Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CASS > SEC Filings for CASS > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for CASS INFORMATION SYSTEMS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CASS INFORMATION SYSTEMS INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Breda, Netherlands and Jacksonville, Florida. The Company's services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from freight, energy, telecommunication and environmental invoices, assisting its customers' transportation, energy, environmental 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, 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, work flow, 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, energy, telecommunication and environmental 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. In 2013, transaction volume increased in the transportation, telecom and environmental sectors despite an anemic economy. That growth was partially offset by lower volumes in the energy marketplace, where recent merger and acquisition activity is affecting customer retention, even as new sales remain strong. 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 2012 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income.

On January 6, 2012, the Company acquired the assets of Waste Reduction Consultants, Inc. ("WRC"), a provider of environmental expense management services. This acquisition positions the Company to expand its portfolio of services for controlling facility-related expenses and accelerates Cass' leadership position as a back-office business processor. The results of operations for this service are included in the Information Services business segment.

Currently, management views Cass' major 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 leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.

-17-


Critical Accounting Policies

The Company has prepared the unaudited consolidated financial statements in this report in accordance with the FASB ASC. In preparing the unaudited consolidated financial statements, 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. The Company's estimates have been materially accurate in the past, and accordingly, we expect to continue to utilize the present processes.

Impairment of Assets. The Company periodically evaluates certain long-term assets such as intangible assets including goodwill, foreclosed assets 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. The Company had no impairment of goodwill and intangible assets for the three-month period ended March 31, 2013 or for the fiscal year ended December 31, 2012, and management does not anticipate any future impairment loss. Investment securities available-for-sale are measured at fair value as calculated by an independent research firm. 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 or 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 FASB ASC 740, "Income Taxes," the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 10 to the unaudited consolidated financial statements contained herein.

Pension Plans. The amounts recognized in the unaudited 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, 2012, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 10 to the consolidated financial statements filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes in the Company's long-term rate of return assumptions for the past three fiscal years ended December 31, and management believes they are not reasonably likely to change in the future. Pursuant to FASB ASC 715, "Compensation - Retirement Benefits," the Company has recognized the funded status of its defined benefit postretirement plan in its balance sheet 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 projected benefit obligation as of the date of its fiscal year-end.

-18-


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, 2013 ("First Quarter of 2013") compared to the three-month period ended March 31, 2012 ("First Quarter of 2012"). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company's 2012 Annual Report on Form 10-K. Results of operations for the First Quarter of 2013 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:

                                                            First Quarter of
                                                                                    %
(Dollars in thousands except per share data)       2013             2012         Change
Net income                                       $   6,032       $   5,908         2.1 %
Diluted earnings per share                       $     .52       $     .51         2.0 %
Return on average assets                              1.86 %          1.79 %           -
Return on average equity                             14.06 %         14.69 %           -

Fee Revenue and Other Income

The Company's fee revenue is derived mainly from transportation and facility
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, fee revenue and other income were as follows:

                                                           First Quarter of
                                                                                     %
(In thousands)                                    2013              2012          Change
Transportation invoice transaction volume             7,344             6,873      6.9 %
Transportation invoice dollar volume          $   5,415,365     $   5,382,091      0.6 %
Expense management transaction volume*                4,618             4,577      0.9 %
Expense management dollar volume*             $   2,640,243     $   2,743,528     (3.8 %)
Payment and processing fees                   $      16,576     $      16,487      0.5 %


____________________

*Includes Energy, Telecom and Environmental

First Quarter of 2013 compared to First Quarter of 2012:

Transportation transaction volume was up 6.9% and expense management transaction volume was up 0.9%, primarily in the telecom and environmental sectors. Transportation dollar volumes were up 0.6%, while expense management dollar volumes were down 3.8%, primarily due to the energy marketplace, where recent merger and acquisition activity is affecting customer retention, even as new sales remain strong.

There were $1,453,000 gains on sales of securities in the First Quarter of 2013, compared to $966,000 in the First Quarter of 2012.

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:

                                                         First Quarter of
                                                                                      %
(In thousands)                                2013                  2012           Change
Average earnings assets                  $    1,165,993       $    1,193,752       (2.3 %)
Average interest-bearing liabilities     $      404,988       $      402,859        .53 %
Net interest income*                     $       11,378       $       12,102       (6.0 %)
Net interest margin*                               3.96 %               4.08 %
Yield on earning assets*                           4.20 %               4.36 %
Rate on interest-bearing liabilities                .69 %                .84 %


____________________

*Presented on a tax-equivalent basis assuming a tax rate of 35%.

-19-


First Quarter of 2013 compared to First Quarter of 2012:

First Quarter of 2013 average earning assets decreased $27,759,000, or 2.3%, 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 2013 as the general level of interest rates remained low.

Total average loans were approximately the same for the First Quarter of 2013 as compared to the First Quarter of 2012. Average investment securities increased $13,244,000, or 4.51%, to $306,597,000.

Total average interest-bearing deposits for the First Quarter of 2013 increased $2,129,000, or 0.53%, to $404,988,000 compared to the First Quarter of 2012. Average accounts and drafts payable decreased $33,101,000, or 5.4%, due to the decline in the expense management dollar volume.

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 tables show 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 2013                         First Quarter of 2012
                                                          Interest                                    Interest
                                         Average          Income/       Yield/         Average         Income/      Yield/
(Dollars in thousands)                   Balance          Expense        Rate          Balance         Expense       Rate
Assets1
Earning assets
Loans2, 3:
    Taxable                          $     677,048       $    8,414      5.04 %     $     677,183     $   8,939      5.31 %
    Tax-exempt4                                629                1       .64                 707             1       .57
Investment securities5:
    Taxable                                  1,030                1       .39                 981             6      2.46
    Tax-exempt4                            298,825            3,542      4.81             289,122         3,861      5.37
Certificates of deposit                      6,742               10       .60               3,250             4       .50
Interest-bearing deposits in
    other financial institutions            84,747               69       .33             116,553            87       .30
Federal funds sold and other
    short-term investments                  96,972               28       .12             105,956            42       .16
Total earning assets                     1,165,993           12,065      4.20           1,193,752        12,940      4.36
Non-earning assets
    Cash and due from banks                 12,350                                         12,224
    Premise and equipment, net              11,535                                          9,539
    Bank-owned life insurance               14,959                                         14,426
    Goodwill and other
        intangibles                         15,288                                         13,187
    Other assets                           107,142                                         95,990
    Allowance for loan losses              (12,058 )                                      (12,964 )
Total assets                         $   1,315,209                                  $   1,326,154
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
        deposits                     $     274,445       $      411       .61 %     $     254,042     $     444       .70 %
    Savings deposits                        18,630               29       .63              22,566            39       .70
    Time deposits >= $100                   34,903               95      1.10              43,868           137      1.26
    Other time deposits                     77,010              152       .80              82,383           218      1.06
Total interest-bearing deposits            404,988              687       .69             402,859           838       .84
Non-interest bearing liabilities
    Demand deposits                        136,078                                        137,034
    Accounts and drafts payable            575,381                                        608,482
    Other liabilities                       24,734                                         16,027
Total liabilities                        1,141,181                                      1,164,402
Shareholders' equity                       174,028                                        161,752
Total liabilities and
    shareholders' equity             $   1,315,209                                  $   1,326,154
Net interest income                                      $   11,378                                   $  12,102
Net interest margin                                                      3.96 %                                      4.08 %
Interest spread                                                          3.51                                        3.52


____________________

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 2012 consolidated financial statements, filed with the Company's 2012 Annual Report on Form 10-K.
3. Interest income on loans includes net loan fees of $65,000 and $70,000 for the First Quarter of 2013 and 2012, respectively.
4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $1,209,000 and $1,351,000 for the First Quarter of 2013 and 2012, 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.

-20-


Analysis of Net Interest Income Changes

The following tables present 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 2013 Over
                                                                           First Quarter of 2012
(In thousands)                                                     Volume          Rate          Total
Increase (decrease) in interest income:
    Loans1, 2:
        Taxable                                                   $    (2 )     $   (523 )     $   (525 )
        Tax-exempt3                                                     -              -              -
    Investment securities:
        Taxable                                                         -             (5 )           (5 )
        Tax-exempt3                                                   117           (436 )         (319 )
    Certificates of deposit                                             5              1              6
    Interest-bearing deposits in other financial institutions         (26 )            8            (18 )
    Federal funds sold and other short-term investments                (3 )          (11 )          (14 )
Total interest income                                                  91           (966 )         (875 )
Interest expense on:
    Interest-bearing demand deposits                                   32            (65 )          (33 )
    Savings deposits                                                   (7 )           (3 )          (10 )
    Time deposits of >=$100                                           (26 )          (16 )          (42 )
    Other time deposits                                               (14 )          (52 )          (66 )
Total interest expense                                                (15 )         (136 )         (151 )
Net interest income                                               $   106       $   (830 )     $   (724 )


____________________

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%.

Provision and Allowance for Loan Losses

A significant determinant of the Company's operating results is the provision for loan losses. Provision for loan losses during both the First Quarter of 2013 and the First Quarter of 2012, was $200,000. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. There were net loan charge-offs of $1,525,000 in the First Quarter of 2013, compared to $207,000 for the same period in 2012.

The allowance for loan losses at March 31, 2013 was $11,032,000 and at December 31, 2012 was $12,357,000. The ratio of allowance for loan losses to total loans outstanding at March 31, 2013 was 1.62% compared to 1.80% at December 31, 2012. Nonperforming loans were $908,000, or .13%, of total loans at March 31, 2013 compared to $6,572,000, or .96%, of total loans at December 31, 2012. These loans, which are also considered impaired, consisted of five nonaccrual loans at March 31, 2013. Total nonaccrual loans decreased $6,721,000 from March 31, 2013 to March 31, 2013, primarily due to the payment of $4,884,000 received on one loan.

-21-


In addition to the loans discussed above, at March 31, 2013, loans totaling $14,831,000 not included in the table below were identified by management as subject to special monitoring. These loans possess some credit deficiency or potential weakness which requires a high level of management attention.

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 allowances on commercial, commercial real estate, and construction loans based on individual review of these loans and an estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and collection options available. The general component relates to all other loans, which are evaluated based on loan grade. The loan grade assigned to each loan is typically evaluated on an annual basis, unless circumstances require interim evaluation. The Company assigns an allowance amount consistent with each loan's rating category. The allowance 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 allowance 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 in 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 related balance. 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

. . .
  Add CASS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CASS - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.