UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

(Mark One)

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

For the Fiscal Year Ended December 31, 2009

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

For the Transition Period From _____ to _____

Commission File Number 000-20827

CASS INFORMATION SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

Missouri		43-1265338
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

13001 Hollenberg Drive, Bridgeton, Missouri		63044		(314) 506-5500
(Address of Principal Executive Offices)		(Zip Code)		(Telephone Number, Incl. Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock par value $.50		The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

		Common Stock Par Value $.50
		(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer: o		Accelerated filer: x		Non-accelerated filer: o		Smaller reporting company: o

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

The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $278,909,000 based on the closing price of the common stock of $32.74 on June 30, 2009, as reported by The Nasdaq Global Select Market. As of March 5, 2010, the Registrant had 9,385,404 shares outstanding of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required for Part III of this report is incorporated by reference from the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

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CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART I.
Item 1. Business			1
Item 1A. Risk Factors			4
Item 1B. Unresolved Staff Comments			8
Item 2. Properties			8
Item 3. Legal Proceedings			8
Item 4. Removed and Reserved			8
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			9
Item 6. Selected Financial Data			10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			28
Item 8. Financial Statements and Supplementary Data			31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			61
Item 9A. Controls and Procedures			61
Item 9B. Other Information			63
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			64
Item 11. Executive Compensation			64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			64
Item 13. Certain Relationships and Related Transactions, and Director Independence			65
Item 14. Principal Accountant Fees and Services			65
PART IV.
Item 15. Exhibits and Financial Statement Schedules			65
Signatures			67

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”. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.

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PART I.

ITEM 1. BUSINESS

Description of Business

Cass Information Systems, Inc. (“Cass” or “The Company”) is a leading provider of payment and information processing services to large manufacturing, distribution and retail enterprises across the United States. The Company provides transportation invoice rating, payment, audit, accounting and transportation information to many of the nation’s largest companies. It is also a processor and payer of utility invoices, including electricity, gas, and other facility related expenses. Additionally, Cass competes in the telecommunications expense management market which includes bill processing, audit and payment services for telephone, data line, cellular and communication equipment expense. Also the Company, through its wholly owned bank subsidiary, Cass Commercial Bank (“the Bank”), provides commercial banking services. The Bank’s primary focus is to support the Company’s payment operations and provide banking services to its target markets, which include privately owned businesses and churches and church-related ministries. Services include commercial and commercial real estate loans, checking, savings and time deposit accounts and other cash management services. The principal offices of the Company are at 13001 Hollenberg Drive, Bridgeton, Missouri 63044. Other operating locations are in Columbus, Ohio, Boston, Massachusetts, Greenville, South Carolina and Wellington, Kansas. The Bank’s headquarters are also located at the Bridgeton location, and the Bank operates five other branches, four in the St. Louis metropolitan area and one in southern California.

Company Strategy and Core Competencies

Cass is an information services company with a primary focus on processing payables and payables-related transactions for large corporations located in the United States. Cass possesses four core competencies that encompass most of its processing services.

Data acquisition – This refers to the gathering of data elements from diverse, heterogeneous sources and the building of complete databases for our customers. Data is the raw material of the information economy. Cass gathers vital data from complex and diverse input documents, electronic media, proprietary databases and data feeds, including data acquired from vendor invoices as well as customer procurement and sales systems. Through its numerous methods of obtaining streams and pieces of raw data, Cass is able to assemble vital data into centralized data management systems and warehouses, thus producing an engine to create the power of information for managing critical corporate functions and processing systems.

Data management – Once data is assembled, Cass is able to utilize the power from derived information to produce significant savings and benefits for its clients. This information is integrated into customers’ unique financial and accounting systems, eliminating the need for internal accounting processing and providing internal and external support for these critical systems. Information is also used to produce management and exception reporting for operational control, feedback, planning assistance and performance measurement.

Business Intelligence – Receiving information in the right place at the right time and in the required format is paramount for business survival. Cass’ information delivery solutions provide reports, digital images, data files and retrieval capabilities through the Internet or directly into customer internal systems. Cass’ proprietary Internet management delivery system is the foundation for driving these critical functions. Transaction, operational, control, status and processing exception information are all delivered through this system creating an efficient, accessible and highly reliable asset for Cass customers.

Financial exchange – Since Cass is unique among its competition in that it owns a commercial bank, it is also able to manage the movement of funds from its customers to their suppliers. This is a distinguishing factor, which clearly requires the processing capability, operating systems and financial integrity of a banking organization. Cass provides immediate, accurate, controlled and protected funds management and transfer system capabilities for all of its customers. Old and costly check processing and delivery mechanisms are replaced with more efficient electronic cash management and funds transfer systems.

Cass’ core competencies allow it to perform the highest levels of transaction processing in an integrated, efficient and systematic approach. Not only is Cass able to process the transaction, it is also able to collect the data defining the transaction and effect the financial payment governing its terms.

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Cass’ shared business processes – Accounting, Human Resources and Technology – support its core competencies. Cass’ accounting function provides the internal control systems to ensure the highest levels of accountability and protection for customers. Cass’ human resources department provides experienced people dedicated to streamlining business procedures and reducing expenses. Cass’ technology is proven and reliable. The need to safeguard data and secure the efficiency, speed and timeliness that govern its business is a priority within the organization. The ability to leverage technology over its strategic units allows Cass the advantage of deploying technology in a proven and reliable manner without hindering clients’ strategic business and system requirements.

These core competencies, enhanced through shared business processes, drive Cass’ strategic business units. Building upon these foundations, Cass continues to explore new business opportunities that leverage these competencies and processes.

Marketing, Customers and Competition

The Company, through its Transportation Information Services business unit, is one of the largest firms in the transportation bill processing and payment industry in the United States based on the total dollars of transportation bills paid and items processed. Competition consists of a few primary competitors and numerous small transportation bill audit firms located throughout the United States. While offering transportation payment services, few of these audit firms compete on a national basis. These competitors compete mainly on price, functionality and service levels. The Company, through its Utility Information Services business unit, also competes with other companies, located throughout the United States, that pay utility bills and provide management reporting. Available data indicates that the Company is one of the largest providers of utility information processing and payment services. Cass’ Utility Information Services is unique among these competitors in that it is not exclusively affiliated with any one energy service provider (“ESP”). The ESPs market the Company’s services adding value with their unique auditing, consulting and technological capabilities. Many of Cass’ services are customized for the ESPs, providing a full-featured solution without any development costs to the ESP. Also the Company, through its Telecom Information Services business unit, is a leader in the growing telecom expense management market, and competes with other companies located throughout the United States in this market.

The Bank is organized as a Missouri trust company with banking powers and was founded in 1906. Due to its ownership of a federally insured commercial bank, the Company is a bank holding corporation and was originally organized in 1982 as Cass Commercial Corporation under the laws of Missouri. It was approved by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) in February 1983. The Company changed its name to Cass Information Systems, Inc. in January 2001. The Company’s bank subsidiary encounters competition from numerous banks and financial institutions located throughout the St. Louis, Missouri metropolitan area and other areas in which the Bank competes. The Bank’s principal competitors, however, are large bank holding companies that are able to offer a wide range of banking and related services through extensive branch networks. The Bank targets its services to privately held businesses located in the St. Louis, Missouri area and church and church-related institutions located in St. Louis, Missouri, Orange County, California and other selected cities located throughout the United States.

The Company holds several trademarks for the payment and rating services it provides. These include: FreightPay®, Transdata®, TransInq®, Ratemaker®, Rate Advice®, First Rate®, Best Rate®, Rate Exchange® and CassPort®. The Company and its subsidiaries are not dependent on any one customer for a significant portion of their businesses. The Company and its subsidiaries have a varied client base with no individual client exceeding 10% of total revenue.

Employees

The Company and its subsidiaries had 646 full-time and 224 part-time employees as of March 2, 2010. Of these employees, the Bank had 61 full-time and two part-time employees.

Supervision and Regulation

The Company and its bank subsidiary are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not shareholders. The Bank is subject to regulation and supervision by the Missouri Division of Finance, the Federal Reserve Bank (the “FRB”) and the Federal

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Deposit Insurance Corporation (the “FDIC”). The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and as such, it is subject to regulation, supervision and examination by the FRB. The Company is required to file quarterly and annual reports with the FRB and to provide to the FRB such additional information as the FRB may require, and it is subject to regular inspections by the FRB. Bank regulatory agencies use Capital Adequacy Guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the agencies may force certain remedial action to be taken. The Capital Adequacy Guidelines are of several types and include risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and account for off-balance sheet exposure; guidelines that consider market risk, which is the risk of loss due to change in value of assets and liabilities due to changes in interest rates; and guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a bank holding company may leverage its equity capital base. For further discussion of the capital adequacy guidelines and ratios, please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, Note 2 of this report.

The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law or regulations or for unsafe or unsound practices. Both the FRB and Missouri Division of Finance also have restrictions on the amount of dividends that banks and bank holding companies may pay.

As a bank holding company, the Company must obtain prior approval from the FRB before acquiring ownership or control of more than 10% of the voting shares of another bank or bank holding company or acquiring all or substantially all of the assets of such a company. In many cases, prior approval is also required for the Company to engage in similar acquisitions involving a non-bank company or to engage in new non-bank activities. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company.

Website Availability of SEC Reports

Cass files annual, quarterly and current reports with the Securities and Exchange Commission (the “SEC”). Cass will, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC, make available free of charge on its website each of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and its definitive proxy statements. The address of Cass’ website is: www.cassinfo.com. All reports filed with the SEC are available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549-0213 or for more information call the Public Reference Room at 1-800-SEC-0330. The SEC also makes all filed reports, proxy statements and information statements available on its website at www.sec.gov.

The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report.

Financial Information about Segments

The services provided by the Company are classified in two reportable segments: Information Services and Banking Services. The revenues from external customers, net income and total assets by segment as of and for the three years ended December 31, 2009, are set forth in Item 8, Note 17 of this report.

Statistical Disclosure by Bank Holding Companies

For the statistical disclosure by bank holding companies refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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ITEM 1A. RISK FACTORS

This section highlights specific risks that could affect the Company’s business. Although this section attempts to highlight key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time, and Cass cannot predict such risks or estimate the extent to which they may affect the Company’s financial performance. In addition to the factors discussed elsewhere or incorporated by reference in this report, the identified risks that could cause actual results to differ materially include the following:

General political, economic or industry conditions may be less favorable than expected.

Local, domestic, and international economic, political and industry-specific conditions and governmental monetary and fiscal policies affect the industries in which the Company competes, directly and indirectly. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors outside of Cass’ control may adversely affect the Company. Economic downturns could result in the delinquency of outstanding loans, which could have a material adverse impact on Cass’ earnings. If the weak global economic conditions persist well into the future, the Company’s financial condition could be negatively impacted.

Unfavorable developments concerning customer credit quality could affect Cass’ financial results.

Although the Company regularly reviews credit exposure related to its customers and various industry sectors in which it has business relationships, default risk may arise from events or circumstances that are difficult to detect or foresee. Under such circumstances, the Company could experience an increase in the level of provision for credit losses, delinquencies, nonperforming assets, net charge-offs and allowance for credit losses.

The Company has lending concentrations, including, but not limited to, churches and church-related entities located in selected cities and privately-held businesses located in or near St. Louis, Missouri, that could suffer a significant decline which could adversely affect the Company.

Cass’ customer base consists, in part, of lending concentrations in several segments and geographical areas. If any of these segments or areas is significantly affected by the general weak economic conditions that currently exist, the Company could experience increased credit losses, and its business could be adversely affected.

Fluctuations in interest rates could affect Cass’ net interest income and balance sheet.

The operations of financial institutions such as the Company are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Prevailing economic conditions, the fiscal and monetary policies of the federal government and the policies of various regulatory agencies all affect market rates of interest, which in turn significantly affect financial institutions’ net interest income. Fluctuations in interest rates affect Cass’ financial statements, as they do for all financial institutions. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal government and corporate securities and other investment vehicles, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a continuation of the current low level of interest rates would have a negative impact on the Company’s net interest income.

Methods of reducing risk exposures might not be effective.

Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, interest rate, market and liquidity, operational, regulatory/compliance, business risks and enterprise-wide risks could be less effective than anticipated. As a result, the Company may not be able to effectively mitigate its risk exposures in particular market environments or against particular types of risk.

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Customer borrowing, repayment, investment, deposit, and payable processing practices may be different than anticipated.

The Company uses a variety of financial tools, models and other methods to anticipate customer behavior as part of its strategic and financial planning and to meet certain regulatory requirements. Individual, economic, political, industry-specific conditions and other factors outside of Cass’ control could alter predicted customer borrowing, repayment, investment, deposit, and payable processing practices. Such a change in these practices could adversely affect Cass’ ability to anticipate business needs, including cash flow and its impact on liquidity, and to meet regulatory requirements.

Cass must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.

If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, the Company’s existing product and service offerings, technology and systems may become obsolete. Further, if Cass fails to adopt or develop new technologies or to adapt its products and services to emerging industry standards, Cass may lose current and future customers, which could have a material adverse effect on its business, financial condition and results of operations. The payment processing and financial services industries are changing rapidly and in order to remain competitive, Cass must continue to enhance and improve the functionality and features of its products, services and technologies. These changes may be more difficult or expensive than the Company anticipates.

Operational difficulties or security problems could damage Cass’ reputation and business.

The Company depends on the reliable operation of its computer operations and network connections from its clients to its systems. Any operational problems or outages in these systems would cause Cass to be unable to process transactions for its clients, resulting in decreased revenues. In addition, any system delays, failures or loss of data, whatever the cause, could reduce client satisfaction with the Company’s products and services and harm Cass’ financial results. Cass also depends on the security of its systems. Company networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A material security problem affecting Cass could damage its reputation, deter prospects from purchasing its products, deter customers from using its products or result in liability to Cass.

Cass’ stock price can become volatile and fluctuate widely in response to a variety of factors.

The Company’s stock price can fluctuate based on factors that can include actual or anticipated variations in Cass’ quarterly results; new technology or services by competitors; unanticipated losses or gains due to unexpected events, including losses or gains on securities held for investment purposes; significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; changes in accounting policies or practices; failure to integrate acquisitions or realize anticipated benefits from acquisitions; or changes in government regulations.

General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or recessions, governmental intervention, interest rate changes, credit loss trends, low trading volume or currency fluctuations also could cause Cass’ stock price to decrease regardless of the Company’s operating results.

Competitive product and pricing pressure within Cass’ markets may change.

The Company operates in a very competitive environment, which is characterized by competition from a number of other vendors and financial institutions in each market in which it operates. The Company competes with large payment processors and national and regional financial institutions and also smaller auditing companies and banks in terms of products and pricing. If the Company is unable to compete effectively in products and pricing in its markets, business could decline.

Management’s ability to maintain and expand customer relationships may differ from expectations.

The industries in which the Company operates are very competitive. The Company not only competes for business opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers. The Company continues to experience pressures to maintain these relationships as its competitors attempt to capture its customers.

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The introductions, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the expansion of payment and processing activities to new markets, the expansion of products and services to existing markets and opening of new bank branches, may be less successful or may be different than anticipated. Such a result could adversely affect Cass’ business.

The Company makes certain projections as a basis for developing plans and strategies for its payment processing and banking products. If the Company does not accurately determine demand for its products and services, it could result in the Company incurring significant expenses without the anticipated increases in revenue, which could result in an adverse effect on its earnings.

Management’s ability to retain key officers and employees may change.

Cass’ future operating results depend substantially upon the continued service of Cass’ executive officers and key personnel. Cass’ future operating results also depend in significant part upon Cass’ ability to attract and retain qualified management, financial, technical, marketing, sales and support personnel. Competition for qualified personnel is intense, and the Company cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire personnel over time. Cass’ business, financial condition and results of operations could be materially adversely affected by the loss of any of its key employees, by the failure of any key employee to perform in his or her current position, or by Cass’ inability to attract and retain skilled employees.

Changes in regulation or oversight may have a material adverse impact on Cass’ operations.

The Company is subject to extensive regulation, supervision and examination by the Missouri Division of Finance, the FDIC, the FRB, the SEC and other regulatory bodies. Such regulation and supervision governs the activities in which the Company may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on Cass’ operations, investigations and limitations related to Cass’ securities, the classification of Cass’ assets and determination of the level of Cass’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on Cass’ operations.

Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving the Company and its subsidiaries, could adversely affect Cass or the financial services industry in general.

The Company is subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these matters, and there can be no assurance that the Company will prevail in any proceeding or litigation. Any such matter could result in substantial cost and diversion of Cass’ efforts, which by itself could have a material adverse effect on Cass’ financial condition and operating results. Further, adverse determinations in such matters could result in actions by Cass’ regulators that could materially adversely affect Cass’ business, financial condition or results of operations. Please refer to Item 3, “Legal Proceedings.”

The Company’s accounting policies and methods are the basis of how Cass reports its financial condition and results of operations, and they require management to make estimates about matters that are inherently uncertain. In addition, changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact Cass’ financial statements.

The Company’s accounting policies and methods are fundamental to how Cass records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report Cass’ financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Company reporting materially different amounts than would have been reported under a different alternative.

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Cass has identified four accounting policies as being “critical” to the presentation of its financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. More information on Cass’ critical accounting policies is contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

From time to time, the regulatory agencies, the Financial Accounting Standards Board (“FASB”), and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how management records and reports the Company’s financial condition and results of operations.

Cass is subject to examinations and challenges by tax authorities, which, if not resolved in the Company’s favor, could adversely affect the Company’s financial condition and results of operations.

In the normal course of business, Cass and its affiliates are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which it is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an adverse effect on Cass’ financial condition and results of operations.

There could be terrorist activities or other hostilities, which may adversely affect the general economy, financial and capital markets, specific industries, and the Company.

The terrorist attacks in September 2001 in the United States and ensuing events, as well as the resulting decline in consumer confidence, had a material adverse effect on the economy. Any similar future events may disrupt Cass’ operations or those of its customers. In addition, these events had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm Cass’ operations. Any of these events could increase volatility in the U.S. and world financial markets, which could harm Cass’ stock price and may limit the capital resources available to its customers and the Company. This could have a significant impact on Cass’ operating results, revenues and costs and may result in increased volatility in the market price of Cass’ common stock.

There could be natural disasters, including, but not limited to, hurricanes, tornadoes, earthquakes, fires and floods, which may adversely affect the general economy, financial and capital markets, specific industries, and the Company.

The Company has significant operations and customer base in Missouri, California, Ohio, Massachusetts, South Carolina, and other regions where natural disasters may occur. These regions are known for being vulnerable to natural disasters and other risks, such as tornadoes, hurricanes, earthquakes, fires and floods. These types of natural disasters at times have disrupted the local economy, Cass’ business and customers and have posed physical risks to Cass’ property. A significant natural disaster could materially affect Cass’ operating results.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company’s headquarters are located at 13001 Hollenberg Drive, Bridgeton, Missouri. This location is owned by the Company, and includes a building with approximately 61,500 square feet of office space. The Company also owns a production facility of approximately 45,500 square feet located at 2675 Corporate Exchange Drive, Columbus, Ohio. Additional facilities are located in Lowell, Massachusetts where approximately 25,800 square feet of office space is leased through March 2011, Greenville, South Carolina where approximately 8,500 square feet of office space is leased through November 2013, Wellington, Kansas where approximately 2,000 square feet of office space is leased through July 2011 and Columbus, Ohio where approximately 8,500 square feet of office space is leased through March 2013.

The Bank’s headquarters are also located at 13001 Hollenberg Drive, Bridgeton, Missouri. The Bank occupies approximately 20,500 square feet of the 61,500 square foot building. In addition, the Bank owns a banking facility near downtown St. Louis, Missouri that consists of approximately 1,750 square feet with adjoining drive-up facilities. The Bank has additional leased facilities in Maryland Heights, Missouri (2,500 square feet), Fenton, Missouri (2,000 square feet), Chesterfield, Missouri (2,850 square feet) and Santa Ana, California (3,400 square feet).

Management believes that these facilities are suitable and adequate for the Company’s operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is the defendant in a proceeding pending in the United States Bankruptcy Court for the District of Delaware, which proceeding was initiated by Chapter 11 debtor LNT Services, Inc. (“LNT”), an affiliate of Linens N’ Things, on December 19, 2009. The LNT Chapter 11 bankruptcy proceeding was subsequently converted to a Chapter 7 proceeding. Pursuant to Section 547 of the United States Bankruptcy Code, the LNT bankruptcy trustee, on behalf of LNT, seeks to avoid and recover $33,825,773.71 in allegedly preferential payments (“the Payments”) made to the Company. The Payments were received by the Company in the normal course of providing services to Linens N’ Things. The Company had been engaged under contract with Linens N’ Things to audit, process, and pay its freight carrier invoices. Accordingly, the Payments made to the Company were subsequently paid to the appropriate Linens N’ Things’ freight carriers as specified in the contract. While there is some uncertainty relating to any litigation, management is of the opinion that the Company has valid defenses to this claim.

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

ITEM 4. (REMOVED AND RESERVED)

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PART II.

The Company’s common stock is quoted on The Nasdaq Global Select Market® under the symbol “CASS.” As of March 1, 2010, there were 168 holders of record of the Company’s common stock. High and low sale prices, as reported by The Nasdaq Global Select Market for each quarter of 2009 and 2008 were as follows:

		2009								2008
		High				Low				High				Low
1st Quarter		$	33.60			$	23.20			$	34.87			$	25.01
2nd Quarter			35.35				29.75				34.71				29.40
3rd Quarter			36.19				29.51				39.15				29.00
4th Quarter			31.39				27.46				36.50				27.14

The Company has continuously paid regularly scheduled cash dividends since 1934 and expects to continue to pay quarterly cash dividends in the future. Cash dividends paid per share by the Company during the two most recent fiscal years were as follows:

		2009				2008
March		$	.130			$	.120
June			.130				.120
September			.130				.120
December			.140				.130

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 in 2009 and repurchased 120,000 shares for $3,984,000 in 2008. As of December 31, 2009, 180,000 shares remained available for repurchase under the program. A portion of the repurchased shares may be used for the Company's employee benefit plans, and the balance will be available for other general corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt, current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.

Performance Quoted on The Nasdaq Stock Market for the last Five Fiscal Years

The following graph compares the cumulative total returns over the last five fiscal years of a hypothetical investment of $100 in shares of common stock of the Company with a hypothetical investment of $100 in The Nasdaq Stock Market (US) (“Nasdaq”) and in the index of Nasdaq computer and data processing stocks. The graph assumes $100 was invested on December 31, 2004, with dividends reinvested. Returns are based on period end prices.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial information for each of the five years ended December 31. The selected financial data should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Item 8 of this report.

(In thousands except per share data)		2009				2008				2007				2006				2005
Fee revenue and other income		$	51,238			$	53,170			$	48,200			$	42,821			$	38,653
Interest income on loans			36,003				34,204				36,288				36,164				32,214
Interest income on debt and equity securities			7,611				7,716				5,531				3,627				2,441
Other interest income			170				2,218				7,527				7,262				3,596
Total interest income			43,784				44,138				49,346				47,053				38,251
Interest expense on deposits			4,924				3,179				7,728				6,414				4,486
Interest expense on short-term borrowings			23				12				6				7				5
Interest on debentures and other			106				187				230				198				196
Total interest expense			5,053				3,378				7,964				6,619				4,687
Net interest income			38,731				40,760				41,382				40,434				33,564
Provision for loan losses			2,050				2,200				900				1,150				775
Net interest income after provision			36,681				38,560				40,482				39,284				32,789
Operating expense			66,385				65,564				62,739				58,277				55,216
Income before income tax expense			21,534				26,166				25,943				23,828				16,226
Income tax expense			5,405				7,160				8,148				8,367				4,982
Income from continuing operations		$	16,129			$	19,006			$	17,795			$	15,461			$	11,244
Net loss from discontinued operations			—				—				—				(395	)			(298	)
Net income			16,129				19,006				17,795				15,066				10,946
Diluted earnings per share from continuing operations		$	1.73			$	2.03			$	1.90			$	1.65			$	1.21
Diluted earnings per share			1.73				2.03				1.90				1.61				1.17
Dividends per share			.530				.490				.447				.400				.352
Dividend payout ratio			30.54	%			24.14	%			23.53	%			24.84	%			29.24	%
Average total assets		$	978,171			$	922,471			$	891,734			$	839,208			$	776,899
Average net loans			606,304				546,110				508,621				516,164				506,898
Average debt and equity securities			193,393				197,273				141,363				91,555				71,037
Average total deposits			375,572				241,844				279,831				278,546				290,555
Average subordinated convertible debentures			1,984				3,669				3,699				3,700				3,700
Average total shareholders’ equity			117,663				104,185				89,427				79,736				71,892
Return on average total assets			1.65	%			2.06	%			2.00	%			1.80	%			1.41	%
Return on average equity			13.71				18.24				19.90				18.89				15.23
Average equity to assets ratio			12.03				11.29				10.03				9.50				9.25
Equity to assets ratio at year-end			12.79				12.00				11.01				9.78				9.20
Net interest margin			4.79				5.34				5.45				5.50				4.95
Allowance for loan losses to loans at year-end			1.29				1.09				1.26				1.31				1.19
Nonperforming assets to loans and foreclosed assets			.55				.57				.77				.16				.28
Net loan charge-offs to average loans outstanding			.04				.37				.24				.16				.10

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The following discussion and analysis provides information about the financial condition and results of operations of the Company for the years ended December 31, 2009, 2008 and 2007. All share and per share data have been restated to give effect to the 10% stock dividend issued on December 17, 2007. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and other selected financial data presented elsewhere in this report.

Executive Overview

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

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

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as transportation, utility and telecommunication payment and audit. The benefits that can be achieved by outsourcing transaction processing and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff and the growth and quality of the loan portfolio. As lower levels of economic activity are encountered, such as those experienced in 2009, the number and total dollar amount of transactions processed by the Company may decline thereby reducing fee revenue, interest income, and possibly liquidity. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in

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greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a decline in the general level of interest rates can have a negative impact on net interest income.

Total fee revenue and other income in 2009 decreased $1,932,000, or 4%, and net interest income after provision for loan losses decreased $1,879,000, or 5%, while total operating expenses increased $821,000, or 1%. These results were driven by a 1,797,000, or 5%, decrease in items processed and $3,183,084,000, or 12%, decrease in dollars processed, plus the decline in the general level of interest rates. The asset quality of the Company’s loans and investments appears strong.

Currently, management views Cass’ major opportunity and challenge as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s lead in applied technology, which the Company believes, when combined with the security and processing controls of the Bank, makes Cass unique in the industry. While the current economic slow-down may reduce the short-term growth rate, management remains optimistic about the long-term prospects for growth.

Recent Developments

In December 2009, the Company’s subsidiary bank, Cass Commercial Bank, was required, along with all other Federal Deposit Insurance Corporation (“FDIC”) insured institutions, to prepay its FDIC insurance premium for the next three years. The total amount of the prepayment was $2,124,000. This amount was recorded as a prepaid asset and will be expensed on a pro-rata basis over three years.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”), which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for annual or interim periods ending after September 15, 2009. As SFAS No. 168 is not intended to change or alter existing GAAP, it is not expected to impact the Company’s financial condition, results of operations or cash flows. The Company adopted SFAS No. 168 and has included the new Codification references (“ASC”) herein.

Critical Accounting Policies

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

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

Impairment of Assets.  The Company periodically evaluates certain long-term assets such as intangible assets including goodwill, foreclosed assets and 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

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required when events and circumstances indicate that the carrying amounts of these assets will not be recoverable in the future. If impairment occurs, various methods of measuring impairment may be called for depending on the circumstances and type of asset, including quoted market prices, estimates based on similar assets, and estimates based on valuation techniques such as discounted projected cash flows. The Company had no impairment of goodwill and intangible assets for fiscal years ended December 31, 2009, 2008 and 2007 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 FASB ASC 740, “Income Taxes,” the Company has unrecognized tax benefits related to tax positions taken or expected to be taken. See Note 14 to the financial statements. The audit of the Company’s federal consolidated tax returns conducted by the Internal Revenue Service for fiscal years 2004 and 2005 resulted in no significant material adjustments.

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

Summary of Results

		December 31,												% Change
(In thousands except per share data)		2009				2008				2007				2009 v. 2008				2008 v. 2007
Total processing volume			34,619				36,416				32,740				(4.9	)%			11.2	%
Total processing dollars		$	23,717,451			$	26,900,535			$	22,185,189				(11.8	)			21.3
Payment and processing fees		$	48,665			$	50,721			$	45,642				(4.1	)			11.1
Net interest income after provision for loan losses		$	36,681			$	38,560			$	40,482				(4.9	)			(4.7	)
Total net revenue		$	87,919			$	91,730			$	88,682				(4.2	)			3.4
Average earning assets		$	894,951			$	841,367			$	809,739				6.4				3.9
Net interest margin*			4.79	%			5.34	%			5.45	%
Net income		$	16,129			$	19,006			$	17,795				(15.1	)			6.8
Diluted earnings per share		$	1.73			$	2.03			$	1.90				(14.8	)			6.8
Return on average assets			1.65	%			2.06	%			2.00	%
Return on average equity			13.71	%			18.24	%			19.90	%

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The results of 2009 compared to 2008 include the following significant items:

Payment and processing fee revenue decreased as the number of transactions processed decreased. This decrease was driven mainly by the decline in the transportation base customer volumes as the global economic slowdown continued.

Net interest income after provision for loan losses decreased $1,879,000 primarily due to a decline in the general level of interest rates and a less favorable mix of funding sources. The net interest margin on a tax equivalent basis was 4.79% in 2009 compared to 5.34% in 2008. The growth in average earning assets was funded mainly by the increase in deposits.

Gains from the sale of securities were $697,000 in 2009 and $552,000 in 2008. Bank service fees and other income were approximately the same in 2009 and 2008. Operating expenses increased $821,000, or 1%.

The results of 2008 compared to 2007 include the following significant items:

Payment and processing fee revenue from continuing operations increased as the number of transactions processed increased. This increase was driven mainly by Utility Information Services processing activity which added a significant amount of new business during 2008. Transportation Information Services also achieved record levels of processing during 2008 and record levels of new customers added.

Net interest income after provision for loan losses decreased $1,922,000 primarily due to both a decline in the general level of interest rates and an increase in the provision for loan losses. The net interest margin on a tax equivalent basis was 5.34% in 2008 compared to 5.45% in 2007. The growth in average earning assets was funded mainly by increases in accounts and drafts payable due to the increase in dollars processed.

There were $552,000 gains from the sale of securities in 2008 and no gains in 2007. Bank service fees decreased $352,000, or 21%, to $1,330,000. Other income from continuing operations decreased $309,000 in 2008 or 35%. Operating expenses from continuing operations increased $2,825,000, or 5%, due mainly to expenses relating to the increase in processing activity.

Fee Revenue and Other Income

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

		December 31,												% Change
(In thousands)		2009				2008				2007				2009 v. 2008				2008 v. 2007
Transportation invoice transaction volume			23,137				25,854				23,480				(10.5	)%			10.1	%
Transportation invoice dollar volume		$	14,047,342			$	17,482,520			$	14,519,906				(19.6	)			20.4
Utility transaction volume			11,482				10,562				9,260				8.7				14.1
Utility transaction dollar volume		$	9,670,109			$	9,418,015			$	7,665,283				2.7				22.9
Payment and processing revenue		$	48,665			$	50,721			$	45,642				(4.1	)			11.1
Bank service fees		$	1,324			$	1,330			$	1,682				(0.5	)			(20.9	)
Gains on sales of investment securities		$	697			$	552				—				26.3				NA
Other		$	552			$	567			$	876				(2.6	)			(35.3	)

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Fee revenue and other income in 2009 compared to 2008 include the following significant pre-tax components:

Transportation volume decreased by 2,717,000 transactions during the past year. This decrease was due mainly to the impact of the general economic slow down on existing customer processing activity. Utility volume experienced solid growth, adding more than 920,000 transactions in 2009. This growth was due mainly to new business. The reduction in transportation transaction volume drove the $2,056,000 decrease in payment and processing revenue.

Fee revenue and other income in 2008 compared to 2007 include the following significant pre-tax components:

Transportation volume increased by 2,374,000 transactions during the past year. This increase was due mainly to new business in 2008 somewhat offset by the impact of the general economic slow down on existing customer processing activity, particularly in the second half of the year. Utility volume experienced solid growth, adding more than 1,302,000 transactions in 2008. This growth was due mainly to new business. These transaction volume increases drove most of the $5,079,000 increase in payment and processing revenue.

Net Interest Income

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

		December 31,												% Change
(In thousands)		2009				2008				2007				2009 v. 2008				2008 v. 2007
Average earning assets		$	894,951			$	841,366			$	809,739				6.4	%			3.9	%
Net interest income*		$	42,869			$	44,966			$	44,115				(4.7	)			1.9
Net interest margin*			4.79	%			5.34	%			5.45	%			(10.3	)			(2.0	)
Yield on earning assets*			5.35	%			5.75	%			6.43	%			(7.0	)			(10.6	)
Rate on interest bearing liabilities			1.81	%			2.16	%			4.20	%			(16.2	)			(48.6	)

Net interest income in 2009 compared to 2008:

The decrease in net interest income was caused by the decrease in net interest margin, partially offset by an increase in average earning assets. The increase in earning assets was funded mainly by the increase in deposits. The decrease in net interest margin was due mainly to the reduction in the general level of interest rates and a less favorable mix of funding sources. More information is contained in the tables below and in Item 7A of this report.

Total average loans increased $60,926,000, or 11%, to $613,259,000. Loans have a positive effect on interest income and the net interest margin due to the fact that loans are one of the Company’s highest yielding earning assets for any given maturity.

Total average investment in securities decreased $3,880,000, or 2%, to $193,393,000. The investment portfolio will expand and contract over time as the interest rate environment changes and the Company manages its liquidity and interest rate position. All purchases were made in accordance with the Company’s investment policy. Total average federal funds sold and other short-term investments decreased $16,090,000, or 22%. This decrease offset the previously mentioned increase in loans.

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The Bank’s average interest-bearing deposits increased $121,362,000, or 80%, compared to the prior year. The increase in deposits was required to offset the $99,342,000, or 18%, decrease in accounts and drafts payable that resulted from lower level of transportation invoice dollar volume. Average rates paid on interest-bearing liabilities decreased from 2.16% to 1.81% as a result of an overall decline in the interest rate environment during 2009.

Net interest income in 2008 compared to 2007:

The increase in net interest income was caused by the increase in earning assets partially offset by a decrease in net interest margin. The increase in earning assets was funded mainly by the increase in accounts and drafts payable due to the increased dollars processed. The decrease in net interest margin was due mainly to the reduction in the general level of interest rates. The Company is negatively affected by decreases in the level of interest rates. Conversely, the Company is positively affected by increases in the level of interest rates due to the fact that its rate sensitive assets significantly exceed its rate sensitive liabilities. This is primarily due to the non-interest-bearing liabilities generated by the Company in the form of accounts and drafts payable. More information is contained in the tables below and in Item 7A of this report.

Total average loans increased $37,210,000, or 7%, to $552,333,000. Loans have a positive effect on interest income and the net interest margin due to the fact that loans are one of the Company’s highest yielding earning assets for any given maturity.

Total average investment in securities increased $55,910,000, or 40%, to $197,273,000. The investment portfolio will expand and contract over time as the interest rate environment changes and the Company manages its liquidity and interest rate position. The increase in 2008 was due to the purchase of state and political subdivision securities with AA or better credit ratings and maturities approaching ten years. With the declining interest rate environment, the Company made these purchases to reduce the level of short-term rate sensitive assets. All purchases were made in accordance with the Company’s investment policy. Total average federal funds sold and other short-term investments decreased $61,493,000, or 40%, to $91,760,000. This decrease was the primary offset to the previously mentioned increases in loans and investment securities.

The Bank’s average interest-bearing deposits decreased $33,634,000, or 18%, compared to the prior year. This decrease was primarily the result of the reduction of higher-cost time deposits. Average rates paid on interest-bearing liabilities decreased from 4.20% to 2.16% as a result of an overall decline in the interest rate environment during 2008 combined with the previously mentioned reduction in higher-cost time deposits.

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

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

		2009												2008												2007
(In thousands)		Average Balance				Interest Income/Expense				Yield/ Rate				Average Balance				Interest Income/Expense				Yield/ Rate				Average Balance				Interest Income/Expense				Yield/ Rate
Assets(1)
Earning assets
Loans(2),(3):
Taxable		$	610,171			$	35,872				5.88	%		$	548,500			$	34,030				6.20	%		$	509,409			$	36,021				7.07	%
Tax-exempt(4)			3,088				202				6.54				3,833				268				6.97				5,714				411				7.19
Debt and equity securities(5):
Taxable			3,373				58				1.72				2,758				78				2.83				15,309				722				4.72
Tax-exempt(4)			190,020				11,620				6.12				194,515				11,750				6.04				126,054				7,398				5.87
Interest-bearing deposits in other financial institutions			29,825				72				0.24				17,196				375				2.18				10,276				337				3.28
Federal funds sold and other short-term investments			58,474				98				0.17				74,564				1,843				2.47				142,977				7,190				5.03
Total earning assets			894,951				47,922				5.35				841,366				48,344				5.75				809,739				52,079				6.43
Non-earning assets
Cash and due from banks			9,541												11,607												24,313
Premise and equipment, net			11,171												12,393												12,915
Bank owned life insurance			13,376												12,802												12,261
Goodwill and other intangibles			7,942												8,216												8,495
Other assets			48,145												42,310												30,513
Allowance for loan losses			(6,955	)											(6,223	)											(6,502	)
Total assets		$	978,171											$	922,471											$	891,734
Liabilities and Shareholders’ Equity(1)
Interest-bearing liabilities
Interest-bearing demand deposits		$	127,952			$	1,798				1.41	%		$	77,835			$	1,086				1.40	%		$	67,719			$	2,122				3.13	%
Savings deposits			25,268				334				1.32				21,434				290				1.35				23,859				795				3.33
Time deposits >=$100			43,590				1,063				2.44				32,052				1,102				3.44				65,127				3,357				5.15
Other time deposits			76,585				1,729				2.26				20,712				701				3.38				28,962				1,454				5.02
Total interest-bearing deposits			273,395				4,924				1.80				152,033				3,179				2.09				185,667				7,728				4.16
Short-term borrowings			3,759				23				0.61				876				12				1.37				138				6				4.35
Subordinated debentures			1,984				106				5.34				3,669				187				5.10				3,699				230				5.33
Total interest bearing liabilities			279,138				5,053				1.81				156,578				3,378				2.16				189,504				7,964				4.20
Non-interest bearing liabilities
Demand deposits			102,177												89,811												94,164
Accounts and drafts payable			459,888												559,230												504,678
Other liabilities			19,305												12,667												13,961
Total liabilities			860,508												818,286												802,307
Shareholders’ equity			117,663												104,185												89,427
Total liabilities and shareholders’ equity		$	978,171											$	922,471											$	891,734
Net interest income						$	42,869											$	44,966											$	44,115
Net interest margin							4.79	%											5.34	%											5.45	%
Interest spread							3.54	%											3.59	%											2.23	%

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Analysis of Net Interest Income Changes

The following table presents the changes in interest income and expense between years due to changes in volume and interest rates.

		2009 Over 2008												2008 Over 2007
(In thousands)		Volume(1)				Rate(1)				Total				Volume(1)				Rate(1)				Total
Increase (decrease) in interest income:
Loans(2),(3):
Taxable		$	3,689			$	(1,847	)		$	1,842			$	2,643			$	(4,634	)		$	(1,991	)
Tax-exempt(4)			(49	)			(17	)			(66	)			(132	)			(11	)			(143	)
Debt and equity securities:
Taxable			15				(35	)			(20	)			(433	)			(211	)			(644	)
Tax-exempt(4)			(274	)			144				(130	)			4,129				223				4,352
Interest-bearing deposits in other financial institutions			165				(468	)			(303	)			177				(139	)			38
Federal funds sold and other short-term investments			(328	)			(1,417	)			(1,745	)			(2,593	)			(2,754	)			(5,347	)
Total interest income		$	3,218			$	(3,640	)		$	(422	)		$	3,791			$	(7,526	)		$	(3,735	)
Interest expense on:
Interest-bearing demand deposits		$	704				8				712			$	281			$	(1,317	)		$	(1,036	)
Savings deposits			51				(7	)			44				(74	)			(431	)			(505	)
Time deposits >=$100			333				(372	)			(39	)			(1,363	)			(892	)			(2,255	)
Other time deposits			1,331				(303	)			1,028				(350	)			(403	)			(753	)
Short-term borrowings			21				(10	)			11				13				(7	)			6
Subordinated debentures			(90	)			9				(81	)			(16	)			(27	)			(43	)
Total interest expense			2,350				(675	)			1,675				(1,509	)			(3,077	)			(4,586	)
Net interest income		$	868			$	(2,965	)		$	(2,097	)		$	5,300			$	(4,449	)		$	851

Loan Portfolio

Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was $641,957,000 and represented 63% of the Company's total assets as of December 31, 2009 and generated $36,003,000 in revenue during the year then ended. The Company had no sub-prime mortgage loans or residential development loans in its portfolio for any of the years presented. The following tables show the composition of the loan portfolio at the end of the periods indicated and remaining maturities for loans as of December 31, 2009.

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Loans by Type

		December 31,
(In thousands)		2009				2008				2007				2006				2005
Commercial and industrial		$	93,371			$	118,044			$	100,827			$	113,162			$	146,892
Real estate: (Commercial and church)
Mortgage			469,097				412,788				360,907				352,044				348,554
Construction			74,407				56,221				31,082				29,779				28,170
Industrial revenue bonds			2,676				3,363				4,149				6,293				4,514
Installment			—				—				—				—				107
Other			2,406				1,560				1,490				2,847				1,069
Total loans		$	641,957			$	591,976			$	498,455			$	504,125			$	529,306

Loans by Maturity
(At December 31, 2009)

		One Year Or Less								Over 1 Year Through 5 Years								Over 5 Years
(In thousands)		Fixed Rate				Floating Rate(1)				Fixed Rate				Floating Rate(1)				Fixed Rate				Floating Rate(1)				Total
Commercial and industrial		$	5,481			$	62,222			$	20,733			$	4,811			$	124			$	—			$	93,371
Real estate (Commercial and Church):
Mortgage			52,511				29,793				358,430				21,402				6,961				—				469,097
Construction			21,784				35,319				7,609				9,695				—				—				74,407
Industrial revenue bonds			22				—				2,654				—				—				—				2,676
Other			1,338				915				151				2				—				—				2,406
Total loans		$	81,136			$	128,249			$	389,577			$	35,910			$	7,085				—			$	641,957

The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan portfolio composition table and as are discussed in Item 8, Note 4 of this report. As can be seen in the loan composition table above and as are discussed in Item 8, Note 4 the Company's primary market niche for banking services is privately held businesses and churches and church-related ministries.

Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable, inventory, machinery and equipment, and the real estate from which the borrower operates. Operating lines of credit to these companies generally are secured by accounts receivable and inventory, with specific percentages of each determined on a customer-by-customer basis based on various factors including the type of business. Intermediate term credit for machinery and equipment is generally provided at some percentage of the value of the equipment purchased, depending on the type of machinery or equipment purchased by the entity. Loans secured exclusively by real estate to businesses and churches are generally made with a maximum 80% loan to value ratio, depending upon the Company's estimate of the resale value and ability of the property to generate cash. The Company's loan policy requires an independent appraisal for all loans over $250,000 secured by real estate. Company management monitors the local economy in an attempt to determine whether it has had a significant deteriorating effect on such real estate loans. When problems are identified, appraised values are updated on a continual basis, either internally or through an updated external appraisal.

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Loan portfolio changes from December 31, 2008 to December 31, 2009:

Total loans increased $49,981,000, or 8%, to $641,957,000. This increase was the result of two primary factors: 1) the continued successful implementation of new marketing efforts by the Company’s lending staff and 2) the negative impact of the credit crisis on many of the Company’s competitors resulted in more attractive loan growth opportunities. The growth in real estate construction loans was primarily due to increased activity in the church portfolio as was the case in 2008. At year-end, church and church-related real estate and construction loans totaled $371,126,000, which represents a 20% increase over 2008. Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.

Loan portfolio changes from December 31, 2007 to December 31, 2008:

Total loans increased $93,521,000, or 19%, to $591,976,000. This increase was the result of two primary factors: 1) the successful implementation of new marketing efforts by the Company’s lending staff and 2) the negative impact of the credit crisis on many of the Company’s competitors resulted in more attractive loan growth opportunities. The growth in real estate construction loans was primarily due to increased activity in the church portfolio. At year-end, church and church-related real estate and construction loans totaled $310,329,000, which represents a 22% increase over 2007. Additional details regarding the types and maturities of loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.

Provision and Allowance for Loan Losses

The Company recorded a provision for loan losses of $2,050,000 in 2009, $2,200,000 in 2008, and $900,000 in 2007. The amount of the provisions for loan losses was derived from the Company’s quarterly analysis of the allowance for loan losses in relation to probable losses in the loan portfolio. The amount of the provision will fluctuate as determined by these quarterly analyses. The Company had net loan charge-offs of $217,000, $2,029,000, and $1,212,000 in 2009, 2008 and 2007, respectively. The allowance for loan losses was $8,284,000 at December 31, 2009 compared to $6,451,000 at December 31, 2008 and $6,280,000 at December 31, 2007. The year-end 2009 allowance represented 1.29% of outstanding loans, compared to 1.09% at year-end 2008 and 1.26% at year-end 2007. From December 31, 2008 to December 31, 2009, the level of nonperforming loans increased $389,000 from $1,219,000 to $1,608,000, which represents .25% of outstanding loans. Nonperforming loans are more fully explained in the section entitled “Nonperforming Assets.”

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. Charges or credits are made to expense to cover any deficiency or reduce any excess, as required. The current methodology employed to determine the appropriate allowance consists of two components, 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 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.

The following schedule summarizes activity in the allowance for loan losses and the allocation of the allowance to the Company’s loan categories. During 2009, the allocation to the real estate portfolio increased primarily due to the $74,495,000 in additional loan balances.

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Summary of Loan Loss Experience

		December 31,
(In thousands)		2009				2008				2007				2006				2005
Allowance at beginning of year		$	6,451			$	6,280			$	6,592			$	6,284			$	6,037
Loans charged-off:
Commercial and industrial, industrial revenue bonds (“IRB’s”)			109				2,120				337				864				532
Real estate: (Commercial and church)
Mortgage			291				—				1,038				—				22
Construction			—				—				—				—				—
Other			—				53				—				—				1
Total loans charged-off			400				2,173				1,375				864				555
Recoveries of loans previously charged-off:
Commercial and industrial, IRB’s			180				136				159				22				10
Real estate: (Commercial and church)
Mortgage			3				—				4				—				13
Construction			—				—				—				—				—
Other			—				8				—				—				4
Total recoveries of loans previously charged-off			183				144				163				22				27
Net loans charged-off			217				2,029				1,212				842				528
Provision charged to expense			2,050				2,200				900				1,150				775
Allowance at end of year		$	8,284			$	6,451			$	6,280			$	6,592			$	6,284
Loans outstanding:
Average		$	613,259			$	552,333			$	515,123			$	522,367			$	512,966
December 31			641,957				591,976				498,455				504,125				529,306
Ratio of allowance for loan losses to loans outstanding:
Average			1.35	%			1.17	%			1.22	%			1.26	%			1.23	%
December 31			1.29	%			1.09	%			1.26	%			1.31	%			1.19	%
Ratio of net charge-offs to average loans outstanding.			04	%			.37	%			.24	%			.16	%			.10	%
Allocation of allowance for loan losses(1):
Commercial and industrial, IRB’s		$	1,511			$	1,521			$	3,380			$	3,507			$	3,419
Real estate: (Commercial and church)
Mortgage			5,953				4,343				2,564				2,723				2,645
Construction			809				569				318				271				200
Other			11				18				18				91				20
Total		$	8,284			$	6,451			$	6,280			$	6,592			$	6,284
Percentage of categories to total loans:
Commercial and industrial, IRB’s			14.9	%			20.5	%			21.1	%			22.5	%			28.6	%
Real estate: (Commercial and church)
Mortgage			73.1				69.7				72.4				69.8				65.9
Construction			11.6				9.5				6.2				5.9				5.3
Other			0.4				0.3				0.3				1.8				0.2
Total			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%

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Nonperforming Assets

It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan on which payment of principal or interest in a timely manner in the normal course of business, is doubtful. Subsequent payments received on such loans are applied to principal if there is any doubt as to the collectability of such principal; otherwise, these receipts are recorded as interest income. Interest on nonaccrual and renegotiated loans, which would have been recorded under the original terms of the loans, was approximately $134,000 for the year ended December 31, 2009. Of this amount, approximately $131,000was actually recorded as interest income on such loans.

Total nonaccrual loans at December 31, 2009 consists of five loans totaling $1,608,000 that relate to businesses/churches that have weak financial positions and/or collateral deficiencies. Allocations of the allowance for loan losses have been established for the estimated loss exposure.

Foreclosed assets and accruing loans 90 days or more past due were $1,910,000 and $0, respectively, at December 31, 2009. The foreclosed assets relate to the foreclosure of two loans which were secured by commercial real estate buildings in St. Louis County and St. Charles County, Missouri. These buildings are currently listed for sale and have been recorded at their estimated fair value less costs to sell. The decrease in accruing loans 90 days or more past due is primarily related to one borrower who paid off the loan during 2009.

The Company does not have any foreign loans. The Company's loan portfolio does not include a significant amount of single family real estate mortgages, as the Company does not market its services to retail customers. Also, the Company had no sub-prime mortgage loans or residential development loans in its portfolio in any of the years presented.

The Company does not have any other interest-earning assets which would have been included in nonaccrual, past due or restructured loans if such assets were loans.

Summary of Nonperforming Assets

		December 31,
(In thousands)		2009				2008				2007				2006				2005
Commercial and industrial, IRB’s:
Nonaccrual		$	—			$	278			$	1,277			$	795			$	983
Contractually past due 90 days or more and still accruing			—				41				496				—				—
Renegotiated loans			—				—				—				—				—
Real estate – mortgage:
Nonaccrual			1,608				900				708				—				—
Contractually past due 90 days or more and still accruing			—				—				—				—				481
Renegotiated loans			—				—				—				—				—
Total nonperforming loans		$	1,608			$	1,219			$	2,481			$	795			$	1,464
Total foreclosed assets			1,910				2,177				1,388				—				—
Total nonperforming assets		$	3,518			$	3,396			$	3,869			$	795			$	1,464

Operating Expenses

Operating expenses in 2009 compared to 2008 include the following significant pre-tax components:

Salaries and employees benefits expense increased $891,000, or 2%, to $50,614,000. This is mainly attributable to higher pension costs.

Occupancy expense increased $168,000, or 8%, to $2,396,000 as a result of additional maintenance and repairs expense plus an increase in rent expense.

Equipment expense increased $17,000, or less than 1%, to $3,348,000.

Amortization of intangibles decreased $58,000, or 21%, to $222,000 because the software from the 2004 PROFITLAB, Inc. acquisition was fully amortized during the third quarter of 2009.

Other operating expense increased $821,000, or 1%, to $66,385,000 primarily due to an increase of $729,000 in FDIC insurance expense.

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Operating expenses in 2008 compared to 2007 include the following significant pre-tax components:

Salaries and employees benefits expense increased $2,758,000, or 6%, to $49,723,000. This is mainly attributable to additional staff related to the increase in processing volume, annual salary increases and the associated increase in benefit expenses.

Occupancy expense increased $122,000, or 6%, to $2,228,000 as a result of additional maintenance and repairs expense plus an increase in rent expense.

Equipment expense decreased $25,000, or 1%, to $3,331,000. This decrease is primarily due to a reduction in contract maintenance expense.

Amortization of intangibles was $280,000 in 2008 and 2007.

Other operating expense decreased $30,000, or less than 1%, to $10,002,000 due to reductions in postage and supplies, promotional expense and professional services offset by an increase in other real estate owned expense.

Income Tax Expense

Income tax expense in 2009 totaled $5,405,000 compared to $7,160,000 in 2008, and $8,148,000 in 2007. When measured as a percent of income, the Company’s effective tax rate was 25% in 2009, 27% in 2008 and 31% in 2007. The effective tax rate varies from year-to-year primarily due to changes in the Company’s amount of investment in tax-exempt municipal bonds.

Investment Portfolio

Investment portfolio changes from December 31, 2008 to December 31, 2009:

All U.S. Treasury securities matured during 2009. State and political subdivision securities increased $31,679,000, or 16%, to $224,597,000. The investment portfolio provides the Company with a significant source of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates. Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s sources of funds and the economic outlook. During this period, the size of the investment portfolio increased as the Company purchased state and political subdivision securities. These securities all had AA or better credit ratings and maturities approaching ten years. With the additional liquidity provided by the increase in deposits and the declining rate environment, the Company made these purchases to continue to reduce the level of short-term rate sensitive assets. All purchases were made in accordance with the Company’s investment policy. As of December 31, 2009, the Company had no mortgage-backed securities in its portfolio.

Investment portfolio changes from December 31, 2007 to December 31, 2008:

U.S. Treasury securities decreased $1,796,000, or 90%, to $200,000. U.S. government-sponsored corporation and agency securities decreased from $1,499,000 to $0. State and political subdivision securities increased $25,440,000, or 15%, to $192,918,000. The investment portfolio provides the Company with a significant source of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest rates. Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the Company’s sources of funds and the economic outlook. During this period, the size of the investment portfolio increased as the Company purchased state and political subdivision securities. These securities all had AA or better credit ratings and maturities approaching ten years. With the additional liquidity provided by the increase in accounts and drafts payables and the declining rate environment, the Company made these purchases to continue to reduce the level of short-term rate sensitive assets. All purchases were made in accordance with the Company’s investment policy. As of December 31, 2008, the Company had no mortgage-backed securities in its portfolio.

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There was no single issuer of securities in the investment portfolio at December 31, 2009 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.

Investments by Type

		December 31,
(In thousands)		2009				2008				2007
U.S. Treasury securities		$	—			$	200			$	1,996
U.S. government-sponsored corporations and agencies			—				—				1,499
State and political subdivisions			224,597				192,918				167,478
Total investments		$	224,597			$	193,118			$	170,973

Investment in Debt Securities by Maturity
(At December 31, 2009)

(In thousands)		Within 1 Year				Over 1 to 5 Years				Over 5 to 10 Years				Over 10 Years				Yield
State and political subdivisions		$	4,905			$	47,710			$	93,795			$	78,187				6.07	%
Weighted average yield(1)			5.47	%			5.83	%			6.23	%			6.08	%			6.07	%

Deposits and Accounts and Drafts Payable

Noninterest-bearing demand deposits increased $9,851,000, or 10%, from December 31, 2008 to $113,151,000 at December 31, 2009. The average balances of these deposits increased $12,366,000, or 14%, from 2008 to $102,177,000 in 2009. These balances are primarily maintained by commercial customers and churches and can fluctuate on a daily basis.

Interest-bearing deposits increased $150,484,000, or 86%, from December 31, 2008 to $324,725,000 at December 31, 2009. The average balances of these deposits increased to $273,395,000 in 2009 from $152,033,000 in 2008. This increase came from new and existing customers who transferred deposits from lower-yielding investment accounts at other institutions and was the result of efforts by the Company to replace the funding lost by the decline in accounts and drafts payable discussed in the following paragraph.

Accounts and drafts payable generated by the Company in its payment processing operations decreased $48,774,000, or 10%, from December 31, 2008 to $430,251,000 at December 31, 2009 The average balance of these funds decreased $99,342,000, or 18%, from 2008 to $459,888,000 in 2009. The decrease relates to the decrease in transportation invoice dollars processed. Due to the Company’s payment processing cycle, average balances are much more indicative of the underlying activity than period-end balances since point-in-time comparisons can be misleading if the comparison dates fall on different days of the week.

The composition of average deposits and the average rates paid on those deposits is represented in the table entitled “Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier in this discussion. The Company does not have any significant deposits from foreign depositors.

In response to the financial crisis, in October 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. In addition, the U.S. Treasury Department announced that it had been authorized to purchase equity stakes in participating U.S. financial institutions. Under this program, known as the Troubled Asset Relief Program — Capital Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury Department made capital available to participating U.S. financial institutions in exchange for, generally, preferred stock. Further, after receiving a recommendation from the boards of the FDIC and the FRB, the U.S. Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. After careful assessment, and due to its strong capital base, the Company chose not to participate in the TARP Capital Purchase Program.

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The Company elected to participate in the Temporary Liquidity Guarantee Program, as not participating could have put the Company at a competitive disadvantage without the 100% FDIC guarantee of its non-interest bearing transaction deposit accounts. The FDIC guarantee of senior debt was not a factor in the Company’s decision process, as it has no senior debt outstanding. The cost of this program is 10 basis points or approximately $40,000 on an annual basis based upon the additional covered deposits at December 31, 2009.

Maturities of Certificates of Deposits of $100,000 or More

(In thousands)		December 31, 2009
Three months or less		$	43,557
Three to six months			31,970
Six to twelve months			8,946
Over twelve months			3,289
Total		$	87,762

Subordinated Convertible Debentures

Total subordinated convertible debentures at December 31, 2009 and 2008 were $0 and $2,991,000, respectively and the average balances of these funds were $1,984,000 and $3,669,000, respectively. The debentures were issued on August 24, 2004 as part of the Company’s purchase of PROFITLAB, Inc. and all debentures have been converted to Cass common stock as of December 31, 2009. For more information on these debentures please refer to Item 8, Note 9 of this report.

Liquidity

The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due, meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources. The Company's Asset/Liability Committee (“ALCO”) has direct oversight responsibility for the Company's liquidity position and profile. Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity.

The balances of liquid assets consist of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and money market funds, and were $79,294,000 at December 31, 2009, an increase of $49,809,000, or 169%, from December 31, 2008. At December 31, 2009 these assets represented 8% of total assets. The Company increased liquid assets during 2009 as a result of the increase in deposits. Cash and cash equivalents 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 debt securities available-for-sale at fair value was $224,597,000 at December 31, 2009, an increase of $31,479,000 or 16% from December 31, 2008. These assets represented 22% of total assets at December 31, 2009 and all were state and political subdivision securities. Of the total portfolio, 2% mature in one year or less, 21% mature after one year through five years and 77% mature after five years. The Company sold $21,906,000 of securities available-for-sale during 2009 in managing its liquidity position and to take advantage of favorable reinvestment opportunities.

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 $126,711,000 collateralized by commercial mortgage loans. The Company also had secured federal funds of $18,961,000 with the Federal Reserve Bank. There were no amounts outstanding under any of the lines of credit discussed above at December 31, 2009 or 2008.

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The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize many other commercial products of the Bank. The accounts and drafts payable generated by the Company have also historically been a stable source of funds.

Net cash flows provided by operating activities for the years 2009, 2008 and 2007 were $19,079,000, $22,030,000 and $23,652,000, respectively. Net income plus depreciation and amortization accounts for most of the operating cash provided. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Further analysis of the changes in these account balances is discussed earlier in this report. Due to the daily fluctuations in these account balances, management believes that the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments, cash from operations, and borrowing lines will continue to be sufficient to fund the Company’s operations and capital expenditures in 2010. The Company anticipates the annual capital expenditures for 2010 will be consistent with the last few years and, accordingly, should range from $1 million to $3 million. As in the past, 2010 capital expenditures are expected to consist primarily of equipment and software related to its payment and information processing services business.

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

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

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. Lower levels of economic activity, as experienced in 2009 and 2008, reduced both fee income (as fewer invoices were processed) and balances of accounts and drafts payable generated (as fewer invoices were processed and invoice amounts were lower) from the Company’s transportation customers as compared to levels achieved in earlier periods with relatively higher levels of business activity.

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. During the third quarter of 2008, the Company benefited from the rise in energy costs; however, by the end of 2008 and during 2009, energy costs had declined to more historically normal levels.

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. During 2009 new business was added in both the Information Services and Banking Services segments. The new business in the Information Services segment was offset by the decline in base customer volumes as the economic downturn had a dramatic negative impact on the Company’s transportation customers. The Banking Services segment was able to grow both loans and

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deposits as it was well positioned (i.e., strong capital and liquidity) to take advantage of weaknesses in its competitors brought on by the difficult economic conditions encountered during 2009.

Capital Resources

One of management’s primary objectives is to maintain a strong capital base to warrant the confidence of customers, shareholders, and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities that arise and to provide assurance to depositors and creditors. The Company and its banking subsidiary continue to exceed all regulatory capital requirements, as evidenced by the capital ratios at December 31, 2009 as shown in Item 8, Note 2 of this report.

In 2009, cash dividends paid were $.53 per share for a total of $4,925,000, an increase of $426,000, or 9%, compared to $.49 per share for a total of $4,499,000 in 2008. The increase is attributable primarily to the per share amount paid.

Shareholders' equity was $129,568,000, or 13%, of total assets, at December 31, 2009, an increase of $23,327,000 over the balance at December 31, 2008. This increase resulted from net income of $16,129,000, $2,990,000 related to the conversion of subordinated debentures, a decrease in other comprehensive loss of $5,692,000, the pension adjustment per FASB ASC 715 of $1,540,000, and $1,901,000 related to stock bonuses, which were offset by cash dividends paid of $4,925,000.

Dividends from the Bank are a source of funds for payment of dividends by the Company to its shareholders. The only restrictions on dividends are those dictated by regulatory capital requirements and prudent and sound banking principles. As of December 31, 2009, unappropriated retained earnings of $6,352,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory authorities.

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 2009 and repurchased 120,000 shares during 2008. As of December 31, 2009, 180,000 shares remained available for repurchase under the program. A portion of the repurchased shares may be used for the Company's employee benefit plans, and the balance will be available for other general corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt, current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.

As discussed earlier in this report, after careful assessment, and due to its strong capital base, the Company chose not to participate in the TARP Capital Purchase Program.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

In the normal course of business, the Company is party to activities that involve credit, market and operational risk that are 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 and capital 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 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 December 31, 2009, the balance of loan commitments, standby and commercial letters of credit were $25,149,000, $15,115,000 and $1,764,000, respectively. Since some of

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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 December 31, 2009:

		Amount of Commitment Expiration per Period
(In thousands)		Total				Less than 1 Year				1-3 Years				3-5 Years				Over 5 Years
Operating lease commitments		$	3,117			$	857			$	1,075			$	655			$	530
Time deposits			115,742				103,020				11,887				835				—
Total		$	118,859			$	103,877			$	12,962			$	1,490			$	530

During 2009, the Company contributed $3,200,000 to its noncontributory defined benefit pension plan. The contribution had no significant effect on the Company’s overall liquidity. In determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return on assets. These assumptions are determined at the beginning of the plan year based on interest rate levels and financial market performance. For 2009 these assumptions were as follows:

Assumption		Rate
Weighted average discount rate			6.50	%
Rate of increase in compensation levels			4.00	%
Expected long-term rate of return on assets			7.25	%

Impact of New Accounting Pronouncements

None.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The Company faces market risk to the extent that its net interest income and its fair market value of equity are affected by changes in market interest rates. The asset/liability management discipline as applied by the Company seeks to limit the volatility, to the extent possible, of both net interest income and the fair market value of equity that can result from changes in market interest rates. This is accomplished by limiting the maturities of fixed rate investments, loans, and deposits; matching fixed rate assets and liabilities to the extent possible; and optimizing the mix of fees and net interest income. However, as discussed below, the Company's asset/liability position often differs significantly from most other bank holding companies with significant positive cumulative “gaps” shown for each time horizon presented. This asset sensitive position is caused primarily by the operations of the Company, which generate large balances of accounts and drafts payable. These balances, which are noninterest bearing, contribute to the Company’s historical high net interest margin but cause the Company to become susceptible to changes in interest rates, with a decreasing net interest margin and fair market value of equity in periods of declining interest rates and an increasing net interest margin and fair market value of equity in periods of rising interest rates.

The Company’s ALCO measures the Company's interest rate risk sensitivity on a quarterly basis to monitor and manage the variability of earnings and fair market value of equity in various interest rate environments. The ALCO evaluates the Company's risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings and value or whether the Company can safely increase risk to enhance returns. The ALCO uses gap reports, twelve-month net interest income simulations,

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and fair market value of equity analyses as its main analytical tools to provide management with insight into the Company's exposure to changing interest rates.

Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitive assets and liabilities in certain time horizons. A negative gap indicates that more liabilities re-price in that particular time frame and, if rates rise, these liabilities will re-price faster than the assets. A positive gap would indicate the opposite. Gap reports can be misleading in that they capture only the re-pricing timing within the balance sheet, and fail to capture other significant risks such as basis risk and embedded options risk. Basis risk involves the potential for the spread relationship between rates to change under different rate environments and embedded options risk relates to the potential for the alteration of the level and/or timing of cash flows given changes in rates.

Another measurement tool used by management is net interest income simulation, which forecasts net interest income during the coming twelve months under different interest rate scenarios in order to quantify potential changes in short term accounting income. Management has set policy limits specifying acceptable levels of interest rate risk given multiple simulated rate movements. These simulations are more informative than gap reports because they are able to capture more of the dynamics within the balance sheet, such as basis risk and embedded options risk. A table containing simulation results as of December 31, 2009, from an immediate and sustained parallel change in interest rates is shown below.

While net interest income simulations do an adequate job of capturing interest rate risk to short term earnings, they do not capture risk within the current balance sheet beyond twelve months. The Company uses fair market value of equity analyses to help identify longer-term risk that may reside on the current balance sheet. The fair market value of equity is represented by the present value of all future income streams generated by the current balance sheet. The Company measures the fair market value of equity as the net present value of all asset and liability cash flows discounted at forward rates suggested by the current U.S. Treasury curve plus appropriate credit spreads. This representation of the change in the fair market value of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes. Management has set policy limits relating to declines in the market value of equity. The table below contains the analysis, which illustrates the effects of an immediate and sustained parallel change in interest rates as of December 31, 2009:

Change in Interest Rates		% Change in Net Interest Income				% Change in Fair Market Value of Equity
+200 basis points			9	%			7	%
+100 basis points			5	%			3	%
Stable rates			—				—
-100 basis points			(3%)				(3%)
-200 basis points			(4%)				(2%)

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Interest Rate Sensitivity Position

The following table presents the Company’s gap or interest rate risk position at December 31, 2009 for the various time periods indicated.

(In thousands)		Variable Rate				0-90 Days				91-180 Days				181-364 Days				1-5 Years				Over 5 Years				Total
Earning assets:
Loans:
Taxable		$	167,726			$	37,794			$	25,498			$	16,255			$	384,922			$	7,086			$	639,281
Tax-exempt			—				—				22				—				2,654				—				2,676
Debt and equity securities(1):
Tax-exempt			—				—				1,185				3,631				43,689				164,146				212,651
Other			792				—				—				—				—				—				792
Federal funds sold and other short-term investments			73,531				—				—				—				—				—				73,531
Total earning assets		$	242,049			$	37,794			$	26,705			$	19,886			$	431,265			$	171,232			$	928,931
Interest-sensitive liabilities:
Money market accounts		$	119,751			$	—			$	—			$	—			$	—			$	—			$	119,751
Now accounts			58,893				—				—				—				—				—				58,893
Savings deposits			30,339				—				—				—				—				—				30,339
Time deposits:
$100K and more			—				43,557				31,969				8,946				3,290				—				87,762
Less than $100K			9,138				7,393				2,017				9,432				—				—				27,980
Federal funds purchased and other short-term borrowing			26				—				—				—				—				—				26
Total interest-bearing liabilities		$	218,147			$	50,950			$	33,986			$	18,378			$	3,290			$	—			$	324,751
Interest sensitivity gap:
Periodic		$	23,902			$	(13,156	)		$	(7,281	)		$	1,508			$	427,975			$	171,232			$	604,180
Cumulative			23,902				10,746				3,465				4,973				432,948				604,180				604,180
Ratio of interest-bearing assets to interest-bearing liabilities:
Periodic			1.11				0.74				0.79				1.08				131.08				—				2.86
Cumulative			1.11				1.04				1.01				1.02				2.33				2.86				2.86

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		December 31,
(In thousands except share and per share data)		2009				2008
Assets
Cash and due from banks		$	5,763			$	10,043
Interest-bearing deposits in other financial institutions			33,426				16,670
Federal funds sold and other short-term investments			40,105				2,772