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| CASS > SEC Filings for CASS > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-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 provides 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 greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances 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 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 half 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' 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.
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 and assets held for sale 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 SFAS 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 June 30, 2009 ("Second Quarter of 2009") compared to the three-month period ended June 30, 2008 ("Second Quarter of 2008") and the six-month period ended June 30, 2009 ("First Half of 2009") compared to the six-month period ended June 30, 2008 ("First Half 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 Second 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 Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
(Dollars in thousands % %
except per share data) 2009 2008 Change 2009 2008 Change
--------------------------------------------------------------------------------- -------------------------------------
Net income $ 3,661 $ 4,566 (19.8)% $ 7,584 $ 8,585 (11.7)%
Diluted earnings per share $ .39 $ .48 (18.8)% $ .81 $ .91 (11.0)%
Return on average assets 1.61% 2.05% -- 1.70% 1.94% --
Return on average equity 12.74% 17.60% -- 13.52% 16.81% --
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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 six-month
periods ended June 30, 2009 and 2008 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- --------------------------------------
% %
(In thousands) 2009 2008 Change 2009 2008 Change
------------------------------------------------------------------------------------- --------------------------------------
Freight Core Invoice Transaction Volume* 5,716 6,765 (15.5)% 11,111 12,737 (12.8)%
Freight Invoice Dollar Volume $3,391,822 $4,355,522 (22.1)% $6,778,562 $8,213,095 (17.5)%
Utility Transaction Volume 2,823 2,618 7.8% 5,653 5,150 9.8%
Utility Transaction Dollar Volume $2,263,404 $2,257,471 .3% $4,759,101 $4,493,361 5.9%
Payment and Processing Fees $ 12,036 $ 12,744 (5.6)% $ 23,980 $ 24,791 (3.3)%
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*Core invoices exclude parcel shipments.
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Second Quarter of 2009 compared to Second Quarter of 2008:
New transportation customer implementations helped offset a 22% decline in base customer volumes as the global economic slowdown impacted the transportation industry. As a result, freight invoice volume was down 16% and dollar volume was down 22%. New business helped boost utility transaction volume by 8% and dollar volume by .3% to partially offset the drop in the freight business. Overall, payment and processing fees decreased 6% compared to the year-earlier period.
Bank service fees were approximately the same in both periods. Other income decreased $77,000, or 36%. There were gains of $83,000 on sales of securities in the Second Quarter of 2009.
First Half of 2009 compared to First Half of 2008:
New transportation customers helped offset a 22% decline in base customer volumes causing freight invoice volume to decline 13% and dollar volume to decline 18% as a result of the impact of the economic recession on the transportation industry. Conversely, utility transaction volume was up 10% while dollar volume increased 6% for the First Half of 2009. The net effect was a 3% decrease in overall payment and processing fees compared to the First Half of 2008.
Bank service fees increased $69,000, or 10%, due to an increase in account analysis fees in the first quarter of 2009. Other income decreased $175,000, or 39%. There were gains of $202,000 on sales of securities in the First Half 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 three and six-month periods ended June 30,
2009 and 2008:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------- -------------------------------------------
% %
(Dollars in thousands) 2009 2008 Change 2009 2008 Change
---------------------------------------------------------------------------------- -------------------------------------------
Average earnings assets $ 831,669 $ 803,611 3.5% $ 817,884 $ 801,903 2.0%
Average interest-bearing liabilities 254,383 142,797 78.1% 228,881 152,546 50.0%
Net interest income* 10,410 11,163 (6.7)% 20,932 21,865 (4.3%)
Net interest margin* 5.02% 5.59% -- 5.16% 5.48% --
Yield on earning assets* 5.64% 5.94% -- 5.72% 5.97% --
Rate on interest bearing liabilities 2.02% 2.00% -- 2.00% 2.56% --
---------------------------------------------------------------------------------- -------------------------------------------
*Presented on a tax-equivalent basis assuming a tax rate of 35%.
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Second Quarter of 2009 compared to Second Quarter of 2008:
Second Quarter 2009 average earning assets increased 4% compared to the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets and the tax equivalent net interest margin both decreased in 2009 as the general level of interest rates declined and there was a less favorable mix of funding sources, resulting in a decrease in net interest income of 7%.
Total average loans increased $52,420,000, or 9%, to $609,826,000 for the Second Quarter of 2009 as compared to the Second 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. Average investment securities decreased $25,725,000, or 13%, to $179,578,000.
Total average interest-bearing deposits for the Second Quarter of 2009 increased $108,610,000, or 79%, to $246,734,000 compared to the Second Quarter of 2008. This increase along with increases in average short-term borrowings and average noninterest-bearing demand deposits of $3,534,000 and $9,883,000, respectively, were the primary sources utilized to offset the decline in average accounts and drafts payable of $119,073,000, or 22%, to $431,942,000 for the Second 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.
First Half of 2009 compared to First Half of 2008:
First Half 2009 average earning assets increased 2% compared to the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets, the rate paid on deposits and tax equivalent net interest margin all decreased in 2009 as the general level of interest rates declined and there was a less favorable mix of funding sources, resulting in a decrease in net interest income of 4%.
Total average loans increased $70,276,000, or 13%, to $601,078,000 for the First Half of 2009 as compared to the First Half 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 was 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 increase was a decrease in average federal funds sold and other short-term investments of $47,973,000, or 61%, to $31,182,000 for the First Half of 2009 as compared to the First Half 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 Half of 2009 increased $69,989,000, or 47%, to $218,355,000 compared to the First Half of 2008. This increase along with increases in average short-term borrowings and average noninterest-bearing demand deposits of $6,938,000 and $7,944,000, respectively, were the primary sources utilized to offset the decline in average accounts and drafts payable of $89,356,000, or 17%, to $446,774,000 for the First Half 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.
Second Quarter of 2009 Second 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 $ 606,645 $ 8,884 5.87% $ 553,453 $ 8,488 6.17%
Tax-exempt (4) 3,181 54 6.81 3,953 69 7.02
Debt and equity securities (5):
Taxable 3,489 16 1.84 2,857 22 3.10
Tax-exempt (4) 176,089 2,708 6.17 202,446 3,068 6.10
Federal funds sold and other
short-term investments 42,265 28 .27 40,902 229 2.25
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Total earning assets 831,669 11,690 5.64 803,611 11,876 5.94
Nonearning assets:
Cash and due from banks 24,747 22,579
Premises and equipment, net 11,300 12,590
Bank owned life insurance 13,303 12,726
Goodwill and other intangibles 7,969 8,251
Other assets 32,303 41,331
Allowance for loan losses (6,761) (6,210)
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Total assets $ 914,530 $ 894,878
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Liabilities And Shareholders' Equity (1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 98,379 $ 380 1.55% $ 76,792 $ 241 1.26%
Savings deposits 20,104 69 1.38 18,238 52 1.15
Time deposits of
$100 or more 41,543 276 2.66 27,899 235 3.39
Other time deposits 86,708 510 2.36 15,195 129 3.41
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Total interest-bearing deposits 246,734 1,235 2.01 138,124 657 1.91
Short-term borrowings & other 4,658 5 .43 1,124 13 4.65
Subordinated debentures 2,991 40 5.36 3,549 43 4.87
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Total interest-bearing
liabilities 254,383 1,280 2.02 142,797 713 2.00
Noninterest-bearing liabilities:
Demand deposits 93,977 84,094
Accounts and drafts payable 431,942 551,015
Other liabilities 18,965 12,648
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Total liabilities 799,267 790,554
Shareholders' equity 115,263 104,324
Total liabilities and `
shareholders' equity $ 914,530 $ 894,878
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Net interest income $ 10,410 $ 11,163
Interest spread 3.62% 3.94%
Net interest margin 5.02 5.59
===================================================================================================================================
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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 $131,000 and $64,000
for the Second Quarter of 2009 and 2008, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate
. . .
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