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 June 30, 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 xNo  ̈





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


Yes  ̈ No  ̈





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





(Check
      one)
            Large
      Accelerated Filer ̈   
          Accelerated Filer x





Non-Accelerated
Filer  ̈      
  Smaller Reporting Company  ̈





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




Yes  ̈No x





The
number of shares outstanding of registrant's only class of stock as of August 3,
2010: Common stock, par value $.50 per share – 9,394,547 shares
outstanding.







TABLE
OF CONTENTS





PART
      I – Financial InformationItem
      1.
                      FINANCIAL
      STATEMENTSConsolidated
      Balance SheetsJune
      30, 2010 (unaudited) and December 31, 2009
                      3Consolidated
      Statements of IncomeThree
      and Six months ended June 30, 2010 and 2009 (unaudited)
                      4Consolidated
      Statements of Cash FlowsSix
      months ended June 30, 2010 and 2009 (unaudited)
                      5Notes
      to Consolidated Financial Statements (unaudited)
                      6Item
      2.
                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
      RESULTS OF OPERATIONS
                      15Item
      3.
                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                      27Item
      4.
                      CONTROLS
      AND PROCEDURES
                      27PART II – Other
      Information – Items 1. – 6.
                      28SIGNATURES
                      29





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,
unless otherwise required by applicable rules.




-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)





June
      30,2010
                            
                            
                            December
      31,(Unaudited)
                            
                            
                            2009AssetsCash
      and due from banks
                            
                            $
                            8,140
                            
                            
                            $
                            5,763Interest-bearing
      deposits in other financial institutions
                            
                            
                            26,040
                            
                            
                            
                            33,426Federal
      funds sold and other short-term investments
                            
                            
                            119,505
                            
                            
                            
                            40,105Cash and cash
      equivalents
                            
                            
                            153,685
                            
                            
                            
                            79,294Securities
      available-for-sale, at fair value
                            
                            
                            232,626
                            
                            
                            
                            224,597Loans
                            
                            
                            680,701
                            
                            
                            
                            641,957Less: Allowance for
      loan losses
                            
                            
                            10,161
                            
                            
                            
                            8,284Loans,
      net
                            
                            
                            670,540
                            
                            
                            
                            633,673Premises
      and equipment, net
                            
                            
                            9,868
                            
                            
                            
                            10,451Investment
      in bank-owned life insurance
                            
                            
                            13,917
                            
                            
                            
                            13,644Payments
      in excess of funding
                            
                            
                            34,800
                            
                            
                            
                            22,637Goodwill
                            
                            
                            7,471
                            
                            
                            
                            7,471Other
      intangible assets, net
                            
                            
                            321
                            
                            
                            
                            375Other
      assets
                            
                            
                            21,940
                            
                            
                            
                            20,839Total
      assets
                            
                            $
                            1,145,168
                            
                            
                            $
                            1,012,981Liabilities
      and Shareholders’ EquityLiabilities:Deposits:Noninterest-bearing
                            
                            $
                            109,691
                            
                            
                            $
                            113,151Interest-bearing
                            
                            
                            354,743
                            
                            
                            
                            324,725Total
      deposits
                            
                            
                            464,434
                            
                            
                            
                            437,876Accounts
      and drafts payable
                            
                            
                            527,278
                            
                            
                            
                            430,251Short-term
      borrowings
                            
                            
                            19
                            
                            
                            
                            26Other
      liabilities
                            
                            
                            15,829
                            
                            
                            
                            15,260Total
      liabilities
                            
                            
                            1,007,560
                            
                            
                            
                            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; 20,000,000shares authorized and
      9,949,324 shares issued at June 30, 2010 and December 31,
      2009
                            
                            
                            4,975
                            
                            
                            
                            4,975Additional
      paid-in capital
                            
                            
                            46,052
                            
                            
                            
                            45,696Retained
      earnings
                            
                            
                            99,421
                            
                            
                            
                            92,401Common
      shares in treasury, at cost (554,777 shares at June 30, 2010 and 564,119
      shares at December 31, 2009)
                            
                            
                            (13,167
                            )
                            
                            
                            (13,323
                            )Accumulated
      other comprehensive income (loss)
                            
                            
                            327
                            
                            
                            
                            (181
                            )Total shareholders’
      equity
                            
                            
                            137,608
                            
                            
                            
                            129,568Total liabilities
      and shareholders’ equity
                            
                            $
                            1,145,168
                            
                            
                            $
                            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
                          June
      30,
                        
                        
                        Six Months Ended
                          June 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Fee
      Revenue and Other Income:Information
      services payment and processing revenue
                        
                        $
                        13,533
                        
                        
                        $
                        12,036
                        
                        
                        $
                        26,278
                        
                        
                        $
                        23,980Bank
      service fees
                        
                        
                        298
                        
                        
                        
                        341
                        
                        
                        
                        639
                        
                        
                        
                        745Gains
      on sales of securities
                        
                        
                        —
                        
                        
                        
                        83
                        
                        
                        
                        —
                        
                        
                        
                        202Other
                        
                        
                        137
                        
                        
                        
                        138
                        
                        
                        
                        276
                        
                        
                        
                        273Total fee revenue and other
      income
                        
                        
                        13,968
                        
                        
                        
                        12,598
                        
                        
                        
                        27,193
                        
                        
                        
                        25,200Interest
      Income:Interest
      and fees on loans
                        
                        
                        9,871
                        
                        
                        
                        8,919
                        
                        
                        
                        19,298
                        
                        
                        
                        17,536Interest
      and dividends on securities:Taxable
                        
                        
                        11
                        
                        
                        
                        16
                        
                        
                        
                        25
                        
                        
                        
                        18Exempt from federal income
      taxes
                        
                        
                        2,151
                        
                        
                        
                        1,761
                        
                        
                        
                        4,249
                        
                        
                        
                        3,619Interest
      on federal funds sold and other short-term investments
                        
                        
                        98
                        
                        
                        
                        28
                        
                        
                        
                        187
                        
                        
                        
                        44Total interest
    income
                        
                        
                        12,131
                        
                        
                        
                        10,724
                        
                        
                        
                        23,759
                        
                        
                        
                        21,217Interest
      Expense:Interest
      on deposits
                        
                        
                        1,199
                        
                        
                        
                        1,235
                        
                        
                        
                        2,375
                        
                        
                        
                        2,169Interest
      on short-term borrowings
                        
                        
                        —
                        
                        
                        
                        5
                        
                        
                        
                        —
                        
                        
                        
                        23Interest
      on subordinated convertible debentures
                        
                        
                        —
                        
                        
                        
                        40
                        
                        
                        
                        —
                        
                        
                        
                        79Total interest
      expense
                        
                        
                        1,199
                        
                        
                        
                        1,280
                        
                        
                        
                        2,375
                        
                        
                        
                        2,271Net interest
    income
                        
                        
                        10,932
                        
                        
                        
                        9,444
                        
                        
                        
                        21,384
                        
                        
                        
                        18,946Provision
      for loan losses
                        
                        
                        1,150
                        
                        
                        
                        300
                        
                        
                        
                        2,050
                        
                        
                        
                        700Net interest income after
      provision for loan losses
                        
                        
                        9,782
                        
                        
                        
                        9,144
                        
                        
                        
                        19,334
                        
                        
                        
                        18,246Total
      net revenue
                        
                        
                        23,750
                        
                        
                        
                        21,742
                        
                        
                        
                        46,527
                        
                        
                        
                        43,446Operating
      Expense:Salaries
      and employee benefits
                        
                        
                        12,683
                        
                        
                        
                        12,730
                        
                        
                        
                        25,173
                        
                        
                        
                        25,179Occupancy
                        
                        
                        611
                        
                        
                        
                        571
                        
                        
                        
                        1,183
                        
                        
                        
                        1,186Equipment
                        
                        
                        916
                        
                        
                        
                        833
                        
                        
                        
                        1,814
                        
                        
                        
                        1,674Amortization
      of intangible assets
                        
                        
                        27
                        
                        
                        
                        70
                        
                        
                        
                        54
                        
                        
                        
                        140Other
      operating
                        
                        
                        2,613
                        
                        
                        
                        2,593
                        
                        
                        
                        4,823
                        
                        
                        
                        4,908Total operating
      expense
                        
                        
                        16,850
                        
                        
                        
                        16,797
                        
                        
                        
                        33,047
                        
                        
                        
                        33,087Income
      before income tax expense
                        
                        
                        6,900
                        
                        
                        
                        4,945
                        
                        
                        
                        13,480
                        
                        
                        
                        10,359Income
      tax expense
                        
                        
                        2,000
                        
                        
                        
                        1,284
                        
                        
                        
                        3,831
                        
                        
                        
                        2,775Net
      Income
                        
                        $
                        4,900
                        
                        
                        $
                        3,661
                        
                        
                        $
                        9,649
                        
                        
                        $
                        7,584Basic
      Earnings Per Share
                        
                        
                        .52
                        
                        
                        
                        .40
                        
                        
                        
                        1.03
                        
                        
                        
                        .83Diluted
      Earnings Per Share
                        
                        
                        .52
                        
                        
                        
                        .39
                        
                        
                        
                        1.02
                        
                        
                        
                        .81





See
accompanying notes to unaudited consolidated financial statements.




-4-




CASS
INFORMATION SYSTEMS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in Thousands)





Six Months Ended
                    June 30,2010
                  
                  
                  2009Cash
      Flows From Operating Activities:Net
      income
                  
                  $
                  9,649
                  
                  
                  $
                  7,584Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation and
      amortization
                  
                  
                  2,068
                  
                  
                  
                  2,044Gains on sales of
      securities
                  
                  
                  —
                  
                  
                  
                  (202
                  )Provision for loan
      losses
                  
                  
                  2,050
                  
                  
                  
                  700Stock-based compensation
      expense
                  
                  
                  746
                  
                  
                  
                  886Decrease in income tax
      liability
                  
                  
                  (1,500
                  )
                  
                  
                  (831
                  )Increase in pension
      liability
                  
                  
                  397
                  
                  
                  
                  442Other operating activities,
      net
                  
                  
                  24
                  
                  
                  
                  1,672Net cash provided by operating
      activities
                  
                  
                  13,434
                  
                  
                  
                  12,295Cash
      Flows From Investing Activities:Proceeds
      from sales of securities available-for-sale
                  
                  
                  —
                  
                  
                  
                  14,591Proceeds
      from maturities of securities available-for-sale
                  
                  
                  1,175
                  
                  
                  
                  5,655Purchase
      of securities available-for-sale
                  
                  
                  (9,324
                  )
                  
                  
                  (2,877
                  )Net
      increase in loans
                  
                  
                  (38,917
                  )
                  
                  
                  (18,969
                  )(Increase)
      decrease in payments in excess of funding
                  
                  
                  (12,163
                  )
                  
                  
                  2,942Purchases
      of premises and equipment, net
                  
                  
                  (529
                  )
                  
                  
                  (548
                  )Net cash (used in) provided
      by  investing activities
                  
                  
                  (59,758
                  )
                  
                  
                  794Cash
      Flows From Financing Activities:Net
      decrease in noninterest-bearing demand deposits
                  
                  
                  (3,460
                  )
                  
                  
                  (2,690
                  )Net
      (decrease) increase in interest-bearing demand and savings
      deposits
                  
                  
                  (10,912
                  )
                  
                  
                  22,011Net
      increase in time deposits
                  
                  
                  40,930
                  
                  
                  
                  64,298Net
      increase (decrease) in accounts and drafts payable
                  
                  
                  97,027
                  
                  
                  
                  (41,829
                  )Net
      decrease in short-term borrowings
                  
                  
                  (7
                  )
                  
                  
                  (296
                  )Cash
      dividends paid
                  
                  
                  (2,629
                  )
                  
                  
                  (2,397
                  )Distribution
      of stock awards, net
                  
                  
                  (251
                  )
                  
                  
                  —Other
      financing activities, net
                  
                  
                  17
                  
                  
                  
                  18Net cash provided by financing
      activities
                  
                  
                  120,715
                  
                  
                  
                  39,115Net
      increase in cash and cash equivalents
                  
                  
                  74,391
                  
                  
                  
                  52,204Cash
      and cash equivalents at beginning of period
                  
                  
                  79,294
                  
                  
                  
                  29,485Cash
      and cash equivalents at end of period
                  
                  $
                  153,685
                  
                  
                  $
                  81,689Supplemental
      information:Cash paid for
      interest
                  
                  $
                  2,340
                  
                  
                  $
                  2,043Cash paid for income
      taxes
                  
                  
                  5,350
                  
                  
                  
                  3,642





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.  Such reclassifications have no effect on
previously reported net income or shareholders’ equity.  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:




June 30, 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
                  
                  
                  
                  (429
                  )
                  
                  
                  750
                  
                  
                  
                  (375
                  )Total
                  
                  
                  1,612
                  
                  
                  
                  (1,291
                  )
                  
                  
                  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
                  
                  
                  $
                  (1,518
                  )
                  
                  $
                  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 $54,000
and $140,000 for the six-month periods ended June 30, 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 June 30, 2010 and December 31, 2009 were $477,000 and
$520,000, respectively.





Note 4 –
Earnings Per Share





Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding.  Diluted earnings per share is
computed by dividing net income, adjusted for the net income effect of the
interest expense on the outstanding convertible debentures, by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of potential common shares outstanding.  There were no
antidilutive shares in the three-month and six-month periods ended June 30, 2010
and 2009.  The calculations of basic and diluted earnings per share
are as follows:




-6-


Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,(In thousands except share and per share
      data)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009BasicNet
      income
                    
                    $
                    4,900
                    
                    
                    $
                    3,661
                    
                    
                    $
                    9,649
                    
                    
                    $
                    7,584Weighted-average
      common shares outstanding
                    
                    
                    9,334,847
                    
                    
                    
                    9,140,944
                    
                    
                    
                    9,331,789
                    
                    
                    
                    9,138,150Basic
      earnings per share
                    
                    $
                    .52
                    
                    
                    $
                    .40
                    
                    
                    $
                    1.03
                    
                    
                    $
                    .83DilutedBasic
      net income
                    
                    $
                    4,900
                    
                    
                    $
                    3,661
                    
                    
                    $
                    9,649
                    
                    
                    $
                    7,584Net income effect of 5.33%
      convertible debentures
                    
                    
                    —
                    
                    
                    
                    21
                    
                    
                    
                    —
                    
                    
                    
                    41Diluted net
income
                    
                    
                    4,900
                    
                    
                    
                    3,682
                    
                    
                    
                    9,649
                    
                    
                    
                    7,625Weighted-average
      common shares outstanding
                    
                    
                    9,334,847
                    
                    
                    
                    9,140,944
                    
                    
                    
                    9,331,789
                    
                    
                    
                    9,138,150Effect
      of dilutive restricted stock, stock options and stock appreciation
      rights
                    
                    
                    107,759
                    
                    
                    
                    141,168
                    
                    
                    
                    100,165
                    
                    
                    
                    115,671Effect
      of convertible debentures
                    
                    
                    —
                    
                    
                    
                    153,630
                    
                    
                    
                    —
                    
                    
                    
                    153,630Weighted-average
      common shares outstanding assuming dilution
                    
                    
                    9,442,606
                    
                    
                    
                    9,435,742
                    
                    
                    
                    9,431,954
                    
                    
                    
                    9,407,451Diluted
      earnings per share
                    
                    $
                    .52
                    
                    
                    $
                    .39
                    
                    
                    $
                    1.02
                    
                    
                    $
                    .81





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 six-month periods ended June 30, 2010 and 2009.  As of June
30, 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 and six-month periods ended June 30, 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
                            June 30,
                          
                          
                          Six Months Ended
                            June 30,(In thousands)
                          
                          2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Net
      income
                          
                          $
                          4,900
                          
                          
                          $
                          3,661
                          
                          
                          $
                          9,649
                          
                          
                          $
                          7,584Other
      comprehensive income:Reclassification
      adjustments for gains included in net income, net of tax
                          
                          
                          —
                          
                          
                          
                          (54
                          )
                          
                          
                          —
                          
                          
                          
                          (131
                          )Net unrealized (loss) gain  on
      securities available-for-sale, net of tax
                          
                          
                          (813
                          )
                          
                          
                          (855
                          )
                          
                          
                          508
                          
                          
                          
                          3,873Total comprehensive income
                          
                          $
                          4,087
                          
                          
                          $
                          2,752
                          
                          
                          $
                          10,157
                          
                          
                          $
                          11,326





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.


-7-





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.





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





(In thousands)
                    
                    Information
                      Services
                    
                    
                    Banking
                      Services
                    
                    
                    Corporate,
                      Eliminations
                      and other
                    
                    
                    TotalThree
      Months Ended June 30, 2010Total Revenues:Revenue from
      customers
                    
                    $
                    18,551
                    
                    
                    $
                    5,199
                    
                    
                    $
                    —
                    
                    
                    $
                    23,750Intersegment
      revenue
                    
                    
                    1,984
                    
                    
                    
                    413
                    
                    
                    
                    (2,397
                    )
                    
                    
                    —Net income
                    
                    
                    3,353
                    
                    
                    
                    1,547
                    
                    
                    
                    —
                    
                    
                    
                    4,900Total assets
                    
                    
                    630,555
                    
                    
                    
                    521,226
                    
                    
                    
                    (6,613
                    )
                    
                    
                    1,145,168Goodwill
                    
                    
                    7,335
                    
                    
                    
                    136
                    
                    
                    
                    —
                    
                    
                    
                    7,471Other intangible assets,
      net
                    
                    
                    321
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    321Three
      Months Ended June 30, 2009Total Revenues:Revenue from
      customers
                    
                    $
                    16,991
                    
                    
                    $
                    4,751
                    
                    
                    $
                    —
                    
                    
                    $
                    21,742Intersegment
      revenue
                    
                    
                    1,732
                    
                    
                    
                    389
                    
                    
                    
                    (2,121
                    )
                    
                    
                    —Net income
                    
                    
                    2,431
                    
                    
                    
                    1,230
                    
                    
                    
                    —
                    
                    
                    
                    3,661Total assets
                    
                    
                    531,935
                    
                    
                    
                    410,090
                    
                    
                    
                    (3,467
                    )
                    
                    
                    938,558Goodwill
                    
                    
                    7,335
                    
                    
                    
                    136
                    
                    
                    
                    —
                    
                    
                    
                    7,471Other intangible assets,
      net
                    
                    
                    457
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    457Six
      Months Ended June 30, 2010Total Revenues:Revenue from
      customers
                    
                    $
                    35,779
                    
                    
                    $
                    10,748
                    
                    
                    $
                    —
                    
                    
                    $
                    46,527Intersegment
      revenue
                    
                    
                    4,259
                    
                    
                    
                    793
                    
                    
                    
                    (5,052
                    )
                    
                    
                    —Net income
                    
                    
                    6,257
                    
                    
                    
                    3,392
                    
                    
                    
                    —
                    
                    
                    
                    9,649Total assets
                    
                    
                    630,555
                    
                    
                    
                    521,226
                    
                    
                    
                    (6,613
                    )
                    
                    
                    1,145,168Goodwill
                    
                    
                    7,335
                    
                    
                    
                    136
                    
                    
                    
                    —
                    
                    
                    
                    7,471Other intangible assets,
      net
                    
                    
                    321
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    321Six
      Months Ended June 30, 2009Total Revenues:Revenue from
      customers
                    
                    $
                    34,374
                    
                    
                    $
                    9,072
                    
                    
                    $
                    —
                    
                    
                    $
                    43,446Intersegment
      revenue
                    
                    
                    3,347
                    
                    
                    
                    746
                    
                    
                    
                    (4,093
                    )
                    
                    
                    —Net income
                    
                    
                    5,265
                    
                    
                    
                    2,319
                    
                    
                    
                    —
                    
                    
                    
                    7,584Total assets
                    
                    
                    531,935
                    
                    
                    
                    410,090
                    
                    
                    
                    (3,467
                    )
                    
                    
                    938,558Goodwill
                    
                    
                    7,335
                    
                    
                    
                    136
                    
                    
                    
                    —
                    
                    
                    
                    7,471Other intangible assets,
      net
                    
                    
                    457
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    457




Note 8 -
Loans by Type





(In
      thousands)
                  
                  June 30, 2010
                  
                  
                  December 31, 2009Commercial
      and industrial
                  
                  $
                  119,454
                  
                  
                  $
                  93,371Real
      estate:  (Commercial and church)Mortgage
                  
                  
                  496,785
                  
                  
                  
                  469,097Construction
                  
                  
                  61,503
                  
                  
                  
                  74,407Industrial
      revenue bonds
                  
                  
                  2,514
                  
                  
                  
                  2,676Other
                  
                  
                  445
                  
                  
                  
                  2,406Total
      loans
                  
                  $
                  680,701
                  
                  
                  $
                  641,957




-8-




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 June 30, 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 June 30, 2010, the balance of unused loan commitments,
standby and commercial letters of credit were $27,570,000, $16,456,000 and
$2,978,000, respectively.  Since some of the financial instruments may
expire without being drawn upon, the total amounts do not necessarily represent
future cash requirements. Commitments to extend credit and letters of credit are
subject to the same underwriting standards as those financial instruments
included on the consolidated balance sheets. The Company evaluates each
customer’s credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of the credit, is based on
management’s credit evaluation of the borrower. Collateral held varies, but is
generally accounts receivable, inventory, residential or income-producing
commercial property or equipment.  In the event of nonperformance, the
Company or its subsidiaries may obtain and liquidate the collateral to recover
amounts paid under its guarantees on these financial instruments.





The
following table summarizes contractual cash obligations of the Company related
to operating lease commitments and time deposits at June 30, 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
                
                $
                2,698
                
                
                $
                793
                
                
                $
                932
                
                
                $
                529
                
                
                $
                444Time
      deposits
                
                
                156,671
                
                
                
                142,200
                
                
                
                13,106
                
                
                
                1,365
                
                
                
                3⁄4Total
                
                $
                159,369
                
                
                $
                142,993
                
                
                $
                14,038
                
                
                $
                1,894
                
                
                $
                444





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 six months ended June 30,
2010, 15,149 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 June
30, 2010, the total unrecognized compensation expense related to non-vested
common stock was $1,153,000 and the related weighted-average period over which
it is expected to be recognized is approximately 1.2 years.




-9-





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





Six Months Ended
                    June 30, 2010Shares
                  
                  
                  Fair ValueBalance
      at December 31, 2009
                  
                  
                  75,965
                  
                  
                  $
                  28.97Granted
                  
                  
                  15,149
                  
                  
                  
                  30.91Vested
                  
                  
                  (40,838
                  )
                  
                  
                  30.25Forfeited
                  
                  
                  —
                  
                  
                  
                  —Balance
      at June 30, 2010
                  
                  
                  50,276
                  
                  
                  $
                  28.51





Stock
Options


Stock
options vest and expire over a period not to exceed seven years.  As
of June 30, 2010, the total unrecognized compensation expense related to
non-vested stock options was $45,000, and the related weighted-average period
over which it is expected to be recognized is approximately 2.1
years.  Following is a summary of the activity of the stock options
during the six-month period ended June 30, 2010:





Shares
                      
                      
                      Weighted-
                        Average
                        Exercise
                        Price
                      
                      
                      Average
                        Remaining
                        Contractual
                        Term Years
                      
                      
                      Aggregate
                        Intrinsic
                        Value
                        (In thousands)Outstanding
      at December 31, 2009
                      
                      
                      44,120
                      
                      
                      $
                      17.65Exercised
                      
                      
                      (3,302
                      )
                      
                      
                      14.10Outstanding
      at June 30, 2010
                      
                      
                      40,818
                      
                      
                      
                      17.93
                      
                      
                      
                      1.95
                      
                      
                      $
                      666Exercisable
      at June 30, 2010
                      
                      
                      28,378
                      
                      
                      $
                      17.12
                      
                      
                      
                      1.78
                      
                      
                      $
                      486





The total
intrinsic value of options exercised was $60,000 and $279,000 for the six-month
periods ended June 30, 2010 and 2009, respectively.  Following is a
summary of the activity of the non-vested stock options during the six-month
period ended June 30, 2010:





Weighted-
                    AverageGrant DateShares
                  
                  
                  Fair ValueNonvested
      at December 31, 2009
                  
                  
                  27,586
                  
                  
                  $
                  2.81Vested
                  
                  
                  (15,146
                  )
                  
                  
                  2.70Forfeited
                  
                  
                  ―
                  
                  
                  
                  ―Nonvested
      at June 30, 2010
                  
                  
                  12,440
                  
                  
                  $
                  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 June 30, 2010, the total
unrecognized compensation expense was $745,000 and the related weighted-average
period over which it is expected to be recognized is 1.2
years.  Following is a summary of the activity of the Company’s SARs
program for the six-month period ended June 30, 2010:





Shares
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price
                    
                    
                    Average
                      Remaining
                      Contractual
                      Term Years
                    
                    
                    Aggregate
                      Intrinsic
                      Value
                      (In thousands)Outstanding
      at December 31, 2009
                    
                    
                    231,262
                    
                    
                    $
                    27.02Granted
                    
                    
                    23,311
                    
                    
                    
                    30.16Exercised
                    
                    
                    (1,012
                    )
                    
                    
                    33.29Forfeited
      or expired
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at June 30, 2010
                    
                    
                    253,561
                    
                    
                    
                    27.31
                    
                    
                    
                    8.35
                    
                    
                    
                    1,760Exercisable
      at June 30, 2010
                    
                    
                    112,360
                    
                    
                    $
                    27.47
                    
                    
                    
                    5.20
                    
                    
                    
                    762




-10-





Following
is a summary of the activity of the nonvested SARs during the six-month period
ended June 30, 2010:





Weighted-
                    AverageGrant
      DateShares
                  
                  
                  Fair ValueNonvested
      at December 31, 2009
                  
                  
                  195,119
                  
                  
                  $
                  6.74Granted
                  
                  
                  23,311
                  
                  
                  
                  9.12Vested
                  
                  
                  (77,229
                  )
                  
                  
                  6.89Nonvested
      at June 30, 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:




Six Months Ended June 30,2010
            
            
            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
            %




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
            
            
            563
            
            
            
            873Net
      periodic pension cost
            
            $
            2,167
            
            
            $
            2,679




Pension
costs recorded to expense were $542,000 and $670,000 for the three-month periods
ended June 30, 2010 and 2009, respectively, and totaled $1,084,000 and
$1,341,000 for the six-month periods ended June 30, 2010 and 2009,
respectively.  The Company made a contribution of $450,000 to the plan
during the three-month period ended June 30, 2010, for a total of $900,000 for
the six-month period ending June 30, 2010 and expects to contribute at least an
additional $900,000 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:


-11-




(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 $168,000 and $113,000 for the three-month periods
ended June 30, 2010 and 2009, respectively, and were $330,000 and $227,000 for
the six-month periods ended June 30, 2010 and 2009, respectively.





Note 12 –
Income Taxes





During
the six months ending June 30, 2010, unrecognized tax benefits increased by
$193,000 and related accrued interest increased by $24,000. 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.





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:





June 30, 2010(In thousands)
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair ValueState
      and political subdivisions
                
                $
                219,898
                
                
                $
                12,752
                
                
                $
                24
                
                
                $
                232,626





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:




June 30, 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
                  
                  $
                  871
                  
                  
                  $
                  24
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  871
                  
                  
                  $
                  24




-12-





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 was
one security (not greater than 12 months) in an unrealized loss position as of
June 30, 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.





June 30, 2010(In thousands)
                  
                  Amortized Cost
                  
                  
                  Fair ValueDue
      in 1 year or less
                  
                  $
                  9,349
                  
                  
                  $
                  9,507Due
      after 1 year through 5 years
                  
                  
                  41,146
                  
                  
                  
                  43,765Due
      after 5 years through 10 years
                  
                  
                  108,001
                  
                  
                  
                  116,101Due
      after 10 years
                  
                  
                  61,402
                  
                  
                  
                  63,253Total
                  
                  $
                  219,898
                  
                  
                  $
                  232,626





The
amortized cost of investment securities pledged to secure public deposits and
for other purposes at June 30, 2010 was $18,149,000.





Proceeds
from sales of investment securities classified as available for sale were $0 and
$10,314,000 for the three months ended June 30, 2010 and 2009, respectively, and
were $0 and $14,591,000 for the six months ended June 30, 2010 and 2009,
respectively.  Gross realized gains were $0 and $83,000 for the three
months ended June 30, 2010 and 2009, respectively, and were $0 and $202,000 for
the six months ended June 30, 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:




June 30, 2010
                  
                  
                  December 31, 2009(In thousands)
                  
                  Carrying
                    Amount
                  
                  
                  Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Fair ValueBalance
      sheet assets:Cash and cash
      equivalents
                  
                  $
                  153,685
                  
                  
                  $
                  153,685
                  
                  
                  $
                  79,294
                  
                  
                  $
                  79,294Investment
    securities
                  
                  
                  232,626
                  
                  
                  
                  232,626
                  
                  
                  
                  224,597
                  
                  
                  
                  224,597Loans, net
                  
                  
                  670,540
                  
                  
                  
                  679,501
                  
                  
                  
                  633,673
                  
                  
                  
                  634,598Accrued interest
      receivable
                  
                  
                  5,448
                  
                  
                  
                  5,448
                  
                  
                  
                  5,294
                  
                  
                  
                  5,294Total
                  
                  $
                  1,062,299
                  
                  
                  $
                  1,071,260
                  
                  
                  $
                  942,858
                  
                  
                  $
                  943,783Balance
      sheet liabilities:Deposits
                  
                  $
                  464,434
                  
                  
                  $
                  464,434
                  
                  
                  $
                  437,876
                  
                  
                  $
                  437,876Accounts and drafts
      payable
                  
                  
                  527,278
                  
                  
                  
                  527,278
                  
                  
                  
                  430,251
                  
                  
                  
                  430,251Short-term
    borrowings
                  
                  
                  19
                  
                  
                  
                  19
                  
                  
                  
                  26
                  
                  
                  
                  26Accrued interest
      payable
                  
                  
                  262
                  
                  
                  
                  262
                  
                  
                  
                  227
                  
                  
                  
                  227Total
                  
                  $
                  991,993
                  
                  
                  $
                  991,993
                  
                  
                  $
                  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:


-13-





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 June 30, 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 June 30, 2010 and December 31, 2009 were $925,000 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 June 30, 2010 and
there were no events identified that would require additional disclosures to
prevent the Company’s consolidated financial statements from being
misleading.




-14-





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





Overview





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





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





Industry-wide
factors that impact the Company include the willingness of large corporations to
outsource key business functions such as freight, utility and telecommunication
payment and audit.  The benefits that can be achieved by outsourcing
transaction processing and the management information generated by Cass’ systems
can be influenced by factors such as the competitive pressures within industries
to improve profitability, the general level of transportation costs,
deregulation of energy costs and consolidation of telecommunication
providers.  Economic factors that impact the Company include the
general level of economic activity that can affect the volume and size of
invoices processed, the ability to hire and retain qualified staff and the
growth and quality of the loan portfolio. As lower levels of economic activity
are encountered, such as those experienced in 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 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
economic slow-down in 2009 reduced the short-term growth rate, management
remains optimistic about the long-term prospects for growth.




-15-




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 or six
month periods ended June 30, 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.





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, 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.





-16-




Results
of Operations




The
following paragraphs more fully discuss the results of operations and changes in
financial condition for the three-month period ended June 30, 2010 (“Second
Quarter of 2010”) compared to the three-month period ended June 30, 2009
(“Second Quarter of 2009”) and the six-month period ended June 30, 2010 (“First
Half of 2010”) compared to the six-month period ended June 30, 2009 (“First Half
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 Second 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:




Second Quarter
                  
                  
                  First Half(In thousands except per share
                    data)
                  
                  2010
                  
                  
                  2009
                  
                  
                  %
                    Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  %
                    ChangeNet
      income
                  
                  $
                  4,900
                  
                  
                  $
                  3,661
                  
                  
                  
                  33.8
                  %
                  
                  $
                  9,649
                  
                  
                  $
                  7,584
                  
                  
                  
                  27.2
                  %Diluted
      earnings per share
                  
                  $
                  .52
                  
                  
                  $
                  .39
                  
                  
                  
                  33.3
                  %
                  
                  $
                  1.02
                  
                  
                  $
                  .81
                  
                  
                  
                  25.9
                  %Return
      on average assets
                  
                  
                  1.77
                  %
                  
                  
                  1.61
                  %
                  
                  
                  —
                  
                  
                  
                  1.78
                  %
                  
                  
                  1.70
                  %
                  
                  
                  —Return
      on average equity
                  
                  
                  14.62
                  %
                  
                  
                  12.74
                  %
                  
                  
                  —
                  
                  
                  
                  14.66
                  %
                  
                  
                  13.52
                  %
                  
                  
                  —




Fee
Revenue and Other Income





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




Second Quarter
                    
                    
                    First Half(In thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    %
                      Change
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    %
                      ChangeFreight
      Core Invoice Transaction Volume*
                    
                    
                    6,716
                    
                    
                    
                    5,716
                    
                    
                    
                    17.5
                    %
                    
                    
                    12,733
                    
                    
                    
                    11,111
                    
                    
                    
                    14.6
                    %Freight
      Invoice Dollar Volume
                    
                    $
                    4,193,903
                    
                    
                    $
                    3,391,822
                    
                    
                    
                    23.6
                    %
                    
                    $
                    7,962,844
                    
                    
                    $
                    6,778,562
                    
                    
                    
                    17.5
                    %Utility
      Transaction Volume
                    
                    
                    3,045
                    
                    
                    
                    2,823
                    
                    
                    
                    7.9
                    %
                    
                    
                    6,100
                    
                    
                    
                    5,653
                    
                    
                    
                    7.9
                    %Utility
      Transaction Dollar Volume
                    
                    $
                    2,451,775
                    
                    
                    $
                    2,263,404
                    
                    
                    
                    8.3
                    %
                    
                    $
                    5,059,874
                    
                    
                    $
                    4,759,101
                    
                    
                    
                    6.3
                    %Payment
      and Processing Fees
                    
                    $
                    13,533
                    
                    
                    $
                    12,036
                    
                    
                    
                    12.4
                    %
                    
                    $
                    26,278
                    
                    
                    $
                    23,980
                    
                    
                    
                    9.6
                    %


*Core
invoices exclude parcel shipments.





Second
Quarter of 2010 compared to Second Quarter of 2009:





Transportation
and utility transaction volumes were up 18% and 8%, respectively, and dollar
volumes were up 24% and 8%, respectively, due to new business and improved
activity for existing customers.





Bank
service fees decreased $43,000, or 13%, due to a decline in account analysis
fees as more customers chose to pay for services with compensating balances
rather than fees as well as a decline in letter of credit fees.  Other
income was approximately the same as the prior period. There were no gains on
sales of securities in the Second Quarter of 2010.





First
Half of 2010 compared to First Half of 2009:





Transportation
and utility transaction volumes were up 15% and 8%, respectively, and dollar
volumes were up 18% and 6%, respectively, due to new business and improved
activity for existing customers.


-17-




Bank
service fees decreased $106,000, or 14%, due to a decrease in account analysis
fees as more customers chose to pay for services with compensating balances
rather than fees as well as a decline inletter of credit
fees.  Other income was approximately the same as the prior
period.  There were no gains on sales of securities in the First Half
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:





Second Quarter
                
                
                First Half(In thousands)
                
                2010
                
                
                2009
                
                
                %
                  Change
                
                
                2010
                
                
                2009
                
                
                %
                  ChangeAverage
      earnings assets
                
                $
                1,017,818
                
                
                $
                831,669
                
                
                
                22.4
                %
                
                $
                1,001,350
                
                
                $
                817,884
                
                
                
                22.4
                %Average
      interest-bearing liabilities
                
                
                334,879
                
                
                
                254,383
                
                
                
                31.6
                %
                
                
                329,098
                
                
                
                228,881
                
                
                
                43.8
                %Net
      interest income*
                
                
                12,103
                
                
                
                10,410
                
                
                
                16.3
                %
                
                
                23,698
                
                
                
                20,932
                
                
                
                13.2
                %Net
      interest margin*
                
                
                4.77
                %
                
                
                5.02
                %
                
                
                —
                
                
                
                4.77
                %
                
                
                5.16
                %
                
                
                —Yield
      on earning assets*
                
                
                5.24
                %
                
                
                5.64
                %
                
                
                —
                
                
                
                5.25
                %
                
                
                5.72
                %
                
                
                —Rate
      on interest-bearing liabilities
                
                
                1.44
                %
                
                
                2.02
                %
                
                
                —
                
                
                
                1.46
                %
                
                
                2.00
                %
                
                
                —


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





Second
Quarter of 2010 compared to Second Quarter of 2009:





Second
Quarter 2010 average earning assets increased 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
16%.





Total
average loans increased $65,188,000, or 11%, to $675,014,000 for the Second
Quarter of 2010 as compared to the Second 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 $38,784,000, or 22%, to $218,362,000, as the Company took advantage of
buying opportunities in the market.





Total
average interest-bearing deposits for the Second Quarter of 2010 increased
$88,131,000, or 36%, to $334,865,000 compared to the Second Quarter of 2009,
primarily due to customers transferring funds from lower-yielding investments at
other institutions.  Accounts and drafts payable increased
$85,171,000, or 20%, as freight and utility payment processing activities
increased.





First
Half of 2010 compared to First Half of 2009:





First
Half of 2010 average earning assets increased 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
13%.





Total
average loans increased $60,727,000, or 10%, to $661,805,000 for the First Half
of 2010 as compared to the First Half 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
$30,213,000, or 16%, to $215,837,000, as the Company took advantage of buying
opportunities in the market.





Total
average interest-bearing deposits for the First Half of 2010 increased
$110,716,000, or 51%, to $329,071,000 compared to the First Half of 2009,
primarily due to customers transferring funds from lower-yielding investments at
other institutions. Accounts and drafts payable increased $57,763,000, or 13%,
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.


-18-





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.


-19-





Second Quarter of 2010
                                                  
                                                  
                                                  Second Quarter of 2009(In thousands)
                                                  
                                                  Average
                                                    Balance
                                                  
                                                  
                                                  Interest
                                                    Income/
                                                    Expense
                                                  
                                                  
                                                  Yield/
                                                    Rate
                                                  
                                                  
                                                  Average
                                                    Balance
                                                  
                                                  
                                                  Interest
                                                    Income/
                                                    Expense
                                                  
                                                  
                                                  Yield/
                                                    RateAssets1Earning
      assets:Loans2,
      3:Taxable
                                                  
                                                  $
                                                  672,465
                                                  
                                                  
                                                  $
                                                  9,848
                                                  
                                                  
                                                  
                                                  5.87
                                                  %
                                                  
                                                  $
                                                  606,645
                                                  
                                                  
                                                  $
                                                  8,884
                                                  
                                                  
                                                  
                                                  5.87
                                                  %Tax-exempt4
                                                  
                                                  
                                                  2,549
                                                  
                                                  
                                                  
                                                  36
                                                  
                                                  
                                                  
                                                  5.66
                                                  
                                                  
                                                  
                                                  3,181
                                                  
                                                  
                                                  
                                                  54
                                                  
                                                  
                                                  
                                                  6.81Debt
      and equity securities5:Taxable
                                                  
                                                  
                                                  890
                                                  
                                                  
                                                  
                                                  11
                                                  
                                                  
                                                  
                                                  4.96
                                                  
                                                  
                                                  
                                                  3,489
                                                  
                                                  
                                                  
                                                  16
                                                  
                                                  
                                                  
                                                  1.84Tax-exempt4
                                                  
                                                  
                                                  217,472
                                                  
                                                  
                                                  
                                                  3,309
                                                  
                                                  
                                                  
                                                  6.10
                                                  
                                                  
                                                  
                                                  176,089
                                                  
                                                  
                                                  
                                                  2,708
                                                  
                                                  
                                                  
                                                  6.17Interest-bearing
      deposits in other financial institutions
                                                  
                                                  
                                                  16,770
                                                  
                                                  
                                                  
                                                  13
                                                  
                                                  
                                                  
                                                  .31
                                                  
                                                  
                                                  
                                                  15,300
                                                  
                                                  
                                                  
                                                  10
                                                  
                                                  
                                                  
                                                  .26Federal
      funds sold and other short-term investments
                                                  
                                                  
                                                  107,672
                                                  
                                                  
                                                  
                                                  85
                                                  
                                                  
                                                  
                                                  .32
                                                  
                                                  
                                                  
                                                  26,965
                                                  
                                                  
                                                  
                                                  18
                                                  
                                                  
                                                  
                                                  .27Total
      earning assets
                                                  
                                                  
                                                  1,017,818
                                                  
                                                  
                                                  
                                                  13,302
                                                  
                                                  
                                                  
                                                  5.24
                                                  
                                                  
                                                  
                                                  831,669
                                                  
                                                  
                                                  
                                                  11,690
                                                  
                                                  
                                                  
                                                  5.64Non-earning
      assets:Cash and due from
      banks
                                                  
                                                  
                                                  10,394
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  9,447Premise and equipment,
      net
                                                  
                                                  
                                                  10,039
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  11,300Bank owned life
      insurance
                                                  
                                                  
                                                  13,857
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  13,303Goodwill and
      otherintangibles
                                                  
                                                  
                                                  7,808
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  7,969Other
      assets
                                                  
                                                  
                                                  62,031
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  47,603Allowance for loan
      losses
                                                  
                                                  
                                                  (9,116
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (6,761
                                                  )Total
      assets
                                                  
                                                  $
                                                  1,112,831
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  914,530Liabilities and
      Shareholders’ Equity1Interest-bearing
      liabilities:Interest-bearing
      demanddeposits
                                                  
                                                  $
                                                  162,721
                                                  
                                                  
                                                  $
                                                  495
                                                  
                                                  
                                                  
                                                  1.22
                                                  %
                                                  
                                                  $
                                                  98,379
                                                  
                                                  
                                                  $
                                                  380
                                                  
                                                  
                                                  
                                                  1.55
                                                  %Savings
      deposits
                                                  
                                                  
                                                  23,996
                                                  
                                                  
                                                  
                                                  71
                                                  
                                                  
                                                  
                                                  1.19
                                                  
                                                  
                                                  
                                                  20,104
                                                  
                                                  
                                                  
                                                  69
                                                  
                                                  
                                                  
                                                  1.38Time deposits >=
      $100
                                                  
                                                  
                                                  55,682
                                                  
                                                  
                                                  
                                                  215
                                                  
                                                  
                                                  
                                                  1.55
                                                  
                                                  
                                                  
                                                  41,543
                                                  
                                                  
                                                  
                                                  276
                                                  
                                                  
                                                  
                                                  2.66Other time
      deposits
                                                  
                                                  
                                                  92,466
                                                  
                                                  
                                                  
                                                  418
                                                  
                                                  
                                                  
                                                  1.81
                                                  
                                                  
                                                  
                                                  86,708
                                                  
                                                  
                                                  
                                                  510
                                                  
                                                  
                                                  
                                                  2.36Total
      interest-bearing deposits
                                                  
                                                  
                                                  334,865
                                                  
                                                  
                                                  
                                                  1,199
                                                  
                                                  
                                                  
                                                  1.44
                                                  
                                                  
                                                  
                                                  246,734
                                                  
                                                  
                                                  
                                                  1,235
                                                  
                                                  
                                                  
                                                  2.01Short-term
      borrowings &
      other
                                                  
                                                  
                                                  14
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  4,658
                                                  
                                                  
                                                  
                                                  5
                                                  
                                                  
                                                  
                                                  1.55
                                                  %Subordinated
      debentures
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  2,991
                                                  
                                                  
                                                  
                                                  40
                                                  
                                                  
                                                  
                                                  1.38Total
      interest bearing liabilities
                                                  
                                                  
                                                  334,879
                                                  
                                                  
                                                  
                                                  1,199
                                                  
                                                  
                                                  
                                                  1.44
                                                  
                                                  
                                                  
                                                  254,383
                                                  
                                                  
                                                  
                                                  1,280
                                                  
                                                  
                                                  
                                                  2.02Non-interest
      bearing liabilities:Demand
      deposits
                                                  
                                                  
                                                  110,343
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  93,977Accounts
      and drafts payable
                                                  
                                                  
                                                  517,113
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  431,942Other
      liabilities
                                                  
                                                  
                                                  16,025
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  18,965Total
      liabilities
                                                  
                                                  
                                                  978,360
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  799,267Shareholders’
      equity
                                                  
                                                  
                                                  134,471
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  115,263Total
      liabilities andshareholders’
      equity
                                                  
                                                  $
                                                  1,112,831
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  914,530Net
      interest income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  12,103
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  10,410Interest
      spread
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3.81
                                                  %
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3.62
                                                  %Net
      interest margin
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  4.77
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  5.02


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 $92,000 and $131,000 for the
      Second 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 $1,171,000
      and $966,000 for the Second 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.


-20-





First Half of 2010
                                                              
                                                              
                                                              First Half of 2009(In thousands)
                                                              
                                                              Average
                                                                Balance
                                                              
                                                              
                                                              Interest
                                                                Income/
                                                                Expense
                                                              
                                                              
                                                              Yield/
                                                                Rate
                                                              
                                                              
                                                              Average
                                                                Balance
                                                              
                                                              
                                                              Interest
                                                                Income/
                                                                Expense
                                                              
                                                              
                                                              Yield/
                                                                RateAssets1Earning
      assets:Loans2,
      3:Taxable
                                                              
                                                              $
                                                              659,216
                                                              
                                                              
                                                              $
                                                              19,250
                                                              
                                                              
                                                              
                                                              5.89
                                                              %
                                                              
                                                              $
                                                              597,827
                                                              
                                                              
                                                              $
                                                              17,464
                                                              
                                                              
                                                              
                                                              5.89
                                                              %Tax-exempt4
                                                              
                                                              
                                                              2,589
                                                              
                                                              
                                                              
                                                              74
                                                              
                                                              
                                                              
                                                              5.76
                                                              
                                                              
                                                              
                                                              3,251
                                                              
                                                              
                                                              
                                                              111
                                                              
                                                              
                                                              
                                                              6.89Debt
      and equity securities5:Taxable
                                                              
                                                              
                                                              841
                                                              
                                                              
                                                              
                                                              25
                                                              
                                                              
                                                              
                                                              5.99
                                                              
                                                              
                                                              
                                                              3,524
                                                              
                                                              
                                                              
                                                              18
                                                              
                                                              
                                                              
                                                              1.03Tax-exempt4
                                                              
                                                              
                                                              214,996
                                                              
                                                              
                                                              
                                                              6,537
                                                              
                                                              
                                                              
                                                              6.13
                                                              
                                                              
                                                              
                                                              182,100
                                                              
                                                              
                                                              
                                                              5,566
                                                              
                                                              
                                                              
                                                              6.16Interest-bearing
      deposits in other financial institutions
                                                              
                                                              
                                                              19,075
                                                              
                                                              
                                                              
                                                              26
                                                              
                                                              
                                                              
                                                              .27
                                                              
                                                              
                                                              
                                                              14,405
                                                              
                                                              
                                                              
                                                              18
                                                              
                                                              
                                                              
                                                              .25Federal
      funds sold and other short-term investments
                                                              
                                                              
                                                              104,633
                                                              
                                                              
                                                              
                                                              161
                                                              
                                                              
                                                              
                                                              .31
                                                              
                                                              
                                                              
                                                              16,777
                                                              
                                                              
                                                              
                                                              26
                                                              
                                                              
                                                              
                                                              .31Total
      earning assets
                                                              
                                                              
                                                              1,001,350
                                                              
                                                              
                                                              
                                                              26,073
                                                              
                                                              
                                                              
                                                              5.25
                                                              
                                                              
                                                              
                                                              817,884
                                                              
                                                              
                                                              
                                                              23,203
                                                              
                                                              
                                                              
                                                              5.72Non-earning
      assets:Cash and due from
      banks
                                                              
                                                              
                                                              9,906
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              9,258Premise and equipment,
      net
                                                              
                                                              
                                                              10,181
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              11,488Bank owned life
      insurance
                                                              
                                                              
                                                              13,784
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              13,235Goodwill and otherintangibles
                                                              
                                                              
                                                              7,822
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              8,004Other assets
                                                              
                                                              
                                                              58,436
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              48,227Allowance for loan
      losses
                                                              
                                                              
                                                              (8,753
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (6,666
                                                              )Total
      assets
                                                              
                                                              $
                                                              1,092,726
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              901,430Liabilities
      and Shareholders’ Equity1Interest-bearing
      liabilities:Interest-bearing
      demanddeposits
                                                              
                                                              $
                                                              166,085
                                                              
                                                              
                                                              $
                                                              1,005
                                                              
                                                              
                                                              
                                                              1.22
                                                              %
                                                              
                                                              $
                                                              90,277
                                                              
                                                              
                                                              $
                                                              682
                                                              
                                                              
                                                              
                                                              1.52
                                                              %Savings deposits
                                                              
                                                              
                                                              24,479
                                                              
                                                              
                                                              
                                                              143
                                                              
                                                              
                                                              
                                                              1.18
                                                              
                                                              
                                                              
                                                              20,192
                                                              
                                                              
                                                              
                                                              138
                                                              
                                                              
                                                              
                                                              1.38Time deposits >=
      $100
                                                              
                                                              
                                                              52,833
                                                              
                                                              
                                                              
                                                              419
                                                              
                                                              
                                                              
                                                              1.60
                                                              
                                                              
                                                              
                                                              41,529
                                                              
                                                              
                                                              
                                                              563
                                                              
                                                              
                                                              
                                                              2.73Other time
    deposits
                                                              
                                                              
                                                              85,674
                                                              
                                                              
                                                              
                                                              808
                                                              
                                                              
                                                              
                                                              1.90
                                                              
                                                              
                                                              
                                                              66,357
                                                              
                                                              
                                                              
                                                              786
                                                              
                                                              
                                                              
                                                              2.39Total
      interest-bearing deposits
                                                              
                                                              
                                                              329,071
                                                              
                                                              
                                                              
                                                              2,375
                                                              
                                                              
                                                              
                                                              1.46
                                                              
                                                              
                                                              
                                                              218,355
                                                              
                                                              
                                                              
                                                              2,169
                                                              
                                                              
                                                              
                                                              2.00Short-term borrowings & other
                                                              
                                                              
                                                              27
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              .75
                                                              
                                                              
                                                              
                                                              7,535
                                                              
                                                              
                                                              
                                                              23
                                                              
                                                              
                                                              
                                                              .62Subordinated
      debentures
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              2,991
                                                              
                                                              
                                                              
                                                              79
                                                              
                                                              
                                                              
                                                              5.33Total
      interest bearing liabilities
                                                              
                                                              
                                                              329,098
                                                              
                                                              
                                                              
                                                              2,375
                                                              
                                                              
                                                              
                                                              1.46
                                                              
                                                              
                                                              
                                                              228,881
                                                              
                                                              
                                                              
                                                              2,271
                                                              
                                                              
                                                              
                                                              2.00Non-interest
      bearing liabilities:Demand deposits
                                                              
                                                              
                                                              110,532
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              93,722Accounts
      and drafts payable
                                                              
                                                              
                                                              504,537
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              446,774Other
liabilities
                                                              
                                                              
                                                              15,844
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              18,965Total
      liabilities
                                                              
                                                              
                                                              960,011
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              788,342Shareholders’
      equity
                                                              
                                                              
                                                              132,715
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              113,088Total
      liabilities andshareholders’
    equity
                                                              
                                                              $
                                                              1,092,726
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              901,430Net
      interest income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              23,698
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              20,932Interest
      spread
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              3.80
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              3.72
                                                              %Net
      interest margin
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              4.77
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5.16


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 $166,000 and $267,000 for the
      First Half 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 $2,314,000
      and $1,986,000 for the First Half 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.


-21-





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.




Second Quarter of 2010 Over
      2009(In thousands)
                      
                      Volume
                      
                      
                      Rate
                      
                      
                      TotalIncrease
      (decrease) in interest income:Loans1,
      2:Taxable
                      
                      $
                      964
                      
                      
                      $
                      0
                      
                      
                      $
                      964Tax-exempt3
                      
                      
                      (10
                      )
                      
                      
                      (8
                      )
                      
                      
                      (18
                      )Debt and equity
      securities:Taxable
                      
                      
                      (18
                      )
                      
                      
                      13
                      
                      
                      
                      (5
                      )Tax-exempt3
                      
                      
                      630
                      
                      
                      
                      (29
                      )
                      
                      
                      601Interest-bearing deposits in
      other financial institutions
                      
                      
                      1
                      
                      
                      
                      2
                      
                      
                      
                      3Federal funds sold and other
      short-term investments
                      
                      
                      63
                      
                      
                      
                      4
                      
                      
                      
                      67Total
      interest income
                      
                      
                      1,630
                      
                      
                      
                      (18
                      )
                      
                      
                      1,612Interest
      expense on:Interest-bearing demand
      deposits
                      
                      
                      209
                      
                      
                      
                      (94
                      )
                      
                      
                      115Savings deposits
                      
                      
                      12
                      
                      
                      
                      (10
                      )
                      
                      
                      2Time deposits of $100 or
      more
                      
                      
                      76
                      
                      
                      
                      (137
                      )
                      
                      
                      (61
                      )Other time
deposits
                      
                      
                      32
                      
                      
                      
                      (124
                      )
                      
                      
                      (92
                      )Short-term borrowings &
      other
                      
                      
                      (2
                      )
                      
                      
                      (3
                      )
                      
                      
                      (5
                      )Subordinated
      debentures
                      
                      
                      (20
                      )
                      
                      
                      (20
                      )
                      
                      
                      (40
                      )Total
      interest expense
                      
                      
                      307
                      
                      
                      
                      (388
                      )
                      
                      
                      (81
                      )Net
      interest income
                      
                      $
                      1,323
                      
                      
                      $
                      370
                      
                      
                      $
                      1,693


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%.





First Half of 2010 Over
2009(In thousands)
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    TotalIncrease
      (decrease) in interest income:Loans1,
      2:Taxable
                    
                    $
                    1,793
                    
                    
                    $
                    (7
                    )
                    
                    $
                    1,786Tax-exempt3
                    
                    
                    (21
                    )
                    
                    
                    (16
                    )
                    
                    
                    (37
                    )Debt and equity
      securities:Taxable
                    
                    
                    (23
                    )
                    
                    
                    30
                    
                    
                    
                    7Tax-exempt3
                    
                    
                    1,000
                    
                    
                    
                    (29
                    )
                    
                    
                    971Interest-bearing deposits in
      other financial institutions
                    
                    
                    6
                    
                    
                    
                    2
                    
                    
                    
                    8Federal funds sold and other
      short-term investments
                    
                    
                    135
                    
                    
                    
                    —
                    
                    
                    
                    135Total
      interest income
                    
                    
                    2,890
                    
                    
                    
                    (20
                    )
                    
                    
                    2,870Interest
      expense on:Interest-bearing demand
      deposits
                    
                    
                    481
                    
                    
                    
                    (158
                    )
                    
                    
                    323Savings deposits
                    
                    
                    27
                    
                    
                    
                    (22
                    )
                    
                    
                    5Time deposits of $100 or
      more
                    
                    
                    128
                    
                    
                    
                    (272
                    )
                    
                    
                    (144
                    )Other time
deposits
                    
                    
                    201
                    
                    
                    
                    (179
                    )
                    
                    
                    22Short-term borrowings &
      other
                    
                    
                    (11
                    )
                    
                    
                    (12
                    )
                    
                    
                    (23
                    )Subordinated
      debentures
                    
                    
                    (40
                    )
                    
                    
                    (39
                    )
                    
                    
                    (79
                    )Total
      interest expense
                    
                    
                    786
                    
                    
                    
                    (682
                    )
                    
                    
                    104Net
      interest income
                    
                    $
                    2,104
                    
                    
                    $
                    662
                    
                    
                    $
                    2,766


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%.




-22-





Provision
and Allowance for Loan Losses





A
significant determinant of the Company's operating results is the provision for
loan losses and the level of loans charged off.  There was a
$1,150,000 and $300,000 provision for loan losses during the Second Quarter of
2010 and the Second Quarter of 2009, respectively.  There was a
$2,050,000 and $700,000 provision for loan losses during the First Half of 2010
and the First Half 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.  The
increases were primarily due to the growth in loan balances of $69,932,000 from
June 30, 2009 to June 30, 2010.  There were net loan recoveries of
$12,000 in the Second Quarter of 2010 compared to $44,000 for the same period in
2009.  There were $173,000 net loan charge-offs in the First Half of
2010 and $176,000 in the First Half of 2009.





The
allowance for loan losses at June 30, 2010 was $10,161,000 and at December 31,
2009 was $8,284,000. The ratio of allowance for loan losses to total loans
outstanding at June 30, 2010 was 1.49% compared to 1.29% at December 31,
2009.  Nonperforming loans were $1,528,000, or .22%, of total loans at
June 30, 2010 compared to $1,608,000, or .25%, of total loans at December 31,
2009.  These loans, which are also considered impaired, consisted of
six loans to borrowers with businesses in financial trouble or in the process of
liquidation.   Nonperforming loans at December 31, 2009 consisted
of five non-accrual loans.  Total nonperforming loans decreased
$439,000 from June 30, 2009 to June 30, 2010.  This change was
primarily due to the charge-off of two loans, full payment of one loan plus the
addition of one loan.





In
addition to the nonperforming loans discussed above, at June 30, 2010, four
loans totaling $3,045,000 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.





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.  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.


-23-





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.





Second Quarter
                
                
                First Half(In thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Allowance
      at beginning of period
                
                $
                8,999
                
                
                $
                6,631
                
                
                $
                8,284
                
                
                $
                6,451Provision
      charged to expense
                
                
                1,150
                
                
                
                300
                
                
                
                2,050
                
                
                
                700Loans charged off
                
                
                —
                
                
                
                —
                
                
                
                (200
                )
                
                
                (254
                )Recoveries on loans previously
      charged off
                
                
                12
                
                
                
                44
                
                
                
                27
                
                
                
                78Net
      loans recovered (charged-off)
                
                
                12
                
                
                
                44
                
                
                
                (173
                )
                
                
                (176
                )Allowance
      at end of period
                
                $
                10,161
                
                
                $
                6,975
                
                
                $
                10,161
                
                
                $
                6,975Loans
      outstanding:Average
                
                $
                675,014
                
                
                $
                609,826
                
                
                $
                661,805
                
                
                $
                601,078June 30
                
                
                680,701
                
                
                
                610,769
                
                
                
                680,701
                
                
                
                610,769Ratio
      of allowance for loan losses to loans outstanding:Average
                
                
                1.51
                %
                
                
                1.14
                %
                
                
                1.54
                %
                
                
                1.16
                %June 30
                
                
                1.49
                
                
                
                1.14
                
                
                
                1.49
                
                
                
                1.14Nonperforming
      loans:Nonaccrual loans
                
                $
                1,528
                
                
                $
                1,411
                
                
                $
                1,528
                
                
                $
                1,411Loans past due 90 days or
      more
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Renegotiated loans
                
                
                —
                
                
                
                556
                
                
                
                —
                
                
                
                556Total nonperforming
      loans
                
                $
                1,528
                
                
                $
                1,967
                
                
                $
                1,528
                
                
                $
                1,967Foreclosed assets
                
                
                1,910
                
                
                
                2,177
                
                
                
                1,910
                
                
                
                2,177Nonperforming
      loans as percentage of average loans
                
                
                .23
                %
                
                
                .32
                %
                
                
                .23
                %
                
                
                .33
                %





The Bank
had two properties carried as other real estate owned of $1,910,000 and
$2,177,000 as of June 30, 2010 and 2009, respectively.





Operating
Expenses





Total
operating expenses for the Second Quarter of 2010 were up less than 1%, or
$53,000 compared to the Second Quarter of 2009.  Total operating
expenses for the First Half of 2010 were down less than 1%, or $40,000 from the
First Half of 2009.





Salaries
and benefits expense for the Second Quarter of 2010 decreased $47,000 to
$12,683,000 compared to the Second Quarter of 2009 and decreased $6,000 to
$25,173,000 for the First Half of 2010 compared to the First Half of
2009.





Occupancy
expense for the Second Quarter of 2010 increased $40,000, or 7%, to $611,000
from the Second Quarter of 2009 and decreased $3,000, or less than 1%, from the
First Half of 2009.





Equipment
expense for the Second Quarter of 2009 increased $83,000, or 10%, compared to
the Second Quarter of 2009 and increased $140,000, or 8%, from the First Half of
2009.





Amortization
of intangible assets was $27,000 and $70,000 for the Second Quarter of 2010 and
2009, respectively, and $54,000 and $140,000 for the First Half of 2010 and
2009, respectively.  Software from the Profitlab, Inc. acquisition in
2004 was fully amortized during the Third Quarter of 2009.





Other
operating expenses for the Second Quarter of 2010 increased $20,000, or 1%,
compared to the Second Quarter of 2009.  Decreases in promotional
expenses were offset by increases in outside service and consulting fees and
telecommunication expense.  Other operating expense decreased $85,000
for the First Half of 2010 compared to the First Half of 2009, primarily due to
FDIC assessments in the First Half of 2009.





Income
tax expense for the Second Quarter of 2010 increased $716,000, or 56%, compared
to the Second Quarter of 2009 and increased $1,056,000 for the First Half of
2010 compared to the First Half of 2009.  The effective tax rate was
29.0% and 26.0% for the Second Quarters of 2010 and 2009, respectively, and was
28.4% and 26.8% for the First Halves of 2010 and 2009,
respectively.  The increases are the result of higher pre-tax income
for the periods and smaller relative increases in tax-exempt investment
income.





Financial
Condition





Total
assets at June 30, 2010 were $1,145,168,000, an increase of $132,187,000, or
13%, from December 31, 2009.  The most significant changes in asset
balances during this period were an increase of $79,400,000, or 198%, in federal
funds sold and other short-term investments and increases of $8,029,000 and
$38,744,000 in securities available for sale and loans, respectively. 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 June 30, 2010 were $1,007,561,000, an increase of $124,147,000,
or 14%, from December 31, 2009.  Total deposits at June 30, 2010 were
$464,434,000, an increase of $26,558,000, or 6%, from December 31,
2009.  Accounts and drafts payable at June 30, 2010 were $527,278,000,
an increase of $97,027,000, or 23%, from December 31, 2009.  Total
shareholders’ equity at June 30, 2010 was $137,608,000, a $8,040,000, or 6%,
increase from December 31, 2009.


-24-





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 $9,649,000,
$746,000 from stock-based compensation expense, an increase in other
comprehensive income of $508,000 offset by dividends paid of $2,629,000 ($.14
per share) and other miscellaneous activity of $234,000.





Liquidity
and Capital Resources





The
balance of liquid assets consists of cash and cash equivalents, which include
cash and due from banks, federal funds sold and money market funds, and was
$153,685,000 at June 30, 2010, an increase of $74,391,000, or 94%, from December
31, 2009.  At June 30, 2010, these assets represented 13% 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 $232,626,000 at June 30,
2010, an increase of $8,029,000 from December 31, 2009.   These
assets represented 20% of total assets at June 30, 2010.  Of this
total, 100% were state and political subdivision securities.  Of the
total portfolio, 4% mature in one year, 19% mature in one to five years, and 77%
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
$135,000,000 collateralized by commercial mortgage loans.  The Company
also had a secured federal funds line of credit of $18,782,000 with the Federal
Reserve Bank.  There were no amounts outstanding under any of the
lines of credit discussed above at June 30, 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 $85,905,000
of CDARS deposits which offer the Bank’s customers the ability to maximize FDIC
insurance coverage.  The Company uses this program to retain or
attract deposits from existing customers.





Net cash
flows provided by operating activities were $13,434,000 for the First Half of
2010 compared with $12,295,000
for the First Half of 2009.  This increase is attributable to the
increases in net income of $2,065,000 and provision for loan losses of
$1,350,000 offset by the income taxes deferred and payable of $669,000 and the
other normal fluctuations in asset and liability accounts.  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.




-25-


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.





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





June 30, 2010
                
                
                December 31, 2009(In thousands)
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital (to risk-weighted assets)Cass Information Systems,
      Inc.
                
                $
                139,650
                
                
                
                16.41
                %
                
                $
                130,187
                
                
                
                16.69
                %Cass Commercial
      Bank
                
                
                54,555
                
                
                
                10.83
                %
                
                
                50,853
                
                
                
                10.34
                %Tier
      I capital (to risk-weighted assets)Cass Information Systems,
      Inc.
                
                $
                129,489
                
                
                
                15.21
                %
                
                $
                121,903
                
                
                
                15.63
                %Cass Commercial
      Bank
                
                
                48,257
                
                
                
                9.58
                %
                
                
                44,864
                
                
                
                9.12
                %Tier
      I capital (to average assets)Cass Information Systems,
      Inc.
                
                $
                129,489
                
                
                
                11.72
                %
                
                $
                121,903
                
                
                
                11.28
                %Cass Commercial
      Bank
                
                
                48,257
                
                
                
                9.64
                %
                
                
                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.




-26-





Impact
of New and Not Yet Adopted Accounting Pronouncements





In July
2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) “Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses”. This guidance requires a
greater level of disaggregated information about the credit quality of financing
receivables and reserves for credit losses, including increased disclosure of
credit quality indicators, past due information, and modifications of financing
receivables. Disclosures regarding activity during a reporting period are
effective for interim and annual reporting periods beginning on or after
December 15, 2010. Adoption of this ASU is not expected to have a material
impact on the Company’s consolidated financial position or results of
operations.





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 June 30, 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 Second 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).




-27-





PART
      II.
            OTHER
      INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS


The
Company and its subsidiaries are not involved in any pending proceedings other
than ordinary routine litigation incidental to its
businesses.  Management believes none of these proceedings, if
determined adversely, would 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 Second 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.




-28-


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:  August
      5, 2010
            By
            /s/ Eric H. BrunngraberEric
      H. BrunngraberPresident
      and Chief Executive Officer(Principal
      Executive Officer)DATE:  August
      5, 2010
            By
            /s/ P. Stephen AppelbaumP.
      Stephen AppelbaumChief
      Financial Officer(Principal
      Financial and Accounting Officer)




-29-