XNAS:CASS Cass Information Systems Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended    March 31, 2012                 
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________________ to ___________________

Commission File No. 000-20827
________________
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Missouri 43-1265338
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
 
13001 Hollenberg Drive
Bridgeton, Missouri 63044
(Address of principal executive offices) (Zip Code)

(314) 506-5500
(Registrant’s telephone number, including area code)
_________________

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes               X                           No                       

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes               X                           No                       

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

      (Check one)   Large Accelerated Filer                       Accelerated Filer        X       
            
      Non-Accelerated Filer                   Smaller Reporting Company                

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes                                            No               X     

     The number of shares outstanding of registrant's only class of stock as of May 4, 2012: Common stock, par value $.50 per share – 10,387,407 shares outstanding.





TABLE OF CONTENTS

PART I – Financial Information
 
           Item 1.      FINANCIAL STATEMENTS 3
 
Consolidated Balance Sheets
       March 31, 2012 (unaudited) and December 31, 2011 3
 
Consolidated Statements of Income
       Three months ended March 31, 2012 and 2011 (unaudited) 4
 
Consolidated Statements of Comprehensive Income
       Three months ended March 31, 2012 and 2011 (unaudited) 5
   
Consolidated Statements of Cash Flows
       Three months ended March 31, 2012 and 2011 (unaudited) 6
 
Notes to Consolidated Financial Statements (unaudited) 7
 
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
       AND RESULTS OF OPERATIONS 16
 
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
 
Item 4. CONTROLS AND PROCEDURES 25
 
PART II – Other Information – Items 1. – 6. 25
 
SIGNATURES 27

Forward-looking Statements - Factors That May Affect Future Results

This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are discussed in the section Part I, Item 1A, “Risk Factors” of the Company’s 2011 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)

      March 31,      
2012 December 31,
(Unaudited) 2011
Assets
Cash and due from banks $       10,144 $       12,579
Interest-bearing deposits in other financial institutions 89,902 123,551
Federal funds sold and other short-term investments 59,070 99,832
       Cash and cash equivalents 159,116 235,962
Securities available-for-sale, at fair value 309,209 310,612
Loans 690,357 671,565
       Less: Allowance for loan losses 12,947 12,954
              Loans, net 677,410 658,611
Premises and equipment, net 9,274 9,587
Investments in bank-owned life insurance 14,506 14,375  
Payments in excess of funding 65,625 61,378
Goodwill 11,590 7,471
Other intangible assets, net 3,699 161
Other assets 23,085 21,144
                     Total assets $ 1,273,514 $ 1,319,301
 
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
       Noninterest-bearing $ 125,500 $ 131,956
       Interest-bearing 390,416 416,412
              Total deposits 515,916 548,368
Accounts and drafts payable 574,990   595,201
Other liabilities 19,229   15,184
                     Total liabilities 1,110,135   1,158,753
 
Shareholders’ Equity:
Preferred stock, par value $.50 per share; 2,000,000  
       shares authorized and no shares issued
Common stock, par value $.50 per share; 20,000,000  
       shares authorized and 10,890,163 shares issued at both
       March 31, 2012 and December 31, 2011 5,445 5,445
Additional paid-in capital 80,744 80,971
Retained earnings 93,996 89,853
Common shares in treasury, at cost (507,045 shares at
       March 31, 2012 and 532,233 shares at
       December 31, 2011) (12,525 ) (12,968 )
Accumulated other comprehensive loss (4,281 ) (2,753 )
                     Total shareholders’ equity 163,379 160,548
                            Total liabilities and shareholders’ equity $ 1,273,514 $ 1,319,301

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)

Three Months Ended
March 31,
      2012       2011
Fee Revenue and Other Income:
Information services payment and processing revenue $       16,487 $       14,347
Bank service fees 298 352
Gains on sales of securities 966
Other 132 133
              Total fee revenue and other income 17,883 14,832
 
Interest Income:
Interest and fees on loans 8,940 10,253
Interest and dividends on securities:
              Taxable 10 5
              Exempt from federal income taxes 2,510 2,477
Interest on federal funds sold and  
       other short-term investments 129 169
              Total interest income 11,589 12,904
 
Interest Expense:
Interest on deposits 838 1,206
              Total interest expense 838 1,206
                     Net interest income   10,751   11,698
Provision for loan losses 200 450
                     Net interest income after provision for loan
                            losses 10,551 11,248
                     Total net revenue 28,434 26,080
 
Operating Expense:
Salaries and employee benefits 15,561 13,706
Occupancy 532 648
Equipment   863 847
Amortization of intangible assets 139 27
Other operating 3,246 2,906
              Total operating expense 20,341 18,134
Income before income tax expense 8,093 7,946
Income tax expense 2,185 2,227
Net Income $ 5,908 $ 5,719
 
Basic Earnings Per Share $ .57 $ .55
Diluted Earnings Per Share .56 .55

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)

Three Months Ended
March 31,
      2012       2011
Net income $       5,908 $       5,719
Other comprehensive income:
       Net unrealized (loss) gain on securities  
              available-for-sale, net of tax (903 )   803
       Reclassification adjustments for gains
              included in net income, net of tax (628 )  
       Foreign currency translation adjustments 3
Comprehensive income $ 4,380 $ 6,522

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)

Three Months Ended
March 31,
      2012       2011
Cash Flows From Operating Activities:
Net income $       5,908 $       5,719
Adjustments to reconcile net income to net cash provided
       by operating activities:
              Depreciation and amortization 1,515 1,091
              Gains on sales of securities (966 )
              Provision for loan losses 200 450
              Stock-based compensation expense 351 350
              Increase in income tax liability 1,770 1,868
              Increase in pension liability 129 60
              Other operating activities, net 903 (808 )
              Net cash provided by operating activities 9,810 8,730
 
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale 14,659 501  
Proceeds from maturities of securities available-for-sale 2,950 5,385
Purchase of securities available-for-sale (18,490 ) (9,027 )
Net increase in loans (18,999 ) (953 )
Increase in payments in excess of funding (4,247 ) (7,931 )
Purchases of premises and equipment, net (168 ) (465 )
Acquisition of waste expense management service company’s assets (7,798 )
              Net cash used in investing activities (32,093 ) (12,490 )
 
Cash Flows From Financing Activities:
Net (decrease) increase in noninterest-bearing demand deposits (6,456 ) 13,282
Net decrease in interest-bearing demand and savings deposits (14,130 ) (8,170 )
Net (decrease) increase in time deposits (11,866 )   1,946
Net decrease in accounts and drafts payable     (20,211 )   (1,952 )
Cash dividends paid (1,765 ) (1,505 )
Distribution of stock awards, net (135 ) (113 )
              Net cash (used in) provided by financing activities (54,563 ) 3,488
Net decrease in cash and cash equivalents (76,846 ) (272 )
Cash and cash equivalents at beginning of period 235,962 138,929
Cash and cash equivalents at end of period $ 159,116 $ 138,657
 
Supplemental information:
              Cash paid for interest $ 842 $ 1,186
              Cash paid for income taxes 293 365

See accompanying notes to unaudited consolidated financial statements.

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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2011. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2011.

Note 2 – Intangible Assets

The Company accounts for intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Goodwill and Other Intangible Assets,” which requires that intangibles with indefinite useful lives be tested annually for impairment and those with finite useful lives be amortized over their useful lives.

In January 2012, the Company acquired the assets of Waste Reduction Consultants, Inc., (“WRC”) and recorded intangible assets of $3,183,000 for the customer list, $261,000 for two non-compete agreements and software of $234,000.

Details of the Company’s intangible assets are as follows:

March 31, 2012 December 31, 2011
Gross Carrying Accumulated

Gross Carrying

  Accumulated
(In thousands)       Amount       Amortization       Amount       Amortization
Assets eligible for amortization:
       Customer lists 3,933 (696 ) 750 (589 )
       Non-compete agreements 261 (13 )    
       Software   234 (20 )  
             
Unamortized intangible assets:  
       Goodwill 11,817 (227 ) 7,698 (227 )
Total intangible assets $                    16,245 $               (956 ) $                    8,448 $               (816 )

The customer lists are amortized over seven and ten years; the non-compete agreements over five years; and, software over three years. Amortization of intangible assets amounted to $139,000 for the three-month period ended March 31, 2012 and $27,000 for the three-month period ended March 31, 2011. Estimated amortization of intangibles over the next five years is as follows: $556,000 in 2012, $502,000 in 2013, $449,000 in 2014, and $371,000 in both 2015 and 2016.

Note 3 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding. There were no anti-dilutive shares in the three months ended March 31, 2012 or 2011. The calculations of basic and diluted earnings per share are as follows:

Three Months Ended
March 31,
(In thousands, except share and per share data)       2012       2011
Basic
       Net income $        5,908 $        5,719
       Weighted-average common shares outstanding 10,335,655 10,292,305
              Basic earnings per share $ .57 $ .55
Diluted  
       Net income $ 5,908 $ 5,719
       Weighted-average common shares outstanding   10,335,655 10,292,305
       Effect of dilutive restricted stock, stock options and stock  
              appreciation rights 159,634   139,515
       Weighted-average common shares outstanding assuming dilution 10,495,289 10,431,820
                     Diluted earnings per share $ .56 $ .55

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Note 4 – Stock Repurchases

The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the repurchase of up to 330,000 shares of the Company’s common stock. The Company did not repurchase any shares during the three-month periods ended March 31, 2012 and 2011. As of March 31, 2012, 330,000 shares remained available for repurchase under the program. Repurchases are made in the open market or through negotiated transactions from time to time depending on market conditions.

Note 5 – Industry Segment Information

The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service, processing and capital requirements.

The Information Services segment provides freight, utility, telecommunication and environmental invoice processing and payment services to large corporations. The Banking Services segment provides banking services primarily to privately-held businesses and churches.

The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Management evaluates segment performance based on net income after allocations for corporate expenses and income taxes. Transactions between segments are accounted for at what management believes to be fair value.

Substantially all revenue originates from and all long-lived assets are located within North America, and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue.

Assets represent actual assets owned by Information Services and there is no allocation methodology used. Loans are sold by Banking Services to Information Services to create liquidity when the Bank’s loan-to-deposit ratio is greater than 100%. Segment interest from customers is the actual interest earned on the loans owned by Information Services and Banking Services, respectively.

Summarized information about the Company’s operations in each industry segment is as follows:

Corporate,
Information Banking Eliminations
(In thousands)       Services       Services       and Other       Total
Quarter Ended March 31, 2012
       Total Revenues:
              Revenue from customers $        22,548 $        5,886 $        $        28,434
              Intersegment income (expense) 2,540 428 (2,968 )
       Net income 5,734 2,031 (1,857 ) 5,908
       Goodwill 11,454 136 11,590
       Other intangible assets, net 3,699 3,699
       Total assets 693,352 590,458 (10,296 ) 1,273,514
Quarter Ended March 31, 2011
       Total Revenues:    
              Revenue from customers $ 19,846 $ 6,234 $ $ 26,080
              Intersegment income (expense) 2,626   457   (3,083 )
       Net income 3,552 2,167     5,719
       Goodwill     7,335   136 7,471
       Other intangible assets, net 241 241
       Total assets 615,586 591,457 (7,023 ) 1,200,020

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Note 6 – Loans by Type

A summary of loan categories is as follows:

March 31, December 31,
(In thousands)       2012       2011
Commercial and industrial $        155,914 $        136,916
Real estate  
       Commercial:
              Mortgage 140,517 140,848
              Construction 11,081   9,067
       Church, church-related:
              Mortgage   348,683 347,726
              Construction 33,941 36,497
Other 221   511
       Total loans $ 690,357 $ 671,565

The following table presents the aging of loans by loan categories at March 31, 2012 and December 31, 2011:

Performing Nonperforming      
90 Days
30-59 60-89 and Non Total
(In thousands)       Current       Days       Days       Over       Accrual       Loans
March 31, 2012
Commercial and industrial $        155,862 $        $        $        $        52 $        155,914
Real estate
       Commercial:
              Mortgage 133,131 23 7,363 140,517
              Construction 11,081 11,081
       Church, church-related:
              Mortgage 348,469 214 348,683
              Construction 33,941 33,941
Other 221 221
Total $ 682,705 $ 23 $ $ $ 7,629 $ 690,357
December 31, 2011    
Commercial and industrial $ 136,850 $ $ 10 $ $ 56 $ 136,916
Real estate    
       Commercial:    
              Mortgage 139,249 137       29 1,433 140,848
              Construction   9,067 9,067
       Church, church-related:    
              Mortgage 347,506   220 347,726
              Construction 36,497 36,497
Other 511 511
Total $ 669,680 $ 137 $ 10 $ 29 $ 1,709 $ 671,565

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The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of March 31, 2012 and December 31, 2011:

Loans Performing Nonperforming
Subject to Loans Subject to Loans Subject to
Normal Special Special Total
(In thousands)       Monitoring1       Monitoring2       Monitoring2       Loans
March 31, 2012
Commercial and industrial $         151,692 $                      4,170 $                      52 $         155,914
Real estate    
       Commercial:              
              Mortgage 125,936 7,218 7,363   140,517
              Construction 11,081 11,081
       Church, church-related:
              Mortgage 346,214 2,255 214 348,683
              Construction 33,941 33,941
Other 221 221
Total $ 669,085 $ 13,643 $ 7,629 $ 690,357
December 31, 2011
Commercial and industrial $ 132,475 $ 4,385 $ 56 $ 136,916
Real estate
       Commercial:
              Mortgage 125,850 13,536 1,462 140,848
              Construction 9,067 9,067
       Church, church-related:
              Mortgage 336,727 10,779 220 347,726
              Construction 36,497 36,497
Other 511 511
Total $ 641,127 $ 28,700 $ 1,738 $ 671,565

1        Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligation.
2 Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention.

Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled debt restructurings, both performing and non-performing. Troubled debt restructuring involves the granting of a concession to a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment schedule or interest rate. Management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses.” At March 31, 2012 and December 31, 2011, all impaired loans were evaluated based on the fair value of the collateral. The fair value of the collateral is based upon an observable market price or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 2. Loans delinquent 90 days or more and still accruing interest at March 31, 2012 and December 31, 2011 were $0 and $29,000, respectively. Loans classified as troubled debt restructuring were $0 and $4,479,000 at March 31, 2012 and December 31, 2011, respectively. There are two foreclosed loans with a book value of $1,689,000 which have been recorded as other real estate owned (included in other assets) as of March 31, 2012 and December 31, 2011.

The following table presents the recorded investment and unpaid principal balance for impaired loans at March 31, 2012 and December 31, 2011:

Unpaid Related
Recorded Principal Allowance for
(In thousands)       Investment       Balance       Loan Losses
March 31, 2012
Commercial and industrial:
              Nonaccrual $          52 $          52 $                26
              Troubled debt restructurings still accruing
Real estate
       Commercial – Mortgage:
              Nonaccrual 7,363 7,363 1,148
              Past due 90 days or more and still accruing
              Troubled debt restructurings still accruing
       Church – Mortgage:
              Nonaccrual   214 214 115
Total impaired loans $ 7,629 $ 7,629 $ 1,289
December 31, 2011  
Commercial and industrial:        
              Nonaccrual $ 56 $ 56 $ 28
              Troubled debt restructurings still accruing 83 83 8
Real estate
       Commercial – Mortgage:  
              Nonaccrual 1,433 1,433 149
              Past due 90 days or more and still accruing 29 29
              Troubled debt restructurings still accruing 4,396 4,396 766
       Church – Mortgage:
              Nonaccrual 220 220 115
Total impaired loans $ 6,217 $ 6,217 $ 1,066

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A summary of the activity in the allowance for loan losses from December 31, 2011 to March 31, 2012 is as follows:

December 31, Charge- March 31,
(In thousands)       2011       Offs       Recoveries       Provision       2012
Commercial and industrial $              2,594 $        $               47 $         97 $         2,738
Real estate
       Commercial:
              Mortgage   4,776   254   391 4,913
              Construction   167 29 196
       Church, church-related:
              Mortgage 4,797   (164 ) 4,633
              Construction 616     (152 )     464
Other 4   (1 ) 3
Total $ 12,954 $ 254 $ 47 $ 200 $ 12,947

Note 7 – Commitments and Contingencies

In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. At March 31, 2012 and December 31, 2011, no amounts have been accrued for any estimated losses for these instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At March 31, 2012 the balance of unused loan commitments, standby and commercial letters of credit were $11,475,000, $16,408,000, and $3,985,000, respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at March 31, 2012:

Amount of Commitment Expiration per Period
Less than 1-3 3-5 Over 5
(In thousands)       Total       1 year       Years       Years       Years
Operating lease commitments $        1,504   $        585 $        750 $        169 $       
Time deposits 119,215 108,379   8,232   2,604
       Total $ 120,719 $ 108,964   $ 8,982 $ 2,773 $

The Company and its subsidiaries are involved in various pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate resolution of these legal actions and proceedings will not have a material effect upon the Company’s consolidated financial position or results of operations.

Note 8 – Stock-Based Compensation

The 2007 Omnibus Incentive Stock Plan (the “Omnibus Plan”) permits the issuance of up to 968,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and performance awards. The Company issues shares out of treasury stock for these awards. During the three months ended March 31, 2012, 21,516 restricted shares and 83,968 SARs were granted under the Omnibus Plan.

 -11-



The Company also continues to maintain its other stock-based incentive plans for the restricted common stock previously awarded and the options previously issued and still outstanding. These plans have been superseded by the Omnibus Plan and accordingly, any available restricted stock and stock option grants not yet issued have been cancelled.

Restricted Stock
Restricted shares are amortized to expense over the three-year vesting period. As of March 31, 2012, the total unrecognized compensation expense related to non-vested common stock was $1,492,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.3 years.

Following is a summary of the activity of the restricted stock:

Three Months Ended
March 31, 2012
      Shares       Fair Value
Balance at December 31, 2011 52,470   $          29.86
Granted 21,516 36.92
Vested             (20,894 ) 27.36
Forfeited
Balance at March 31, 2012 53,092 $ 33.70

Stock Options
Stock options vest and expire over a period not to exceed seven years. As of March 31, 2012, the total unrecognized compensation expense related to non-vested stock options was $14,000, and the related weighted-average period over which it is expected to be recognized is approximately .8 years. Following is a summary of the activity of the stock options during the three-month period ended March 31, 2012:

Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
      Shares       Price        Term Years       (In thousands)
Outstanding at December 31, 2011          30,628   $           17.79                   .84 $                      545
Exercised 12,101   16.26  
Outstanding at March 31, 2012 18,527 $ 18.79 .77 $ 392
Exercisable at March 31, 2012 18,527 $ 18.79 .77 $ 392

The total intrinsic value of options exercised was $268,000 and $140,000, for the three-month periods ended March 31, 2012 and 2011, respectively. Following is a summary of the activity of the non-vested stock options during the three-month period ended March 31, 2012:

Weighted-Average Grant
      Shares       Date Fair Value
Non-vested at December 31, 2011          3,674   $                                    2.69
Vested 3,674 2.69
Non-vested at March 31, 2012 $ 0.00

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SARs
SARs vest over a three-year period, with one-third of the shares vesting and becoming exercisable each year on the anniversary date of the grant, and they expire 10 years from the grant date. As of March 31, 2012, the total unrecognized compensation expense was $4,738,000 and the related weighted-average period over which it is expected to be recognized is 2.2 years. Following is a summary of the activity of the Company’s SARs program for the three-month period ended March 31, 2012:

Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term Years (In thousands)
Outstanding at December 31, 2011 332,586 $ 26.87 7.42 $ 3,166
Granted 83,968   36.92  
Exercised (12,657 ) 25.35  
Outstanding at March 31, 2012 403,897 29.01   7.77 4,420
Exercisable at March 31, 2012       256,366       $      25.62       6.79       $      3,673

Following is a summary of the activity of non-vested SARs during the three-month period ended March 31, 2012:

Weighted-Average Grant
  Shares Date Fair Value
Non-vested at December 31, 2011     144,321     $ 29.35
Granted 83,968 36.92
Vested (80,758 ) 27.49
Non-vested at March 31, 2012       147,531       $ 34.89

The Company uses the Black-Scholes pricing model to determine the fair value of the SARs at the date of grant. Following are the assumptions used to estimate the per share fair value of SARs granted:

Three Months Ended
March 31,
2012 2011
Risk-free interest rate 1.38 % 2.70 %
Expected life 7 yrs. 7 yrs.
Expected volatility 29.39 % 27.86 %
Expected dividend yield       1.84 %       1.77 %

The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for the period equal to the expected life of the SARs at the time of the grant. The expected life was derived using the historical exercise activity. The Company uses historical volatility for a period equal to the expected life of the rights using average monthly closing market prices of the Company’s stock as reported on The Nasdaq Global Market. The expected dividend yield is based on the Company’s current rate of annual dividends.

Note 9 – Defined Pension Plans

The Company has a noncontributory defined benefit pension plan, which covers most of its employees. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs:

Estimated Actual
(In thousands) 2012 2011
Service cost – benefits earned during the year $ 2,688 $ 2,073
Interest cost on projected benefit obligation 2,532 2,423
Expected return on plan assets (3,968 ) (3,314 )
Net amortization and deferral 1,396 603  
       Net periodic pension cost       $      2,648       $      1,785

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Pension costs recorded to expense were $665,000 and $466,000 for the three-month periods ended March 31, 2012 and 2011, respectively. The increase in pension costs is primarily due to additional employees for the year ended December 31, 2011. The Company made a contribution of $750,000 to the plan during the three-month period ended March 31, 2012 and expects to contribute at least an additional $2,250,000 in 2012.

In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan. The following table represents the components of the net periodic pension costs for 2011 and an estimate for 2012:

Estimated Actual
(In thousands) 2012 2011
Service cost – benefits earned during the year $ 134 $ 89
Interest cost on projected benefit obligation 329 295
Net amortization 422 250
       Net periodic pension cost       $      885       $      634

Pension costs recorded to expense were $224,000 and $158,000 for the three-month periods ended March 31, 2012 and 2011, respectively.

Note 10 – Income Taxes

As of March 31, 2012, the Company’s unrecognized tax benefits were approximately $2,188,000, of which $1,587,000 would, if recognized, affect the Company’s effective tax rate. As of December 31, 2011, the Company’s unrecognized tax benefits were approximately $2,069,000, of which $1,496,000 would, if recognized, affect the Company’s effective tax rate. During the next twelve months, the Company may realize a reduction of its unrecognized tax benefits of approximately $456,000 due to the lapse of federal and state statutes of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company had $112,000 and $95,000 of gross interest accrued as of March 31, 2012 and December 31, 2011 respectively. There were no penalties for unrecognized tax benefits accrued at March 31, 2012 and December 31, 2011.

The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction. U.S. federal income tax returns for tax years 2008 through 2010 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2007 through 2010.

Note 11 – Investment in Securities

Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore falls into the Level 2 category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:

March 31, 2012
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
State and political subdivisions $ 288,537 $ 17,816 $ 394 $ 305,959
Certificates of deposit 3,250 3,250
       Total $ 291,787 $ 17,816 $ 394 $ 309,209
    
December 31, 2011
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
State and political subdivisions $ 287,585 $ 19,797 $ 20 $ 307,362
Certificates of deposit 3,250 3,250
       Total       $      290,835       $      19,797       $      20       $      310,612

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The fair values of securities with unrealized losses are as follows:

March 31, 2012
Less than 12 months 12 months or more Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In thousands) fair value losses fair value losses Fair value losses
State and political
       subdivisions $ 25,593 $ 394 $ $ $ 25,593 $ 394
Certificates of deposit
       Total $ 25,593 $ 394 $ $ $ 25,593 $ 394
   
December 31, 2011
Less than 12 months 12 months or more Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(In thousands) fair value losses fair value losses Fair value Losses
State and political
       subdivisions $ 4,362 $ 20 $ $ $ 4,362 $ 20
Certificates of deposit
       Total       $      4,362       $      20       $            $            $      4,362       $      20

There were 30 securities (none greater than 12 months) in an unrealized loss position as of March 31, 2012. There were 7 securities (none greater than 12 months) in an unrealized loss position as of December 31, 2011. All unrealized losses were reviewed to determine whether the losses were other than temporary. Management believes that all unrealized losses are temporary since they were market driven, and the Company has the ability and intent to hold these securities until maturity.

The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

March 31, 2012
(In thousands) Amortized Cost Fair Value
Due in 1 year or less $ 8,119 $ 8,220
Due after 1 year through 5 years 48,415 52,210
Due after 5 years through 10 years 120,163 128,348
Due after 10 years 115,090 120,431
       Total       $      291,787       $      309,209

There was one security for $3,250,000 pledged to secure public deposits and for other purposes at March 31, 2012.

Proceeds from sales of investment securities classified as available for sale were $14,659,000 and $501,000 for the first three months of 2012 and 2011, respectively. There were $966,000 gross realized gains for the first three months of 2012 and no gross realized gains or losses for the first three months of 2011.

Note 12 – Fair Value of Financial Instruments

Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:

March 31, 2012 December 31, 2011
Carrying Carrying
(In thousands) Amount Fair Value Amount Fair Value
Balance sheet assets:
       Cash and cash equivalents $ 159,116 $ 159,116 $ 235,962 $ 235,962
       Investment securities 309,209 309,209 310,612 310,612
       Loans, net 677,410 683,080 658,611 665,348
       Accrued interest receivable 5,876 5,876 6,125 6,125
              Total       $      1,151,611       $      1,157,281       $      1,211,310       $      1,218,047
Balance sheet liabilities:
       Deposits $ 515,916 $ 516,430 $ 548,368 $ 548,985
       Accounts and drafts payable 574,990 574,990 595,201 595,201
       Accrued interest payable 155 155 159 159
              Total $ 1,091,061 $ 1,091,575 $ 1,143,728 $ 1,144,345

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The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Other Short-term Instruments – For cash and cash equivalents, accrued interest receivable, accounts and drafts payable and accrued interest payable, the carrying amount is a reasonable estimate of fair value because of the demand nature or short maturities of these instruments.

Investment in Securities – The fair value is measured using Level 2 valuations.

Loans – The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits – The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits.

There were no transfers between Levels 1 and 2 of the fair value hierarchy for the three months ended March 31, 2012 and 2011. No financial instruments are measured using Level 3 inputs for the three months ended March 31, 2012 and 2011.

Note 13 – Subsequent Events

In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events after the consolidated balance sheet date of March 31, 2012 and there were no events identified that would require additional disclosures to prevent the Company’s consolidated financial statements from being misleading.

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 utility invoices, which include electricity, gas and telecommunications expenses, and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from freight, utility, 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/loan 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.

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Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, utility, 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. As economic conditions continued to slowly improve in 2012, the number and total dollar volumes of transactions processed increased, thereby increasing fee revenue, interest income, and 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 2011 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income.

In January 2011, Cass opened an office in Breda, Netherlands, to support the Company’s multinational information processing clients. The revenues, expenditures and assets related to this office did not account for a significant portion of the Company’s business during the three months ended March 31, 2011 and 2012 and the current activities are not significant enough to pose substantial risk.

On January 6, 2012, the Company acquired the assets of WRC, one of the fastest-growing providers 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.

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.

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 our results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.

Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly, we expect to continue to utilize the present processes.

Impairment of Assets. The Company periodically evaluates certain long-term assets such as intangible assets including goodwill, foreclosed assets and assets held for sale for impairment. Generally, these assets are initially recorded at cost, and recognition of impairment is required when events and circumstances indicate that the carrying amounts of these assets will not be recoverable in the future. If impairment occurs, various methods of measuring impairment may be called for depending on the circumstances and type of asset, including quoted market prices, estimates based on similar assets, and estimates based on valuation techniques such as discounted projected cash flows. The Company had no impairment of goodwill and intangible assets for the three months ended March 31, 2012 or for the fiscal year ended December 31, 2011, 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. 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.

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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 financial statements.

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, 2011, 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, 2011. 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 March 31, 2012 (“First Quarter of 2012”) compared to the three-month period ended March 31, 2011 (“First Quarter of 2011”). 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 2011 Annual Report on Form 10-K. Results of operations for the First Quarter of 2012 are not necessarily indicative of the results to be attained for any other period.

Net Income

The following table summarizes the Company’s operating results:

First Quarter of
(In thousands except per share data) 2012 2011 % Change
Net income $ 5,908 $ 5,719 3.3%
Diluted earnings per share $      .56       $      .55       1.8%
Return on average assets 1.79 % 1.86 %  
Return on average equity       14.69 % 16.23 %

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Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation 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 were as follows:

First Quarter of
(In thousands)       2012       2011       % Change
Transportation Core Invoice Transaction Volume* 6,873 6,670 3.04 %
Transportation Invoice Dollar Volume $      5,382,091 $      4,568,930 17.80 %
Utility Transaction Volume 3,607 3,358 7.42 %
Utility Transaction Dollar Volume $ 2,592,486 $ 2,689,235 (3.60 )%
Payment and Processing Fees $ 16,487 $ 14,347 14.92 %

*       Core invoices exclude parcel shipments.

First Quarter of 2012 compared to First Quarter of 2011:

Transportation transaction and dollar volumes were up 3% and 18%, respectively, due to new business and improved activity from existing customers. Utility transaction volumes rose 7% due to new business and improved activity from existing customers, while utility dollar volumes fell 4% due to the unseasonably mild winter temperatures experienced across much of the U.S.

Bank service fees decreased $54,000, or 15% and other income decreased $1,000. There were $966,000 gains on sales of securities in First Quarter 2012 and no gains or losses on sales of securities in the First Quarter of 2011.

Net Interest Income

Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in net interest income and related factors:

First Quarter of
(In thousands)       2012       2011       % Change
Average earnings assets $      1,193,752 $      1,149,715 3.83 %
Average interest-bearing liabilities 402,859 409,071 (.02 )%
Net interest income* 12,102 13,033 (7.14 )%
Net interest margin* 4.08 % 4.60 %
Yield on earning assets* 4.36 % 5.02 %
Rate on interest bearing liabilities .84 % 1.20 %

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

First Quarter of 2012 compared to First Quarter of 2011:

First Quarter 2012 average earning assets increased approximately $44,037,000, or 4%, 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 2012 as the general level of interest rates remained low.

Total average loans decreased $27,813,000, or 4%, to $677,890,000 for the First Quarter of 2012 as compared to the First Quarter of 2011. This decrease was the result of intense competition from other lenders. Average investment securities increased $35,963,000, or 14%, to $293,353,000 as the Company took advantage of buying opportunities in the market.

Total average interest-bearing deposits for the First Quarter of 2012 decreased $6,210,000, or 2%, to $402,859,000 compared to the First Quarter of 2011. Accounts and drafts payable increased $58,688,000, or 11%, as freight and utility payment processing activities increased.

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

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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.

First Quarter of 2012 First Quarter of 2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(In thousands)       Balance       Expense       Rate       Balance       Expense       Rate
Assets1
Earning assets
Loans2, 3:
       Taxable $      677,183 $      8,939 5.31 % $      704,737 $      10,249 5.90 %
       Tax-exempt4 707 1 .57 966 6 2.52
Investment securities5:
       Taxable 981 6 2.46 928 5 2.19
       Tax-exempt4 289,122 3,861 5.37 256,462 3,810 6.02
Certificates of deposit 3,250 4 .50
Interest-bearing deposits in
       other financial institutions 116,553 87 .30 62,287 66 .43
Federal funds sold and other
       short-term investments 105,956 42 .16 124,335 103 .34
Total earning assets 1,193,752 12,940 4.36 1,149,715 14,239 5.02
Non-earning assets
       Cash and due from banks 12,224 11,464
       Premises and equipment, net 9,539 9,679
       Bank-owned life insurance 14,426 14,267
       Goodwill and other
              intangibles 13,187 7,728
       Other assets 95,990 62,954
       Allowance for loan losses (12,964 ) (12,074 )
Total assets $ 1,326,154 $ 1,243,733
Liabilities and Shareholders’ Equity1
Interest-bearing liabilities
       Interest-bearing demand
              deposits $ 254,042 $ 444 .70 % $ 218,525 $ 556 1.03 %
       Savings deposits 22,566 39 .70 24,831 64 1.05
       Time deposits >=$100 43,868 137 1.26 53,609 184 1.39
       Other time deposits 82,383 218 1.06 112,104 402 1.45
Total interest-bearing deposits 402,859 838 .84 409,069 1,206 1.20
       Short-term borrowings 2
Total interest bearing liabilities 402,859 838 .84 409,071 1,206 1.20
Non-interest bearing liabilities
       Demand deposits 137,034 130,406
       Accounts and drafts payable 608,482 549,794
       Other liabilities 16,027 11,534
Total liabilities 1,164,402 1,100,805
Shareholders’ equity 161,752 142,928
Total liabilities and shareholders’ equity $ 1,326,154 $ 1,243,733
Net interest income $ 12,102 $ 13,033
Net interest margin 4.08 % 4.60 %
Interest spread 3.52 3.83
     
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 2011 consolidated financial statements, filed with the Company’s 2011 Annual Report on Form 10-K.
3. Interest income on loans includes net loan fees of $70,000 and $238,000 for the First Quarter of 2012 and 2011, respectively.

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4. Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustment was approximately $1,351,000 and $1,335,000 for the First Quarter of 2012 and 2011, 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.

Analysis of Net Interest Income Changes

The following table presents the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

First Quarter of 2012 Over
First Quarter of 2011
(In thousands)       Volume       Rate       Total
Increase (decrease) in interest income:
Loans1, 2:
       Taxable $      (369 ) $      (941 ) $      (1,310 )
       Tax-exempt3 (1 ) (4 ) (5 )
Investment securities:
       Taxable 1 1
       Tax-exempt3 479 (428 ) 51
Certificates of deposit 2 2 4
Interest-bearing deposits in
       other financial institutions 45 (24 ) 21
Federal funds sold and other
       short-term investments (13 ) (48 ) (61 )
Total interest income 143 (1,442 ) (1,299 )
Interest expense on:
       Interest-bearing demand deposits 83 (195 ) (112 )
       Savings deposits (5 ) (20 ) (25 )
       Time deposits >=$100 (31 ) (16 ) (47 )
       Other time deposits (91 ) (93 ) (184 )
Total interest expense (44 ) (324 ) (368 )
Net interest income 187 (1,118 ) (931 )
     
1. Average balances include nonaccrual loans.
2. Interest income includes net loan fees.
3. Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

Provision and Allowance for Loan Losses

A significant determinant of the Company's operating results is the provision for loan losses. There was a $200,000 and $450,000 provision for loan losses during the First Quarter of 2012 and the First Quarter of 2011, respectively. As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits. There were net loan charge offs of $207,000 in the First Quarter of 2012 compared to $36,000 in recoveries for the same period in 2011.

The allowance for loan losses at March 31, 2012 was $12,947,000 and at December 31, 2011 was $12,954,000. The ratio of allowance for loan losses to total loans outstanding at March 31, 2012 was 1.88% compared to 1.93% at December 31, 2011. Nonperforming loans were $7,629,000, or 1.11%, of total loans at March 31, 2012 compared to $1,738,000, or .26%, of total loans at December 31, 2011. These loans, which are also considered impaired, consisted of six nonaccrual loans to borrowers in financial trouble. Nonperforming loans at December 31, 2011 consisted of four nonaccrual loans. Total nonperforming loans increased $7,090,000 from March 31, 2011. This increase was due to the addition of four loans and the write-off of two loans.

In addition to the loans discussed above, at March 31, 2012, loans totaling $6,886,000 not included in the table below were identified by management as subject to special monitoring. These loans possess some credit deficiency or potential weakness which requires a high level of management attention.

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The allowance for loan losses has been established and is maintained to absorb probable losses in the loan portfolio. An ongoing assessment of risk of loss is performed to determine if the current balance of the allowance is adequate to cover probable losses in the portfolio. A charge or credit is made to expense to cover any deficiency or reduce any excess, as required. The current methodology employed to determine the appropriate allowance consists of two components, specific and general. The Company develops specific allowances on commercial, commercial real estate, and construction loans based on individual review of these loans and an estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and collection options available. The general component relates to all other loans, which are evaluated based on loan grade. The loan grade assigned to each loan is typically evaluated on an annual basis, unless circumstances require interim evaluation. The Company assigns an allowance amount consistent with each loan's rating category. The allowance amount is based on derived loss experience over prescribed periods. In addition to the amounts derived from the loan grades, a portion is added to the general allowance to take into account other factors, including national and local economic conditions; downturns in specific industries, including loss in collateral value; trends in credit quality at the Company and in the banking industry; and trends in risk rating changes. As part of their examination process, federal and state agencies review the Company's methodology for maintaining the allowance for loan losses and the related balance. These agencies may require the Company to increase the allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examination.

Summary of Asset Quality

The following table presents information pertaining to the Company's provision for loan losses and analysis of the allowance for loan losses:

First Quarter of
(In thousands)       2012       2011
Allowance at beginning of period $      12,954 $      11,891
Provision charged to expense 200 450
       Loans charged off (254 )
       Recoveries on loans previously charged off 47 36
Net recoveries (loans charged off) (207 ) 36
Allowance at end of period $ 12,947 $ 12,377
Loans outstanding:
       Average $ 677,890 $ 705,703
       March 31 690,357 709,622
Ratio of allowance for loan losses to loans outstanding:
       Average 1.91 % 1.75 %
       March 31 1.88 1.74
Nonperforming loans:
       Nonaccrual loans $ 7,629 $ 539
       Loans past due 90 days or more
       Renegotiated loans
              Total nonperforming loans $ 7,629 $ 539
Foreclosed assets 1,689 1,910
Nonperforming loans as a % of average loans 1.11 % .08 %

The Bank had two properties carried as other real estate owned of $1,689,000 and $1,910,000 as of March 31, 2012 and 2011, respectively.

Operating Expense

Total operating expenses for the First Quarter of 2012 were up $2,207,000, or 12%, compared to the First Quarter of 2011.

Salaries and benefits expense for the First Quarter of 2012 increased $1,855,000, or 14%, compared to the First Quarter of 2011 due to higher payroll and pension expenses.

Occupancy expense for the First Quarter of 2012 decreased $116,000, or 18%, to $532,000 from the First Quarter of 2011 as maintenance and repair costs and rental expense declined with the consolidation of bank branches.

Equipment expense for the First Quarter of 2012 increased $16,000, or less than 2%, compared to the First Quarter of 2011.

Amortization of intangible assets increased $112,000 for the First Quarter of 2012 over 2011 due to the purchase of the assets of WRC.

Other operating expenses for the First Quarter of 2012 increased $340,000, or 12%, compared to the First Quarter of 2011 due to an increase in promotional expense and additional litigation expense.

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Income tax expense for the First Quarter of 2012 decreased $42,000, or 2%, compared to the First Quarter of 2011. The effective tax rate was 27% and 28% for the First Quarters of 2012 and 2011, respectively.

Financial Condition

Total assets at March 31, 2012 were $1,273,514,000, a decrease of $45,787,000, or 3%, from December 31, 2011. The most significant changes in asset balances during this period were a decrease of $76,846,000 in cash and cash equivalents offset by an increase in loans of $18,792,000. Changes in federal funds sold and other short-term investments reflect the Company’s daily liquidity position and are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.

Total liabilities at March 31, 2012 were $1,110,135,000, a decrease of $48,618,000, or 4%, from December 31, 2011. Total deposits at March 31, 2012 were $515,916,000 a decrease of $32,452,000, or 6%, from December 31, 2011. Accounts and drafts payable at March 31, 2012 were $574,990,000, a decrease of $20,210,000, or 3%, from December 31, 2011. Total shareholders’ equity at March 31, 2012 was $163,379,000, a $2,831,000, or 2%, increase from December 31, 2011.

Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when funds are disbursed and higher balances on days when funds are received. For this reason, average balances are a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).

The increase in total shareholders’ equity resulted from net income of $5,908,000, plus $216,000 from stock-based bonuses off-set by an increase in other comprehensive loss of $1,528,000 and dividends paid of $1,765,000 ($.17 per share).

Liquidity and Capital Resources

The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments, and was $159,116,000 at March 31, 2012, a decrease of $77,000,000, or 33%, from December 31, 2011. At March 31, 2012, these assets represented 12% of total assets. These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $309,209,000 at March 31, 2012, a decrease of $1,403,000, or less than 1%, from December 31, 2011. These assets represented 24% of total assets at March 31, 2012. Of this total, 99% were state and political subdivision securities. Of the total portfolio, 3% mature in one year, 17% mature in one to five years, and 80% mature in five or more years.

The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $88,000,000 at the following banks: Bank of America, $20,000,000; US Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $5,000,000; and JPM Chase Bank, $6,000,000. The Company has secured lines of credit with the Federal Home Loan Bank of $123,158,000 collateralized by commercial mortgage loans. The Company also has a secured federal funds line of credit of $29,750,000 with the UMB Bank. There were no amounts outstanding under any line of credit as of March 31, 2012 or December 31, 2011.

The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”). Time deposits include $75,023,000 of CDARS deposits which offer the Bank’s customers the ability to maximize FDIC insurance coverage. The Company uses this program to retain or attract deposits from existing customers.

Net cash flows provided by operating activities were $9,810,000 for the First Quarter of 2012 compared with $8,730,000 for the First Quarter of 2011. This increase is attributable to the increases in net income of $189,000 and the increase in depreciation and amortization of $424,000 offset by gains on sales of securities of $966,000 and the other normal fluctuations in asset and liability accounts of $1,433,000. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2012, which are estimated to be less than $3,000,000.

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The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business opportunities available to the Company.

As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in the low interest rate environment currently faced by the Company, short-term relatively lower rate liquid investments are reduced in favor of longer term relatively higher yielding investments and loans.

The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable.

The relative level of energy costs can impact the Company’s earnings and available liquidity. Higher levels of energy costs will tend to increase transportation and utility invoice amounts resulting in a corresponding increase in accounts and drafts payable. Increases in accounts and drafts payable generate higher interest income and improve liquidity.

New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.

Risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0%, of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital generally consists of (a) common shareholders' equity (excluding the unrealized market value adjustments on the available-for-sale securities), (b) qualifying perpetual preferred stock and related surplus subject to certain limitations specified by the FDIC, (c) minority interests in the equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights within certain limits, and (f) any other intangible assets and investments in subsidiaries that the FDIC determines should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier 1 capital less purchased mortgage servicing rights to total assets, for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for loan losses, and debt considered equity for regulatory capital purposes.

The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:

March 31, 2012 December 31, 2011
(In thousands)       Amount       Ratio       Amount       Ratio
Total capital (to risk-weighted assets)
       Cass Information Systems, Inc. $      163,483 18.38 % $      166,605 19.03 %
       Cass Commercial Bank 68,919 13.03 % 66,851 12.71 %
Tier I capital (to risk-weighted assets)                        
       Cass Information Systems, Inc.   $      152,343   17.13 %   $      155,638   17.78 %
       Cass Commercial Bank     62,279   11.78 %     60,248   11.46 %
Tier I capital (to average assets)                        
       Cass Information Systems, Inc.   $ 152,343   11.62 %   $ 155,638   11.53 %
       Cass Commercial Bank     62,279   10.12 %     60,248   9.49 %

-24-



Inflation

The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company's consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.

Impact of New and Not Yet Adopted Accounting Pronouncements

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company's most recent evaluation, management does not believe the Company's risk position at March 31, 2012 has changed materially from that at December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.

There were no changes in the First Quarter of 2012 in the Company's internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).

PART II. OTHER INFORMATION
     
ITEM 1. LEGAL PROCEEDINGS
The Company has included in Part I, Item 3 of its Annual Report on Form 10-K for the year ended December 31, 2011 disclosure regarding certain legal proceedings. On September 28, 2010, Asentinel LLC (“Asentinel”) filed a lawsuit in the United States District Court for the Western District of Tennessee against the Company, AnchorPoint, Inc. (“AnchorPoint”) and Veramark Technologies, Inc. (“Veramark”), alleging infringement of two Asentinel patents by the Company. The lawsuit and all claims were settled by mutual agreement and the suit was dismissed with prejudice on April 11, 2012. There were no material developments with regard to the other proceeding during the three months ended March 31, 2012.
 

All other legal proceedings and actions involving the Company are of an ordinary and routine nature and are incidental to the operations of the Company. Management believes the outcome of all proceedings will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.

-25-



ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2011, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). There are no material changes to the Risk Factors as disclosed in the Company’s 2011 Annual Report on Form 10-K.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 
ITEM 4. MINE SAFETY DISCLOSURES

None.

 
ITEM 5. OTHER INFORMATION
(a)         None.
(b)

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the First Quarter of 2012.

 
ITEM 6. EXHIBITS
 

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
Exhibit 101.INS XBRL Instance Document
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
 
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
Exhibit 101.LAB      XBRL Taxonomy Extension Label Linkbase Document
 
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document

-26-




SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  CASS INFORMATION SYSTEMS, INC.
 
DATE: May 4, 2012 By /s/ Eric H. Brunngraber
    Eric H. Brunngraber
    President and Chief Executive Officer
    (Principal Executive Officer)
 
 
DATE: May 4, 2012 By    /s/ P. Stephen Appelbaum
    P. Stephen Appelbaum
    Executive Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

-27-
 

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XNAS:CASS Cass Information Systems Inc Quarterly Report 10-Q Filing - 3/31/2012
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