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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
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
-----------------
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 |X| No |_|
The number of shares outstanding of registrant's only class of stock as of
May 4, 2005: Common stock, par value $.50 per share - 3,679,126 shares
outstanding.
- --------------------------------------------------------------------------------
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act of 1933.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 2005 (unaudited) and December 31, 2004 (unaudited) 3
Consolidated Statements of Income
Three months ended March 31, 2005 and 2004 (unaudited) ...... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004 (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 .... 20
Item 4. CONTROLS AND PROCEDURES ....................................... 20
PART II - Other Information - Items 1. - 6. ................................. 21
SIGNATURES ............................................................ 22
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements
made pursuant to the safe harbor provisions of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are not guarantees of future performance and
involve risks, uncertainties, and other factors 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. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands except Share and Per Share Data)
March 31 December 31
2005 2004
Assets
Cash and due from banks $ 21,653 $ 23,131
Federal funds sold and other short-term investments 89,892 64,412
--------- ---------
Cash and cash equivalents 111,545 87,543
--------- ---------
Investment in debt and equity securities
available-for-sale, at fair value 63,952 77,130
Loans 508,997 500,448
Less: Allowance for loan losses 5,806 6,037
--------- ---------
Loans, net 503,191 494,411
--------- ---------
Premises and equipment, net 11,840 12,187
Investment in bank owned life insurance 11,207 11,090
Payments in excess of funding 8,428 6,998
Goodwill 7,346 7,360
Other intangible assets, net 2,262 2,383
Other assets 16,699 17,419
--------- ---------
Total assets $ 736,470 $ 716,521
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 97,224 $ 96,362
Interest-bearing 195,013 179,267
--------- ---------
Total deposits 292,237 275,629
Accounts and drafts payable 360,510 358,473
Short-term borrowings 165 127
Subordinated convertible debentures 3,700 3,700
Other liabilities 9,195 9,003
--------- ---------
Total liabilities 665,807 646,932
--------- ---------
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 4,494,510
shares issued at March 31, 2005 and
December 31, 2004, respectively 2,247 2,247
Additional paid-in capital 18,450 18,370
Retained earnings 66,679 64,685
Common shares in treasury, at cost (817,184 shares at
March 31, 2005 and 807,262 shares at December 31, 2004) (16,550) (16,096)
Unamortized stock bonus awards (201) (160)
Accumulated other comprehensive income 38 543
--------- ---------
Total shareholders' equity 70,663 69,589
--------- ---------
Total liabilities and shareholders' equity $ 736,470 $ 716,521
========= =========
See accompanying notes to unaudited consolidated financial statements.
-3-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Share and Per Share Data)
Three Months Ended
March 31
------------------------
2005 2004
Fee Revenue and Other Income:
Information services payment and processing revenue $ 8,592 $ 7,598
Software revenue 1,680 1,179
Bank service fees 358 414
Gains on sales of investment securities 547 441
Other 184 135
---------- ----------
Total fee revenue and other income 11,361 9,767
---------- ----------
Interest Income:
Interest and fees on loans 7,426 6,454
Interest and dividends on debt and equity securities:
Taxable 173 97
Exempt from federal income taxes 393 427
Interest on federal funds sold and
other short-term investments 526 162
---------- ----------
Total interest income 8,518 7,140
---------- ----------
Interest Expense:
Interest on deposits 942 567
Interest on short-term borrowings 1 --
Interest on subordinated convertible debentures 49 --
---------- ----------
Total interest expense 992 567
---------- ----------
Net interest income 7,526 6,573
Provision for loan losses 200 200
---------- ----------
Net interest income after provision for loan losses 7,326 6,373
---------- ----------
Operating Expense:
Salaries and employee benefits 10,344 9,157
Occupancy 500 458
Equipment 837 1,025
Amortization of intangible assets 121 78
Other operating 2,740 2,764
---------- ----------
Total operating expense 14,542 13,482
---------- ----------
Income before income tax expense 4,145 2,658
Income tax expense 1,378 811
---------- ----------
Net income $ 2,767 $ 1,847
========== ==========
Earnings per share:
Basic $ .75 $ .50
Diluted $ .74 $ .50
Weighted average shares outstanding:
Basic 3,674,548 3,668,393
Diluted 3,797,034 3,708,419
See accompanying notes to unaudited consolidated financial statements.
-4-
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31
-----------------------
2005 2004
Cash Flows From Operating Activities:
Net income $ 2,767 $ 1,847
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 737 1,046
Gains on sales of investment securities (547) (441)
Provision for loan losses 200 200
Amortization of stock bonus awards 29 20
Deferred income tax benefit (260) (474)
Increase in pension liability 335 296
Increase in income tax liability 754 662
Increase in payments in excess of funding (1,430) (1,320)
Change in other assets 1,176 (241)
Change in other liabilities (897) (583)
Other operating activities, net (38) --
--------- ---------
Net cash provided by operating activities 2,826 1,012
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of investment securities available-for-sale 12,950 12,052
Proceeds from maturities of debt and equity securities
available-for-sale 19,000 3,200
Purchase of debt and equity securities available-for-sale (19,004) (10,407)
Net (increase) decrease in loans (8,980) 8,550
Purchases of premises and equipment, net (256) (571)
--------- ---------
Net cash provided by investing activities 3,710 12,824
--------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in noninterest-bearing demand deposits 862 (16,575)
Net increase (decrease) in interest-bearing demand and savings deposits 391 (7,128)
Net increase in time deposits 15,355 19,970
Net increase (decrease) increase in accounts and drafts payable 2,037 (32,823)
Purchase of common shares for treasury (586) --
Net increase (decrease) in short-term borrowings 38 (16)
Cash proceeds from exercise of stock options 98 111
Tax benefit from exercise of stock options and bonuses 43 85
Cash paid for stock dividend fractional shares -- (4)
Cash dividends paid (772) (703)
--------- ---------
Net cash provided by (used in) financing activities 17,466 (37,083)
--------- ---------
Net increase (decrease) increase in cash and cash equivalents 24,002 (23,247)
Cash and cash equivalents at beginning of period 87,543 62,367
--------- ---------
Cash and cash equivalents at end of period $ 111,545 $ 39,120
========= =========
Supplemental information:
Cash paid for interest $ 897 $ 513
Cash paid for income taxes 475 660
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 U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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. Certain amounts in the 2004 consolidated financial statements
have been reclassified to conform to the 2005 presentation. Such
reclassifications have no effect on previously reported net income or
shareholders' equity. For further information, refer to the audited consolidated
financial statements and related footnotes included in Cass Information System,
Inc.'s ("the Company" or "Cass") Annual Report on Form 10-K for the year ended
December 31, 2004.
Note 2 - 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 March 31, 2005 and December 31, 2004 are as follows:
March 31, 2005 December 31, 2004
- ------------------------------------------------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(In Thousands) Amount Amortization Amount Amortization
- ------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Customer list $ 823 $ (123) $ 823 $ (110)
Acquired software 1,886 (677) 1,886 (569)
- ------------------------------------------------------------------------------------------------------------
Total amortized intangibles 2,709 (800) 2,709 (679)
- ------------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill 7,573 (227)* 7,587 (227)*
Minimum pension liability 353 -- 353 --
- ------------------------------------------------------------------------------------------------------------
Total unamortized intangibles 7,926 (227) 7,940 (227)
- ------------------------------------------------------------------------------------------------------------
Total intangible assets $10,635 $(1,027) $10,649 $ (906)
- ------------------------------------------------------------------------------------------------------------
*Amortization through December 31, 2001 prior to adoption of SFAS 142.
Customer list and software are amortized over 15 years and 4-5 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 of which 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 $121,000 and $78,000 for the three
month periods ended March 31, 2005 and 2004, respectively. Estimated
amortization of intangibles over the next five years is as follows: $483,000 in
2005 and 2006, $227,000 for 2007 and 2008 and $170,000 in 2009.
Note 3 - Equity Investments in Non-Marketable Securities
During 2003, the Company converted a $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 investing an additional $1,100,000 when
certain conditions were met. This additional commitment has funded and the total
investment of the Company in this entity was $3,100,000 at March 31, 2005 and
December 31, 2004. At March 31, 2005 the Company had a 19.99% ownership interest
in this entity and the Chairman and CEO of the Company was a member of the
entity's Board of Directors. In addition, the Company has extended a $2,400,000
line of credit for working capital purposes to this entity, with a 50% interest
sold to a new non-affiliated majority owner. As of March 31, 2005 the Company's
interest in this line amounted to $1,200,000 and all payments are current.
-6-
This business has performed poorly during the past few years and the new
majority owner is currently in the process of stabilizing the business and
improving its financial performance. However, should this business fail to meet
its objectives, the Company's investment could be subject to future impairment.
This investment, along with $506,000 of other investments in non-marketable
securities, is included in other assets on the Company's consolidated balance
sheets.
Note 4 - Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding. The calculations of basic and
diluted earnings per share for the periods ended March 31, 2005 and 2004 are as
follows:
Three Months Ended
March 31
------------------------
(Dollars In Thousands Except Share and Per Share Data) 2005 2004
Calculation of basic earnings per share:
Net income $ 2,767 $ 1,847
Weighted-average number of common shares outstanding 3,674,548 3,668,393
- --------------------------------------------------------------------------------
Basic earnings per share $ .75 $ .50
================================================================================
Calculation of diluted earnings per share:
Net income $ 2,767 $ 1,847
Net income effect of 5.33% convertible debentures 27
- --------------------------------------------------------------------------------
Net income assuming dilution $ 2,794 $ 1,847
- --------------------------------------------------------------------------------
Weighted-average number of common shares outstanding 3,674,548 3,668,393
Effect of dilutive stock options and awards 45,723 40,026
Effect of 5.33% convertible debentures 76,763 --
- --------------------------------------------------------------------------------
Weighted-average number of common shares
assuming dilution 3,797,034 3,708,419
- --------------------------------------------------------------------------------
Diluted earning per share $ .74 $ .50
================================================================================
Note 5 - Stock Repurchases
The following table sets forth information about the Company's purchases of its
$.50 par value Common Stock, its only class of stock registered pursuant to
Section 12 of the Exchange Act.
Total Number of Maximum
Shares Purchased Number that
Total Number Average As part of Publicly May Yet Be
of Shares Price Paid Announced Purchased Under
Period Purchased per Share Program the Program
- ------------------------------------------------------------------------------------------------------------------
January 1-31, 2005 1,545 $34.98 1,545 98,455
February 1 -28, 2005 15,000 35.49 15,000 83,455
March 1-31, 2005 -- -- -- 83,455
- ------------------------------------------------------------------------------------------------------------------
Total 16,545 $35.44 16,545 83,455
- ------------------------------------------------------------------------------------------------------------------
The Company maintains a treasury stock buyback program and repurchases are made
in the open market or through negotiated transactions from time to time
depending on market conditions. The Company did not repurchase any stock during
the three months ended March 31, 2004.
-7-
Note 6 - Comprehensive Income
For the three-month periods ended March 31, 2005 and 2004, unrealized gains and
losses on debt and equity securities available-for-sale were the Company's only
other comprehensive income component. Comprehensive income for the three-month
periods ended March 31, 2005 and 2004 is summarized as follows:
Three Months Ended
March 31
-------------------
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------------
Net income $ 2,767 $ 1,847
Other comprehensive income:
Net unrealized (loss) gain on debt and equity
securities available-for-sale, net of tax (144) 552
Less: reclassification adjustment for realized gains on
sales of debt and equity securities, available-for-sale,
included in net income, net of tax (361) (291)
- --------------------------------------------------------------------------------------
Total other comprehensive (loss) income (505) 261
Total comprehensive income $ 2,262 $ 2,108
- --------------------------------------------------------------------------------------
Note 7 - Industry Segment Information
The services provided by the Company are classified into three reportable
segments: 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 Information Services segment provides freight, utility and telecommunication
invoice processing and payment services to large corporations. The Banking
Services segment provides banking services primarily to privately-held
businesses and churches. The Government Software Services segment provides
integrated financial, property and human resource management systems to cities,
counties, and other public entities.
The Company's accounting policies for segments are the same as those described
in the summary of significant accounting policies in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004. Management evaluates segment
performance based on net income after allocations for corporate expenses and
income taxes. Transactions between segments are accounted for at what management
believes to be market value. Information for prior periods has been restated to
reflect changes in the composition of the Company's segments.
All revenue originates from and all long-lived assets are located within the
United States and no revenue from any customer of any segment exceeds 10% of the
Company's consolidated revenue.
Summarized information about the Company's operations in each industry segment
for the three-month periods ended March 31, 2005 and 2004, is as follows:
Government Corporate,
Information Banking Software Eliminations
(In Thousands) Services Services Services and Other Total
- -------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 2005
Total Revenues:
Revenue from customers $ 13,488 $ 3,519 $ 1,680 $ -- $ 18,687
Intersegment revenue 26 351 -- (377) --
Net income (loss) 1,958 993 (184) -- 2,767
Total assets 412,231 328,913 4,739 (9,413) 736,470
Goodwill 4,263 156 2,927 -- 7,346
Other intangible assets, net 761 -- 1,148 353 2,262
Quarter Ended March 31, 2004
Total Revenues:
Revenue from customers $ 11,791 $ 3,170 $ 1,179 $ -- $ 16,140
Intersegment revenue 19 355 -- (374) --
Net income 1,414 859 (426) -- 1,847
Total assets 309,396 301,670 6,175 (5,918) 611,323
Goodwill 223 -- 2,927 -- 3,150
Other intangible assets, net -- -- 1,458 404 1,862
- -------------------------------------------------------------------------------------------------------------
-8-
Note 8 - Loans by Type
(In Thousands) March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Commercial and industrial $124,726 $117,777
Real estate:
Mortgage 176,463 182,476
Mortgage - churches & related 170,685 164,235
Construction 17,995 16,694
Construction - churches & related 4,920 9,144
Industrial revenue bonds 4,908 4,955
Installment 1,690 1,741
Other 7,610 3,426
- --------------------------------------------------------------------------------
Total loans $508,997 $500,448
- --------------------------------------------------------------------------------
Note 9 - Commitments and Contingencies
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
in part in the Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit-related financial instruments and
commitments under operating and capital leases. 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
March 31, 2005, 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
or its subsidiaries 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. At March
31, 2005 the balance of unused loan commitments, standby and commercial letters
of credit were $24,014,000, $6,189,000 and $1,040,000, respectively. 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 or its subsidiaries may obtain and
liquidate the collateral to recover amounts paid under its guarantees on these
financial instruments.
The following table summarizes contractual cash obligations of the Company
related to operating and capital lease commitments and convertible subordinated
debentures at March 31, 2005:
Amount of Commitment Expiration per Period
------------------------------------------
Less than 1-3 3-5 Over 5
(Dollars in thousands at March 31, 2005) Total 1 Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------
Operating lease commitments $4,214 $731 $1,011 $730 $1,742
Capital lease commitments 19 15 4 -- --
Convertible subordinated debentures* 3,700 -- -- 3,700
- ---------------------------------------------------------------------------------------------------------------
Total $7,933 $746 $1,015 $730 $5,442
===============================================================================================================
* Includes principal payments only.
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.
-9-
Note 10 - Stock-Based Compensation
The Company maintains stock bonus and stock option plans. 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.
An entity that continues to apply APB 25 must disclose certain pro forma
information as if the fair value-based accounting method in SFAS 123 had been
used to account for all stock-based compensation costs. The required disclosure
provisions of SFAS 123 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 5,885 options granted in the First
Quarter of 2005 and 5,871 options granted in the First Quarter of 2004. The
following table represents the effect on basic and diluted earnings per share
and weighted average assumptions used for the periods ended March 31, 2005 and
2004:
Three Months Ended
March 31
-------------------------
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------
Net income:
As reported $ 2,767 $ 1,847
Add: Stock based compensation expense
included in reported net income, net of tax 19 13
Less: Stock based compensation expense
determined under the fair value based method
for all awards, net of tax (24) (20)
- --------------------------------------------------------------------------------
Pro forma net income $ 2,762 $ 1,840
- --------------------------------------------------------------------------------
Net income effect of subordinated convertible
debentures 27 --
Proforma net income assuming dilution 2,789 1,840
Net income per common share:
Basic, as reported $ .75 $ .50
Basic, pro forma .75 .50
Diluted, as reported .74 .50
Diluted, pro forma .73 .50
- --------------------------------------------------------------------------------
Weighted average assumptions:
Risk-free interest rate 3.97% 3.31%
Expected life 7 yrs. 7 yrs.
Expected volatility 15% 15%
Dividend yield 2.32% 2.52%
- --------------------------------------------------------------------------------
Note 11 - Defined Pension Plans
The Company has a noncontributory defined benefit pension plan, which covers
most of its employees. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit
with service proration method to amortize prior service costs arising from
improvements in pension benefits and qualifying service prior to the
establishment of the plan over a period of approximately 30 years. Disclosure
information is based on a measurement date of December 31 of the corresponding
year.
The following table represents the components of the net periodic pension costs
for 2004 and an estimate for 2005:
Estimated Actual
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 1,245 $ 1,186
Interest cost on projected benefit obligation 1,370 1,237
Expected return on plan assets (1,393) (1,233)
Net amortization 115 60
- --------------------------------------------------------------------------------
Net periodic pension cost $ 1,337 $ 1,250
- --------------------------------------------------------------------------------
-10-
Pension costs recorded to expense were $312,000 and $260,000 for the First
Quarter of 2005 and 2004, respectively. The Company has not made any
contribution to the plan during the three-month period ended March 31, 2005, but
is expecting to contribute approximately $1,221,000 in 2005.
In addition to the above funded benefit plan, the Company has an unfunded
supplemental executive retirement plan which covers key executives of the
Company. This is a noncontributory plan in which the Company and its
subsidiaries make accruals designed to fund normal service costs on a current
basis using the same method and criteria as its defined benefit plan. The
following table represents the components of the net periodic pension costs for
2004 and an estimate for 2005:
Estimated Actual
(In Thousands) 2005 2004
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $ -- $ (57)
Interest cost on projected benefit obligation 117 117
Net amortization 50 50
- --------------------------------------------------------------------------------
Net periodic pension cost $ 167 $ 110
- --------------------------------------------------------------------------------
Pension costs recorded to expense were $30,000 and $36,000 for the First Quarter
of 2005 and 2004, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Cass Information Systems, Inc. (the "Company" or "Cass") provides payment and
information processing services to national manufacturing, distribution and
retail enterprises from its processing centers in St. Louis, Missouri, Columbus,
Ohio, Boston, Massachusetts and Greenville, South Carolina. The Company's
services include freight invoice rating, payment processing, auditing, and the
generation of cost accounting and transportation information. Cass also
processes and pays utility invoices, including electricity, gas and
telecommunications. The Company significantly enhanced its telecommunication
payment processing and audit capabilities with the acquisition of PROFITLAB,
Inc. ("PROFITLAB") located in Greenville, South Carolina during 2004. Cass
extracts, stores and presents information from freight, utility and
telecommunication invoices, assisting our customers' transportation, energy and
information technology managers in making decisions that will enable them to
improve operating performance. The Company receives data from multiple sources,
electronic and otherwise, and processes the data to accomplish the specific
operating requirements of its customers. It then provides the data in a central
repository for access and archiving. The data is finally transformed into
information through the Company's databases that allow client interaction as
required and provide Internet-based tools for analytical processing. The Company
also, through its St Louis, Missouri based bank subsidiary, Cass Commercial Bank
(the "Bank"), provides banking services in the St Louis metropolitan area and
other selected cities in the United States. The Company acquired Franklin
Bancorp located in Orange County, California in November 2004 and merged its
subsidiary bank, Franklin Bank of California into the Bank. This acquisition
will allow the company to establish branches in California to better serve
existing customers and expand the Bank's customer base. In addition to
supporting the Company's payment operations, the Bank also provides banking
services to its target markets, which include privately owned businesses and
churches and church-related ministries. The Company, through the Bank's
subsidiary, Government e-Management Solutions, Inc. ("GEMS"), also develops and
licenses integrated financial, property and human resource management systems to
the public sector.
The specific payment and information processing services provided to each
customer are developed individually to meet each customer's specific
requirements. These requirements can vary greatly from customer to customer. In
addition, the degree of automation such as electronic data interchange ("EDI"),
imaging, and web-enhanced solutions varies greatly among customers and
industries. These factors combine so that pricing varies greatly among the
customer base. In general however, Cass is compensated for its processing
services through service fees and account balances that are generated during the
payment process. The amount, type and calculation of service fees vary greatly
by service offering, but generally follow the volume of transactions processed.
Interest income from the balances generated during the payment processing cycle
is affected by the amount of time Cass holds the funds prior to payment and the
dollar volume processed. Both the number of transactions processed and the
dollar volume processed are therefore key metrics followed by management. Other
factors will also influence revenue and profitability, such as changes in the
-11-
general level of interest rates which have a significant effect on net interest
income. The funds generated by these processing activities are invested in
overnight investments, investment grade securities and loans generated by the
Bank. The Bank earns most of its revenue from net interest income, or the
difference between the interest earned on its loans and investments and the
interest expense on its deposits. The Bank also assesses fees on other services
such as cash management services. GEMS earns most of its revenue from the
license of its enterprise software solutions and its installation and
maintenance services.
Industry-wide factors that impact the Company include the acceptance by large
corporations of the outsourcing of key business functions such as freight,
utility and telecommunication payment and audit. The benefits that can be
achieved by outsourcing transaction processing and the management information
generated by Cass' systems can be influenced by factors such as the competitive
pressures within industries to improve profitability, the general level of
transportation costs, deregulation of energy costs and consolidation of
telecommunication providers. Economic factors that impact the Company include
the general level of economic activity that can affect the volume and size of
invoices processed, the ability to hire and retain qualified staff and the
growth and quality of our loan portfolio. The general level of interest rates
has a significant effect on the revenue of the Company. Finally, the general
fiscal condition of the counties and municipalities that can benefit from GEMS'
enterprise software can impact licenses sold and related revenue.
Currently, management views Cass' most significant opportunity as the continued
expansion of its payment and information processing service offerings and
customer base. Management intends to accomplish this by maintaining the
Company's lead in applied technology, which, when combined with the security and
processing controls of the Bank, makes Cass unique in the industry. This trend
has been positive over the past years and management anticipates that this
should continue in 2005. The low level of interest rates has had a significant
negative impact on net income over the past few years. The general level of
interest rates, particularly short term interest rates, began to increase during
2004 and this has had a positive effect on net interest income. If these rates
continue to rise, this positive impact on net interest income and net earnings
should continue. Management had been pleased prior to 2004 with the growth in
revenue generated by GEMS. However, during 2004 the sales of new systems
declined sharply due mainly to a sluggish marketplace. In the First Quarter
2005, revenues for GEMS increased 42% or $501,000. The Company continues to
invest in GEMS through system improvements and product enhancements and
anticipates that the remainder of 2005 should continue to reflect improved
results.
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this
report in accordance with U.S. generally accepted accounting principles ("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. These estimates have been
generally accurate and consistent in the past and have not required any material
changes. There can be no assurances that actual results will not differ from
those estimates. Certain accounting policies that require significant management
estimates and are deemed critical to our results of operations or financial
position have been discussed with the Audit Committee of the Board of Directors
and are described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed
reviews of its loan portfolio to assess overall collectability. The level of the
allowance for loan losses reflects management's estimate of the collectability
of the loan portfolio. Although these estimates are based on established
methodologies for determining allowance requirements, actual results can differ
significantly from estimated results. These policies affect all segments of the
Company with the exception of governmental software services. The impact and
associated risks related to these policies on our business operations are
discussed in the " Allowance and Provision for Loan Losses" section of this
report.
Impairment of Assets. Management periodically evaluates certain long-term assets
such as intangible assets including goodwill, foreclosed assets, internally
developed software and investments in private equity securities for impairment.
Generally, these assets are initially recorded at cost, and 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. These policies affect all segments of
the Company and require significant management assumptions and estimates that
could result in materially different results if conditions or underlying
circumstances change.
-12-
Results of Operations
The following paragraphs more fully discuss the results of operations and
changes in financial condition for the three-month periods ended March 31, 2005
(the First Quarter of 2005") compared to the three month period ended March 31,
2004 (the "First Quarter of 2004"). 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 2004 Annual Report on Form 10-K. Results of
operations for the First Quarter of 2005 are not necessarily indicative of the
results to be attained for any other period.
Net Income
The following table summarizes the Company's operating results:
Three Months Ended
March 31
--------------------------------------
%
2005 2004 Change
- --------------------------------------------------------------------------------
Net income (In thousands) $ 2,767 $ 1,847 49.8%
Diluted earnings per share $ .74 $ .50 48.0%
Return on average assets 1.52% 1.13% --
Return on average equity 16.16% 11.52% --
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility payment and
processing fees. As the Company provides its processing and payment services, it
is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the First Quarter of 2005
and First Quarter of 2004 are as follows:
Three Months Ended
March 31
---------------------------------
%
(In Thousands) 2005 2004 Change
- --------------------------------------------------------------------------------
Freight Invoice Transaction Volume 7,132 5,429 31.4%
Freight Invoice Dollar Volume $2,568,090 $2,221,646 15.6%
Utility Transaction Volume 1,403 1,284 9.3%
Utility Transaction Dollar Volume $1,029,235 $ 934,361 10.2%
Payment and Processing Fees $ 8,592 $ 7,598 13.1%
Freight transaction volume for the First Quarter of 2005 increased mainly due to
increased activity with existing accounts and a growing customer base. Total
dollar volume processed by this division also increased during this period due
to increased activity from existing clients and larger average freight charges.
Fees for the period grew due to the increased volume and additional services
provided. The increase in volume and fees from Utility transactions increased
primarily due to new customers as the growth of this market continues. Revenues
of PROFITLAB were $486,000 for the First Quarter of 2005.
Software revenue was up $501,000 or 42% from the First Quarter of 2004 primarily
due to additional licenses sold. Bank service fees decreased $56,000 or 14%
primarily due to a reduction in bank account analysis fees. This decrease was
due primarily to the fact that service fees decrease as the credit allowance for
non-interest bearing deposits increases with the general level of interest
rates. Net gains of $547,000 and $441,000 were recognized on the sales of
securities during the First Quarter of 2005 and 2004, respectively. Other income
increased $49,000 in the First Quarter of 2005 primarily due to the sale of one
property that had been foreclosed on in 2004.
-13-
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the First Quarter of 2005 and First Quarter of
2004:
Three Months Ended
March 31
----------------------------------------
%
(Dollars In Thousands) 2005 2004 Change
- --------------------------------------------------------------------------------
Average earning assets $ 664,590 $ 599,227 10.9%
Net interest income* 7,755 6,826 13.6%
Net interest margin 4.73% 4.58% --
Yield on earning assets 5.34% 4.96% --
Rate on interest bearing liabilities 2.09% 1.34% --
*Net interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
The increase in net interest income was primarily due to a significant increase
in earning assets and an increase in yields on earning assets that exceeded the
counteracting effect of increases in rates paid on deposit accounts. The
increase in earning assets was funded by both an increase in accounts and drafts
payable due to the increase in dollar volume processed and an increase in bank
deposits due to the expansion of the Banks' customer base. Yields on earning
assets and rates paid on deposit accounts both increased as the general level of
interest rates increased. However, as the balances of earning assets greatly
exceed the balances of interest-bearing deposits, the net effect on net interest
margin was positive.
Total average loans increased $38,660,000 or 8% to $502,121,000. This increase
was attributable to new business relationships and was funded by the increase in
accounts and drafts payable and growth in bank deposits. Total average
investment in debt and equity securities increased $5,276,000 or 8% to
$69,914,000 as the Company invested part of the increase in deposits and
payables. Total average federal funds sold and other short-term investments
increased $21,427,000 or 30% to $92,555,000. This increase provides additional
liquidity to the Company. For more information on the changes in net interest
income please refer to the tables on the pages that follow.
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. This is primarily due to the noninterest-bearing
liabilities generated by the Company in the form of accounts and drafts payable.
Changes in interest rates will affect some earning assets such as federal funds
sold and floating rate loans immediately and some earning assets, such as fixed
rate loans and municipal bonds, over time.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and
Interest Differential
The following table shows the condensed average balance sheets for each of the
periods reported, the tax-equivalent interest income and expense on each
category of interest-earning assets and interest-bearing liabilities, and the
average yield on such categories of interest-earning assets and the average
rates paid on such categories of interest-bearing liabilities for each of the
periods reported.
-14-
First Quarter 2005 First Quarter 2004
------------------------------------- -------------------------------------
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 $497,194 $ 7,375 6.02% $458,116 $ 6,387 5.61%
Tax-exempt (4) 4,927 78 6.42 5,345 101 7.60
Debt and equity securities (5):
Taxable 28,569 172 2.44 23,785 97 1.64
Tax-exempt (4) 41,345 596 5.85 40,853 646 6.36
Federal funds sold and other
short-term investments 92,555 526 2.30 71,128 162 .92
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 664,590 8,747 5.34 599,227 7,393 4.96
Nonearning assets:
Cash and due from banks 24,051 18,857
Premises and equipment, net 12,088 13,474
Bank owned life insurance 11,128 10,752
Goodwill and other intangibles, net 9,698 5,063
Other assets 23,539 15,264
Allowance for loan losses (6,067) (5,560)
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $739,027 $657,077
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 84,055 331 1.60% $ 56,611 $ 79 .56%
Savings deposits 23,711 84 1.44 30,387 51 .68
Time deposits of
$100 or more 48,556 324 2.71 48,454 267 2.22
Other time deposits 32,203 203 2.56 34,672 170 1.97
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 188,525 942 2.03 170,124 567 1.34
Short-term borrowings 220 1 1.84 118 -- --
Subordinated Debentures 3,700 49 5.37 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 192,445 992 2.09 170,242 567 1.34
Noninterest-bearing liabilities:
Demand deposits 97,349 100,436
Accounts and drafts payable 370,652 313,593
Other liabilities 9,139 8,343
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 669,585 592,614
Shareholders' equity 69,442 64,463
Total liabilities and
shareholders' equity $739,027 $657,077
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,755 $ 6,826
Net interest margin 4.73% 4.58%
Interest spread 3.25% 3.62%
- -----------------------------------------------------------------------------------------------------------------------------
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 2004
Consolidated Financial Statements, filed with the Company's 2004 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $36,000 and $41,000 for
the First Quarter of 2005 and 2004, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%. The tax-equivalent adjustment was approximately $229,000 and
$253,000 for the First Quarter of 2005 and 2004, respectively.
5. For purposes of these computations, yields on investment securities are
computed as interest income divided by the average amortized cost of the
investments.
- --------------------------------------------------------------------------------
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between
periods due to changes in volume and interest rates. That portion of the change
in interest attributable to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of the
change in each.
-15-
First Quarter
2005 Over 2004
-------------------------------
(In Thousands) Volume Rate Total
- -------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans (1),(2):
Taxable $ 533 455 $ 988
Tax-exempt (3) (8) (15) (23)
Debt and equity securities:
Taxable 22 53 75
Tax-exempt (3) 7 (57) (50)
Federal funds sold and other
short-term investments 60 304 364
- -------------------------------------------------------------------------------
Total interest income 614 740 1,354
- -------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 51 201 252
Savings deposits (13) 46 33
Time deposits of $100 or more 1 56 57
Other time deposits (13) 46 33
Short-term borrowings -- 1 1
Subordinated debentures 24 25 49
- -------------------------------------------------------------------------------
Total interest expense 50 375 425
- -------------------------------------------------------------------------------
Net interest income $ 564 $ 365 $ 929
- -------------------------------------------------------------------------------
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 34%.
Allowance and Provision for Loan Losses
A significant determinant of the Company's operating results is the provision
for loan losses and the level of loans charged off. There was a $200,000
provision made for loan losses during the First Quarter of 2005 and the First
Quarter of 2004. As discussed below, the Company continually analyzes the
outstanding loan portfolio based on the performance, financial condition and
collateralization of the credits. There was $431,000 of net loan charge-offs in
the First Quarter of 2005 and $17,000 of net loan recoveries in the First
Quarter 2004. Of the amount charged off in 2005, $425,000 was related to one
commercial borrower that ceased operations.
The allowance for loan losses at March 31, 2005 was $5,806,000 and at December
31, 2004 was $6,037,000. The ratio of allowance for loan losses to total loans
outstanding at March 31, 2005 was 1.14% compared to 1.21% at December 31, 2004.
Nonperforming loans were $669,000 or .13% of total loans at March 31, 2005
compared to $538,000 or .11% of total loans at December 31, 2004.
At March 31, 2005, impaired loans totaled $2,839,000 which included $669,000 of
nonperforming loans and one other loan with a balance of $2,170,000 that was
renegotiated in 2003. Although current under the new terms of the contract, due
to the financial condition of the borrower there still remains risk as to the
collectibility of all amounts under the renegotiated agreement. Impaired loans
at December 31, 2004 were $2,718,000, which included $366,000 of nonaccrual
loans, $4,000 of loans contractually past due 90 days or more, $168,000 of
renegotiated loans and $2,180,000 related to the loan renegotiated in 2003
mentioned above. The allowance for loan losses on impaired loans was $1,082,000
at March 31, 2005 and there were no impaired loans without an allowance for loan
losses.
Total impaired loans decreased $778,000 from March 31, 2004 to March 31, 2005.
This decrease was primarily due to one loan that had a balance of $731,000 at
March 31, 2004 and is now current under the terms of the loan agreement. The
remaining decrease is due primarily to reductions in principal balance of
various impaired loans from March 31, 2004 to March 31, 2005. These reductions
were partially offset by two loans on nonaccrual and in the process of
liquidation at March 31, 2005. The first loan, with a balance of $294,000, is
expected to be collected once the company is fully liquidated. The second loan,
with a balance of $150,000, has a specific reserve set up for the amount of the
expected shortfall.
The allowance for loan losses has been established and is maintained to absorb
probable losses 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 based on individual review of
these loans and our estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and collection
options available to us. The general component relates to all other loans, which
are evaluated based on loan grade. The loan grade assigned to each loan is
-16-
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 derived 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.
Summary of Asset Quality
The following table presents information as of and for the three-month
periods ended March 31, 2005 and 2004 pertaining to the Company's provision for
loan losses and analysis of the allowance for loan losses.
Three Months Ended
March 31
------------------------
(Dollars in Thousands) 2005 2004
- ------------------------------------------------------------------------------------
Allowance at beginning of period $ 6,037 $ 5,506
Provision charged to expense 200 200
Loans charged off (448) (1)
Recoveries on loans previously charged off 17 4
- ------------------------------------------------------------------------------------
Net loan (charge-offs) recoveries (431) 3
Allowance at end of period $ 5,806 $ 5,709
- ------------------------------------------------------------------------------------
Loans outstanding:
Average $ 502,121 $ 463,461
March 31 508,997 460,110
Ratio of allowance for loan losses to loans outstanding:
Average 1.16% 1.23%
March 31 1.14% 1.24%
Nonperforming loans:
Nonaccrual loans $ 669 $ 1,041
Loans past due 90 days or more -- --
Renegotiated loans -- 2,410
- ------------------------------------------------------------------------------------
Total non performing loans $ 669 $ 3,451
Other impaired loans $ 2,170 $ 166
Foreclosed assets $ -- $ 1,234
- ------------------------------------------------------------------------------------
Nonperforming loans as a percent of average loans .13% .74%
- ------------------------------------------------------------------------------------
The Bank sold the two properties it had been carrying as other real estate owned
as of March 31, 2004. One property with a balance of $859,000 at March 31, 2004
was sold in December 2004 at a net loss of $59,000. The second property with a
balance of $375,000 at March 31,2004 was sold during the First Quarter of 2005
at a net gain of $38,000.
Operating Expense
Total operating expense for the First Quarter of 2005 increased $1,060,000 or 8%
to $14,542,000 compared to the First Quarter of 2004 due primarily to operating
expenses of PROFITLAB and expenses related to the 27% growth in processing
activity.
Salaries and benefits expense increased $1,187,000 or 13% to $10,344,000 in the
First Quarter of 2005 compared with the First Quarter of 2004. Salaries and
benefits expense related to PROFITLAB was $447,000 for the quarter. The
remaining increase for the First Quarter of 2005 was primarily due to an
increase in profit-sharing expense and additional salaries and benefits
necessary to support the increase in freight processing volume.
Occupancy expense for the First Quarter of 2005 increased $42,000 or 9% to
$500,000 from the First Quarter of 2004. Occupancy expense related to PROFITLAB
was $20,000 for the quarter. The remaining increase is due primarily to an
increase in rent expense from the Bank expansion into Southern California and
moving two of its existing bank branches to new locations in Missouri.
-17-
Equipment expense for the First Quarter of 2005 decreased $188,000 or 18%
compared to the First Quarter of 2004. Equipment expense related to PROFITLAB
was $21,000 for the quarter. The decrease relates primarily to software that was
capitalized in 2000 and 2001 and is now fully amortized.
Amortization of intangible assets increased $43,000 or 55% to $121,000 for the
First Quarter of 2005 compared to the same period of 2004. This increase relates
to the software acquired from the acquisition of PROFITLAB.
Other operating expense for the First Quarter of 2005 decreased $24,000, or less
than 1% compared to the First Quarter of 2004. Other operating expense related
to PROFITLAB was $193,000 for the quarter. The decrease for the quarter was
primarily from reductions in postage and other expenses in the Information
Services division related to technology initiatives put into place over the past
two years and a decrease in promotional expenses.
Income tax expense for the First Quarter of 2005 increased $567,000 or 70%
compared to the First Quarter of 2004. The effective tax rate for the First
Quarter of 2005 was 33.2% compared with 30.5% in the First Quarter of 2004. The
increase in the effective tax rate was due to the lower relative effect of
tax-exempt investment income to total income.
Financial Condition
Total assets at March 31, 2005 increased $19,949,000 or 3% from December 31,
2004. The most significant changes in asset balances during this period were
federal funds sold and other short-term investments that increased $25,480,000
or 40%, investments in debt and equity securities that decreased $13,178,000 or
17% and loans, net of the allowance for loan losses, that increased $8,780,000
or 2%. Loans increased as the Bank continues to expand its customer base.
Investments in debt and equity securities decreased as the Company sold
$12,950,000 in securities as part of the Company's ongoing asset/liability
program to manage liquidity and interest rate risk. Changes in federal funds
sold and other short-term investments reflect the Company's daily liquidity
position and is affected by the changes in the asset balances listed above and
also changes in deposit and accounts and draft payable balances detailed below.
Total liabilities were $665,807,000, an increase of $18,875,000 or 3% from
December 31, 2004. Total deposits at March 31, 2005 were $292,237,000, an
increase of $16,608,000 or 6%. Accounts and drafts payable were $360,510,000, an
increase of $2,037,000 or less than 1%. Total shareholders' equity at March 31,
2005 was $70,663,000, a $1,074,000 or 2% increase from December 31, 2004.
The increase in deposits reflects the Bank's ongoing marketing efforts to
attract deposits. Accounts and drafts payable will fluctuate from period-end to
period-end due to the payment processing cycle, which results in lower balances
on days when checks clear and higher balances on days when checks are issued.
For this reason, average balances are a more meaningful measure of accounts and
drafts payable (for average balances refer to the tables under the "Distribution
of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest
Differential" section of this report).
The increase in total shareholders' equity resulted from net income of
$2,767,000, cash received on the exercise of stock options of $98,000, a $43,000
tax benefit on stock awards, $29,000 from the amortization of stock bonus
awards, offset by dividends paid of $772,000 ($.21 per share), the repurchase of
16,545 shares of treasury stock for $586,000 and a decrease in other
comprehensive income of $505,000.
Liquidity and Capital Resources
The balances of liquid assets consists of cash and cash equivalents, which
include cash and due from banks, federal funds sold and money market funds, and
were $111,545,000 at March 31, 2005, an increase of $24,002,000 or 27% from
December 31, 2004. At March 31, 2005 these assets represented 15% 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 $63,952,000 at March
31 2005 a decrease of $13,178,000 from December 31, 2004. These assets
represented 9% of total assets at March 31, 2005. Of this total, 56% were state
and political subdivision securities, 34% were U.S. Treasury securities, 9% were
U.S. government agencies and 1% was other securities. Of the total portfolio,
33% mature in one year, 31% mature in one to five years, and 36% mature in five
or more years. During the First Quarter of 2005 the Company sold securities with
a market value of $12,950,000 and these funds were reinvested in federal funds
sold and short-term investments.
-18-
The Bank has unsecured lines at correspondent banks to purchase federal funds up
to a maximum of $29,000,000. Additionally, the Bank maintains a line of credit
at unaffiliated financial institutions in the maximum amount of $78,328,000
collateralized by U.S. Treasury and agency securities and commercial and
residential mortgage loans.
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 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 flows provided by operating activities were $2,826,000 for the First
Quarter of 2005 compared with $1,012,000 for the First Quarter of 2004. This
increase is attributable to the significant increase in net income of $920,000,
the sale of one foreclosed property and normal fluctuations in asset and
liability accounts. Net cash flows from investing and financing activities
fluctuate greatly as the Company actively manages its investment and loan
portfolios and customer activity influences changes in deposit and accounts and
drafts payable balances. Other causes for the changes in these account balances
are discussed earlier in this report. Due to the daily fluctuations in these
account balances, the analysis of changes in average balances, also discussed
earlier in this report, can be more indicative of underlying activity than the
period-end balances used in the statements of cash flows. Management anticipates
that cash and cash equivalents, maturing investments and cash from operations
will continue to be sufficient to fund the Company's operations and capital
expenditures in 2005.
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 March 31, 2005 and
December 31, 2004:
March 31, 2005 (In Thousands) Amount Ratio
- -------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $70,718 11.83%
Cass Commercial Bank 36,776 12.01
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $61,212 10.24%
Cass Commercial Bank 32,945 10.76
Tier I capital (to average assets)
Cass Information Systems, Inc. $61,212 8.39%
Cass Commercial Bank 32,945 9.97
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December 31, 2004 (In Thousands) Amount Ratio
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Total capital (to risk-weighted assets)
Cass Information Systems, Inc. $69,238 11.86%
Cass Commercial Bank 36,634 12.01
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc. $59,501 10.19%
Cass Commercial Bank 32,817 10.76
Tier I capital (to average assets)
Cass Information Systems, Inc. $59,501 7.91%
Cass Commercial Bank 32,817 9.46
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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.
Impact of New Accounting Pronouncements
In 2003, the Emerging Issues Task Force ("EITF") reached a consensus on, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"), which provides guidance to assess whether there have
been any events or economic circumstances to indicate that a security is
impaired on an other-than-temporary basis. Factors to consider include the
length of time the security has had a market value less than the cost basis, the
intent and ability of the company to hold the security for a period of time
sufficient for a recovery in value, recent events specific to the issuer or
industry and for debt securities, external credit rating and recent downgrades.
Securities on which there is an unrealized loss that is deemed to be
other-than-temporary are written down to fair value with the write-down recorded
as a realized loss. In December 2004, the Financial Accounting Standards Board
("FASB") announced that it will reconsider in its entirety all guidance on
disclosing, measuring and recognizing other-than-temporary impairments of debt
and equity securities. Until new guidance is issued, companies must continue to
comply with the disclosure requirements of EITF 03-1 and all relevant
measurement and recognition requirements in other accounting literature.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which replaced, "Accounting for Stock-Based Compensation" ("SFAS
123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123R requires the measurement of all
employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in
our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for fiscal years beginning after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer will be an
alternative to financial statement recognition. See Note 10 of this report for
the pro forma net income and net income per share amounts, for First Quarter
2005 and 2004, as if we had used a fair-value-based method similar to the
methods required under SFAS 123R to measure compensation expense for employee
stock incentive awards. Although we have not yet determined whether the adoption
of SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R
and do not expect the adoption to have a significant adverse impact on our
consolidated statements of income and net income per share.
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, 2004, the Company manages its interest rate risk through
measurement techniques that include gap analysis and a simulation model. As part
of the risk management process, asset/liability management policies are
established and monitored by management. The policy objective is to limit the
change in annualized net interest income to 15% from an immediate and sustained
parallel change in interest rates of 200 basis points. Based on the Company's
most recent evaluation, management does not believe the Company's risk position
at March 31, 2005 has changed materially from that at December 31, 2004.
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
Securities and Exchange Commission ("SEC") is recorded, processed, summarized
and reported to management, including the Chief Executive Officer and Principal
Financial Officer, within the time periods specified in the rules of the SEC.
The Company's Chief Executive and Principal 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 Securities Exchange Act of 1934, as amended)
as of March 31, 2005 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.
There were no changes in the first quarter of 2005 in the Company's internal
controls identified by the Chief Executive and Principal Financial Officers in
connection with their evaluation that 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).
-20-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending
proceedings other than ordinary routine litigation incidental to its
businesses. Management believes none of these proceedings, if determined
adversely, would have a material effect on the business or financial
condition of the Company or its subsidiaries.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company maintains a treasury stock buyback program and as of March 31,
2005 was authorized by the Board of Directors to repurchase up to 83,455
shares of its Common Stock. The Company did repurchase 16,545 shares
during the First Quarter of 2005 and did not repurchase any shares during
the First Quarter of 2004. Repurchases are made in the open market or
through negotiated transactions from time to time depending on market
conditions. For more information, please see Note 5 of this Report.
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
Exhibit 31.1 Certification Pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASS INFORMATION SYSTEMS, INC.
DATE: May 9, 2005 By /s/ Lawrence A. Collett
-----------------------------------------
Lawrence A. Collett
Chairman and Chief Executive Officer
DATE: May 9, 2005 By /s/ Eric H. Brunngraber
-----------------------------------------
Eric H. Brunngraber
Vice President-Secretary
(Principal Financial and Accounting Officer)
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