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| CASS > SEC Filings for CASS > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Overview
Cass 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, imaging, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies 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 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 and other borrowings. The Bank also assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the willingness of large corporations to outsource 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 the loan portfolio. As lower levels of economic activity are encountered, such as those experienced in the second half of 2008 and continuing into the first quarter of 2009, the number and total dollar amount of transactions processed by the Company may decline thereby reducing fee revenue, interest income, and possibly liquidity. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," in the Company's 2008 Annual Report on Form 10K, a decline in the general level of interest rates can have a negative impact on net interest income.
Currently, management views Cass's major opportunity as the continued expansion of its payment and information processing service offering and customer base. While the current 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's 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 the lower interest rate environment has on Cass.
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. In accordance with FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 12 to the financial statements.
Pension Plans. The amounts recognized in the consolidated financial statements related to pension plans 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, 2008, 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, 2008. Pursuant to Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," 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 March 31, 2009 ("First Quarter of 2009") compared to the three-month period ended March 31, 2008 ("First Quarter of 2008"). 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 2008 Annual Report on Form 10-K. Results of operations for the First Quarter of 2009 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,
===================================
%
(Dollars in thousands, except per share data) 2009 2008 Change
====================================================================================
Net income $ 3,923 $ 4,019 (2.4) %
Diluted earnings per share $ .42 $ .43 (2.3) %
Return on average assets 1.79% 1.84% --
Return on average equity 14.35% 16.12% --
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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 2009
and First Quarter of 2008 were as follows:
Three Months Ended
March 31,
======================================
%
(In thousands) 2009 2008 Change
==================================================================================
Freight Core Invoice Transaction Volume* 5,395 5,972 (9.7)%
Freight Invoice Dollar Volume $3,386,740 $3,857,573 (12.2)%
Utility Transaction Volume 2,830 2,532 11.8%
Utility Transaction Dollar Volume $2,495,697 $2,235,890 11.6%
Payment and Processing Revenue $ 11,944 $ 12,047 (.9)%
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*Core invoices exclude parcel shipments.
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New transportation customer implementations helped off-set a 21% decline in base customer volumes as the global economic slowdown impacted the transportation industry. As a result, freight invoice volume was down 10% and dollar volume was down 12%. Utility transaction volume and dollar volume were up 12% primarily due to new business, partially offsetting the lower volumes in the freight business. The net effect was overall payment and processing fees decreased less than 1% compared to the year-earlier period.
Bank service fees increased $73,000, or 22%, due to an increase in account analysis fees. Other income decreased $98,000, or 42%, because of a decline in freight disbursement processing fees. There were gains of $119,000 on sales of securities in the First Quarter of 2009.
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 2009 and First Quarter of
2008:
Three Months Ended
March 31,
======================================
(Dollars in thousands) 2009 2008 Change
==============================================================================
Average earning assets $ 803,943 $ 800,191 .5%
Net interest income* 10,522 10,704 (1.7)%
Net interest margin* 5.31% 5.37% --
Yield on earning assets* 5.81% 5.99% --
Rate on interest bearing liabilities 1.98% 3.05% --
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First Quarter 2009 average earning assets, tax equivalent net interest income, and tax equivalent net interest margin all remained relatively consistent with levels for the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets and the rate paid on deposits both decreased in 2009 as the general level of interest rates declined.
Total average loans increased $88,041,000, or 17%, to $592,233,000 for the First Quarter of 2009 as compared to the First Quarter of 2008. This increase was attributable to the successful implementation of new marketing efforts by the Company's lending staff and the negative impact the credit crisis had on many of the Company's competitors which resulted in attractive loan growth opportunities. This increase in average loans along with the increase in average investment securities of $13,147,000, or 7%, to $191,737,000 were part of the Company's strategy to redeploy assets in the face of a declining interest rate environment. The primary offset to the previously mentioned increases was a decrease in average federal funds sold and other short-term investments of $97,436,000, or 83%, to $19,973,000 for the First Quarter of 2009 as compared to the First Quarter of 2008. In effect, this strategy of replacing short-term relatively low yielding assets with longer term relatively higher yielding assets has allowed the Company to reduce its interest rate sensitivity and protect its source of revenue from net interest income.
Total average interest-bearing deposits for the First Quarter of 2009 increased $31,052,000, or 20%, to $189,661,000 compared to the First Quarter of 2008. This increase along with increases in average short-term borrowings and average noninterest-bearing demand deposits of $10,372,000 and $6,002,000, respectively, were the primary sources utilized to offset the decline in average accounts and drafts payable of $59,475,000, or 11%, to $461,770,000 for the First Quarter of 2009 as compared to the same period last year. The decline in accounts and drafts payable was primarily the result of lower levels of freight payment processing activities as the Company's customers dealt with the global economic slowdown.
For more information on the changes in net interest income, please refer to the tables that follow.
Distribution of Assets, Liabilities and Shareholders' 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.
First Quarter of 2009 First Quarter of 2008
==================================== =====================================
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 $ 588,912 $ 8,580 5.91% $ 500,091 $ 8,228 6.60%
Tax-exempt (4) 3,321 57 6.91 4,101 72 7.04
Securities (5):
Taxable 3,559 2 .22 3,670 28 3.06
Tax-exempt (4) 188,178 2,858 6.16 174,920 2,617 6.00
Federal funds sold and other
short-term investments 19,973 16 .34 117,409 996 3.40
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Total earning assets 803,943 11,513 5.81 800,191 11,941 5.99
Nonearning assets:
Cash and due from banks 9,067 22,111
Premises and equipment, net 11,678 12,660
Bank-owned life insurance 13,168 12,591
Goodwill and other intangibles, net 8,039 8,323
Other assets 48,856 35,529
Allowance for loan losses (6,569) (6,341)
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Total assets $ 888,182 $ 885,064
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Liabilities and Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 82,085 $ 302 1.49% $ 75,927 $ 377 1.99%
Savings deposits 20,281 69 1.38 19,001 96 2.03
Time deposits of
$100 or more 41,516 287 2.80 40,298 438 4.36
Other time deposits 45,779 276 2.45 23,383 274 4.70
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Total interest-bearing deposits 189,661 934 2.00 158,609 1,185 3.00
Short-term borrowings 10,443 18 .69 71 0 0.00
Subordinated Debentures 2,991 39 5.33 3,618 52 5.76
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Total interest-bearing
liabilities 203,095 991 1.98 162,298 1,237 3.06
Noninterest-bearing liabilities:
Demand deposits 93,464 87,462
Accounts and drafts payable 461,770 521,245
Other liabilities 18,963 12,929
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Total liabilities 777,292 783,934
Shareholders' equity 110,890 101,130
Total liabilities and
shareholders' equity $ 888,182 $ 885,064
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Net interest income $ 10,522 $ 10,704
Interest spread 3.83% 2.93%
Net interest margin 5.31% 5.37%
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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 2008
consolidated financial statements, filed with the Company's 2008 Annual
Report on Form 10-K.
3. Interest income on loans includes net loan fees of $136,000 and $54,000
for the First Quarter of 2009 and 2008, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
of 35% in 2009 and 2008. The tax-equivalent adjustment was approximately
$1,020,000 and $941,000 for the First Quarter of 2009 and 2008,
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.
First Quarter of 2009
Over First Quarter of 2008
===============================
(In thousands) Volume Rate Total
===============================================================================
Increase (decrease) in interest income:
Loans (1,2):
Taxable $ 1,307 $ (955) $ 352
Tax-exempt (3) (14) (1) (15)
Securities:
Taxable (1) (25) (26)
Tax-exempt (3) 183 58 241
Federal funds sold and other
short-term investments (469) (511) (980)
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Total interest income 1,006 (1,434) (428)
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Interest expense on:
Interest-bearing demand deposits 28 (103) (75)
Savings deposits 6 (33) (27)
Time deposits of $100 or more 12 (163) (151)
Other time deposits 175 (173) 2
Short-term borrowings 0 18 18
Subordinated debentures (13) -- (13)
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Total interest expense $ 208 $ (454) $ (246)
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Net interest income $ 798 $ (980) $ (182)
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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 35% in 2009 and 2008.
Provision and Allowance for Loan Losses
A significant determinant of the Company's operating results is the provision for loan losses and the amount of loans charged off. Provisions for loan losses of $400,000 and $450,000 were recorded during the First Quarter of 2009 and the First Quarter of 2008, respectively. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. There was $220,000 of net loan charge-offs in the First Quarter of 2009 and $473,000 of net loan charge-offs in the First Quarter of 2008.
The allowance for loan losses at March 31, 2009 was $6,631,000 and at December 31, 2008 was $6,451,000. The ratio of allowance for loan losses to total loans . . .
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