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CASS > SEC Filings for CASS > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for CASS INFORMATION SYSTEMS INC


1-Nov-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, Jacksonville, Florida, and Breda, Netherlands. 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 (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, 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 hampered by flat 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., 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 nine-month period ended September 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 determined 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 September 30, 2013 ("Third Quarter of 2013") compared to the three-month period ended September 30, 2012 ("Third Quarter of 2012") and the nine-month period ended September 30, 2013 ("Nine Months Ended 2013") compared to the nine-month period ended September 30, 2012 ("Nine Months Ended 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 Third 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:

                                                  Third Quarter of                                Nine Months Ended
(Dollars in thousands except per                                          %                                                 %
share data)                              2013             2012          Change          2013              2012           Change
Net income                           $    6,138       $    6,092          .76 %     $    18,243       $    17,962          1.56 %
Diluted earnings per share           $      .53       $      .53            -       $      1.57       $      1.56           .64 %
Return on average assets                   1.79 %           1.76 %          -              1.82 %            1.79 %           -
Return on average equity                  14.09 %          14.29 %          -             13.98 %           14.50 %           -

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:

                                                     Third Quarter of                                  Nine Months Ended
                                                                              %                                                   %
(In thousands)                             2013              2012           Change           2013               2012            Change
Transportation invoice transaction
    volume                                     8,389             7,302       14.89 %             23,668             21,470       10.24 %
Transportation invoice dollar
    volume                            $    6,113,332    $    5,599,551        9.18 %    $    17,398,391    $    16,647,242        4.51 %
Expense management transaction
volume*                                        4,978             4,533        9.82 %             14,396             13,666        5.34 %
Expense management dollar
volume                                $    3,213,889    $    2,954,816        8.77 %    $     8,616,645    $     8,311,803        3.67 %
Payment and processing fees           $       18,398    $       16,600       10.83 %    $        52,422    $        49,712        5.45 %

* Includes Energy, Telecom and Environmental

Third Quarter of 2013 compared to Third Quarter of 2012:

Transportation transaction volume was up 14.89% and expense management transaction volume was up 9.82%, primarily in the telecom and environmental sectors. Transportation dollar volume was up 9.18% and expense management dollar volume was up 8.77%.

Bank service fees were approximately the same. There were $866,000 gains on sales of securities in the Third Quarter of 2013, compared to $267,000 in the Third Quarter of 2012.

Nine Months Ended 2013 compared to Nine Months Ended 2012:

Transportation and expense management transaction volumes were up 10.24% and 5.34%, respectively. Transportation dollar volume was up 4.51%. Expense management dollar volume was up 3.67%.

Bank service fees were approximately the same. There were $4,003,000 gains on sales of securities in the Nine Months Ended 2013, compared to $2,401,000 in the Nine Months Ended 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:

                                                        Third Quarter of                                     Nine Months Ended
                                                                                  %                                                     %
(In thousands)                             2013               2012              Change            2013               2012            Change
Average earnings assets                $   1,210,560      $   1,229,687          (1.56 )%    $   1,184,662      $   1,199,950         (1.27 )%
Average interest-bearing
    liabilities                              416,288            406,604           2.38 %           408,385            400,533          1.96 %
Net interest income*                          10,519             11,922         (11.77 )%           32,959             36,111         (8.73 )%
Net interest margin*                            3.45 %             3.86 %            -                3.72 %             4.02 %           -
Yield on earning assets*                        3.68 %             4.11 %            -                3.96 %             4.29 %           -
Rate on interest-bearing liabilities             .69 %              .77 %            -                 .69 %              .79 %           -

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

Third Quarter of 2013 compared to Third Quarter of 2012:

Third Quarter of 2013 average earning assets decreased $19,127,000, or less than 2%, 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 $35,644,000, or 5.25%, for the Third Quarter of 2013 as compared to the Third Quarter of 2012 due to continuing competition from other lenders. Average investment securities decreased $28,001,000, or 9.01%, for the Third Quarter of 2013.

Total average interest-bearing deposits for the Third Quarter of 2013 increased $9,684,000, or 2.38%, compared to the Third Quarter of 2012. Average accounts and drafts payable decreased $28,925,000, or 4.52%, for the Third Quarter of 2013.

Nine Months Ended 2013 compared to Nine Months Ended 2012:

Nine Months Ended 2013 average earning assets decreased $15,288,000, or 1.27%, 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 $19,548,000, or 2.85%, for the Nine Months Ended 2013 as compared to the Nine Months Ended 2012. This decrease was attributable to the intense competition from other lenders. Average investment securities decreased $11,660,000, or 3.92%, for the Nine Months Ended 2013 as the Company took advantage of market activity to realize investment gains.

Total average interest-bearing deposits for Nine Months Ended 2013 increased $7,852,000, or 1.96%, compared to the Nine Months Ended 2012. Average accounts and drafts payable decreased $26,443,000, or 4.27%, for the Nine Months Ended 2013.

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.

-20-


                                                 Third Quarter of 2013                              Third 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                          $      642,809       $     7,764        4.79 %     $      678,377       $     8,819        5.17 %
    Tax-exempt4                                 590                 2        1.34                  666                 1         .60
Investment securities5:
    Taxable                                   1,085                 -           -                1,030                 1         .39
    Tax-exempt4                             281,829             3,309        4.66              309,885             3,746        4.81
Certificates of deposit                       4,246                 5         .47               10,161                15         .59
Interest-bearing deposits in
    other financial institutions            138,228               113         .32              129,890               100         .31
Federal funds sold and other
    short-term investments                  141,773                48         .13               99,678                25         .10
Total earning assets                      1,210,560            11,241        3.68            1,229,687            12,707        4.11
Non-earning assets
    Cash and due from banks                  13,269                                             12,597
    Premises and equipment, net              12,490                                              9,444
    Bank-owned life insurance                15,226                                             14,688
    Goodwill and other
       intangibles                           15,004                                             15,582
    Other assets                            108,754                                            104,588
    Allowance for loan losses               (11,603 )                                          (12,586 )
Total assets                         $    1,363,700                                     $    1,374,000
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
       deposits                      $      287,755       $       448         .62 %     $      256,390       $       444         .69 %
    Savings deposits                         22,343                38         .67               26,018                46         .70
    Time deposits >= $100                    32,879                87        1.05               38,882                99        1.01
    Other time deposits                      73,311               149         .81               85,314               196         .91
Total interest-bearing deposits             416,288               722         .69              406,604               785         .77
Non-interest bearing liabilities
    Demand deposits                         137,493                                            138,808
    Accounts and drafts payable             610,542                                            639,467
    Other liabilities                        26,596                                             19,496
Total liabilities                         1,190,919                                          1,204,375
Shareholders' equity                        172,781                                            169,625
Total liabilities and
    shareholders' equity             $    1,363,700                                     $    1,374,000
Net interest income                                       $    10,519                                        $    11,922
Net interest margin                                                          3.45 %                                             3.86 %
Interest spread                                                              2.99                                               3.34

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 $70,000 for the Third 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 $1,159,000 and $1,312,000 for the Third 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-


                                                 Nine Months Ended 2013                             Nine Months Ended 2012
                                                           Interest                                           Interest
                                         Average            Income/        Yield/           Average            Income/        Yield/
(Dollars in thousands)                   Balance            Expense         Rate            Balance            Expense         Rate
Assets1
Earning assets
Loans2, 3:
    Taxable                          $      665,041       $    24,521        4.93 %     $      684,512       $    26,719        5.21 %
    Tax-exempt4                                 609                 4         .88                  686                 4         .78
Investment securities5:
    Taxable                                   1,062                11        1.38                1,009                16        2.12
    Tax-exempt4                             285,042            10,124        4.75              296,755            11,366        5.12
Certificates of deposit                       5,699                23         .54                5,875                23         .52
Interest-bearing deposits in
    other financial institutions            106,398               266         .33              117,319               272         .31
Federal funds sold and other
    short-term investments                  120,811               113         .13               93,794                94         .13
Total earning assets                      1,184,662            35,062        3.96            1,199,950            38,494        4.29
Non-earning assets
    Cash and due from banks                  12,676                                             12,361
    Premises and equipment, net              12,020                                              9,472
    Bank-owned life insurance                15,093                                             14,558
    Goodwill and other
       intangibles                           15,143                                             14,814
    Other assets                            108,833                                            101,480
    Allowance for loan losses               (11,569 )                                          (12,841 )
Total assets                         $    1,336,858                                     $    1,339,794
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
       deposits                      $      278,746       $     1,282         .61 %     $      252,938       $     1,293         .68 %
    Savings deposits                         20,038                99         .66               23,456               122         .69
. . .
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