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,
2010





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
                  organization)
                (I.R.S.
      Employer Identification No.)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 xNon-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,
2010: Common stock, par value $.50 per share – 9,393,578 shares
outstanding.







TABLE
OF CONTENTS




PART
      I – Financial InformationItem
      1.
                        FINANCIAL
      STATEMENTSConsolidated
      Balance SheetsMarch
      31, 2010 (unaudited) and December 31, 2009
                        3Consolidated
      Statements of IncomeThree
      months ended March 31, 2010 and 2009 (unaudited)
                        4Consolidated
      Statements of Cash FlowsThree
      months ended March 31, 2010 and 2009 (unaudited)
                        5Notes
      to Consolidated Financial Statements (unaudited)
                        6Item
      2.
                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                        14Item
      3.
                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                        23Item 4.
                        CONTROLS
      AND PROCEDURES
                        23PART II – Other
      Information – Items 1. – 6.
                        24SIGNATURES
                        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 2009
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,
                              2010
                              (Unaudited)
                            
                            
                            December 31,
                              2009AssetsCash
      and due from banks
                            
                            $
                            6,633
                            
                            
                            $
                            5,763Interest-bearing
      deposits in other financial institutions
                            
                            
                            18,989
                            
                            
                            
                            33,426Federal
      funds sold and other short-term investments
                            
                            
                            85,172
                            
                            
                            
                            40,105Cash
      and cash equivalents
                            
                            
                            110,794
                            
                            
                            
                            79,294Securities
      available-for-sale, at fair value
                            
                            
                            226,183
                            
                            
                            
                            224,597Loans
                            
                            
                            664,824
                            
                            
                            
                            641,957Less:
      Allowance for loan losses
                            
                            
                            8,999
                            
                            
                            
                            8,284Loans,
      net
                            
                            
                            655,825
                            
                            
                            
                            633,673Premises
      and equipment, net
                            
                            
                            10,101
                            
                            
                            
                            10,451Investments
      in bank-owned life insurance
                            
                            
                            13,779
                            
                            
                            
                            13,644Payments
      in excess of funding
                            
                            
                            28,150
                            
                            
                            
                            22,637Goodwill
                            
                            
                            7,471
                            
                            
                            
                            7,471Other
      intangible assets, net
                            
                            
                            348
                            
                            
                            
                            375Other
      assets
                            
                            
                            20,510
                            
                            
                            
                            20,839Total
      assets
                            
                            $
                            1,073,161
                            
                            
                            $
                            1,012,981Liabilities
      and Shareholders’ EquityLiabilities:DepositsNoninterest-bearing
                            
                            $
                            116,319
                            
                            
                            $
                            113,151Interest-bearing
                            
                            
                            327,620
                            
                            
                            
                            324,725Total
      deposits
                            
                            
                            443,939
                            
                            
                            
                            437,876Accounts
      and drafts payable
                            
                            
                            479,779
                            
                            
                            
                            430,251Short-term
      borrowings
                            
                            
                            18
                            
                            
                            
                            26Other
      liabilities
                            
                            
                            14,941
                            
                            
                            
                            15,260Total
      liabilities
                            
                            
                            938,677
                            
                            
                            
                            883,413Shareholders’
      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, 2010 and December 31,
      2009
                            
                            
                            4,975
                            
                            
                            
                            4,975Additional
      paid-in capital
                            
                            
                            45,910
                            
                            
                            
                            45,696Retained
      earnings
                            
                            
                            95,835
                            
                            
                            
                            92,401Common
      shares in treasury, at cost (563,920 shares at March 31, 2010 and 564,119
      shares at December 31, 2009)
                            
                            
                            (13,376
                            )
                            
                            
                            (13,323
                            )Accumulated
      other comprehensive income (loss)
                            
                            
                            1,140
                            
                            
                            
                            (181
                            )Total
      shareholders’ equity
                            
                            
                            134,484
                            
                            
                            
                            129,568Total
      liabilities and shareholders’ equity
                            
                            $
                            1,073,161
                            
                            
                            $
                            1,012,981





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 31,2010
                    
                    
                    2009Fee
      Revenue and Other Income:Information
      services payment and processing revenue
                    
                    $
                    12,745
                    
                    
                    $
                    11,944Bank
      service fees
                    
                    
                    341
                    
                    
                    
                    404Gains
      on sales of securities
                    
                    –
                    
                    
                    
                    119Other
                    
                    
                    139
                    
                    
                    
                    135Total
      fee revenue and other income
                    
                    
                    13,225
                    
                    
                    
                    12,602Interest
      Income:Interest
      and fees on loans
                    
                    
                    9,427
                    
                    
                    
                    8,617Interest
      and dividends on securities:Taxable
                    
                    
                    14
                    
                    
                    
                    2Exempt
      from federal income taxes
                    
                    
                    2,098
                    
                    
                    
                    1,858Interest
      on federal funds sold and other short-term investments
                    
                    
                    89
                    
                    
                    
                    16Total
      interest income
                    
                    
                    11,628
                    
                    
                    
                    10,493Interest
      Expense:Interest
      on deposits
                    
                    
                    1,176
                    
                    
                    
                    934Interest
      on short-term borrowings
                    
                    –
                    
                    
                    
                    18Interest
      on subordinated convertible debentures
                    
                    –
                    
                    
                    
                    39Total
      interest expense
                    
                    
                    1,176
                    
                    
                    
                    991Net
      interest income
                    
                    
                    10,452
                    
                    
                    
                    9,502Provision
      for loan losses
                    
                    
                    900
                    
                    
                    
                    400Net
      interest income after provision for loan losses
                    
                    
                    9,552
                    
                    
                    
                    9,102Total
      net revenue
                    
                    
                    22,777
                    
                    
                    
                    21,704Operating
      Expense:Salaries
      and employee benefits
                    
                    
                    12,490
                    
                    
                    
                    12,449Occupancy
                    
                    
                    572
                    
                    
                    
                    615Equipment
                    
                    
                    898
                    
                    
                    
                    841Amortization
      of intangible assets
                    
                    
                    27
                    
                    
                    
                    70Other
      operating
                    
                    
                    2,210
                    
                    
                    
                    2,315Total
      operating expense
                    
                    
                    16,197
                    
                    
                    
                    16,290Income
      before income tax expense
                    
                    
                    6,580
                    
                    
                    
                    5,414Income
      tax expense
                    
                    
                    1,831
                    
                    
                    
                    1,491Net
      Income
                    
                    $
                    4,749
                    
                    
                    $
                    3,923Basic
      Earnings Per Share
                    
                    $
                    .51
                    
                    
                    $
                    .43Diluted
      Earnings Per Share
                    
                    
                    .50
                    
                    
                    
                    .42





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
      31,2010
                  
                  
                  2009Cash
      Flows From Operating Activities:Net
      income
                  
                  $
                  4,749
                  
                  
                  $
                  3,923Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  1,031
                  
                  
                  
                  1,055Gains
      on sales of securities
                  
                  
                  –
                  
                  
                  
                  (119
                  )Provision
      for loan losses
                  
                  
                  900
                  
                  
                  
                  400Stock-based
      compensation expense
                  
                  
                  392
                  
                  
                  
                  308(Decrease)
      increase in income tax liability
                  
                  
                  (649
                  )
                  
                  
                  494Increase
      in pension liability
                  
                  
                  198
                  
                  
                  
                  186Other
      operating activities, net
                  
                  
                  (387
                  )
                  
                  
                  (531
                  )Net
      cash provided by operating activities
                  
                  
                  6,234
                  
                  
                  
                  5,716Cash
      Flows From Investing Activities:Proceeds
      from sales of securities available-for-sale
                  
                  
                  –
                  
                  
                  
                  4,277Proceeds
      from maturities of securities available-for-sale
                  
                  
                  –
                  
                  
                  
                  2,680Purchase
      of securities available-for-sale
                  
                  
                  –
                  
                  
                  
                  (2,877
                  )Net
      increase in loans
                  
                  
                  (23,052
                  )
                  
                  
                  (9,414
                  )Increase
      in payments in excess of funding
                  
                  
                  (5,512
                  )
                  
                  
                  (1,015
                  )Purchases
      of premises and equipment, net
                  
                  
                  (207
                  )
                  
                  
                  (396
                  )Net
      cash used in investing activities
                  
                  
                  (28,771
                  )
                  
                  
                  (6,745
                  )Cash
      Flows From Financing Activities:Net
      increase (decrease) in noninterest-bearing demand deposits
                  
                  
                  3,168
                  
                  
                  
                  (8,383
                  )Net
      (decrease) increase in interest-bearing demand and savings
      deposits
                  
                  
                  (22,573
                  )
                  
                  
                  2,006Net
      increase in time deposits
                  
                  
                  25,468
                  
                  
                  
                  39,680Net
      increase (decrease) in accounts and drafts payable
                  
                  
                  49,528
                  
                  
                  
                  (52,087
                  )Net
      (decrease) increase in short-term borrowings
                  
                  
                  (8
                  )
                  
                  
                  12,857Cash
      dividends paid
                  
                  
                  (1,315
                  )
                  
                  
                  (1,199
                  )Distribution
      of  stock awards, net
                  
                  
                  (251
                  )
                  
                  
                  –Other
      financing activities, net
                  
                  
                  20
                  
                  
                  
                  19Net
      cash provided by (used in) financing activities
                  
                  
                  54,037
                  
                  
                  
                  (7,107
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  31,500
                  
                  
                  
                  (8,136
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  79,294
                  
                  
                  
                  29,485Cash
      and cash equivalents at end of period
                  
                  $
                  110,794
                  
                  
                  $
                  21,349Supplemental
      information:Cash
      paid for interest
                  
                  $
                  1,125
                  
                  
                  $
                  910Cash
      paid for income taxes
                  
                  
                  2,501
                  
                  
                  
                  1,030





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 2009 consolidated financial statements have been reclassified to conform
to the 2010 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, 2009.





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, 2010
                
                
                December 31, 2009(In thousands)
                
                Gross Carrying
                  Amount
                
                
                Accumulated
                  Amortization
                
                
                Gross Carrying
                  Amount
                
                
                Accumulated
                  AmortizationAssets
      eligible for amortization:Software
                
                $
                862
                
                
                $
                (862
                )
                
                $
                862
                
                
                $
                (862
                )Customer
      List
                
                
                750
                
                
                
                (402
                )
                
                
                750
                
                
                
                (375
                )Total
                
                
                1,612
                
                
                
                (1,264
                )
                
                
                1,612
                
                
                
                (1,237
                )Unamortized
      intangible assets:Goodwill
                
                
                7,698
                
                
                
                (227
                )
                
                
                7,698
                
                
                
                (227
                )Total
      unamortized intangibles
                
                
                7,698
                
                
                
                (227
                )
                
                
                7,698
                
                
                
                (227
                )Total
      intangible assets
                
                $
                9,310
                
                
                $
                (1,491
                )
                
                $
                9,310
                
                
                $
                (1,464
                )





Software
is amortized over four to five years and the customer list is amortized over
seven years.  Amortization of intangible assets amounted to $27,000
and $70,000 for the three-month periods ended March 31, 2010 and 2009,
respectively.  Estimated amortization of intangibles over the next
five years is as follows:  $107,000 in 2010, 2011 and 2012, $54,000 in
2013 and $0 in 2014.





Note 3 –
Equity Investments in Non-Marketable Securities





Non-marketable
equity investments in low-income housing projects are included in other assets
on the Company’s consolidated balance sheets.  The total balance of
these investments at March 31, 2010 and December 31, 2009 were $499,000 and
$520,000, respectively.





Note 4 –
Earnings Per Share





Basic
earnings per share are 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.  There were no
antidilutive shares in the three months ended March 31, 2010 or
2009.  The calculations of basic and diluted earnings per share are as
follows:





Three Months Ended
                    March 31,(In thousands, except per share data)
                  
                  2010
                  
                  
                  2009BasicNet
      income
                  
                  $
                  4,749
                  
                  
                  $
                  3,923Weighted-average
      common shares outstanding
                  
                  
                  9,328,697
                  
                  
                  
                  9,135,326Basic
      earnings per share
                  
                  $
                  .51
                  
                  
                  $
                  .43DilutedBasic
      net income
                  
                  $
                  4,749
                  
                  
                  $
                  3,923Net
      income effect of 5.33% convertible debentures
                  
                  
                  –
                  
                  
                  
                  20Diluted
      net income
                  
                  
                  4,749
                  
                  
                  
                  3,943Weighted-average
      common shares outstanding
                  
                  
                  9,328,697
                  
                  
                  
                  9,135,326Effect
      of dilutive restricted stock, stock options and stock appreciation
      rights
                  
                  
                  94,039
                  
                  
                  
                  89,889Effect
      of convertible debentures
                  
                  
                  –
                  
                  
                  
                  153,630Weighted-average
      common shares outstanding assuming dilution
                  
                  
                  9,422,736
                  
                  
                  
                  9,378,845Diluted
      earnings per share
                  
                  $
                  .50
                  
                  
                  $
                  .42




-6-


Note 5 –
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, 2010 and 2009.  As of
March 31, 2010, 180,000 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 6 –
Comprehensive Income





For the
three-month periods ended March 31, 2010 and 2009, 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)
                              
                              2010
                              
                              
                              2009Net
      income
                              
                              $
                              4,749
                              
                              
                              $
                              3,923Other
      comprehensive income:Reclassification
      adjustments for gains included in net income, net of tax
                              
                              
                              –
                              
                              
                              
                              (77
                              )Net
      unrealized gain on securities available-for-sale, net of
    tax
                              
                              
                              1,321
                              
                              
                              
                              4,728Total
      comprehensive income
                              
                              $
                              6,070
                              
                              
                              $
                              8,574





Note 7 –
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, 2009.  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.


-7-





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





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





(In thousands)
                
                Information
                  Services
                
                
                Banking
                  Services
                
                
                Corporate,
                  Eliminations
                  and Other
                
                
                TotalQuarter
      Ended March 31, 2010Total
      Revenues:Revenue
      from customers
                
                $
                17,228
                
                
                $
                5,549
                
                
                $
                ―
                
                
                $
                22,777Intersegment
      income (expense)
                
                
                2,275
                
                
                
                380
                
                
                
                (2,655
                )
                
                
                ―Net
      income
                
                
                2,904
                
                
                
                1,845
                
                
                
                ―
                
                
                
                4,749Goodwill
                
                
                7,335
                
                
                
                136
                
                
                
                ―
                
                
                
                7,471Other
      intangible assets, net
                
                
                348
                
                
                
                –
                
                
                
                ―
                
                
                
                348Total
      assets
                
                
                579,766
                
                
                
                498,105
                
                
                
                (4,710
                )
                
                
                1,073,161Quarter
      Ended March 31, 2009Total
      Revenues:Revenue
      from customers
                
                $
                17,383
                
                
                $
                4,321
                
                
                $
                ―
                
                
                $
                21,704Intersegment
      income (expense)
                
                
                1,615
                
                
                
                357
                
                
                
                (1,972
                )
                
                
                ―Net
      income
                
                
                2,834
                
                
                
                1,089
                
                
                
                ―
                
                
                
                3,923Goodwill
                
                
                7,335
                
                
                
                136
                
                
                
                ―
                
                
                
                7,471Other
      intangible assets, net
                
                
                527
                
                
                
                ―
                
                
                
                ―
                
                
                
                527Total
      assets
                
                
                556,709
                
                
                
                419,592
                
                
                
                (89,031
                )
                
                
                887,270





Note 8 –
Loans by Type





(In thousands)
                
                March 31,
                  2010
                
                
                December 31,
                  2009Commercial
      and industrial
                
                $
                108,243
                
                
                $
                93,371Real
      estate (commercial and church):Mortgage
                
                
                494,523
                
                
                
                469,097Construction
                
                
                57,891
                
                
                
                74,407Industrial
      revenue bonds
                
                
                2,596
                
                
                
                2,676Other
                
                
                1,571
                
                
                
                2,406Total
      loans
                
                $
                664,824
                
                
                $
                641,957





Note 9 –
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, 2010 and December 31, 2009, 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, 2010 the balance of unused loan commitments,
standby and commercial letters of credit were $23,379,000, $15,959,000, and
$2,538,000, 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.


-8-




The
following table summarizes contractual cash obligations of the Company related
to operating lease commitments and time deposits at March 31, 2010:





Amount of Commitment Expiration per Period(In thousands)
                      
                      Total
                      
                      
                      Less than
                        1 year
                      
                      
                      1-3
                        Years
                      
                      
                      3-5
                        Years
                      
                      
                      Over 5
                        YearsOperating
      lease commitments
                      
                      $
                      2,917
                      
                      
                      $
                      877
                      
                      
                      $
                      968
                      
                      
                      $
                      600
                      
                      
                      $
                      472Time
      deposits
                      
                      
                      141,210
                      
                      
                      
                      130,894
                      
                      
                      
                      9,268
                      
                      
                      
                      1,048
                      
                      
                      
                      ―Total
                      
                      $
                      144,127
                      
                      
                      $
                      131,771
                      
                      
                      $
                      10,236
                      
                      
                      $
                      1,648
                      
                      
                      $
                      472





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 10 –
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, 2010, 7,049 restricted shares and 23,311 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, 2010, the total unrecognized compensation expense related to non-vested
common stock was $1,095,000 and the related weighted-average period over which
it is expected to be recognized is approximately 1.1 years.





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





Three Months Ended
                    March 31, 2010Shares
                  
                  
                  Fair ValueBalance
      at December 31, 2009
                  
                  
                  75,965
                  
                  
                  $
                  28.97Granted
                  
                  
                  7,049
                  
                  
                  
                  30.16Vested
                  
                  
                  (34,118
                  )
                  
                  
                  29.99Forfeited
                  
                  
                  –
                  
                  
                  
                  –Balance
      at March 31, 2010
                  
                  
                  48,896
                  
                  
                  $
                  28.43





Stock
Options


Stock
options vest and expire over a period not to exceed seven years.  As
of March 31, 2010, the total unrecognized compensation expense related to
non-vested stock options was $51,000, and the related weighted-average period
over which it is expected to be recognized is approximately 2.3
years.  Following is a summary of the activity of the stock options
during the three-month period ended March 31, 2010:


-9-





Weighted-
                        Average
                      
                      
                      Average
                        Remaining
                      
                      
                      Aggregate
                        IntrinsicExercise
                      
                      
                      Contractual
                      
                      
                      ValueShares
                      
                      
                      Price
                      
                      
                      Term Years
                      
                      
                      (In thousands)Outstanding
      at December 31, 2009
                      
                      
                      44,120
                      
                      
                      $
                      17.65Exercised
                      
                      
                      (1,631
                      )
                      
                      
                      12.82Outstanding
      at March 31, 2010
                      
                      
                      42,489
                      
                      
                      $
                      17.83
                      
                      
                      
                      2.15
                      
                      
                      $
                      565Exercisable
      at March 31, 2010
                      
                      
                      30,048
                      
                      
                      $
                      17.03
                      
                      
                      
                      1.96
                      
                      
                      $
                      424





The total
intrinsic value of options exercised was $29,000, and $231,000, for the
three-month periods ended March 31, 2010 and 2009,
respectively.  Following is a summary of the activity of the
non-vested stock options during the three-month period ended March 31,
2010:





Shares
                  
                  
                  Weighted-
                    Average
                    Grant Date
                    Fair ValueNon-vested
      at December 31, 2009
                  
                  
                  27,586
                  
                  
                  $
                  2.81Vested
                  
                  
                  (15,145
                  )
                  
                  
                  2.70Non-vested
      at March 31, 2010
                  
                  
                  12,441
                  
                  
                  $
                  2.94





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 original grant date.  As of March 31, 2010, the total
unrecognized compensation expense was $895,000 and the related weighted-average
period over which it is expected to be recognized is 1.5
years.  Following is a summary of the activity of the Company’s SARs
program for the three-month period ended March 31, 2010:


Weighted-
                        Average
                      
                      
                      Average
                        Remaining
                      
                      
                      Aggregate
                        IntrinsicExercise
                      
                      
                      Contractual
                      
                      
                      ValueShares
                      
                      
                      Price
                      
                      
                      Term Years
                      
                      
                      (In thousands)Outstanding
      at December 31, 2009
                      
                      
                      231,262
                      
                      
                      $
                      27.02Granted
                      
                      
                      23,311
                      
                      
                      
                      30.16Outstanding
      at March 31, 2010
                      
                      
                      254,573
                      
                      
                      $
                      27.31
                      
                      
                      
                      8.60
                      
                      
                      $
                      979Exercisable
      at March 31, 2010
                      
                      
                      113,372
                      
                      
                      $
                      27.46
                      
                      
                      
                      5.35
                      
                      
                      $
                      418





Following
is a summary of the activity of non-vested SARs during the three-month period
ended March 31, 2010:





Shares
                  
                  
                  Weighted-
                    Average
                    Grant Date
                    Fair ValueNon-vested
      at December 31, 2009
                  
                  
                  195,119
                  
                  
                  $
                  6.74Granted
                  
                  
                  23,311
                  
                  
                  
                  9.12Vested
                  
                  
                  (77,229
                  )
                  
                  
                  6.89Non-vested
      at March 31, 2010
                  
                  
                  141,201
                  
                  
                  $
                  7.06





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 31,2010
                  
                  
                  2009Risk-free
      interest rate
                  
                  
                  3.33
                  %
                  
                  
                  1.94
                  %Expected
      life
                  
                  7
      yrs.
                  
                  
                  7
      yrs.Expected
      volatility
                  
                  
                  30.00
                  %
                  
                  
                  27.00
                  %Expected
      dividend yield
                  
                  
                  1.86
                  %
                  
                  
                  2.02
                  %


-10-





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 11 –
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
                    2010
                  
                  
                  Actual
                    2009Service
      cost – benefits earned during the year
                  
                  $
                  1,796
                  
                  
                  $
                  1,606Interest
      cost on projected benefit obligation
                  
                  
                  2,251
                  
                  
                  
                  2,080Expected
      return on plan assets
                  
                  
                  (2,443
                  )
                  
                  
                  (1,880
                  )Net
      amortization and deferral
                  
                  
                  563
                  
                  
                  
                  873Net periodic pension
      cost
                  
                  $
                  2,167
                  
                  
                  $
                  2,679





Pension
costs recorded to expense were $542,000 and $671,000 for the three-month periods
ended March 31, 2010 and 2009, respectively.  The decrease in pension
costs is primarily due to the asset gain in the year ended December 31,
2009.  The Company made a contribution of $450,000 to the plan during
the three-month period ended March 31, 2010 and expects to contribute at least
an additional $1,350,000 in 2010.





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 2009 and an estimate for 2010:





(In thousands)
                  
                  Estimated
                    2010
                  
                  
                  Actual
                    2009Service
      cost – benefits earned during the year
                  
                  $
                  78
                  
                  
                  $
                  33Interest
      cost on projected benefit obligation
                  
                  
                  315
                  
                  
                  
                  278Net
      amortization
                  
                  
                  257
                  
                  
                  
                  130Net periodic pension
      cost
                  
                  $
                  650
                  
                  
                  $
                  441





Pension
costs recorded to expense were $162,000 and $114,000 for the three-month periods
ended March 31, 2010 and 2009, respectively.





Note 12 –
Income Taxes





During
the first quarter of 2010, unrecognized tax benefits increased by $97,000 and
related accrued interest increased by $12,000.  As of December 31,
2009, the Company’s unrecognized tax benefits were approximately $1,750,000, of
which $1,466,000 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 $401,000 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.  At December 31, 2009, before any tax benefits,
the Company had $147,000 of accrued interest on unrecognized tax
benefits.  There were no penalties for unrecognized tax benefits
accrued at December 31, 2009.





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 2008 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 2008.


-11-





Note 13 –
Investment Securities Available for Sale





Effective
July 1, 2009, the Company adopted FASB ASC 820, “Fair Value Measurements and
Disclosures.”  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, 2010(In thousands)
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair ValueState
      and political subdivisions
                
                $
                212,204
                
                
                $
                13,999
                
                
                $
                20
                
                
                $
                226,183





December 31, 2009(In thousands)
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair ValueState
      and political subdivisions
                
                $
                212,651
                
                
                $
                11,970
                
                
                $
                24
                
                
                $
                224,597





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





March 31, 2010Less than 12 months
                                      
                                      12 months or more
                                      
                                      TotalEstimated
                                      
                                      Unrealized
                                      
                                      Estimated
                                      
                                      Unrealized
                                      
                                      Estimated
                                      
                                      Unrealized(In thousands)
                                      
                                      fair value
                                      
                                      losses
                                      
                                      fair value
                                      
                                      losses
                                      
                                      Fair value
                                      
                                      lossesState and
      political subdivisions
                                      
                                      $
                                      1,415
                                      
                                      
                                      $
                                      20
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      1,415
                                      
                                      
                                      $
                                      20





December 31, 2009Less than 12 months
                  
                  
                  12 months or more
                  
                  
                  TotalEstimated
                  
                  
                  Unrealized
                  
                  
                  Estimated
                  
                  
                  Unrealized
                  
                  
                  Estimated
                  
                  
                  Unrealized(In thousands)
                  
                  fair value
                  
                  
                  losses
                  
                  
                  fair value
                  
                  
                  losses
                  
                  
                  Fair value
                  
                  
                  lossesState and
      political subdivisions
                  
                  $
                  1,415
                  
                  
                  $
                  24
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,415
                  
                  
                  $
                  24





There
were two securities (none greater than 12 months) in an unrealized loss position
as of March 31, 2010.   There were two securities (none greater
than 12 months) in an unrealized loss position as of December 31,
2009.   All unrealized losses were reviewed to determine whether
the losses were other than temporary.  Management believes that all
unrealized losses are temporary since they were market driven, and the Company
has the ability and intent to hold these securities until maturity.





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





March 31, 2010(In thousands)
                  
                  Amortized Cost
                  
                  
                  Fair ValueDue
      in 1 year or less
                  
                  $
                  8,752
                  
                  
                  $
                  8,930Due
      after 1 year through 5 years
                  
                  
                  43,069
                  
                  
                  
                  46,094Due
      after 5 years through 10 years
                  
                  
                  103,024
                  
                  
                  
                  111,401Due
      after 10 years
                  
                  
                  57,359
                  
                  
                  
                  59,758Total
                  
                  $
                  212,204
                  
                  
                  $
                  226,183





The
amortized cost of investment securities pledged to secure public deposits and
for other purposes at March 31, 2010 was $18,207,000.


-12-





Proceeds
from sales of investment securities classified as available for sale were $0 and
$4,277,000 for the first three months of 2010 and 2009,
respectively.  Gross realized gains were $0 and $119,000 for the first
three months of 2010 and 2009, respectively.





Note 14 –
Fair Value of Financial Instruments





Effective
July 1, 2009, the Company adopted FASB ASC 270, “Interim
Reporting.”  Following is a summary of the carrying amounts and fair
values of the Company’s financial instruments:





March 31, 2010
                
                
                December 31, 2009(In thousands)
                
                Carrying
                  Amount
                
                
                Fair Value
                
                
                Carrying
                  Amount
                
                
                Fair ValueBalance
      sheet assets:Cash
      and cash equivalents
                
                $
                110,794
                
                
                $
                110,794
                
                
                $
                79,294
                
                
                $
                79,294Investment
      securities
                
                
                226,183
                
                
                
                226,183
                
                
                
                224,597
                
                
                
                224,597Loans,
      net
                
                
                655,825
                
                
                
                656,774
                
                
                
                633,673
                
                
                
                634,598Accrued
      interest receivable
                
                
                5,245
                
                
                
                5,245
                
                
                
                5,294
                
                
                
                5,294Total
                
                $
                998,047
                
                
                $
                998,996
                
                
                $
                942,858
                
                
                $
                943,783Balance
      sheet liabilities:Deposits
                
                $
                443,939
                
                
                $
                443,939
                
                
                $
                437,876
                
                
                $
                437,876Accounts
      and drafts payable
                
                
                479,779
                
                
                
                479,779
                
                
                
                430,251
                
                
                
                430,251Short-term
      borrowings
                
                
                18
                
                
                
                18
                
                
                
                26
                
                
                
                26Accrued
      interest payable
                
                
                278
                
                
                
                278
                
                
                
                227
                
                
                
                227Total
                
                $
                924,014
                
                
                $
                924,014
                
                
                $
                868,380
                
                
                $
                868,380





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 Company does not
record loans at fair value on a recurring basis other than loans that are
considered impaired.  Once a loan is identified as impaired,
management measures impairment in accordance with FASB ASC 310, “Allowance for
Credit Losses.”  At March 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.  The total principal balance of impaired loans measured at fair
value at March 31, 2010 and December 31, 2009 were $1,000,000 and $1,115,000,
respectively.  The fair value of loans in the above table 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 15 –
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, 2010
and there were no events identified that would require additional disclosures to
prevent the Company’s consolidated financial statements from being
misleading.


-13-





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 includes 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, as those
experienced in early 2010, 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 2009 Annual Report on Form 10-K, a decline in the
general level of interest rates can have a negative impact on net interest
income.





Currently,
management views Cass’ major opportunity as the continued expansion of its
payment and information processing service offering and customer base. While the
current economic slow-down may reduce the short-term growth rate, management
remains optimistic about the long-term prospects for growth.


-14-




Critical
Accounting Policies





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





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





Impairment of
Assets.  The Company periodically evaluates certain long-term
assets such as intangible assets including goodwill, foreclosed assets and
investments in private equity securities and assets held for sale for
impairment.  Generally, these assets are initially recorded at cost,
and recognition of impairment is required when events and circumstances indicate
that the carrying amounts of these assets will not be recoverable in the
future.  If impairment occurs, various methods of measuring impairment
may be called for depending on the circumstances and type of asset, including
quoted market prices, estimates based on similar assets, and estimates based on
valuation techniques such as discounted projected cash flows.  The
Company had no impairment of goodwill and intangible assets for the three months
ended March 31, 2010 or for the fiscal year ended December 31, 2009, and
management does not anticipate any future impairment loss.  Investment
securities available-for-sale are measured at fair value using Level 2
valuations calculated by an independent research firm.  The market
evaluation utilizes several sources which include “observable inputs” rather
than “significant unobservable inputs.” These policies affect both segments of
the Company and require significant management assumptions and estimates that
could result in materially different results if conditions or underlying
circumstances change.





Income Taxes.  The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity's financial statements or tax returns.  Judgment is required in
addressing the future tax consequences of events that have been recognized in
the Company’s financial statements or tax returns such as the realization of
deferred tax assets or changes in tax laws or interpretations
thereof.  In addition, the Company is subject to the continuous
examination of its income tax returns by the Internal Revenue Service and other
taxing authorities.  In accordance with ASC 740, “Income Taxes,” the
Company has unrecognized tax benefits related to tax positions taken or expected
to be taken.  See Note 12 to the financial statements.  The
audit of the Company’s federal consolidated tax returns conducted by the
Internal Revenue Service for fiscal years 2004 and 2005 resulted in no material
adjustments.





Pension Plans.The
amounts recognized in the consolidated financial statements related to pension
plans are determined from actuarial valuations.  Inherent in these
valuations are assumptions, including expected return on plan assets, discount
rates at which the liabilities could be settled at December 31, 2009, rate of
increase in future compensation levels and mortality rates.  These
assumptions are updated annually and are disclosed in Note 11 to the
consolidated financial statements filed with the Company’s Annual Report on Form
10-K for the year ended December 31, 2009.   There have been no
significant changes in the Company’s long-term rate of return assumptions for
the past three fiscal years ended December 31 and management believes they are
not reasonably likely to change in the future. Pursuant to ASC 715,
“Compensation – Retirement Benefits,” the Company has recognized the funded
status of its defined benefit postretirement plan in its statement of financial
position and has recognized changes in that funded status through comprehensive
income.  The funded status is measured as the difference between the
fair value of the plan assets and the benefit obligation as of the date of its
fiscal year-end.




-15-





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, 2010 (“First
Quarter of 2010”) compared to the three-month period ended March 31, 2009
(“First Quarter of 2009”).   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 2009 Annual Report on
Form 10-K. Results of operations for the First Quarter of 2010 are not
necessarily indicative of the results to be attained for any other
period.





Net
Income





The
following table summarizes the Company’s operating results:





First Quarter of(In thousands except per share data)
                        
                        2010
                        
                        
                        2009
                        
                        
                        % ChangeNet
      income
                        
                        $
                        4,749
                        
                        
                        $
                        3,923
                        
                        
                        
                        21.1
                        %Diluted
      earnings per share
                        
                        $
                        .50
                        
                        
                        $
                        .42
                        
                        
                        
                        19.0
                        %Return
      on average assets
                        
                        
                        1.80
                        %
                        
                        
                        1.79
                        %
                        
                        
                        —Return
      on average equity
                        
                        
                        14.71
                        %
                        
                        
                        14.35
                        %
                        
                        
                        —





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)
                    
                    2010
                    
                    
                    2009
                    
                    
                    % ChangeFreight
      Core Invoice Transaction Volume*
                    
                    
                    6,017
                    
                    
                    
                    5,395
                    
                    
                    
                    11.5
                    %Freight
      Invoice Dollar Volume
                    
                    $
                    3,768,941
                    
                    
                    $
                    3,386,740
                    
                    
                    
                    11.3
                    %Utility
      Transaction Volume
                    
                    
                    3,055
                    
                    
                    
                    2,830
                    
                    
                    
                    8.0
                    %Utility
      Transaction Dollar Volume
                    
                    $
                    2,608,099
                    
                    
                    $
                    2,495,697
                    
                    
                    
                    4.5
                    %Payment
      and Processing Fees
                    
                    $
                    12,745
                    
                    
                    $
                    11,944
                    
                    
                    
                    6.7
                    %


*Core
invoices exclude parcel shipments.





First
Quarter of 2010 compared to First Quarter of 2009:





Transportation
and utility transaction volumes were up 12% and 8%, respectively, and dollar
volumes were up 11% and 5%, respectively, due to new business and improved
activity from existing customers.





Bank
service fees decreased $63,000, or 16%, due to a decline in account analysis
fees as more customers chose to pay for services with compensating balances
rather than fees and a decline in fees from the sale of mutual
funds.  Other income increased $4,000, or 3%.  There were no
gains on sales of securities in the First Quarter of 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)
                    
                    2010
                    
                    
                    2009
                    
                    
                    % ChangeAverage
      earnings assets
                    
                    $
                    984,700
                    
                    
                    $
                    803,943
                    
                    
                    
                    22.5
                    %Average
      interest-bearing liabilities
                    
                    
                    323,253
                    
                    
                    
                    203,095
                    
                    
                    
                    59.2
                    %Net
      interest income*
                    
                    
                    11,595
                    
                    
                    
                    10,522
                    
                    
                    
                    10.2
                    %Net
      interest margin*
                    
                    
                    4.78
                    %
                    
                    
                    5.31
                    %
                    
                    
                    —Yield
      on earning assets*
                    
                    
                    5.26
                    %
                    
                    
                    5.81
                    %
                    
                    
                    —Rate
      on interest bearing liabilities
                    
                    
                    1.48
                    %
                    
                    
                    1.98
                    %
                    
                    
                    —


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


-16-





First
Quarter of 2010 compared to First Quarter of 2009:





First
Quarter 2010 average earning assets increased approximately 22% 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 2010 as the general level of interest rates declined; however, the
significant increase in average earning assets caused net interest income to
increase 10%.





Total
average loans increased $56,215,000, or 9%, to $648,448,000 for the First
Quarter of 2010 as compared to the First Quarter of 2009. This increase was
attributable to the continuing successful implementation of new marketing
efforts by the Company’s lending staff.  Average investment securities
increased $21,547,000, or 11%, to $213,284,000.





Total
average interest-bearing deposits for the First Quarter of 2010 increased
$133,552,000, or 70%, to $323,213,000 compared to the First Quarter of
2009.  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 $30,051,000, or
7%, 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.


-17-




First Quarter of 2010
                                            
                                            
                                            First Quarter of 2009(In thousands)
                                            
                                            Average
                                              Balance
                                            
                                            
                                            Interest
                                              Income/
                                              Expense
                                            
                                            
                                            Yield/
                                              Rate
                                            
                                            
                                            Average
                                              Balance
                                            
                                            
                                            Interest
                                              Income/
                                              Expense
                                            
                                            
                                            Yield/
                                              RateAssets1Earning
      assetsLoans2,
      3:Taxable
                                            
                                            $
                                            645,818
                                            
                                            
                                            $
                                            9,402
                                            
                                            
                                            
                                            5.90
                                            %
                                            
                                            $
                                            588,912
                                            
                                            
                                            $
                                            8,580
                                            
                                            
                                            
                                            5.91
                                            %Tax-exempt4
                                            
                                            
                                            2,630
                                            
                                            
                                            
                                            38
                                            
                                            
                                            
                                            5.86
                                            
                                            
                                            
                                            3,321
                                            
                                            
                                            
                                            57
                                            
                                            
                                            
                                            6.91Investment
      securities5:Taxable
                                            
                                            
                                            792
                                            
                                            
                                            
                                            14
                                            
                                            
                                            
                                            7.17
                                            
                                            
                                            
                                            3,559
                                            
                                            
                                            
                                            2
                                            
                                            
                                            
                                            .22Tax-exempt4
                                            
                                            
                                            212,492
                                            
                                            
                                            
                                            3,228
                                            
                                            
                                            
                                            6.16
                                            
                                            
                                            
                                            188,178
                                            
                                            
                                            
                                            2,858
                                            
                                            
                                            
                                            6.16Interest-bearing
      deposits in other financial institutions
                                            
                                            
                                            21,406
                                            
                                            
                                            
                                            13
                                            
                                            
                                            
                                            .25
                                            
                                            
                                            
                                            13,498
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            .24Federal
      funds sold and other short-term investments
                                            
                                            
                                            101,562
                                            
                                            
                                            
                                            76
                                            
                                            
                                            
                                            .30
                                            
                                            
                                            
                                            6,475
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            .50Total
      earning assets
                                            
                                            
                                            984,700
                                            
                                            
                                            
                                            12,771
                                            
                                            
                                            
                                            5.26
                                            
                                            
                                            
                                            803,943
                                            
                                            
                                            
                                            11,513
                                            
                                            
                                            
                                            5.81Non-earning
      assetsCash
      and due from banks
                                            
                                            
                                            9,414
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            9,067Premises
      and equipment, net
                                            
                                            
                                            10,324
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            11,678Bank-owned
      life insurance
                                            
                                            
                                            13,710
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            13,168Goodwill
      and other intangibles
                                            
                                            
                                            7,835
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            8,039Other
      assets
                                            
                                            
                                            54,801
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            48,856Allowance
      for loan losses
                                            
                                            
                                            (8,386
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (6,569
                                            )Total
      assets
                                            
                                            $
                                            1,072,398
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            888,182Liabilities
      and Shareholders’ Equity1Interest-bearing
      liabilitiesInterest-bearing
      demand deposits
                                            
                                            $
                                            169,486
                                            
                                            
                                            $
                                            510
                                            
                                            
                                            
                                            1.22
                                            %
                                            
                                            $
                                            82,085
                                            
                                            
                                            $
                                            302
                                            
                                            
                                            
                                            1.49
                                            %Savings
      deposits
                                            
                                            
                                            24,967
                                            
                                            
                                            
                                            72
                                            
                                            
                                            
                                            1.17
                                            
                                            
                                            
                                            20,281
                                            
                                            
                                            
                                            69
                                            
                                            
                                            
                                            1.38Time
      deposits >=$100
                                            
                                            
                                            49,953
                                            
                                            
                                            
                                            204
                                            
                                            
                                            
                                            1.66
                                            
                                            
                                            
                                            41,516
                                            
                                            
                                            
                                            287
                                            
                                            
                                            
                                            2.80Other
      time deposits
                                            
                                            
                                            78,807
                                            
                                            
                                            
                                            390
                                            
                                            
                                            
                                            2.01
                                            
                                            
                                            
                                            45,779
                                            
                                            
                                            
                                            276
                                            
                                            
                                            
                                            2.45Total
      interest-bearing deposits
                                            
                                            
                                            323,213
                                            
                                            
                                            
                                            1,176
                                            
                                            
                                            
                                            1.48
                                            
                                            
                                            
                                            189,661
                                            
                                            
                                            
                                            934
                                            
                                            
                                            
                                            2.00Short-term
      borrowings
                                            
                                            
                                            40
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            10,443
                                            
                                            
                                            
                                            18
                                            
                                            
                                            
                                            .69Subordinated
      debentures
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            2,991
                                            
                                            
                                            
                                            39
                                            
                                            
                                            
                                            5.33Total
      interest bearing liabilities
                                            
                                            
                                            323,253
                                            
                                            
                                            
                                            1,176
                                            
                                            
                                            
                                            1.48
                                            
                                            
                                            
                                            203,095
                                            
                                            
                                            
                                            991
                                            
                                            
                                            
                                            1.98Non-interest
      bearing liabilitiesDemand
      deposits
                                            
                                            
                                            110,722
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            93,464Accounts
      and drafts payable
                                            
                                            
                                            491,821
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            461,770Other
      liabilities
                                            
                                            
                                            15,661
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            18,963Total
      liabilities
                                            
                                            
                                            941,457
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            777,292Shareholders’
      equity
                                            
                                            
                                            130,941
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            110,890Total
      liabilities and shareholders’ equity
                                            
                                            $
                                            1,072,398
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            888,182Net
      interest income
                                            
                                            
                                            
                                            
                                            
                                            $
                                            11,595
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            10,522Net
      interest margin
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4.78
                                            %
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            5.31
                                            %Interest
      spread
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3.78
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3.83


1.
            Balances
      shown are daily averages.


2.
            For
      purposes of these computations, nonaccrual loans are included in the
      average loan amounts outstanding.  Interest on nonaccrual loans
      is recorded when received as discussed further in Note 1 to the Company’s
      2009 consolidated financial statements, filed with the Company’s 2009
      Annual Report on Form 10-K.


3.
            Interest
      income on loans includes net loan fees of $74,000 and $136,000 for the
      First Quarter of 2010 and 2009,
respectively.


4.
            Interest
      income is presented on a tax-equivalent basis assuming a tax rate of
      35%.  The tax-equivalent adjustment was approximately $1,143,000
      and $1,020,000 for the First Quarter of 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.


-18-




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 2010 Over
                    First Quarter of 2009(In thousands)
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  TotalIncrease
      (decrease) in interest income:Loans1,
      2:Taxable
                  
                  $
                  828
                  
                  
                  $
                  (6
                  )
                  
                  $
                  822Tax-exempt3
                  
                  
                  (11
                  )
                  
                  
                  (8
                  )
                  
                  
                  (19
                  )Investment
      securities:Taxable
                  
                  
                  (3
                  )
                  
                  
                  15
                  
                  
                  
                  12Tax-exempt3
                  
                  
                  369
                  
                  
                  
                  1
                  
                  
                  
                  370Interest-bearing
      deposits in other financial institutions
                  
                  
                  5
                  
                  
                  
                  –
                  
                  
                  
                  5Federal
      funds sold and other short-term investments
                  
                  
                  72
                  
                  
                  
                  (4
                  )
                  
                  
                  68Total
      interest income
                  
                  
                  1,260
                  
                  
                  
                  (2
                  )
                  
                  
                  1,258Interest
      expense on:Interest-bearing
      demand deposits
                  
                  
                  272
                  
                  
                  
                  (64
                  )
                  
                  
                  208Savings
      deposits
                  
                  
                  14
                  
                  
                  
                  (11
                  )
                  
                  
                  3Time
      deposits >=$100
                  
                  
                  50
                  
                  
                  
                  (133
                  )
                  
                  
                  (83
                  )Other
      time deposits
                  
                  
                  171
                  
                  
                  
                  (57
                  )
                  
                  
                  114Short-term
      borrowings
                  
                  
                  (9
                  )
                  
                  
                  (9
                  )
                  
                  
                  (18
                  )Subordinated
      debentures
                  
                  
                  (20
                  )
                  
                  
                  (19
                  )
                  
                  
                  (39
                  )Total
      interest expense
                  
                  
                  478
                  
                  
                  
                  (293
                  )
                  
                  
                  185Net interest income
                  
                  
                  782
                  
                  
                  
                  291
                  
                  
                  
                  1,073


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 $900,000 and $400,000 provision for loan
losses during the First Quarter of 2010 and the First Quarter of 2009,
respectively.  As discussed below, the Company continually analyzes
the outstanding loan portfolio based on the performance, financial condition and
collateralization of the credits.  There were net loan charge-offs of
$185,000 in the First Quarter of 2010 compared to $220,000 for the same period
in 2009.





The
allowance for loan losses at March 31, 2010 was $8,999,000 and at December 31,
2009 was $8,284,000. The ratio of allowance for loan losses to total loans
outstanding at March 31, 2010 was 1.35% compared to 1.29% at December 31,
2009.  Nonperforming loans were $1,392,000, or .21%, of total loans at
March 31, 2010 compared to $1,608,000, or .25%, of total loans at December 31,
2009.  These loans, which are also considered impaired, consisted of
five nonaccrual loans to borrowers with businesses in financial
trouble.   Nonperforming loans at December 31, 2009 also
consisted of five nonaccrual loans.  Total nonperforming loans
increased $478,000 from March 31, 2009.  This increase was primarily
due to the addition of two loans offset by the charge-off of one loan and the
repayment of one loan.





In
addition to the nonperforming loans discussed above, at March 31, 2010, four
loans totaling $3,102,000 not included in the table below were identified by
management as having potential credit problems.  These loans are
excluded from the table due to the fact that they are current under the original
terms of the loans; however, circumstances have raised doubts as to the ability
of the borrowers to comply with the current loan repayment
terms.  These loans are closely monitored by
management.


-19-


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)
                                        
                                        2010
                                        
                                        
                                        2009Allowance
      at beginning of period
                                        
                                        $
                                        8,284
                                        
                                        
                                        $
                                        6,451Provision
      charged to expense
                                        
                                        
                                        900
                                        
                                        
                                        
                                        400Loans
      charged off
                                        
                                        
                                        (200
                                        )
                                        
                                        
                                        (254
                                        )Recoveries
      on loans previously charged off
                                        
                                        
                                        15
                                        
                                        
                                        
                                        34Net
      loans charged off
                                        
                                        
                                        (185
                                        )
                                        
                                        
                                        (220
                                        )Allowance
      at end of period
                                        
                                        $
                                        8,999
                                        
                                        
                                        $
                                        6,631Loans
      outstanding:Average
                                        
                                        $
                                        648,448
                                        
                                        
                                        $
                                        592,233March
      31
                                        
                                        
                                        664,824
                                        
                                        
                                        
                                        601,170Ratio
      of allowance for loan losses to loans outstanding:Average
                                        
                                        
                                        1.39
                                        %
                                        
                                        
                                        1.12
                                        %March
      31
                                        
                                        
                                        1.35
                                        
                                        
                                        
                                        1.10Nonperforming
      loans:Nonaccrual
      loans
                                        
                                        $
                                        1,392
                                        
                                        
                                        $
                                        914Loans
      past due 90 days or more
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Renegotiated
      loans
                                        
                                        
                                        –
                                        
                                        
                                        
                                        –Total
      nonperforming loans
                                        
                                        $
                                        1,392
                                        
                                        
                                        $
                                        914Foreclosed
      assets
                                        
                                        
                                        1,910
                                        
                                        
                                        
                                        2,177Nonperforming
      loans as a % of average loans
                                        
                                        
                                        .21
                                        %
                                        
                                        
                                        .15
                                        %





The Bank
had two properties carried as other real estate owned of $1,910,000 and
$2,177,000 as of March 31, 2010 and 2009, respectively.





Operating
Expense





Total
operating expenses for the First Quarter of 2010 were down $93,000, or 0.6%,
compared to the First Quarter of 2009.





Salaries
and benefits expense for the First Quarter of 2010 increased $41,000, or 0.3%,
compared to the First Quarter of 2009 as higher profit-sharing expense offset
lower payroll and pension costs.





Occupancy
expense for the First Quarter of 2010 decreased $43,000, or 7%, to $572,000 from
the First Quarter of 2009 due to lower maintenance costs.





Equipment
expense for the First Quarter of 2010 increased $57,000, or 7%, compared to the
First Quarter of 2009 due to higher software licensing expenses.





Amortization
of intangible assets was $27,000 and $70,000 for the First Quarter of 2010 and
2009, respectively.  Software from the Profitlab, Inc. acquisition in
2004 was fully amortized during the Third Quarter of 2009.


-20-





Other
operating expenses for the First Quarter of 2010 decreased $105,000, or 5%,
compared to the First Quarter of 2009 due to decreases in promotional, supplies
and outside services expenses.





Income
tax expense for the First Quarter of 2010 increased $340,000, or 23%, compared
to the First Quarter of 2009. The effective tax rate was 27.8% and 27.5% for the
First Quarters of 2010 and 2009, respectively.





Financial
Condition





Total
assets at March 31, 2010 were $1,073,161,000, an increase of $60,180,000, or 6%,
from December 31, 2009.  The most significant changes in asset
balances during this period were an increase of $45,067,000, or 112%, in federal
funds sold and other short-term investments and an increase of $22,867,000 in
loans. 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, 2010 were $938,677,000, an increase of $55,264,000, or
6%, from December 31, 2009.  Total deposits at March 31, 2010 were
$443,939,000, an increase of $6,063,000, or 1%, from December 31,
2009.  Accounts and drafts payable at March 31, 2010 were
$479,779,000, an increase of $49,528,000, or 12%, from December 31,
2009.  Total shareholders’ equity at March 31, 2010 was $134,484,000,
a $4,916,000, or 4%, increase from December 31, 2009.





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 checks
clear and higher balances on days when checks are issued.  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 $4,749,000,
of which $392,000 is from stock-based compensation expense; an increase in other
comprehensive income of $1,321,000; and other miscellaneous activity of
$231,000, offset by dividends paid of $1,315,000 ($.14 per share) and $251,000
for the distribution of stock awards.





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 money market funds, and was $110,794,000 at
March 31, 2010, an increase of $31,500,000, or 40%, from December 31,
2009.  At March 31, 2010, these assets represented 10% 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 $226,183,000 at March 31,
2010, an increase of $1,586,000, or less than one percent, from December 31,
2009.   These assets represented 21% of total assets at March 31,
2010.  Of this total, 100% were state and political subdivision
securities.  Of the total portfolio, 4% mature in one year, 20% mature
in one to five years, and 76% 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 $76,000,000 at the following banks:  Bank of
America, $20,000,000; US Bank, $20,000,000; Wells Fargo Bank, $20,000,000; Frost
National Bank, $10,000,000 and JPM Chase Bank, $6,000,000.  The
Company had secured lines of credit with the Federal Home Loan Bank of
$131,085,000 collateralized by commercial mortgage loans.  The Company
also had a secured federal funds line of credit of $18,783,000 with the Federal
Reserve Bank.  There were no amounts outstanding under any of the
lines of credit discussed above at March 31, 2010 or December 31,
2009.





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 $72,650,000
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.




-21-


Net cash
flows provided by operating activities were $6,234,000 for the First Quarter of
2010 compared with $5,716,000
for the First Quarter of 2009.  This increase is attributable to the
increases in net income of $826,000, provision for loan losses of $500,000, the
impact of $119,000 in security gains in 2009 versus none in 2010 and stock-based
compensation expenses of $84,000, offset by a decrease in income tax liability
of $1,143,000 and the other normal fluctuations in asset and liability accounts
of $132,000.  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 2010, 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 lower 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, 2010
                
                
                December 31, 2009(In thousands)
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital (to risk-weighted assets)Cass
      Information Systems, Inc.
                
                $
                134,524
                
                
                
                16.42
                %
                
                $
                130,187
                
                
                
                16.69
                %Cass
      Commercial Bank
                
                
                52,985
                
                
                
                10.55
                %
                
                
                50,853
                
                
                
                10.34
                %Tier
      I capital (to risk-weighted assets)Cass
      Information Systems, Inc.
                
                $
                125,525
                
                
                
                15.32
                %
                
                $
                121,903
                
                
                
                15.63
                %Cass
      Commercial Bank
                
                
                46,710
                
                
                
                9.30
                %
                
                
                44,864
                
                
                
                9.12
                %Tier
      I capital (to average assets)Cass
      Information Systems, Inc.
                
                $
                125,525
                
                
                
                11.79
                %
                
                $
                121,903
                
                
                
                11.28
                %Cass
      Commercial Bank
                
                
                46,710
                
                
                
                9.55
                %
                
                
                44,864
                
                
                
                8.75
                %





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, 2009, 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, 2010 has changed materially from that at December 31,
2009.





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 2010 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, 2009, a description of a legal proceeding pending in the
United States Bankruptcy Court for the District of Delaware, which proceeding
was initiated by LNT Services, Inc., an affiliate of Linens N’ Things, on
December 19, 2009.  There were no material developments with regard to
this proceeding during the three months ended March 31, 2010.  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 the LNT proceeding, 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, 2009, 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 2009 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 2010.





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
      6, 2010
                By
                /s/ Eric H. BrunngraberEric
      H. BrunngraberPresident
      and Chief Executive Officer(Principal
      Executive Officer)DATE:  May
      6, 2010
                By
                /s/ P. Stephen AppelbaumP.
      Stephen AppelbaumChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




-25-