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| CASS > SEC Filings for CASS > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Overview
Cass Information Systems, Inc. provides payment and information processing services to large manufacturing, distribution and retail enterprises from its processing centers in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina and Wellington, Kansas. The Company's services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays utility invoices, which includes electricity, gas and telecommunications expenses and is a provider of telecom expense management solutions. Cass extracts, stores and presents information from freight, utility and telecommunication invoices, assisting its 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 Cass Commercial Bank, its St. Louis, Missouri based bank subsidiary (the "Bank"), provides banking services in the St. Louis metropolitan area Orange County, California and other selected cities in the United States. In addition to supporting the Company's payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-related ministries.
The specific payment and information processing services provided to each customer are developed individually to meet each customer's requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange ("EDI"), imaging, and web-based 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 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 paid on its deposits. The Bank also assesses fees on other services such as cash management 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. Acquisition and merger activity involving our customers, business partners, and competitors can also impact the Company. 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 the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company.
Currently, management views Cass' major opportunity as the continued expansion of its payment and information processing service offering and customer base. While the current turmoil in the credit markets and the related economic slow-down may reduce the short-term growth rate, management remains optimistic about the long-term prospects for growth. With the recent significant drop in short-term interest rates, the major challenge faced by Cass is the prudent management of earning assets and interest bearing liabilities. Management actively monitors Cass' balance sheet and has already taken a number of actions to reduce the interest rate sensitivity of its earning assets and lower the cost of its interest-bearing liabilities in an effort to mute the effect that the lower interest rate environment has on Cass.
Recent Developments
The U. S. and global economies have experienced and are experiencing significant stress and disruptions in the financial sector. In response to the financial crisis, in October 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. In addition, the U.S. Treasury announced that it has been authorized to purchase equity stakes in U. S. financial institutions. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), the U.S. Treasury will make $250 billion of capital available to U. S. financial institutions in the form of preferred stock.
Further, after receiving a recommendation from the boards of the Federal Deposit Insurance Corporation ("the FDIC") and the Federal Reserve System ("the Federal Reserve"), the U.S. Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program.
The Company is currently assessing its participation in both the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program.
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 in the past, have been consistent 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 both segments of the Company. The impact and associated risks related to these policies on the Company's business operations are discussed in the "Provision and Allowance for Loan Losses" section of this report.
Impairment of Assets. The Company periodically evaluates certain long-term assets such as intangible assets including goodwill, foreclosed assets 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 both segments of the Company and require significant management assumptions and estimates that could result in materially different results if conditions or underlying circumstances change.
Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns such as the realization of deferred tax assets, changes in tax laws or interpretations thereof. In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other taxing authorities. Effective January 1, 2007, the Company adopted FIN No. 48, "Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109." FIN No. 48 provides guidance for the recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. See Note 12 to the financial statements.
Pension Plans. The amounts recognized in the consolidated financial statements related to pension are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2007, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 12 to the consolidated financial statements filed with the Company's annual report on Form 10-K for the year ended December 31, 2007. Pursuant to Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), the Company has recognized the funded status of its defined benefit postretirement plan in its statement of financial position and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation as of the date of its fiscal year-end.
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, 2008 ("Third Quarter of 2008") compared to the three-month period ended September 30, 2007 ("Third Quarter of 2007") and the nine-month period ended September 30, 2008 ("First Nine Months of 2008") compared to the nine-month period ended September 30, 2007 ("First Nine Months of 2007"). 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 2007 annual report on Form 10-K. Results of operations for the Third Quarter of 2008 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 Nine Months Ended
September 30 September 30
------------------------------------ ----------------------------------
(Dollars in Thousands except Per Share % %
Data) 2008 2007 Change 2008 2007 Change
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Net income $ 5,228 $ 4,677 11.8% $ 13,813 $ 13,055 5.8%
Diluted earnings per share $ .56 $ .50 12.0% $ 1.47 $ 1.40 5.0%
Return on average assets 2.16% 2.04% -- 2.02% 1.98% --
Return on average equity 19.90% 20.51% -- 17.86% 19.94% --
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Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility processing
and payment 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 three and nine-month
periods ended September 30, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ ----------------------------------
% %
(In Thousands) 2008 2007 Change 2008 2007 Change
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Freight Core Invoice Transaction Volume* 6,772 5,976 13.3% 19,509 17,659 10.5%
Freight Invoice Dollar Volume $ 4,936,507 $ 3,669,117 34.5% $13,149,602 $10,764,558 22.2%
Utility Transaction Volume 2,702 2,361 14.4% 7,852 6,872 14.3%
Utility Transaction Dollar Volume $ 2,633,438 $ 2,081,529 26.5% $ 7,126,799 $ 5,687,627 25.3%
Payment and Processing Fees $ 13,116 $ 11,441 14.6% $ 37,907 $ 34,089 11.2%
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* Core invoices exclude parcel shipments.
Third Quarter of 2008 compared to Third Quarter of 2007:
Freight transaction volume and invoice dollar volume for the Third Quarter of 2008 increased compared to the same period in 2007. The increase in transaction and dollar volume was primarily due to new customers and growth in activity from existing customers. The dollar volume also increased due to higher average bills because of fuel surcharges.
Bank service fees decreased $84,000 or 20% primarily due to the elimination of correspondent banking services which was completed in the fiscal quarter ended June 30, 2008. There were gains of $209,000 on the sales of securities in the Third Quarter of 2008. Other income increased $23,000 in the Third Quarter of 2008.
First Nine Months of 2008 compared to First Nine Months of 2007:
Freight and utility transaction volume and dollar volume increased for the First Nine Months of 2008 compared to 2007 due to the same factors discussed above for the Third Quarter of 2008.
Bank service fees decreased $229,000 or 19%. This decrease was due to a penalty charged for the early withdrawal of a certificate of deposit by one large customer in the first quarter of 2007 and to the elimination of correspondent banking discussed above. There were gains of $209,000 on the sales of securities in the First Nine Months of 2008. Other income increased $26,000 in the First Nine Months of 2008.
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 three and nine-month periods ended September
30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ ----------------------------------
% %
(Dollars in Thousands) 2008 2007 Change 2008 2007 Change
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Average earnings assets $864,685 $827,757 4.5% $822,980 $799,144 3.0%
Net interest income* 11,608 11,385 2.0% 33,473 32,747 2.2%
Net interest margin* 5.34% 5.46% -- 5.43% 5.48% --
Yield on earning assets* 5.66% 6.44% -- 5.86% 6.50% --
Rate on interest bearing liabilities 1.83% 4.26% -- 2.32% 4.30% --
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* Presented on a tax-equivalent basis assuming a tax rate of 35%.
Third Quarter of 2008 compared to Third Quarter of 2007:
The increase in tax equivalent net interest income was due to an increase in average earning assets combined with a shift in the balances of earning assets from the relatively lower yielding federal funds sold and other short-term investments to longer term and relatively higher yielding loans and non-taxable state and municipal securities. Yields on earning assets and rates paid on deposit accounts both decreased as the general level of interest rates decreased.
Total average loans increased $52,917,000 or 10%, to $570,367,000. Total average investment in debt and equity securities increased $54,939,000 or 37% to $203,715,000 as the Company invested the increase in payables. Total average federal funds sold and other short-term investments decreased $70,926,000 or 44% to $90,603,000. For more information on the changes in net interest income please refer to the tables that follow.
First Nine Months of 2008 compared to First Nine Months of 2007:
The increase in tax equivalent net interest income was due to an increase in average earning assets combined with a shift in the balances of earning assets from the relatively lower yielding federal funds sold and other short-term investments to longer term and relatively higher yielding loans and non-taxable state and municipal securities. Yields on earning assets and rates paid on deposit accounts both decreased as the general level of interest rates decreased.
Total average loans increased $23,322,000 or 4% to $544,083,000. Total average investment in debt and equity securities increased $63,784,000 or 48% to $195,898,000 as the Company invested the increase in payables. Total average federal funds sold and other short-term investments decreased $63,270,000 or 43% to $82,999,000. For more information on the changes in net interest income please refer to the tables that follow.
The Company is negatively affected by decreases in the level of interest rates due to the fact that its rate-sensitive assets 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.
Third Quarter 2008 Third Quarter 2007
---------------------------------- -----------------------------------
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 $ 566,571 $ 8,721 6.12% $ 511,826 $ 9,158 7.10%
Tax-exempt (4) 3,796 66 6.92 5,624 102 7.20
Debt and equity securities (5):
Taxable 2,785 13 1.86 17,831 212 4.72
Tax-exempt (4) 200,930 3,034 6.01 130,945 1,926 5.84
Federal funds sold and other
short-term investments 90,603 466 2.05 161,529 2,030 4.99
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Total earning assets 864,685 12,300 5.66 827,755 13,428 6.44
Nonearning assets:
Cash and due from banks 23,931 23,063
Premises and equipment, net 12,368 12,937
Bank owned life insurance 12,864 12,321
Goodwill and other intangibles 8,181 8,463
Other assets 47,275 30,960
Allowance for loan losses (6,029) (6,292)
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Total assets $ 963,275 $ 909,207
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Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 78,659 $ 245 1.24% $ 67,696 $ 555 3.25%
Savings deposits 21,584 66 1.22 24,433 213 3.46
Time deposits of
$100 or more 28,399 204 2.86 65,596 857 5.18
Other time deposits 18,458 131 2.82 28,338 361 5.05
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Total interest-bearing deposits 147,100 646 1.75 186,063 1,986 4.23
Short-term borrowings & other 103 0 0.00 611 7 4.55
Subordinated debentures 3,464 46 5.28 3,700 50 5.36
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Total interest-bearing
liabilities 150,667 692 1.83 190,374 2,043 4.26
Noninterest-bearing liabilities:
Demand deposits 90,279 92,405
Accounts and drafts payable 604,491 521,989
Other liabilities 13,338 13,974
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Total liabilities 858,775 818,742
Shareholders' equity 104,500 90,465
Total liabilities and
shareholders' equity $ 963,275 $ 909,207
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Net interest income $ 11,608 $ 11,385
Interest spread 3.83% 2.18%
Net interest margin 5.34 5.46
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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 2007
Consolidated Financial Statements, filed with the Company's 2007 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $104,000 and $56,000
for the Third Quarter of 2008 and 2007, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35%. The tax-equivalent adjustment was approximately $1,085,000 and
$710,000 for the Third Quarter of 2008 and 2007, 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.
First Nine Months of 2008 First Nine Months of 2007
---------------------------------- -----------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
. . .
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