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CASS > SEC Filings for CASS > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for CASS INFORMATION SYSTEMS INC

Form 10-Q for CASS INFORMATION SYSTEMS INC


2-Aug-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 six-month period ended June 30, 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.

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, 2013 ("Second Quarter of 2013") compared to the three-month period ended June 30, 2012 ("Second Quarter of 2012") and the six-month period ended June 30, 2013 ("First Half of 2013") compared to the six-month period ended June 30, 2012 ("First Half 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 Second Quarter of 2013 are not necessarily indicative of the results to be attained for any other period.

-18-


Net Income

The following table summarizes the Company's operating results:

                                              Second Quarter of                                  First Half of
(Dollars in thousands except per                                       %                                                 %
share data)                          2013             2012          Change           2013              2012           Change
Net income                       $    6,073       $    5,962           1.9 %     $    12,105       $    11,870           2.0 %
Diluted earnings per share       $      .52       $      .52             -       $      1.04       $      1.03           1.0 %
Return on average assets               1.83 %           1.82 %           -              1.84 %            1.80 %           -
Return on average equity              13.81 %          14.55 %           -             13.93 %           14.62 %           -

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:

                                                  Second Quarter of                                      First Half of
                                                                             %                                                     %
(In thousands)                          2013               2012           Change            2013                2012            Change
Transportation invoice transaction
    volume                                  7,935              7,295         8.8 %              15,279              14,168         7.8 %
Transportation invoice dollar
    volume                         $    5,869,694     $    5,665,600         3.6 %     $    11,285,059     $    11,047,691         2.1 %
Expense management transaction
    volume*                                 4,800              4,556         5.4 %               9,418               9,133         3.1 %
Expense management dollar
    volume                         $    2,762,513     $    2,613,459         5.7 %     $     5,402,756     $     5,356,987          .9 %
Payment and processing fees        $       17,448     $       16,625         5.0 %     $        34,024     $        33,112         2.8 %

* Includes Energy, Telecom and Environmental

Second Quarter of 2013 compared to Second Quarter of 2012:

Transportation transaction volume was up 8.8% and expense management transaction volume was up 5.4%, primarily in the telecom and environmental sectors. Transportation dollar volumes were up 3.6% and expense management dollar volumes were up 5.7%.

Bank service fees were approximately the same. There were $1,684,000 gains on sales of securities in the Second Quarter of 2013, compared to $1,168,000 in the Second Quarter of 2012.

First Half of 2013 compared to First Half of 2012:

Transportation and expense management transaction volumes were up 7.8% and 3.1%, respectively. Transportation dollar volumes were up 2.1%. Expense management dollar volumes were up .9%.

There were $3,137,000 gains on sales of securities in the First Half of 2013, compared to $2,134,000 in the First Half of 2012.

-19-


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:

                                                   Second Quarter of                                  First Half of
                                                                             %                                               %
(In thousands)                            2013              2012          Change           2013             2012           Change
Average earnings assets              $  1,176,943      $  1,176,084          .07 %    $  1,171,498     $  1,184,918         (1.13 )%
Average interest-bearing
    liabilities                           403,756           392,070         2.98 %         404,369          397,465          1.74 %
Net interest income*                       11,062            12,087        (8.48 )%         22,440           24,189         (7.23 )%
Net interest margin*                         3.77 %            4.13 %          -              3.86 %           4.11 %           -
Yield on earning assets*                     4.01 %            4.39 %          -              4.10 %           4.38 %           -
Rate on interest-bearing liabilities          .69 %             .78 %          -               .69 %            .81 %           -

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

Second Quarter of 2013 compared to Second Quarter of 2012:

Second Quarter of 2013 average earning assets increased $859,000, or less than 1%, 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 remains low and the impact becomes more pronounced as longer-term, higher-yielding assets re-price, mature or are sold.

Total average loans decreased $22,479,000, or 3.22%, for the Second Quarter of 2013 as compared to the Second Quarter of 2012 due to continuing competition from other lenders. Average investment securities decreased $16,398,000, or 5.61%.

Total average interest-bearing deposits for the Second Quarter of 2013 increased $11,686,000, or 2.98%, compared to the Second Quarter of 2012. Average accounts and drafts payable decreased $17,469,000, or 2.86%, due to the decline in the dollar volume.

First Half of 2013 compared to First Half of 2012:

First Half of 2013 average earning assets decreased $13,420,000, or 1.13%, compared to the same period in the prior year (see following discussion). 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 decreased $11,350,000 for the First Half of 2013 as compared to the First Half of 2012. This decrease was attributable to the intense competition from other lenders. Average investment securities decreased $3,390,000, or 1.16%, as the Company took advantage of market activity to realize investment gains.

Total average interest-bearing deposits for the First Half of 2013 increased $6,904,000, or 1.74%, to $404,369,000 compared to the First Half of 2012. Average accounts and drafts payable decreased $25,238,000, or 4.14%, to $583,941,000.

For more information on the changes in net interest income, please refer to the tables that follow.

-20-


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.

                                                 Second Quarter of 2013                              Second 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                          $      675,641       $     8,343         4.95 %     $      698,046       $     8,960         5.16 %
    Tax-exempt4                                 610                 1          .66                  684                 2         1.18
Investment securities5:
    Taxable                                   1,070                10         3.75                1,015                 9         3.57
    Tax-exempt4                             274,659             3,273         4.78              291,112             3,759         5.19
Certificates of deposit                       6,135                 8          .52                4,169                 5          .48
Interest-bearing deposits in
    other financial institutions             95,631                84          .35              105,375                85          .32
Federal funds sold and other
    short-term investments                  123,197                37          .12               75,683                27          .14
Total earning assets                      1,176,943            11,756         4.01            1,176,084            12,847         4.39
Non-earning assets
    Cash and due from banks                  12,398                                              12,260
    Premise and equipment, net               12,027                                               9,433
    Bank-owned life insurance                15,090                                              14,560
    Goodwill and other
        intangibles                          15,140                                              15,664
    Other assets                            110,587                                             103,828
    Allowance for loan losses               (11,052 )                                           (12,976 )
Total assets                         $    1,331,133                                      $    1,318,853
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
        deposits                     $      273,892       $       423          .62 %     $      248,343       $       405          .66 %
    Savings deposits                         19,100                32          .67               21,757                37          .68
    Time deposits >= $100                    34,151                87         1.02               41,032               121         1.19
    Other time deposits                      76,612               152          .80               80,938               197          .98
Short term borrowings                             1                 -            -                    -                 -            -
Total interest-bearing deposits             403,756               694          .69              392,070               760          .78
Non-interest bearing liabilities
    Demand deposits                         132,434                                             132,431
    Accounts and drafts payable             592,407                                             609,876
    Other liabilities                        26,070                                              19,623
Total liabilities                         1,154,667                                           1,154,000
Shareholders' equity                        176,466                                             164,853
Total liabilities and
    shareholders' equity           $      1,331,133                                      $    1,318,853
Net interest income                                       $    11,062                                         $    12,087
Net interest margin                                                           3.77 %                                              4.13 %
Interest spread                                                               3.32                                                3.61

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 $63,000 and $79,000 for the Second 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 $1,133,000 and $1,317,000 for the Second 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.

-21-


                                               First Half of 2013                                  First Half 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                      $      676,341       $    16,757         5.00 %     $      687,614       $    17,899         5.23 %
    Tax-exempt4                             619                 2          .65                  696                 3          .87
Investment securities5:
    Taxable                               1,050                11         2.11                  998                15         3.02
    Tax-exempt4                         286,675             6,815         4.79              290,117             7,620         5.28
Certificates of deposit                   6,437                18          .56                3,709                 9          .49
Interest-bearing deposits in
    other financial institutions         90,219               153          .34              110,964               172          .31
Federal funds sold and other
    short-term investments              110,157                65          .12               90,820                69          .15
Total earning assets                  1,171,498            23,821         4.10            1,184,918            25,787         4.38
Non-earning assets
    Cash and due from banks              12,374                                              12,242
    Premise and equipment, net           11,782                                               9,486
    Bank-owned life insurance            15,025                                              14,493
    Goodwill and other
        intangibles                      15,214                                              14,425
    Other assets                        108,874                                              99,909
    Allowance for loan losses           (11,552 )                                           (12,970 )
Total assets                     $    1,323,215                                      $    1,322,503
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
        deposits                 $      274,167       $       834          .61 %     $      251,192       $       849          .68 %
    Savings deposits                     18,866                61          .65               22,162                76          .69
    Time deposits >= $100                34,525               182         1.06               42,450               258         1.22
. . .
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