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, 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
November 10, 2003: Common stock, par value $.50 per share - 3,335,512 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, 2003 (unaudited) and December 31, 2002 ......................................... 3
Consolidated Statements of Income
Three and nine months ended September 30, 2003 and 2002 (unaudited) .......................... 4
Consolidated Statements of Cash Flows
Nine months ended September 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. CONTROLS AND PROCEDURES ........................................................................ 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 and
fluctuations in interest rates, 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 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
2003 2002
Assets
Cash and due from banks $ 24,603 $ 24,279
Federal funds sold and other short-term investments 65,175 5,727
--------- ---------
Cash and cash equivalents 89,778 30,006
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 56,316 69,371
Loans 450,977 434,689
Less: Allowance for loan losses 5,399 5,293
--------- ---------
Loans, net 445,578 429,396
--------- ---------
Premises and equipment, net 14,196 15,359
Bank owned life insurance 10,590 10,178
Goodwill 3,150 223
Other intangible assets, net 1,992 379
Other assets 15,230 17,321
--------- ---------
Total assets $ 636,830 $ 572,233
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 108,340 $ 109,352
Interest-bearing 161,289 134,166
--------- ---------
Total deposits 269,629 243,518
Accounts and drafts payable 295,706 223,621
Short-term borrowings 7 37,438
Other liabilities 8,634 6,610
--------- ---------
Total liabilities 573,976 511,187
--------- ---------
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 8,466 8,466
Retained earnings 68,271 64,607
Common shares in treasury, at cost (824,598 shares at
September 30, 2003 and 796,278 shares at December 31, 2002) (16,442) (15,275)
Unamortized stock bonus awards (145) (25)
Accumulated other comprehensive income 624 1,193
--------- ---------
Total shareholders' equity 62,854 61,046
--------- ---------
Total liabilities and shareholders' equity $ 636,830 $ 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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2003 2002 2003 2002
Noninterest Income:
Freight and utility payment and processing revenue $ 7,308 $ 6,279 $ 21,147 $ 17,952
Software revenue 2,221 -- 5,871 --
Bank service fees 464 403 1,355 1,239
Gains (losses) on sales of investment securities, net 92 (2) 1,454 942
Other 215 76 480 129
----------- ----------- ----------- -----------
Total noninterest income 10,300 6,756 30,307 20,262
----------- ----------- ----------- -----------
Interest Income:
Interest and fees on loans 6,403 6,753 19,138 19,541
Interest and dividends on debt and equity securities:
Taxable 91 377 412 2,580
Exempt from federal income taxes 282 527 1,068 1,375
Interest on federal funds sold and
other short-term investments 187 206 413 485
----------- ----------- ----------- -----------
Total interest income 6,963 7,863 21,031 23,981
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 449 575 1,339 1,686
Interest on short-term borrowings -- 4 14 29
----------- ----------- ----------- -----------
Total interest expense 449 579 1,353 1,715
----------- ----------- ----------- -----------
Net interest income 6,514 7,284 19,678 22,266
Provision for loan losses -- 90 90 360
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,514 7,194 19,588 21,906
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries and employee benefits 9,274 7,847 28,026 23,350
Occupancy expense 447 367 1,340 1,115
Equipment expense 1,068 1,037 3,350 3,241
Other 3,068 2,242 8,832 6,824
----------- ----------- ----------- -----------
Total noninterest expense 13,857 11,493 41,548 34,530
----------- ----------- ----------- -----------
Income before income tax expense 2,957 2,457 8,347 7,638
Income tax expense 935 683 2,568 2,287
----------- ----------- ----------- -----------
Net income $ 2,022 $ 1,774 $ 5,779 $ 5,351
=========== =========== =========== ===========
Earnings per share*:
Basic $ .61 $ .53 $ 1.73 $ 1.60
Diluted $ .60 $ .52 $ 1.71 $ 1.58
Weighted average shares outstanding*:
Basic 3,327,989 3,362,047 3,347,816 3,361,531
Effect of dilutive stock options and awards 35,037 20,869 33,052 21,596
Diluted 3,363,026 3,382,916 3,380,868 3,383,127
* Earnings per share and weighted average shares outstanding for three and
nine months ended September 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)
Nine Months Ended
September 30
---------------------
2003 2002
Cash Flows From Operating Activities:
Net income $ 5,779 $ 5,351
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,495 2,905
Provision for loan losses 90 360
Amortization of stock bonus awards 41 18
Tax benefit from exercise of stock option and bonus awards 176 186
Increase in accrued interest receivable (326) (133)
Increase in deferred income 1,565 --
Deferred income tax (benefit) expense (757) 1,104
Increase (decrease) in income tax liability 1,154 (511)
Increase (decrease) in pension liability 959 (833)
Gains on sales of investment securities, net (1,454) (942)
Change in other assets 234 (2,102)
Change in other liabilities (1,605) 1,819
Other operating activities, net 8 (49)
-------- --------
Net cash provided by operating activities 9,359 7,173
-------- --------
Cash Flows From Investing Activities:
Proceeds from sales of debt securities available-for-sale 37,831 52,870
Proceeds from maturities of debt and equity securities
available-for-sale 15,145 27,786
Purchase of debt and equity securities available-for-sale (39,813) (73,850)
Net increase in loans (18,272) (35,083)
Purchases of premises and equipment, net (1,625) (2,011)
Purchase of bank owned life insurance -- (10,000)
-------- --------
Net cash used in investing activities (6,734) (40,288)
-------- --------
Cash Flows From Financing Activities:
Net decrease in noninterest-bearing demand deposits (1,012) (17,022)
Net increase (decrease) in interest-bearing demand and savings deposits 669 (18,283)
Net increase in time deposits 26,454 27,305
Net increase (decrease) in accounts and drafts payable 72,085 (14,247)
Net (decrease) increase in short-term borrowings (37,431) 4,800
Cash proceeds from exercise of stock options 260 348
Cash dividends paid (2,114) (1,922)
Purchase of common shares for treasury (1,764) (383)
-------- --------
Net cash provided by (used in) financing activities 57,147 (19,404)
-------- --------
Net increase (decrease) in cash and cash equivalents 59,772 (52,519)
Cash and cash equivalents at beginning of period 30,006 99,855
-------- --------
Cash and cash equivalents at end of period $ 89,778 $ 47,336
======== ========
Supplemental information:
Cash paid for interest $ 1,349 $ 1,704
Cash paid for income taxes 1,652 2,356
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 nine month periods ended
September 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 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 no options granted in the Third Quarter
of 2003 or 2002. For the First Nine Months of 2003 there were 14,130 options
granted and no options granted in the First Nine Months of 2002. The following
table presents the effect on earnings and diluted earnings per share for the
periods ended September 30, 2003 and 2002:
-6-
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
(In Thousands, except per share data) 2003 2002 2003 2002
==========================================================================================================
Net income:
As reported $ 2,022 $ 1,774 $ 5,779 $ 5,351
Add: Stock based compensation expense
included in reported net income, net of tax 11 4 27 12
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (22) (15) (60) (46)
- ----------------------------------------------------------------------------------------------------------
Pro forma net income $ 2,011 $ 1,763 $ 5,746 $ 5,317
- ----------------------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ .61 $ .53 $ 1.73 $ 1.60
Basic, proforma .61 .52 1.72 1.58
Diluted, as reported .60 .52 1.71 1.58
Diluted, proforma .60 .52 1.70 1.57
- ----------------------------------------------------------------------------------------------------------
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. If a VIE existed prior to February 1, 2003, FIN 46 was effective at
the beginning of the first interim period beginning June 15, 2003. However on
October 8, 2003, the FASB deferred the implementation date of FIN 46, for those
VIE's in existence prior to February 1, 2003, until the first period ending
after December 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. The provisions of SFAS 149 did not
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 the adoption of SFAS 150 did not have a
material impact on its consolidated financial statements.
-7-
Note 3 - Loans by Type
(In Thousands) September 30, 2003 December 31, 2002
================================================================================
Commercial and industrial $103,503 $101,116
Real estate:
Mortgage 186,000 176,667
Mortgage - Churches & Related 115,402 105,458
Construction 1,558 3,101
Construction - Churches & Related 33,724 36,074
Industrial revenue bonds 5,643 5,773
Installment 1,937 1,918
Other 3,210 4,582
- --------------------------------------------------------------------------------
Total loans $450,977 $434,689
================================================================================
Note 4 - Stock Repurchases
The Company maintains a treasury stock buyback program and as of September
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 nine months ended September 30, 2003 and repurchased 15,664 shares for
$383,000 during the nine months ended September 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 nine month periods ended September 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 nine month periods ended September 30, 2003 and 2002 is
summarized as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
(In Thousands) 2003 2002 2003 2002
================================================================================================================
Net Income $ 2,022 $ 1,774 $ 5,779 $ 5,351
Other comprehensive income:
Net unrealized (loss) gain on debt and equity
securities available-for-sale, net of tax (280) 1,066 391 1,927
Less: reclassification adjustment for realized (gains) losses
on sales of debt and equity securities, available-for-sale,
included in net income, net of tax (61) 1 (960) (622)
- ----------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (341) 1,067 (569) 1,305
- ----------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,681 $ 2,841 $ 5,210 $ 6,656
- ----------------------------------------------------------------------------------------------------------------
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 nine month periods ended September 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 September 30, 2003
Total Revenues:
Revenue from customers $ 8,072 $ 3,282 $ 3,239 $ 2,221 $ -- $ 16,814
Intersegment revenue 7 4 369 -- (380) --
Net Income 518 499 903 102 -- 2,022
Total Assets 261,728 68,845 302,461 7,134 (3,338) 636,830
Goodwill 223 -- -- 2,927 -- 3,150
Other Intangible Assets, Net -- -- -- 1,613 379 1,992
Quarter Ended September 30, 2002
Total Revenues:
Revenue from customers $ 7,969 $ 2,549 $ 3,432 N/A $ -- $ 13,950
Intersegment revenue (3) (1) 386 N/A (382) --
Net Income 377 345 1,052 N/A -- 1,774
Total Assets 252,878 65,601 277,853 N/A (7,573) 588,759
Goodwill 223 -- -- N/A -- 223
Other Intangible Assets, Net -- -- -- N/A 587 587
- --------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003
Total Revenues:
Revenue from customers $ 24,632 $ 9,225 $ 10,167 $ 5,871 $ -- $ 49,895
Intersegment revenue 111 30 989 -- (1,130) --
Net Income 1,507 1,200 2,944 128 -- 5,779
Total Assets 261,728 68,845 302,461 7,134 (3,338) 636,830
Goodwill 223 -- -- 2,927 -- 3,150
Other Intangible Assets, Net -- -- -- 1,613 379 1,992
Nine Months Ended September 30, 2002
Total Revenues:
Revenue from customers $ 24,661 $ 7,364 $ 10,143 N/A $ -- $ 42,168
Intersegment revenue (81) (18) 1,217 N/A (1,118) --
Net Income 1,447 802 3,102 N/A -- 5,351
Total Assets 252,878 65,601 277,853 N/A (7,573) 588,759
Goodwill 223 -- -- N/A -- 223
Other Intangible Assets, Net -- -- -- N/A 587 587
- --------------------------------------------------------------------------------------------------------------------------
-9-
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 September 30, 2003 and December 31, 2002 are as follows:
(In Thousands) September 30, 2003 December 31, 2002
================================================================================
Goodwill $3,150 $ 223
Customer list 781 --
Software 832 --
Minimum pension liability 379 379
- --------------------------------------------------------------------------------
Other intangible assets, net 1,992 379
- --------------------------------------------------------------------------------
Total intangible assets $5,142 $ 602
- --------------------------------------------------------------------------------
The increase in goodwill, customer list and software relates to the
consolidation of GEMS, which is further discussed in Item 2 on page 12 of this
report. 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.
Amortization of intangible assets amounted to $78,000 and $233,000 for the
three and nine-month periods ended September 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 second quarter of 2003, 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
$1,100,000 if certain conditions are met. As of September 30, 2003, the total
investment of the Company in this entity was $2,708,000 and is included in other
assets in the accompanying consolidated balance sheets. The Company now has an
effective 19.93% ownership interest in this entity and the Chairman and CEO of
the Company is a member of the entity's Board of Directors. No business has been
transacted between the companies during the nine-month periods ended September
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 September 30, 2003, no amounts have been accrued for
any estimated losses for these instruments.
-10-
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.
The following table shows conditional commitments to extend credit,
standby letters of credit and commercial letters of credit at September 30,
2003:
Amount of Commitment Expiration per Period
------------------------------------------
Less than Over 1-3 Over 3-5
(In Thousands) Total 1 year Years Years
========================================================================================================
Unused loan commitments $24,701 $18,301 $6,400 $ --
Standby letters of credit 4,451 4,215 173 63
Commercial letters of credit 402 402 -- --
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.
-11-
In addition, management evaluates certain long-term assets such as
premises and equipment, goodwill, investments 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.
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,
2003 (the "Third Quarter of 2003") compared to the three-month period ended
September 30, 2002 (the "Third Quarter of 2002") and the nine-month period ended
September 30, 2003 ("First Nine Months of 2003") compared to the nine-month
period ended September 30, 2002 ("First Nine Months 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 Third Quarter of 2003 are not
necessarily indicative of the results to be attained for any other period.
The Company's net income was $2,022,000 for the Third Quarter of 2003, a
$248,000 or 14.0% increase compared to net income of $1,774,000 for the Third
Quarter of 2002. The Company's net income was $5,779,000 for the First Nine
Months of 2003, a $428,000 or 8.0% increase compared to net income of $5,351,000
for the First Nine Months of 2002. Diluted earnings per share were $.60 for the
Third Quarter of 2003, a 15.4% increase compared to $.52 for the Third Quarter
of 2002. Diluted earnings per share were $1.71 for the First Nine Months of
2003, an 8.2% increase compared to $1.58 for the First Nine Months of 2002.
Return on average assets for the Third Quarter of 2003 was 1.26% compared with
1.18% for the Third Quarter of 2002. Return on average assets for the First Nine
Months of 2003 was 1.27% compared with 1.21% for the First Nine Months of 2002.
Return on average equity for the Third Quarter of 2003 was 13.11% compared to
12.16% for the Third Quarter of 2002. Return on average equity for the First
Nine Months of 2003 was 12.67% compared with 12.68% for the First Nine Months of
2002.
-12-
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, 2003 and 2002 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ --------------------------------------
% %
(In Thousands) 2003 2002 Change 2003 2002 Change
============================================================================= ======================================
Transportation Information Services:
Invoice Bill Volume 5,882 5,639 4.3% 17,358 15,914 9.1%
Invoice Dollar Volume $2,208,878 $1,989,867 11.0% $6,417,046 $5,717,571 12.2%
Payment and Processing Fees $4,886 $4,542 7.6% $14,525 $13,097 10.9%
Utility Information Services:
Invoice Transaction Volume 1,218 870 40.0% 3,367 2,477 35.9%
Invoice Dollar Volume $878,998 $725,695 21.1% $2,493,073 $1,919,357 29.9%
Payment and Processing Fees $2,422 $1,737 39.4% $6,622 $4,855 36.4%
The increases in fees from the Transportation Information Services
Division during the Third Quarter and First Nine Months 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 $2,221,000 of additional noninterest
income for the Third Quarter of 2003 and $5,871,000 for the First Nine Months of
2003. As explained earlier, the operating results of this wholly owned
subsidiary were consolidated on January 1, 2003. Bank service fees for the Third
Quarter of 2003 were $464,000, a $61,000 or 15.1% increase compared to the Third
Quarter of 2002. Bank service fees for the First Nine Months of 2003 were
$1,355,000, an $116,000 or 9.4% increase compared with the First Nine Months of
2002.
Gains on the sales of investment securities for the Third Quarter of 2003
were $92,000 compared with a net loss of $2,000 in Third Quarter of 2002. Gains
for the First Nine Months of 2003 were $1,454,000, a $512,000 or 54.4% increase
over the First Nine Months of 2002. The fair value of securities sold in the
Third Quarter of 2003 was $13,297,000 and for the Third Quarter of 2002 was
$633,000. The fair value of securities sold in the First Nine Months of 2003 was
$37,831,000 and for the First Nine Months of 2002 was $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 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 $139,000 from $76,000 in the Third
Quarter of 2002 to $215,000 in the Third Quarter of 2003. Other noninterest
income for the First Nine Months of 2003 increased $351,000 from $129,000 in the
First Nine Months of 2002 to $480,000 in the First Nine Months 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.
Net Interest Income
Third Quarter of 2003 compared to Third Quarter of 2002:
The Company's tax-equivalent net interest income decreased 11.8% or
$899,000 from $7,593,000 to $6,694,000. Average earning assets increased 6.1% or
$33,108,000 from $542,929,000 to $576,037,000. The tax-equivalent net interest
margin decreased from 5.55% to 4.61%. The average tax-equivalent yield on
earning assets decreased from 5.97% to 4.92%. The average rate paid on
interest-bearing liabilities decreased from 1.61% to 1.14%.
The average balances of loans increased $34,034,000 from $414,378,000 to
$448,412,000, investment in debt and equity securities, at amortized cost,
decreased $34,484,000 from $80,582,000 to $46,098,000, and federal funds sold
and other short-term investments increased $33,558,000 from $47,969,000 to
$81,527,000. The average balance of noninterest-bearing demand deposit accounts
increased $6,142,000 from $97,317,000 to $103,459,000, interest-bearing
liabilities increased $13,875,000 from $142,304,000 to $156,179,000 and accounts
and drafts payable increased $10,696,000 from $295,138,000 to $305,834,000.
-13-
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
increase in interest-bearing liabilities is primarily due to an increase in
other time deposits as a result of a certificate of deposit promotion. The
increase in average accounts and drafts payable relates to increases in invoice
dollars paid, primarily from new business, reduced by a decrease in the amount
of time funds were held by the Company for investment.
The decreases experienced during the Third 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 14 through 17.
First Nine Months of 2003 compared to the First Nine Months of 2002:
The Company's tax-equivalent net interest income decreased 11.9% or
$2,753,000 from $23,086,000 to $20,333,000. Average earning assets increased
1.4% or $7,599,000 from $540,941,000 to $548,540,000. The tax-equivalent net
interest margin decreased from 5.71% to 4.96%. The average tax-equivalent yield
on earning assets decreased from 6.13% to 5.29%. The average rate paid on
interest-bearing liabilities decreased from 1.63% to 1.24%.
The average balances of loans increased $41,028,000 from $398,346,000 to
$439,374,000, investment in debt and equity securities, at amortized cost,
decreased $49,183,000 from $104,737,000 to $55,554,000, and federal funds sold
and other short-term investments increased $15,754,000 from $37,858,000 to
$53,612,000. The average balance of noninterest bearing demand deposit accounts
decreased $2,314,000 from $100,265,000 to $97,951,000, accounts and drafts
payable increased $5,177,000 from $289,454,000 to $294,631,000, and
interest-bearing liabilities increased $4,864,000 from $140,808,000 to
$145,672,000.
The increases and decreases experienced in earning assets and funding
sources during the First Nine Months of 2003 were attributable to the same
factors as those described for the third quarter, except for noninterest-
bearing deposits. The average balance of noninterest-bearing deposits decreased
slightly in the First Nine Months of 2003 compared with the First Nine Months of
2002 due to a shift from demand and savings deposits to time deposits as new and
existing customers shifted funds to higher yielding deposit accounts.
The decreases experienced during the First Nine Months of 2003 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 14 through 17.
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.
-14-
Third Quarter 2003 Third 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 $ 442,753 $ 6,332 5.67% $ 408,329 $ 6,679 6.49%
Tax-exempt(4) 5,659 107 7.50 6,049 114 7.48
Debt and equity securities(5):
Taxable 19,598 91 1.84 33,709 377 4.44
Tax-exempt(4) 26,500 426 6.38 46,873 796 6.74
Federal funds sold and other
short-term investments 81,527 187 .91 47,969 206 1.70
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 576,037 7,143 4.92 542,929 8,172 5.97
Nonearning assets:
Cash and due from banks 20,133 24,121
Premises and equipment, net 14,639 16,276
Foreclosed assets 1,154 5,623
Other assets 28,646 15,102
Allowance for loan losses (5,397) (5,142)
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 635,212 $ 598,909
- ----------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 51,348 $ 74 .57% $ 51,047 $ 135 1.05%
Savings deposits 36,985 61 .65 38,169 115 1.20
Time deposits of
$100 or more 45,835 191 1.65 46,776 282 2.39
Other time deposits 22,011 123 2.22 5,701 43 2.99
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 156,179 449 1.14 141,693 575 1.61
Short-term borrowings -- -- -- 611 4 2.60
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 156,179 449 1.14 142,304 579 1.61
Noninterest-bearing liabilities:
Demand deposits 103,459 97,317
Accounts and drafts payable 305,834 295,138
Other liabilities 8,545 6,257
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 574,017 541,016
Shareholders' equity 61,195 57,893
Total liabilities and
shareholders' equity $ 635,212 $ 598,909
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,694 $ 7,593
Interest spread 3.78% 4.36%
Net interest margin 4.61% 5.55%
- ----------------------------------------------------------------------------------------------------------------------
(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 $26,000 and $101,000
for the Third 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 $180,000 and
$308,000 for the Third 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.
-15-
First Nine Months of 2003 First Nine Months 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 $ 433,670 $ 18,925 5.83% $ 392,256 $ 19,315 6.58%
Tax-exempt(4) 5,704 323 7.57 6,090 344 7.55
Debt and equity securities(5):
Taxable 22,971 412 2.40 64,125 2,580 5.38
Tax-exempt(4) 32,583 1,613 6.62 40,612 2,077 6.84
Federal funds sold and other
short-term investments 53,612 413 1.03 37,858 485 1.71
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 548,540 21,686 5.29 540,941 24,801 6.13
Nonearning assets:
Cash and due from banks 19,840 23,817
Premises and equipment, net 15,232 16,423
Foreclosed assets 1,096 5,507
Other assets 27,559 11,060
Allowance for loan losses (5,372) (5,029)
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 606,895 $ 592,719
- ----------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 52,367 $ 295 .75% $ 56,733 $ 479 1.13%
Savings deposits 36,244 224 .83 43,314 422 1.30
Time deposits of
$100 or more 43,824 607 1.85 33,682 648 2.57
Other time deposits 12,022 213 2.37 5,367 137 3.41
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 144,457 1,339 1.24 139,096 1,686 1.62
Short-term borrowings 1,215 14 1.54 1,712 29 2.26
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 145,672 1,353 1.24 140,808 1,715 1.63
Noninterest-bearing liabilities:
Demand deposits 97,951 100,265
Accounts and drafts payable 294,631 289,454
Other liabilities 7,670 5,782
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 545,924 536,309
Shareholders' equity 60,971 56,410
Total liabilities and
shareholders' equity $ 606,895 $ 592,719
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ 20,333 $ 23,086
Interest spread 4.05% 4.50%
Net interest margin 4.96% 5.71%
- ----------------------------------------------------------------------------------------------------------------------
(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 $61,000 and $359,000
for the First Nine Months 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 $655,000 and
$819,000 for the First Nine Months 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.
-16-
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
2003 Over 2002
---------------------------------
(In Thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans(1),(2):
Taxable $ 535 $ (882) $ (347)
Tax-exempt(3) (7) -- (7)
Debt and equity securities:
Taxable (119) (167) (286)
Tax-exempt(3) (330) (40) (370)
Federal funds sold and other
short-term investments 104 (123) (19)
- -------------------------------------------------------------------------------
Total interest income 183 (1,212) (1,029)
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 1 (62) (61)
Savings deposits (3) (51) (54)
Time deposits of $100 or more (6) (85) (91)
Other time deposits 94 (14) 80
Short-term borrowings (2) (2) (4)
- -------------------------------------------------------------------------------
Total interest expense 84 (214) (130)
- -------------------------------------------------------------------------------
Net interest income $ 99 $ (998) $ (899)
- -------------------------------------------------------------------------------
(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 Nine Months
2003 Over 2002
---------------------------------
(In Thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans(1),(2):
Taxable $ 1,928 $(2,318) $ (390)
Tax-exempt(3) (22) 1 (21)
Debt and equity securities:
Taxable (1,163) (1,005) (2,168)
Tax-exempt(3) (399) (65) (464)
Federal funds sold and other
short-term investments 161 (233) (72)
- -------------------------------------------------------------------------------
Total interest income 505 (3,620) (3,115)
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits (35) (149) (184)
Savings deposits (61) (137) (198)
Time deposits of $100 or more 167 (208) (41)
Other time deposits 128 (52) 76
Short-term borrowings (7) (8) (15)
- -------------------------------------------------------------------------------
Total interest expense 192 (554) (362)
- -------------------------------------------------------------------------------
Net interest income $ 313 $(3,066) $(2,753)
- -------------------------------------------------------------------------------
(1). Average balances include nonaccrual loans.
(2). Interest income includes net loan fees.
(3). Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
-17-
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 Third Quarter of 2003 and a $90,000
provision made in the Third Quarter of 2002. There was a $90,000 provision made
during the First Nine Months of 2003 and a $360,000 provision made during the
First Nine Months of 2002. Net loans recovered for the Third Quarter of 2003
were $6,000 compared to $5,000 for the Third Quarter of 2002. Net loans
recovered for the First Nine Months of 2003 were $16,000 compared with net loans
charged off of $62,000 for the First Nine Months 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 September 30, 2003 was $5,399,000 and at
December 31, 2002 was $5,293,000. The ratio of allowance for loan losses to
total loans outstanding at September 30, 2003 was 1.20% and 1.22% at December
31, 2002. Nonperforming loans were $1,943,000 or .43% of total loans at
September 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 September 30, 2003, impaired loans totaled $8,350,000, which included
$1,462,000 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 $1,122,000 at September 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 $4,199,000 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 $1,425,000, 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 $760,000 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 $635,000 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.
-18-
Summary of Asset Quality
The following table presents information as of and for the three and
nine-month periods ended September 30, 2003 and 2002 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) 2003 2002 2003 2002
==================================================================================================================
Allowance at beginning of period $ 5,393 $ 5,109 $ 5,293 $ 4,906
Provision charged to expense -- 90 90 360
Loans charged off -- -- 2 95
Recoveries on loans previously charged off 6 5 18 33
- ------------------------------------------------------------------------------------------------------------------
Net loans (recovered) charged-off (6) (5) (16) 62
Allowance at end of period $ 5,399 $ 5,204 $ 5,399 $ 5,204
- ------------------------------------------------------------------------------------------------------------------
Loans outstanding:
Average $ 448,412 $ 414,378 $ 439,374 $ 398,346
September 30 450,977 416,473 450,977 416,473
Ratio of allowance for loan losses to loans outstanding:
Average 1.20% 1.26% 1.23% 1.31%
September 30 1.20 1.25 1.20 1.25
Nonperforming loans:
Nonaccrual loans $ 1,462 $ 450 $ 1,462 $ 450
Loans past due 90 days or more -- 1,911 -- 1,911
Renegotiated loans 481 172 481 172
- ------------------------------------------------------------------------------------------------------------------
Total non performing loans $ 1,943 $ 2,533 $ 1,943 $ 2,533
Other impaired loans $ 6,407 $ 4,978 $ 6,407 $ 4,978
Foreclosed assets $ 1,154 $ 5,911 $ 1,154 $ 5,911
- ------------------------------------------------------------------------------------------------------------------
Nonperforming loans as percentage of average loans .43% .61% .44% .64%
==================================================================================================================
Foreclosed assets at September 30, 2002 includes $5,315,000 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 costs 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 Expense
Total noninterest expense for the Third Quarter of 2003 increased
$2,364,000 or 20.6% compared to the Third Quarter of 2002 and increased
$7,018,000 or 20.3% in the First Nine Months of 2003 over 2002. Of these
increases, the consolidation of GEMS contributed $2,016,000 for the quarter and
$5,523,000 for the first nine months. Excluding the GEMS consolidation, total
noninterest expense increased 3.0% for the quarter and 4.3% for the first nine
months.
Salaries and benefits expense for the Third Quarter of 2003 increased
$1,427,000 or 18.2% over the same period last year and increased $4,676,000 or
20.0% for the First Nine Months of 2003 over 2002. Of these increases, the
consolidation of GEMS amounted to $1,041,000 for the quarter $3,064,000 for the
first nine months. The remaining increases were due primarily to an increase in
staff in the utility processing division due to an increase in production and to
increases in health, worker's compensation, pension and short-term disability
insurance expenses.
Occupancy expense for the Third Quarter of 2003 increased $80,000 or 21.8%
compared to the Third Quarter of 2002 and increased $225,000 or 20.2% in the
First Nine Months of 2003 over 2002. Of these increases, $59,000 relates to the
consolidation of GEMS for the quarter and $175,000 for the first nine months.
The remaining increases relate primarily to real estate taxes and the
maintenance and repair of premises.
-19-
Equipment expense for the Third Quarter of 2003 increased $31,000 compared
to the Third Quarter of 2002 and increased $109,000 or 3.4% in the First Nine
Months of 2003 over 2002. Increases in equipment expenses related to the
consolidation of GEMS were $118,000 for the quarter and $320,000 in the first
nine months. 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.
Other noninterest expenses for the Third Quarter of 2003 increased
$826,000 or 36.8% compared to the Third Quarter of 2002 and increased $2,008,000
or 29.4% in the First Nine Months of 2003 over 2002. The consolidation of GEMS
contributed $798,000 for the quarter and $1,964,000 for the first nine months.
Included in the other noninterest expenses of GEMS is the amortization of
customer list and software intangible assets of $78,000 for the quarter and
$233,000 for the first nine months. Excluding the affect of the GEMS
consolidation, these expenses remained relatively flat for the Third Quarter and
increased for the first nine months due to increases in consulting and legal
fees.
Income tax expense for the Third Quarter of 2003 increased $252,000 or
36.9% compared to the Third Quarter of 2002 and increased $281,000 or 12.3% for
the First Nine Months of 2003 over 2002. The effective tax rate for the Third
Quarter of 2003 was 32% compared with 28% in the Third Quarter of 2002 and was
31% for the First Nine Months of 2003 compared to 30% for the First Nine Months
of 2002. The primary reason for the increase in the effective tax rate for the
Third 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 Nine Months of 2003 did not have the full effect of this reduction.
Financial Condition
Total assets at September 30, 2003 were $636,830,000, an increase of
$64,597,000 or 11.3% from December 31, 2002. Loans, net of the allowance for
loan losses, at September 30, 2003 were $445,578,000, an increase of $16,182,000
or 3.8% from December 31, 2002. Total investments in debt and equity securities
at September 30, 2003 were $56,316,000, a $13,055,000 or 18.8% decrease from
December 31, 2002. Federal funds sold and other short-term investments at
September 30, 2003 were $65,175,000 a $59,448,000 increase from December 31,
2002.
Total deposits at September 30, 2003 were $269,629,000, a $26,111,000 or
10.7% increase from December 31, 2002. Accounts and drafts payable were
$295,706,000, a $72,085,000 or 32.2% increase from December 31, 2002. Short-term
borrowings at September 30, 2003 were $7,000, a $37,431,000 decrease from
December 31, 2002. Total shareholders' equity at September 30, 2003 was
$62,854,000, a $1,808,000 or 3.0% 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 $37,831,000 of
securities and the maturity $15,145,000 of securities during the First Nine
Months 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
14 through 16). The increase in total shareholders' equity resulted from net
income of $5,779,000; cash received from the exercise of stock options of
$260,000; the tax benefit received from the exercise of stock options of
$176,000; and the amortization of the stock bonus plan of $41,000; offset by
dividends paid of $2,114,000 ($.63 per share); purchase of treasury shares of
$1,764,000 (59,237 shares); a decrease in other comprehensive income of $569,000
and $1,000 of other items.
Liquidity and Capital Resources
The balances of liquid assets consist of cash and cash equivalents, which
include cash and due from banks, federal funds sold, and money market funds were
$89,778,000 at September 30, 2003, an increase of $59,772,000 from December 31,
2002. At September 30, 2003 these assets represented 14.1% 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.
-20-
Secondary sources of liquidity include the investment portfolio and
borrowing lines. Total investment in debt and equity securities was $56,316,000
at September 30, 2003, a decrease of $13,055,000 or 18.8% from December 31,
2002. These assets represented 8.8% of total assets at September 30, 2003. Of
this total, 73% were state and municipal securities, 20% were U.S. treasury
securities, 6% were U.S. government agencies and 1% were other securities. Of
the total portfolio, 14% matures in less than one year, 14% matures in one to
five years and 72% 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.
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 $76,546,000.
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 have also historically been a stable source of
funds.
Net cash provided by operating activities totaled $9,359,000 for the First
Nine Months of 2003, compared to $7,173,000 for the First Nine Months of 2002.
Net cash used in investing activities was $6,734,000 for the First Nine Months
of 2003, compared with $40,288,000 for the First Nine Months of 2002. Net cash
provided by financing activities for the First Nine Months of 2003 was
$57,147,000, compared with net cash used of $19,404,000 for the First Nine
Months of 2002. The increase in net cash provided by operating activities
relates primarily to the consolidation of GEMS. The decrease of net cash used in
investing activities in the First Nine Months of 2003 relates to the purchase of
more securities, a larger increase in loan balances and the purchase of bank
owned life insurance in the First Nine Months of 2002. The increase in net cash
provided by financing activities in the First Nine Months of 2003 over net cash
used in 2002 relates to the increase of accounts and drafts payable balances and
an increase in deposit balances in 2003 compared with a decrease in 2002. These
increases were partially offset by a decrease in short-term borrowings.
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
September 30, 2003 and December 31, 2002:
September 30, 2003 Amount Ratio
- --------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $62,866,000 12.09%
Cass Commercial Bank 30,941,000 11.89
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $57,467,000 11.05%
Cass Commercial Bank 27,822,000 10.69
Tier I capital (to average assets)
Cass Information Systems, Inc. $57,467,000 9.54%
Cass Commercial Bank 27,822,000 9.54
- --------------------------------------------------------------------------------
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 September 30, 2003 has changed materially from that at December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure 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 the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of September 30, 2003 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 that have materially affected or are reasonably likely to
materially affect the Company's internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
-22-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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 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
July 17, 2003, reporting the announcement of the Company's earnings
for the second 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: November 10, 2003 By /s/ Lawrence A. Collett
-------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: November 10, 2003 By /s/ Eric H. Brunngraber
-------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Chief Financial and Accounting Officer)
-24-