UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 


FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  March 31, 2011                        

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                           to                                                 

Commission File No. 000-20827
 

CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Missouri
43-1265338
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
 

13001 Hollenberg Drive
 
Bridgeton, Missouri
63044
(Address of principal executive offices)
(Zip Code)

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


Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes           x   No           ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes           ¨           No           ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes¨    No x

The number of shares outstanding of registrant's only class of stock as of May 3, 2011: Common stock, par value $.50 per share – 9,413,670 shares outstanding.

 
 

 

TABLE OF CONTENTS

PART I – Financial Information
 
     
Item 1.
FINANCIAL STATEMENTS
3
     
 
Consolidated Balance Sheets
 
 
March 31, 2011 (unaudited) and December 31, 2010
3
     
 
Consolidated Statements of Income
 
 
Three months ended March 31, 2011 and 2010 (unaudited)
4
     
 
Consolidated Statements of Cash Flows
 
 
Three months ended March 31, 2011 and 2010 (unaudited)
5
     
 
Notes to Consolidated Financial Statements (unaudited)
6
     
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
 
AND RESULTS OF OPERATIONS
15
     
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
     
Item 4.
CONTROLS AND PROCEDURES
23
     
PART II – Other Information – Items 1. – 6.
24
     
SIGNATURES
 
25

Forward-looking Statements - Factors That May Affect Future Results

This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements.  These risks, uncertainties and other factors are discussed in the section Part I, Item 1A, “Risk Factors” of the Company’s 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC.   We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.

 
-2-

 

PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

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

   
March 31,
2011
(Unaudited)
   
December 31,
2010
 
Assets
           
Cash and due from banks
  $ 11,541     $ 12,277  
Interest-bearing deposits in other financial institutions
    26,490       67,299  
Federal funds sold and other short-term investments
    100,626       59,353  
Cash and cash equivalents
    138,657       138,929  
Securities available-for-sale, at fair value
    268,365       264,569  
Loans
    709,622       708,633  
Less: Allowance for loan losses
    12,377       11,891  
Loans, net
    697,245       696,742  
Premises and equipment, net
    9,598       9,617  
Investments in bank-owned life insurance
    14,324       14,191  
Payments in excess of funding
    41,540       33,609  
Goodwill
    7,471       7,471  
Other intangible assets, net
    241       268  
Other assets
    22,579       22,639  
Total assets
  $ 1,200,020     $ 1,188,035  
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Deposits
               
Noninterest-bearing
  $ 126,379     $ 113,097  
Interest-bearing
    399,269       405,493  
Total deposits
    525,648       518,590  
Accounts and drafts payable
    514,155       516,107  
Other liabilities
    12,869       11,244  
Total liabilities
    1,052,672       1,045,941  
                 
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 9,949,324 shares issued at
               
March 31, 2011 and December 31, 2010
    4,975       4,975  
Additional paid-in capital
    46,496       46,653  
Retained earnings
    111,477       107,263  
Common shares in treasury, at cost (541,054 shares at March 31, 2011 and 561,533 shares at December 31, 2010)
    (13,155 )     (13,549 )
Accumulated other comprehensive loss
    (2,445 )     (3,248 )
Total shareholders’ equity
    147,348       142,094  
Total liabilities and shareholders’ equity
  $ 1,200,020     $ 1,188,035  

See accompanying notes to unaudited consolidated financial statements.

 
-3-

 

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

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Fee Revenue and Other Income:
           
Information services payment and processing revenue
  $ 14,347     $ 12,745  
Bank service fees
    352       341  
Other
    133       139  
Total fee revenue and other income
    14,832       13,225  
                 
Interest Income:
               
Interest and fees on loans
    10,253       9,427  
Interest and dividends on securities:
               
Taxable
    5       14  
Exempt from federal income taxes
    2,477       2,098  
Interest on federal funds sold and other short-term investments
    169       89  
Total interest income
    12,904       11,628  
                 
Interest Expense:
               
Interest on deposits
    1,206       1,176  
Total interest expense
    1,206       1,176  
Net interest income
    11,698       10,452  
Provision for loan losses
    450       900  
Net interest income after provision for loan losses
    11,248       9,552  
Total net revenue
    26,080       22,777  
                 
Operating Expense:
               
Salaries and employee benefits
    13,706       12,490  
Occupancy
    648       572  
Equipment
    847       898  
Amortization of intangible assets
    27       27  
Other operating
    2,906       2,210  
Total operating expense
    18,134       16,197  
Income before income tax expense
    7,946       6,580  
Income tax expense
    2,227       1,831  
Net Income
  $ 5,719     $ 4,749  
                 
Basic Earnings Per Share
  $ .61     $ .51  
Diluted Earnings Per Share
    .60       .50  

See accompanying notes to unaudited consolidated financial statements.

 
-4-

 


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

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net income
  $ 5,719     $ 4,749  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,091       1,031  
Provision for loan losses
    450       900  
Stock-based compensation expense
    350       392  
Increase (decrease) in income tax liability
    1,868       (649 )
Increase in pension liability
    60       198  
Other operating activities, net
    (808 )     (387 )
Net cash provided by operating activities
    8,730       6,234  
                 
Cash Flows From Investing Activities:
               
Proceeds from sales of securities available-for-sale
    501    
 
Proceeds from maturities of securities available-for-sale
    5,385    
 
Purchase of securities available-for-sale
    (9,027 )  
 
Net increase in loans
    (953 )     (23,052 )
Increase in payments in excess of funding
    (7,931 )     (5,512 )
Purchases of premises and equipment, net
    (465 )     (207 )
Net cash used in investing activities
    (12,490 )     (28,771 )
                 
Cash Flows From Financing Activities:
               
Net increase in noninterest-bearing demand deposits
    13,282       3,168  
Net decrease in interest-bearing demand and savings deposits
    (8,170 )     (22,573 )
Net increase in time deposits
    1,946       25,468  
Net (decrease) increase in accounts and drafts payable
    (1,952 )     49,528  
Cash dividends paid
    (1,505 )     (1,315 )
Distribution of  stock awards, net
    (113 )     (251 )
Other financing activities, net
 
      12  
Net cash provided by financing activities
    3,488       54,037  
Net (decrease) increase in cash and cash equivalents
    (272 )     31,500  
Cash and cash equivalents at beginning of period
    138,929       79,294  
Cash and cash equivalents at end of period
  $ 138,657     $ 110,794  
                 
Supplemental information:
               
Cash paid for interest
  $ 1,186     $ 1,125  
Cash paid for income taxes
    365       2,501  

See accompanying notes to unaudited consolidated financial statements.

 
-5-

 

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.  For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2010.

Note 2 – Intangible Assets

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

   
March 31, 2011
   
December 31, 2010
 
(In thousands)
 
Gross Carrying
Amount
   
Accumulated
Amortization
   
Gross Carrying
Amount
   
Accumulated
Amortization
 
Assets eligible for amortization:
                       
Customer List
    750       (509 )     750       (482 )
Unamortized intangible assets:
                               
Goodwill
    7,698       (227 )     7,698       (227 )
Total intangible assets
  $ 8,448     $ (736 )   $ 8,448     $ (709 )

The customer list is amortized over seven years.  Amortization of intangible assets amounted to $27,000 for both of the three-month periods ended March 31, 2011 and 2010.  Estimated amortization of intangibles over the next five years is as follows:  $107,000 in 2011 and 2012, $54,000 in 2013 and $0 in 2014.

Note 3 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding.  Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding.  There were no antidilutive shares in the three months ended March 31, 2011 or 2010.  The calculations of basic and diluted earnings per share are as follows:

 
 
Three Months Ended
March 31,
 
(In thousands, except share and per share data)
 
2011
   
2010
 
Basic
           
Net income
  $ 5,719     $ 4,749  
Weighted-average common shares outstanding
    9,356,641       9,328,697  
                 
Basic earnings per share
  $ .61     $ .51  
Diluted
               
Net income
  $ 5,719     $ 4,749  
Weighted-average common shares outstanding
    9,356,641       9,328,697  
Effect of dilutive restricted stock, stock options and stock appreciation rights
    126,832       94,039  
Weighted-average common shares outstanding assuming dilution
    9,483,473       9,422,736  
                 
Diluted earnings per share
  $ .60     $ .50  

 
-6-

 

Note 4 – Stock Repurchases

The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the repurchase of up to 300,000 shares of the Company’s common stock.  The Company did not repurchase any shares during the three-month periods ended March 31, 2011 and 2010.  As of March 31, 2011, 168,000 shares remained available for repurchase under the program.  Repurchases are made in the open market or through negotiated transactions from time to time depending on market conditions.

Note 5 – Comprehensive Income

For the three-month periods ended March 31, 2011 and 2010, unrealized gains and losses on securities available-for-sale and reclassification adjustments for gains included in net income were the Company’s other comprehensive income components.  Comprehensive income is summarized as follows:

   
Three Months Ended
March 31,
 
(In thousands)
 
2011
   
2010
 
Net income
  $ 5,719     $ 4,749  
                 
Other comprehensive income:
               
Net unrealized gain on securities available-for-sale, net of tax
    803       1,321  
                 
Total comprehensive income
  $ 6,522     $ 6,070  

Note 6 – Industry Segment Information

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

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

The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  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.

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

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

 
-7-

 

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

(In thousands)
 
Information
Services
   
Banking
Services
   
Corporate,
Eliminations
and Other
   
Total
 
Quarter Ended March 31, 2011
                       
Total Revenues:
                       
Revenue from customers
  $ 19,846     $ 6,234     $     $ 26,080  
Intersegment income (expense)
    2,626       457       (3,083 )      
Net income
    3,552       2,167             5,719  
Goodwill
    7,335       136             7,471  
Other intangible assets, net
    241                   241  
Total assets
    615,586       591,457       (7,023 )     1,200,020  
Quarter Ended March 31, 2010
                               
Total Revenues:
                               
Revenue from customers
  $ 17,228     $ 5,549     $     $ 22,777  
Intersegment income (expense)
    2,275       380       (2,655 )      
Net income
    2,904       1,845             4,749  
Goodwill
    7,335       136             7,471  
Other intangible assets, net
    348                   348  
Total assets
    579,766       498,105       (4,710 )     1,073,161  

Note 7 – Loans by Type

A summary of loan categories by segment and class is as follows:

(In thousands)
 
March 31,
2011
   
December 31,
2010
 
Commercial and industrial
  $ 149,026     $ 135,061  
Real estate:
               
Mortgage – Commercial
    136,206       151,201  
Mortgage – Church & related
    361,388       365,378  
Construction – Commercial
    16,427       18,434  
Construction – Church & related
    44,598       36,318  
Industrial revenue bonds
    931       1,014  
Other
    1,046       1,227  
Total loans
  $ 709,622     $ 708,633  

The following tables present the aging of loans by loan classification at March 31, 2011 and December 31, 2010:

(In thousands)
 
30-59
Days
   
60-89
Days
   
90 Days
and
Over
   
Total
Past
Due
   
Current
   
Total
Loans
 
March 31, 2011
                                   
Commercial and industrial
  $ 67     $ ¾     $ 26     $ 93     $ 148,933     $ 149,026  
Real estate:
            ¾                                  
Mortgage – Commercial
    ¾       ¾       475       475       135,731       136,206  
Mortgage – Church & related
    490       ¾       ¾       490       360,898       361,388  
Construction – Commercial
    ¾       ¾       ¾       ¾       16,427       16,427  
Construction – Church & related
    ¾       ¾       ¾       ¾       44,598       44,598  
Industrial revenue bonds
    ¾       ¾       ¾       ¾       931       931  
Other
    ¾       ¾       ¾       ¾       1,046       1,046  
Total
  $ 557     $ ¾     $ 501     $ 1,058     $ 708,564     $ 709,622  
December 31, 2010
                                               
Commercial and industrial
  $ 105     $ ¾     $ ¾     $ 105     $ 134,956     $ 135,061  
Real estate:
            ¾                                  
Mortgage – Commercial
    145       ¾       490       635       150,566       151,201  
Mortgage – Church & related
    1,954       ¾       ¾       1,954       363,424       365,378  
Construction – Commercial
    ¾       ¾       ¾       ¾       18,434       18,434  
Construction – Church & related
    ¾       ¾       ¾       ¾       36,318       36,318  
Industrial revenue bonds
    ¾       ¾       ¾       ¾       1,014       1,014  
Other
    ¾       ¾       ¾       ¾       1,227       1,227  
Total
  $ 2,204     $ ¾     $ 490     $ 2,694     $ 705,939     $ 708,633  

 
-8-

 

The following tables present the recorded investment and unpaid principal balance for impaired loans at March 31, 2011 and December 31, 2010.

(In thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance for
Loan Losses
 
March 31, 2011
                 
Commercial and industrial:
                 
Nonaccrual
  $ 36     $ 36     $ 4  
Real estate – mortgage:
                       
Nonaccrual
    503       503       116  
Total impaired loans
  $ 539     $ 539     $ 120  
December 31, 2010
                       
Commercial and industrial:
                       
Nonaccrual
  $ 46     $ 46     $ 4  
Real estate – mortgage:
                       
Nonaccrual
    519       519       116  
Total impaired loans
  $ 565     $ 565     $ 120  

Impaired loans consist primarily of nonaccrual loans and loans greater than 90 days past due and still accruing interest.  Management measures impairment in accordance with FASB ASC 310, “Allowance for Credit Losses.”  At March 31, 2011 and December 31, 2010, all impaired loans were evaluated based on the fair value of the collateral.  The fair value of the collateral is based upon an observable market price or current appraised value and therefore, the Company classifies these assets as nonrecurring Level 2.  There were no loans delinquent 90 days or more and still accruing interest at March 31, 2011 and December 31, 2010.  There are two foreclosed loans with a book value of $1,910,000 which have been reclassified as other real estate owned (included in other assets) as of March 31, 2011 and December 31, 2010.

The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of March 31, 2011 and December 31, 2010:

(In thousands)
 
Commercial
and
Industrial
   
Real
Estate
Mortgage
   
Real Estate
Construction
   
Other
   
Total
 
March 31, 2011
                             
Loans subject to normal monitoring1
  $ 145,053     $ 472,062     $ 61,025     $ 1,977     $ 680,117  
Loans subject to special monitoring2:
                                       
Performing
    3,937       25,029       ¾       ¾       28,966  
Nonperforming
    36       503       ¾       ¾       539  
Total
  $ 149,026     $ 497,594     $ 61,025     $ 1,977     $ 709,622  
December 31, 2010
                                       
Loans subject to normal monitoring1
  $ 130,148     $ 495,573     $ 54,752     $ 2,241     $ 682,714  
Loans subject to special monitoring2:
                                       
Performing
    4,867       20,487       ¾       ¾       25,354  
Nonperforming
    46       519       ¾       ¾       565  
Total
  $ 135,061     $ 516,579     $ 54,752     $ 2,241     $ 708,633  

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

The following table provides information regarding the changes in the allowance for loan losses by segment from December 31, 2010 to March 31, 2011.

(In thousands)
 
December 31,
2010
   
 Charge-Offs
   
Recoveries
   
Provision
   
March 31,
2011
 
Commercial and industrial
  $ 2,728       ¾     $ 35     $ 213     $ 2,976  
Real estate - mortgage
    8,491       ¾       1       172       8,664  
Real estate - construction
    656       ¾       ¾       67       723  
Other
    16       ¾       ¾       (2 )     14  
Total
  $ 11,891       ¾     $ 36     $ 450     $ 12,377  

 
-9-

 

Note 8 – Commitments and Contingencies

In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements.  Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases.  These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments.  At March 31, 2011 and December 31, 2010, no amounts have been accrued for any estimated losses for these instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  At March 31, 2011 the balance of unused loan commitments, standby and commercial letters of credit were $27,676,000, $22,946,000, and $3,940,000, respectively.  Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment.  In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.

The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time deposits at March 31, 2011:

   
Amount of Commitment Expiration per Period
 
(In thousands)
 
Total
   
Less than
1 year
   
1-3
Years
   
3-5
Years
   
Over 5
Years
 
Operating lease commitments
  $ 2,591     $ 599     $ 1,015     $ 606     $ 371  
Time deposits
    159,064       138,010       18,509       2,545        
Total
  $ 161,655     $ 138,609     $ 19,524     $ 3,151     $ 371  

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

Note 9 – Stock-Based Compensation

In 2007, the Board and the Company’s shareholders approved the 2007 Omnibus Incentive Stock Plan (the “Omnibus Plan”).  The Omnibus Plan permits the issuance of up to 880,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units and performance awards.  The Company issues shares out of treasury stock for these awards.  During the three months ended March 31, 2011, 20,617 restricted shares and 75,016 SARs were granted under the Omnibus Plan.

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

Restricted Stock
Restricted shares are amortized to expense over the three-year vesting period. As of March 31, 2011, the total unrecognized compensation expense related to non-vested common stock was $1,290,000 and the related weighted-average period over which it is expected to be recognized is approximately 1.27 years.

 
-10-

 

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

   
Three Months Ended
March 31, 2011
 
   
Shares
   
Fair Value
 
Balance at December 31, 2010
    50,271     $ 28.51  
Granted
    20,617       36.24  
Vested
    (21,980 )     27.42  
Forfeited
           
Balance at March 31, 2011
    48,908     $ 32.26  

Stock Options
Stock options vest and expire over a period not to exceed seven years.  As of March 31, 2011, the total unrecognized compensation expense related to non-vested stock options was $27,000, and the related weighted-average period over which it is expected to be recognized is approximately 1.6 years.  Following is a summary of the activity of the stock options during the three-month period ended March 31, 2011:

         
Weighted-
Average
   
Average
Remaining
   
Aggregate
Intrinsic
 
         
Exercise
   
Contractual
   
Value
 
   
Shares
   
Price
   
Term Years
   
(In thousands)
 
Outstanding at December 31, 2010
    36,628     $ 18.36       1.56     $ 717  
Exercised
    5,756       13.04                  
Outstanding at March 31, 2011
    30,872     $ 19.24       1.54       619  
Exercisable at March 31, 2011
    27,532     $ 19.06       1.51       557  

The total intrinsic value of options exercised was $140,000, and $29,000, for the three-month periods ended March 31, 2011 and 2010, respectively.  Following is a summary of the activity of the non-vested stock options during the three-month period ended March 31, 2011:

   
Shares
   
Weighted-Average
Grant Date
Fair Value
 
Non-vested at December 31, 2010
    12,440     $ 2.94  
Vested
    9,100       2.93  
Non-vested at March 31, 2011
    3,340     $ 2.95  

SARs
SARs vest over a three-year period, with one-third of the shares vesting and becoming exercisable each year on the anniversary date of the grant, and they expire 10 years from the grant date.  As of March 31, 2011, the total unrecognized compensation expense was $1,045,000 and the related weighted-average period over which it is expected to be recognized is 1.6 years.  Following is a summary of the activity of the Company’s SARs program for the three-month period ended March 31, 2011:

         
Weighted-
Average
   
Average
Remaining
   
Aggregate
Intrinsic
 
         
Exercise
   
Contractual
   
Value
 
   
Shares
   
Price
   
Term Years
   
(In thousands)
 
Outstanding at December 31, 2010
    241,755     $ 27.34       7.83     $ 2,562  
Granted
    75,016       36.24                  
Exercised
    (6,754 )     26.01                  
Outstanding at March 31, 2011
    310,017     $ 29.53       8.15     $ 3,027  
Exercisable at March 31, 2011
    178,800     $ 27.51       7.37     $ 2,107  

 
-11-

 

Following is a summary of the activity of non-vested SARs during the three-month period ended March 31, 2011:

   
Shares
   
Weighted-Average
Grant Date
Fair Value
 
Non-vested at December 31, 2010
    141,201     $ 27.18  
Granted
    75,016       36.24  
Vested
    (85,000 )     27.31  
Non-vested at March 31, 2011
    131,217     $ 32.28  

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

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Risk-free interest rate
    2.70 %     3.33 %
Expected life
 
7 yrs.
   
7 yrs.
 
Expected volatility
    27.86 %     30.00 %
Expected dividend yield
    1.77 %     1.86 %

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

Note 10 – Defined Pension Plans

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

(In thousands)
 
Estimated
2011
   
Actual
2010
 
Service cost – benefits earned during the year
  $ 2,079     $ 1,771  
Interest cost on projected benefit obligation
    2,457       2,290  
Expected return on plan assets
    (3,314 )     (2,440 )
Net amortization and deferral
    642       616  
Net periodic pension cost
  $ 1,864     $ 2,237  

Pension costs recorded to expense were $466,000 and $542,000 for the three-month periods ended March 31, 2011 and 2010, respectively.  The decrease in pension costs is primarily due to the asset gain in the year ended December 31, 2010.  The Company made a contribution of $450,000 to the plan during the three-month period ended March 31, 2011 and expects to contribute at least an additional $1,350,000 in 2011.

In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan.  The following table represents the components of the net periodic pension costs for 2010 and an estimate for 2011:

(In thousands)
 
Estimated
2011
   
Actual
2010
 
Service cost – benefits earned during the year
  $ 90     $ 78  
Interest cost on projected benefit obligation
    295       315  
Net amortization
    249       258  
Net periodic pension cost
  $ 634     $ 651  

 
-12-

 
 
Pension costs recorded to expense were $158,000 and $162,000 for the three-month periods ended March 31, 2011 and 2010, respectively.

Note 11 – Income Taxes

As of March 31, 2011, the Company’s unrecognized tax benefits were approximately $2,016,000, of which $1,568,000 would, if recognized, affect the Company’s effective tax rate.  As of December 31, 2010, the Company’s unrecognized tax benefits were approximately $1,877,000, of which $1,465,000 would, if recognized, affect the Company’s effective tax rate.  During the next twelve months, the Company may realize a reduction of its unrecognized tax benefits of approximately $451,000 due to the lapse of federal and state statutes of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  The Company had $120,000 and $106,000 of gross interest accrued as of March 31, 2011 and December 31, 2010 respectively.  There were no penalties for unrecognized tax benefits accrued at March 31, 2011 and December 31, 2010.

The Company is subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions.  U.S. federal income tax returns for tax years 2006 through 2009 remain subject to examination by the Internal Revenue Service.  In addition, the Company is subject to state tax examinations for the tax years 2005 through 2009.

Note 12 – Investment Securities Available for Sale

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

   
March 31, 2011
 
(In thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
State and political subdivisions
  $ 258,491     $ 10,704     $ 830     $ 268,365  

   
December 31, 2010
 
(In thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
State and political subdivisions
  $ 255,929     $ 9,829     $ 1,189     $ 264,569  

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

    March 31, 2011  
 
Less than 12 months
 
12 months or more
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
(In thousands)
fair value
 
losses
 
fair value
 
losses
 
Fair value
 
losses
 
State and political subdivisions
  $ 42,626     $ 830     $     $     $ 42,626     $ 830  

    December 31, 2010  
   
Less than 12 months
   
12 months or more
   
Total
 
   
Estimated
   
Unrealized
   
Estimated
   
Unrealized
   
Estimated
   
Unrealized
 
(In thousands)
 
fair value
   
losses
   
fair value
   
losses
   
Fair value
   
losses
 
State and political  subdivisions
  $ 53,741     $ 1,189     $     $     $ 53,741     $ 1,189  

There were 51 securities (none greater than 12 months) in an unrealized loss position as of March 31, 2011.   There were 61 securities (none greater than 12 months) in an unrealized loss position as of December 31, 2010.   All unrealized losses were reviewed to determine whether the losses were other than temporary.  Management believes that all unrealized losses are temporary since they were market driven, and the Company has the ability and intent to hold these securities until maturity.

 
-13-

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

   
March 31, 2011
 
(In thousands)
 
Amortized Cost
   
Fair Value
 
Due in 1 year or less
  $ 15,184     $ 15,467  
Due after 1 year through 5 years
    35,278       37,541  
Due after 5 years through 10 years
    102,260       109,468  
Due after 10 years
    105,769       105,889  
Total
  $ 258,491     $ 268,365  

There were no securities pledged to secure public deposits and for other purposes at March 31, 2011.

Proceeds from sales of investment securities classified as available for sale were $501,000 and $0 for the first three months of 2011 and 2010, respectively.  There were no gross realized gains or losses for the first three months of 2011 and 2010.

Note 13 – Fair Value of Financial Instruments

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

   
March 31, 2011
   
December 31, 2010
 
 
(In thousands)
 
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
Balance sheet assets:
                       
Cash and cash equivalents
  $ 138,657     $ 138,657     $ 138,929     $ 138,929  
Investment securities
    268,365       268,365       264,569       264,569  
Loans, net
    697,245       701,207       696,742       710,294  
Accrued interest receivable
    5,938       5,938       5,857       5,857  
Total
  $ 1,110,205     $ 1,114,167     $ 1,106,097     $ 1,119,649  
                                 
Balance sheet liabilities:
                               
Deposits
  $ 525,648     $ 525,648     $ 518,590     $ 518,590  
Accounts and drafts payable
    514,155       514,155       516,107       516,107  
Short-term borrowings
                9       9  
Accrued interest payable
    12,869       12,869       208       208  
Total
  $ 1,052,672     $ 1,052,672     $ 1,034,914     $ 1,034,914  

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.

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.

Note 14 – Subsequent Events

In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events after the
consolidated balance sheet date of March 31, 2011 and there were no events identified that would require additional disclosures to prevent the Company’s consolidated financial statements from being misleading.

 
-14-

 

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina and Wellington, Kansas.  The Company’s services include transportation invoice rating, payment processing, auditing, and the generation of accounting and transportation information.  Cass also processes and pays utility invoices, which include electricity, gas and telecommunications expenses, and is a provider of telecom expense management solutions.  Cass extracts, stores and presents information from transportation, utility and telecommunication invoices, assisting its customers’ transportation, energy and information technology managers in making decisions that will enable them to improve operating performance.  The Company receives data from multiple sources, electronic and otherwise, and processes the data to accomplish the specific operating requirements of its customers.  It then provides the data in a central repository for access and archiving.  The data is finally transformed into information through the Company’s databases that allow client interaction as required and provide Internet-based tools for analytical processing.  The Company also, through Cass Commercial Bank, its St. Louis, Missouri based bank subsidiary (the “Bank”), provides banking services in the St. Louis metropolitan area, Orange County, California and other selected cities in the United States.  In addition to supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include privately-owned businesses and churches and church-related ministries.

The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly.  In addition, the degree of automation such as electronic data interchange, imaging, and web-based solutions varies greatly among customers and industries.  These factors combine so that pricing varies greatly among the customer base.  In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process.  The amount, type and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed.  Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed.  Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management.  Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income.  The funds generated by these processing activities are invested in overnight investments, investment grade securities and loans generated by the Bank.  The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings.  The Bank also assesses fees on other services such as cash management services.

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as transportation, utility and telecommunication payment and audit.  The benefits that can be achieved by outsourcing transaction processing and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs and consolidation of telecommunication providers.  Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff and the growth and quality of the loan portfolio. As lower levels of economic activity are encountered, such as those experienced in 2009, the number and total dollar amount of transactions processed by the Company may decline, thereby reducing fee revenue, interest income, and possibly liquidity.  Conversely, improving economic conditions, will tend to increase fee revenue, interest income and liquidity.  The general level of interest rates also has a significant effect on the revenue of the Company.  As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2010 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income.

Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offering and customer base.  Management intends to accomplish this by maintaining the Company’s lead in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.

 
-15-

 

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the FASB Accounting Standards Codification (“ASC”).  In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  These estimates have been generally accurate in the past, have been consistent and have not required any material changes.  There can be no assurances that actual results will not differ from those estimates.  Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position have been discussed with the Audit Committee of the Board of Directors and are described below.

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

Impairment of Assets.  The Company periodically evaluates certain long-term assets such as intangible assets including goodwill, foreclosed assets and assets held for sale for impairment.  Generally, these assets are initially recorded at cost, and recognition of impairment is required when events and circumstances indicate that the carrying amounts of these assets will not be recoverable in the future.  If impairment occurs, various methods of measuring impairment may be called for depending on the circumstances and type of asset, including quoted market prices, estimates based on similar assets, and estimates based on valuation techniques such as discounted projected cash flows.  The Company had no impairment of goodwill and intangible assets for the three months ended March 31, 2011 or for the fiscal year ended December 31, 2010, 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 Note 11 to the financial statements.  The audit of the Company’s federal consolidated tax returns conducted by the Internal Revenue Service for fiscal years 2004 and 2005 resulted in no material adjustments.

Pension Plans.  The amounts recognized in the consolidated financial statements related to pension plans are determined from actuarial valuations.  Inherent in these valuations are assumptions, including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2010, rate of increase in future compensation levels and mortality rates.  These assumptions are updated annually and are disclosed in Note 10 to the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.   There have been no significant changes in the Company’s long-term rate of return assumptions for the past three fiscal years ended December 31 and management believes they are not reasonably likely to change in the future. Pursuant to FASB ASC 715, “Compensation – Retirement Benefits,” the Company has recognized the funded status of its defined benefit postretirement plan in its balance sheet and has recognized changes in that funded status through comprehensive income.  The funded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.

Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended March 31, 2011 (“First Quarter of 2011”) compared to the three-month period ended March 31, 2010 (“First Quarter of 2010”).   The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as the Company's 2010 Annual Report on Form 10-K. Results of operations for the First Quarter of 2011 are not necessarily indicative of the results to be attained for any other period.

 
-16-

 

Net Income

The following table summarizes the Company’s operating results:

   
First Quarter of
 
(In thousands except per share data)
 
2011
   
2010
   
% Change
 
Net income
  $ 5,719     $ 4,749       20.4 %
Diluted earnings per share
  $ .60     $ .50       20.0 %
Return on average assets
    1.86 %     1.80 %        
Return on average equity
    16.23 %     14.71 %        

Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and utility processing and payment fees.  As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income.  Processing volumes related to fees and accounts and drafts payable were as follows:

   
First Quarter of
 
(In thousands)
 
2011
   
2010
   
% Change
 
Freight Core Invoice Transaction Volume*
    6,670       6,017       10.9 %
Freight Invoice Dollar Volume
  $ 4,568,930     $ 3,768,941       21.2 %
Utility Transaction Volume
    3,358       3,055       9.9 %
Utility Transaction Dollar Volume
  $ 2,689,235     $ 2,608,099       3.1 %
Payment and Processing Fees
  $ 14,347     $ 12,745       12.6 %
*Core invoices exclude parcel shipments.

First Quarter of 2011 compared to First Quarter of 2010:

Transportation and utility transaction volumes were up 11% and 10%, respectively, and dollar volumes were up 21% and 3%, respectively, due to new business and improved activity from existing customers.

Bank service fees increased $11,000, or 3% and other income decreased $6,000, or 4%.  There were no gains or losses on sales of securities in the First Quarter of 2011 and 2010.

Net Interest Income

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

   
First Quarter of
 
(In thousands)
 
2011
   
2010
   
% Change
 
Average earnings assets
  $ 1,149,715     $ 984,700       16.8 %
Average interest-bearing liabilities
    409,071       323,253       26.5 %
Net interest income*
    13,033       11,595       12.4 %
Net interest margin*
    4.60 %     4.78 %        
Yield on earning assets*
    5.02 %     5.26 %        
Rate on interest bearing liabilities
    1.20 %     1.48 %        
*Presented on a tax-equivalent basis assuming a tax rate of 35%.

First Quarter of 2011 compared to First Quarter of 2010:

First Quarter 2011 average earning assets increased approximately $165,015,000, or 17%, compared to the same period in the prior year (see discussion in the following paragraphs). The yield on earning assets and the tax equivalent net interest margin both decreased in 2011 as the general level of interest rates remained low; however, the significant increase in average earning assets caused net interest income to increase 12%.

 
-17-

 
 
Total average loans increased $57,255,000, or 9%, to $705,703,000 for the First Quarter of 2011 as compared to the First Quarter of 2010. This increase was attributable to the continuing successful marketing efforts by the Company’s lending staff.  Average investment securities increased $44,106,000, or 21%, to $257,390,000.

Total average interest-bearing deposits for the First Quarter of 2011 increased $85,856,000, or 27%, to $409,069,000 compared to the First Quarter of 2010.  This increase was primarily the result of both new and existing customers transferring funds from lower-yielding investments at other institutions.  Accounts and drafts payable increased $57,973,000, or 12%, as freight and utility payment processing activities increased.

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

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

The following table shows the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.

   
First Quarter of 2011
   
First Quarter of 2010
 
(In thousands)
 
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate
 
Assets1
                                   
Earning assets
                                   
Loans2, 3:
                                   
Taxable
  $ 704,737     $ 10,249       5.90 %   $ 645,818     $ 9,402       5.90 %
Tax-exempt4
    966       6       2.52       2,630       38       5.86  
Investment securities5:
                                               
Taxable
    928       5       2.19       792       14       7.17  
Tax-exempt4
    256,462       3,810       6.02       212,492       3,228       6.16  
Interest-bearing deposits in other financial institutions
    62,287       66       .43       21,406       13       .25  
Federal funds sold and other short-term investments
    124,335       103       .34       101,562       76       .30  
Total earning assets
    1,149,715       14,239       5.02       984,700       12,771       5.26  
Non-earning assets
                                               
Cash and due from banks
    11,464                       9,414                  
Premises and equipment, net
    9,679                       10,324                  
Bank-owned life insurance
    14,267                       13,710                  
Goodwill and other intangibles
    7,728                       7,835                  
Other assets
    62,954                       54,801                  
Allowance for loan losses
    (12,074 )                     (8,386 )                
Total assets
  $ 1,243,733                     $ 1,072,398                  
Liabilities and Shareholders’ Equity1
                                               
Interest-bearing liabilities
                                               
Interest-bearing demand deposits
  $ 218,525     $ 556       1.03 %   $ 169,486     $ 510       1.22 %
Savings deposits
    24,831       64       1.05       24,967       72       1.17  
Time deposits >=$100
    53,609       184       1.39       49,953       204       1.66  
Other time deposits
    112,104       402       1.45       78,807       390       2.01  
Total interest-bearing deposits
    409,069       1,206       1.20       323,213       1,176       1.48  
Short-term borrowings
    2                   40              
Total interest bearing liabilities
    409,071       1,206       1.20       323,253       1,176       1.48  
Non-interest bearing liabilities
                                               
Demand deposits
    130,406                       110,722                  
Accounts and drafts payable
    549,794                       491,821                  
Other liabilities
    11,534                       15,661                  
Total liabilities
    1,100,805                       941,457                  
Shareholders’ equity
    142,928                       130,941                  
Total liabilities and share- holders’ equity
  $ 1,243,733                     $ 1,072,398                  
Net interest income
          $ 13,033                     $ 11,595          
Net interest margin
                    4.60 %                     4.78 %
Interest spread
                    3.83                       3.78  
 
 
-18-

 
 
1.
Balances shown are daily averages.
2.
For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding.  Interest on nonaccrual loans is recorded when received as discussed further in Note 1 to the Company’s 2010 consolidated financial statements, filed with the Company’s 2010 Annual Report on Form 10-K.
3.
Interest income on loans includes net loan fees of $238,000 and $74,000 for the First Quarter of 2011 and 2010, respectively.
4.
Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.  The tax-equivalent adjustment was approximately $1,335,000 and $1,143,000 for the First Quarter of 2011 and 2010, respectively.
5.
For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

Analysis of Net Interest Income Changes

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

   
First Quarter of 2011 Over
First Quarter of 2010
 
(In thousands)
 
Volume
   
Rate
   
Total
 
Increase (decrease) in interest income:
                 
Loans1, 2:
                 
Taxable
  $ 857     $ (10 )   $ 847  
Tax-exempt3
    (17 )     (15 )     (32 )
Investment securities:
                       
Taxable
    2       (11 )     (9 )
Tax-exempt3
    655       (73 )     582  
Interest-bearing deposits in other financial institutions
    38       15       53  
Federal funds sold and other short-term investments
    18       9       27  
Total interest income
    1,553       (85 )     1,468  
Interest expense on:
                       
Interest-bearing demand deposits
    133       (87 )     46  
Savings deposits
    0       (8 )     (8 )
Time deposits >=$100
    14       (34 )     (20 )
Other time deposits
    137       (125 )     12  
Total interest expense
    284       (254 )     30  
Net interest income
    1,269       169       1,438  
1.
Average balances include nonaccrual loans.
2.
Interest income includes net loan fees.
3.
Interest income is presented on a tax-equivalent basis assuming a tax rate of 35%.

Provision and Allowance for Loan Losses

A significant determinant of the Company's operating results is the provision for loan losses.  There was a $450,000 and $900,000 provision for loan losses during the First Quarter of 2011 and the First Quarter of 2010, respectively.  As discussed below, the Company continually analyzes the outstanding loan portfolio based on the performance, financial condition and collateralization of the credits.  There were net loan recoveries of $36,000 in the First Quarter of 2011 compared to net loan charge-offs of $185,000 for the same period in 2010.

The allowance for loan losses at March 31, 2011 was $12,377,000 and at December 31, 2010 was $11,891,000. The ratio of allowance for loan losses to total loans outstanding at March 31, 2011 was 1.74% compared to 1.68% at December 31, 2010.  Nonperforming loans were $539,000, or .08%, of total loans at March 31, 2011 compared to $565,000, or .08%, of total loans at December 31, 2010.  These loans, which are also considered impaired, consisted of four nonaccrual loans to borrowers in financial trouble.   Nonperforming loans at December 31, 2010 also consisted of four nonaccrual loans.  Total nonperforming loans decreased $853,000 from March 31, 2010.  This decrease was primarily due to the repayment of one loan and the charge-off of one loan.

 
-19-

 
 
In addition to the nonperforming loans discussed above, at March 31, 2011, loans totaling $28,966,000 not included in the table below were identified by management as subject to special monitoring.  These loans possess some credit deficiency or potential weakness which requires a high level of management attention.

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

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

   
First Quarter of
 
(In thousands)
 
2011
   
2010
 
Allowance at beginning of period
  $ 11,891     $ 8,284  
Provision charged to expense
    450       900  
                 
Loans charged off
          (200 )
Recoveries on loans previously charged off
    36       15  
Net recoveries (loans charged off)
    36       (185 )
Allowance at end of period
  $ 12,377     $ 8,999  
Loans outstanding:
               
Average
  $ 705,703     $ 648,448  
March 31
    709,622       664,824  
Ratio of allowance for loan losses to loans outstanding:
               
Average
    1.75 %     1.39 %
March 31
    1.74       1.35  
Nonperforming loans:
               
Nonaccrual loans
  $ 539     $ 1,392  
Loans past due 90 days or more
           
Renegotiated loans
           
Total nonperforming loans
  $ 539     $ 1,392  
Foreclosed assets
    1,910       1,910  
Nonperforming loans as a % of average loans
    .08 %     .21 %

The Bank had two properties carried as other real estate owned of $1,910,000 as of March 31, 2011 and 2010, respectively.

Operating Expense

Total operating expenses for the First Quarter of 2011 were up $1,937,000, or 12%, compared to the First Quarter of 2010.

Salaries and benefits expense for the First Quarter of 2011 increased $1,216,000, or 10%, compared to the First Quarter of 2010 as higher payroll and profit-sharing expenses were offset by lower pension costs.

 
-20-

 
 
Occupancy expense for the First Quarter of 2011 increased $76,000, or 13%, to $648,000 from the First Quarter of 2010 due to higher maintenance and repair costs.

Equipment expense for the First Quarter of 2011 decreased $51,000, or 6%, compared to the First Quarter of 2010 due to lower software depreciation expense.

Amortization of intangible assets was $27,000 for both the First Quarter of 2011 and 2010.

Other operating expenses for the First Quarter of 2011 increased $696,000, or 31%, compared to the First Quarter of 2010 due to increases in professional fees, FDIC insurance, and supplies.

Income tax expense for the First Quarter of 2011 increased $396,000, or 22%, compared to the First Quarter of 2010. The effective tax rate was 28.0% and 27.8% for the First Quarters of 2011 and 2010, respectively.

Financial Condition

Total assets at March 31, 2011 were $1,200,020,000, an increase of $11,985,000, or 1%, from December 31, 2010.  The most significant changes in asset balances during this period were a repositioning of cash balances by an increase of $41,273,000, or 70%, in federal funds sold and other short-term investments offset by a decrease of $40,809,000, or 61%, in interest bearing deposits in other financial institutions. Changes in federal funds sold and other short-term investments reflect the Company’s daily liquidity position and are affected by the changes in the other asset balances and changes in deposit and accounts and drafts payable balances.

Total liabilities at March 31, 2011 were $1,052,672,000, an increase of $6,731,000, or less than 1%, from December 31, 2010.  Total deposits at March 31, 2011 were $525,648,000 an increase of $7,058,000, or 1%, from December 31, 2010.  Accounts and drafts payable at March 31, 2011 were $514,155,000, a decrease of $1,952,000, or less than 1%, from December 31, 2010.  Total shareholders’ equity at March 31, 2011 was $147,348,000, a $5,254,000, or 4%, increase from December 31, 2010.

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

The increase in total shareholders’ equity resulted from net income of $5,719,000, of which $237,000 is from stock-based bonuses and a decrease in other comprehensive loss of $803,000, offset by dividends paid of $1,505,000 ($.16 per share).

Liquidity and Capital Resources

The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments, and was $138,657,000 at March 31, 2011, a decrease of $272,000, or less than 1%, from December 31, 2010.  At March 31, 2011, these assets represented 12% of total assets.  These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines.  Total investment in securities was $268,365,000 at March 31, 2011, an increase of $3,796,000, or 1%, from December 31, 2010.  These assets represented 22% of total assets at March 31, 2011.  Of this total, 100% were state and political subdivision securities.  Of the total portfolio, 6% mature in one year, 14% mature in one to five years, and 80% mature in five or more years.

The Bank has unsecured lines of credit at correspondent banks to purchase federal funds up to a maximum of $88,000,000 at the following banks:  Bank of America, $20,000,000; US Bank, $20,000,000; Wells Fargo Bank, $15,000,000; Frost National Bank, $10,000,000; PNC Bank, $12,000,000; UMB Bank, $5,000,000; and JPM Chase Bank, $6,000,000.  The Company had secured lines of credit with the Federal Home Loan Bank of $129,690,000 collateralized by commercial mortgage loans.  The Company also had a secured federal funds line of credit of $10,000,000 with the UMB Bank.  There were no amounts outstanding under any line of credit as of March 31, 2011 or December 31, 2010.

 
-21-

 
 
The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank.  The accounts and drafts payable generated by the Company has also historically been a stable source of funds.  The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”).  Time deposits include $97,190,000 of CDARS deposits which offer the Bank’s customers the ability to maximize FDIC insurance coverage.  The Company uses this program to retain or attract deposits from existing customers.

Net cash flows provided by operating activities were $8,730,000 for the First Quarter of 2011 compared with
$6,234,000 for the First Quarter of 2010.  This increase is attributable to the increases in net income of $970,000 and the increase in income tax liability of $2,517,000 offset by a decrease in the provision for loan losses of $450,000 and the other normal fluctuations in asset and liability accounts of $541,000.  Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances.  Other causes for the changes in these account balances are discussed earlier in this report.  Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows.  Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2011, which are estimated to be less than $3,000,000.

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

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

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

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

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

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

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

 
-22-

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

   
March 31, 2011
 
December 31, 2010
 
(In thousands)
 
Amount
   
Ratio
 
Amount
   
Ratio
 
Total capital (to risk-weighted assets)
                       
Cass Information Systems, Inc.
  $ 153,320       17.08 %   $ 148,659       16.82 %
Cass Commercial Bank
    60,946       11.21 %     58,838       10.72 %
Tier I capital (to risk-weighted assets)
                               
Cass Information Systems, Inc.
  $ 142,082       15.82 %   $ 137,603       15.57 %
Cass Commercial Bank
    54,122       9.95 %     51,955       9.46 %
Tier I capital (to average assets)
                               
Cass Information Systems, Inc.
  $ 142,082       11.50 %   $ 137,603       11.18 %
Cass Commercial Bank
    54,122       8.93 %     51,955       8.92 %

Inflation

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

Impact of New and Not Yet Adopted Accounting Pronouncements
 
None.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management. The policy objective is to limit the change in annualized net interest income to 15% from an immediate and sustained parallel change in interest rates of 200 basis points. Based on the Company's most recent evaluation, management does not believe the Company's risk position at March 31, 2011 has changed materially from that at December 31, 2010.

ITEM 4.
CONTROLS AND PROCEDURES

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

There were no changes in the First Quarter of 2011 in the Company's internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).

 
-23-

 

PART II.
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
The Company has included in Part I, Item 3 of its Annual Report on Form 10-K for the year ended December 31, 2010 disclosure regarding certain legal proceedings. There were no material developments with regard to these proceedings during the three months ended March 31, 2011.  All other legal proceedings and actions involving the Company are of an ordinary and routine nature and are incidental to the operations of the Company.  Management believes the outcome of these proceedings, including proceedings discussed in the Annual Report on Form 10-K for the year ended December 31, 2010, will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.

ITEM 1A.
RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2010, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”).  There are no material changes to the Risk Factors as disclosed in the Company’s 2010 Annual Report on Form 10-K.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4.
[REMOVED AND RESERVED]

ITEM 5.
OTHER INFORMATION
 
(a)
None
 
(b)
There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the First Quarter of 2011.

ITEM 6.
EXHIBITS

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

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

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

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

 
-24-

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CASS INFORMATION SYSTEMS, INC.
     
DATE:  May 5, 2011
By
/s/ Eric H. Brunngraber
   
Eric H. Brunngraber
   
President and Chief Executive Officer
   
(Principal Executive Officer)
     
DATE:  May 5, 2011
By
/s/ P. Stephen Appelbaum
   
P. Stephen Appelbaum
   
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
 
 
-25-