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 June 30, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of registrant's only class of stock as of
July 31, 2003: Common stock, par value $.50 per share - 3,334,524 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
June 30, 2003 (unaudited) and December 31, 2002 ................ 3
Consolidated Statements of Income
Three and six months ended June 30, 2003 and 2002 (unaudited) .. 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002 (unaudited) ............ 5
Notes to Consolidated Financial Statements (unaudited) ........... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..................................... 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 22
Item 4. DISCLOSURES AND CONTROLS ........................................ 22
PART II - Other Information - Items 1. - 6. ................................. 23
SIGNATURES .............................................................. 24
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking
statements made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties, and other factors which may cause
future performance to vary from expected performance summarized in the future
looking statements, 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,
increased 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 certain segments such as commercial enterprises, churches and borrowers in
the St. Louis area which creates risks associated with adverse factors that may
affect these groups, 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)
June 30 December 31
2003 2002
Assets
Cash and due from banks $ 26,732 $ 24,279
Federal funds sold and other short-term investments 43,693 5,727
--------- ---------
Cash and cash equivalents 70,425 30,006
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 39,351 69,371
Loans 443,621 434,689
Less: Allowance for loan losses 5,393 5,293
--------- ---------
Loans, net 438,228 429,396
--------- ---------
Premises and equipment, net 14,827 15,359
Bank owned life insurance 10,407 10,178
Goodwill 3,150 223
Other intangible assets, net 2,070 379
Other assets 14,592 17,321
--------- ---------
Total assets $ 593,050 $ 572,233
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 104,095 $ 109,352
Interest-bearing 149,220 134,166
--------- ---------
Total deposits 253,315 243,518
Accounts and drafts payable 269,142 223,621
Short-term borrowings 18 37,438
Other liabilities 8,744 6,610
--------- ---------
Total liabilities 531,219 511,187
--------- ---------
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
4,160,110 shares issued 2,080 2,080
Additional paid-in capital 8,458 8,466
Retained earnings 66,951 64,607
Common shares in treasury, at cost (825,586 shares at
June 30, 2003 and 796,278 shares at December 31, 2002) (16,462) (15,275)
Unamortized stock bonus awards (161) (25)
Accumulated other comprehensive income 965 1,193
--------- ---------
Total shareholders' equity 61,831 61,046
--------- ---------
Total liabilities and shareholders' equity $ 593,050 $ 572,233
========= =========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2003 2002 2003 2002
Interest Income:
Interest and fees on loans $ 6,319 $ 6,561 $ 12,735 $ 12,788
Interest and dividends on debt and equity securities:
Taxable 133 1,008 321 2,203
Exempt from federal income taxes 351 511 786 848
Interest on federal funds sold and
other short-term investments 126 119 226 279
---------- ---------- ---------- ----------
Total interest income 6,929 8,199 14,068 16,118
---------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 439 563 890 1,111
Interest on short-term borrowings 5 22 14 25
---------- ---------- ---------- ----------
Total interest expense 444 585 904 1,136
---------- ---------- ---------- ----------
Net interest income 6,485 7,614 13,164 14,982
Provision for loan losses -- 180 90 270
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 6,485 7,434 13,074 14,712
---------- ---------- ---------- ----------
Noninterest Income:
Freight and utility payment and processing revenue 6,870 6,122 13,839 11,673
Software revenue 1,829 -- 3,607 --
Bank service fees 465 424 891 836
Gains on sales of investment securities 1,362 944 1,362 944
Other 136 12 265 53
---------- ---------- ---------- ----------
Total noninterest income 10,662 7,502 19,964 13,506
---------- ---------- ---------- ----------
Noninterest Expense:
Salaries and employee benefits 9,400 7,897 18,752 15,503
Occupancy expense 457 384 893 748
Equipment expense 1,121 1,115 2,282 2,204
Other 2,893 2,317 5,721 4,582
---------- ---------- ---------- ----------
Total noninterest expense 13,871 11,713 27,648 23,037
---------- ---------- ---------- ----------
Income before income tax expense 3,276 3,223 5,390 5,181
Income tax expense 1,037 992 1,633 1,604
---------- ---------- ---------- ----------
Net income $ 2,239 $ 2,231 $ 3,757 $ 3,577
========== ========== ========== ==========
Earnings per share:
Basic $ .67 $ .67 $ 1.12 $ 1.07
Diluted $ .66 $ .66 $ 1.11 $ 1.06
Weighted average shares outstanding*:
Basic 3,353,786 3,361,861 3,357,894 3,361,231
Effect of dilutive stock options and awards 30,362 21,996 32,060 21,960
Diluted 3,384,148 3,383,857 3,389,954 3,383,191
* Earnings per share and weighted average shares outstanding for three and
six months ended June 30, 2002 have been restated to reflect the 5% stock
dividend distributed in December 2002.
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30
-----------------------
2003 2002
Cash Flows From Operating Activities:
Net income $ 3,757 $ 3,577
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,369 1,943
Provision for loan losses 90 270
Amortization of stock bonus awards 25 13
Tax benefit from exercise of stock option and bonus awards 173 186
Decrease (increase) in accrued interest receivable 685 (145)
Increase in deferred income 1,796 506
Deferred income tax (benefit) expense (757) 554
Increase (decrease) in income tax liability 1,190 (26)
Increase in pension liability 573 224
Gains on sales of investment securities (1,362) (944)
Change in other assets (113) (1,569)
Change in other liabilities (1,395) 383
Other operating activities, net 9 5
--------- ---------
Net cash provided by operating activities 7,040 4,977
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of debt securities available-for-sale 24,534 52,238
Proceeds from maturities of debt and equity securities
available-for-sale 7,197 20,275
Purchase of debt and equity securities available-for-sale (1,038) (44,637)
Net increase in loans (10,922) (31,243)
Purchases of premises and equipment, net (1,348) (1,476)
--------- ---------
Net cash provided by (used in) investing activities 18,423 (4,843)
--------- ---------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (5,257) (15,672)
Net decrease in interest-bearing demand and savings deposits (1,037) (9,272)
Net increase in time deposits 16,091 21,427
Net increase in accounts and drafts payable 45,521 22,446
Net decrease in short-term borrowings (37,420) (200)
Cash proceeds from exercise of stock options 236 348
Cash dividends paid (1,414) (1,281)
Purchase of common shares for treasury (1,764) (383)
--------- ---------
Net cash provided by financing activities 14,956 17,413
--------- ---------
Net increase in cash and cash equivalents 40,419 17,547
Cash and cash equivalents at beginning of period 30,006 99,855
--------- ---------
Cash and cash equivalents at end of period $ 70,425 $ 117,402
========= =========
Supplemental information:
Cash paid for interest $ 899 $ 1,087
Cash paid for income taxes 695 1,012
Transfer of loans to other equity investments 2,000 --
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 three and six month periods ended June
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. For further information, refer to the
consolidated financial statements and related footnotes included in the Annual
Report on Form 10-K of Cass Information Systems, Inc. ("the Company") for the
year ended December 31, 2002.
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation. Such reclassifications have no
effect on previously reported net income or shareholders' equity. All share and
per share data for 2002 has been restated to reflect the 5% stock dividend
issued in December 2002.
Note 2 - Impact of New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34." This interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligation under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the interpretation are applicable to guarantees issued or modified
after December 31, 2002 and did not have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of periods ending after December 15, 2002 and are included
in Note 9 of this report.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123." This statement amends
SFAS 123 "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both the annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
The Company maintains two stock-based compensation plans, a stock bonus
plan and a stock option plan. Upon issuance of shares in the stock bonus plan a
contra shareholders' equity amount is recorded for the fair value of the shares
at the time of issuance and this amount is amortized to expense over the
three-year vesting period. The stock option plan is accounted for under APB 25,
"Accounting for Stock Issued to Employees," and accordingly the Company
recognizes no compensation expense as the price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
The Company elected not to adopt the recognition provisions of the SFAS 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148. An entity
that continues to apply APB 25 shall disclose certain pro forma information as
if the fair value-based accounting method in SFAS 123 had been used to account
for stock-based compensation costs. The required disclosure provisions of SFAS
123, as amended by SFAS 148, are provided in the table below. The Company uses
the Black-Scholes option-pricing model to determine the fair value of the stock
options at the date of grant. There were 3,221 shares granted in the Second
Quarter of 2003 and no shares granted in the Second Quarter of 2002. For the
First Half of 2003 there were 14,130 shares granted and no shares granted in the
First Half of 2002. The following table represents the effect on earnings and
diluted earnings per share for the periods ended June 30, 2003 and 2002:
-6-
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
(In Thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Net income:
As reported $ 2,239 $ 2,231 $ 3,757 $ 3,577
Add: Stock based compensation expense
included in reported net income, net of tax 9 3 16 8
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (20) (14) (38) (31)
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Pro forma net income $ 2,228 $ 2,220 $ 3,735 $ 3,554
- ----------------------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ .67 $ .67 $ 1.12 $ 1.07
Basic, proforma .66 .66 1.11 1.06
Diluted, as reported .66 .66 1.11 1.06
Diluted, proforma .66 .66 1.10 1.05
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In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51". This interpretation establishes accounting guidance for consolidation
of variable interest entities (VIE) that function to support the activities of
the primary beneficiary. The primary beneficiary of a VIE entity is the entity
that absorbs a majority of the VIE's expected losses, receives a majority of the
VIE's expected residual returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business relationship with a VIE.
Prior to implementation of FIN 46, VIEs were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The provisions of FIN
46 were effective immediately for all arrangements entered into after January
31, 2003, and are otherwise effective at the beginning of the first interim
period beginning June 15, 2003. The Company is currently not a primary
beneficiary of a VIE and therefore adoption of FIN 46 is not expected to have a
material impact on the consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of derivative. The amendments set forth in SFAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. It is not expected that the
provisions of SFAS 149 will have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This statement
requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of nonpublic
companies. The Company currently does not have any instruments that fall within
the scope of SFAS 150 and therefore does not believe that the adoption of SFAS
150 will have a significant impact on its consolidated financial statements.
-7-
Note 3 - Loans by Type
(In Thousands) June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Commercial and industrial $101,973 $101,116
Real estate:
Mortgage 187,318 176,667
Mortgage - Churches & Related 105,014 105,458
Construction 2,753 3,101
Construction - Churches & Related 33,354 36,074
Industrial revenue bonds 5,687 5,773
Installment 1,948 1,918
Other 5,574 4,582
- --------------------------------------------------------------------------------
Total loans $443,621 $434,689
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Note 4 - Stock Repurchases
The Company maintains a treasury stock buyback program and as of June 30,
2003 was authorized by the Board of Directors to repurchase up to 100,000 shares
of its common stock. The Company repurchased 59,237 shares for $1,764,000 for
the six months ended June 30, 2003 and repurchased 15,664 shares for $383,000
during the six months ended June 30, 2002. Repurchases are made in the open
market or through negotiated transactions from time to time depending on market
conditions.
Note 5 - Comprehensive Income
For the three and six month periods ended June 30, 2003 and 2002,
unrealized gains and losses on debt and equity securities available-for-sale
were the Company's only other comprehensive income component. Comprehensive
income for the three and six month periods ended June 30, 2003 and 2002 is
summarized as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
(In Thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Net Income $ 2,239 $ 2,231 $ 3,757 $ 3,577
Other comprehensive income:
Net unrealized gain on debt and equity
securities available-for-sale, net of tax 575 1,366 671 861
Less: reclassification adjustment for realized gains on
sales of debt and equity securities, available-for-sale,
included in net income, net of tax (899) (623) (899) (623)
- --------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (324) 743 (228) 238
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,915 $ 2,974 $ 3,529 $ 3,815
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Note 6 - Industry Segment Information
The services provided by the Company are classified into four reportable
segments: Transportation Information Services, Utility Information Services,
Banking Services and Government Software Services. Each of these segments
provides distinct services that are marketed through different channels. They
are managed separately due to their unique service, processing and capital
requirements.
The Transportation Information Services segment provides freight invoice
rating, payment, auditing, cost accounting and transportation information
services to large corporate shippers. The Utility Information Services segment
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 segment provides banking
services primarily to privately-held businesses and churches. The Government
Software Services segment provides the public sector with integrated financial,
property and human resource management systems through the Company's
wholly-owned subsidiary, Government e-Management Solutions, Inc. (GEMS).
-8-
The Company's accounting policies for segments are described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. Management evaluates segment
performance based on net income after allocations for corporate expenses and
income taxes. Transactions between segments are accounted for at what management
believes to be fair value.
All four segments market their services within the United States and no
revenue from any customer of any segment exceeds 10% of the Company's
consolidated revenue.
Summarized information about the Company's operations in each industry
segment for the three and six month periods ended June 30, 2003 and 2002, is as
follows:
Transportation Utility Government Corporate
Information Information Banking Software and Elim-
(In Thousands) Services Services Services Services inations Total
- ---------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, 2003
Total Revenues $ 8,501 $ 3,147 $ 3,796 $ 1,829 $ (126) $ 17,147
Net Income 812 439 994 (6) -- 2,239
Total Assets 265,783 69,416 298,592 7,013 (47,754) 593,050
Goodwill 223 -- -- 2,927 -- 3,150
Other intangibles, net -- -- -- 1,691 379 2,070
Quarter Ended June 30, 2002
Total Revenues $ 8,596 $ 2,599 $ 3,873 N/A $ (132) $ 14,936
Net Income 851 337 1,043 N/A -- 2,231
Total Assets 293,469 56,516 278,673 N/A (5,271) 623,387
Goodwill 223 -- -- N/A -- 223
Other intangible assets, net -- -- -- N/A 587 587
- ---------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003
Total Revenues $ 16,266 $ 5,869 $ 7,549 $ 3,607 $ (253) $ 33,038
Net Income 989 701 2,041 26 -- 3,757
Total Assets 265,783 69,416 298,592 7,013 (47,754) 593,050
Goodwill 223 -- -- 2,927 -- 3,150
Other intangible assets, net -- -- -- 1,691 379 2,070
Six Months Ended June 30, 2002
Total Revenues $ 16,149 $ 4,803 $ 7,542 N/A $ (276) $ 28,218
Net Income 1,070 457 2,050 N/A -- 3,577
Total Assets 293,469 56,516 278,673 N/A (5,271) 623,387
Goodwill 223 -- -- N/A -- 223
Other intangibles, net -- -- -- N/A 587 587
- ---------------------------------------------------------------------------------------------------------------------
Note 7 - Intangible Assets
The Company accounts for intangible assets in accordance with SFAS 142,
"Goodwill and Other Intangible Assets," which requires that intangibles with
indefinite useful lives be tested annually for impairment and those with finite
useful lives be amortized over their useful lives. Intangible assets for the
periods ended June 30, 2003 and December 31, 2002 are as follows:
(In Thousands) June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Goodwill $3,150 $ 223
Customer list 795 --
Software 896 --
Minimum pension liability 379 379
- --------------------------------------------------------------------------------
Other intangible assets, net 2,070 379
- --------------------------------------------------------------------------------
Total intangible assets $5,220 $ 602
- --------------------------------------------------------------------------------
The customer list and software are amortized over 15 years and 4 years,
respectively. The minimum pension liability was recorded in accordance with SFAS
87, "Employers' Accounting for Pensions", which requires the Company to record
an additional minimum pension liability by the amount that the accumulated
benefit obligation exceeds the sum of the fair value of plan assets and accrued
amount previously recorded and offset this liability by an intangible asset to
the extent of previously unrecognized prior service costs. The liability and
corresponding intangible asset are adjusted annually.
-9-
Amortization of intangible assets amounted to $77,000 and $155,000 for the
three and six-month periods ended June 30, 2003, respectively. There was no
amortization of intangible assets recorded in 2002. Estimated amortization of
intangibles over the next five years is as follows: $311,000 in 2003, 2004, 2005
and 2006 and $55,000 in 2007.
Note 8 - Equity Investments in Non-Marketable Securities
During the quarter, the Company converted its $2,000,000 investment in a
private imaging company from a convertible debenture into common stock. As part
of the conversion, the Company committed to invest an additional $1,133,000 if
certain conditions are met. As of June 30, 2003, the total investment of the
Company in this entity was $2,433,000. The Company now has an effective 19.93%
ownership interest in this entity and the Chairman and CEO of the Company
maintains a seat on the entity's Board of Directors. No business has transacted
between the companies during the six-month periods ended June 30, 2003 or 2002.
The Company made its initial investment in 2001 through a convertible
debenture. The business has since performed poorly and has recently received a
commitment of an additional $3,000,000 from a new non-affiliated majority owner,
in addition to the Company's additional commitment. The new majority owner is
currently in the process of stabilizing the business and improving its financial
performance. The primary condition for any additional investment by the Company
is the amount of the new majority owner's actual financial investment. Should
the full amount of such commitment not materialize or the business fail to meet
its objectives, the Company's investment could be subject to future impairment.
The Company accounts for this investment, along with its other
non-marketable equity investments, under the cost method. Under the cost method
of accounting, investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. The Company periodically evaluates whether any declines
in fair value of its investments are other than temporary. In performing this
evaluation, the Company considers various factors including any decline in
market price, where available, the investee's financial condition, results of
operations, operating trends and other financial ratios.
Note 9 - Commitments and Contingencies
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, commercial
letters of credit and standby letters of credit. The Company's maximum potential
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, commercial letters of
credit and standby letters of credit is represented by the contractual amounts
of those instruments. At June 30, 2003, no amounts have been accrued for any
estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commercial and standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. These
off-balance sheet financial instruments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The approximate
remaining term of commercial and standby letters of credit range from less than
1 to 5 years. Since some of the financial instruments may expire without being
drawn upon, the total amounts do not necessarily represent future cash
requirements. Commitments to extend credit and letters of credit are subject to
the same underwriting standards as those financial instruments included on the
consolidated balance sheets. The Company evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of the credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but is generally accounts
receivable, inventory, residential or income-producing commercial property or
equipment. In the event of nonperformance, the Company may obtain and liquidate
the collateral to recover amounts paid under its guarantees on these financial
instruments.
-10-
The following table shows conditional commitments to extend credit,
standby letters of credit and commercial letters of credit at June 30, 2003:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 4-5
(In Thousands) Total 1 year Years Years
- --------------------------------------------------------------------------------
Unused loan commitments $24,222 $19,222 $ 5,000 $ --
Standby letters of credit 4,746 3,236 1,447 63
Commercial letters of credit 439 439 -- --
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates in four primary business segments: Transportation
Information Services, Utility Information Services and through the Company's
wholly owned subsidiaries, Cass Commercial Bank ("the Bank"), Banking Services
and Government e-Management Solutions, Inc. (GEMS), Government Software
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. GEMS provides the public
sector in the United States with integrated financial, property and human
resource management systems.
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 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.
Consolidation of Subsidiary
On January 2, 2001, the Bank foreclosed on certain operating assets
relating to one borrower in order to protect its financial interests. This
borrower was a software company that provided the public sector with integrated
financial, property and human resource management systems. The Bank sold these
assets to a wholly owned subsidiary, Government e-Management Solutions, Inc.
(GEMS) and invested in and stabilized this business. From the date of
foreclosure through December 31, 2002 these assets were accounted for as a
foreclosed asset held for sale. Statement of Financial Accounting Standards SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", adopted
by the Company on January 1, 2002, 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 has reclassified the foreclosed assets relating to GEMS as held and
used and consolidated its operations into those of the Company.
-11-
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month period ended June 30, 2003
(the "Second Quarter of 2003") compared to the three-month period ended June 30,
2002 (the "Second Quarter of 2002") and the six-month period ended June 30, 2003
("First Half of 2003") compared to the six-month period ended June 30, 2002
("First Half of 2002"). 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 2002 Annual Report on Form 10-K. Results of operations for
the Second Quarter of 2003 are not necessarily indicative of the results to be
attained for any other period.
Net Income
The Company's net income was $2,239,000 for the Second Quarter of 2003, an
$8,000 or .4% increase compared to net income of $2,231,000 for the Second
Quarter of 2002. The Company's net income was $3,757,000 for the First Half of
2003, an $180,000 or 5.0% increase compared to net income of $3,577,000 for the
First Half of 2002. Diluted earnings per share were $.66 for both the Second
Quarter of 2003 and the Second Quarter of 2002. Diluted earnings per share were
$1.11 for the First Half of 2003, a 4.7% increase compared to $1.06 for the
First Half of 2002. Payment and processing revenue increased $748,000, or 12.2%
during the Second Quarter of 2003 compared to the Second Quarter of 2002. Gains
from the sales of securities in the investment portfolio increased $418,000
during this period. These increases however, were mostly offset by a decrease of
$949,000, or 12.8% in net interest income due to the dramatic decline in the
general level of interest rates during the past year resulting in the modest
increase in net income. The increase in net income for the First Half of 2003
over the First Half of 2002 was due to these same factors, although a $2,166,000
increase in payment and processing revenue alone was more than enough to offset
the $1,638,000 decrease in net interest income resulting in the 5.0% increase in
net income over the prior year. Return on average assets for both the Second
Quarter of 2003 and 2002 was 1.51%. Return on average assets for the First Half
of 2003 was 1.28% compared with 1.22% for the First Half of 2002. Return on
average equity for the Second Quarter of 2003 was 14.74% compared to 16.00% for
the Second Quarter of 2002. Return on average equity for the First Half of 2003
was 12.45% compared with 12.96% for the First Half of 2002.
Net Interest Income
Second Quarter of 2003 compared to Second Quarter of 2002:
The Company's tax-equivalent net interest income decreased 15.3% or
$1,214,000 from $7,914,000 to $6,700,000. Average earning assets decreased 1.5%
or $8,196,000 from $543,006,000 to $534,810,000. The tax-equivalent net interest
margin decreased from 5.85% to 5.02%. The average tax-equivalent yield on
earning assets decreased from 6.28% to 5.36%. The average rate paid on
interest-bearing liabilities decreased from 1.61% to 1.28%.
The average balances of loans increased $38,525,000 from $396,927,000 to
$435,452,000, investment in debt and equity securities, at amortized cost,
decreased $63,477,000 from $118,116,000 to $54,639,000, and federal funds sold
and other short-term investments increased $16,756,000 from $27,963,000 to
$44,719,000. The average balance of noninterest-bearing demand deposit accounts
decreased $3,762,000 from $99,180,000 to $95,418,000, interest-bearing
liabilities decreased $6,450,000 from $145,624,000 to $139,174,000 and accounts
and drafts payable increased $3,879,000 from $286,279,000 to $290,158,000.
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
increase in federal funds sold and other short-term investments reflects
management's asset allocation decisions given projected liquidity requirements,
market interest rates and the attractiveness of alternative investments. The
decrease in interest-bearing liabilities is primarily due to existing customers
maintaining lower balances in savings and money market deposit accounts and
shifting funds to higher yielding accounts, both within the Bank, creating an
increase in time deposits, and outside the Bank, resulting in lower overall
deposits. Time deposits also increased as a result of a certificate of deposit
promotion. The moderate increase in average accounts and drafts payable relates
to increases in invoice dollars paid reduced by a decrease in the amount of time
funds were held by the Company for investment.
-12-
The decreases experienced during the Second Quarter of 2003 in net
interest income and the net interest margin were 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 increasing loan balances, which is one of
the Company's highest yielding earning assets. The Company is positively
affected by increases in the level of interest rates due to the fact that its
rate sensitive assets significantly exceed its rate sensitive liabilities.
Conversely, the Company is 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 13 through 16.
First Half of 2003 compared to the First Half of 2002:
The Company's tax-equivalent net interest income decreased 12.0% or
$1,854,000 from $15,493,000 to $13,639,000. Average earning assets decreased
1.0% or $5,367,000 from $539,931,000 to $534,564,000. The tax-equivalent net
interest margin decreased from 5.79% to 5.15%. The average tax-equivalent yield
on earning assets decreased from 6.21% to 5.49%. The average rate paid on
interest-bearing liabilities decreased from 1.64% to 1.30%.
The average balances of loans increased $44,582,000 from $390,198,000 to
$434,780,000, investment in debt and equity securities, at amortized cost,
decreased $56,654,000 from $117,014,000 to $60,360,000, and federal funds sold
and other short-term investments increased $6,705,000 from $32,719,000 to
$39,424,000. The average balance of noninterest bearing demand deposit accounts
decreased $6,602,000 from $101,753,000 to $95,151,000, accounts and drafts
payable increased $2,371,000 from $286,565,000 to $288,936,000, and
interest-bearing liabilities increased $285,000 from $140,048,000 to
$140,333,000.
The increases and decreases experienced in earning assets and funding
sources during the First Half of 2003 were attributable to the same factors as
those described for the second quarter, except for interest bearing deposits.
The average balance of interest bearing deposits increased slightly in the First
Half of 2003 compared with the First Half of 2002 although there was a shift
from demand and savings deposits to time deposits as new and existing customers
shifted funds to the higher yielding deposit accounts.
The decreases experienced during the First Half 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
table on pages 14 through 16.
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.
-13-
Second Quarter 2003 Second Quarter 2002
------------------- -------------------
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 $ 429,749 $ 6,248 5.83% $ 390,838 $ 6,485 6.66%
Tax-exempt (4) 5,703 108 7.60 6,089 115 7.58
Debt and equity securities (5):
Taxable 22,806 133 2.34 73,035 1,008 5.54
Tax-exempt (4) 31,833 529 6.67 45,081 772 6.87
Federal funds sold and other
short-term investments 44,719 126 1.13 27,963 119 1.71
- ---------------------------------------------------------------------------------------------------------------------
Total earning assets 534,810 7,144 5.36 543,006 8,499 6.28
Nonearning assets:
Cash and due from banks 20,398 24,245
Premises and equipment, net 15,236 16,399
Foreclosed assets 1,134 5,499
Other assets 27,514 8,559
Allowance for loan losses (5,390) (5,002)
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 593,702 $ 592,706
- ---------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 51,014 $ 104 .82% $ 59,356 $ 166 1.12%
Savings deposits 35,962 81 .90 46,406 151 1.31
Time deposits of
$100 or more 42,913 203 1.90 30,410 200 2.64
Other time deposits 8,184 51 2.50 5,543 46 3.33
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 138,073 439 1.28 141,715 563 1.59
Short-term borrowings 1,101 5 1.82 3,909 22 2.26
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 139,174 444 1.28 145,624 585 1.61
Noninterest-bearing liabilities:
Demand deposits 95,418 99,180
Accounts and drafts payable 290,158 286,279
Other liabilities 8,029 5,708
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 532,779 536,791
Shareholders' equity 60,923 55,915
Total liabilities and
shareholders' equity $ 593,702 $ 592,706
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,700 $ 7,914
Interest spread 4.08% 4.67%
Net interest margin 5.02% 5.85%
- ---------------------------------------------------------------------------------------------------------------------
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 2002
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $24,000 and $202,000
for the Second Quarter of 2003 and 2002, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $215,000 and
$300,000 for the Second Quarter of 2003 and 2002, 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.
-14-
First Half of 2003 First Half of 2002
------------------ ------------------
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 $ 429,054 $ 12,593 5.92% $ 384,087 $ 12,636 6.63%
Tax-exempt (4) 5,726 216 7.61 6,111 230 7.59
Debt and equity securities (5):
Taxable 24,685 321 2.62 79,585 2,203 5.58
Tax-exempt (4) 35,675 1,187 6.71 37,429 1,281 6.90
Federal funds sold and other
short-term investments 39,424 226 1.16 32,719 279 1.72
- ---------------------------------------------------------------------------------------------------------------
Total earning assets 534,564 14,543 5.49 539,931 16,629 6.21
Nonearning assets:
Cash and due from banks 19,691 23,662
Premises and equipment, net 15,533 16,497
Foreclosed assets 1,066 5,453
Other assets 27,006 9,002
Allowance for loan losses (5,359) (4,972)
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 592,501 $ 589,573
- ---------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 52,885 $ 221 .84% $ 59,623 $ 344 1.16%
Savings deposits 35,868 163 .92 45,929 307 1.35
Time deposits of
$100 or more 42,790 416 1.96 27,026 366 2.73
Other time deposits 6,957 90 2.61 5,198 94 3.65
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 138,500 890 1.30 137,776 1,111 1.63
Short-term borrowings 1,833 14 1.54 2,272 25 2.22
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 140,333 904 1.30 140,048 1,136 1.64
Noninterest-bearing liabilities:
Demand deposits 95,151 101,753
Accounts and drafts payable 288,936 286,565
Other liabilities 7,225 5,551
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 531,645 533,917
Shareholders' equity 60,856 55,656
Total liabilities and
shareholders' equity $ 592,501 $ 589,573
- ---------------------------------------------------------------------------------------------------------------
Net interest income $ 13,639 $ 15,493
Interest spread 4.19% 4.57%
Net interest margin 5.15% 5.79%
- ---------------------------------------------------------------------------------------------------------------
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 2002
Consolidated Financial Statements.
3. Interest income on loans includes net loan fees of $35,000 and $258,000
for the First Half of 2003 and 2002, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $475,000 and
$511,000 for the First Half of 2003 and 2002, 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.
-15-
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
Second Quarter
2003 Over 2002
-------------------------------
(In Thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 610 $ (847) $ (237)
Tax-exempt (3) (7) -- (7)
Debt and equity securities:
Taxable (476) (399) (875)
Tax-exempt (3) (221) (22) (243)
Federal funds sold and other
short-term investments 56 (49) 7
- --------------------------------------------------------------------------------
Total interest income (38) (1,317) (1,355)
- --------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (21) (41) (62)
Savings deposits (30) (40) (70)
Time deposits of $100 or more 69 (66) 3
Other time deposits 18 (13) 5
Short-term borrowings (13) (4) (17)
- --------------------------------------------------------------------------------
Total interest expense 23 (164) (141)
- --------------------------------------------------------------------------------
Net interest income $ (60) $(1,154) $(1,214)
- --------------------------------------------------------------------------------
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
First Half
2003 Over 2002
-------------------------------
(In Thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 1,396 $(1,439) $ (43)
Tax-exempt (3) (15) 1 (14)
Debt and equity securities:
Taxable (1,064) (818) (1,882)
Tax-exempt (3) (59) (35) (93)
Federal funds sold and other
short-term investments 50 (103) (53)
- --------------------------------------------------------------------------------
Total interest income 308 (2,394) (2,086)
- --------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (36) (87) (123)
Savings deposits (59) (85) (144)
Time deposits of $100 or more 173 (123) 50
Other time deposits 27 (31) (4)
Short-term borrowings (4) (7) (11)
- --------------------------------------------------------------------------------
Total interest expense 101 (333) (232)
- --------------------------------------------------------------------------------
Net interest income $ 207 $(2,060) $(1,854)
- --------------------------------------------------------------------------------
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%.
-16-
Allowance and Provision for Loan Losses
A significant determinant of the Company's operating results is the
provision for loan losses and the level of loans charged off. There was no
provision made for loan losses during the Second Quarter of 2003 and a $180,000
provision made in the Second Quarter of 2002. There was a $90,000 provision made
during the First Half of 2003 and a $270,000 provision made during the First
Half of 2002. Net loans recovered for the Second Quarter of 2003 were $6,000
compared to net loans charged off of $77,000 for the Second Quarter of 2002. Net
loans recovered for the First Half of 2003 were $10,000 compared with net loans
charged off of $67,000 for the First Half of 2002. The provision for loan losses
can vary over time based on an ongoing assessment of the adequacy of the
allowance for loan losses.
The allowance for loan losses at June 30, 2003 was $5,393,000 and at
December 31, 2002 was $5,293,000. The ratio of allowance for loan losses to
total loans outstanding at June 30, 2003 and December 31, 2002 was 1.22%.
Nonperforming loans were $1,727,000 or .39% of total loans at June 30, 2003
compared to $9,194,000 or 2.12% of total loans at December 31, 2002. The
decrease from December 31, 2002 is primarily due to two loans totaling
$4,252,000 that were renegotiated in 2002 that are currently performing under
their new terms and two loans totaling $4,891,000 that were contractually past
due over 90 days at year-end and were fully paid-off during the First Quarter of
2003.
At June 30, 2003, impaired loans totaled $8,398,000, which included
$1,206,000 of nonaccrual loans compared with impaired loans at December 31, 2002
of $12,188,000, which included $51,000 of nonaccrual loans. The allowance for
loan losses on impaired loans was $1,123,000 at June 30, 2003. The decrease in
impaired loans from December 31, 2002 relates primarily to the decrease in loans
contractually past due over 90 days as explained in the previous paragraph. The
current balance of $4,229,000 of loans renegotiated in 2002, as explained in the
previous paragraph, relates to two borrowers and although currently performing,
are still considered impaired by management. The remaining balance of impaired
loans relates to several other borrowers. One represents a borrower that has an
outstanding balance of $1,476,000, which is collateralized by all business
assets and 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 second borrower has an outstanding balance of
$783,000 collateralized by real estate and has a SBA guarantee. There has been
delinquency in loan payments due to slower than expected lease-up of real estate
property. Another borrower with an outstanding balance of $675,000 is current
under the loan terms, but is going through a liquidation of assets. This loan is
secured by the borrower's inventory, but management believes that there may be a
shortfall in collecting the full principal balance of the loan upon liquidation
and therefore has specifically reserved for the expected shortfall. The
remaining balance is made up of smaller loans, one with a balance of $481,000
that was renegotiated in the First Quarter of 2003 and is current under the new
terms of the agreement.
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 expense to cover any deficiency or reduce any excess. The current methodology
employed to determine the appropriate allowance consists of two components,
specific and general. The Company develops specific valuation allowances on
commercial, commercial real estate, and construction loans when a loan is
considered to be impaired. A loan is impaired when, based on an evaluation of
current information and events, it is probable that the Company will not be able
to collect all amounts due (principal and interest) pursuant to the original
contractual terms. The Company measures impairment based upon the present value
of expected future cash flows discounted at the loan's original effective
interest rate or the fair value of the collateral if the loan is collateral
dependent. The general component relates to all other loans, which are evaluated
based on loan grade. The loan grade assigned to each loan is typically evaluated
on an annual basis, unless circumstances require interim evaluation. The Company
assigns a reserve amount consistent with each loan's rating category. The
reserve amount is based on loss experience over prescribed periods. In addition
to the amounts derived from the loan grades, a portion is added to the general
reserve to take into account other factors including national and local economic
conditions, downturns in specific industries including loss in collateral value,
trends in credit quality at the Company and the banking industry, and trends in
risk rating changes. As part of their examination process, federal and state
agencies review the Company's methodology for maintaining the allowance for loan
losses and the balance in the account. These agencies may require the Company to
increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examination.
-17-
Summary of Asset Quality
The following table presents information as of and for the three and
six-month periods ended June 30, 2003 and 2002 pertaining to the Company's
provision for loan losses and analysis of the allowance for loan losses.
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
(Dollars in Thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Allowance at beginning of period $ 5,387 $ 5,006 $ 5,293 $ 4,906
Provision charged to expense -- 180 90 270
Loans charged off -- 95 2 95
Recoveries on loans previously charged off 6 18 12 28
- -----------------------------------------------------------------------------------------------------------------
Net loans (recoverd) charged-off (6) 77 (10) 67
Allowance at end of period $ 5,393 $ 5,109 $ 5,393 $ 5,109
- -----------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 435,452 $ 396,927 $ 434,780 $ 390,198
June 30 443,621 412,628 443,621 412,628
Ratio of allowance for loan losses to loans outstanding:
Average 1.24% 1.29% 1.24% 1.31%
June 30 1.22 1.24 1.22 1.24
Nonperforming loans:
Nonaccrual loans $ 1,206 $ 454 $ 1,206 $ 454
Loans past due 90 days or more 40 22 40 22
Renegotiated loans 481 174 481 174
- -----------------------------------------------------------------------------------------------------------------
Total non performing loans $ 1,727 $ 650 $ 1,727 $ 650
Other impaired loans $ 6,671 $ 4,404 $ 6,671 $ 4,404
Foreclosed assets $ 1,154 $ 5,814 $ 1,154 $ 5,814
- -----------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .40% .16% .40% .17%
- -----------------------------------------------------------------------------------------------------------------
Foreclosed assets at June 30, 2002 includes $5,102,000 related to
operating assets of one business, which was foreclosed on by the Bank on January
2, 2001. This entity, Government e-Management Solutions, Inc.(GEMS), is a
software company that provides the public sector with integrated financial,
property and human resource management systems. As explained earlier, under the
provision of SFAS 144, this group of assets was reclassified effective January
1, 2003 and the related operations have been consolidated into those of the
Company.
The Bank currently has two properties which it is carrying as other real
estate owned at what management believes to be fair value less cost to sell. The
first property was foreclosed on August 8, 2001 and is recorded at $858,000 and
the second property was foreclosed on December 19, 2002 and is recorded at
$296,000.
Noninterest Income
Noninterest income is principally derived from payment and processing
fees. Processing volumes related to these fees for the three and six-month
periods ended June 30, 2003 and 2002 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ---------------------------------
% %
(In Thousands) 2003 2002 Change 2003 2002 Change
- --------------------------------------------------------------------------------------------------------------
Transportation Information Services:
Invoice Bill Volume 5,810 5,316 9.3% 11,476 10,275 11.7%
Invoice Dollar Volume $2,154,256 $1,886,067 14.2% $4,208,168 $3,727,704 12.9%
Utility Information Services:
Invoice Transaction Volume 1,116 845 32.1% 2,149 1,607 33.7%
Invoice Dollar Volume 788,714 $ 589,295 33.8% $1,614,075 $1,193,662 35.2%
-18-
Total noninterest income for the Second Quarter of 2003 was $10,662,000, a
$3,160,000 or 42.1% increase compared with the Second Quarter of 2002. Total
noninterest income for the First Half of 2003 was $19,964,000, a 47.8% increase
over the First Half of 2002. The Company's freight and utility payment and
processing fees for the Second Quarter of 2003 were $6,870,000, a $748,000 or
12.2% increase compared to the Second Quarter of 2002. Fees generated from the
Transportation Information Services Division in the Second Quarter of 2003 were
$4,669,000, a $247,000 or 5.6% increase compared to the Second Quarter of 2002.
Processing fees from the Utility Information Services Division in the Second
Quarter of 2003 were $2,201,000, a $501,000 or 29.5% increase compared to the
Second Quarter of 2002. Payment and processing fees for the First Half of 2003
were $13,839,000, a $2,166,000 or 18.6% increase compared to the First Half of
2002. Fees generated from the Transportation Information Services Division for
the First Half of 2003 were $9,639,000, a $1,084,000 or 12.7% increase compared
to the First Half of 2002. Processing fees from the Utility Information Services
Division for the First Half of 2003 were $4,200,000, a $1,082,000 or 34.7%
increase compared to the First Half of 2002. The increases in fees from the
Transportation Information Services Division during the First Quarter and First
Half of 2003 were due to new customers and new services. 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.
The consolidation of GEMS resulted in $1,829,000 of additional noninterest
income for the Second Quarter of 2003 and $3,607,000 for the First Half of 2003.
As explained earlier, the operating results of this wholly owned subsidiary were
consolidated on January 1, 2003. Bank service fees for the Second Quarter of
2003 were $465,000, a $41,000 or 9.7% increase compared to the Second Quarter of
2002. Bank service fees for the First Half of 2003 were $891,000, a $55,000 or
6.6% increase compared with the First Half of 2002.
Gains on the sales of investment securities for the Second Quarter and
First Half of 2003 were $1,362,000, a $418,000 or 44.3% increase over the Second
Quarter and First Half of 2002. The fair value of securities sold in the Second
Quarter and First Half of 2003 were $24,534,000 and for the Second Quarter and
First Half of 2002 were $52,238,000. 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 two years and to offset the loss in
interest income due to the dramatic decline in the general level of interest
rates.
Other noninterest income increased $124,000 from $12,000 in the Second
Quarter of 2002 to $136,000 in the Second Quarter of 2003. Other noninterest
income for the First Half of 2003 increased $212,000 from $53,000 in the First
Half of 2002 to $265,000 in the First Half of 2003. This increase is primarily
due to income recognized from the increase in the cash surrender value of bank
owned life insurance purchased by the Company in the Third Quarter of 2002.
Noninterest Expense
Total noninterest expense for the Second Quarter of 2003 increased
$2,158,000 or 18.4% compared to the Second Quarter of 2002 and increased
$4,611,000 or 20.0% in the First Half of 2003 over 2002. Of these increases, the
consolidation of GEMS contributed $1,786,000 for the quarter and $3,464,000 for
the half. Excluding the GEMS consolidation, total noninterest expense increased
3.2% for the quarter and 5.0% for the half.
Salaries and benefits expense for the Second Quarter of 2003 increased
$1,503,000 or 19.0% over the same period last year and increased $3,249,000 or
21.0% for the First Half of 2003 over 2002. Of these increases, the
consolidation of GEMS amounted to $1,000,000 for the quarter $2,023,000 for the
half. The remaining increases were due primarily to an increase in staff in both
the transportation and utility processing divisions due to an increase in
production and to increases in health, worker's compensation and short-term
disability insurance expenses.
Occupancy expense for the Second Quarter of 2003 increased $73,000 or
19.0% compared to the Second Quarter of 2002 and increased $145,000 or 19.4% in
the First Half of 2003 over 2002. Of these increases, $58,000 relates to the
consolidation of GEMS for the quarter and $116,000 for the half. The remaining
increases relate primarily to real estate taxes and the maintenance and repair
of premises.
Equipment expense for the Second Quarter of 2003 increased $6,000 compared
to the Second Quarter of 2002 and increased $78,000 or 3.5% in the First Half of
2003 over 2002. Increases in equipment expenses related to the consolidation of
GEMS were $96,000 for the quarter and $201,000 in the half. The increases
related to the consolidation were offset by decreases in computer equipment
maintenance from the consolidation of equipment within the transportation
processing division and lower depreciation and amortization on equipment and
computer software.
-19-
Other noninterest expenses for the Second Quarter of 2003 increased
$576,000 or 24.9% compared to the Second Quarter of 2002 and increased
$1,139,000 or 24.9% in the First Half of 2003 over 2002. The consolidation of
GEMS contributed $632,000 for the quarter and $1,124,000 for the half. Included
in the other noninterest expenses of GEMS is the amortization of customer list
and software intangible assets of $77,000 for the quarter and $155,000 for the
half. Excluding the affect of the GEMS consolidation, these expenses remained
relatively flat.
Income tax expense for the Second Quarter of 2003 increased $45,000 or
4.5% compared to the Second Quarter of 2002 and increased $29,000 or 1.8% for
the First Half of 2003 over 2002. The effective tax rate for the Second Quarter
of 2003 was 32% compared with 31% in the Second Quarter of 2002 and was 30% for
the First Half of 2003 compared to 31% for the First Half of 2002. The primary
reason for the increase in the effective tax rate for the Second Quarter of 2003
was due to the reduction of the Company's investment in tax-exempt securities.
Since the decrease in the investment in tax-exempt securities occurred in the
Second Quarter of 2003 the effective tax rate for First Half of 2003 did not
have the full effect of this reduction.
Financial Condition
Total assets at June 30, 2003 were $593,050,000, an increase of
$20,817,000 or 3.6% from December 31, 2002. Loans, net of the allowance for loan
losses, at June 30, 2003 were $438,228,000, an increase of $8,832,000 or 2.1%
from December 31, 2002. Total investments in debt and equity securities at June
30, 2003 were $39,351,000, a $30,020,000 or 43.3% decrease from December 31,
2002. Federal funds sold and other short-term investments at June 30, 2003 were
$43,693,000 a $37,966,000 increase from December 31, 2002.
Total deposits at June 30, 2003 were $253,315,000, a $9,797,000 or 4.0%
increase from December 31, 2002. Accounts and drafts payable were $269,142,000,
a $45,521,000 or 20.4% increase from December 31, 2002. Short-term borrowings at
June 30, 2003 were $18,000, a $37,420,000 decrease from December 31, 2002. Total
shareholders' equity at June 30, 2003 was $61,831,000, a $785,000 or 1.3%
increase from December 31, 2002.
The increase in loans relates primarily to the Bank's marketing efforts.
The decrease in debt and equity securities relates to the sale of $24,534,000 of
securities in the Second Quarter of 2003 and the maturing of securities during
the First Half of 2003. The reduction in securities contributed to an increase
in federal funds sold and other short-term investments. The increase in deposits
was primarily due to the Bank's promotional efforts in the Second Quarter of
2003. The ending balances of accounts and drafts payable increased due to both
the fact that these balances 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 and due to
special funding arrangements the Company made with a few large customers at
year-end. For this reason, average balances are a more meaningful measure of
accounts and drafts payable (for average balances refer to the tables on pages
13 through 15). The increase in total shareholders' equity resulted from net
income of $3,757,000; cash received from the exercise of stock options of
$236,000; the tax benefit received from the exercise of stock options of
$173,000; and the amortization of the stock bonus plan of $25,000; offset by
dividends paid of $1,414,000 ($.42 per share); purchase of treasury shares of
$1,764,000 (59,237 shares) and the decrease in other comprehensive income of
$228,000.
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
$70,425,000 at June 30, 2003, an increase of $40,419,000 or 134.7% from December
31, 2002. At June 30, 2003 these assets represented 11.9% of total assets. These
funds are the Company's and its subsidiaries' primary source of liquidity to
meet future expected and unexpected loan demand, depositor withdrawals or
reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and
borrowing lines. Total investment in debt and equity securities was $39,351,000
at June 30, 2003, a decrease of $30,020,000 or 43.3% from December 31, 2002.
These assets represented 6.6% of total assets at June 30, 2003. Of this total,
47% were state and municipal securities, 38% were mortgage-backed securities,
12% were U.S. government agencies and 3% were other securities. Of the total
portfolio, 25% matures in less than one year, 30% matures in one to five years
and 45% matures in five or more years. The investment portfolio provides
secondary liquidity through regularly scheduled maturities, the ability to sell
securities and the ability to use these securities in conjunction with
repurchase lines of credit.
-20-
The Bank has unsecured lines at correspondent banks to purchase federal
funds up to a maximum of $33,000,000. Additionally, the Company maintains
secured lines of credit at unaffiliated financial institutions in the maximum
amount of $57,708,000.
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 $7,040,000 for the First
Half of 2003, compared to $4,977,000 for the First Half of 2002. Net cash
provided by investing activities was $18,423,000 for the First Half of 2003,
compared with net cash used of $4,843,000 for the First Half of 2002. Net cash
provided by financing activities for the First Half of 2003 was $14,956,000,
compared with $17,413,000 for the First Half of 2002. The increase in net cash
provided by operating activities relates primarily to the consolidation of GEMS.
Net cash provided by investing activities in the First Half of 2003 compared
with net cash used in the First Half of 2002 relates primarily to the purchase
of debt and equity securities and a larger increase in loan balances in the
First Half of 2002. These increases in cash used in investing activities were
partially offset by an increase in the amount of securities sold and maturing in
the First Half of 2002. The decrease in net cash provided by financing
activities in the First Half of 2003 relates primarily to the decrease in
short-term borrowings, which was offset by an increase in deposits and an
increase in 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.
The Company and the Bank continue to exceed all regulatory capital
requirements, as evidenced by the following capital amounts and ratios at June
30, 2003 and December 31, 2002:
June 30, 2003 Amount Ratio
- --------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $61,418,000 12.11%
Cass Commercial Bank 29,852,000 11.46
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $56,025,000 11.05%
Cass Commercial Bank 26,739,000 10.27
Tier I capital (to average assets)
Cass Information Systems, Inc. $56,025,000 9.53%
Cass Commercial Bank 26,739,000 9.26
- --------------------------------------------------------------------------------
December 31, 2002 Amount Ratio
- --------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $59,625,000 12.07%
Cass Commercial Bank 27,425,000 10.94
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $54,332,000 11.00%
Cass Commercial Bank 24,412,000 9.74
Tier I capital (to average assets)
Cass Information Systems, Inc. $54,332,000 9.16%
Cass Commercial Bank 24,412,000 8.98
- --------------------------------------------------------------------------------
-21-
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, 2002, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at June 30, 2003 has changed materially from that at December 31, 2002.
ITEM 4. DISCLOSURES AND CONTROLS
The Company maintains controls and procedures designed to ensure that the
information it is required to disclose in the reports it files with the SEC is
recorded, processed, summarized and reported to management, including the Chief
Executive Officer and Chief Financial Officer within the time periods specified
in the rules of the SEC. The Company's Chief Executive and Chief Financial
Officers have reviewed and evaluated these controls within 90 days of the filing
of this report and based on their evaluation believe that these procedures are
effective to ensure that the Company is able to collect, process and disclose
the information it is required to disclose in the reports it files with the SEC
within the required time periods.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions.
-22-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders of Cass Information Systems,
Inc. held on April 21, 2003, the following proposals were voted on and
approved:
The following is a summary of votes cast. No broker non-votes were
received.
1.Proposal to elect four Directors for a term
of three years ending 2006;
Withheld
For Authority
--------- ---------
Robert J. Bodine 2,490,410 74,744
Thomas J. Fucoloro 2,490,205 74,949
Harry J. Krieg 2,490,410 74,744
Howard A. Kuehner 2,490,410 74,744
2.Proposal to ratify the selection of KPMG LLP
as independent accountants for 2003.
For Against Abstain
--------- ------- -------
2,551,704 2,542 10,908
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports of Form 8-K
The Company filed a report on Form 8-K under Items 7 and 9 dated
April 21, 2003, reporting the announcement of the Company's earnings
for the first quarter of 2003.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: August 8, 2003 By /s/ Lawrence A. Collett
----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: August 8, 2003 By /s/ Eric H. Brunngraber
----------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
-24-