for the First Nine Months of 2001.
The increase in net cash used in investing activities relates primarily to an
increase in outstanding loans, increase in the purchase of debt and equity
securities and the purchase of bank owned life insurance and was offset by the
sales of debt securities. The increase in net cash used in financing activities
in the First Nine Months of 2002 over net cash provided in 2001 relates to both
a decrease in deposits and accounts and drafts payable.
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.
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The Company and the Bank continue to significantly exceed all regulatory
capital requirements, as evidenced by the following capital amounts and ratios
at September 30, 2002 and December 31, 2001:
September 30, 2002 Amount Ratio
- -------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $58,228,000 12.14%
Cass Commercial Bank 26,814,000 11.92
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $53,024,000 11.06%
Cass Commercial Bank 24,005,000 10.67
Tier I capital (to average assets)
Cass Information Systems, Inc. $53,024,000 9.03%
Cass Commercial Bank 24,005,000 8.90
- -------------------------------------------------------------------------------
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 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 September 30, 2002 has changed materially from that at December 31, 2001.
ITEM 4. DISCLOSURES AND CONTROLS
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Based upon their
evaluation of those controls and procedures performed within 90 days of
the filing date of this report, the chief executive officer and the chief
financial officer of the Company concluded that the Company's disclosure
controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of those
controls by the chief executive officer and chief financial officer.
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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) Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Cass Information Systems, Inc. did not file any reports on
Form 8-K during the three-month period ended September 30,
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: November 4, 2002 By /s/ Lawrence A. Collett
---------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: November 4, 2002 By /s/ Eric H. Brunngraber
---------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
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CERTIFICATIONS
I, Lawrence A. Collett, Chairman and Chief Executive Officer of Cass Information
Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Lawrence A. Collett
- ------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
November 4, 2002
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I, Eric H. Brunngraber, Chief Financial and Accounting Officer of Cass
Information Systems, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cass Information
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Eric H. Brunngraber
- ----------------------------------------
Eric H. Brunngraber
Vice President - Secretary
(Chief Financial and Accounting Officer)
November 4, 2002
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