Add
CASS to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CASS > SEC Filings for CASS > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
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 and Wellington, Kansas. The Company's services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays utility invoices, which includes electricity, gas and telecommunications expenses, and is a provider of telecom expense management solutions. Cass extracts, stores and presents information from freight, utility and telecommunication invoices, assisting its customers' transportation, energy and information technology managers in making decisions that will enable them to improve operating performance. The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers. It then provides the data in a central repository for access and archiving. The data is finally transformed into information through the Company's databases that allow client interaction as required and 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, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, utility and telecommunication payment and audit. The benefits that can be achieved by outsourcing transaction processing and the management information generated by Cass' systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff and the growth and quality of the loan portfolio. As lower levels of economic activity are encountered, such as those experienced in the second half of 2008 and continuing into the first nine months of 2009, the number and total dollar amount of transactions processed by the Company may decline thereby reducing fee revenue, interest income, and possibly liquidity. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" in the Company's 2008 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income.
Currently, management views Cass' major opportunity as the continued expansion of its payment and information processing service offering and customer base. While the current economic slow-down may reduce the short-term growth rate, management remains optimistic about the long-term prospects for growth.
Critical Accounting Policies
The Company has prepared all of the consolidated financial information in this report in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). In preparing the consolidated financial statements in accordance with U.S. GAAP, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management's estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company's business operations are discussed in the "Provision and Allowance for Loan Losses" section of this report. 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 investments in private equity securities and assets held for sale for impairment. Generally, these assets are initially recorded at cost, and recognition of impairment is required when events and circumstances indicate that the carrying amounts of these assets will not be recoverable in the future. If impairment occurs, various methods of measuring impairment may be called for depending on the circumstances and type of asset, including quoted market prices, estimates based on similar assets, and estimates based on valuation techniques such as discounted projected cash flows. The Company had no impairment of goodwill and intangible assets for the nine months ended September 30, 2009 or for fiscal years ended December 31, 2008 and 2007 and management does not anticipate any future impairment loss. Investment securities available-for-sale are measured at fair value using Level 2 valuations calculated by an independent research firm. The market evaluation utilizes several sources which include "observable inputs" rather than "significant unobservable inputs." 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 ASC 740, "Income Taxes," the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 12 to the financial statements. The audit of the Company's federal consolidated tax returns conducted by the Internal Revenue Service for fiscal years 2004 and 2005 resulted in no material adjustments.
Pension Plans. The amounts recognized in the consolidated financial statements related to pension plans are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2008, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 12 to the consolidated financial statements filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2008. 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 ASC 715, "Compensation - Retirement Benefits," the Company has recognized the funded status of its defined benefit postretirement plan in its statement of financial position and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation as of the date of its fiscal year-end.
Results of Operations
The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended September 30, 2009 ("Third Quarter of 2009") compared to the three-month period ended September 30, 2008 ("Third Quarter of 2008") and the nine-month period ended September 30, 2009 ("First Nine Months of 2009") compared to the nine-month
period ended September 30, 2008 ("First Nine Months of 2008"). The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2008 Annual Report on Form 10-K. Results of operations for the Third Quarter of 2009 are not necessarily indicative of the results to be attained for any other period.
Net Income
The following table summarizes the Company's operating results:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------
% %
(In thousands except per share data) 2009 2008 Change 2009 2008 Change
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 4,318 $ 5,228 (17.4)% $ 11,902 $ 13,813 (13.8)%
Diluted earnings per share $ .46 $ .56 (17.9)% $ 1.27 $ 1.47 (13.6)%
Return on average assets 1.68% 2.16% -- 1.69% 2.02% --
Return on average equity 14.44% 19.90% -- 13.84% 17.86% --
|
Fee Revenue and Other Income
The Company's fee revenue is derived mainly from freight and utility processing
and payment fees. As the Company provides its processing and payment services,
it is compensated by service fees which are typically calculated on a per-item
basis and by the accounts and drafts payable balances generated in the payment
process which can be used to generate interest income. Processing volumes
related to fees and accounts and drafts payable for the three and nine-month
periods ended September 30, 2009 and 2008 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------
% %
(In thousands) 2009 2008 Change 2009 2008 Change
-----------------------------------------------------------------------------------------------------------------------------
Freight Core Invoice Transaction 5,962 6,772 (12.0)% 17,073 19,509 (12.5)%
Volume*
Freight Invoice Dollar Volume $ 3,573,371 $ 4,936,507 (27.6)% $10,351,933 $13,149,602 (21.3)%
Utility Transaction Volume 2,903 2,702 7.4% 8,556 7,852 9.0%
Utility Transaction Dollar Volume $ 2,546,747 $ 2,633,438 (3.3)% $ 7,305,848 $ 7,126,799 2.5%
Payment and Processing Fees $ 12,302 $ 13,116 (6.2)% $ 36,282 $ 37,907 (4.3)%
*Core invoices exclude parcel shipments.
|
Third Quarter of 2009 compared to Third Quarter of 2008:
New transportation customer implementations helped offset a 14% decline in base customer volumes as the global economic slowdown impacted the transportation industry. As a result, freight invoice volume was down 12%. New business helped boost utility transaction volume by 7% to partially offset the drop in the freight business. Overall, payment and processing fees decreased 6% compared to the year-earlier period. The 28% decline in freight invoice dollar volume is the result of both the slowdown in the transportation industry that reduced the number of invoices processed and the significant decline in energy cost that reduced the average invoice amount.
Bank service fees decreased $40,000, or 12%, due to a decline in credit card income and fees from the sale of mutual funds. Other income decreased $96,000, or 41%. There were no gains on sales of securities in the Third Quarter of 2009.
First Nine Months of 2009 compared to First Nine Months of 2008:
New transportation customers helped offset a 19% decline in base customer volumes causing freight invoice volume to decline 13% as a result of the impact of the economic recession on the transportation industry. Conversely, utility transaction volume was up 9% while dollar volume increased 3% for the First Nine Months of 2009. The net effect was a 4% decrease in overall payment and processing fees compared to the First Nine Months of 2008. The 21% decline in freight invoice dollar volume is the result of both the slowdown in the transportation industry that reduced the number of invoices processed and the significant decline in energy cost that reduced the average invoice amount.
Bank service fees increased $29,000, or 3%, due to an increase in account analysis fees in the first quarter of 2009, offsetting declines in other bank fees. Other income decreased $271,000, or 40%. There were gains of $202,000 on sales of securities in the First Nine Months of 2009.
Net Interest Income
Net interest income is the difference between interest earned on loans,
investments, and other earning assets and interest expense on deposits and other
interest-bearing liabilities. Net interest income is a significant source of the
Company's revenues. The following table summarizes the changes in net interest
income and related factors for the three and nine-month periods ended September
30, 2009 and 2008:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
% %
(In thousands) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------------------------------------------------
Average earnings assets $ 938,566 $ 864,685 8.5% $ 858,557 $ 822,980 4.3%
Average interest-bearing
liabilities 308,980 150,667 105.1% 255,875 152,247 68.1%
Net interest income* 10,652 11,608 (8.2)% 31,584 33,473 (5.6)%
Net interest margin* 4.50% 5.34% -- 4.92% 5.43% --
Yield on earning assets* 5.09% 5.66% -- 5.49% 5.86% --
Rate on interest bearing
liabilities 1.80% 1.83% -- 1.92% 2.32% --
|
*Presented on a tax-equivalent basis assuming a tax rate of 35%.
Third Quarter of 2009 compared to Third Quarter of 2008:
Third Quarter 2009 average earning assets increased approximately 9% compared to the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets and the tax equivalent net interest margin both decreased in 2009 as the general level of interest rates declined and there was a less favorable mix of funding sources, resulting in a decrease in net interest income of approximately 8%.
Total average loans increased $50,055,000, or 9%, to $620,422,000 for the Third Quarter of 2009 as compared to the Third Quarter of 2008. This increase was attributable to the successful implementation of new marketing efforts by the Company's lending staff and the negative impact the credit crisis had on many of the Company's competitors which resulted in attractive loan growth opportunities. Average investment securities decreased $15,978,000, or 8%, to $187,737,000.
Total average interest-bearing deposits for the Third Quarter of 2009 increased $159,892,000, or 109%, to $306,992,000 compared to the Third Quarter of 2008. This increase along with an increase in average noninterest-bearing demand deposits of $16,406,000 were the primary sources utilized to offset the decline in average accounts and drafts payable of $139,558,000, or 23%, to $464,933,000 for the Third Quarter of 2009 as compared to the same period last year. The decline in accounts and drafts payable was primarily the result of lower levels of freight payment processing activities as the Company's customers dealt with the global economic slowdown.
First Nine Months of 2009 compared to First Nine Months of 2008:
First Nine Months of 2009 average earning assets increased approximately 4% compared to the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets, the rate paid on deposits and tax equivalent net interest margin all decreased in 2009 as the general level of interest rates declined and there was a less favorable mix of funding sources, resulting in a decrease in net interest income of approximately 6%.
Total average loans increased $63,514,000, or 12%, to $607,597,000 for the First Nine Months of 2009 as compared to the First Nine Months of 2008. This increase was attributable to the successful implementation of new marketing efforts by the Company's lending staff and the negative impact the credit crisis had on many of the Company's competitors which resulted in attractive loan growth opportunities. This increase in average loans was part of the Company's strategy to redeploy assets in the face of a declining interest rate environment. Partially offsetting the previously mentioned increase was a decrease in average federal funds sold and other short-term investments of $18,374,000, or 22%, to $64,625,000 for the First Nine Months of 2009 as compared to the First Nine Months of 2008.
Total average interest-bearing deposits for the First Nine Months of 2009 increased $100,285,000, or 68%, to $248,226,000 compared to the First Nine Months of 2008. This increase along with increases in average short-term
borrowings and average noninterest-bearing demand deposits of $4,569,000 and $10,800,000, respectively, were the primary sources utilized to offset the decline in average accounts and drafts payable of $106,211,000, or 19%, to $452,898,000 for the First Nine Months of 2009 as compared to the same period last year. The decline in accounts and drafts payable was primarily the result of lower levels of freight payment processing activities as the Company's customers dealt with the global economic slowdown.
For more information on the changes in net interest income, please refer to the tables that follow.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential
The following table shows the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.
Third Quarter of 2009 Third Quarter of 2008
------------------------------------ -------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance % Expense Rate Balance % Expense Rate
-----------------------------------------------------------------------------------------------------------------------------
Assets(1)
Earning assets
Loans(2,) (3):
Taxable $ 617,368 $ 9,093 5.84% $ 566,571 $ 8,721 6.12%
Tax-exempt(4) 3,054 49 6.37 3,796 66 6.92
Debt and equity securities(5):
Taxable 3,425 15 1.74 2,785 13 1.86
Tax-exempt(4) 184,312 2,837 6.11 200,930 3,034 6.01
Federal funds sold and other
short-term investments 130,407 57 .17 90,603 466 2.05
-----------------------------------------------------------------------------------------------------------------------------
Total earning assets 938,566 12,051 5.09 864,685 12,300 5.66
Non-earning assets
Cash and due from banks 10,028 23,931
Premise and equipment, net 10,996 12,368
Bank owned life insurance 13,446 12,864
Goodwill and other
intangibles 7,901 8,181
Other assets 45,167 47,275
Allowance for loan losses (7,075) (6,029)
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,019,029 $ 963,275
-----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity(1)
Interest-bearing liabilities
Interest-bearing demand
deposits $ 141,077 $ 499 1.40% $ 78,659 $ 245 1.24%
Savings deposits 30,356 104 1.36 21,584 66 1.22
Time deposits >=$100 46,503 264 2.25 28,399 204 2.86
Other time deposits 89,056 505 2.25 18,458 131 2.82
-----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 306,992 1,372 1.77 147,100 646 1.75
Short-term borrowings 13 -- -- 103 -- --
Subordinated debentures 1,975 27 5.42 3,464 46 5.28
-----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 308,980 1,399 1.80 150,667 692 1.83
Non-interest bearing liabilities
Demand deposits 106,685 90,279
Accounts and drafts payable 464,933 604,491
Other liabilities 19,804 13,338
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 900,402 858,775
Shareholders' equity 118,627 104,500
Total liabilities and share-
holders' equity $ 1,019,029 $ 963,275
-----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 10,652 $ 11,608
Interest spread 3.29% 3.83%
Net interest margin 4.50 5.34
-----------------------------------------------------------------------------------------------------------------------------
|
1. Balances shown are daily averages. . . .
|
|