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CASS > SEC Filings for CASS > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for CASS INFORMATION SYSTEMS INC

Form 10-K for CASS INFORMATION SYSTEMS INC


11-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information about the financial condition and results of operations of the Company for the years ended December 31, 2013, 2012 and 2011. All share and per share data have been restated to give effect to the 10% stock dividend issued on December 14, 2012. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and accompanying notes and other selected financial data presented elsewhere in this report.

Executive 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, 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. 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," 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 new service are included in the Information Services business segment.

In 2013, total fee revenue and other income increased $5,434,000, or 8%, net interest income after provision for loan losses decreased $2,140,000, or 5%, and total operating expenses increased $3,753,000, or 5%. These results were driven by a 4,330,000, or 9%, increase in items processed and $1,927,296,000, or 6%, increase in dollars processed in 2013. Gains on sales of investments securities were up significantly, by $1,389,000, or 53%, as the Company took advantage of market gains. The asset quality of the Company's loans and investments as of December 31, 2013 remained strong.

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.

Impact of New and Not Yet Adopted Accounting Pronouncements

The new accounting pronouncements are not applicable to the Company and/or do not materially impact the Company.

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the FASB Accounting Standards Codification ("ASC"). In preparing the 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 the Company's results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.


Investment in Debt Securities. The Company classifies its debt marketable securities as available-for-sale. Securities classified as available-for-sale are carried at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and reported in accumulated other comprehensive income, a component of shareholders' equity. A decline in the fair value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. To determine whether impairment is other than temporary, the Company considers whether it is more likely than not that the Company will not be required to sell prior to recovery of the amortized cost basis. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee.

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, the Company expects 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 fiscal years ended December 31, 2013, 2012, and 2011 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 13 to the consolidated financial statements contained herein.

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, 2013, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Item 8, Note 10 to the consolidated financial statements. 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," ("ASC 715") 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.

Summary of Results

                                                      For the Years Ended December 31,                            % Change
(In thousands except per share data)            2013                2012                2011           2013 v. 2012      2012 v. 2011
Total processing volume                           51,397              47,067              45,426               9.2 %             3.6 %
Total processing dollars                   $  35,089,708      $   33,162,412      $   31,899,494               5.8               4.0
Payment and processing fees                $      70,805      $       66,695      $       60,688               6.2               9.9
Net interest income after provision for
loan losses                                $      38,245      $       40,385      $       43,711              (5.3 )            (7.6 )
Total net revenue                          $     114,817      $      111,523      $      106,535               3.0               4.7
Average earning assets                     $   1,198,710      $    1,201,846      $    1,188,283               (.3 )             1.1
Net interest margin*                                3.63 %              4.00 %              4.31 %
Net income                                 $      23,497      $       23,303      $       23,009                .8               1.3
Diluted earnings per share                 $        2.02      $         2.02      $         2.01                 -                .5
Return on average assets                            1.74 %              1.73 %              1.77 %
Return on average equity                           13.39 %             13.88 %             15.17 %

* Presented on a tax-equivalent basis


The results of 2013 compared to 2012 include the following significant items:

Payment and processing fee revenue increased as the number of transactions processed increased. This increase was due to increased activity from new customers.

Net interest income after provision for loan losses decreased $2,140,000, or 5%, due to the decrease in the net interest margin on a tax equivalent basis from 4.00% in 2012 to 3.63% in 2013. The decrease in average earning assets was the result of a decrease in accounts and drafts payable, partially offset by an increase in deposits.

Gains from the sale of securities were $4,024,000 in 2013 and $2,635,000 in 2012. Bank service fees were down $57,000, or 4%, and other income was approximately the same as last year. Operating expenses increased $3,753,000, or 5%, primarily in the area of salaries and benefits resulting from the increase in business volume.

The results of 2012 compared to 2011 include the following significant items:

Payment and processing fee revenue increased as the number of transactions processed increased. This increase was due to increased activity from both base and new customers.

Net interest income after provision for loan losses decreased $3,326,000, or 8%, due to the decrease in the net interest margin on a tax equivalent basis from 4.31% in 2011 to 4.00% in 2012. The growth in average earning assets was $14,000 funded by increases in deposits.

Gains from the sale of securities were $2,635,000 in 2012 and $43,000 in 2011. Bank service fees were down $82,000, or 6%, and other income was down $203,000 primarily due to a bank-owned life insurance death benefit received in 2011. Operating expenses increased $5,304,000, or 7%, primarily in the area of salaries and benefits resulting from the acquisition of WRC and increase in business volume.

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:

                                                                December 31,                                  % Change
(In thousands)                                    2013              2012              2011         2013 v. 2012      2012 v. 2011
Transportation invoice transaction volume            31,895            28,790            28,279           10.8 %             1.8 %
Transportation invoice dollar volume         $   23,506,097    $   22,263,118    $   20,599,503            5.6               8.1
Expense management transaction volume*               19,502            18,277            17,147            6.7               6.6
Expense management dollar volume*            $   11,583,611    $   10,899,294    $   11,299,991            6.3              (3.5 )
Payment and processing revenue               $       70,805    $       66,695    $       60,688            6.2               9.9
Bank service fees                            $        1,215    $        1,272    $        1,354           (4.5 )            (6.1 )
Gains on sales of investment securities      $        4,024    $        2,635    $           43           52.7                 -
Other                                        $          528    $          536    $          739            (.1 )           (27.5 )

* Includes energy, telecom and environmental

Fee revenue and other income in 2013 compared to 2012 include the following significant pre-tax components:

Transportation transaction volume increased 11% during the past year, primarily due to increased activity from new customers. Expense management transaction volume increased 7%. Overall, revenues for the year were up primarily due to new business in the transportation sector. Gains on sales of investment securities were up significantly as the Company took advantage of market gains.

Fee revenue and other income in 2012 compared to 2011 include the following significant pre-tax components:

Transportation transaction volume increased by 2%, primarily due to increased activity from both base and new customers. Expense management transaction volume increased by 7%, primarily due to the WRC acquisition. Overall, revenues for the year were up slightly under 10%. Gains on sales of investment securities were up significantly as the Company took advantage of market gains.


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 tax-equivalent
net interest income and related factors:

                                                              December 31,                                       % Change
(In thousands)                                2013                2012                2011            2013 v. 2012       2012 v. 2011
Average earning assets                   $   1,198,710       $   1,201,846       $   1,188,283               (.3 %)              1.1 %
Net interest income*                     $      43,468       $      48,086       $      51,248              (9.6 )              (6.2 )
Net interest margin*                              3.63 %              4.00 %              4.31 %
Yield on earning assets*                          3.86 %              4.26 %              4.68 %
Rate on interest bearing liabilities               .69 %               .78 %              1.07 %

* Presented on a tax-equivalent basis using a tax rate of 35% in all years.

Net interest income in 2013 compared to 2012:

The decrease in net interest income was caused by a decrease in net interest margin. The decrease in net interest margin was due to the lack of satisfactory investment alternatives in this historically low interest rate environment. More information is contained in the tables below and in Item 7A of this report.

Total average loans decreased $25,175,000, or 4%, to $659,422,000. Loans have a positive effect on interest income and the net interest margin due to the fact that loans are one of the Company's highest yielding earning assets for any given maturity.

Total average investment in securities decreased $16,927,000, or 6%. The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. All purchases were made in accordance with the Company's investment policy. Total average federal funds sold and other short-term investments increased $36,051,000, or 41%.

The Bank's total average interest-bearing deposits increased $8,712,000, or 2%, compared to the prior year. Average rates paid on interest-bearing liabilities decreased from .78% to .69% as a result of the continued low interest rate environment.

Net interest income in 2012 compared to 2011:

The decrease in net interest income was caused by a decrease in net interest margin. The decrease in net interest margin was due to the lack of satisfactory investment alternatives in this historically low interest rate environment. More information is contained in the tables below and in Item 7A of this report.

Total average loans decreased $11,387,000, or 2%, to $684,597,000. Loans have a positive effect on interest income and the net interest margin due to the fact that loans are one of the Company's highest yielding earning assets for any given maturity.

Total average investment in securities increased $44,103,000, or 17%. The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. All purchases were made in accordance with the Company's investment policy. Total average federal funds sold and other short-term investments decreased $41,405,000, or 32%.

The Bank's total average interest-bearing deposits decreased $5,001,000, or 1%, compared to the prior year. A $19,638,000, or 3%, increase in accounts and drafts payable more than offset the decrease in deposits and funded a slight increase in earning assets. Average rates paid on interest-bearing liabilities decreased from 1.07% to .78% as a result of the continued low interest rate environment.


Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and
Interest Differential

The following table contains 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:

                                                         2013                                   2012                                   2011
                                                          Interest                               Interest                               Interest
                                            Average       Income/     Yield/       Average       Income/     Yield/       Average       Income/     Yield/
(In thousands)                              Balance       Expense      Rate        Balance       Expense      Rate        Balance       Expense      Rate
Assets1
Earning assets
Loans2, 3:
    Taxable                              $   657,385     $ 32,078      4.88 %   $   683,921     $ 35,521      5.19 %   $   695,121     $ 39,504      5.68 %
    Tax-exempt4                                2,037           49      2.45             676            6       .89             863           18      2.09
Securities5:
    Taxable                                    1,068           21      1.97           1,014           25      2.47             997           37      3.71
    Tax-exempt4                              288,571       13,573      4.70         305,552       15,177      4.97         261,466       15,373      5.88
    Certificates of deposit                    5,207           27       .52           6,618           35       .53             801            4       .50
Interest-bearing deposits in other
    financial institutions                   120,672          398       .33         116,346          362       .31          99,911          347       .35
Federal funds sold and other
    short-term investments                   123,770          154       .12          87,719          108       .12         129,124          339       .26
Total earning assets                       1,198,710       46,300      3.86       1,201,846       51,234      4.26       1,188,283       55,622      4.68
Non-earning assets
    Cash and due from banks                   12,476                                 12,469                                 12,525
    Premise and equipment, net                12,258                                  9,649                                  9,790
    Bank owned life insurance                 15,160                                 14,625                                 14,299
    Goodwill and other
        intangibles                           15,078                                 14,970                                  7,688
    Other assets                             109,695                                103,630                                 81,819
    Allowance for loan losses                (11,595 )                              (12,697 )                              (12,769 )
Total assets                             $ 1,351,782                            $ 1,344,492                            $ 1,301,635
Liabilities and Shareholders' Equity1
Interest-bearing liabilities
    Interest-bearing demand
        deposits                         $   283,728     $  1,737       .61 %   $   256,332     $  1,739       .68 %   $   233,636     $  2,162       .93 %
    Savings deposits                          20,840          138       .66          24,261          169       .70          25,556          225       .88
    Time deposits >=$100                      33,703          357      1.06          39,638          456      1.15          52,123          690      1.32
    Other time deposits                       74,174          600       .81          83,502          784       .94          97,419        1,297      1.33
    Total interest-bearing deposits          412,445        2,832       .69         403,733        3,148       .78         408,734        4,374      1.07
    Short-term borrowings                          3            -         -               5            -         -               3            -         -
    Total interest bearing liabilities       412,448        2,832       .69         403,738        3,148       .78         408,737        4,374      1.07
Non-interest bearing liabilities
    Demand deposits                          137,665                                137,313                                132,603
    Accounts and drafts payable              600,611                                616,573                                596,935
. . .
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