FORM 10-K (Mark One) | | | x | ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | | | | EXCHANGE ACT OF 1934 | | | | For the fiscal year ended December 31, 2011 | | 2014 | | o | | | ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | | | | SECURITIES EXCHANGE ACT OF 1934 | | | | For the transition period from __________________ to __________________ | |
Commission file number 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 organization) | | (I.R.S. Employer Identification No.) |
| | | 13001 Hollenberg12444 Powerscourt Drive, Bridgeton,Suite 550, St. Louis, Missouri | 6304463131 | | (314) 506-5500 | (Address of principal executive offices) | (Zip Code) | | (Telephone Number, incl. area code) | | | | |
Securities registered pursuant to Section 12(b) of the Act: | | | Title of each Class | | | Name of each exchange on which registered | Common Stock, par value $.50 | | | The Nasdaq Global Select Market | | Securities registered pursuant to Section 12(g) of the Act: | | | Title of each Class | | | | None | | | | | | | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo x
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 xNo o
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o☒
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer: o Accelerated filer: xNon-accelerated filer: o Smaller reporting company:o | ☐ | Accelerated filer: | ☒ | Non-accelerated filer: | ☐ | Smaller reporting company: | ☐ |
Indicate by check mark whether the registrant is a shell company(ascompany (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $327,184,000$540,000,000 based on the closing price of the common stock of $34.33$49.48 on June 30, 2011,2014, as reported by The Nasdaq Global Select Market. As of March 5, 2012,2, 2015, the Registrant had 10,383,11811,488,014 shares outstanding of common stock.
DOCUMENTS INCORPORATED BY REFERENCE Certain information required for Part III of this report is incorporated by reference fromto the Registrant’s Proxy Statement for the 20122015 Annual Meeting of Shareholders.
Table of Contents CASS INFORMATION SYSTEMS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
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”.Factors.” 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.
Table of Contents PART I. ITEM 1.BUSINESS Description of Business Cass Information Systems, Inc. (“Cass” or “the Company”the “Company”) is a leading provider of payment and information processing services to large manufacturing, distribution and retail enterprises across the United States. The Company provides transportation invoice rating, payment audit,processing, auditing, accounting and transportation information to many of the nation’s largest companies. It is also a processor and payer of utilityenergy invoices, including electricity, gas, waste, and other facility related expenses. Additionally, Cass competes in the telecommunications expense management market which includes bill processing, audit and payment services for telephone, data line, cellular and communication equipment expense. In January 2011, Cass opened an office in Breda, Netherlands, to support the Company’s multinational information processing clients. Cass purchased the assets of an environmental expense management company in January 2012 and now provides such services. The Company, through its wholly owned bank subsidiary, Cass Commercial Bank (“the Bank”(the “Bank”), also provides commercial banking services. The Bank’s primary focus is to support the Company’s payment operations and provide banking services to its target markets, which include privately ownedprivately-owned businesses and churches and church-related ministries. Services include commercial and commercial real estate loans, checking, savings and time deposit accounts and other cash management services. The principal offices of the Company are at 13001 Hollenberg Drive, Bridgeton, Missouri 63044. Other operating locations are in Bridgeton, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, and Breda, Netherlands and Jacksonville, Florida.Netherlands. The Bank’s headquarters are also located at the Bridgeton location, and the Bank operates twofour branches in the St. Louis metropolitan area and one loan production officeoffices in southern California.California and Colorado Springs, Colorado. The Company’s headquarters and the Bank’s headquarters are located in St. Louis County, Missouri. Company Strategy and Core Competencies Cass is an information services company with a primary focus on processing payables and payables-related transactions for large corporations located in the United States. Cass possesses four core competencies that encompass most of its processing services. Data acquisition – This refers to the gathering of data elements from diverse, heterogeneous sources and the building of complete databases for our customers. Data is the raw material of the information economy. Cass gathers vital data from complex and diverse input documents, electronic media, proprietary databases and data feeds, including data acquired from vendor invoices as well as customer procurement and sales systems. Through its numerous methods of obtaining streams and pieces of raw data, Cass is able to assemble vital data into centralized data management systems and warehouses, thus producing an engine to create the power of information for managing critical corporate functions and processing systems. Data management – Once data is assembled, Cass is able to utilize the power from derived information to produce significant savings and benefits for its clients. This information is integrated into customers’ unique financial and accounting systems, eliminating the need for internal accounting processing and providing internal and external support for these critical systems. Information is also used to produce management and exception reporting for operational control, feedback, planning assistance and performance measurement. Business Intelligence – Receiving information in the right place at the right time and in the required format is paramount for business survival. Cass’ information delivery solutions provide reports, digital images, data files and retrieval capabilities through the Internet or directly into customer internal systems. Cass’ proprietary Internet management delivery system is the foundation for driving these critical functions. Transaction, operational, control, status and processing exception information are all delivered through this system creating an efficient, accessible and highly reliable asset for Cass customers. Financial exchange – Since Cass is unique among its competition in that it owns a commercial bank, it is also able to manage the movement of funds from its customers to their suppliers. This is a distinguishing factor, which clearly requires the processing capability, operating systems and financial integrity of a banking organization. Cass provides immediate, accurate, controlled and protected funds management and transfer system capabilities for all of its customers. Old and costly check processing and delivery mechanisms are replaced with more efficient electronic cash management and funds transfer systems. Cass’ core competencies allow it to perform the highest volumes of transaction processing in an integrated, efficient and systematic approach. Not only is Cass able to process the transaction, it is also able to collect the data defining the transaction and effect the financial payment governing its terms. Cass’ shared business processes – Accounting, Human Resourcesaccounting, human resources and Technologytechnology – support its core competencies. Cass’ accounting function provides the internal control systems to ensure the highest levels of accountability and protection for customers. Cass’ human resources department provides experienced people dedicated to streamlining business procedures and reducing expenses. Cass’ technology is proven and reliable. The need to safeguard data and secure the efficiency, speed and timeliness that govern its business is a priority within the organization. The ability to leverage technology over its strategic units allows Cass the advantage of deploying technology in a proven and reliable manner without hindering clients’ strategic business and system requirements.
Table of Contents These core competencies, enhanced through shared business processes, drive Cass’ strategic business units. Building upon these foundations, Cass continues to explore new business opportunities that leverage these competencies and processes. Marketing, Customers and Competition The Company, through its Transportation Information Services business unit, is one of the largest firms in the transportation bill processing and payment industry in the United States based on the total dollars of transportation bills paid and items processed. Competition consists of a few primary competitors and numerous small transportation bill audit firms located throughout the United States. While offering transportation payment services, few of these audit firms compete on a national basis. These competitors compete mainly on price, functionality and service levels. The Company, through its Utility Information ServicesExpense Management business unit, also competes with other companies, located throughout the United States, that pay utilityenergy and waste bills and provide management reporting. Available data indicates that the Company is one of the largest providers of utilityenergy information processing and payment services. Cass’ Utility Information ServicesCass is unique among these competitors in that it is not exclusively affiliated with any one energy service provider (“ESP”). The ESPs market the Company’s services adding value with their unique auditing, consulting and technological capabilities. Many of Cass’ services are customized for the ESPs, providing a full-featured solution without any development costs to the ESP. Also the Company, through its Telecom Information Services business unit, is a leader in the growing telecom expense management market, and competes with other companies located throughout the United States in this market. In January 2011, Cass opened an office in Breda, Netherlands, to support the Company’s multinational information processing clients. The Company recently added environmental expense management services. The Bank is organized as a Missouri trust company with banking powers and was founded in 1906. DueThe Company is classified as a bank holding corporation due to its ownership of a federally insuredfederally-insured commercial bank the Companyand was a bank holding corporation and originally organized in 1982 as Cass Commercial Corporation under the laws of Missouri. It was approvedApproval by the Board of Governors of the Federal Reserve System (the “Federal Reserve”)was received in February 1983. The Company changed its name to Cass Information Systems, Inc. in January 2001. In December 2011, the Federal Reserve Bank (“FRB”) of St. Louis approved the election of Cass Information Systems, Inc. to become a financial holding company. As a financial holding company, Cass may engage in activities that are financial in nature or incidental to a financial activity. The Company’s bank subsidiaryBank encounters competition from numerous banks and financial institutions located throughout the St. Louis, Missouri metropolitan area and other areas in which the Bank competes. The Bank’s principal competitors, however, are large bank holding companies that are able to offer a wide range of banking and related services through extensive branch networks. The Bank targets its services to privately held businesses located in the St. Louis, Missouri area and church and church-related institutions located in St. Louis, Missouri, Orange County, California, Colorado Springs, Colorado, and other selected cities located throughout the United States. The Company holds several trademarks for the payment and rating services it provides. These include: FreightPay®FreightPay®, Transdata®Transdata®, TransInq®TransInq®, Ratemaker®Ratemaker®, Rate Advice®Advice®, First Rate®Rate®, Best Rate®Rate®, Rate Exchange®Exchange®, CassPort® and CassPort®Expense$mart®. The Company and its subsidiaries are not dependent on any one customer for a significant portion of their businesses. The Company and its subsidiaries have a varied client base with no individual client exceeding 10% of total revenue. Employees The Company and its subsidiaries had 750788 full-time and 287289 part-time employees as of March 5, 2012.2, 2015. Of these employees, the Bank had 5955 full-time and no part-time employees. Supervision and Regulation The Company and its bank subsidiary are extensively regulated under federal and state law. These laws and regulations are intended to primarily protect depositors, not shareholders. These laws also include the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (The Dodd-Frank Act). The regulations related to the Dodd-Frank Act are currently being written, and accordingly, the full implication of this new law is not yet known. The Bank is subject to regulation and supervision by the Missouri Division of Finance, the Federal Reserve Bank (the “FRB”)FRB and the Federal Deposit Insurance Corporation (the “FDIC”). The Company is a financial holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and as such, it is subject to regulation, supervision and examination by the FRB. Significant elements of the laws and regulations applicable to the Company and the Bank are described below. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the business, financial condition and results of operations of the Company. Bank Holding Company Activities – In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other related activities. In addition, bank holding companies that qualify and elect to be financial holding companies such as the Company, may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is requiredeither (i) financial in nature or incidental to file quarterlysuch financial activity complementary to a financial activity and annual reports withdoes not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Such permitted activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
Table of Contents To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section “Prompt Corrective Action” below. A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed’ under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB may impose limitations or conditions on the conduct of its activities during the non-compliance period, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to provide to the FRB such additional information ascompliance within 180 days, the FRB may require and it is subjectdivestiture of the holding company’s depository institutions. In order for a financial holding company to regular inspectionscommence any new activity permitted by the FRB.BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See “Community Reinvestment Act” below. The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company. The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by the Company of more than 5% of the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory agencies use Capital Adequacy Guidelinesauthority is required for the Bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing acquisition applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act and fair housing laws. The Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in their examination and regulation ofJuly 2010, significantly restructured the financial regulatory environment in the United States, affecting all bank holding companies and banks. Ifbanks, including the Company and the Bank, some of which are described in more detail below. The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on the Company or the Bank at this time, including the extent to which it could increase costs or restrict their ability to pursue business opportunities, or otherwise adversely affect the Company’s business, financial condition and results of operations. However, at a minimum, the Company expects that the regulations enacted under the Dodd-Frank Act will increase operating and compliance costs. Dividends –Both the Company and the Bank are subject to various regulations that restrict their ability to pay dividends and the amount of dividends that they may pay. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital falls belowand, under certain circumstances, the minimum levels established by theseability of federal regulators to prohibit dividend payments as an unsound or unsafe practice. Capital Requirements – As a bank holding company, the Company and the Bank are subject to capital requirements pursuant to the FRB’s capital guidelines the agencies may force certain remedial action to be taken. The Capital Adequacy Guidelines are of several types andwhich include (i) risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and account for off-balance sheet exposure; (ii) guidelines that consider market risk, which is the risk of loss due to change in value of assets and liabilities due to changes in interest rates; and (iii) guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may leverage its equity capital base. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For further discussionpurposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A banking organization’s capital, in turn, is classified in tiers, depending on type: Tier 1 – Currently, Tier 1 capital includes common equity, retained earnings, qualifying noncumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries, and, under existing standards, a limited amount of qualifying trust preferred securities, and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill, most intangible assets and certain other assets.
Table of Contents Tier 2 – Currently, Tier 2 capital includes, among other things, perpetual preferred stock not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations. Under the existing risk-based capital rules, the Company and the Bank are currently required to maintain Tier 1 capital and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4% and 8%, respectively, of its total risk-weighted assets (including various off-balance-sheet items). For a depository institution to be considered “well capitalized,” its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3% for financial holding companies and banking organizations that have the highest supervisory rating. All other banking organizations are required to maintain a minimum leverage ratio of 4%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well-capitalized,” its leverage ratio must be at least 5%. As of December 31, 2014 and 2013, the Company and the Bank exceeded all applicable capital requirements and each met the requirements to be considered well-capitalized. Basel III Capital Rules – Effective July 2, 2013, the FRB approved final rules known as the “Basel III Capital Rules” that substantially revise the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital framework agreed upon by the Basel Committee and incorporates changes required by the Dodd-Frank Act. The Basel III Capital Rules will come into effect for the Company and the Bank on January 1, 2015 (subject to a phase-in period). Among other things, the Basel III Capital Rules (i) introduce “Common Equity Tier 1” (“CET1”) as a new capital measure (which is subject to a number of phased-in deductions and adjustments); (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain requirements; (iii) define CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the adjustments as compared to existing regulations. CET1 capital consists of common stock instruments that meet criteria set forth in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interests. When fully phased-in on January 1, 2019, the Basel III Capital Rules require banking organizations to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer;” (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6%, plus the 2.5% capital conservation buffer; (iii) a minimum ratio of total capital (Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8%, plus the 2.5% capital conservation buffer; and (iv) as a newly adopted international standard, a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets. The Basel III Capital Rules also incorporate a countercyclical buffer of 0% to 2.5% of common equity or other fully loss-absorbing capital that may be implemented according to national circumstances as an extension of the conservation buffer. The capital conservation buffer is designed to absorb losses during periods of economic hardship. Institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will be subject to limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall. Implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased-in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). With respect to the Bank, the Basel III Capital Rules also revised the “prompt corrective action” regulations by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be well-capitalized. Management believes that, as of December 31, 2014, the Company and the Bank would meet all capital adequacy guidelinesrequirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income.
Table of Contents Source of Strength Doctrine – FRB and other regulations require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, the Company is expected to commit resources to support the Bank. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Deposit Insurance – Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC, and the Bank is subject to deposit insurance assessments to maintain the DIF. Deposit insurance assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC’s risk-based assessment system, insured institutions with less than $10 billion in assets, such as the Bank, are assigned to one of four risk categories based on supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other factors. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. FDIC insurance expense totaled approximately $332,600, $320,700 and $214,400 for the years ended December 31, 2014, 2013 and 2012, respectively. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Prompt Corrective Action – The Basel III Capital Rules incorporate new requirements into the prompt correction action framework, described above. The Federal Deposit Insurance Act (“FDIA”) requires that federal banking agencies take “prompt corrective action” against depository institutions that do not meet minimum capital requirements and includes the following five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio. A depository institution will be (i) “well-capitalized” if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to any regulatory order agreement or written directive to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of less than 4%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage ratio of less than 3%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2% of total assets. An institution may be deemed to be in a capital category that is lower than indicated by its capital ratios please referif it is determined to Item 7 “Management’s Discussionbe in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and Analysisthe capital category may not constitute an accurate representation of Financial Conditionthe bank’s overall financial condition or prospects for other purposes. The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and Resultsare required to submit a capital restoration plan, which must be guaranteed by parent holding companies. Bank holding companies must also provide appropriate assurances of Operations”performance, and are, to a certain extent, liable for the performance of their subsidiary banks. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. As of December 31, 2014 and 2013, the most recent notification from the regulatory agencies categorized the Company and the Bank as well-capitalized. For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see Item 8, Note 2 of this report.
Table of Contents Safety and Soundness Regulations – In accordance with the FDIA, the federal banking agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require that institutions maintain appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The FRB alsoguidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies authorize the agencies to require that an institution that has extensive enforcement authoritybeen given notice that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. Loans to One Borrower – The Bank generally may not make loans or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2014, the Bank was in compliance with the loans-to-one-borrower limitations. Depositor Preference – The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over financialother general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding companies, including,company, with respect to any extensions of credit they have made to such insured depository institution. Community Reinvestment Act – The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. The Bank received a rating of “satisfactory” in its most recent CRA exam. Financial Privacy – Banks and other financial institutions are subject to regulations that limit their ability to assess civil money penalties,disclose non-public information about consumers to issue ceasenonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and desistaffect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information and maintaining information security programs. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or removal ordershazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Transactions with Affiliates – Transactions between the Bank and its affiliates are subject to regulations that limit the types and amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’slength basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes the Company and its non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, certain purchases of assets from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that a holding company divest subsidiaries (includingany such transaction by the Bank (or its bank subsidiaries). In general, enforcement actions with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis. Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may be initiated for violationsnot involve more than the normal risk of lawrepayment or regulations or for unsafe or unsound practices. Both the FRBpresent other unfavorable features and Missouri Division of Finance also have restrictionsmay not exceed certain limitations on the amount of dividendscredit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.
Table of Contents Federal Reserve System – FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against aggregate transaction accounts between $12.4 million and $79.5 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that banks and financial holding companies may pay.portion of total transaction accounts in excess of $79.5 million. The first $12.4 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements. As a financial holding company,Other Regulations – The operations of the Company must obtain prior approval fromand the FRB before acquiring ownership or control of more than 10% of the voting shares of another financial/bank holding company or acquiring all or substantially all of the assets of such a company. In many cases, approval isBank are also required for the Company to engage in similar acquisitions involving a non-bank company or to engage in new non-bank activities. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company.subject to:
● | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; | ● | Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information; | ● | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; | ● | Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. | ● | Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services; | ● | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; | ● | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and | ● | The USA PATRIOT Act, which requires banks and savings institutions to establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. |
WebsiteWebsite Availability of SEC Reports
Cass files annual, quarterly and current reports with the Securities and Exchange Commission (the “SEC”). Cass will, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC, make available free of charge on its website each of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and its definitive proxy statements. The address of Cass’ website is: www.cassinfo.com. All reports filed with the SEC are available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549-021320549-2736 or for more information call the Public Reference Room at 1-800-SEC-0330. The SEC also makes all filed reports, proxy statements and information statements available on its website at www.sec.gov. The reference to ourthe Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report. Financial Information about Segments The services provided by the Company are classified in two reportable segments: Information Services and Banking Services. The revenues from external customers, net income and total assets by segment as of and for each of the years in the three yearthree-year period ended December 31, 2011,2014, are set forth in Item 8, Note 16 of this report.
Table of Contents Statistical Disclosure by Bank Holding Companies For the statistical disclosure by bank holding companies, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” ITEM 1A.RISK FACTORS This section highlights specific risks that could affect the Company’s business. Although this section attempts to highlight key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time, and Cass cannot predict such risks or estimate the extent to which they may affect the Company’s financial performance. In addition to the factors discussed elsewhere or incorporated by reference in this report, the identified risks that could cause actual results to differ materially include the following: General political, economic or industry conditions may be less favorable than expected. Local, domestic, and international economic, political and industry-specific conditions and governmental monetary and fiscal policies affect the industries in which the Company competes, directly and indirectly. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors outside of Cass’ control may adversely affect the Company. Economic downturns could result in the delinquency of outstanding loans, which could have a material adverse impact on Cass’ earnings. Unfavorable developments concerning customer credit quality could affect Cass’ financial results. Although the Company regularly reviews credit exposure related to its customers and various industry sectors in which it has business relationships, default risk may arise from events or circumstances that are difficult to detect or foresee. Under such circumstances, the Company could experience an increase in the level of provision for credit losses, delinquencies, nonperforming assets, net charge-offs and allowance for credit losses.
The Company has lending concentrations, including, but not limited to, churches and church-related entities located in selected cities and privately-held businesses located in or near St. Louis, Missouri, that could suffer a significant decline which could adversely affect the Company. Cass’ customer base consists, in part, of lending concentrations in several segments and geographical areas. If any of these segments or areas is significantly affected by weak economic conditions, the Company could experience increased credit losses, and its business could be adversely affected. Fluctuations in interest rates could affect Cass’ net interest income and balance sheet. The operations of financial institutions such as the Company are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Prevailing economic conditions, the fiscal and monetary policies of the federal government and the policies of various regulatory agencies all affect market rates of interest, which in turn significantly affect financial institutions’ net interest income. Fluctuations in interest rates affect Cass’ financial statements, as they do for all financial institutions. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal government and corporate securities and other investment vehicles, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a continuation of the current low level of interest rates would have a negative impact on the Company’s net interest income. Methods of reducing risk exposures might not be effective. Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, interest rate, market and liquidity, operational, regulatory/compliance, business risks and enterprise-wide risks could be less effective than anticipated. As a result, the Company may not be able to effectively mitigate its risk exposures in particular market environments or against particular types of risk. Customer borrowing, repayment, investment, deposit, and payable processing practices may be different than anticipated. The Company uses a variety of financial tools, models and other methods to anticipate customer behavior as part of its strategic and financial planning and to meet certain regulatory requirements. Individual, economic, political and industry-specific conditions and other factors outside of Cass’ control could alter predicted customer borrowing, repayment, investment, deposit, and payable processing practices. Such a change in these practices could adversely affect Cass’ ability to anticipate business needs, including cash flow and its impact on liquidity, and to meet regulatory requirements.
Table of Contents Cass must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated. If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, the Company’s existing product and service offerings, technology and systems may become obsolete. Further, if Cass fails to adopt or develop new technologies or to adapt its products and services to emerging industry standards, Cass may lose current and future customers, which could have a material adverse effect on its business, financial condition and results of operations. The payment processing and financial services industries are changing rapidly and in order to remain competitive, Cass must continue to enhance and improve the functionality and features of its products, services and technologies. These changes may be more difficult or expensive than the Company anticipates. Operational difficulties or securitycyber-security problems could damage Cass’ reputation and business. The Company depends on the reliable operation of its computer operations and network connections from its clients to its systems. Any operational problems or outages in these systems would cause Cass to be unable to process transactions for its clients, resulting in decreased revenues. In addition, any system delays, failures or loss of data, whatever the cause, could reduce client satisfaction with the Company’s products and services and harm Cass’ financial results. Cass also depends on the security of its systems. Company networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A material security problem affecting Cass could damage its reputation, deter prospects from purchasing its products and services, deter customers from using its products and services or result in liability to Cass. Cass’ stock price can become volatile and fluctuate widely in response to a variety of factors. The Company’s stock price can fluctuate based on factors that can include actual or anticipated variations in Cass’ quarterly results; new technology or services by competitors; unanticipated losses or gains due to unexpected events, including losses or gains on securities held for investment purposes; significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; changes in accounting policies or practices; failure to integrate acquisitions or realize anticipated benefits from acquisitions; or changes in government regulations.
General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or recessions, governmental intervention, interest rate changes, credit loss trends, low trading volume or currency fluctuations also could cause Cass’ stock price to decrease regardless of the Company’s operating results. Competitive product and pricing pressure within Cass’ markets may change. The Company operates in a very competitive environment, which is characterized by competition from a number of other vendors and financial institutions in each market in which it operates. The Company competes with large payment processors and national and regional financial institutions and also smaller auditing companies and banks in terms of products and pricing. If the Company is unable to compete effectively in products and pricing in its markets, business could decline. Management’s ability to maintain and expand customer relationships may differ from expectations. The industries in which the Company operates are very competitive. The Company not only competes for business opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers. The Company continues to experience pressures to maintain these relationships as its competitors attempt to capture its customers. The introduction, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the expansion of payment and processing activities to new markets, the expansion of products and services to existing markets and opening of new bank branches, may be less successful or may be different than anticipated. Such a result could adversely affect Cass’ business. The Company makes certain projections as a basis for developing plans and strategies for its payment processing and banking products. If the Company does not accurately determine demand for its products and services, it could result in the Company incurring significant expenses without the anticipated increases in revenue, which could result in an adverse effect on its earnings. Management’s ability to retain key officers and employees may change. Cass’ future operating results depend substantially upon the continued service of Cass’ executive officers and key personnel. Cass’ future operating results also depend in significant part upon Cass’ ability to attract and retain qualified management, financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense, and the Company cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire personnel over time. Cass’ business, financial condition and results of operations could be materially adversely affected by the loss of any of its key employees, by the failure of any key employee to perform in his or her current position, or by Cass’ inability to attract and retain skilled employees.
Table of Contents Recent legislative and regulatory initiatives to support the financial services industry have been coupled with numerous restrictions and requirements that could detrimentally affect the Company’s business. The Dodd-Frank Act is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Company and the Bank are supervised and regulated primarily by the FRB. In addition, the Company is subject to consolidated capital requirements, made more strict by the recent adoptions of the Basel III Capital Rules, and must serve as a source of strength to the Bank. It is possible such requirements may limit our capacity to pay dividends or repurchase shares. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. The Bank’s FDIC insurance premiums increased substantially beginning in 2009, and they expect to pay high premiums in the future. Economic conditions during the recent recession increased bank failures and decreased the DIF. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. Any increase in our FDIC premiums could have an adverse effect on the Bank’s profits and financial condition. The scope and impact of many of the Dodd-Frank Act provisions will be determined over time as regulations are issued and become effective. As a result, the Company cannot predict the ultimate impact of the Dodd-Frank Act at this time, including the extent to which it could increase costs or limit their ability to pursue business opportunities in an efficient manner, or otherwise adversely affect the business, financial condition and results of operations. However, it is expected that at a minimum, they will increase operating and compliance costs. Cass is subject to extensive regulatory oversight. The Company is subject to extensive regulation and supervision that is designed primarily for the protection of the DIF and depositors, and not to the benefit of the shareholders. As a result, the Company is limited in the manner in which it conducts business, undertakes new investments and activities and obtains financing. This regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Failure to comply with these and other regulatory requirements can lead to, among other remedies, administrative enforcement actions and other legal proceedings, including the imposition of civil money penalties. Changes in regulation or oversight may have a material adverse impact on Cass’ operations. The Company is subject to extensive regulation, supervision and examination by the Missouri Division of Finance, the FDIC, the FRB, the SEC and other regulatory bodies. Such regulation and supervision governs the activities in which the Company may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on Cass’ operations, investigations and limitations related to Cass’ securities, the classification of Cass’ assets and determination of the level of Cass’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on Cass’ operations. Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving the Company and its subsidiaries, could adversely affect Cass or the financial services industry in general. The Company is subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these matters, and there can be no assurance that the Company will prevail in any proceeding or litigation. Any such matter could result in substantial cost and diversion of Cass’ efforts, which by itself could have a material adverse effect on Cass’ financial condition and operating results. Further, adverse determinations in such matters could result in actions by Cass’ regulators that could materially adversely affect Cass’ business, financial condition or results of operations. Please refer to Item 3, “Legal Proceedings.”
Table of Contents The Company’s accounting policies and methods are the basis of how Cass reports its financial condition and results of operations, and they require management to make estimates about matters that are inherently uncertain. In addition, changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact Cass’ financial statements. The Company’s accounting policies and methods are fundamental to how Cass records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report Cass’ financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Company reporting materially different amounts than would have been reported under a different alternative. Cass has identified four accounting policies as being “critical” to the presentation of its financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. More information on Cass’ critical accounting policies is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” From time to time, the regulatory agencies, the Financial Accounting Standards Board (“FASB”), and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how management records and reports the Company’s financial condition and results of operations. Cass is subject to examinations and challenges by tax authorities, which, if not resolved in the Company’s favor, could adversely affect the Company’s financial condition and results of operations. In the normal course of business, Cass and its affiliates are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which it is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an adverse effect on Cass’ financial condition and results of operations. There could be terrorist activities or other hostilities, which may adversely affect the general economy, financial and capital markets, specific industries, and the Company. The terrorist attacks in September 2001 in the United States and ensuing events, as well as the resulting decline in consumer confidence, had a material adverse effect on the economy. Any similar future events may disrupt Cass’ operations or those of its customers. In addition, these events had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm Cass’ operations. Any of these events could increase volatility in the U.S. and world financial markets, which could harm Cass’ stock price and may limit the capital resources available to its customers and the Company. This could have a significant impact on Cass’ operating results, revenues and costs and may result in increased volatility in the market price of Cass’ common stock. There could be natural disasters, including, but not limited to, hurricanes, tornadoes, earthquakes, fires and floods, which may adversely affect the general economy, financial and capital markets, specific industries, and the Company. The Company has significant operations and customer base in Missouri, California, Ohio, Massachusetts, South Carolina, Kansas, Florida, Colorado and other regions where natural disasters may occur. These regions are known for being vulnerable to natural disasters and other risks, such as tornadoes, hurricanes, earthquakes, fires and floods. These types of natural disasters at times have disrupted the local economy, Cass’ business and customers and have posed physical risks to Cass’ property. A significant natural disaster could materially affect Cass’ operating results. ITEM 1B.UNRESOLVED STAFF COMMENTS None.
Table of Contents ITEM 2.PROPERTIES In September 2012, the Company entered into a 10-year lease for office space in St. Louis County, Missouri, to house the headquarters of the Company and the Bank. The Company’s headquarters are locatedoccupy 13,991 square feet in an office center at 13001 Hollenberg12444 Powerscourt Drive, Bridgeton, Missouri. This location is owned byand the Bank’s headquarters occupy 10,564 square feet in the same center at 12412 Powerscourt Drive. The Company and includes a building withowns approximately 61,500 square feet of office space. space at 13001 Hollenberg Drive in Bridgeton, Missouri where the Company’s transportation processing activities are performed. The Company also owns a production facility of approximately 45,500 square feet located at 2675 Corporate Exchange Drive, Columbus, Ohio. Additional facilities are located in Lowell, Massachusetts, where approximately 7,000 square feet of office space is leased through March 2016, Greenville, South Carolina, where approximately 8,500 square feet of office space is leased through November 2013, Wellington, Kansas, where approximately 2,000 square feet of office space is leased through June 2016Jacksonville, Florida and Columbus, Ohio where approximately 8,500 square feet of office space is leased through March 2013.Ohio. The Company has an office in Breda, Netherlands to service its multinational customers. Total space leased is 732 square feet and it is leased through December 2013. During January 2012, Cass purchased the assets of an environmental expense management company in Jacksonville, Florida with two locations totaling 4,876 square feet leased through December 2012. The Bank’s headquarters are also located at 13001 Hollenberg Drive, Bridgeton, Missouri. The Bank occupies approximately 20,500 square feet of the 61,500 square foot building. In addition, the Bank owns a banking facility near downtown St. Louis, Missouri, that consists of approximately 1,750 square feet with adjoining drive-up facilities. The Bankhas an operating branch in the Bridgeton, Missouri location, and has additional leased facilities in Fenton, Missouri, (2,000 square feet) and Santa Ana, California (3,400 square feet). The Bank closed its facilities in Maryland Heights, Missouri (2,500 square feet) and Chesterfield, Missouri (2,850 square feet) in December 2011 and February 2012, respectively.Colorado Springs, Colorado.
Management believes that these facilities are suitable and adequate for the Company’s operations. ITEM 3.LEGAL PROCEEDINGS The Company is the defendantand its subsidiaries are not involved in a proceedingany pending in the United States Bankruptcy Court for the District of Delaware, which proceeding was initiated by Chapter 11 debtor LNT Services, Inc. ("LNT"), an affiliate of Linens N' Things, on December 19, 2009. LNT seeks to avoid and recover $33,825,773.71 in allegedly preferential payments (the "Payments") made to the Company within 90 days preceding LNT’s bankruptcy filing. The Company processed and paid the freight carrier bills for Linens N’ Things. The Payments were received by the Company in the normal course of providing services to Linens N' Things, and were subsequently paid by the Company to the appropriate Linens N’ Things freight carriers. In an attempt to secure a favorable result prior to filing an answer, the Company has provided the plaintiff with information and data which supports its primary defenses. 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"). The suit alleges infringement of two Asentinel patents by the Company, AnchorPoint and Veramark. Cass vigorously denies infringing any valid claim of either patent. Asentinel has requested an order enjoining the Company from infringing the two patents at issue, damages for the alleged infringement, interest and costs, treble damages for willful infringement, and attorneys' fees.
While there is some uncertainty relating to anyproceedings other than ordinary routine litigation management is of the opinion that the Company has valid defenses to both these claims. 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.their businesses. Management believes the outcomenone of these proceedings, including the LNT and Asentinel proceedings, will notif determined adversely, would have a material effect on the businessesbusiness or financial conditions of the Company or its subsidiaries.
ITEM 4.MINE SAFETY DISCLOSURES Not applicable.
Table of Contents PART II.II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS The Company’s common stock is quoted on The Nasdaq Global Select Market® under the symbol “CASS.” As of March 5, 2012,2, 2015, there were 148155 holders of record of the Company’s common stock. High and low sale prices, as reported by The Nasdaq Global Select Market for each quarter of 20112014 and 2010, restated for stock dividends,2013, were as follows: | | 2011 | | 2010 | | 2014 | | 2013 | | | High | | Low | | High | | Low | | High | | Low | | High | | Low | 1stQuarter | | $ | 36.23 | | $ | 32.08 | | $ | 28.82 | | $ | 26.50 | | $ | 67.29 | | $ | 45.74 | | $ | 43.97 | | $ | 38.01 | 2ndQuarter | | | 36.64 | | 32.49 | | 31.82 | | 27.37 | | 54.17 | | | 48.55 | | | 47.31 | | 39.41 | 3rdQuarter | | | 35.25 | | 27.05 | | | 32.08 | | 28.75 | | 51.00 | | 41.19 | | 62.57 | | 46.23 | 4thQuarter | | 36.39 | | 35.54 | | 36.81 | | 30.46 | | 54.91 | | 39.00 | | 68.81 | | 50.95 |
The Company has continuously paid regularly scheduled cash dividends since 1934 and expects to continue to pay quarterly cash dividends in the future. Cash dividends paid per share restated for stock dividends, by the Company during the two most recent fiscal years were as follows: | | 2011 | | 2010 | 2014 | | 2013 | March | | $ | .145 | | $ | .127 | $ | .200 | | $ | .180 | June | | .145 | | | .127 | | .200 | | .180 | September | | .145 | | | .127 | | .200 | | .180 | December | | | .170 | | .145 | | .210 | | .200 |
On October 17, 2011,Subsidiary dividends can be a significant source of funds for payment of dividends by the BoardCompany to its shareholders. Both the Company and the Bank are subject to various regulations that restrict their ability to pay dividends and the amount of Directors re-authorizeddividends that they may pay. Under the repurchaseFDICIA, a depository institution, such as the Bank, may not pay dividends if payment would cause it to become undercapitalized or if it is already undercapitalized. The payment of updividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to 330,000maintain adequate capital and, under certain circumstances, the ability of federal regulators to prohibit dividend payments as an unsound or unsafe practice. For further information regarding capital ratios and leverage ratio requirements of the Company and the Bank and the effect on payment of dividends, see Item 8, Note 2 of this report.
During the three months ended December 31, 2014, the Company repurchased a total of 19,960 shares of the Company’sits common stock pursuant to aits treasury stock buyback program, maintained by the Company. Under the program,as follows: | | | Total Number of | Maximum Number | | | | Shares Purchased as | of Shares that May | | | | Part of Publicly | Yet Be Purchased | | Total Number of | Average Price Paid | Announced Plans or | Under the Plans or | Period | Shares Purchased | per Share | Programs(1) | Programs | October 1, 2014 – | 1,000 | $43.35 | 1,000 | 499,000 | October 31, 2014 | | | | | November 1, 2014 – | – | – | – | 499,000 | November 30, 2014 | | | | | December 1, 2014 – | 18,960 | $47.13 | 18,960 | 480,040 | December 31, 2014 | | | | | Total | 19,960 | $46.94 | 19,960 | 480,040 |
(1) | All repurchases made during the quarter ended December 31, 2014 were made pursuant to the treasury stock buyback program which was re-authorized by the Board of Directors on October 17, 2011 and announced by the Company on October 20, 2011. The program provides that the Company may repurchase up to an aggregate of 363,000 shares of common stock (increased to 500,000 shares by the Board of Directors on October 20, 2014) and has no expiration date. |
The Company repurchased 12,000a total of 39,502 shares (not restated for the 2011 stock dividend) forat an aggregate purchase pricecost of $467,000 in 2010. There were no repurchases in 2011. As of$1,848,000 during the year ended December 31, 2011, 330,000 shares remained available for repurchase under2014 and 0 during the program.year ended December 31, 2013. A portion of the repurchased shares may be used for the Company'sCompany’s employee benefit plans, and the balance will be available for other general corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt, current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.
Table of Contents Performance Quoted on The Nasdaq Stock Market for the Last Five Fiscal Years The following graph compares the cumulative total returns over the last five fiscal years of a hypothetical investment of $100 in shares of common stock of the Company with a hypothetical investment of $100 in The Nasdaq Stock Market (US) (“Nasdaq”) and in the index of Nasdaq computer and data processing stocks. The graph assumes $100 was invested on December 31, 2006,2009, with dividends reinvested. Returns are based on period end prices.
ITEM 6.SELECTED FINANCIAL DATA The following table presents selected financial information for each of the five years ended December 31. The selected financial data should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Item 8 of this report. (Dollars in thousands except per share data) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | Fee revenue and other income | | $ | 62,824 | | | $ | 56,146 | | | $ | 51,238 | | | $ | 53,170 | | | $ | 48,200 | | $ | 79,907 | | $ | 76,572 | | $ | 71,138 | | $ | 62,824 | | $ | 56,146 | | Interest income on loans | | 39,515 | | 39,785 | | 36,003 | | 34,204 | | 36,288 | | | 29,726 | | 32,110 | | 35,525 | | 39,515 | | 39,785 | | Interest income on debt and equity securities | | 10,034 | | 8,747 | | 7,611 | | 7,716 | | 5,531 | | | Interest income on equity securities | | | 9,441 | | 8,915 | | 9,938 | | 10,034 | | 8,747 | | Other interest income | | 686 | | 514 | | 170 | | 2,218 | | 7,527 | | | 592 | | 552 | | 470 | | 686 | | 514 | | Total interest income | | 50,235 | | 49,046 | | 43,784 | | 44,138 | | 49,346 | | | 39,759 | | 41,577 | | 45,933 | | 50,235 | | 49,046 | | Interest expense on deposits | | 4,374 | | 4,875 | | 4,924 | | 3,179 | | 7,728 | | | 2,460 | | 2,832 | | 3,148 | | 4,374 | | 4,875 | | Interest expense on short-term borrowings | | — | | — | | 23 | | 12 | | 6 | | | Interest on debentures and other | | — | | — | | 106 | | 187 | | 230 | | | Total interest expense | | 4,374 | | 4,875 | | 5,053 | | 3,378 | | 7,964 | | | Net interest income | | 45,861 | | 44,171 | | 38,731 | | 40,760 | | 41,382 | | | Provision for loan losses | | 2,150 | | 4,100 | | 2,050 | | 2,200 | | 900 | | | — | | 500 | | 2,400 | | 2,150 | | 4,100 | | Net interest income after provision | | 43,711 | | 40,071 | | 36,681 | | 38,560 | | 40,482 | | | 37,299 | | 38,245 | | 40,385 | | 43,711 | | 40,071 | | Operating expense | | 75,029 | | 68,284 | | 66,385 | | 65,564 | | 62,739 | | | 85,414 | | 84,086 | | 80,333 | | 75,029 | | 68,284 | | Income before income tax expense | | 31,506 | | 27,933 | | 21,534 | | 26,166 | | 25,943 | | | 31,792 | | 30,731 | | 31,190 | | 31,506 | | 27,933 | | Income tax expense | | 8,497 | | 7,623 | | 5,405 | | 7,160 | | 8,148 | | | 7,759 | | 7,234 | | 7,887 | | 8,497 | | 7,623 | | Net income | | $ | 23,009 | | | $ | 20,310 | | | $ | 16,129 | | | $ | 19,006 | | | $ | 17,795 | | $ | 24,033 | | $ | 23,497 | | $ | 23,303 | | $ | 23,009 | | $ | 20,310 | | Diluted earnings per share | | $ | 2.21 | | | $ | 1.95 | | | $ | 1.57 | | | $ | 1.85 | | | $ | 1.73 | | $ | 2.06 | | $ | 2.02 | | $ | 2.02 | | $ | 2.01 | | $ | 1.78 | | Dividends per share | | .61 | | .53 | | .48 | | .45 | | .41 | | | .81 | | .74 | | .64 | | .55 | | .48 | | Dividend payout ratio | | 27.29 | % | | | 26.82 | % | | | 30.54 | % | | | 24.14 | % | | | 23.53 | % | | 38.85 | % | | | 36.21 | % | | | 31.59 | % | | | 27.29 | % | | | 26.82 | % | Average total assets | | $ | 1,301,635 | | | $ | 1,157,257 | | | $ | 978,171 | | | $ | 922,471 | | | $ | 891,734 | | $ | 1,424,967 | | | $ | 1,351,782 | | | $ | 1,344,492 | | $ | 1,301,635 | | $ | 1,157,257 | | Average net loans | | 683,215 | | 666,202 | | 606,304 | | 546,110 | | 508,621 | | | 651,984 | | | | 647,827 | | 671,900 | | 683,215 | | 666,202 | | Average debt and equity securities | | 263,264 | | 222,249 | | 193,393 | | 197,273 | | 141,363 | | | Average investment securities | | | 321,836 | | 294,846 | | 313,184 | | 263,264 | | 222,249 | | Average total deposits | | 541,337 | | 470,096 | | 375,572 | | 241,844 | | 279,831 | | | 571,039 | | 550,110 | | 541,046 | | 541,337 | | 470,096 | | Average subordinated convertible debentures | | — | | — | | 1,984 | | 3,669 | | 3,699 | | | Average total shareholders’ equity | | 151,669 | | 137,748 | | 117,663 | | 104,185 | | 89,427 | | | 200,149 | | 175,441 | | 167,867 | | 151,669 | | | 137,748 | | Return on average total assets | | 1.77 | % | | | 1.76 | % | | | 1.65 | % | | | 2.06 | % | | | 2.00 | % | | 1.69 | % | | | 1.74 | % | | | 1.73 | % | | | 1.77 | % | | | 1.76 | % | Return on average equity | | 15.17 | | 14.74 | | 13.71 | | 18.24 | | 19.90 | | | 12.01 | | | 13.39 | | | 13.88 | | | 15.17 | | 14.74 | | Average equity to assets ratio | | 11.65 | | 11.90 | | 12.03 | | 11.29 | | 10.03 | | | 14.05 | | 12.98 | | 12.49 | | 11.65 | | 11.90 | | Equity to assets ratio at year-end | | 12.17 | | 11.96 | | 12.79 | | 12.00 | | 11.01 | | | 13.36 | | 14.36 | | 13.80 | | 12.17 | | 11.96 | | Tangible common equity to tangible assets | | 11.66 | | 11.38 | | 12.11 | | 11.19 | | 10.18 | | | 12.52 | | 13.39 | | 12.47 | | 11.66 | | 11.38 | | Tangible common equity to risk-weighted assets | | 17.47 | | 15.20 | | 15.60 | | 13.60 | | 14.25 | | | Tangible common equity to risk-weighted | | | | | | | | | | | | | assets | | | 19.65 | | 20.37 | | 17.98 | | 17.47 | | 15.20 | | Net interest margin | | 4.31 | | 4.61 | | 4.79 | | 5.34 | | 5.45 | | | 3.43 | | 3.63 | | 4.00 | | 4.31 | | | 4.61 | | Allowance for loan losses to loans at year-end | | 1.93 | | 1.68 | | 1.29 | | 1.09 | | 1.26 | | | 1.78 | | 1.79 | | 1.80 | | | 1.93 | | 1.68 | | Nonperforming assets to loans and foreclosed assets | | .51 | | .35 | | .55 | | .57 | | .77 | | | Net loan charge-offs to average loans outstanding | | .16 | | .07 | | .04 | | .37 | | .24 | | | Nonperforming assets to loans and foreclosed | | | | | | | | | | | | | | | | assets | | | .07 | | .27 | | 1.15 | * | | .51 | | | .35 | | Net loan (recoveries) charge-offs to average | | | | | | | | | | | | | loans outstanding | | | (.03 | ) | | .18 | | .44 | | .16 | | .07 | |
* In February 2013, a payment of $4,115,000 was received for one nonaccrual loan with a balance of $4,198,000. $83,000 was charged off. The percentage, as adjusted, would have been .54%.
Table of Contents ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis provides information about the financial condition and results of operations of the Company for the years ended December 31, 2011, 20102014, 2013 and 2009. All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2011.2012. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and other selected financial data presented elsewhere in this report.
Executive Overview Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, and Breda, Netherlands and Jacksonville, Florida.Netherlands. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays utilityenergy invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass extracts, stores, and presents information from freight, utility,energy, telecommunication and environmental invoices, assisting its customers’ transportation, energy, environmental and information technology managers in making decisions that will enable them to improve operating performance. The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers. It then provides the data in a central repository for access and archiving. The data is finally transformed into information through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical processing. The Company also, through Cass Commercial Bank, its St. Louis, Missouri basedMissouri-based bank subsidiary, (the “Bank”), provides banking services in the St. Louis metropolitan area, Orange County, California, Colorado Springs, Colorado, and other selected cities in the United States. In addition to supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-related ministries. The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services. Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, utility,energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. As economic conditions continued to slowly improve in 2011, 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,” 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 portionTable of the Company’s business during the year ended December 31, 2011 and the current activities are not significant enough to pose substantial risk.Contents
On January 6, 2012, the Company acquired the assets of Waste Reduction Consultants, Inc., one of the fastest-growing providersa provider of environmental expense management services. This acquisition positions the Company to expand its portfolio of services for controlling facility-related expenses and accelerates Cass’ leadership position as a back-office business processor. The results of operations for this new service will beare included in the Information Services business segment beginning in January 2012.segment. In 2011,2014, total fee revenue and other income increased $6,678,000,$3,335,000, or 12%4%, net interest income after provision for loan losses increased $3,640,000,decreased $946,000, or 9%2%, and total operating expenses increased $6,745,000,$1,328,000, or 10%2%. These results were driven by a 3,932,000,3,344,000, or 10%7%, increase in items processed and $4,519,000,000,$3,382,792,000, or 16%10%, increase in dollars processed.processed in 2014. This positive performance in 2014 was mainly attributed to a large number of new customers in the transportation expense management operation, driven by both successful marketing efforts and the solid market leadership position held by Cass. Conversely, performance in the facility expense management operation was hampered, despite a high number of new customer wins, as competitor consolidation in the energy sector continued to impair customer retention. Gains on sales of investments securities were down significantly, by $4,001,000, or 99%. The asset quality of the Company’s loans and investments as of December 31, 20112014 remained strong. Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.
Impact of New and Not Yet Adopted Accounting Pronouncements In June 2011,The new accounting pronouncements are not applicable to the FASB issued Accounting Standards Update (“ASU”) No. 2011-05 –Comprehensive Income (ASC Topic 220) – Presentation of Comprehensive Income. This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income Company and/or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. ASU No. 2011-12 deferred the presentation of reclassification adjustments and superseded certain pending paragraphs in ASU No. 2011-05. As these ASU’s address financial statement presentation, the adoptions willdo not materially impact the Company’s consolidated financial statements or results of operations.
In September 2011, the FASB issued ASU No. 2011-08 –Intangibles – Goodwill and Other (ASC Topic 350) – Testing of Goodwill for Impairment. This ASU simplifies how entities test goodwill for impairment. The amendments under this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.Company.
Critical Accounting Policies The Company has prepared the consolidated financial statements in this report in accordance with the FASB Accounting Standards Codification (“ASC”). In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below. Investment in Debt Securities.The Company classifies its debt marketable securities as available-for-sale. Securities classified as available-for-sale are carried at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and reported in accumulated other comprehensive income, a component of shareholders’ equity. A decline in the fair value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. To determine whether impairment is other than temporary, the Company considers guidance provided in FASB ASC Topic 320,Investments –Debt and Equity Securities.When determining whether a debt security is other-than-temporarily impaired, the Company assesses whether it has the intent to sell the security and whether it is more likely than not that the Company will be required to sell prior to recovery of the amortized cost basis. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. Allowance for Loan LossesLosses.. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan portfolio. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly, the Company expects to continue to utilize the present processes. Impairment of AssetsIncome Taxes.. 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 fiscal years ended December 31, 2011, 2010 and 2009 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.
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 Item 8, Note 13 to the consolidated financial statements.statements contained herein.
Table of Contents 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, 2011,2014, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Item 8, Note 10 to the consolidated financial statements. There have been no significant changes in the Company’s long-term rate of return assumptions for the past three fiscal years ended December 31 and management believes they are not reasonably likely to change in the future. Pursuant to FASB ASC 715, “Compensation – Retirement Benefits,”Benefits” (“ASC 715”), the Company has recognized the funded status of its defined benefit postretirement plan in its consolidated balance sheet and has recognized changes in that funded status through comprehensive income. The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end. Summary of Results | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | % Change | (In thousands except per share data) | 2014 | | 2013 | | 2012 | | 2014 v. 2013 | | 2013 v. 2012 | Total processing volume | | 54,741 | | | | 51,397 | | | | 47,067 | | | 6.5 | % | | 9.2 | % | Total processing dollars | $ | 38,472,500 | | | $ | 35,089,708 | | | $ | 33,162,412 | | | 9.6 | | | 5.8 | | Payment and processing fees | $ | 77,427 | | | $ | 70,805 | | | $ | 66,695 | | | 9.4 | | | 6.2 | | Net interest income after provision for | | | | | | | | | | | | | | | | | | loan losses | $ | 37,299 | | | $ | 38,245 | | | $ | 40,385 | | | (2.5 | ) | | (5.3 | ) | Total net revenue | $ | 117,206 | | | $ | 114,817 | | | $ | 111,523 | | | 2.1 | | | 3.0 | | Average earning assets | $ | 1,242,549 | | | $ | 1,198,710 | | | $ | 1,201,846 | | | 3.7 | | | (.3 | ) | Net interest margin* | | 3.43 | % | | | 3.63 | % | | | 4.00 | % | | | | | | | Net income | $ | 24,033 | | | $ | 23,497 | | | $ | 23,303 | | | 2.3 | | | .8 | | Diluted earnings per share | $ | 2.06 | | | $ | 2.02 | | | $ | 2.02 | | | 2.0 | | | — | | Return on average assets | | 1.69 | % | | | 1.74 | % | | | 1.73 | % | | | | | | | Return on average equity | | 12.01 | % | | | 13.39 | % | | | 13.88 | % | | | | | | |
Summary of Results*Presented on a tax-equivalent basis
| | For the Years Ended December 31, | | % Change | (In thousands except per share data) | | 2011 | | 2010 | | 2009 | | 2011 v. 2010 | | 2010 v. 2009 | Total processing volume | | | 42,466 | | | | 38,534 | | | | 34,619 | | | 10.2 | % | | 11.3 | % | Total processing dollars | | $ | 31,945,761 | | | $ | 27,426,336 | | | $ | 23,717,451 | | | 16.5 | | | 15.6 | | Payment and processing fees | | $ | 60,688 | | | $ | 54,183 | | | $ | 48,665 | | | 12.0 | | | 11.3 | | Net interest income after provision for loan losses | | $ | 43,711 | | | $ | 40,071 | | | $ | 36,681 | | | 9.1 | | | 9.2 | | Total net revenue | | $ | 106,535 | | | $ | 96,217 | | | $ | 87,919 | | | 10.7 | | | 9.4 | | Average earning assets | | $ | 1,188,283 | | | $ | 1,060,559 | | | $ | 894,951 | | | 12.0 | | | 18.5 | | Net interest margin* | | | 4.31 | % | | | 4.61 | % | | | 4.79 | % | | | | | | | Net income | | $ | 23,009 | | | $ | 20,310 | | | $ | 16,129 | | | 13.3 | | | 25.9 | | Diluted earnings per share | | $ | 2.21 | | | $ | 1.95 | | | $ | 1.57 | | | 13.3 | | | 24.3 | | Return on average assets | | | 1.77 | % | | | 1.76 | % | | | 1.65 | % | | | | | | | Return on average equity | | | 15.17 | % | | | 14.74 | % | | | 13.71 | % | | | | | | |
* | | Presented on a tax-equivalent basis |
The results of 20112014 compared to 20102013 include the following significant items: Payment and processing fee revenue increased as the number of transactions processed increased. This positive performance in 2014 was mainly attributed to a large number of new customers in the transportation expense management operation, driven by both successful marketing efforts and the solid market leadership position held by Cass. Conversely, performance in the facility expense management operation was hampered, despite a high number of new customer wins, as competitor consolidation in the energy sector continued to impair customer retention. Net interest income after provision for loan losses decreased $946,000, or 2%, due to the decrease in the net interest margin on a tax equivalent basis from 3.63% in 2013 to 3.43% in 2014. The increase in average earning assets was the result of increases in accounts and drafts payable and deposits. Gains from the sale of securities were $23,000 in 2014 and $4,024,000 in 2013. Bank service fees were down $83,000, or 7%, and other income was up $797,000. Operating expenses increased $1,328,000, or 2%, primarily due to salary and technology expense increases. The results of 2013 compared to 2012 include the following significant items: Payment and processing fee revenue increased as the number of transactions processed increased. This increase was due to increased activity from both base and new customers. Net interest income after provision for loan losses increased $3,640,000,decreased $2,140,000, or 9%5%, due to the 12% growthdecrease in average earning assets. Thethe net interest margin on a tax equivalent basis decreased from 4.61%4.00% in 20102012 to 4.31%3.63% in 2011.2013. The growthdecrease in average earning assets was funded by increasesthe result of a decrease in deposits and accounts and drafts payable. Gains from the sale of securities were $43,000 in 2011 and $0 in 2010. Bank service fees were down $56,000, or 4%, and other income was up $229,000 primarily due topayable, partially offset by an increase in bank-owned life insurance income. Operating expenses increased $6,745,000, or 10%, primarily in response to the increase in business volume.
The results of 2010 compared to 2009 include the following significant items:
Payment and processing fee revenue increased as the number of transactions processed increased. This increase was due to increased activity from both base and new customers.
Net interest income after provision for loan losses increased $3,390,000, or 9%, due to the 18% growth in average earning assets. The net interest margin on a tax equivalent basis was 4.61% in 2010 compared to 4.79% in 2009. The growth in average earning assets was funded mainly by the increase in deposits.
Gains from the sale of securities were $0$4,024,000 in 20102013 and $697,000$2,635,000 in 2009.2012. Bank service fees were up $86,000,down $57,000, or 6%4%, and other income was approximately the same in 2010 and 2009.as last year. Operating expenses increased $1,899,000,$3,753,000, or 3%5%, primarily in response tothe area of salaries and benefits resulting from the increase in business volume, as well as higher professional fees as the Company invested for future growth.volume.
Table of Contents Fee Revenue and Other Income The Company’s fee revenue is derived mainly from transportation and utilityfacility payment and processing fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income. Processing volumes, fee revenue and other income were as follows: | | December 31, | | % Change | December 31, | | % Change | (In thousands) | | 2011 | | 2010 | | 2009 | | 2011 v. 2010 | | 2010 v. 2009 | 2014 | | 2013 | | 2012 | | 2014 v. 2013 | | 2013 v. 2012 | Transportation invoice transaction volume | | 29,025 | | 26,287 | | 23,137 | | 10.4 | % | | 13.6 | % | | 34,141 | | 31,895 | | 28,790 | | 7.0 | % | | 10.8 | % | Transportation invoice dollar volume | | $ | 20,599,503 | | $ | 16,966,003 | | $ | 14,047,342 | | 21.4 | | 20.8 | | $ | 25,993,966 | | $ | 23,506,097 | | $ | 22,263,118 | | 10.6 | | 5.6 | | Utility transaction volume | | 13,441 | | 12,247 | | 11,482 | | 9.7 | | 6.7 | | | Utility transaction dollar volume | | $ | 10,702,242 | | $ | 10,460,333 | | $ | 9,670,109 | | 2.3 | | 8.2 | | | Expense management transaction volume* | | | 20,600 | | 19,502 | | 18,277 | | 5.6 | | 6.7 | | Expense management dollar volume* | | $ | 12,478,534 | | $ | 11,583,611 | | $ | 10,899,294 | | 7.7 | | 6.3 | | Payment and processing revenue | | $ | 60,688 | | $ | 54,183 | | $ | 48,665 | | 12.0 | | 11.3 | | $ | 77,427 | | $ | 70,805 | | $ | 66,695 | | 9.4 | | 6.2 | | Bank service fees | | $ | 1,354 | | $ | 1,410 | | $ | 1,324 | | (4.0 | ) | | 6.5 | | $ | 1,132 | | $ | 1,215 | | $ | 1,272 | | (6.8 | ) | | (4.5 | ) | Gains on sales of investment securities | | $ | 43 | | $ | 0 | | $ | 697 | | — | | — | | $ | 23 | | $ | 4,024 | | $ | 2,635 | | (99.4 | ) | | 52.7 | | Other | | $ | 739 | | $ | 553 | | $ | 552 | | 33.6 | | 0.2 | | $ | 1,325 | | $ | 528 | | $ | 536 | | 150.9 | | (.1 | ) |
* Includes energy, telecom and environmental Fee revenue and other income in 20112014 compared to 20102013 include the following significant pre-tax components: Transportation dollartransaction volume increased by 21%7% during the year, primarily due to increased activity from new customers. Expense management transaction volume increased 6%. Overall, revenues for the year were up primarily due to new business in the transportation sector. Gains on sales of investment securities were down significantly because the Company held on to its investments. Fee revenue and other income in 2013 compared to 2012 include the following significant pre-tax components: Transportation transaction volume increased 11% during the past year, primarily due to increased activity from both base and new customers. UtilityExpense management transaction dollar volume had a slight increase of 2%increased 7%. Overall, revenues for the year were up 12%. Fee revenue and other income in 2010 compared to 2009 include the following significant pre-tax components:
Transportation dollar volume increased by 21% during 2010. This increase wasprimarily due to new business in the increased activity from both base and new customers. Utility transaction dollar volume was up a solid 8%. Overall, revenues for the yeartransportation sector. Gains on sales of investment securities were up 11%.significantly as the Company took advantage of market gains.
Net Interest Income Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors: | | December 31, | | % Change | December 31, | | % Change | (In thousands) | | 2011 | | 2010 | | 2009 | | 2011 v. 2010 | | 2010 v. 2009 | 2014 | | 2013 | | 2012 | | 2014 v. 2013 | | 2013 v. 2012 | Average earning assets | | $ | 1,188,283 | | $ | 1,060,559 | | $ | 894,951 | | 12.0 | % | | 18.5 | % | $ | 1,242,549 | | | $ | 1,198,710 | | $ | 1,201,846 | | 3.7 | % | | (.3 | %) | Net interest income* | | $ | 51,248 | | $ | 48,891 | | $ | 42,869 | | 4.8 | | 14.0 | | $ | 42,587 | | | $ | 43,468 | | | $ | 48,086 | | | (2.0 | ) | | (9.6 | ) | Net interest margin* | | 4.31 | % | | 4.61 | % | | 4.79 | % | | | | | | | 3.43 | % | | | 3.63 | % | | 4.00 | % | | | | | | Yield on earning assets* | | 4.68 | % | | 5.07 | % | | 5.35 | % | | | | | | | 3.63 | % | | 3.86 | % | | 4.26 | % | | | | | | Rate on interest bearing liabilities | | 1.07 | % | | 1.37 | % | | 1.81 | % | | | | | | | .58 | % | | .69 | % | | .78 | % | | | | | |
* | | Presented on a tax-equivalent basis using a tax rate of 35% in 2011, 35% in 2010 and 34% in 2009. |
* Presented on a tax-equivalent basis using a tax rate of 35% in all years. Net interest income in 20112014 compared to 2010:2013: The increasedecrease in net interest income was caused by the increase in average earning assets, partially offset by a decrease in net interest margin. The increase in earning assets was funded mainly by the increase in deposits and accounts and drafts payable. The decrease in net interest margin was due to the lack of satisfactory investment alternatives in this historically low interest rate environment. More information is contained in the tables below and in Item 7A of this report. Total average loans increased $20,083,000,$4,402,000, or 3%less than 1%, to $695,984,000.$663,824,000. Loans have a positive effect on interest income and the net interest margin due to the fact that loans are one of the Company’s highest yielding earning assets for any given maturity. Total average investment in securities increased $41,015,000,$26,990,000, or 18%, to $263,264,000.9%. The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. All purchases were made in accordance with the Company’s investment policy. Interest bearing deposits in other financial institutions increased $14,591,000, or 12%. Total average federal funds sold and other short-term investments increased $2,370,000,decreased $2,144,000, or 2%. The Bank’s total average interest-bearing deposits increased $52,276,000,$11,019,000, or 15%3%, compared to the prior year. This increase in deposits, along with the $63,318,000, or 12% increase in accounts and drafts payable, funded the increase in earning assets. Average rates paid on interest-bearing liabilities decreased from 1.37%.69% to 1.07%.58% as a result of the continued low interest rate environment.
Table of Contents Net interest income in 20102013 compared to 2009:2012: The increasedecrease in net interest income was caused by the increase in average earning assets, partially offset by a decrease in net interest margin. The increase in earning assets was funded mainly by the increase in deposits and accounts and drafts payable. The decrease in net interest margin was due to the continuedlack of satisfactory investment alternatives in this historically low interest rate environment. More information is contained in the tables below and in Item 7A of this report.
Total average loans increased $62,642,000,decreased $25,175,000, or 10%4%, to $675,901,000.$659,422,000. Loans have a positive effect on interest incomeinterestincome and the net interest margin due to the fact that loans are one of the Company’s highestCompany’shighest yielding earning assets for any given maturity. Total average investment in securities increased $28,856,000,decreased $16,927,000, or 15%, to $222,249,000.6%. The investment portfolio will expand and contract over time as the interest rate environment changes and the Company manages its liquidity and interest rate position. All purchases were made in accordanceinaccordance with the Company’s investment policy. Total average federal funds sold and other short-term investments increased $68,280,000,$36,051,000, or 117%41%. The Bank’s totalBank’stotal average interest-bearing deposits increased $83,063,000,$8,712,000, or 30%2%, compared to the prior year. This increase in deposits, along with the $73,729,000, or 16% increase in accounts and drafts payable, funded the increase in earning assets. Average rates paid on interest-bearing liabilities decreased from 1.81%.78% to 1.37%..69% as a result of the continued low interest rate environment experienced during 2010.environment. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential The following table contains condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported: | | | 2014 | | 2013 | | 2012 | | | | | | | Interest | | | | | | Interest | | | | Interest | | | | | | 2011 | | 2010 | | 2009 | | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | (In thousands) | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | Assets1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans2, 3: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable | | $ | 695,121 | | $ | 39,504 | | 5.68 | % | | $ | 674,026 | | $ | 39,723 | | 5.89 | % | | $ | 610,171 | | $ | 35,872 | | 5.88 | % | | $ | 647,896 | | | $ | 29,316 | | 4.52 | % | | $ | 657,385 | | | $ | 32,078 | | | 4.88 | % | | $ | 683,921 | | | $ | 35,521 | | 5.19 | % | Tax-exempt4 | | 863 | | 18 | | 2.09 | | 1,875 | | 95 | | 5.07 | | 3,088 | | 202 | | 6.54 | | | 15,928 | | 630 | | 3.96 | | 2,037 | | 49 | | | 2.45 | | 676 | | 6 | | .89 | | Securities5: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable | | 997 | | 37 | | 3.71 | | 885 | | 43 | | 4.86 | | 3,373 | | 58 | | 1.72 | | | 1,095 | | 21 | | 1.92 | | 1,068 | | 21 | | | 1.97 | | 1,014 | | 25 | | 2.47 | | Tax-exempt4 | | 261,466 | | 15,373 | | 5.88 | | 221,364 | | 13,391 | | 6.05 | | 190,020 | | 11,620 | | 6.12 | | | 316,991 | | 14,480 | | 4.57 | | 288,571 | | 13,573 | | | 4.70 | | 305,552 | | 15,177 | | 4.97 | | Certificates of deposit | | 801 | | 4 | | .50 | | — | | — | | — | | — | | — | | — | | | 3,750 | | 8 | | .21 | | 5,207 | | 27 | | | .52 | | 6,618 | | 35 | | .53 | | Interest-bearing deposits in other financial institutions | | 99,911 | | 347 | | .35 | | 35,655 | | 139 | | .39 | | 29,825 | | 72 | | 0.24 | | | Federal funds sold and other short-term investments | | 129,124 | | 339 | | .26 | | 126,754 | | 375 | | .30 | | 58,474 | | 98 | | 0.17 | | | Interest-bearing deposits in other | | | | | | | | | | | | | | | | | | | financial institutions | | | 135,263 | | 424 | | .31 | | 120,672 | | 398 | | | .33 | | 116,346 | | 362 | | .31 | | Federal funds sold and other | | | | | | | | | | | | | | | | | | | short-term investments | | | 121,626 | | 168 | | .14 | | 123,770 | | 154 | | | .12 | | 87,719 | | 108 | | .12 | | Total earning assets | | 1,188,283 | | 55,622 | | 4.68 | | 1,060,559 | | 53,766 | | 5.07 | | 894,951 | | 47,922 | | 5.35 | | | 1,242,549 | | 45,047 | | 3.63 | | 1,198,710 | | 46,300 | | | 3.86 | | 1,201,846 | | 51,234 | | 4.26 | | Non-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and due from banks | | 12,525 | | | | | | 10,794 | | | | | | 9,541 | | | | | | | 12,074 | | | | | | 12,476 | | | | | | 12,469 | | | | | | Premise and equipment, net | | 9,790 | | | | | | 9,979 | | | | | | 11,171 | | | | | | | 14,793 | | | | | | 12,258 | | | | | | 9,649 | | | | | | Bank owned life insurance | | 14,299 | | | | | | 13,924 | | | | | | 13,376 | | | | | | | 15,295 | | | | | | 15,160 | | | | | | 14,625 | | | | | | Goodwill and other intangibles | | 7,688 | | | | | | 7,795 | | | | | | 7,942 | | | | | | | Goodwill and other | | | | | | | | | | | | | | | | | | | intangibles | | | 14,593 | | | | | | 15,078 | | | | | | 14,970 | | | | | | Other assets | | 81,819 | | | | | | 63,905 | | | | | | 48,145 | | | | | | | 137,503 | | | | | | 109,695 | | | | | | 103,630 | | | | | | Allowance for loan losses | | (12,769 | ) | | | | | | (9,699 | ) | | | | | | (6,955 | ) | | | | | | | (11,840 | ) | | | | | | (11,595 | ) | | | | | | (12,697 | ) | | | | | | Total assets | | $ | 1,301,635 | | | | | | $ | 1,157,257 | | | | | | $ | 978,171 | | | | | | | $ | 1,424,967 | | | | | | | $ | 1,351,782 | | | | | | $ | 1,344,492 | | | | | | Liabilities and Shareholders’ Equity1 | Liabilities and Shareholders’ Equity1 | Liabilities and Shareholders’ Equity1 | | | | | | | | | | | | | | | | Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing demand deposits | | $ | 233,636 | | $ | 2,162 | | .93 | % | | $ | 182,869 | | $ | 2,082 | | 1.14 | % | | $ | 127,952 | | $ | 1,798 | | 1.41 | % | | Interest-bearing demand | | | | | | | | | | | | | | | | | | | deposits | | | $ | 317,120 | | | $ | 1,564 | | .49 | % | | $ | 283,728 | | | $ | 1,737 | | | .61 | % | | $ | 256,332 | | | $ | 1,739 | | .68 | % | Savings deposits | | 25,556 | | 225 | | .88 | | 28,137 | | 321 | | 1.14 | | 25,268 | | 334 | | 1.32 | | | 17,073 | | 87 | | .51 | | 20,840 | | 138 | | | .66 | | 24,261 | | 169 | | .70 | | Time deposits >=$100 | | 52,123 | | 690 | | 1.32 | | 52,510 | | 814 | | 1.55 | | 43,590 | | 1,063 | | 2.44 | | | 29,643 | | 337 | | 1.14 | | 33,703 | | 357 | | | 1.06 | | 39,638 | | 456 | | 1.15 | | Other time deposits | | 97,419 | | 1,297 | | 1.33 | | 92,942 | | 1,658 | | 1.78 | | 76,585 | | 1,729 | | 2.26 | | | 59,628 | | 472 | | .79 | | 74,174 | | 600 | | | .81 | | 83,502 | | 784 | | .94 | | Total interest-bearing deposits | | 408,734 | | 4,374 | | 1.07 | | 356,458 | | 4,875 | | 1.37 | | 273,395 | | 4,924 | | 1.80 | | | 423,464 | | 2,460 | | .58 | | 412,445 | | 2,832 | | | .69 | | 403,733 | | 3,148 | | .78 | | Short-term borrowings | | 3 | | — | | — | | 33 | | — | | — | | 3,759 | | 23 | | 0.61 | | | 6 | | — | | — | | 3 | | — | | | — | | 5 | | — | | — | | Subordinated debentures | | — | | — | | — | | — | | — | | — | | 1,984 | | 106 | | 5.34 | | | Total interest bearing liabilities | | 408,737 | | 4,374 | | 1.07 | | 356,491 | | 4,875 | | 1.37 | | 279,138 | | 5,053 | | 1.81 | | | 423,470 | | 2,460 | | .58 | | 412,448 | | 2,832 | | | .69 | | 403,738 | | 3,148 | | .78 | | Non-interest bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand deposits | | 132,603 | | | | | | 113,638 | | | | | | 102,177 | | | | | | | 147,575 | | | | | | 137,665 | | | | | | 137,313 | | | | | | Accounts and drafts payable | | 596,935 | | | | | | 533,617 | | | | | | 459,888 | | | | | | | 643,077 | | | | | | 600,611 | | | | | | 616,573 | | | | | | Other liabilities | | 11,691 | | | | | | 15,763 | | | | | | 19,305 | | | | | | | 10,696 | | | | | | 25,617 | | | | | | 19,001 | | | | | | Total liabilities | | | 1,149,966 | | | | | | 1,019,509 | | | | | | 860,508 | | | | | | | 1,224,818 | | | | | | 1,176,341 | | | | | | 1,176,625 | | | | | | Shareholders’ equity | | | 151,669 | | | | | | 137,748 | | | | | | 117,663 | | | | | | | 200,149 | | | | | | 175,441 | | | | | | 167,867 | | | | | | Total liabilities and shareholders’ equity | | $ | 1,301,635 | | | | | | $ | 1,157,257 | | | | | | $ | 978,171 | | | | | | | Total liabilities and | | | | | | | | | | | | | | | | | | | | | shareholders’ equity | | | $ | 1,424,967 | | | | | | $ | 1,351,782 | | | | | | $ | 1,344,492 | | | | | | Net interest income | | | | | $ | 51,248 | | | | | | $ | 48,891 | | | | | | $ | 42,869 | | | | | | | $ | | 42,587 | | | | | | $ | 43,468 | | | | | | | $ | 48,086 | | | | Net interest margin | | | | | 4.31 | % | | | | | | 4.61 | % | | | | | | 4.79 | % | | | | | | | 3.43 | % | | | | | | 3.63 | % | | | | | | 4.00 | % | | | | Interest spread | | | | | 3.61 | % | | | | | | 3.70 | % | | | | | | 3.54 | % | | | | | | | 3.05 | % | | | | | | 3.17 | % | | | | | | 3.48 | % | | | |
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 Item 8, Note 1 of this report. 3 Interest income on loans includes net loan fees of $325,000, $339,000, and $333,000 for 2014, 2013 and 2012, respectively. 4 Interest income is presented on a tax-equivalent basis assuming a tax rate 35% in all years. The tax-equivalent adjustment was approximately $5,288,000, $4,723,000 and $5,301,000 for 2014, 2013 and 2012, respectively. 5 For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.
| | | 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 Item 8, Note 1 of this report. | 3 | | Interest income on loans includes net loan fees of $542,000, $372,000 and $409,000 for 2011, 2010 and 2009, respectively. | 4 | | Interest income is presented on a tax-equivalent basis assuming a tax rate of 35% in 2011, 35% in 2010 and 34% for 2009. The tax-equivalent adjustment was approximately $5,387,000, $4,720,000 and $4,138,000 for 2011, 2010 and 2009, 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. |
Table of Contents Analysis of Net Interest Income Changes The following table presents the changes in interest income and expense between years due to changes in volume and interest rates. | | 2011 Over 2010 | | 2010 Over 2009 | | 2014 Over 2013 | | 2013 Over 2012 | (In thousands) | | Volume1 | | Rate1 | | Total | | Volume1 | | Rate1 | | Total | | Volume1 | | Rate1 | | Total | | Volume1 | | Rate1 | | Total | Increase (decrease) in interest income: | | | | | | | | | | | | | Loans2,3: | | | | | | | | | | | | | Taxable | | $ | 1,222 | | $ | (1,441 | ) | | $ | (219 | ) | | $ | 3,763 | | $ | 88 | | $ | 3,851 | | | $ | (457 | ) | | $ | (2,305 | ) | | $ | (2,762 | ) | | $ | (1,346 | ) | | $ | (2,097 | ) | | $ | (3,443 | ) | Tax-exempt4 | | (37 | ) | | (40 | ) | | (77 | ) | | (68 | ) | | (39 | ) | | (107 | ) | | 533 | | 48 | | 581 | | 23 | | 20 | | 43 | | Securities: | | | | | | | | | | | | | Taxable | | 5 | | (11 | ) | | (6 | ) | | (65 | ) | | 50 | | (15 | ) | | 1 | | (1 | ) | | 0 | | 1 | | (5 | ) | | (4 | ) | Tax-exempt4 | | 2,367 | | (385 | ) | | 1,982 | | 1,897 | | (126 | ) | | 1,771 | | | 1,307 | | (400 | ) | | 907 | | (821 | ) | | (783 | ) | | (1,604 | ) | Certificates of deposit | | 2 | | 2 | | 4 | | — | | — | | — | | | (6 | ) | | (13 | ) | | (19 | ) | | (7 | ) | | (1 | ) | | (8 | ) | Interest-bearing deposits in other financial institutions | | 224 | | (16 | ) | | 208 | | 16 | | 51 | | 67 | | | Federal funds sold and other short-term investments | | | 7 | | (43 | ) | | (36 | ) | | 167 | | 110 | | 277 | | | Interest-bearing deposits in other | | | | | | | | | | | | | financial institutions | | | 46 | | (20 | ) | | 26 | | 14 | | 22 | | 36 | | Federal funds sold and other short-term | | | | | | | | | | | | | investments | | | | (3 | ) | | 17 | | 14 | | 45 | | 1 | | 46 | | Total interest income | | $ | 3,790 | | $ | (1,934 | ) | | $ | 1,856 | | $ | 5,710 | | $ | 134 | | $ | 5,844 | | | $ | 1,421 | | $ | (2,674 | ) | | $ | (1,253 | ) | | $ | (2,091 | ) | | $ | (2,843 | ) | | $ | (4,934 | ) | Interest expense on: | | | | | | | | | | | | | Interest-bearing demand deposits | | $ | 513 | | $ | (433 | ) | | $ | 80 | | $ | 670 | | $ | (386 | ) | | $ | 284 | | | $ | 189 | | $ | (362 | ) | | $ | (173 | ) | | $ | 176 | | $ | (178 | ) | | $ | (2 | ) | Savings deposits | | (28 | ) | | (68 | ) | | (96 | ) | | 36 | | (49 | ) | | (13 | ) | | (22 | ) | | (29 | ) | | (51 | ) | | (23 | ) | | (8 | ) | | (31 | ) | Time deposits >=$100 | | (6 | ) | | (118 | ) | | (124 | ) | | 189 | | (438 | ) | | (249 | ) | | (45 | ) | | 25 | | (20 | ) | | (65 | ) | | (34 | ) | | (99 | ) | Other time deposits | | 77 | | (438 | ) | | (361 | ) | | 330 | | (401 | ) | | (71 | ) | | | (115 | ) | | (13 | ) | | (128 | ) | | (82 | ) | | (102 | ) | | (184 | ) | Short-term borrowings | | — | | — | | — | | (11 | ) | | (12 | ) | | (23 | ) | | Subordinated debentures | | | — | | — | | — | | (53 | ) | | (53 | ) | | (106 | ) | | | | | Total interest expense | | | 556 | | (1,057 | ) | | (501 | ) | | 1,161 | | (1,339 | ) | | (178 | ) | | | 7 | | (379 | ) | | (372 | ) | | 6 | | (322 | ) | | (316 | ) | Net interest income | | $ | 3,234 | | $ | (877 | ) | | $ | 2,357 | | $ | 4,549 | | $ | 1,473 | | $ | 6,022 | | | $ | 1,414 | | $ | (2,295 | ) | | $ | (881 | ) | | $ | (2,097 | ) | | $ | (2,521 | ) | | $ | (4,618 | ) |
1 | | The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the change in each. | 2 | | Average balances include nonaccrual loans. | 3 | | Interest income includes net loan fees. | 4 | | Interest income is presented on a tax-equivalent basis assuming a tax rate of 35% in 2011, 35% in 2010 and 34% in 2009. |
1The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the change in each. 2Average balances include nonaccrual loans. 3Interest income includes net loan fees. 4Interest income is presented on a tax-equivalent basis assuming a tax rate 35% in all years. Loan Portfolio Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was $671,565,000$669,346,000 and represented 51%44.6% of the Company's total assets as of December 31, 20112014 and generated $39,515,000$29,726,000 in revenue during the year then ended. The Company had no sub-prime mortgage loans or residential development loans in its portfolio for any of the years presented. The following tables show the composition of the loan portfolio at the end of the periods indicated and remaining maturities for loans as of December 31, 2011.2014. Loans by Type | | | | December 31, | | | December 31, | | (In thousands) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | Commercial and industrial | | $ | 136,916 | | $ | 135,061 | | $ | 93,371 | | $ | 118,044 | | $ | 100,827 | | $ | 203,350 | | $ | 171,304 | | $ | 160,862 | | $ | 136,916 | | $ | 135,061 | Real estate (Commercial and church): | | | Real estate (commercial and church): | | | | | | | | | | | | Mortgage | | 488,574 | | 517,593 | | 471,773 | | 416,151 | | 365,056 | | 423,641 | | 455,190 | | 502,961 | | 488,574 | | 517,593 | Construction | | 45,564 | | 54,752 | | 74,407 | | 56,221 | | 31,082 | | 18,612 | | 16,449 | | 23,475 | | 45,564 | | 54,752 | Industrial Revenue Bond | | | 23,348 | | 9,167 | | — | | — | | — | Other | | 511 | | 1,227 | | 2,406 | | 1,560 | | 1,490 | | 395 | | 67 | | 435 | | 511 | | 1,227 | Total loans | | $ | 671,565 | | $ | 708,633 | | $ | 641,957 | | $ | 591,976 | | $ | 498,455 | | $ | 669,346 | | $ | 652,177 | | $ | 687,733 | | $ | 671,565 | | $ | 708,633 |
Table of Contents Loans by Maturity | | | | | | | | | | | | | | | | | | | | | | (At December 31, 2014) | | One Year | | Over 1 Year | | Over | | | | | | Or Less | | Through 5 Years | | 5 Years | | | | | | Fixed | | Floating | | Fixed | | Floating | | Fixed | | Floating | | | | (In thousands) | | Rate | | Rate1 | | Rate | | Rate1 | | Rate | | Rate1 | | Total | Commercial and industrial | | $ | 7,104 | | $ | 77,726 | | $ | 31,843 | | $ | 48,185 | | $ | 4,754 | | $ | 33,738 | | $ | 203,350 | Real Estate: | | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 50,829 | | | 15,560 | | | 275,898 | | | 16,246 | | | 44,674 | | | 20,434 | | | 423,641 | Construction | | | 6,982 | | | 2,641 | | | 2,823 | | | 6,166 | | | — | | | — | | | 18,612 | Industrial Revenue Bond | | | — | | | — | | | 13,107 | | | — | | | 10,241 | | | — | | | 23,348 | Other | | | — | | | 395 | | | — | | | — | | | — | | | — | | | 395 | Total loans | | $ | 64,915 | | $ | 96,322 | | $ | 323,671 | | $ | 70,597 | | $ | 59,669 | | $ | 54,172 | | $ | 669,346 |
1Loans by Maturityhave been classified as having "floating" interest rates if the rate specified in the loan varies with the prime commercial rate of interest. Note: Due to the historically low interest rates, the Company instituted a 4% floor for its prime lending rate.(At December 31, 2011) | | One Year | | Over 1 Year | | Over | | | | | | Or Less | | Through 5 Years | | 5 Years | | | | | | Fixed | | Floating | | Fixed | | Floating | | Fixed | | Floating | | | | (In thousands) | | Rate | | Rate1 | | Rate | | Rate1 | | Rate | | Rate1 | | Total | Commercial and industrial | | $ | 1,762 | | $ | 58,494 | | $ | 22,492 | | $ | 24,689 | | $ | 2,363 | | $ | 27,116 | | $ | 136,916 | Mortgage | | | 53,326 | | | 26,713 | | | 312,066 | | | 50,589 | | | 34,841 | | | 11,730 | | | 489,265 | Construction | | | 10,599 | | | 34,274 | | | — | | | — | | | — | | | — | | | 44,873 | Other | | | — | | | 506 | | | 5 | | | — | | | — | | | — | | | 511 | Total loans | | $ | 65,687 | | $ | 119,987 | | $ | 334,563 | | $ | 75,278 | | $ | 37,204 | | $ | 38,846 | | $ | 671,565 |
| | | 1 | | Loans have been classified as having "floating" interest rates if the rate specified in the loan varies with the prime commercial rate of interest. Note: Due to the historically low interest rates, the Company instituted a 4% floor for its prime lending rate. |
The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan portfolio composition table and as are discussed in Item 8, Note 4, of this report. As can be seen in the loan composition table above and as are discussed in Item 8, Note 4, the Company's primary market niche for banking services is privately held businesses and churches and church-related ministries. Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable, inventory, machinery and equipment, and the real estate from which the borrower operates. Operating lines of credit to these companies generally are secured by accounts receivable and inventory, with specific percentages of each determined on a customer-by-customer basis based on various factors including the type of business. Intermediate term credit for machinery and equipment is generally provided at some percentage of the value of the equipment purchased, depending on the type of machinery or equipment purchased by the entity. Loans secured exclusively by real estate to businesses and churches are generally made with a maximum 80% loan to value ratio, depending upon the Company's estimate of the resale value and ability of the property to generate cash. The Company's loan policy requires an independent appraisal for all loans over $250,000secured by real estate. Company management monitors the local economy in an attempt to determine whether it has had a significant deteriorating effect on such real estate loans. When problems are identified, appraised values are updated on a continual basis, either internally or through an updated external appraisal. Loan portfolio changes from December 31, 20102013 to December 31, 2011:2014: Total loans decreased $37,068,000,increased $17,169,000, or 5%3%, to $671,565,000. This decrease was the result of intense competition in the marketplace as other lending institutions expanded their loan portfolios.$669,346,000. Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4. Loan portfolio changes from December 31, 20092012 to December 31, 2010:2013: Total loans increased $66,676,000,decreased $35,556,000, or 10%5%, to $708,633,000. This increase was the result of successful marketing efforts by the Company’s lending staff, particularly in the commercial and industrial loan sector. The growth in real estate mortgage loans was primarily due to increased activity in the church portfolio.$652,177,000. Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4. Provision and Allowance for Loan Losses (ALLL) The Company recorded ano provision for loan losses of $2,150,000 in 2011, $4,100,0002014, $500,000 in 20102013 and $2,050,000$2,400,000 in 2009.2012. The amount of the provisionstheprovisions for loan losses was derived from the Company’s quarterly analysisquarterlyanalysis of the allowance for loan losses. The amount of the provision will fluctuate as determined by these quarterly analyses. The decrease in provision for loan losses in 2011 was due to the decrease in loan balances described above. The Company had net loan (recoveries) charge-offs of $1,087,000, $493,000($215,000), $1,178,000, and $217,000$2,997,000 in 2011, 20102014, 2013, and 2009,2012, respectively. The allowance for loan lossesALLL was $12,954,000$11,894,000 at December 31, 20112014 compared to $11,891,000$11,679,000 at December 31, 20102013 and $8,284,000$12,357,000 at December 31, 2009.2012. The year-end 20112014 allowance represented 1.93%1.8% of outstanding loans, compared to 1.68% of outstanding loansthe same as at year-end 20102013 and 1.29% at year-end 2009.2012. From December 31, 20102013 to December 31, 2011,2014, the level of nonperforming loans increased $1,173,000decreased $1,309,000 from $565,000$1,797,000 to $1,738,000,$488,000, which represents .26%.07% of outstanding loans. Nonperforming loans are more fully explained in the section entitled “NonperformingAssets.” The allowance for loan lossesALLL has been established and is maintained to absorb reasonably estimated and 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.adequate. Charges or credits are 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, specificcomponents: 1) estimated credit losses on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310 and general. The Company develops specific allowances on commercial, commercial real estate, and construction loans based on individual review2) estimated credit losses inherent in the remainder of these loans andthe loan portfolio in accordance with FASB ASC 450. Estimated credit losses is an estimate of the borrower’s abilitycurrent amount of loans that is probable the Company will be unable to repaycollect according to the loan givenoriginal terms. For loans that are individually evaluated, the availabilityCompany uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral other sourcesvalue. For the remainder of cash flowthe portfolio, the Company groups loans with similar risk characteristics into eight segments and collection options available. The general component relatesapplies historical loss rates to all other loans, which are evaluatedeach segment based on loan grade.a three fiscal-year look-back period. The loan grade assigned to each loanhistorical look-back calculation is typically evaluatedadditionally risk-weighted with the emphasis 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.the most-recent charge-off activity. In addition, to the amounts derived from the loan grades, a portion is added to the general allowance to take into account otherqualitative factors including credit concentration risk, national and local economic conditions, nature and volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losslosses in collateral value, trends in credit quality at the Company and in the banking industry and trends in risk rating changes. As partrisk-rating agencies are also considered.
Table of their examination process, federalContents The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required levels of regulatory capital. Federal and state agencies review the Company'sCompany’s methodology for maintaining the allowance for loan losses and the related balance.theALLL. These agencies may require the Company to increaseadjust the allowance for loan lossesALLL based on their judgments and interpretations about information available to them at the time of their examination.examinations.
The following schedule summarizes activity in the allowance for loan losses and the allocation of the allowance to the Company’s loan categories. Summary of Loan Loss Experience | | December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | Allowance at beginning of year | | $ | 11,891 | | | $ | 8,284 | | | $ | 6,451 | | | $ | 6,280 | | | $ | 6,592 | | Loans charged-off: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 1,118 | | | | 554 | | | | 109 | | | | 2,120 | | | | 337 | | Real estate (Commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 28 | | | | — | | | | 291 | | | | — | | | | 1,038 | | Construction | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | — | | | | — | | | | — | | | | 53 | | | | — | | Total loans charged-off | | | 1,146 | | | | 554 | | | | 400 | | | | 2,173 | | | | 1,375 | | Recoveries of loans previously charged-off: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 58 | | | | 60 | | | | 180 | | | | 136 | | | | 159 | | Real estate (Commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 1 | | | | 1 | | | | 3 | | | | — | | | | 4 | | Construction | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | — | | | | — | | | | — | | | | 8 | | | | — | | Total recoveries of loans previously charged-off | | | 59 | | | | 61 | | | | 183 | | | | 144 | | | | 163 | | Net loans charged-off | | | 1,087 | | | | 493 | | | | 217 | | | | 2,029 | | | | 1,212 | | Provision charged to expense | | | 2,150 | | | | 4,100 | | | | 2,050 | | | | 2,200 | | | | 900 | | Allowance at end of year | | $ | 12,954 | | | $ | 11,891 | | | $ | 8,284 | | | $ | 6,451 | | | $ | 6,280 | | Loans outstanding: | | | | | | | | | | | | | | | | | | | | | Average | | $ | 695,984 | | | $ | 675,901 | | | $ | 613,259 | | | $ | 552,333 | | | $ | 515,123 | | December 31 | | | 671,565 | | | | 708,633 | | | | 641,957 | | | | 591,976 | | | | 498,455 | | Ratio of allowance for loan losses to loans outstanding: | | | | | | | | | | | | | | | | | | | | | Average | | | 1.86 | % | | | 1.76 | % | | | 1.35 | % | | | 1.17 | % | | | 1.22 | % | December 31 | | | 1.93 | % | | | 1.68 | % | | | 1.29 | % | | | 1.09 | % | | | 1.26 | % | Ratio of net charge-offs to average loans outstanding | | | .16 | % | | | .07 | % | | | .04 | % | | | .37 | % | | | .24 | % | Allocation of allowance for loan losses1: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 2,594 | | | $ | 2,732 | | | $ | 1,511 | | | $ | 1,521 | | | $ | 3,380 | | Real estate (Commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 9,573 | | | | 8,491 | | | | 5,953 | | | | 4,343 | | | | 2,564 | | Construction | | | 783 | | | | 656 | | | | 809 | | | | 569 | | | | 318 | | Other | | | 4 | | | | 12 | | | | 11 | | | | 18 | | | | 18 | | Total | | $ | 12,954 | | | $ | 11,891 | | | $ | 8,284 | | | $ | 6,451 | | | $ | 6,280 | | Percentage of categories to total loans: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 20.4 | % | | | 19.2 | % | | | 14.9 | % | | | 20.5 | % | | | 21.1 | % | Real estate (Commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 72.7 | % | | | 72.9 | % | | | 73.1 | % | | | 69.7 | % | | | 72.4 | % | Construction | | | 6.8 | % | | | 7.7 | % | | | 11.6 | % | | | 9.5 | % | | | 6.2 | % | Other | | | 0.1 | % | | | 0.2 | % | | | 0.4 | % | | | 0.3 | % | | | 0.3 | % | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | 1 | | Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category. |
| | December 31, | (In thousands) | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | Allowance at beginning of year | | $ | 11,679 | | | $ | 12,357 | | | $ | 12,954 | | | $ | 11,891 | | | $ | 8,284 | | Loans charged-off: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | — | | | | 1,307 | | | | 1,546 | | | | 1,118 | | | | 554 | | Real estate (commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 76 | | | | 233 | | | | 1,562 | | | | 28 | | | | — | | Construction | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | 3 | | | | — | | | | — | | | | — | | | | — | | Total loans charged-off | | | 79 | | | | 1,540 | | | | 3,108 | | | | 1,146 | | | | 554 | | Recoveries of loans previously charged-off: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 41 | | | | 47 | | | | 111 | | | | 58 | | | | 60 | | Real estate (commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 252 | | | | 315 | | | | — | | | | 1 | | | | 1 | | Construction | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | 1 | | | | — | | | | — | | | | — | | | | — | | Total recoveries of loans previously charged-off | | | 294 | | | | 362 | | | | 111 | | | | 59 | | | | 61 | | Net loans (recovered) charged-off | | | (215 | ) | | | 1,178 | | | | 2,997 | | | | 1,087 | | | | 493 | | Provision charged to expense | | | — | | | | 500 | | | | 2,400 | | | | 2,150 | | | | 4,100 | | Allowance at end of year | | $ | 11,894 | | | $ | 11,679 | | | $ | 12,357 | | | $ | 12,954 | | | $ | 11,891 | | Loans outstanding: | | | | | | | | | | | | | | | | | | | | | Average | | $ | 663,824 | | | $ | 659,422 | | | $ | 684,597 | | | $ | 695,984 | | | $ | 675,901 | | December 31 | | | 669,346 | | | | 652,177 | | | | 687,733 | | | | 671,565 | | | | 708,633 | | Ratio of allowance for loan losses to loans | | | | | | | | | | | | | | | | | | | | | outstanding: | | | | | | | | | | | | | | | | | | | | | Average | | | 1.79 | % | | | 1.77 | % | | | 1.81 | % | | | 1.86 | % | | | 1.76 | % | December 31 | | | 1.78 | % | | | 1.79 | % | | | 1.80 | % | | | 1.93 | % | | | 1.68 | % | Ratio of net charge-offs to average loans | | | | | | | | | | | | | | | | | | | | | outstanding | | | (.03 | )% | | | .18 | % | | | .44 | % | | | .16 | % | | | .07 | % | Allocation of allowance for loan losses1: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 3,515 | | | $ | 3,139 | | | $ | 3,192 | | | $ | 2,594 | | | $ | 2,732 | | Real estate (commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 7,076 | | | | 7,439 | | | | 8,687 | | | | 9,573 | | | | 8,491 | | Construction | | | 140 | | | | 124 | | | | 470 | | | | 783 | | | | 656 | | Industrial Revenue Bond | | | 394 | | | | 155 | | | | — | | | | — | | | | — | | Other2 | | | 769 | | | | 822 | | | | 8 | | | | 4 | | | | 12 | | Total | | $ | 11,894 | | | $ | 11,679 | | | $ | 12,357 | | | $ | 12,954 | | | $ | 11,891 | | Percentage of categories to total loans: | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 30.4 | % | | | 26.3 | % | | | 23.4 | % | | | 20.4 | % | | | 19.2 | % | Real estate (commercial and church): | | | | | | | | | | | | | | | | | | | | | Mortgage | | | 63.3 | % | | | 69.8 | % | | | 73.1 | % | | | 72.7 | % | | | 72.9 | % | Construction | | | 2.8 | % | | | 2.5 | % | | | 3.4 | % | | | 6.8 | % | | | 7.7 | % | Industrial Revenue Bond | | | 3.5 | % | | | 1.4 | % | | | — | | | | — | | | | — | | Other | | | —% | | | | —% | | | | 0.1 | % | | | 0.1 | % | | | 0.2 | % | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
1 Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category. 2 Includes unallocated of $767,000 and $822,000 in 2014 and 2013, respectively.
Table of Contents Nonperforming Assets Nonperforming loans are defined as loans on non-accrual status and loans 90 days or more past due but still accruing. Nonperforming assets include nonperforming loans plus foreclosed real estate. Troubled debt restructurings are not included in nonperforming loans unless they are on non-accrual status or past due 90 days or more. It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan onfor which payment of principal or interest, in a timely manner in the normal course of business,collection is doubtful.not probable. Subsequent payments received on such loans are applied to principal if therecollection of principal is any reasonable doubt as to the collectability of such principal;not probable; otherwise, these receipts are recorded as interest income. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $107,000$108,000 and $180,000 for the yearyears ended December 31, 2011.2014 and 2013, respectively. Of this amount, approximately $102,000 $77,000 and $131,000was actually recorded as interest income on such loans.loans during the years ended December 31, 2014 and 2013, respectively.
Total nonaccrual loans at December 31, 20112014 consists of fivetwo loans totaling $1,709,000$488,000 that relate to businesses/churches that have weak financial positions and/or are in liquidation. Allocations of the allowance for loan losses have been established for the estimated loss exposure. ForeclosedThere were no foreclosed assets were $1,689,000 at December 31, 2011. The foreclosed assets relate to the foreclosure of two loans which were secured by commercial real estate buildings in St. Louis County2014 and St. Charles County, Missouri. These buildings are currently listed for sale and have been recorded at their estimated fair value less costs to sell.December 31, 2013.
The Company does not have any foreign loans. The Company's loan portfolio does not include a significant amount of single family real estate mortgages, as the Company does not market its services to retail customers. Also, the Company had no sub-prime mortgage loans or residential development loans in its portfolio in any of the years presented. The Company does not have any other interest-earning assets which would have been included in nonaccrual, past due or restructured loans if such assets were loans. Summary of Nonperforming Assets | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | Commercial and industrial: | | | | | | | | | | | | Nonaccrual | | $ | 56 | | $ | 46 | | $ | — | | $ | 278 | | $ | 1,277 | | $ | — | | $ | 11 | | $ | 1,439 | | $ | 56 | | $ | 46 | Contractually past due 90 days or more and still accruing | | — | | — | | — | | 41 | | 496 | | Real estate – mortgage: | | | Contractually past due 90 days or more and still | | | | | | | | | | | | accruing | | | — | | — | | — | | — | | — | Real estate–mortgage: | | | | | | | | | | | | Nonaccrual | | 1,653 | | 519 | | 1,608 | | 900 | | 708 | | 488 | | 1,786 | | 5,133* | | | 1,653 | | 519 | Contractually past due 90 days or more and still accruing | | 29 | | — | | — | | — | | — | | Contractually past due 90 days or more and still | | | | | | | | | | | | accruing | | | — | | — | | — | | 29 | | — | Total nonperforming loans | | $ | 1,738 | | $ | 565 | | $ | 1,608 | | $ | 1,219 | | $ | 2,481 | | $ | 488 | | $ | 1,797 | | $ | 6,572 | | $ | 1,738 | | $ | 565 | Total foreclosed assets | | 1,689 | | 1,910 | | 1,910 | | 2,177 | | 1,388 | | — | | — | | 1,322 | | 1,689 | | 1,910 | Total nonperforming assets | | $ | 3,427 | | $ | 2,475 | | $ | 3,518 | | $ | 3,396 | | $ | 3,869 | | $ | 488 | | $ | 1,797 | | $ | 7,894 | | $ | 3,427 | | $ | 2,475 |
*In February 2013, a payment of $4,115,000 was received for one nonaccrual loan with a balance of $4,198,000. $83,000 was charged off. Operating Expenses Operating expenses in 20112014 compared to 20102013 include the following significant pre-tax components: Salaries and employee benefits expense increased $5,205,000,$378,000, or 10%, to $56,573,000. An increase in the number of employees primarily drove this increase. Occupancy expense decreased $167,000, or 7%, to $2,318,000 as a result of decreased rental square footage. Equipment expense decreased $36,000, orless than 1%, to $3,525,000$66,100,000. Occupancy expense increased $298,000, or 10.4%, due to the rent escalation on two properties and additional depreciation on building improvements. Equipment expense increased $320,000 to $4,130,000 primarily due to lower depreciation expense.on new furniture and additional systems software. Amortization of intangibles remained the same in 2011 as 2010, at $107,000.decreased $52,000 to $483,000. Other operating expense increased $1,743,000,$384,000, or 16%3.4%, to $12,506,000$11,529,000 primarily due to an increase in legaloutside service fees. Operating expenses in 20102013 compared to 20092012 include the following significant pre-tax components: Salaries and employee benefits expense increased $754,000,$3,159,000, or 1%5%, to $51,368,000. This is mainly attributable$65,722,000. An increase in the number of employees to higher incentive compensation related to higher pre-tax income.support the additional volume primarily drove this increase. Occupancy expense increased $89,000,$717,000, or 4%33%, due to $2,485,000 as a result of additional maintenancethe new Company headquarters and repairs expense.Bank headquarters. Equipment expense increased $213,000, or 6%,$294,000 to $3,561,000$3,810,000 primarily due to increased software license and maintenance expenses.depreciation on additional systems software. Amortization of intangibles decreased $115,000, or 52%,$46,000 to $107,000 because the software from the 2004 PROFITLAB, Inc. acquisition was fully amortized during the third quarter of 2009.$535,000. Other operating expense increased $958,000,decreased $371,000, or 10%3%, to $10,763,000$11,145,000 primarily due to an increasea decrease in professionallegal fees.
Table of Contents Income Tax Expense Income tax expense in 20112014 totaled $8,497,000$7,759,000 compared to $7,623,000$7,234,000 and $7,887,000 in 20102013 and $5,405,000 in 2009.2012, respectively. When measured as a percent of income, the Company’s effective tax rate was 27%was24% in 2011, 27%2014, 24% in 20102013, and 25% in 2009.2012. The effective tax rate varies from year-to-year primarily dueprimarilydue to changes in the Company’s pre-tax income and the amount of investment in tax-exempt municipal bonds.
Investment Portfolio Investment portfolio changes from December 31, 20102013 to December 31, 2011:2014: State and political subdivision securities increased $42,793,000,$38,374,000, or 16%12%, to $307,362,000.$352,391,000. The investment portfolio provides the Company with a significant source of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates. Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s sources of funds and the economic outlook. Duringoutlook.During this period, the size of the investment portfolio increased as the Company purchased state and political subdivision securities. These securities all had A or better credit ratings and maturities approaching fifteen15 years. With the additional liquidity provided by the increase in deposits and accounts and drafts payable, the Company made these purchases to continue to reduce the level of short-term rate sensitive assets. All purchases were made in accordance with the Company’s investment policy.investmentpolicy. As of December 31, 2011,2014, the Company had no mortgage-backed securities in its portfolio. There was no single issuer of securities in the investment portfolio at December 31, 20112014 for which the aggregate amortized cost exceeded 10% of total shareholders' equity. Investments by Type | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | State and political subdivisions | | $ | 307,362 | | $ | 264,569 | | $ | 224,597 | | $ | 352,391 | | $ | 314,017 | | $ | 335,193 | Certificates of deposit | | 3,250 | | — | | | — | | | 3,750 | | 3,750 | | 6,742 | Total investments | | $ | 310,612 | | $ | 264,569 | | $ | 224,597 | | $ | 356,141 | | $ | 317,767 | | $ | 341,935 |
Investment Securities by Maturity (At December 31, 2011)
2014) | | Within 1 | | Over 1 to 5 | | Over 5 to | | Over | | | | (In thousands) | | Year | | Years | | 10 Years | | 10 Years | | Yield | State and political subdivisions | | $ | 13,262 | | | $ | 44,131 | | | $ | 124,680 | | | $ | 125,289 | | | 5.49 | % | Certificates of deposit | | | 3,250 | | | | — | | | | — | | | | — | | | .47 | % | Total investments | | $ | 16,512 | | | $ | 44,131 | | | $ | 124,680 | | | | 125,289 | | | 5.44 | % | Weighted average yield1 | | | 5.67 | % | | | 6.01 | % | | | 5.46 | % | | | 5.32 | % | | 5.44 | % |
| | Within 1 | | Over 1 to 5 | | Over 5 to | | Over | | | | (In thousands) | | Year | | Years | | 10 Years | | 10 Years | | Yield | State and political subdivisions | | $ | 24,462 | | | $ | 84,500 | | | $ | 150,429 | | | $ | 93,000 | | | 4.09 | % | Certificates of deposit | | | 3,750 | | | | — | | | | — | | | | — | | | .25 | % | Total investments | | $ | 28,212 | | | $ | 84,500 | | | $ | 150,429 | | | $ | 93,000 | | | 4.04 | % | Weighted average yield1 | | | 3.85 | % | | | 4.48 | % | | | 3.82 | % | | | 4.06 | % | | 4.04 | % |
1 Weighted average yield is presented on a tax-equivalent basis assuming a tax rate of 35%. 1 | | Weighted average yield is presented on a tax-equivalent basis assuming a tax rate of 35%. |
Deposits and Accounts and Drafts Payable Noninterest-bearing demand deposits increased $18,859,000, or 17%,11% from December 31, 20102013 to $131,956,000$158,999,000 at December 31, 2011.2014. The average balances of these deposits increased $18,965,000, or 17%, from 20107% in 2014 to $132,603,000 in 2011.$147,575,000. These balances are primarily maintained by commercial customers and churches and can fluctuate on a daily basis. Interest-bearing deposits increased $10,919,000,$20,545,000, or 3%5%, from December 31, 2010 to $416,412,000$459,200,000 at December 31, 2011.2014. The average balances of these deposits increased to $408,734,000$423,464,000 in 20112014 from $356,458,000$412,445,000 in 2010. This increase came from new and existing customers who transferred deposits from other institutions.2013. Accounts and drafts payable generated by the Company in its payment processing operations increased $79,094,000,$111,475,000, or 15%20%, from December 31, 2010 to $595,201,000 at December 31, 2011.2013 to $655,428,000 at December 31, 2014. The average balance of these funds increased $63,318,000,$42,466,000, or 12%7%, from 2010 to $596,935,000$643,077,000 in 2011. The increase relates to the increase in transportation invoice dollars processed.2014. Due to the Company’s payment processing cycle, average balances are much moremuchmore indicative of the underlying activity than period-end balances since point-in-time comparisons can be misleading if the comparison dates fall on different days of the week. The composition of average deposits and the average rates paid on those deposits is represented in the table entitled “Distributionentitled“Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier in this discussion. The Company does not have any significant deposits from foreign depositors. The Dodd-Frank Act, which was signed into law on July 21, 2010, permanently increased the FDIC insurance limit to $250,000 (retroactive to January 1, 2008), repealed the prohibition against paying interest on demand deposits (effective July, 21, 2011), and extended the Transaction Account Guaranty Program (i.e., unlimited FDIC insurance coverage for certain non-interest bearing demand deposit accounts) to December 31, 2012.
Table of Contents Maturities of Certificates of DepositsDeposit of $100,000 or More (In thousands) | | December 31, 2011 | | December 31, 2014 | Three months or less | | $ | 55,519 | | $ | 37,633 | Three to six months | | 46,644 | | 17,929 | Six to twelve months | | | 6,714 | | 5,802 | Over twelve months | | | 9,037 | | | 11,455 | Total | | $ | 117,914 | | $ | 72,819 |
Liquidity The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources. The Company's Asset/Liability CommitteeLiabilityCommittee (“ALCO”) has direct oversight responsibility for the Company's liquidity position and profile. Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity. The balances of liquid assets consist of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and money market funds, which totaled $235,962,000$294,335,000 at December 31, 2011,2014, an increase of $97,033,000,$69,073,000, or 70%31%, from December 31, 2010.2013. At December 31, 20112014, these assets represented 18% of total20% oftotal assets. The Company increased liquid assets during 2011 as a result of the increase in deposits and accounts and drafts payable. Cash and cash equivalents are the Company’s and its subsidiaries’ primary source of liquidity to meet future expectedfutureexpected 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 debt securities available-for-sale at fair value was $310,612,000$356,141,000 at December 31, 2011,2014, an increase of $46,043,000$38,374,000, or 17%12%, from December 31, 2010.2013. These assets represented 24% of total assets at December 31, 20112014 and were primarily state and political subdivision securities. Of the total portfolio, 5%8% mature in one year or less, 14%24% mature after one year through five years and 81%68% mature after five years. The Company sold $5,887,000$587,000 in securities available-for-sale during 2011.2014. As of December 31, 2011,2014, the Bank had 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; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; JPM Chase Bank, $6,000,000; and UMB Bank $5,000,000. The CompanyAs of December 31, 2014, the Bank had secured lines of credit with the Federal Home Loan BankBank(“FHLB”) of $132,578,000$158,247,000 collateralized by commercial mortgage loans. There were no amounts outstanding under any of the lines of credit discussed above at December 31, 20112014 or 2010.2013. At Decemember 31, 2014, the Company had a line of credit from UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. 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 many other commercial products of the Bank. The accounts and drafts payable generated by the Company have also historically been a stable source of funds. Net cash flows provided by operating activities for the years 2011, 20102014, 2013 and 20092012 were $25,642,000, $23,776,000,$34,843,000, $28,886,000 and $19,079,000$35,328,000, respectively. Net income plus depreciation and amortization accounts for most of the operating cash provided. 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. Further analysis of the changes in these account balances is discussed earlier in this report. Due to the daily fluctuations in these account balances, management believes that 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, cash from operations, and borrowing lines will continue to betobe sufficient to fund the Company’s operationsCompany’soperations and capital expenditures in 2012.2014. The Company anticipates the annual capital expenditures for 2012 will be consistent with the last few years and, accordingly,2015 should range from $1$5 million to $3$7 million. AsCapital expenditures in the past, 2012 capital expenditures2015 are expected to consist primarily of equipment and software related to itsthe payment and information processing services business. There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levelsthelevels 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 fundingCompany’sfunding sources are the non-interest bearing accounts and drafts payable generated from its payment and informationprocessing 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 a low interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer term relatively higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.
Table of Contents The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income,andincome, 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 generated (as more invoices are processed) from the Company’s transportationCompany’stransportation customers. 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 utilityenergy 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.improveperformance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses. During 2011,2014, new business was added in both the Information Servicestransportation and Banking Services segments.facility expense management operations, driven by both successful marketing efforts and the solid market leadership position held by Cass. Capital Resources One of management’sofmanagement’s primary objectives is to maintain a strong capital base to warrant the confidence of customers,shareholders, and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities that arise and to provide assurance to depositors and creditors. The Company and its banking subsidiary continue to exceed all regulatory capital requirements, as evidenced by the capital ratios at December 31, 20112014 as shown in Item 8, Note 2 of this report. In 2011,2014, cash dividends paid were $.61$.81 per share for a total of $6,279,000,$9,337,000, an increase of $831,000,$827,000, or 15%9.7%, compared to $.53$.74 per share for a total of $5,448,000$8,510,000 in 2010.2013. The increase is attributable primarily to the per shareper-share amount paid and the 10% stock dividend paid by the Company in December 2011.paid. Shareholders'Shareholders’ equity was $160,548,000,was$200,432,000, or 12%,13.4% of total assets, at December 31, 2011,2014, an increase of $18,454,000$10,005,000 over the balance at December 31, 2010.2013. This increase resulted primarily from net income of $23,009,000, $1,256,000 related to stock bonuses and an increase in other comprehensive income$24,033,000, the available-for-sale net unrealized gain of $7,240,000$5,237,000 offset by cash dividends paid of $6,279,000,$9,337,000 and the pension adjustment per FASB ASC 715 of $6,713,000, $27,000 from the 10% stock dividend paid by the Company and $32,000 in foreign currency translation.$9,189,000.
Dividends from the Bank are a source of funds for payment of dividends by the Company to its shareholders. The only restrictions on dividends are those dictated by regulatory capital requirements and prudent and sound banking principles. As of December 31, 2011,2014, unappropriated retained earnings of $20,465,000$23,801,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities. On October 17, 2011,The Company maintains a treasury stock buyback program pursuant to which the Board of Directors re-authorizedhas authorized the repurchase of up to 330,000 shares500,000shares of the Company’s common stock, pursuant to a treasury stock buyback program maintained by the Company. Under the program, thestock. The Company repurchased 12,00039,502 shares (not restated for 10% stock dividend) for an aggregate purchase priceat anaggregate cost of $467,000 in 2010. There were no repurchases in 2011.$1,848,000 during the year ended December 31, 2014 and 0 during the year ended December 31, 2013. As of December 31, 2011, 330,0002014, 480,040 shares remained available for repurchase under the program. A portion of the repurchased shares may be used for the Company's employee benefit plans, and the balance will be available for other general corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt, current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements In the normal course of business, the Company is party to activities that involve credit, market and operational risk that are notarenot 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 and capital leases. These financial instrumentsfinancialinstruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximumCompany’smaximum 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 contractualamounts of those instruments. At December 31, 2011,2014, no amounts have been accrued for any estimated losses for these instruments.
Table of Contents 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 December 31, 2011,2014, the balance of loan commitments, standby and commercial letters of credit were $10,485,000, $22,302,000$19,066,000, $12,693,000 and $4,518,000,$2,571,000, 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 eachevaluateseach customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extensionuponextension 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 December 31, 2011:2014: | | Amount of Commitment Expiration per Period | | Amount of Commitment Expiration per Period | | | | | | Less than 1 | | 1-3 | | 3-5 | | Over 5 | | | | | Less than 1 | | 1-3 | | 3-5 | | Over | (In thousands) | | Total | | Year | | Years | | Years | | Years | | Total | | Year | | Years | | Years | | 5 Years | Operating lease commitments | | $ | 1,664 | | $ | 615 | | $ | 807 | | $ | 242 | | $ | — | | $ | 6,841 | | $ | 1,213 | | $ | 2,121 | | $ | 1,484 | | $ | 2,023 | Time deposits | | | 131,081 | | | 119,394 | | | 9,097 | | 2,590 | | — | | 79,775 | | 66,436 | | 11,907 | | 1,432 | | — | Total | | $ | 132,745 | | $ | 120,009 | | $ | 9,904 | | $ | 2,832 | | $ | — | | $ | 86,616 | | $ | 67,649 | | $ | 14,028 | | $ | 2,916 | | $ | 2,023 |
During 2011,2014, the Company contributed $9,000,000made no contribution to its noncontributory defined benefit pension plan. The contribution had no significant effect on the Company’s overall liquidity. In determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets. These assumptions are determined at the beginning of the plan year based on interest rate levels and financial market performance. For 20112014, these assumptions were as follows: Assumption | �� | Rate | Weighted average discount rate | | 5.755.00 | % | Rate of increase in compensation levels | | 4.003.75 | % | Expected long-term rate of return on assets | | 7.256.75 | % |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity The Company faces market risk to the extent that its net interest income and its fair market value of equity are affected by changes in market interest rates. The asset/liability management discipline as applied by the Company seeks to limit the volatility, to the extent possible, of both net interest income and the fair market value of equity that can result from changes in market interest rates. This is accomplished by limiting the maturities of fixed rate investments, loans, and deposits; matching fixed rate assets and liabilities to the extent possible; and optimizing the mix of fees and net interest income. However, as discussed below, the Company's asset/liability position often differs significantly from most other financial holding companies with significant positive cumulative "gaps" shown for each time horizon presented. This asset sensitive position is caused primarily by the operations of the Company, which generate large balances of accounts and drafts payable. These balances, which are noninterest bearing, contribute to the Company’s historical high net interest margin but cause the CompanytheCompany to become susceptible to changes in interest rates, with a decreasing net interest margin and fair market value of equity in periods of declining interest rates and an increasing net interest margin and fair market value of equity in periods of rising interest rates. The Company’s ALCO measures the Company's interest rate risk sensitivity on a quarterly basis to monitor and manage the variabilitythevariability of earnings and fair market value of equity in various interest rate environments. The ALCO evaluates the Company's risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings and value or whether the Company can safely increase risk to enhance returns. The ALCO uses gap reports, twelvemonth12-month net interest income simulations, and fair market value of equity analyses as its main analytical tools to provide management with insight into the Company's exposure to changing interest rates. Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitiveratesensitive assets and liabilities in certain time horizons. A negative gap indicates that more liabilities re-price in that particulartime frame and, if rates rise, these liabilities will re-price faster than the assets. A positive gap would indicate the opposite. Gap reports can be misleading in that they capture only the re-pricing timing within the balance sheet, and fail to capture other significant risks such as basis risk and embedded options risk. Basis risk involves the potential for the spread relationship between rates to change under different rate environments and embedded options risk relates to the potential for the alteration of the level and/or timing of cash flows given changes in rates.
Table of Contents Another measurement tool used by management is net interest income simulation, which forecasts net interest income during the coming twelve12 months under different interest rate scenarios in order to quantify potential changes in short termshort-term accounting income. Management has set policy limits specifying acceptable levels of interest rate risk given multiple simulated rate movements. These simulations are more informative than gap reports because they are able to capture more of the dynamics within the balance sheet, such as basis risk and embedded options risk. A table containing simulation results as of December 31, 2011,2014, from an immediate and sustained parallel change in interest rates is shown below. While net interest income simulations do an adequate job of capturing interest rate risk to short term earnings, they do not capture risk within the current balance sheet beyond twelve12 months. The Company uses fair market value of equity analyses to help identify longer-term risk that may reside on the current balance sheet. The fair market value of equity is represented by the present value of all future income streams generated by the current balance sheet. The Company measures the fair market value of equity as the net present value of all asset and liability cash flows discounted at forward rates suggested by the current U.S. Treasury curve plus appropriate credit spreads. This representation of the change in the fair market value of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes. Management has set policy limits relating to declines in the market value of equity. The table below contains the analysis, which illustrates the effects of an immediate and sustained parallel change in interest rates as of December 31, 2011:2014: Change in Interest Rates | | % Change in Net Interest Income | | % Change in Fair Market Value of Equity | | % Change in Net Interest Income | | % Change in Fair Market Value of Equity | +200 basis points | | 9% | | 12% | | 7% | | 10% | +100 basis points | | 5% | | 6% | | 4% | | 5% | Stable rates | | —— | | —— | | — | | — | -100 basis points | | (1%) | | (5%) | | (1%) | | (4%) | -200 basis points | | (2%) | | (7%) | | (4%) | | (7%) |
Interest Rate Sensitivity Position The following table presents the Company’s interest rate risk position at December 31, 20112014 for the various time periods indicated. | | Variable | | 0-90 | | 91-180 | | 181-364 | | 1-5 | | Over | | | | Variable | | 0-90 | | 91-180 | | 181-364 | | 1-5 | | Over | | | (In thousands) | | Rate | | Days | | Days | | Days | | Years | | 5 Years | | Total | | Rate | | Days | | Days | | Days | | Years | | 5 Years | | Total | Earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable | | $ | 237,987 | | $ | 31,461 | | $ | 11,553 | | $ | 22,504 | | $ | 330,113 | | $ | 37,204 | | $ | 670,822 | | $ | 221,091 | | $ | 64,915 | | $ | — | | $ | — | | $ | 310,564 | | $ | 49,428 | | $ | 645,998 | Tax-exempt | | — | | 29 | | — | | — | | 714 | | — | | 743 | | — | | — | | — | | — | | 13,107 | | 10,241 | | 23,348 | Securities1: | | | | | | | | | | | | | | | | | | | | | | | | | | | Tax-exempt | | — | | 2,965 | | 2,028 | | 8,269 | | 44,131 | | 249,969 | | 307,362 | | — | | 24,463 | | — | | — | | 84,500 | | 243,428 | | 352,391 | Certificates of deposit | | — | | — | | 3,250 | | — | | — | | — | | 3,250 | | — | | — | | — | | 3,750 | | — | | — | | 3,750 | Investments in the FHLB | | | | | | | | | | | | | | and FRB | | | 1,098 | | — | | — | | — | | — | | — | | 1,098 | Federal funds sold and other | | | | | | | | | | | | | | | | | | | | | | | | | | | short-term investments | | 223,383 | | — | | — | | — | | — | | — | | 223,383 | | 283,028 | | — | | — | | — | | — | | — | | 283,028 | Total earning assets | | $ | 461,370 | | $ | 34,455 | | $ | 16,831 | | $ | 30,773 | | $ | 374,958 | | $ | 287,173 | | $ | 1,205,560 | | $ | 505,217 | | $ | 89,378 | | $ | — | | $ | 3,750 | | $ | 408,171 | | $ | 303,097 | | $ | 1,309,613 | Interest-sensitive liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | Money market accounts | | $ | 175,961 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 175,961 | | $ | 274,446 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 274,446 | Now accounts | | 81,333 | | — | | — | | — | | — | | — | | 81,333 | | 80,065 | | — | | — | | — | | — | | — | | 80,065 | Savings deposits | | 28,037 | | — | | — | | — | | — | | — | | 28,037 | | 24,914 | | — | | — | | — | | — | | — | | 24,914 | Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | $100K and more | | — | | 55,518 | | 46,644 | | 6,715 | | 9,037 | | — | | 117,914 | | — | | 37,633 | | 17,929 | | 5,802 | | 11,455 | | — | | 72,819 | Less than $100K | | — | | 5,839 | | 3,554 | | 1,125 | | 2,649 | | — | | | 13,167 | | — | | 2,194 | | 2,228 | | 650 | | 1,884 | | — | | 6,956 | Federal funds purchased and | | | | | | | | | | | | | | | | | | | | | | | | | | | other short-term borrowing | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | Total interest-bearing liabilities | | $ | 285,331 | | $ | 61,357 | | | $ | 50,198 | | | $ | 7,840 | | $ | 11,686 | | $ | — | | $ | 416,412 | | $ | 379,425 | | $ | 39,827 | | $ | 20,157 | | $ | 6,452 | | $ | 13,339 | | $ | — | | $ | 459,200 | Interest sensitivity gap: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Periodic | | $ | 176,039 | | $ | (26,902 | ) | | $ | (33,367 | ) | | $ | 22,933 | | $ | 363,272 | | $ | 287,173 | | $ | 789,148 | | $ | 125,792 | | $ | 49,551 | | $ | (20,157 | ) | | $ | (2,702 | ) | | $ | 394,832 | | $ | 303,097 | | $ | 772,343 | Cumulative | | | 176,039 | | | 149,137 | | | 115,770 | | 138,703 | | 501,975 | | 789,148 | | 789,148 | | 125,792 | | 175,343 | | 155,186 | | 152,484 | | 547,316 | | 850,413 | | 772,343 | Ratio of interest-bearing assets | | | | | | | | | | | | | | | | | | | | | | | | | | | to interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | Periodic | | 1.62 | | 0.56 | | 0.34 | | 3.93 | | 32.09 | | 0.00 | | 2.90 | | 1.33 | | 2.24 | | — | | 0.58 | | 30.60 | | — | | 2.85 | Cumulative | | 1.62 | | 1.43 | | 1.29 | | 1.34 | | 2.21 | | 2.90 | | 2.90 | | 1.33 | | 1.42 | | 1.35 | | 1.34 | | 2.19 | | 2.85 | | 2.85 |
1Balances shown reflect earliest re-pricing date. 1 | | Balances shown reflect earliest re-pricing date. |
Table of Contents ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS | | | December 31, | | December 31, | (In thousands except share and per share data) | | 2011 | | 2010 | | 2014 | | 2013 | Assets | | | | | | | | | | | | | | Cash and due from banks | | $ | 12,579 | | $ | 12,277 | | | $ | 11,307 | | $ | 11,283 | | Interest-bearing deposits in other financial institutions | | 123,551 | | 67,299 | | | 200,966 | | 160,316 | | Federal funds sold and other short-term investments | | | 99,832 | | | | 59,353 | | | | 82,062 | | | | 53,663 | | Cash and cash equivalents | | | 235,962 | | | | 138,929 | | | | 294,335 | | | | 225,262 | | Securities available-for-sale, at fair value | | 310,612 | | 264,569 | | | 356,141 | | 317,767 | | | Loans | | 671,565 | | 708,633 | | | 669,346 | | 652,177 | | Less: Allowance for loan losses | | | 12,954 | | | | 11,891 | | | Less allowance for loan losses | | | | 11,894 | | | | 11,679 | | Loans, net | | | 658,611 | | | | 696,742 | | | | 657,452 | | | | 640,498 | | Premises and equipment, net | | 9,587 | | 9,617 | | | 16,909 | | 13,231 | | Investments in bank-owned life insurance | | 14,375 | | 14,191 | | | 15,429 | | 15,437 | | Payments in excess of funding | | 61,378 | | 33,609 | | | 120,227 | | 77,650 | | Goodwill | | 7,471 | | 7,471 | | | 11,590 | | 11,590 | | Other intangible assets, net | | 161 | | 268 | | | 2,762 | | 3,222 | | Other assets | | | 21,144 | | | | 22,639 | | | | 25,886 | | | | 21,363 | | Total assets | | $ | 1,319,301 | | | $ | 1,188,035 | | | $ | 1,500,731 | | | $ | 1,326,020 | | | Liabilities and Shareholders’ Equity | | | | | | Liabilities and Shareholders’ Equity | | | | Liabilities: | | | | | | | | | | | Deposits | | | | | | | | | | | | Noninterest-bearing | | $ | 131,956 | | $ | 113,097 | | | $ | 158,999 | | $ | 143,841 | | Interest-bearing | | | 416,412 | | | | 405,493 | | | | 459,200 | | | | 438,655 | | Total deposits | | | 548,368 | | | | 518,590 | | | | 618,199 | | | | 582,496 | | Accounts and drafts payable | | 595,201 | | 516,107 | | | 655,428 | | | | 543,953 | | Other liabilities | | | 15,184 | | | | 11,244 | | | | 26,672 | | | | 9,144 | | Total liabilities | | | 1,158,753 | | | | 1,045,941 | | | | 1,300,299 | | | | 1,135,593 | | | 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 and 9,949,324 shares | | | | | | | issued at December 31, 2011 and 2010, respectively | | | 5,445 | | 4,975 | | | Common stock, par value $.50 per share; 40,000,000 | | | | | | | shares authorized, 11,931,147 shares | | | | | | | issued at December 31, 2014 and 2013 | | | 5,966 | | 5,966 | | Additional paid-in capital | | 80,971 | | | | 46,653 | | | 126,169 | | 125,062 | | Retained earnings | | 89,853 | | 107,263 | | | 90,635 | | 75,939 | | Common shares in treasury, at cost (532,233 and 561,533 | | | | | | | | shares at December 31, 2011 and 2010, respectively) | | | (12,968 | ) | | (13,549 | ) | | Common shares in treasury, at cost (428,572 and 409,667 | | | | | | | shares at December 31, 2014 and 2013, respectively) | | | (12,707 | ) | | (10,980 | ) | Accumulated other comprehensive loss | | | (2,753 | ) | | | (3,248 | ) | | | (9,631 | ) | | | (5,560 | ) | Total shareholders’ equity | | | 160,548 | | | | 142,094 | | | | 200,432 | | | | 190,427 | | Total liabilities and shareholders’ equity | | $ | 1,319,301 | | | $ | 1,188,035 | | | $ | 1,500,731 | | | $ | 1,326,020 | |
See accompanying notes to consolidated financial statements.
Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME | | For the Years Ended December 31, | | For the Years Ended December 31, | (In thousands except per share data) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Fee Revenue and Other Income: | | | | | | | | | | | | | | | | Information services payment and processing revenue | | $ | 60,688 | | $ | 54,183 | | $ | 48,665 | | $ | 77,427 | | $ | 70,805 | | $ | 66,695 | Bank service fees | | 1,354 | | 1,410 | | 1,324 | | 1,132 | | 1,215 | | 1,272 | Gains on sales of securities | | 43 | | — | | 697 | | 23 | | 4,024 | | 2,635 | Other | | | 739 | | | 553 | | | 552 | | | 1,325 | | | 528 | | | 536 | Total fee revenue and other income | | | 62,824 | | | 56,146 | | | 51,238 | | | 79,907 | | | 76,572 | | | 71,138 | | Interest Income: | | | | | | | | | | | | | Interest and fees on loans | | 39,515 | | 39,785 | | 36,003 | | 29,726 | | 32,110 | | 35,525 | Interest and dividends on securities: | | | | | | | | | | | | | Taxable | | 41 | | 43 | | 58 | | 29 | | 48 | | 60 | Exempt from federal income taxes | | 9,993 | | 8,704 | | 7,553 | | 9,412 | | 8,867 | | 9,878 | Interest on federal funds sold and | | | | | | | | | | | | | other short-term investments | | | 686 | | | 514 | | | 170 | | | 592 | | | 552 | | | 470 | Total interest income | | | 50,235 | | | 49,046 | | | 43,784 | | | 39,759 | | | 41,577 | | | 45,933 | | Interest Expense: | | | | | | | | | | | | | Interest on deposits | | 4,374 | | 4,875 | | 4,924 | | | 2,460 | | | 2,832 | | | 3,148 | Interest on short-term borrowings | | — | | — | | 23 | | Interest on subordinated convertible debentures | | | — | | | — | | | 106 | | Total interest expense | | | 4,374 | | | 4,875 | | | 5,053 | | | 2,460 | | | 2,832 | | | 3,148 | Net interest income | | 45,861 | | 44,171 | | 38,731 | | 37,299 | | 38,745 | | 42,785 | Provision for loan losses | | | 2,150 | | | 4,100 | | | 2,050 | | | — | | | 500 | | | 2,400 | Net interest income after provision for loan losses | | | 43,711 | | | 40,071 | | | 36,681 | | | 37,299 | | | 38,245 | | | 40,385 | Total net revenue | | 106,535 | | 96,217 | | 87,919 | | | 117,206 | | | 114,817 | | | 111,523 | | Operating Expense: | | | | | | | | | | | | | Salaries and employee benefits | | | 56,573 | | 51,368 | | 50,614 | | 66,100 | | 65,722 | | 62,563 | Occupancy | | 2,318 | | | 2,485 | | | 2,396 | | 3,172 | | 2,874 | | 2,157 | Equipment | | 3,525 | | 3,561 | | 3,348 | | 4,130 | | 3,810 | | 3,516 | Amortization of intangible assets | | 107 | | 107 | | 222 | | 483 | | 535 | | 581 | Other operating | | | 12,506 | | | 10,763 | | | 9,805 | | | 11,529 | | | 11,145 | | | 11,516 | Total operating expense | | | 75,029 | | | 68,284 | | | 66,385 | | | 85,414 | | | 84,086 | | | 80,333 | Income before income tax expense | | 31,506 | | 27,933 | | 21,534 | | | 31,792 | | 30,731 | | 31,190 | Income tax expense | | | 8,497 | | | 7,623 | | | 5,405 | | | 7,759 | | | 7,234 | | | 7,887 | Net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,129 | | $ | 24,033 | | $ | 23,497 | | $ | 23,303 | | Basic Earnings Per Share | | $ | 2.23 | | $ | 1.98 | | $ | 1.60 | | $ | 2.09 | | $ | 2.05 | | $ | 2.05 | Diluted Earnings Per Share | | 2.21 | | 1.95 | | 1.57 | | 2.06 | | 2.02 | | 2.02 |
See accompanying notes to consolidated financial statements.
Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | For the Years Ended December 31, | (In thousands) | | 2014 | | 2013 | | 2012 | Comprehensive income: | | | | | | | | | | | | | Net income | | $ | 24,033 | | | $ | 23,497 | | | $ | 23,303 | | Other comprehensive income: | | | | | | | | | | | | | Net unrealized gain (loss) on securities available-for-sale | | | 8,333 | | | | (10,748 | ) | | | 2,702 | | Tax effect | | | (3,096 | ) | | | 3,993 | | | | (946 | ) | Reclassification adjustments for gains included in | | | | | | | | | | | | | net income | | | (23 | ) | | | (4,024 | ) | | | (2,635 | ) | Tax effect | | | 8 | | | | 1,408 | | | | 923 | | FASB ASC 715 adjustment | | | (14,621 | ) | | | 15,674 | | | | (5,206 | ) | Tax effect | | | 5,432 | | | | (5,823 | ) | | | 1,822 | | Foreign currency translation adjustments | | | (104 | ) | | | 53 | | | | — | | Total comprehensive income | | $ | 19,962 | | | $ | 24,030 | | | $ | 19,963 | |
See accompanying notes to consolidated financial statements.
Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS | | For the Years Ended December 31, | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Cash Flows From Operating Activities: | | | | | | | | | | | | | | | | | | | | Net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,129 | | | $ | 24,033 | | $ | 23,497 | | $ | 23,303 | | Adjustments to reconcile net income to net cash provided | | | | | | | | | | | | | | | by operating activities: | | | | | | | | | | | | | | | Depreciation and amortization | | 4,528 | | 4,026 | | 4,039 | | | 8,181 | | 7,346 | | 6,916 | | Net gains on sales of securities | | (43 | ) | | | | (697 | ) | | (23 | ) | | (4,024 | ) | | (2,635 | ) | Stock-based compensation expense | | 1,390 | | 1,472 | | 1,881 | | | 2,041 | | 1,975 | | 1,399 | | Provisions for loan losses | | 2,150 | | 4,100 | | 2,050 | | | — | | 500 | | 2,400 | | Deferred income tax expense (benefit) | | 2,145 | | 1,268 | | (650 | ) | | Decrease in income tax liability | | (192 | ) | | (487 | ) | | (869 | ) | | Decrease in pension liability | | (6,817 | ) | | (4,259 | ) | | (398 | ) | | FDIC insurance prepayment | | — | | — | | (2,124 | ) | | Deferred income tax (benefit) expense | | | (679 | ) | | 57 | | 974 | | Increase (decrease) in income tax liability | | | 34 | | (964 | ) | | 1,073 | | Increase (decrease) in pension liability | | | 2,282 | | 2,822 | | (2,158 | ) | Other operating activities, net | | | (528 | ) | | (2,654 | ) | | | (282 | ) | | | (1,026 | ) | | | (2,323 | ) | | | 4,056 | | Net cash provided by operating activities | | | 25,642 | | | 23,776 | | | | 19,079 | | | | 34,843 | | | | 28,886 | | | | 35,328 | | | Cash Flows From Investing Activities: | | | | | | | | | | | | | | | Proceeds from sales of securities available-for-sale | | 5,930 | | — | | 21,906 | | | 587 | | 95,742 | | 69,747 | | Proceeds from maturities of securities available-for-sale | | 18,510 | | 4,770 | | 5,655 | | | 18,340 | | 18,117 | | 11,898 | | Purchase of securities available-for-sale | | | (61,768 | ) | | (49,944 | ) | | (51,160 | ) | | (54,054 | ) | | (104,351 | ) | | (114,646 | ) | Net decrease (increase) in loans | | 35,981 | | | | (67,169 | ) | | (50,198 | ) | | Net (increase) decrease in loans | | | (16,954 | ) | | 34,378 | | (19,165 | ) | Increase in payments in excess of funding | | (27,769 | ) | | | (10,972 | ) | | | (772 | ) | | (42,577 | ) | | (14,128 | ) | | (2,144 | ) | Purchases of premises and equipment, net | | | (1,925 | ) | | | (1,190 | ) | | | (1,077 | ) | | (6,291 | ) | | (4,857 | ) | | (3,099 | ) | Net cash used in investing activities | | | (31,041 | ) | | | (124,505 | ) | | | (75,646 | ) | | Environmental management acquisition | | | | — | | | | — | | | | (7,798 | ) | Net cash (used in) provided by investing activities | | | | (100,949 | ) | | | 24,901 | | | | (65,207 | ) | | Cash Flows From Financing Activities: | | | | | | | | | | | | | | | Net increase (decrease) in noninterest-bearing demand deposits | | 18,859 | | (54 | ) | | 9,851 | | | 15,158 | | (302 | ) | | 12,187 | | Net increase in interest-bearing demand and savings deposits | | 36,956 | | 39,392 | | 104,390 | | | 39,766 | | 32,645 | | 21,683 | | Net (decrease) increase in time deposits | | (26,037 | ) | | 41,376 | | 46,094 | | | Net decrease in time deposits | | | (19,221 | ) | | (13,555 | ) | | | (18,530 | ) | Net increase (decrease) in accounts and drafts payable | | 79,094 | | 85,856 | | (48,774 | ) | | 111,475 | | 21,192 | | | | (72,440 | ) | Cash dividends paid | | (6,279 | ) | | (5,448 | ) | | (4,925 | ) | | (9,337 | ) | | (8,510 | ) | | (7,361 | ) | Purchase of common shares of treasury | | — | | | (467 | ) | | — | | | Purchase of common shares for treasury | | | | (1,848 | ) | | | — | | — | | Other financing activities, net | | | (161 | ) | | | (291 | ) | | | (260 | ) | | | (814 | ) | | | (1,083 | ) | | | (534 | ) | Net cash provided by financing activities | | | 102,432 | | | | 160,364 | | | | 106,376 | | | Net increase in cash and cash equivalents | | 97,033 | | 59,635 | | 49,809 | | | Net cash (used in) provided by financing activities | | | | 135,179 | | | | 30,387 | | | | (64,995 | ) | Net increase (decrease) in cash and cash equivalents | | | 69,073 | | 84,174 | | (94,874 | ) | Cash and cash equivalents at beginning of year | | | 138,929 | | | | 79,294 | | | | 29,485 | | | | 225,262 | | | | 141,088 | | | | 235,962 | | Cash and cash equivalents at end of year | | $ | 235,962 | | | $ | 138,929 | | | $ | 79,294 | | | $ | 294,335 | | | $ | 225,262 | | | $ | 141,088 | | | Supplemental information: | | | | | | | | | | | | | | | Cash paid for interest | | $ | 4,424 | | $ | 4,893 | | $ | 5,128 | | | $ | 2,491 | | $ | 2,855 | | $ | 3,196 | | Cash paid for income taxes | | 6,287 | | 7,934 | | 5,677 | | | 8,476 | | 8,265 | | 6,407 | |
See accompanying notes to consolidated financial statements.
Table of Contents CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | Additional | | | | | | | | | | Other | | | | | | | | | | | Common | | Paid-in | | Retained | | Treasury | | Comprehensive | | | | | | Comprehensive | (In thousands except per share data) | | Stock | | Capital | | Earnings | | Stock | | Loss | | Total | | Income (Loss) | Balance, December 31, 2008 | | $ | 4,975 | | $ | 45,746 | | | $ | 81,197 | | | $ | (18,264 | ) | | $ | (7,413 | ) | | $ | 106,241 | | | | | | Net income | | | | | | | | | | 16,129 | | | | | | | | | | | | 16,129 | | | | 16,129 | | Cash dividends ($.48 per share) | | | | | | | | | | (4,925 | ) | | | | | | | | | | | (4,925 | ) | | | | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustments for gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | included in net income, net of tax | | | | | | | | | | | | | | | | | | (453 | ) | | | (453 | ) | | | (453 | ) | Net unrealized gain on securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | available-for-sale, net of tax | | | | | | | | | | | | | | | | | | 6,145 | | | | 6,145 | | | | 6,145 | | FASB ASC 715 adjustment, net of tax | | | | | | | | | | | | | | | | | | 1,540 | | | | 1,540 | | | | 1,540 | | Issuance of 42,500 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (910 | ) | | | | | | | 910 | | | | | | | | — | | | | | | Exercise of stock options | | | | | | (388 | ) | | | | | | | 408 | | | | | | | | 20 | | | | | | Stock-based compensation expense | | | | | | 1,881 | | | | | | | | | | | | | | | | 1,881 | | | | | | Subordinated debenture conversion | | | | | | (633 | ) | | | | | | | 3,623 | | | | | | | | 2,990 | | | | | | Balance, December 31, 2009 | | $ | 4,975 | | $ | 45,696 | | | $ | 92,401 | | | $ | (13,323 | ) | | $ | (181 | ) | | $ | 129,568 | | | | | | Comprehensive income for 2009 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 23,361 | | | Net income | | | | | | | | | | 20,310 | | | | | | | | | | | | 20,310 | | | | 20,310 | | Cash dividends ($.53 per share) | | | | | | | | | | (5,448 | ) | | | | | | | | | | | (5,448 | ) | | | | | Purchase of 13,200 shares | | | | | | | | | | | | | | (467 | ) | | | | | | | (467 | ) | | | | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net unrealized loss on securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | available-for-sale, net of tax | | | | | | | | | | | | | | | | | | (2,149 | ) | | | (2,149 | ) | | | (2,149 | ) | FASB ASC 715 adjustment, net of tax | | | | | | | | | | | | | | | | | | (918 | ) | | | (918 | ) | | | (918 | ) | Issuance of 16,664 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (349 | ) | | | | | | | 108 | | | | | | | | (241 | ) | | | | | Exercise of stock options and SARs | | | | | | (166 | ) | | | | | | | 133 | | | | | | | | (33 | ) | | | | | Stock-based compensation expense | | | | | | 1,472 | | | | | | | | | | | | | | | | 1,472 | | | | | | Balance, December 31, 2010 | | $ | 4,975 | | $ | 46,653 | | | $ | 107,263 | | | $ | (13,549 | ) | | $ | (3,248 | ) | | $ | 142,094 | | | | | | Comprehensive income for 2010 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 17,243 | | | Net income | | | | | | | | | | 23,009 | | | | | | | | | | | | 23,009 | | | | 23,009 | | Cash dividends ($.61 per share) | | | | | | | | | | (6,279 | ) | | | | | | | | | | | (6,279 | ) | | | | | Stock dividend | | | 470 | | | 33,643 | | | | (34,140 | ) | | | | | | | | | | | (27 | ) | | | | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net unrealized gain on securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | available-for-sale, net of tax | | | | | | | | | | | | | | | | | | 7,268 | | | | 7,268 | | | | 7,268 | | Reclassification adjustments for gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | included in net income, net of tax | | | | | | | | | | | | | | | | | | (28 | ) | | | (28 | ) | | | (28 | ) | FASB ASC 715 adjustment, net of tax | | | | | | | | | | | | | | | | | | (6,713 | ) | | | (6,713 | ) | | | (6,713 | ) | Issuance of 28,611 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (519 | ) | | | | | | | 436 | | | | | | | | (83 | ) | | | | | Exercise of stock options and SARs | | | | | | (196 | ) | | | | | | | 145 | | | | | | | | (51 | ) | | | | | Stock-based compensation expense | | | | | | 1,390 | | | | | | | | | | | | | | | | 1,390 | | | | | | Foreign currency translation | | | | | | | | | | | | | | | | | | (32 | ) | | | (32 | ) | | | (32 | ) | Balance, December 31, 2011 | | $ | 5,445 | | $ | 80,971 | | | $ | 89,853 | | | $ | (12,968 | ) | | $ | (2,753 | ) | | $ | 160,548 | | | | | | Comprehensive income for 2011 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 23,504 | |
(In thousands except per share data) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total | Balance, December 31, 2011 | | $ | 5,445 | | $ | 80,971 | | | $ | 89,853 | | | $ | (12,968 | ) | | $ | (2,753 | ) | | $ | 160,548 | | Net income | | | | | | | | | | 23,303 | | | | | | | | | | | | 23,303 | | Cash dividends ($.64 per share) | | | | | | | | | | (7,361 | ) | | | | | | | | | | | (7,361 | ) | Stock dividend | | | 521 | | | 44,280 | | | | (44,843 | ) | | | | | | | | | | | (42 | ) | Issuance of 21,195 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (310 | ) | | | | | | | 392 | | | | | | | | 82 | | Exercise of stock options and SARs | | | | | | (1,254 | ) | | | | | | | 680 | | | | | | | | (574 | ) | Stock-based compensation expense | | | | | | 1,399 | | | | | | | | | | | | | | | | 1,399 | | Other comprehensive loss | | | | | | | | | | | | | | | | | | (3,340 | ) | | | (3,340 | ) | Balance, December 31, 2012 | | | 5,966 | | | 125,086 | | | | 60,952 | | | | (11,896 | ) | | | (6,093 | ) | | | 174,015 | | | Net income | | | | | | | | | | 23,497 | | | | | | | | | | | | 23,497 | | Cash dividends ($.74 per share) | | | | | | | | | | (8,510 | ) | | | | | | | | | | | (8,510 | ) | Stock dividend | | | | | | | | | | | | | | | | | | | | | | | | Issuance of 30,407 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (755 | ) | | | | | | | 508 | | | | | | | | (247 | ) | Exercise of stock options and SARs | | | | | | (1,244 | ) | | | | | | | 408 | | | | | | | | (836 | ) | Stock-based compensation expense | | | | | | 1,975 | | | | | | | | | | | | | | | | 1,975 | | Other comprehensive income | | | | | | | | | | | | | | | | | | 533 | | | | 533 | | Balance, December 31, 2013 | | | 5,966 | | | 125,062 | | | | 75,939 | | | | (10,980 | ) | | | (5,560 | ) | | | 190,427 | | | Net income | | | | | | | | | | 24,033 | | | | | | | | | | | | 24,033 | | Cash dividends ($.81 per share) | | | | | | | | | | (9,337 | ) | | | | | | | | | | | (9,337 | ) | Issuance of 22,629 common shares pursuant | | | | | | | | | | | | | | | | | | | | | | | | to stock-based compensation plan, net | | | | | | (594 | ) | | | | | | | (38 | ) | | | | | | | (632 | ) | Exercise of SARs | | | | | | (340 | ) | | | | | | | 159 | | | | | | | | (181 | ) | Stock-based compensation expense | | | | | | 2,041 | | | | | | | | | | | | | | | | 2,041 | | Purchase of 39,502 shares | | | | | | | | | | | | | | (1,848 | ) | | | | | | | (1,848 | ) | Other comprehensive loss | | | | | | | | | | | | | | | | | | (4,071 | ) | | | (4,071 | ) | Balance, December 31, 2014 | | $ | 5,966 | | $ | 126,169 | | | $ | 90,635 | | | $ | (12,707 | ) | | $ | (9,631 | ) | | $ | 200,432 | |
See accompanying notes to consolidated financial statements.
Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies Summary of OperationsCass Information Systems, Inc.(theInc. (the “Company”) provides payment and information services, which include processing and payment of transportation, utility,energy, telecommunications and environmental invoices. These services include the acquisition and management of data, information delivery and financial exchange. The consolidated balance sheet captions, “Accounts and drafts payable” and “Payments in excess of funding,” represent the Company’s resulting financial position related to the payment services that are performed for customers. The Company also provides a full range of banking services to individual, corporate and institutional customers through Cass Commercial Bank (the “Bank”), its wholly owned bank subsidiary. Basis of Presentation The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany transactions. Certain amounts in the 20102013 and 2012 consolidated financial statements have been reclassified to conform to the 20112014 presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity. The Company issued a 10% stock dividend on December 15, 2011. The share and per share information have been restated unless indicated otherwise for all periods presented in the accompanying consolidated financial statements. Use of EstimatesIn preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statements. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments as segregated in the accompanying consolidated balance sheets to be cash equivalents. Investment in Debt Securities The Company classifies its debt marketable securities as available-for-sale. Securities classified as available-for-sale are carried at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and reported in accumulated other comprehensive income, a component of shareholders’ equity. A decline in the fair value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. To determine whether impairment is other than temporary, the Company considers guidance provided in FASB ASC Topic 320, Investments –Debt and Equity Securities. When determining whether a debt security is other-than-temporarily impaired, the Company assesses whether it has the ability and intent to holdsell the investment until a marketplacesecurity and whether it is more likely than not that the Company will be required to sell prior to recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.amortized cost basis. Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. Premiums and discounts are amortized or accreted to interest income over the estimated lives of the securities using the level-yield method. Interest income is recognized when earned. Gains and losses are calculated using the specific identification method. Allowance for Loan Losses(ALLL) The allowance for loan lossesALLL is increased by provisions charged to expense and is available to absorb charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the allowance for loan losses. Management’s approach which provides for generalestimated credit losses on individually evaluated loans in accordance with FASB ASC 310 and specific allocations, is based on current economic conditions, pastestimated credit losses collection experience, risk characteristicsinherent in the remainder of the portfolio assessments of collateral values by obtaining independent appraisals for significant properties, and such other factors which, in management’s judgment, deserve current recognition in estimating loan losses.accordance with FASB ASC 450. Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses all available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such 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.examinations. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated useful lives of the assets, or the respective lease terms for leasehold improvements, using straight-line and accelerated methods. Estimated useful lives do not exceed 40 years for buildings, the lesser of 10 years or the life of the lease for leasehold improvements and range from 3 to 7 years for software, equipment, furniture and fixtures. Maintenance and repairs are charged to expense as incurred. Intangible Assets Cost in excess of fair value of net assets acquired has resulted from business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective estimated useful lives.
Table of Contents Periodically, the Company reviews intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable. Based on those reviews, adjustments of recorded amounts have not been required. Non-marketable Equity InvestmentsThe Company accounts for non-marketable equity investments, in which it holds less than a 20% ownership, under the cost method. Under the cost method of accounting, investments are carried at cost and are adjusted only for other than temporary declines in fair value, distributions of earnings and additional investments. The Company periodically evaluates whether any declines in fair value of its investments are other than temporary. In performing this evaluation, the Company considers various factors including any decline in market price, where available, the investee's financial condition, results of operations, operating trends and other financial ratios. Non-marketable equity investments are included in other assets on the consolidated balance sheets. Foreclosed AssetsReal estate acquired as a result of foreclosure is initially recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus foreclosure costs, or fair value less estimated selling costs. Fair value is generally determined through the receipt of appraisals. Any write down to fair value at the time the property is acquired is recorded as a charge-off to the allowance for loan losses. Any decline in the fair value of the property subsequent to acquisition is recorded as a charge to non-interest expense. Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon reissuance, treasury stock is reduced based upon the average cost basis of shares held. Comprehensive Income Comprehensive income consists of net income, changes in net unrealized gains (losses) on available-for-sale securities and pension liability adjustments and is presented in the accompanying consolidated statements of shareholders' equity and consolidated statements of comprehensive income. Loans Interest on loans is recognized based upon the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when there is reasonable doubt as to the collectability of principal or interest. Subsequent payments received on such loans are applied to principal if there is any doubt as to the collectability of such principal; otherwise, these receipts are recorded as interest income. The accrual of interest on a loan is resumed when the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Loan origination and commitment fees on originated loans, net of certain direct loan origination costs, are deferred and amortized to interest income using the level-yield method over the estimated lives of the related loans. Impairment of Loans A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment could be measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair value of the collateral when the Company determines foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. The Company uses its nonaccrual methods as discussed above for recognizing interest on impaired loans. Information Services Revenue A majority of the Company’s revenues are attributable to fees for providing services. These services include transportation invoice rating, payment processing, auditing, and the generation of accounting transportation and environmentaltransportation information. The Company also processes, pays and generates management information from electric, gas, telecommunications, environmental, and other invoices. The specific payment and information processing services provided to each customer are developed individually to meet each customer’s specific requirements. The Company enters into service agreements with customers typically for fixed fees per transaction that are invoiced monthly. Revenues are recognized in the period services are rendered and earned under the service agreements, as long as collection is reasonably assured. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced if necessary, by a deferred tax asset valuation allowance. In the event that management determines it is more likely than not that it will not be able to realize all or part of net deferred tax assets in the future, the Company adjusts the recorded value of deferred tax assets, which would result in a direct charge to income tax expense in the period that such determination is made. Likewise, the Company will reverse the valuation allowance when realization of the deferred tax asset is expected. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 adjusted for the net income effect of the interest expense on the outstanding convertible debentures, by the sum of the weighted average number of common shares outstanding and the weighted average number of potential common shares outstanding.
Table of Contents Stock-Based Compensation The Company follows FASB ASC 718Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), “Accounting for Stock Options and Other Stock-based Compensation” (“ASC 718”), which requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. FASB ASC 718 also requires that excess tax benefits related to stock option exercises and restricted stock awards be reflected as financing cash inflows instead of operating cash inflows. Pension PlansThe amounts recognized in the consolidated financial statements related to pension 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, 2011,2014, rate of increase in future compensation levels and mortality rates. These assumptions are updated annually and are disclosed in Note 10. The Company follows FASB ASC 715, “Compensation – Retirement Benefits,”Benefits” (“ASC 715”), which requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial positionconsolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur 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. There have been no significant changes Fair Value Measurements The Company follows the provisions of FASB ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and outlines disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the Company’s long-term rate of return assumptionsprincipal or most advantageous market for the past three fiscal years ended December 31asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy for valuation techniques is used to measure financial assets and management believesfinancial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. Financial instrument valuations are considered Level 1 when they are based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instrument valuations use quoted prices for similar assets or liabilities, quoted prices in markets that are not reasonably likely to change inactive, or other inputs that are observable or can be corroborated by observable market data. Financial instrument valuations are considered Level 3 when they are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable, and when determination of the future. Pursuant to ASC 715,fair value requires significant management judgment or estimation. The Company records securities available for sale at their fair values on a recurring basis using Level 2 valuations. Additionally, the Company has recognized the funded statusrecords impaired loans and other real estate owned at their fair value on a nonrecurring basis. The nonrecurring fair value adjustments typically involve application of its defined benefit postretirement plan in its consolidated balance sheet and has recognized changes in that funded status through comprehensive income.lower-of-cost-or-market accounting or impairment write-downs of individual assets. Impact of New and Not Yet Adopted Accounting Pronouncements In June 2011,The new accounting pronouncements are not applicable to the FASB issued Accounting Standards Update (“ASU”) No. 2011-05 –Comprehensive Income (ASC Topic 220)–Presentation of Comprehensive Income. This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income Company and/or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. ASU No. 2011-12 deferred the presentation of reclassification adjustments and superseded certain pending paragraphs in ASU No. 2011-05. As these ASU’s address financial statement presentation, the adoptions willdo not materially impact the Company’s consolidated financial statements or results of operations.Company.
In September 2011, the FASB issued ASU No. 2011-08 –Intangibles–Goodwill and Other (ASC Topic 350)–Testing of Goodwill for Impairment. This ASU simplifies how entities test goodwill for impairment. The amendments under this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.
Note 2 Capital Requirements and Regulatory Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The CompanyCompany’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes that as of December 31, 20112014 and 2010,2013, the Company and the Bank met all capital adequacy requirements to which they are subject. Effective July 2, 2013, the Federal Reserve Board approved final rules known as the “Basel III Capital Rules” that substantially revise the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital framework agreed upon by the Basel Committee and incorporate changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the Basel III Capital Rules establish stricter capital requirements and calculation standards, as well as more restrictive risk weightings for certain loans and facilities. The Basel III Capital Rules will come into effect for the Company and the Bank on January 1, 2015 (subject to a phase-in period).
Table of Contents The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 20112014 and 20102013, the most recent notification from the regulatory agencies categorized the Bank as well capitalized.well-capitalized. To be categorized as well capitalized,well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
Subsidiary dividends arecan be a significant source of funds for payment of dividends by the Company to its shareholders. At December 31, 2011,2014, unappropriated retained earnings of $20,465,000$23,801,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities. However, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 20112014 and 2010.2013. The Company’s and the Bank’s actual and required capital amounts and ratios as are as follows: | | | | | | Capital | | Requirement to be | | | | | | | Capital | | Requirement to be | | | Actual | | Requirements | | Well Capitalized | | Actual | | Requirements | | Well-Capitalized | (In thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | At December 31, 2011 | | | | | | | | | | | | | | | At December 31, 2014 | | | | | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | $ | 166,605 | | | 19.03 | % | | $ | 70,033 | | | 8.00 | % | | $ | N/A | | N/A | % | | $ | 207,468 | | 21.91 | % | | $ | 75,761 | | 8.00 | % | | $ | N/A | | N/A | % | Cass Commercial Bank | | 66,851 | | 12.71 | | 42,070 | | 8.00 | | 52,588 | | 10.00 | | | 91,249 | | 15.88 | | 45,977 | | 8.00 | | 57,472 | | 10.00 | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | 155,638 | | 17.78 | | 35,016 | | 4.00 | | N/A | | N/A | | | 195,630 | | 20.66 | | 37,880 | | 4.00 | | N/A | | N/A | | Cass Commercial Bank | | 60,248 | | 11.46 | | 21,035 | | 4.00 | | 31,553 | | 6.00 | | | 84,049 | | 14.62 | | 22,989 | | 4.00 | | 34,483 | | 6.00 | | Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | 155,638 | | 11.53 | | 40,502 | | 3.00 | | N/A | | N/A | | | 195,630 | | 13.42 | | 43,742 | | 3.00 | | N/A | | N/A | | Cass Commercial Bank | | 60,248 | | 9.49 | | 19,044 | | 3.00 | | 31,741 | | 5.00 | | | 84,049 | | 11.94 | | 21,124 | | 3.00 | | 35,207 | | 5.00 | | At December 31, 2010 | | | | | | | | | | | | | | | At December 31, 2013 | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | $ | 148,659 | | 16.82 | % | | $ | 70,695 | | 8.00 | % | | $ | N/A | | N/A | % | | $ | 191,984 | | 22.27 | % | | $ | 68,956 | | 8.00 | % | | $ | N/A | | N/A | % | Cass Commercial Bank | | 58,838 | | 10.72 | | 43,916 | | 8.00 | | | 54,895 | | 10.00 | | | 83,168 | | 15.38 | | 43,256 | | 8.00 | | 54,071 | | 10.00 | | Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | | 137,603 | | 15.57 | | | 35,348 | | 4.00 | | N/A | | N/A | | | 181,198 | | 21.02 | | 34,478 | | 4.00 | | N/A | | N/A | | Cass Commercial Bank | | 51,955 | | 9.46 | | 21,958 | | 4.00 | | | | 32,937 | | 6.00 | | | 76,395 | | 14.13 | | | 21,628 | | 4.00 | | | 32,442 | | 6.00 | | Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cass Information Systems, Inc. | | 137,603 | | 11.18 | | 36,923 | | 3.00 | | N/A | | N/A | | | | 181,198 | | 13.12 | | 41,438 | | 3.00 | | N/A | | N/A | | Cass Commercial Bank | | | 51,955 | | | 8.92 | | | | 17,472 | | | 3.00 | | | | 29,121 | | 5.00 | | | 76,395 | | 11.37 | | | 20,162 | | 3.00 | | 33,603 | | 5.00 | |
Note 3 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 at December 31, 20112014 and 20102013 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 table below presents the balances of securities available-for-sale measured at fair value on a recurring basis. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of debt and equity securities are summarized as follows: | | December 31, 2011 | | December 31, 2014 | | | | | | Gross | | Gross | | | | | | | Gross | | Gross | | | | | Amortized | | Unrealized | | Unrealized | | | | Amortized | | Unrealized | | Unrealized | | | (In thousands) | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value | State and political subdivisions | | $ | 287,585 | | $ | 19,797 | | $ | 20 | | $ | 307,362 | | $ | 338,469 | | $ | 14,120 | | $ | 198 | | $ | 352,391 | Certificates of deposit | | 3,250 | | — | | — | | 3,250 | | 3,750 | | — | | — | | 3,750 | Total | | $ | 290,835 | | $ | 19,797 | | $ | 20 | | $ | 310,612 | | $ | 342,219 | | $ | 14,120 | | $ | 198 | | $ | 356,141 | | | | | | December 31, 2010 | | December 31, 2013 | | | | | | Gross | | Gross | | | | | | | Gross | | Gross | | | | | Amortized | | Unrealized | | Unrealized | | | | Amortized | | Unrealized | | Unrealized | | | (In thousands) | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value | State and political subdivisions | | $ | 255,929 | | $ | 9,829 | | $ | 1,189 | | $ | 264,569 | | $ | 308,403 | | $ | 8,537 | | $ | 2,923 | | $ | 314,017 | Certificates of deposit | | | | 3,750 | | | — | | — | | | 3,750 | Total | | $ | 255,929 | | $ | 9,829 | | $ | 1,189 | | $ | 264,569 | | $ | 312,153 | | $ | 8,537 | | $ | 2,923 | | $ | 317,767 |
Table of Contents The fair values of securities with unrealized losses are as follows: | | December 31, 2011 | | December 31, 2014 | | | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total | | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | (In thousands) | | Fair Value | | Losses | | Fair Value | | Losses | | Fair value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair value | | Losses | State and political subdivisions | | $ | 4,362 | | $ | 20 | | $ | — | | $ | — | | $ | 4,362 | | $ | 20 | | $ | 8,700 | | $ | 15 | | $ | 13,833 | | $ | 183 | | $ | 22,533 | | $ | 198 | Certificates of deposit | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | Total | | $ | 4,362 | | $ | 20 | | $ | — | | $ | — | | $ | 4,362 | | $ | 20 | | $ | 8,700 | | $ | 15 | | $ | 13,833 | | $ | 183 | | $ | 22,533 | | $ | 198 | | | | | | December 31, 2010 | | December 31, 2013 | | | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total | | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | | Estimated | | Unrealized | (In thousands) | | Fair Value | | Losses | | Fair Value | | Losses | | Fair value | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair value | | Losses | State and political subdivisions | | $ | 53,741 | | $ | 1,189 | | $ | — | | $ | — | | $ | 53,741 | | $ | 1,189 | | $ | 101,792 | | $ | 2,661 | | $ | 3,554 | | $ | 262 | | $ | 105,346 | | $ | 2,923 | Certificates of deposit | | | — | | | — | | | — | | — | | — | | — | Total | | $ | 53,741 | | $ | 1,189 | | $ | — | | $ | — | | $ | 53,741 | | $ | 1,189 | | $ | 101,792 | | $ | 2,661 | | $ | 3,554 | | $ | 262 | | $ | 105,346 | | $ | 2,923 |
There were 720 securities, (noneor 6% of the total, (12 greater than 12 months) in an unrealized loss position as of December 31, 20112014 compared to 61102 securities (none(3 greater than 12 months) in an unrealized loss position as of December 31, 2010 .2013. All unrealized losses are reviewed to determine whether the losses are other than temporary. Management believes that all unrealized losses are temporary since they are market driven, and the Company hasdoes not have the ability and intent to hold these securities until maturity.sell the security, and it is more likely than not that the Company will not be required to sell prior to recovery of the amortized basis. The amortized cost and fair value of debt and equity 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. | | December 31, 2011 | | December 31, 2014 | (In thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Due in 1 year or less | | $ | 16,289 | | $ | 16,512 | | $ | 27,929 | | $ | 28,213 | Due after 1 year through 5 years | | 41,109 | | 44,131 | | 80,542 | | | 84,500 | Due after 5 years through 10 years | | | 114,454 | | 124,680 | | 144,350 | | 150,428 | Due after 10 years | | 118,983 | | | 125,289 | | | 89,398 | | | 93,000 | No stated maturity | | — | | | — | | — | | — | Total | | $ | 290,835 | | $ | 310,612 | | $ | 342,219 | | $ | 356,141 |
The premium related to the purchase of state and political subdivisions was $5,085,000 and $4,450,000 in 2014 and 2013, respectively. The amortized cost of debt securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes at December 31, 20112014 and 2010 were $3,250,0002013 was $3,750,000 and $27,776,000$3,750,000 respectively. Proceeds from sales of debt securities classified as available-for-sale were $5,930,000$587,000 in 2011, $02014, $95,742,000 in 2010,2013, and $21,906,000$69,747,000 in 2009.2012. Gross realized gains on the sales in 2011, 20102014, 2013 and 20092012 were $48,000, $0$23,000, $4,295,000, and $699,000, respectively; gross$2,646,000, respectively. Gross realized losses on sales in 2011, 20102014, 2013 and 20092012 were $5,000, $0, $271,000, and $2,000,$11,000, respectively. Note 4 Loans The Company originates commercial, industrial and real estate loans to businesses and churches throughout the metropolitan St. Louis, Missouri area, Orange County, California and other selected cities in the United States. The Company does not have any particular concentration of credit in any one economic sector; however, a substantial portion of the commercial and industrial loans areis extended to privately-held commercial companies in these market areas, and are generally secured by the assets of the business. The Company also has a substantial portion of real estate loans secured by mortgages that are extended to churches in its market area and selected cities in the United States.
Table of Contents A summary of loan categories is as follows: | | December 31, | December 31, | (In thousands) | | 2011 | | 2010 | 2014 | | 2013 | Commercial and industrial | | $ | 136,916 | | $ | 135,061 | $ | 203,350 | | $ | 171,304 | Real estate | | | | | | Commercial: | | | | | | Mortgage | | 140,848 | | 152,215 | | 117,754 | | 128,358 | Construction | | | 9,067 | | 18,434 | | — | | 6,632 | Church, church-related: | | | | | | Mortgage | | 347,726 | | 365,378 | | 305,887 | | 326,832 | Construction | | 36,497 | | | 36,318 | | 18,612 | | 9,817 | Industrial Revenue Bond | | | 23,348 | | 9,167 | Other | | 511 | | 1,227 | | 395 | | 67 | Total loans | | $ | 671,565 | | $ | 708,633 | $ | 669,346 | | $ | 652,177 |
The following table presents the aging of loans by loan categories at December 31, 2011:2014: | | Performing | | Nonperforming | | Performing | | Nonperforming | | | | | | | | | | 90 Days | | | | | | | 90 Days | | | | | | 30-59 | | 60-89 | | and | | Non | | Total | | | 30-59 | | 60-89 | | and | | Non- | | Total | (In thousands) | | Current | | Days | | Days | | Over | | Accrual | | Loans | | Current | | Days | | Days | | Over | | accrual | | Loans | Commercial and industrial | | $ | 136,850 | | $ | — | | $ | 10 | | $ | — | | $ | 56 | | $ | 136,916 | | $ | 203,350 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 203,350 | Real estate | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | Mortgage | | 139,249 | | 137 | | — | | 29 | | 1,433 | | 140,848 | | 117,393 | | — | | — | | — | | 361 | | 117,754 | Construction | | 9,067 | | — | | — | | — | | — | | 9,067 | | — | | — | | — | | — | | — | | — | Church, church-related: | | | | | | | | | | | | | | | | Mortgage | | | 347,506 | | — | | — | | — | | 220 | | 347,726 | | 305,760 | | — | | — | | — | | 127 | | 305,887 | Construction | | | 36,497 | | — | | | — | | — | | — | | 36,497 | | 18,612 | | — | | — | | — | | — | | 18,612 | Industrial Revenue Bond | | | 23,348 | | — | | — | | — | | — | | 23,348 | Other | | 511 | | — | | | — | | — | | — | | 511 | | 395 | | — | | — | | — | | — | | 395 | Total | | $ | 669,680 | | $ | 137 | | $ | 10 | | $ | 29 | | $ | 1,709 | | $ | 671,565 | | $ | 668,858 | | $ | — | | $ | — | | $ | — | | $ | 488 | | $ | 669,346 |
The following table presents the aging of loans by loan categories at December 31, 2010:2013: | | Performing | | Nonperforming | | Performing | | Nonperforming | | | | | | | | | | | 90 Days | | | | | | | 90 Days | | | | | | | 30-59 | | 60-89 | | and | | Non | | Total | | | 30-59 | | 60-89 | | and | | Non- | | Total | (In thousands) | | Current | | Days | | Days | | Over | | Accrual | | Loans | | Current | | Days | | Days | | Over | | accrual | | Loans | Commercial and industrial | | $ | 134,936 | | $ | 79 | | $ | — | | $ | — | | $ | 46 | | $ | 135,061 | | $ | 171,293 | | $ | — | | $ | — | | $ | — | | $ | 11 | | $ | 171,304 | Real estate | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | Mortgage | | | 151,581 | | 145 | | — | | — | | 489 | | 152,215 | | 127,879 | | — | | — | | 479 | | 128,358 | Construction | | 18,434 | | — | | — | | — | | — | | 18,434 | | 6,632 | | — | | — | | — | | — | | 6,632 | Church, church-related: | | | | | | | | | | | | | | | | Mortgage | | 363,424 | | 1,924 | | — | | — | | 30 | | 365,378 | | 325,091 | | 434 | | — | | — | | 1,307 | | 326,832 | Construction | | 36,318 | | | — | | — | | — | | | — | | | 36,318 | | 9,817 | | — | | — | | — | | — | | 9,817 | Industrial Revenue Bond | | | 9,167 | | — | | — | | — | | — | | 9,167 | Other | | | 1,227 | | — | | | — | | — | | — | | 1,227 | | 67 | | — | | — | | — | | — | | 67 | Total | | $ | 705,920 | | $ | 2,148 | | $ | — | | $ | — | | $ | 565 | | $ | 708,633 | | $ | 649,946 | | $ | 434 | | $ | — | | $ | — | | $ | 1,797 | | $ | 652,177 |
Table of Contents The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2011:2014: | | Loans | | Performing | | Nonperforming | | | | Loans | | Performing | | Nonperforming | | | | Subject to | | Loans Subject to | | Loans Subject to | | | | Subject to | | Loans Subject to | | Loans Subject | | | | Normal | | Special | | Special | | Total | | Normal | | Special | | to Special | | (In thousands) | | Monitoring1 | | Monitoring2 | | Monitoring2 | | Loans | | Monitoring1 | | Monitoring2 | | Monitoring2 | | Total Loans | Commercial and industrial | | $ | 132,475 | | $ | 4,385 | | $ | 56 | | $ | 136,916 | | $ | 199,837 | | $ | 3,513 | | $ | — | | $ | 203,350 | Real estate | | | | | | | | | | Commercial: | | | | | | | | | | Mortgage | | 125,850 | | 13,536 | | 1,462 | | 140,848 | | 103,097 | | 14,296 | | 361 | | 117,754 | Construction | | 9,067 | | — | | — | | 9,067 | | — | | — | | — | | — | Church, church-related: | | | | | | | | | | Mortgage | | 336,727 | | 10,779 | | 220 | | 347,726 | | 304,219 | | 1,541 | | 127 | | 305,887 | Construction | | | 36,497 | | — | | — | | 36,497 | | 18,612 | | — | | — | | 18,612 | Industrial Revenue Bond | | | 23,348 | | — | | — | | 23,348 | Other | | 511 | | | — | | — | | 511 | | 395 | | — | | — | | 395 | Total | | $ | 641,127 | | $ | 28,700 | | $ | 1,738 | | $ | 671,565 | | $ | 649,508 | | $ | 19,350 | | $ | 488 | | $ | 669,346 |
11 | | 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. | 22 | | Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention. |
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31, 2010:2013: | | Loans | | Performing | | Nonperforming | | | | Loans | | Performing | | Nonperforming | | | | Subject to | | Loans Subject to | | Loans Subject to | | | | Subject to | | Loans Subject to | | Loans Subject to | | | | Normal | | Special | | Special | | Total | | Normal | | Special | | Special | | Total | (In thousands) | | Monitoring1 | | Monitoring2 | | Monitoring2 | | Loans | | Monitoring1 | | Monitoring2 | | Monitoring2 | | Loans | Commercial and industrial | | $ | 130,148 | | $ | 4,867 | | $ | 46 | | $ | 135,061 | | $ | 167,878 | | $ | 3,415 | | $ | 11 | | $ | 171,304 | Real estate | | | | | | | | | | Commercial: | | | | | | | | | | Mortgage | | 143,009 | | 8,717 | | 489 | | 152,215 | | 119,521 | | 8,358 | | 479 | | 128,358 | Construction | | 18,434 | | — | | — | | 18,434 | | 6,632 | | — | | — | | 6,632 | Church, church-related: | | | | | | | | | | Mortgage | | 353,578 | | 11,770 | | 30 | | 365,378 | | 323,291 | | 2,234 | | 1,307 | | 326,832 | Construction | | 36,318 | | | — | | — | | | 36,318 | | 9,817 | | — | | — | | 9,817 | Industrial Revenue Bond | | | 9,167 | | — | | — | | 9,167 | Other | | | 1,227 | | | — | | — | | 1,227 | | 67 | | — | | — | | 67 | Total | | $ | 682,714 | | $ | 25,354 | | $ | 565 | | $ | 708,633 | | $ | 636,373 | | $ | 14,007 | | $ | 1,797 | | $ | 652,177 |
11 | | 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. The allowance for loan losses related to impaired loans was $1,066,000$127,000 and $120,000$318,000 at December 31, 20112014 and 2010,2013, respectively. ThereNonaccrual loans were no impaired loans without a valuation allowance$488,000 and $1,797,000 at December 31, 2011 or 2010. Nonaccrual loans were $1,709,0002014 and $565,000 at December 31, 2011 and 2010,2013, respectively. Loans delinquent 90 days or more and still accruing interest were $29,000 and $0 at December 31, 20112014 and 2010, respectively.2013. At December 31, 20112014 and 2013, there were twono loans totaling $4,479,000 classified as troubled debt restructuring, with a total pre-modification loan balance of $4,486,000; there were no troubled debt restructurings at December 31, 2010.restructuring. The average balances of impaired loans during 2011, 20102014, 2013 and 20092012 were $5,276,000 $1,130,000$1,262,000, $1,381,000 and $1,568,000,$5,451,000, respectively. Income that would have been recognized on non-accrual loans under the original terms of the contract was $107,000, $83,000$108,000, $180,000 and $134,000$381,000 for 2011, 20102014, 2013 and 2009,2012, respectively. Income that was recognized on nonaccrual loans was $102,000, $35,000$77,000, $131,000 and $131,000$141,000 for 2011, 20102014, 2013 and 20092012 respectively. There are twowere no foreclosed loans with a book value of $1,689,000 which have been reclassified as other real estate owned (included in other assets)assets as of December 31, 2011.2014 and December 31, 2013.
Table of Contents The following table presents the recorded investment and unpaid principal balance for impaired loans at December 31, 2011:2014: | | | | Related | | | | | | Unpaid | | Related | | | Unpaid | | Allowance | | | Recorded | | Principal | | Allowance for | | Recorded | | Principal | | for Loan | (In thousands) | | Investment | | Balance | | Loan Losses | | Investment | | Balance | | Losses | Commercial and industrial: | | | | | | | | Nonaccrual | | $ | 56 | | $ | 56 | | $ | 28 | | $ | — | | $ | — | | $ | — | Troubled debt restructurings still accruing | | 83 | | 83 | | 8 | | Real estate | | | | | | | | Commercial – Mortgage: | | | | | | | | Commercial Mortgage: | | | Nonaccrual | | 1,433 | | 1,433 | | 149 | | 361 | | 361 | | — | Past due 90 days or more and still accruing | | 29 | | 29 | | | — | | Troubled debt restructurings still accruing | | 4,396 | | 4,396 | | 766 | | Church – Mortgage: | | | | | | | | | | | Church Mortgage: | | | Nonaccrual | | 220 | | 220 | | 115 | | 127 | | 127 | | 127 | Total impaired loans | | $ | 6,217 | | $ | 6,217 | | $ | 1,066 | | $ | 488 | | $ | 488 | | $ | 127 |
The following table presents the recorded investment and unpaid principal balance for impaired loans at December 31, 2010:2013: | | | | Related | | | | | Unpaid | | Related | | | Unpaid | | Allowance | | | Recorded | | Principal | | Allowance for | | Recorded | | Principal | | for Loan | (In thousands) | | Investment | | Balance | | Loan Losses | | Investment | | Balance | | Losses | Commercial and industrial: | | | | | | | | Nonaccrual | | $ | 46 | | $ | 46 | | $ | 5 | | $ | 11 | | $ | 11 | | $ | 6 | Troubled debt restructurings still accruing | | — | | — | | — | | Real estate | | | | | | | | | Commercial – Mortgage: | | | | | | | | Commercial Mortgage: | | | Nonaccrual | | 489 | | 489 | | 100 | | 479 | | 479 | | 89 | Church – Mortgage: | | | | | | | | | Church Mortgage: | | | Nonaccrual | | | 30 | | 30 | | | 15 | | 1,307 | | 1,307 | | 223 | Total impaired loans | | $ | 565 | | $ | 565 | | $ | 120 | | $ | 1,797 | | $ | 1,797 | | $ | 318 |
The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired.basis. Once a loan is identified as impaired, management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses”.Losses.” At December 31, 2011,2014, all impaired loans were evaluated based on the fair value of the collateral.collateral or present value of expected future cash flow. 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. The total principal balance of impaired loans measured at fair value at December 31,2011 and 2010 was $5,151,000 and $445,000.3. A summary of the activity in the allowance for loan losses is as follows: | | December 31, | | Charge- | | | | | | December 31, | | December 31, | | Charge- | | December 31, | (In thousands) | | 2010 | | Offs | | Recoveries | | Provision | | 2011 | | 2013 | | Offs | | Recoveries | | Provision | | 2014 | Commercial and industrial | | $ | 2,732 | | $ | 1,118 | | $ | 58 | | $ | 922 | | $ | 2,594 | | $ | 3,139 | | $ | — | | $ | 41 | | $ | 335 | | $ | 3,515 | Real estate | | | | | | | | | | | | Commercial: | | | | | | | | | | | | Mortgage | | 3,356 | | — | | — | | 1,420 | | 4,776 | | 3,064 | | — | | 222 | | (226 | ) | | 3,060 | Construction | | 269 | | — | | — | | (102 | ) | | 167 | | — | | — | | — | | — | | — | Church, church-related: | | | | | | | | | | | | Mortgage | | 5,135 | | 28 | | 1 | | (311 | ) | | 4,797 | | 4,375 | | 76 | | 30 | | (313 | ) | | 4,016 | Construction | | 387 | | | — | | — | | 229 | | 616 | | 124 | | — | | — | | 16 | | 140 | Industrial Revenue Bond | | | 155 | | — | | — | | 239 | | 394 | Other | | | 12 | | | — | | | — | | | (8 | ) | | | 4 | | 822 | | 3 | | 1 | | (51 | ) | | 769 | Total | | $ | 11,891 | | $ | 1,146 | | $ | 59 | | $ | 2,150 | | | $ | 12,954 | | $ | 11,679 | | $ | 79 | | $ | 294 | | $ | — | | $ | 11,894 |
Loan transactions involving executive officers and directorsAs of the Company and its subsidiaries andDecember 31, 2014 there were no loans to affiliates of executive officers and directors decreased during 2011 by $2,000 in payments, from an aggregate balanceor directors.
Table of $580,000 on January 1, 2011 to $578,000 at December 31, 2011. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability.Contents Note 5 Premises and Equipment A summary of premises and equipment is as follows: | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2014 | | 2013 | Land | | $ | 873 | | $ | 873 | | $ | 873 | | $ | 873 | Buildings | | 10,491 | | 10,491 | | 12,541 | | 10,801 | Leasehold improvements | | 836 | | 1,794 | | 2,112 | | 2,086 | Furniture, fixtures and equipment | | 10,072 | | 11,247 | | 10,762 | | 12,081 | Purchased software | | 5,894 | | 5,390 | | 10,274 | | 9,328 | Internally developed software | | 2,650 | | 3,283 | | 2,527 | | 2,650 | | | $ | 30,816 | | $ | 33,078 | | 39,089 | | 37,819 | Less accumulated depreciation | | 21,229 | | 23,461 | | 22,180 | | 24,588 | Total | | $ | 9,587 | | $ | 9,617 | | $ | 16,909 | | $ | 13,231 |
Total depreciation charged to expense in 2011, 20102014, 2013 and 20092012 amounted to $1,955,000, $2,024,000,$2,613,000, $2,361,000 and $2,243,000,$1,951,000, respectively. The Company and its subsidiaries lease various premises and equipment under operating lease agreements which expire at various dates through 2016.2023. Rental expense for 2011, 20102014, 2013 and 20092012 was $598,000, $767,000$1,405,000, $1,222,000 and $814,000,$547,000, respectively. The following is a schedule, by year, of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011:2014: (In thousands) | | Amount | | Amount | 2012 | | 614 | | 2013 | | 487 | | 2014 | | 321 | | 2015 | | 196 | | $ | 1,213 | 2016 | | | 46 | | 1,071 | 2017 | | | 1,050 | 2018 | | | 861 | 2019 | | | 624 | 2020-2023 | | | 2,022 | Total | | $ | 1,664 | | $ | 6,841 |
Note 6 Acquired Intangible Assets The Company accounts for intangible assets in accordance with FASB ASC 350, “Goodwill and Other Intangible Assets,”Assets” (“ASC 350”), 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., 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: | | December 31, 2011 | | December 31, 2010 | | December 31, 2014 | | December 31, 2013 | | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | (In thousands) | | Amount | | Amortization | | Amount | | Amortization | | Amount | | Amortization | | Amount | | Amortization | Assets eligible for amortization: | | | | | | | | | | | Customer List | | $ | 750 | | $ | (589 | ) | | $ | 750 | | $ | (482 | ) | | Total | | 750 | | (589 | ) | | 750 | | (482 | ) | | Customer Lists | | | $ | 3,933 | | $ | (1,705 | ) | | $ | 3,933 | | $ �� | (1,387 | ) | | | | Patent | | | 23 | | (1 | ) | | — | | — | | Non-compete agreements | | | 261 | | (157 | ) | | 261 | | (105 | ) | Software | | | 234 | | (234 | ) | | 234 | | (156 | ) | Other | | | 500 | | (92 | ) | | 500 | | (58 | ) | Unamortized intangible assets: | | | | | | | | | | | | Goodwill1 | | | 7,698 | | (227 | ) | | 7,698 | | (227 | ) | | 11,817 | | (227 | ) | | 11,817 | | (227 | ) | Total unamortized intangibles | | 7,698 | | | (227 | ) | | 7,698 | | (227 | ) | | Total intangible assets | | $ | 8,448 | | $ | (816 | ) | | $ | 8,448 | | $ | (709 | ) | | $ | 16,768 | | $ | (2,416 | ) | | $ | 16,745 | | $ | (1,933 | ) |
1 | | Amortization through December 31, 2001 prior to adoption of FASB ASC 350. |
The customer list that was acquired in the NTransit purchase islists are amortized over seven and ten years; the non-compete agreements over five years, on a straight-line basis. The weighted average remaining amortization period at December 31, 2011 was twosoftware over three years for all amortizedand other intangible assets combined.over fifteen years. Amortization of intangible assets amounted to $107,000, $107,000$483,000, $535,000 and $222,000$581,000 for the years ended December 31, 2011, 20102014, 2013 and 2009,2012, respectively. Estimated future amortization of intangibles is as follows: $107,000$405,000 in 20122015, $405,000 in 2016, $353,000 in 2017, $353,000 in 2018, and $54,000$353,000 in 2013.2019.
Table of Contents Note 7 Interest-Bearing Deposits Interest-bearing deposits consist of the following: | | | December 31, | | | December 31, | | 2014 | | 2013 | (In thousands) | | 2011 | | 2010 | | | Weighted | | Weighted | NOW and money market deposit accounts | | $ | 257,294 | | $ | 215,927 | | | | | | Average | | Average | | | | | Interest | | Interest | | | | Amounts | | Rate | | Amounts | | Rate | Interest-bearing demand deposits | | | $ | 354,511 | | .49 | % | | $ | 316,743 | | .61 | % | Savings deposits | | 28,037 | | 32,447 | | 24,914 | | .51 | | 20 | | .66 | | Time deposits: | | | | | | Less than $100 | | 13,167 | | 20,950 | | 6,956 | | 1.14 | | 7,777 | | 1.09 | | $100 or more | | 117,914 | | | 136,169 | | 72,819 | | .79 | | 91,219 | | .81 | | Total | | $ | 416,412 | | $ | 405,493 | | $ | 459,200 | | .58 | % | | $ | 438,655 | | .69 | % |
Interest on deposits consists of the following: | | December 31, | | December 31, | (In thousands) | | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | NOW and money market deposit accounts | | $ | 2,162 | | $ | 2,082 | | $ | 1,797 | | Interest-bearing demand deposits | | | $ | 1,564 | | $ | 1,737 | | $ | 1,739 | Savings deposits | | 225 | | 321 | | 335 | | 87 | | 138 | | 169 | Time deposits: | | | | | | | | Less than $100 | | 1,297 | | 1,658 | | 1,729 | | 472 | | 600 | | 784 | $100 or more | | | 690 | | | 814 | | | 1,063 | | 337 | | 357 | | 456 | Total | | $ | 4,374 | | $ | 4,875 | | $ | 4,924 | | $ | 2,460 | | $ | 2,832 | | $ | 3,148 |
The scheduled maturities of time deposits are summarized as follows: | | December 31, | | December 31, | | | 2011 | | 2010 | | 2014 | | 2013 | | | | | | Percent | | | | Percent | | | Percent | | Percent | (In thousands) | | Amount | | of Total | | Amount | | of Total | | Amount | | of Total | | Amount | | of Total | Due within: | | | | | | | | | | | One year | | $ | 119,394 | | 91.1 | % | | $ | 134,217 | | 85.4 | % | | $ | 66,436 | | 83.3 | % | | $ | 84,088 | | 84.9 | % | Two years | | 7,362 | | 5.6 | % | | 19,442 | | 12.4 | % | | 10,759 | | 13.5 | | 12,690 | | 12.8 | | Three years | | 1,735 | | 1.3 | % | | | 914 | | 0.6 | % | | 1,148 | | 1.4 | | 594 | | .6 | | Four years | | 2,332 | | 1.8 | % | | 447 | | 0.3 | % | | 1,250 | | 1.6 | | 459 | | .5 | | Five years | | 258 | | .2 | % | | 2,099 | | 1.3 | % | | 182 | | .2 | | 1,165 | | 1.2 | | Total | | $ | 131,081 | | 100.0 | % | | $ | 157,119 | | 100.0 | % | | $ | 79,775 | | 100.0 | % | | $ | 98,996 | | 100.0 | % |
Note 8
Subordinated Convertible Debentures and Unused Available Lines of Credit On August 24, 2004, the Company issued $3,700,000 of 5.33% subordinated convertible debentures in partial consideration for the acquisition of the assets of PROFITLAB, Inc. Interest was payable annually on the anniversary date of the acquisition. Prior to 2010, all debt-holders converted the principal balance into shares of the Company’s common stock in accordance with the conversion provisions. As such, no convertible debentures are outstanding as of December 31, 2010 and 2011.
As of December 31, 2011,2014, the Bank had 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; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; JPM Chase Bank, $6,000,000; and UMB Bank $5,000,000. The CompanyAs of December 31, 2014, the Bank had secured lines of credit with the Federal Home Loan BankFHLB of $132,578,000$158,247,000 collateralized by commercial mortgage loans. There were no amounts outstanding under any of the lines of credit discussed above at December 31, 20112014 or 2010.2013. At December 31, 2014, the Company had secured lines of credit with UMB Bank of $50,000,000 and First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. Note 9 Common Stock and Earnings per Share The table below shows activity in the outstanding shares of the Company’s common stock during 2011.during2014.
Table of Contents | | 20112014 | Shares outstanding at January 1 | 9,387,791 | 10% stock dividend issued December 15, 2011 | 940,83911,521,480 | | Issuance of common stock: | | Issued under stock-based compensation plan | 21,195 | Stock options/Employee restricted stock grants | | 6,007 | | Employee SARs exercised | 8,105 | 8,066 | | Directors’ compensation | | 6,524 | | Shares repurchased | | (39,502 | ) | Shares outstanding at December 31 | 10,357,930 | 11,502,575 | |
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 adjusted for the net income effect of the interest expense on the outstanding convertible debentures, by the sum of the weighted average number of common shares outstanding and the weighted average number of potential common shares outstanding. Under the treasury stock method, outstanding stock options and SARsappreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the optionSAR price during a period. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period. Anti-dilutive shares are those option sharesSARs with exercise prices in excess of the current market value.
The calculations of basic and diluted earnings per share are as follows:
| | December 31, | (In thousands except share and per share data) | | 2011 | | 2010 | | 2009 | Basic | | | | | | | | | | Net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,129 | Weighted-average common shares outstanding | | | 10,297,244 | | | 10,268,812 | | | 10,072,340 | Basic earnings per share | | $ | 2.23 | | $ | 1.98 | | $ | 1.60 | Diluted | | | | | | | | | | Basic net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,129 | Net income effect of 5.33% convertible | | | | | | | | | | debentures | | | — | | | — | | | 55 | Diluted net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,184 | Weighted-average common shares outstanding | | | 10,297,244 | | | 10,268,812 | | | 10,072,340 | Effect of dilutive restricted stock, stock | | | | | | | | | | options and SARs | | | 135,138 | | | 123,521 | | | 136,862 | Effect of convertible debentures | | | — | | | — | | | 102,274 | Weighted-average common shares outstanding | | | | | | | | | | assuming dilution | | | 10,432,382 | | | 10,392,333 | | | 10,311,476 | Diluted earnings per share | | $ | 2.21 | | $ | 1.95 | | $ | 1.57 |
| | December 31, | (In thousands except share and per share data) | | 2014 | | 2013 | | 2012 | Basic | | | | | | | | | | Net income | | $ | 24,033 | | $ | 23,497 | | $ | 23,303 | Weighted average common shares outstanding | | | 11,479,025 | | | 11,441,158 | | | 11,378,216 | Basic earnings per share | | $ | 2.09 | | $ | 2.05 | | $ | 2.05 | Diluted | | | | | | | | | | Net income | | $ | 24,033 | | $ | 23,497 | | $ | 23,303 | Weighted average common shares outstanding | | | 11,479,025 | | | 11,441,158 | | | 11,378,216 | Effect of dilutive restricted stock and SARs | | | 164,954 | | | 199,581 | | | 178,998 | Weighted average common shares outstanding | | | | | | | | | | assuming dilution | | | 11,643,979 | | | 11,640,739 | | | 11,557,214 | Diluted earnings per share | | $ | 2.06 | | $ | 2.02 | | $ | 2.02 |
All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2011.
Note 10 Employee Benefit Plans Defined Benefit Plan The Company has a noncontributory defined-benefit pension plan (the “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 planPlan over a period of approximately 30 years. A summary of the activity in the Plan’s projected benefit obligation, assets, funded status and amounts recognized in the Company’s consolidated balance sheets is as follows: | | December 31, | | (In thousands) | | 2011 | | 2010 | | 2014 | | 2013 | Projected benefit obligation: | | | | | | | Balance, January 1 | | $ | 43,337 | | $ | 36,588 | | | $ | 63,439 | | $ | 67,087 | | Service cost | | 2,073 | | 1,771 | | | 3,003 | | 3,452 | | Interest cost | | 2,423 | | 2,290 | | | 3,037 | | 2,819 | | Actuarial loss | | 7,357 | | 3,853 | | | Actuarial loss (gain) | | | 13,349 | | (8,496 | ) | Benefits paid | | (1,218 | ) | | (1,165 | ) | | (1,486 | ) | | (1,423 | ) | Balance, December 31 | | $ | 53,972 | | $ | 43,337 | | | $ | 81,342 | | $ | 63,439 | | Plan assets: | | | | | | | Fair value, January 1 | | $ | 45,427 | | $ | 33,362 | | | $ | 70,627 | | $ | 61,384 | | Actual return | | 686 | | 3,880 | | | 3,831 | | 9,166 | | Employer contribution | | 9,000 | | 9,350 | | | — | | 1,500 | | Benefits paid | | | (1,218 | ) | | (1,165 | ) | | (1,486 | ) | | (1,423 | ) | Fair value, December 31 | | $ | 53,895 | | | $ | 45,427 | | | $ | 72,972 | | $ | 70,627 | | Funded status: | | | | | | | | Accrued pension asset (liability) | | $ | (77 | ) | | $ | 2,090 | | | $ | (8,370 | ) | | $ | 7,188 | |
Table of Contents The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2011, 20102014, 2013 and 20092012, the Plan’s expected benefit cash flows were discounted using the Citibank Above Median Curve. Also, for 2014, 2013, and 2012, the RP-2014 Mortality Tables were used. | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Weighted average discount rate | | 4.75% | | 5.75% | | 6.25% | | 4.00 | % | | 5.00 | % | | 4.25 | % | Rate of increase in compensation levels | | 4.00% | | 4.00% | | 4.00% | | (a) | | | 3.75 | % | | 3.75 | % |
(a) 6.0% graded down to 3.25% over the first seven years of service The accumulated benefit obligation was $43,421,000$69,420,000 and $34,881,000$52,187,000 as of December 31, 20112014 and 2010,2013, respectively. The Company expectsdoes not expect to contribute approximately $3,000,000make a contribution to the Plan in 2012.2015. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the Plan: | Amount | 2012 | 1,315,000 | 2013 | 1,359,000 | 2014 | 1,512,000 | 2015 | 1,640,000 | 2016 | 1,855,000 | 2017-2021 | 13,025,000 |
| | Amount | 2015 | | $ | 1,842,000 | 2016 | | | 2,065,000 | 2017 | | | 2,305,000 | 2018 | | | 2,649,000 | 2019 | | | 2,822,000 | 2020-2024 | | | 18,649,000 |
The Plan’s pension cost included the following components: | | For the Year Ended | | For the Year Ended | | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Service cost – benefits earned during the year | | $ | 2,073 | | $ | 1,771 | | $ | 1,606 | | | Service cost benefits earned during the year | | | $ | 3,003 | | $ | 3,452 | | $ | 2,799 | | Interest cost on projected benefit obligations | | | 2,423 | | 2,290 | | 2,080 | | | 3,037 | | 2,819 | | 2,570 | | Expected return on plan assets | | | (3,314 | ) | | (2,440 | ) | | | (1,880 | ) | | (4,711 | ) | | (4,469 | ) | | (3,967 | ) | Net amortization and deferral | | 603 | | | 616 | | | | 873 | | | 244 | | 1,729 | | 1,473 | | Net periodic pension cost | | $ | 1,785 | | | $ | 2,237 | | | $ | 2,679 | | | $ | 1,573 | | $ | 3,531 | | $ | 2,875 | |
The following represent the major assumptions used to determine the net pension cost of the Plan: | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Weighted average discount rate | 5.75% | | 6.25% | | 6.50% | | 5.00 | % | | 4.25 | % | | 4.75 | % | Rate of increase in compensation levels | 4.00% | | 4.00% | | 4.00% | | 3.75 | % | | 3.75 | % | | 4.00 | % | Expected long-term rate of return on assets | 7.25% | | 7.25% | | 7.25% | | 6.75 | % | | 7.25 | % | | 7.25 | % |
For 2014, 2013, and 2012, the RP-2000 Employees Mortality Table, RP-2000 Healthy Annuitant Mortality Table, and RP-2000 Disabled Mortality Table were used. The investment objective for the Plan is to maximize total return with a tolerance for average risk. Asset allocation is a balance between fixed income and equity investments, with a target allocation of approximately 50% fixed income, 34% USU.S. equity and 16% Non-USnon-U.S. equity. Due to volatility in the market, this target allocation is not always desirable and asset allocations can fluctuate between acceptable ranges. The fixed income component is invested in pooled investment grade securities. The equity components are invested in pooled large cap, small/mid cap and Non-USnon-U.S. stocks. The expected one-year nominal returns and annual standard deviations are shown by asset class below: | | | | | One-Year Nominal | | Annual Standard | Asset Class | | % of Total Portfolio | | Return | | Deviation | Core Fixed Income | | 49 | % | | 4.79 | % | | 4.68 | % | Large Cap U.S. Equities | | 9 | % | | 7.67 | % | | 16.65 | % | Large Cap U.S. Growth Equities | | 9 | % | | 8.42 | % | | 19.20 | % | Large Cap U.S. Value Equities | | 9 | % | | 7.53 | % | | 16.73 | % | Small Cap U.S. Equities | | 8 | % | | 8.70 | % | | 20.53 | % | International (Developed) | | 15 | % | | 8.98 | % | | 19.79 | % | International (Emerging) | | 1 | % | | 10.77 | % | | 28.45 | % |
Table of Contentsassumed Applying appropriate correlation factors between each of the asset classes the long-term rate of return on assets which falls within the expected range, is 7.25% as derived below:estimated to be 6.75%. | Expected Long-Term | | | | | | | | | Asset Class | Return on Class | | X | | Allocation | | = | | Assumption | Fixed Income | 4 – 6% | | | | 50% | | | | 2.0 – 3.0% | US Equity | 5 – 9% | | | | 34% | | | | 1.7 – 3.1% | Non-US Equity | 5 – 10% | | | | 16% | | | | 0.8 – 1.6% | | | | | | | | | | 4.5 – 7.7% |
A summary of the fair value measurements by type of asset is as follows: | | Fair Value Measurements as of December 31 | | | 2011 | | 2010 | | | | | | Quoted Prices | | | | | | | | Quoted Prices | | | | | | | | | in Active | | | | | | | | in Active | | | | | | | | | Markets for | | Significant | | | | | Markets for | | Significant | | | | | | Identical | | Observable | | | | | Identical | | Observable | | | | | | Assets | | Inputs | | | | | Assets | | Inputs | (In thousands) | | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) | Cash | | $ | 219 | | $ | 219 | | $ | — | | $ | 203 | | $ | 203 | | $ | — | Equity securities | | | | | | | | | | | | | | | | | | | U. S. Large Cap Growth | | | 4,497 | | | — | | | 4,497 | | | 3,844 | | | — | | | 3,844 | U. S. Large Cap Value | | | 4,586 | | | — | | | 4,586 | | | 3,853 | | | — | | | 3,853 | U. S. Small/Mid Cap Growth | | | 1,856 | | | — | | | 1,856 | | | 1,594 | | | — | | | 1,594 | U. S. Small/Mid Cap Value | | | 1,888 | | | — | | | 1,888 | | | 1,597 | | | — | | | 1,597 | Non-U. S. Core | | | 8,470 | | | — | | | 8,470 | | | 7,236 | | | — | | | 7,236 | U. S. Large Cap Passive | | | 5,387 | | | — | | | 5,387 | | | 4,542 | | | — | | | 4,542 | Fixed Income | | | | | | | | | | | | | | | | | | | U. S. Core Opportunistic | | | 19,410 | | | — | | | 19,410 | | | 16,227 | | | — | | | 16,227 | U. S. Passive | | | 7,582 | | | — | | | 7,582 | | | 6,331 | | | — | | | 6,331 | Total | | $ | 53,895 | | $ | 219 | | $ | 53,676 | | $ | 45,427 | | $ | 203 | | $ | 45,224 |
| | Fair Value Measurements as of December 31, | | | 2014 | | 2013 | | | | | | Quoted Prices | | | | | Quoted Prices | | | | | | in Active | | | | | | | | in Active | | | | | | | | | Markets for | | Significant | | | | | Markets for | | Significant | | | | | | Identical | | Observable | | | | | Identical | | Observable | | | | | | Assets | | Inputs | | | | | Assets | | Inputs | (In thousands) | | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) | Cash | | $ | 268 | | $ | 268 | | $ | — | | $ | 245 | | $ | 245 | | $ | — | Equity securities | | | | | | | | | | | | | | | | | | | U.S. Large Cap Growth | | | 7,165 | | | — | | | 7,165 | | | 6,650 | | | — | | | 6,650 | U.S. Large Cap Value | | | 7,066 | | | — | | | 7,066 | | | 6,835 | | | — | | | 6,835 | U.S. Small/Mid Cap Growth | | | 2,950 | | | — | | | 2,950 | | | 2,825 | | | — | | | 2,825 | U.S. Small/Mid Cap Value | | | 2,721 | | | — | | | 2,721 | | | 2,784 | | | — | | | 2,784 | Non-U. S. Core | | | 10,317 | | | — | | | 10,317 | | | 10,840 | | | — | | | 10,840 | U.S. Large Cap Passive | | | 7,192 | | | — | | | 7,192 | | | 6,929 | | | — | | | 6,929 | Emerging Markets | | | 703 | | | — | | | 703 | | | 711 | | | — | | | 711 | Fixed Income | | | | | | | | | | | | | | | | | | | U.S. Core | | | 24,019 | | | — | | | 24,019 | | | 22,720 | | | — | | | 22,720 | U.S. Passive | | | 9,275 | | | — | | | 9,275 | | | 8,747 | | | — | | | 8,747 | Opportunistic | | | 1,296 | | | — | | | 1,296 | | | 1,341 | | | — | | | 1,341 | Total | | $ | 72,972 | | $ | 268 | | $ | 72,704 | | $ | 70,627 | | $ | 245 | | $ | 70,382 |
Supplemental Executive Retirement Plan The Company also has an unfunded supplemental executive retirement plan (“SERP”) which covers key executives of the Company. The SERP is a noncontributory plan in which the Company’s subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as the Plan.
A summary of the activity in the SERP’s projected benefit obligation, funded status and amounts recognized in the Company’s consolidated balance sheets issheetsis as follows: | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2014 | | 2013 | Benefit obligation: | | | Balance, January 1 | | $ | 5,479 | | $ | 5,369 | | | $ | 8,048 | | $ | 8,482 | | Service cost | | 89 | | 78 | | | 136 | | 144 | | Interest cost | | | 295 | | 315 | | | 377 | | 335 | | Benefits paid | | (236 | ) | | (235 | ) | | (236 | ) | | (236 | ) | Actuarial loss (gain) | | 1,807 | | (48 | ) | | Actuarial (gain) loss | | | 1,078 | | (677 | ) | Balance, December 31 | | $ | 7,434 | | $ | 5,479 | | | $ | 9,403 | | $ | 8,048 | |
The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2011, 20102014, 2013 and 2009,2012, the SERP’s expected benefit cash flows were discounted using the Citigroup Above Median Curve. | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Weighted average discount rate | | 4.50 | % | | 5.50 | % | | 6.00 | % | | 3.75 | % | | 4.75 | % | | 4.00 | % | Rate of increase in compensation levels | | 4.00 | % | | 4.00 | % | | 4.00 | % | | (a) | | | 3.75 | % | | 3.75 | % |
(a) 6.00% graded down to 3.25% over the first seven years of service. The accumulated benefit obligation was $5,109,000$7,622,000 and $4,136,000$5,917,000 as of December 31, 20112014 and 2010,2013, respectively. Since this is an unfunded plan there are no plan assets. Benefits paid were $236,000 in 2011, $235,0002014, $236,000 in 20102013 and $317,000$236,000 in 2009.2012. Expected future benefits payable by the Company over the next 10ten years are as follows: | | Amount | 2012 | | 236,000 | 2013 | | 235,000 | 2014 | | 234,000 | 2015 | | 233,000 | 2016 | | 245,000 | 2017-2021 | | 1,714,000 |
Table of Contents | Amount | 2015 | $ | 236,000 | 2016 | | 244,000 | 2017 | | 258,000 | 2018 | | 324,000 | 2019 | | 323,000 | 2020-2024 | | 2,852,000 |
The SERP’s pension cost includedcostincluded the following components: | | For the Year Ended December 31, | | For the Year Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Service cost – benefits earned during the year | | $ | 89 | | $ | 78 | | $ | 33 | | $ | 136 | | $ | 144 | | $ | 115 | Interest cost on projected benefit obligations | | 295 | | 315 | | 278 | | 377 | | 335 | | 307 | Net amortization and deferral | | 250 | | 258 | | 130 | | 431 | | 551 | | 360 | Net periodic pension cost | | $ | 634 | | $ | 651 | | $ | 441 | | $ | 944 | | $ | 1,030 | | $ | 782 |
The pre-taxpretax amounts in accumulated other comprehensive loss as of December 31 were as follows: | | The Plan | | SERP | | The Plan | | SERP | (In thousands) | | 2011 | | 2010 | | 2011 | | 2010 | | 2014 | | 2013 | | 2014 | | 2013 | Prior service cost | | $ | 24 | | $ | 33 | | $ | — | | $ | 50 | | $ | — | | $ | 8 | | $ | — | | $ | — | Net actuarial loss | | 21,376 | | 11,985 | | 3,802 | | 2,194 | | 25,464 | | 11,471 | | 3,723 | | 3,075 | Total | | $ | 21,400 | | $ | 12,018 | | $ | 3,802 | | $ | 2,244 | | $ | 25,464 | | $ | 11,479 | | $ | 3,723 | | $ | 3,075 |
The estimated pre-taxpretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 20112014 expected to be recognized as components of net periodic benefit cost in 20122015 for the Plan are $8,000$0 and $1,387,000,$1,606,000, respectively. The estimated pre-taxpretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2011,2014 expected to be recognized as components of net periodic benefit cost in 20122015 for the SERP are $0 and $421,000$654,000 respectively. The Company also maintains a noncontributory profit sharing plan,program, which covers most of its employees. Employer contributions are calculated based upon formulas which relate to current operating results and other factors. Profit sharing expense recognized in the consolidated statements of income in 2011, 20102014, 2013 and 20092012 was $5,270,000, $4,665,000,$5,298,000, $5,065,000, and $3,668,000,$5,213,000, respectively. The Company also sponsors a defined contribution 401(k) plan to provide additional retirement benefits to substantially all employees. Contributions under the 401(k) plan for 2011, 20102014, 2013 and 20092012 were $497,000, $450,000$584,000, $591,000, and $470,000,$537,000, respectively.
Note 11 Stock-based Compensation In 2007, the Company’s shareholders approved theThe Amended and Restated Omnibus Incentive Stock and Performance Compensation Plan (“the Omnibus(the “Omnibus Plan”) to provideprovides incentive opportunities for key employees and non-employee directors and to align the personal financial interests of such individuals with those of the Company’s shareholders. The Omnibus Plan permits the issuance of up to 968,0001,500,000 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 also continuesRestricted Stock Restricted shares granted prior to maintain its other stock-based incentive plans for the restricted common stock previously awarded and the options previously issued and outstanding. Restricted sharesApril 16, 2013 are amortized to expense over the three-year vesting period. Options currently vestBeginning on April 16, 2013, restricted shares granted to Company employees are amortized to expense over the three-year vesting period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period not to exceed seven years. The plans authorizewith the grantexception of awardsthose shares granted in lieu of cash payment for retainer fees which are expensed in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, options that do not qualify (non-statutory stock options) and grants of restricted shares of common stock. The Company issues shares out of treasury stock for restricted shares and option exercises. These plans have been superseded by the Omnibus Plan and accordingly, all remaining unissued shares under these plans have been cancelled.
All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2011.
Restricted Stock period earned. Changes in restricted shares outstanding for the year ended December 31, 20112014 were as follows:
| | Shares | | Fair Value | | Weighted Average | Balance at December 31, 2010 | | 55,297 | | $ | 25.92 | | | | | Grant Date | | | Shares | | Fair Value | Balance at December 31, 2013 | | 58,649 | | $ | 37.45 | Granted | | 28,611 | | 33.05 | 22,629 | | $ | 58.89 | Vested | | (31,438 | ) | | 25.84 | (30,117 | ) | | $ | 35.41 | Balance at December 31, 2011 | | 52,470 | | $ | 29.86 | | Balance at December 31, 2014 | | 51,161 | | $ | 48.13 |
Table of Contents During 20102013 and 2009, 16,6642012, 30,407 and 42,50028,370 shares, respectively, were granted with weighted average per share market values at date of grant of $28.10$42.21 in 20102013 and $24.82$34.03 in 2009.2012. The fair value of such shares, which is based on the market price on the date of grant, is amortized to expense over the three-year vesting period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year period. Amortization of the restricted stock bonus awards totaled $787,000$1,250,000 for 2011, $848,0002014, $1,176,000 for 20102013 and $1,194,000$788,000 for 2009.2012. As of December 31, 2011,2014, the total unrecognized compensation expense related to non-vested restricted stock awards was $897,000$1,154,000 and the related weighted average period over which it is expected to be recognized is approximately 0.800.55 years. The total fair value of shares vested during the years ended December 2014, 2013, and 2012 was $1,066,000, $822,000, and $788,000 respectively. Stock Options
Changes in options outstanding for the year ended December 31, 2011 were as follows:
| | | | | Weighted Average | | | Shares | | Exercise Price | Balance at December 31, 2010 | | 40,290 | | | $ | 16.05 | Exercised | | (9,662 | ) | | $ | 13.22 | Balance at December 31, 2011 | | 30,628 | | | $ | 17.79 | Exercisable at December 31, 2011 | | 26,954 | | | $ | 17.65 |
The total intrinsic value of options exercised during 2011 and 2010 was $212,000 and $159,000, respectively. The average remaining contractual term for options outstanding as of December 31, 2011 was 0.84 years and the aggregate intrinsic value was $545,000. The average remaining contractual term for options exercisable as of December 31, 2011 was 0.81 years and the aggregate intrinsic value was $505,000.
A summary of the activity of the non-vested options during 2011 is shown below.
| | | | | Weighted Average | | | Shares | | Grant Date Fair Value | Non-vested at December 31, 2010 | | 13,684 | | | $ | 2.67 | Vested | | (10,010 | ) | | $ | 2.67 | Non-vested at December 31, 2011 | | 3,674 | | | $ | 2.69 |
As of December 31, 2011, the total unrecognized compensation expense related to non-vested stock options was $17,000 and the related weighted average period over which it is expected to be recognized is approximately 0.80 years. For the year ended December 31, 2011, there were 3,444 non-qualified options exercised and 6,218 incentive stock options exercised. During 2011, the Company recognized stock option expense of $27,000.
Stock Appreciation Rights (SARs)SARs There were 82,50837,213 SARs granted during the year ended December 31, 2011.2014. The Company uses the Black-Scholes option-pricing model to determine the fair value of the SARs at the date of grant. Following are the assumptions used to estimate the $9.05$17.84 per share fair value.
| | Year Ended December 31, 20112014 | Risk-free interest rate | 2.38 | 2.70% | % | Expected life | | 7 yrs.years | | Expected volatility | 28.11 | 27.86% | % | Expected dividend yield | 1.30 | 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 optionsSARs 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 optionsSARs using average monthly closing market prices of the Company’s stock. The expected dividend yield is determined based on the Company’s current rate of annual dividends. During 2011,2014, the Company recognized SARs expense of $577,000.$792,000. As of December 31, 2011,2014, the total unrecognized compensation expense related to stock appreciation rightsSARs was $616,000,$815,000, and the related weighted average period over which it is expected to be recognized is 0.601.03 years. Changes in SARs outstanding for the year ended December 31, 20112014 were as follows: | | Shares | | Weighted Average Exercise Price | Balance at December 31, 2010 | | 265,911 | | | $ | 24.85 | Granted | | 82,508 | | | $ | 32.95 | Exercised | | (15,833 | ) | | $ | 24.81 | Balance at December 31, 2011 | | 332,586 | | | $ | 26.87 | Exercisable at December 31, 2011 | | 188,265 | | | $ | 24.97 |
| | SARs | | Weighted Average Exercise Price | Balance at December 31, 2013 | | 343,445 | | | $ | 32.01 | Granted | | 37,213 | | | $ | 61.64 | Exercised | | (26,703 | ) | | $ | 26.83 | Balance at December 31, 2014 | | 353,955 | | | $ | 35.52 | Exercisable at December 31, 2014 | | 228,973 | | | $ | 29.87 |
The total intrinsic value of SARs exercised during 20112014 and 20102013 was $175,000$716,000 and $188,000,$2,328,000, respectively. The average remaining contractual term for SARs outstanding as of December 31, 20112014 was 7.426.77 years, and the aggregate intrinsic value was $3,166,000.$6,277,000. The average remaining contractual term for SARs exercisable as of December 31, 20112013 was 3.767.33 years, and the aggregate intrinsic value was $2,149,000.$12,137,000. The total compensation cost for share-based payment arrangements was $2,042,000, $1,976,000, and $1,398,000 in 2014, 2013, and 2012, respectively. Note 12 Other Operating Expense Details of other operating expense are as follows: | | For the Years Ended December 31, | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Postage and supplies | | $ | 2,239 | | $ | 2,031 | | $ | 2,171 | | $ | 2,008 | | $ | 2,066 | | $ | 2,052 | Promotional expense | | 1,646 | | 1,588 | | 1,508 | | 2,049 | | 2,024 | | 2,345 | Professional fees | | 3,141 | | 1,892 | | 1,388 | | 1,566 | | 1,340 | | 2,183 | Outside service fees | | 2,628 | | 2,282 | | 1,956 | | 2,876 | | 3,046 | | 2,729 | Data processing services | | 362 | | 356 | | 339 | | 338 | | 367 | | 373 | Telecommunications | | 641 | | 627 | | 550 | | 1,045 | | 955 | | 754 | Other | | 1,849 | | 1,987 | | 1,893 | | 1,647 | | 1,347 | | 1,080 | Total other operating expense | | $ | 12,506 | | $ | 10,763 | | $ | 9,805 | | $ | 11,529 | | $ | 11,145 | | $ | 11,516 |
Table of Contents Note 13 Income Taxes The components of income tax expense (benefit) are as follows: | | For the Years Ended December 31, | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | Current: | | | | | | | | | | | | | | Federal | | $ | 5,372 | | $ | 5,435 | | $ | 5,458 | | | $ | 7,189 | | | $ | 6,729 | | $ | 6,195 | State | | 980 | | 920 | | 597 | | | 1,191 | | 448 | | 718 | Deferred: | | | | | | | | | | | | | | Federal | | 1,983 | | 1,178 | | (602 | ) | | (585 | ) | | 39 | | 933 | State | | 162 | | 90 | | (48 | ) | | (36 | ) | | 18 | | 41 | Total income tax expense | | $ | 8,497 | | $ | 7,623 | | $ | 5,405 | | | $ | 7,759 | | $ | 7,234 | | $ | 7,887 |
A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 35% for 2011, 35% for 2010each of 2014, 2013 and 34% for 20092012 to income before income tax expense to reported income tax expense is as follows: | | For the Years Ended December 31, | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | | 2014 | | 2013 | | 2012 | | Expected income tax expense | | $ | 11,027 | | $ | 9,777 | | $ | 7,322 | | | $ | 11,127 | | | $ | 10,756 | | | $ | 10,917 | | (Reductions) increases resulting from: | | | | | | | | | | | | | | | Tax-exempt income | | (3,760 | ) | | (3,273 | ) | | (2,798 | ) | | (3,896 | ) | | (3,297 | ) | | (3,633 | ) | State taxes, net of federal benefit | | 742 | | 657 | | 694 | | | 751 | | 303 | | 493 | | Other, net | | 488 | | 462 | | 187 | | | (223 | ) | | (528 | ) | | 110 | | Total income tax expense | | $ | 8,497 | | $ | 7,623 | | $ | 5,405 | | | $ | 7,759 | | $ | 7,234 | | $ | 7,887 | |
The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: | | December 31, | (In thousands) | | 2011 | | 2010 | Deferred tax assets: | | | | | | | | | Allowance for loan losses | | $ | 4,912 | | | $ | 4,419 | | ASC 715 pension funding liability | | | 9,679 | | | | 5,452 | | Net operating loss carryforward1 | | | 384 | | | | 421 | | Stock compensation | | | 834 | | | | 731 | | Supplemental executive retirement plan accrual | | | 634 | | | | 474 | | Other | | | 454 | | | | 288 | | Total deferred tax assets | | $ | 16,897 | | | $ | 11,785 | | Deferred tax liabilities: | | | | | | | | | Premises and equipment | | | (440 | ) | | | (352 | ) | Pension | | | (7,327 | ) | | | (4,499 | ) | Intangible/assets | | | (752 | ) | | | (652 | ) | Unrealized gain on investment in securities available-for-sale | | | (6,922 | ) | | | (3,024 | ) | Other | | | (315 | ) | | | (300 | ) | Total deferred tax liabilities | | $ | (15,756 | ) | | $ | (8,827 | ) | Net deferred tax assets | | $ | 1,141 | | | $ | 2,958 | |
| | | | | December 31, | (In thousands) | | 2014 | | | 2013 | | Deferred tax assets: | | | | | | | | | Allowance for loan losses | | $ | 4,441 | | | $ | 4,368 | | ASC 715 pension funding liability | | | 10,887 | | | | 5,444 | | Net operating loss carryforward1 | | | 255 | | | | 298 | | Stock compensation | | | — | | | | 337 | | Supplemental executive retirement plan accrual | | | 1,392 | | | | 1,130 | | Other | | | 509 | | | | 569 | | Total deferred tax assets | | $ | 17,484 | | | $ | 12,146 | | Deferred tax liabilities: | | | | | | | | | Premises and equipment | | | (976 | ) | | | (1,767 | ) | Pension | | | (5,636 | ) | | | (6,233 | ) | Stock compensation | | | (394 | ) | | | — | | Intangible/assets | | | (1,153 | ) | | | (996 | ) | Unrealized gain on investment in securities available-for-sale | | | (5,172 | ) | | | (2,086 | ) | Other | | | (407 | ) | | | (353 | ) | Total deferred tax liabilities | | $ | (13,738 | ) | | $ | (11,435 | ) | Net deferred tax assets | | $ | 3,746 | | | $ | 711 | |
1As of December 31, 2014, the Company had approximately $729,000 of net operating loss carry forwards as a result of the acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal Revenue Code and limits the Company’s use to approximately $122,000 per year during the carry forward period, which expires in 2020. 1
| | As of December 31, 2011, the Company had approximately $1,097,000 of net operating loss carry forwards as a result of the acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal Revenue Code and limits the Company’s use to approximately $122,000 per year during the carry forward period, which expires in 2020. |
A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance at December 31, 20112014 or 2010,2013, due to management’s belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets.
Table of Contents The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table: (In thousands) | | 2011 | | 2010 | | 2009 | Balance at January 1 | | $ | 1,877 | | | $ | 1,750 | | | $ | 1,399 | | Changes in unrecognized tax benefits as a result of tax positions taken during a prior year | | | 287 | | | | 560 | | | | 119 | | Changes in unrecognized tax benefits as a result of tax position taken during the current year | | | 475 | | | | 555 | | | | 387 | | Decreases in unrecognized tax benefits relating to settlements with taxing authorities | | | — | | | | (466 | ) | | | — | | Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations | | | (570 | ) | | | (522 | ) | | | (155 | ) | Balance at December 31 | | $ | 2,069 | | | $ | 1,877 | | | $ | 1,750 | |
(In thousands) | | 2014 | | | 2013 | | | 2012 | | Balance at January 1 | | $ | 1,208 | | | $ | 1,885 | | | $ | 2,069 | | Changes in unrecognized tax benefits as a result of tax | | | | | | | | | | | | | positions taken during a prior year | | | (107 | ) | | | (666 | ) | | | (140 | ) | Changes in unrecognized tax benefits as a result of tax | | | | | | | | | | | | | position taken during the current year | | | 267 | | | | 374 | | | | 419 | | Decreases in unrecognized tax benefits relating to | | | | | | | | | | | | | settlements with taxing authorities | | | — | | | | — | | | | — | | Reductions to unrecognized tax benefits as a result of a | | | | | | | | | | | | | lapse of the applicable statute of limitations | | | (251 | ) | | | (385 | ) | | | (463 | ) | Balance at December 31 | | $ | 1,117 | | | $ | 1,208 | | | $ | 1,885 | |
At December 31, 2011, 20102014, 2013 and 2009,2012, the balance of the Company’s unrecognized tax benefits which would, if recognized, affect the Company’s effective tax rate was $1,496,000, $1,465,000,$819,000, $861,000 and $1,466,000,$1,357,000, respectively. These amounts are net of the offsetting benefits from other taxing jurisdictions.
As of December 31, 2011, 20102014, 2013 and 2009,2012, the Company had $95,000, $106,000,$45,000, $41,000 and $147,000$89,000, respectively, in accrued interest related to unrecognized tax benefits. During 20112014 and 2010,2013, the Company recorded a net reductionincrease (reduction) in accrued interest of $11,000$4,000 and $41,000,($48,000), respectively, as a result of settlements with taxing authorities and other prior-year adjustments. During 2009, the Company recorded a net increase in accrued interest of $34,000. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company believes it is reasonably possible that the total amount of tax benefits will decrease by approximately $456,000$210,000 over the next twelve months. The reduction primarily relates to the anticipated lapse in the statute of limitations. The unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax jurisdictions. The Company is subject to income tax in the U. S.U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction. The Company’s federal income tax returns for tax years 20082011 through 20102013 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 20072010 through 2010.2013. Note 14 Contingencies The Company is the defendantand its subsidiaries are not involved in a proceedingany pending in the United States Bankruptcy Court for the District of Delaware, which proceeding was initiated by Chapter 11 debtor LNT Services, Inc. ("LNT"), an affiliate of Linens N' Things, on December 19, 2009. LNT seeks to avoid and recover $33,825,773.71 in allegedly preferential payments (the "Payments") made to the Company within 90 days preceding LNT’s bankruptcy filing. The Company processed and paid the freight carrier bills for Linens N’ Things. The Payments were received by the Company in the normal course of providing services to Linens N' Things, and were subsequently paid by the Company to the appropriate Linens N’ Things freight carriers. In an attempt to secure a favorable result prior to filing an answer, the Company has provided the plaintiff with information and data which supports its primary defenses. 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"). The suit alleges infringement of two Asentinel patents by the Company, AnchorPoint and Veramark. Cass vigorously denies infringing any valid claim of either patent. Asentinel has requested an order enjoining the Company from infringing the two patents at issue, damages for the alleged infringement, interest and costs, treble damages for willful infringement, and attorneys' fees.
While there is some uncertainty relating to anyproceedings other than ordinary routine litigation management is of the opinion that the Company has valid defenses to both these claims. 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.their businesses. Management believes the outcomenone of these proceedings, including the LNT and Asentinel proceedings, will notif determined adversely, would have a material effect on the businessesbusiness or financial conditionscondition of the Company or its subsidiaries.
Note 15 Disclosures about Fair Value of Financial Instruments The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. 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 December 31, 20112014 and 2010,2013, 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 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. The approximate remaining terms of commercial and standby letters of credit range from less than one to five years. Since these 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 may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.
Table of Contents The following table shows conditional commitments to extend credit, standby letters of credit and commercial letters: | | December 31, | | December 31, | (In thousands) | | 2011 | | 2010 | | 2014 | | 2013 | Conditional commitments to extend credit | | $ | 10,485 | | $ | 33,031 | | $ | 19,066 | | $ | 5,596 | Standby letters of credit | | 22,302 | | 23,587 | | 12,693 | | 13,168 | Commercial letters of credit | | 4,518 | | 3,821 | | 2,571 | | 3,325 |
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:
| | December 31, | | | 2011 | | 2010 | | | Carrying | | | | | Carrying | | | | (In thousands) | | Amount | | Fair Value | | Amount | | Fair Value | Balance sheet assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 235,962 | | $ | 235,962 | | $ | 138,929 | | $ | 138,929 | Investment in securities | | | 310,612 | | | 310,612 | | | 264,569 | | | 264,569 | Loans, net | | | 658,611 | | | 665,348 | | | 696,742 | | | 710,294 | Accrued interest receivable | | | 6,125 | | | 6,125 | | | 5,857 | | | 5,857 | Total | | $ | 1,211,310 | | $ | 1,218,047 | | $ | 1,106,097 | | $ | 1,119,649 | | Balance sheet liabilities: | | | | | | | | | | | | | Deposits | | $ | 548,368 | | $ | 548,985 | | $ | 518,590 | | $ | 518,733 | Accounts and drafts payable | | | 595,201 | | | 595,201 | | | 516,107 | | | 516,107 | Short-term borrowings | | | — | | | — | | | 9 | | | 9 | Accrued interest payable | | | 159 | | | 159 | | | 208 | | | 208 | Total | | $ | 1,143,728 | | $ | 1,144,345 | | $ | 1,034,914 | | $ | 1,035,057 |
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, short-term borrowings 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 Fair values are 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.
Commitments to Extend Credit and Standby Letters of CreditThe fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present credit-worthinesscredit worthiness of such counterparties. The Company believes such commitments have been made at terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon.
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments: | | December 31, | | | 2014 | | 2013 | | | Carrying | | | | | Carrying | | | | (In thousands) | | Amount | | Fair Value | | Amount | | Fair Value | Balance sheet assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 294,335 | | $ | 294,335 | | $ | 225,262 | | $ | 225,262 | Investment in securities | | | 356,141 | | | 356,141 | | | 317,767 | | | 317,767 | Loans, net | | | 657,452 | | | 663,247 | | | 640,498 | | | 642,543 | Accrued interest receivable | | | 6,521 | | | 6,521 | | | 6,030 | | | 6,030 | Total | | $ | 1,314,449 | | $ | 1,320,244 | | $ | 1,189,557 | | $ | 1,191,602 | | Balance sheet liabilities: | | | | | | | | | | | | | Deposits | | $ | 618,199 | | $ | 618,199 | | $ | 582,496 | | $ | 583,989 | Accounts and drafts payable | | | 655,428 | | | 655,428 | | | 543,953 | | | 543,953 | Accrued interest payable | | | 57 | | | 57 | | | 88 | | | 88 | Total | | $ | 1,273,684 | | $ | 1,273,684 | | $ | 1,126,537 | | $ | 1,128,030 |
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 Cash EquivalentsThe carrying amount approximates fair value. Investment in SecuritiesThe fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 3, “Investment in Securities,” for fair value and unrealized gains and losses by investment type. LoansThe fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses results in a fair valuation. Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or current appraised value and therefore, the fair value is a nonrecurring Level 3 valuation. Accrued Interest ReceivableThe carrying amount approximates fair value. 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 and therefore, is a Level 2 valuation. 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. Accounts and Drafts PayableThe carrying amount approximates fair value. Accrued InterestThe carrying amount approximates fair value. Limitations Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets or liabilities that are not considered financial assets or liabilities include premises andequipment and the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market (core deposit intangible). In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on management’s judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Table of Contents Note 16 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 transportation, utility,energy, 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 Note 1 of this report. 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 the United States, 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 Banking 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 for the years ended December 31, 2011, 20102014, 2013 and 2009,2012, is as follows: | | | | | | Corporate, | | | | | | | | Corporate, | | | | | Information | | Banking | | Eliminations | | | | Information | | Banking | | Eliminations | | | (In thousands) | | Services | | Services | | and Other | | Total | | Services | | Services | | and Other | | Total | 2011 | | | | | | | | | | 2014 | | | | | | | | | | Fee revenue and other income: | | | | | | | | | | | | | | | | | Income from customers | | $ | 61,470 | | $ | 1,354 | | $ | — | | $ | 62,824 | | $ | 78,773 | | $ | 1,134 | | | $ | — | | | $ | 79,907 | Intersegment income (expense) | | 10,088 | | 1,859 | | (11,947 | ) | | — | | 9,210 | | 1,504 | | (10,714 | ) | | — | Net interest income (expense) after provision for loan losses: | | | | | | | | | | Net interest income (expense) after provision | | | | | | | | | | for loan losses: | | | | | | | | | | Income from customers | | 21,030 | | 22,681 | | — | | 43,711 | | 15,678 | | 21,621 | | — | | 37,299 | Intersegment income (expense) | | 17 | | (17 | ) | | — | | — | | 12 | | (12 | ) | | — | | — | Depreciation and amortization | | 1,874 | | 164 | | 24 | | 2,062 | | 2,795 | | 182 | | 119 | | 3,096 | Income taxes | | 3,028 | | 5,469 | | — | | 8,497 | | 3,006 | | 4,753 | | — | | 7,759 | Net income | | 14,716 | | 8,293 | | — | | 23,009 | | 16,379 | | 7,654 | | — | | 24,033 | Goodwill | | 7,335 | | 136 | | — | | 7,471 | | 11,454 | | 136 | | — | | 11,590 | Other intangible assets, net | | 161 | | — | | — | | 161 | | 2,762 | | — | | — | | 2,762 | Total assets | | $ | 698,685 | | $ | 622,996 | | $ | (2,380 | ) | | $ | 1,319,301 | | $ | 782,844 | | $ | 755,400 | | $ | (37,513 | ) | | $ | 1,500,731 | 2010 | | | | | | | | | | 2013 | | | | | | | | | | Fee revenue and other income: | | | | | | | | | | | | | | | | | Income from customers | | $ | 54,732 | | $ | 1,414 | | $ | — | | $ | 56,146 | | $ | 75,010 | | $ | 1,216 | | $ | 346 | | $ | 76,572 | Intersegment income (expense) | | 8,939 | | 1,656 | | (10,595 | ) | | — | | 9,637 | | 1,479 | | (11,116 | ) | | — | Net interest income (expense) after provision for loan losses: | | | | | | | | | | Net interest income (expense) after provision | | | | | | | | | | for loan losses: | | | | | | | | | | Income from customers | | 19,381 | | 20,690 | | — | | 40,071 | | 15,986 | | 22,259 | | — | | 38,245 | Intersegment income (expense) | | 23 | | (23 | ) | | — | | — | | 11 | | (11 | ) | | — | | — | Depreciation and amortization | | 1,875 | | 242 | | 14 | | 2,131 | | 2,638 | | 143 | | 115 | | 2,896 | Income taxes | | 2,955 | | 4,668 | | — | | 7,623 | | 2,232 | | 5,002 | | — | | 7,234 | Net income | | 13,220 | | 7,090 | | — | | 20,310 | | 15,237 | | 8,133 | | 127 | | 23,497 | Goodwill | | 7,335 | | 136 | | — | | 7,471 | | 11,454 | | 136 | | — | | 11,590 | Other intangible assets, net | | 268 | | — | | — | | 268 | | 3,222 | | — | | — | | 3,222 | Total assets | | $ | 612,981 | | $ | 580,948 | | $ | (5,894 | ) | | $ | 1,188,035 | | $ | 657,604 | | $ | 679,357 | | $ | (10,941 | ) | | $ | 1,326,020 | 2009 | | | | | | | | | | 2012 | | | | | | | | | | Fee revenue and other income: | | | | | | | | | | | | | | | | | Income from customers | | $ | 49,913 | | $ | 1,325 | | $ | — | | $ | 51,238 | | $ | 70,376 | | $ | 1,272 | | $ | (510 | ) | | $ | 71,138 | Intersegment income (expense) | | 6,964 | | 1,632 | | (8,596 | ) | | — | | 9,478 | | 1,663 | | (11,141 | ) | | — | Net interest income (expense) after provision for loan losses: | | | | | | | | | | Net interest income (expense) after provision | | | | | | | | | | for loan losses: | | | | | | | | | | Income from customers | | 19,220 | | 17,461 | | — | | 36,681 | | 18,547 | | 21,838 | | — | | 40,385 | Intersegment income (expense) | | 94 | | (94 | ) | | — | | — | | 24 | | (24 | ) | | — | | — | Depreciation and amortization | | 2,147 | | 305 | | 13 | | 2,465 | | 2,392 | | 101 | | 39 | | 2,532 | Income taxes | | 2,158 | | 3,247 | | — | | 5,405 | | 2,802 | | 5,085 | | — | | 7,887 | Net income | | 11,047 | | 5,082 | | — | | 16,129 | | 15,761 | | 8,014 | | (472 | ) | | 23,303 | Goodwill | | 7,335 | | 136 | | — | | 7,471 | | 11,454 | | 136 | | — | | 11,590 | Other intangible assets, net | | 375 | | — | | — | | 375 | | 3,757 | | — | | — | | 3,757 | Total assets | | $ | 527,897 | | $ | 496,286 | | $ | (11,202 | ) | | $ | 1,012,981 | | $ | 642,623 | | $ | 668,648 | | $ | (23,884 | ) | | $ | 1,287,387 |
Table of Contents Note 17
Subsequent Events On January 6, 2012,In accordance with FASB ASC 855, “Subsequent Events,” the Company acquiredhas evaluated subsequent events after the assetsconsolidated balance sheet date of Waste Reduction Consultants, Inc., one of the fastest-growing providers of environmental expense management services. This acquisition positions the CompanyDecember 31, 2014, and there were no events identified that would require additional disclosures to expand its portfolio of services for controlling facility-related expenses and acceleratesprevent the Company’s leadership position as a back-office business processor. The results of operations for this new service will be included in the Information Services business segment beginning in January 2012.consolidated financial statements from being misleading.
Note 18 Condensed Financial Information of Parent Company Following are the condensed balance sheets of the Company (parent company only) and the related condensed statements of income and cash flows. | | Condensed Balance Sheets | | | December 31, | (In thousands) | | 2011 | | 2010 | Assets | | | | | | | Cash and due from banks | | $ | 26,986 | | $ | 17,842 | Short-term investments | | | 95,043 | | | 61,775 | Securities available-for-sale, at fair value | | | 310,612 | | | 264,569 | Loans, net | | | 173,854 | | | 193,622 | Investments in subsidiary | | | 58,582 | | | 52,091 | Premises and equipment, net | | | 9,305 | | | 9,093 | Other assets | | | 93,582 | | | 66,080 | Total assets | | $ | 767,964 | | $ | 665,072 | Liabilities and Shareholders’ Equity | | | | | | | Liabilities: | | | | | | | Accounts and drafts payable | | | 595,201 | | | 516,107 | Other liabilities | | | 12,183 | | | 6,871 | Total liabilities | | | 607,384 | | | 522,978 | Total shareholders’ equity | | | 160,580 | | | 142,094 | Total liabilities and shareholders’ equity | | $ | 767,964 | | $ | 665,072 |
| | Condensed Statement of Income | | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | Income from subsidiary: | | | | | | | | | | Interest | | $ | 18 | | $ | 24 | | $ | 115 | Management fees | | | 1,794 | | | 1,849 | | | 1,882 | Income from subsidiary | | | 1,812 | | | 1,873 | | | 1,997 | Information services revenue | | | 60,688 | | | 54,183 | | | 48,665 | Net interest income after provision | | | 19,933 | | | 18,373 | | | 18,157 | Gain on sales of investment securities | | | 43 | | | — | | | 697 | Other income | | | 701 | | | 549 | | | 551 | Total income | | | 83,177 | | | 74,978 | | | 70,067 | Expenses: | | | | | | | | | | Salaries and employee benefits | | | 50,296 | | | 45,598 | | | 45,172 | Other expenses | | | 14,462 | | | 13,205 | | | 11,690 | Total expenses | | | 64,758 | | | 58,803 | | | 56,862 | Income before income tax and equity in undistributed income of subsidiary | | | 18,419 | | | 16,175 | | | 13,205 | Income tax expense | | | 3,156 | | | 2,955 | | | 2,158 | Income before undistributed income of subsidiary | | | 15,263 | | | 13,220 | | | 11,047 | Equity in undistributed income of subsidiary | | | 7,746 | | | 7,090 | | | 5,082 | | | | | | | | | | | Net income | | $ | 23,009 | | $ | 20,310 | | $ | 16,129 |
| | Condensed Balance Sheets | | | December 31, | (In thousands) | | 2014 | | 2013 | Assets | | | | | | | Cash and due from banks | | $ | 32,399 | | $ | 24,519 | Short-term investments | | | 107,932 | | | 63,063 | Securities available-for-sale, at fair value | | | 356,141 | | | 317,767 | Loans, net | | | 115,958 | | | 125,316 | Investments in subsidiaries | | | 82,688 | | | 76,500 | Premises and equipment, net | | | 16,030 | | | 12,276 | Other assets | | | 166,235 | | | 120,438 | Total assets | | $ | 877,383 | | $ | 739,879 | Liabilities and Shareholders’ Equity | | | | | Liabilities: | | | | | | | Accounts and drafts payable | | $ | 655,358 | | $ | 543,953 | Other liabilities | | | 21,511 | | | 5,521 | Total liabilities | | | 676,869 | | | 549,474 | Total shareholders’ equity | | | 200,514 | | | 190,405 | Total liabilities and shareholders’ equity | | $ | 877,383 | | $ | 739,879 |
| | Condensed Statements of Cash Flows | | | For the Years Ended December 31, | (In thousands) | | 2011 | | 2010 | | 2009 | Cash flows from operating activities: | | | | | | | | | | | | | Net income | | $ | 23,009 | | | $ | 20,310 | | | $ | 16,129 | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Equity in undistributed income of subsidiary | | | (7,746 | ) | | | (7,090 | ) | | | (5,082 | ) | Net change in other assets | | | (19,669 | ) | | | (4,463 | ) | | | 187 | | Net change in other liabilities | | | 1,655 | | | | (4,930 | ) | | | (962 | ) | Amortization of stock-based awards | | | 1,390 | | | | 1,472 | | | | 1,193 | | Other, net | | | (7,497 | ) | | | — | | | | (325 | ) | Net cash (used in) provided by operating activities | | | (8,858 | ) | | | 5,299 | | | | 11,140 | | Cash flows from investing activities: | | | | | | | | | | | | | Net increase in securities | | | (37,329 | ) | | | (45,173 | ) | | | (22,226 | ) | Net (increase) decrease in loans | | | 19,068 | | | | (19,911 | ) | | | 53,364 | | Purchases of premises and equipment, net | | | (2,107 | ) | | | (1,166 | ) | | | (901 | ) | Net cash (used in) provided by investing activities | | | (20,368 | ) | | | (66,250 | ) | | | 30,237 | | Cash flows from financing activities: | | | | | | | | | | | | | Net increase (decrease) in accounts and drafts payable | | | 79,094 | | | | 85,856 | | | | (48,774 | ) | Cash dividends paid | | | (6,279 | ) | | | (5,448 | ) | | | (4,925 | ) | Purchase of common shares for treasury | | | — | | | | (467 | ) | | | — | | Other financing activities | | | (1,177 | ) | | | (275 | ) | | | 603 | | Net cash provided by (used in) financing activities | | | 71,638 | | | | 79,666 | | | | (53,096 | ) | Net increase (decrease) in cash and cash equivalents | | | 42,412 | | | | 18,715 | | | | (11,719 | ) | Cash and cash equivalents at beginning of year | | | 79,617 | | | | 60,902 | | | | 72,621 | | Cash and cash equivalents at end of year | | $ | 122,029 | | | $ | 79,617 | | | $ | 60,902 | |
Table of Contents | | Condensed Statements of Income | | | For the Years Ended December 31, | (In thousands) | | 2014 | | | 2013 | | | 2012 | | Income from subsidiaries: | | | | | | | | | | | | | Interest | | $ | 12 | | | $ | 12 | | | $ | 24 | | Management fees | | | 2,058 | | | | 2,119 | | | | 1,955 | | Income from subsidiaries | | | 2,070 | | | | 2,131 | | | | 1,979 | | Information services revenue | | | 77,064 | | | | 70,503 | | | | 66,417 | | Net interest income after provision | | | 14,986 | | | | 15,069 | | | | 17,563 | | Gain on sales of investment securities | | | 23 | | | | 3,677 | | | | 3,145 | | Other income | | | 1,323 | | | | 527 | | | | 535 | | Total income | | | 95,466 | | | | 91,907 | | | | 89,639 | | Expenses: | | | | | | | | | | | | | Salaries and employee benefits | | | 59,885 | | | | 59,004 | | | | 55,981 | | Other expenses | | | 15,587 | | | | 15,027 | | | | 14,492 | | Total expenses | | | 75,472 | | | | 74,031 | | | | 70,473 | | Income before income tax and equity in undistributed income | | | | | | | | | | | | | of subsidiaries | | | 19,994 | | | | 17,876 | | | | 19,166 | | Income tax expense | | | 3,125 | | | | 2,381 | | | | 2,914 | | Income before undistributed income of subsidiaries | | | 16,869 | | | | 15,495 | | | | 16,252 | | Equity in undistributed income of subsidiaries | | | 7,164 | | | | 7,530 | | | | 7,523 | | Intercompany elimination | | | — | | | | 472 | | | | (472 | ) | Net income | | $ | 24,033 | | | $ | 23,497 | | | $ | 23,303 | | | | | | | Condensed Statements of Cash Flows | | | For the Years Ended December 31, | (In thousands) | | 2014 | | | 2013 | | | 2012 | | Cash flows from operating activities: | | | | | | | | | | | | | Net income | | $ | 24,033 | | | $ | 23,497 | | | $ | 23,303 | | Adjustments to reconcile net income to net cash provided | | | | | | | | | | | | | by (used in) operating activities: | | | | | | | | | | | | | Equity in undistributed income of subsidiaries | | | (7,164 | ) | | | (7,530 | ) | | | (7,523 | ) | Net change in other assets | | | (44,879 | ) | | | (8,420 | ) | | | (3,338 | ) | Net change in other liabilities | | | 534 | | | | (2,729 | ) | | | 5,603 | | Amortization of stock-based awards | | | 1,250 | | | | 1,177 | | | | 1,201 | | Other, net | | | 13,487 | | | | (4,180 | ) | | | (2,673 | ) | Net cash (used in) provided by operating activities | | | (12,739 | ) | | | 1,815 | | | | 16,573 | | Cash flows from investing activities: | | | | | | | | | | | | | Net increase in securities | | | (35,128 | ) | | | (15,385 | ) | | | (7,697 | ) | Net decrease in loans | | | 9,358 | | | | 31,619 | | | | 16,319 | | Purchases of premises and equipment, net | | | (8,941 | ) | | | (4,050 | ) | | | (3,555 | ) | Net cash (used in) provided by investing activities | | | (34,711 | ) | | | 12,184 | | | | 5,067 | | Cash flows from financing activities: | | | | | | | | | | | | | Net increase (decrease) in accounts and drafts payable | | | 111,405 | | | | 21,192 | | | | (72,440 | ) | Cash dividends paid | | | (9,337 | ) | | | (8,510 | ) | | | (7,361 | ) | Other financing activities | | | (1,869 | ) | | | (513 | ) | | | (2,454 | ) | Net cash provided by (used in) financing activities | | | 100,199 | | | | 12,169 | | | | (82,255 | ) | Net increase (decrease) in cash and cash equivalents | | | 52,749 | | | | 26,168 | | | | (60,615 | ) | Cash and cash equivalents at beginning of year | | | 87,582 | | | | 61,414 | | | | 122,029 | | Cash and cash equivalents at end of year | | $ | 140,331 | | | $ | 87,582 | | | $ | 61,414 | |
Table of Contents Note 19 SUPPLEMENTARY FINANCIAL INFORMATION (Unaudited) | | First | | Second | | Third | | Fourth | | | | First | | Second | | Third | | Fourth | | | (In thousands except per share data) | | Quarter | | Quarter | | Quarter | | Quarter | | YTD | | Quarter | | Quarter | | Quarter | | Quarter | | YTD | 2011 | | | | | | | | | | | | 2014 | | | | | | | | | | | | Fee revenue and other income | | $ | 14,832 | | $ | 15,783 | | $ | 16,447 | | $ | 15,762 | | $ | 62,824 | | $ | 19,575 | | $ | 19,952 | | $ | 20,223 | | $ | 20,157 | | $ | 79,907 | Interest income | | 12,904 | | 12,795 | | 12,494 | | 12,042 | | 50,235 | | 9,772 | | 9,975 | | 9,991 | | 10,021 | | 39,759 | Interest expense | | 1,206 | | 1,125 | | 1,060 | | 983 | | 4,374 | | 625 | | 628 | | 604 | | 603 | | 2,460 | Net interest income | | 11,698 | | 11,670 | | 11,434 | | 11,059 | | 45,861 | | 9,147 | | 9,347 | | 9,387 | | 9,418 | | 37,299 | Provision for loan losses | | 450 | | 850 | | 550 | | 300 | | 2,150 | | — | | — | | — | | — | | — | Operating expense | | 18,134 | | 18,635 | | 18,913 | | 19,347 | | 75,029 | | 21,025 | | 21,306 | | 21,196 | | 21,887 | | 85,414 | Income tax expense | | 2,227 | | 2,229 | | 2,358 | | 1,683 | | 8,497 | | 1,886 | | 1,958 | | 2,013 | | 1,902 | | 7,759 | Net income | | $ | 5,719 | | $ | 5,739 | | $ | 6,060 | | $ | 5,491 | | $ | 23,009 | | $ | 5,811 | | $ | 6,035 | | $ | 6,401 | | $ | 5,786 | | $ | 24,033 | Net income per share: | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | .55 | | $ | .56 | | $ | .59 | | $ | .53 | | $ | 2.23 | | $ | .51 | | $ | .52 | | $ | .56 | | $ | .50 | | $ | 2.09 | Diluted earnings per share | | .55 | | .55 | | .58 | | .53 | | 2.21 | | .50 | | .52 | | .55 | | .49 | | 2.06 | 2010 | | | | | | | | | | | | 2013 | | | | | | | | | | | | Fee revenue and other income | | $ | 13,225 | | $ | 13,968 | | $ | 14,401 | | $ | 14,552 | | $ | 56,146 | | $ | 18,465 | | $ | 19,567 | | $ | 19,695 | | $ | 18,845 | | $ | 76,572 | Interest income | | 11,628 | | 12,131 | | 12,489 | | 12,798 | | 49,046 | | 10,856 | | 10,623 | | 10,082 | | 10,016 | | 41,577 | Interest expense | | 1,176 | | 1,199 | | 1,249 | | 1,251 | | 4,875 | | 687 | | 694 | | 722 | | 729 | | 2,832 | Net interest income | | 10,452 | | 10,932 | | 11,240 | | 11,547 | | 44,171 | | 10,169 | | 9,929 | | 9,360 | | 9,287 | | 38,745 | Provision for loan losses | | 900 | | 1,150 | | 950 | | 1,100 | | 4,100 | | 200 | | 300 | | — | | — | | 500 | Operating expense | | 16,197 | | 16,850 | | 17,098 | | 18,139 | | 68,284 | | 20,389 | | 21,017 | | 21,384 | | 21,296 | | 84,086 | Income tax expense | | 1,831 | | 2,000 | | 2,013 | | 1,779 | | 7,623 | | 2,013 | | 2,106 | | 1,533 | | 1,582 | | 7,234 | Net income | | $ | 4,749 | | $ | 4,900 | | $ | 5,580 | | $ | 5,081 | | $ | 20,310 | | $ | 6,032 | | $ | 6,073 | | $ | 6,138 | | $ | 5,254 | | $ | 23,497 | Net income per share: | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | .46 | | $ | .48 | | $ | .54 | | $ | .50 | | $ | 1.98 | | $ | .53 | | $ | .53 | | $ | .54 | | $ | .45 | | $ | 2.05 | Diluted earnings per share | | .46 | | .47 | | .54 | | .48 | | 1.95 | | .52 | | .52 | | .53 | | .45 | | 2.02 |
Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Cass Information Systems, Inc.: We have audited the accompanying consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries (the Company) as of December 31, 20112014 and 2010,2013, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows, and shareholders’ equity for each of the years in the three-yearthree year period ended December 31, 2011.2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cass Information Systems, Inc. and subsidiaries as of December 31, 20112014 and 2010,2013, and the results of their operations and their cash flows for each of the years in the three-yearthree year period ended December 31, 2011,2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 20112014, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 20122015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP
St. Louis, Missouri March 9, 20122015
Table of Contents ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”―Exchange Act‖), as of December 31, 2011.2014. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2011. There have not been changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.2014.
Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentations. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.2014. There have not been changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The effectiveness of our internal control over financial reporting as of December 31, 20112014 has been audited by KPMG LLP, our independent registered public accounting firm. KPMG LLP’s report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2011,2014, is included below.
Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Cass Information Systems, Inc.: We have audited Cass Information Systems, Inc.’s and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2011,2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control overOver Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Cass Information Systems, Inc.the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries as of December 31, 20112014 and 2010,2013, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows, and shareholders’ equity for each of the years in the three-year period ended December 31, 2011,2014, and our report dated March 9, 20122015 expressed an unqualified opinion on those consolidated financial statements.statements.. /s/ KPMG LLP St. Louis, Missouri March 9, 20122015
Table of Contents ITEM 9B.OTHER INFORMATION None. PART III. ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain information required by this Item 10 is incorporated herein by reference from thetothe following sections of the Company’s definitiveCompany’sdefinitive Proxy Statement for its 20122015 Annual Meeting of Shareholders (“2012 Proxy2015Proxy Statement”), a copy of which will be filedbefiled with the SEC no later than 120 days after the close of the fiscal year: “Election“Election of Directors– Proposal 1,” “Executive Compensation“ExecutiveCompensation and Related Information,” and “Ownership“Beneficial Ownership of Securities”.Securities.” The Company has adopted a Code of Conduct and Business Ethics policy, applicable to all Company directors, executive officersexecutiveofficers and employees. The policy is publicly available and can be viewed on the Company’s website at www.cassinfo.com. Thewww.cassinfo.com.The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding the amendment to, or a waiverawaiver of, a provision of this policy that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K by posting such information on its website. There have beenwere no material changes to the procedures by which shareholders may recommend nominees to the Board.Board during the fourth quarter of fiscal 2014. ITEM 11.EXECUTIVE COMPENSATION Certain information required pursuant to this Item 11 is incorporated herein by reference fromto the sections entitled “Election of Directors,” “Executiveentitled“Election ofDirectors– Proposal 1” and“Executive Compensation and Related Information,” and “Ownership of Securities” Information”of the Company’s 20122015 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year. ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required pursuant to this Item 12 is incorporated herein by reference fromto the sections entitled “Executive Compensation and Related Information” and “Ownershipsection entitled“Beneficial Ownership of Securities” of the Company’s 20122015 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year. Securities Authorized for Issuance under Equity Compensation Plans The following information is as of December 31, 2011:2014: | | | | | | Number of securities | | | Number of securities | | | | | | | remaining available for | | | remaining available for | | | | | Weighted-average | | future issuance under | | | Weighted-average | | future issuance under | | | Number of securities to | | exercise price of | | equity compensation | | Number of securities to | | exercise price of | | equity compensation | | | be issued upon exercise | | outstanding | | plans (excluding | | be issued upon exercise | | outstanding | | plans (excluding | | | of outstanding options, | | options, warrants | | securities reflected in | | of outstanding options, | | options, warrants | | securities reflected in | | | warrants and rights | | and rights | | column (a)) | | warrants and rights | | and rights | | column (a)) | Plan Category | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) | Equity compensation plans | | 30,6281 | | $ | 17.79 | | —1 | | 405,124 | | $ | 37.11 | | 668,159 | approved by security | | 385,0562 | | | 27.28 | | 481,7282 | | | | | | | holders(1) | | | | | | | | | | | | | | | | Equity compensation plans | | — | | — | | — | | _ | | _ | | _ | not approved by security | | | | | | | | | | | | | holders | | | | | | | | | | | | | Total | | 415,684 | | $ | 26.58 | | 481,728 | | 405,124 | | $ | 37.11 | | 668,159 |
Note:All share and per share data have been restated to give effect to the 10% stock dividend issued on December 15, 2011. | 1(1) | | Amount disclosed relates to the Company’s 1995 Performance-Based Stock OptionAmended and Restated Omnibus Stock and Performance Compensation Plan and 1995 Restricted Stock Bonus Plan. There will be no more shares or options granted under these plans. | (the “Omnibus Plan”)2. | | Amount disclosed relates to the 2007 Omnibus Incentive Stock Plan. |
Refer to Note 11 to the consolidated financial statements for information concerning stock options and bonus plans.the Omnibus Plan.
Table of Contents ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required by this Item 13 is incorporated herein by reference from thetothe section entitled “Election of Directors”ofDirectors– Proposal 1” of the Company’s 20122015 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year. ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning our principal accountant’s fees and services is incorporated herein by reference fromreferenceto the section entitled “Ratificationentitled“Ratification of Appointment of Independent Registered Public Accounting Firm”Firm– Proposal 2” of the Company’s 20122015 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year. PART IV. ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | (a) | | The following documents are incorporated by reference in or filed as an exhibit to this Report: | | | | | | (1) and (2) | | Financial Statements and Financial Statement Schedules
| | | | | Included in Item 8 of this report. | | | | | | (3) | | Exhibits listed under (b) of this Item 15. | | | | (b) | | Exhibits | | | | | | | | | 3.1 | | Restated Articles of Incorporation of Registrant, incorporated by reference to Exhibit 4.1 to Form S-8 Registration Statement No. 333-44499, filed with the SEC on January 20, 1998. | | | | | | | 3.2 | | Amendment to Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on April 19, 2013. | | | | | 3.3 | | Articles of Merger of Cass Commercial Corporation, incorporated by reference to Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended September 30, 2006 (File No. 333 – 44497).2006. | | | | | | | | 3.4 | | 3.3 | | Second Amended and Restated Bylaws of Registrant, incorporated by reference to Exhibit 3.1 to the current report on Form 8-K, filed with the SEC on April 18, 2007 (File No. 333 – 44497).2007. | | | | | | | 10.1 | | 1995 Restricted Stock Bonus Plan, as amended toon January 19, 1999, including form of Restriction Agreement, incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 2 to Form S-8 Registration Statement No. 33-91456, filed with the SEC on February 16, 1999.* | | | | | | | 10.2 | | 1995 Performance-Based Stock Option Plan, as amended toon January 19, 1999, including forms of Option Agreements, incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 2 to Form S-8 Registration Statement No. 33-91568, filed with the SEC on February 16, 1999.* | | | | | | | | | | | | 10.3 | | Form of Directors’ IndemnificationDirectors’Indemnification Agreement, incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended March 31, 2003 (File No. 333 – 44497).2003.* | | | | | | | 10.4 | | Amended and Restated 2007 Omnibus Incentive Stock and Performance Compensation Plan, incorporated by reference to Exhibit 10.1 to the quarterlycurrent report on Form 10-Q for8-K, filed with the quarter ended September 30, 2007 (File No. 333-44497).SEC on April 19, 2013.* | | | | | | | 10.5 | | Amendment and Restatement of the Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended September 30, 2007 (File No. 333 – 44497).2007.* | | | | | | | 10.6 | | Form of Restricted Stock Agreement Award Agreement, incorporated by reference to Exhibit 10.310.1 to the quarterly report on Form 10-Q for the quarter ended September 30, 2007 (File No. 333 – 44497).March 31, 2013.* |
Table of Contents | | | | | | | | | | | 10.7 | | Form of Stock Appreciation Rights Award Agreement, incorporated by reference to Exhibit10.4 to the quarterly report on Form 10-Q for the quarter ended September 30, 2007 (FileNo. 333 – 44497).2007.* | | | | | | | | | 10.8 | | Description of Cass Information Systems, Inc. Profit Sharing Program, incorporated by reference to Exhibit 10.8 to the annual report on Form 10-K for the year ended December 31, 2012.* | | | | | | 21 | | Subsidiaries of registrant. | | | | | | | | | | | | 23 | | Consent of Independent Registered Public Accounting Firm. | | | | | | | | | | | | 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | | | | | 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | | 32 .1 | | | 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. | | | | | | | | | 32 .2 | | | 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. | | | | | | | | | | | | 101.INS | | XBRL INSTANCE DOCUMENT | | | | | | | | | | | | 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA | | | | | | | | | | | | 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | | | | | | | | | | | | 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE | | | | | | | | | | | | 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | | | | | | | | | | | | 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
____________________
* Management contract or compensatory plan or arrangement. (c) None.
Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | CASS INFORMATION SYSTEMS, INC. | | Date:March 9, 20122015 | | By | /s/ Eric H. Brunngraber | | | | Eric H. Brunngraber | | | | | Eric H. Brunngraber | | | | President and Chief Executive Officer | | | | | (Principal Executive Officer) | | | | Date:March 9, 20122015 | | By | /s/ | P. Stephen Appelbaum | | | | | P. Stephen Appelbaum | | | | | Executive Vice President and Chief Financial Officer | | | | | (Principal Financial and Accounting Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the registrant and in their capacity as a member of the Board of Directors of the Company. Date:March 9, 20122015 | By | /s/ | K. Dane Brooksher | | | | | K. Dane Brooksher | | | | Date:March 9, 2012 | By | /s/ | | Eric H. Brunngraber | | | | | | | Eric H. Brunngraber | | | | Date:March 9, 20122015 | By | | /s/ | Bryan S. Chapell | | | | | Bryan S. Chapell | | | | Date:March 9, 2012 | By | /s/ | Lawrence A. Collett | | | | | | Lawrence A. Collett | | Date: March 9, 2015 | By | | Date:March 9, 2012 | By | /s/ | | Robert A. Ebel | | | | | | Robert A. Ebel | | | | Date:March 9, 20122015 | By | | /s/ | | Benjamin F. Edwards, IV | | | | | | Benjamin F. Edwards, IV | | Date: March 9, 2015 | By | | Date:March 9, 2012 | By | /s/ | | John L. Gillis, Jr. | | | | | | John L. Gillis, Jr. | | | | Date:March 9, 20122015 | By | | /s/ | | Wayne J. Grace | | | | | | Wayne J. Grace | | | | Date:March 9, 20122015 | By | | /s/ | | James J. Lindemann | | | | | | James J. Lindemann | | | | Date:March 9, 20122015 | By | | /s/ | | Randall L. Schilling | | | | | | Randall L. Schilling | | | | Date:March 9, 20122015 | By | | /s/ | Andrew J. Signorelli | | | | | Andrew J. Signorelli | | | | Date:March 9, 2012 | By | /s/ | Franklin D. Wicks, Jr. | | | | | | Franklin D. Wicks, Jr. | |
5462
|