UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
quarterly period ended March 31,
2009


OR





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from
_________________to___________________________





Commission
file number 0-13507





RURBAN
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





Ohio
                
                34-1395608(State
      or other jurisdiction of
                
                (I.R.S.
      Employer Identification No.)incorporation
      or organization)





401 Clinton Street,
Defiance, Ohio 43512


(Address
of principal executive offices)


(Zip
Code)





(419)
783-8950


(Registrant’s
telephone number, including area code)





None


(Former
name, former address and former fiscal year, if changed since last
report.)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.       Yes xNo  ̈




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  Large Accelerate Filer o  Accelerated
Filer o  Non-Accelerated
Filer o
Smaller Reporting Company x




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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Common
      Shares, without par value
              4,868,530
      shares(class)
              (Outstanding
      at May 14, 2009)









RURBAN
FINANCIAL CORP.





FORM
10-Q





TABLE
OF CONTENTS





PART I – FINANCIAL
    INFORMATIONItem 1.
                      Financial
      Statements
                      3Item 2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      21Item 3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      30Item 4T.
                      Controls
      and Procedures
                      31PART II – OTHER INFORMATIONItem 1.
                      Legal
      ProceedingsItem 1A.
                      Risk
      Factors
                      33Item 2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      33Item 3.
                      Defaults
      Upon Senior Securities
                      33Item 4.
                      Submission
      of Matters to a Vote of Security Holders
                      34Item 5.
                      Other
      Information
                      34Item 6.
                      Exhibits
                      3535Signatures
                      36





2





PART I – FINANCIAL
INFORMATION





Item 1. Financial
Statements





The
interim condensed consolidated financial statements of Rurban Financial Corp.
(“Rurban” or the “Company”) are unaudited; however, the information contained
herein reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial condition and results of
operations for the interim periods presented.  All adjustments
reflected in these financial statements are of a normal recurring nature in
accordance with Rule 10-01 of Regulation S-X.  Results of operations
for the three months ended March 31, 2009 are not necessarily indicative of
results for the complete year.





3


Rurban
Financial Corp.


Condensed
Consolidated Balance Sheets


March
31, 2009 and December 31, 2008





(Unaudited)March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008AssetsCash
      and due from banks
                      
                      $
                      14,814,685
                      
                      
                      $
                      18,059,532Federal
      funds sold
                      
                      
                      8,200,000
                      
                      
                      
                      10,000,000Cash
      and cash equivalents
                      
                      
                      23,014,685
                      
                      
                      
                      28,059,532Available-for-sale
      securities
                      
                      
                      127,879,529
                      
                      
                      
                      102,606,475Loans
      held for sale
                      
                      
                      9,095,776
                      
                      
                      
                      3,824,499Loans,
      net of unearned income
                      
                      
                      434,051,854
                      
                      
                      
                      450,111,653Allowance
      for loan losses
                      
                      
                      (5,348,952
                      )
                      
                      
                      (5,020,197
                      )Premises
      and equipment
                      
                      
                      17,159,167
                      
                      
                      
                      17,621,262Purchased
      software
                      
                      
                      5,741,678
                      
                      
                      
                      5,867,395Federal
      Reserve and Federal Home Loan Bank stock
                      
                      
                      3,544,100
                      
                      
                      
                      4,244,100Foreclosed
      assets held for sale, net
                      
                      
                      1,393,155
                      
                      
                      
                      1,384,335Interest
      receivable
                      
                      
                      2,864,190
                      
                      
                      
                      2,964,663Goodwill
                      
                      
                      21,414,790
                      
                      
                      
                      21,414,790Core
      deposits and other intangibles
                      
                      
                      5,614,025
                      
                      
                      
                      5,835,936Cash
      value of life insurance
                      
                      
                      12,734,983
                      
                      
                      
                      12,625,015Other
                      
                      
                      6,653,626
                      
                      
                      
                      6,079,451Total
      assets
                      
                      $
                      665,812,606
                      
                      
                      $
                      657,618,909





See
notes to condensed consolidated financial statements (unaudited)





Note: The balance
sheet at December 31, 2008 has been derived from the audited consolidated financial
statements at that date


4


Rurban
Financial Corp.


Condensed
Consolidated Balance Sheets


March
31, 2009 and December 31, 2008




(Unaudited)March 31,
                        
                        
                        December 31,2009
                        
                        
                        2008Liabilities
      and Stockholders’ EquityLiabilitiesDepositsDemand
                        
                        $
                        49,968,772
                        
                        
                        $
                        52,242,626Savings,
      interest checking and money market
                        
                        
                        204,527,419
                        
                        
                        
                        189,461,755Time
                        
                        
                        233,137,761
                        
                        
                        
                        242,516,203Total
      deposits
                        
                        
                        487,633,952
                        
                        
                        
                        484,220,584Notes
      payable
                        
                        
                        2,500,000
                        
                        
                        
                        1,000,000Federal
      Home Loan Bank advances
                        
                        
                        36,059,017
                        
                        
                        
                        36,646,854Retail
      repurchase agreements
                        
                        
                        47,894,843
                        
                        
                        
                        43,425,978Trust
      preferred securities
                        
                        
                        20,620,000
                        
                        
                        
                        20,620,000Interest
      payable
                        
                        
                        1,724,525
                        
                        
                        
                        1,965,842Other
      liabilities
                        
                        
                        5,759,759
                        
                        
                        
                        8,077,647Total
      liabilities
                        
                        
                        602,192,096
                        
                        
                        
                        595,956,905Commitments
      and Contingent LiabilitiesStockholders’
      EquityCommon
      stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433
      shares; outstanding March 2009 – 4,871,373 shares, December 2008 –
      4,881,452 shares
                        
                        
                        12,568,583
                        
                        
                        
                        12,568,583Additional
      paid-in capital
                        
                        
                        15,072,847
                        
                        
                        
                        15,042,781Retained
      earnings
                        
                        
                        36,449,912
                        
                        
                        
                        35,785,317Accumulated
      other comprehensive income (loss)
                        
                        
                        1,222,435
                        
                        
                        
                        (121,657
                        )Treasury
      Stock, at costCommon;
      Mar. 2009 – 156,060 shares, Dec. 2008 – 145,981 shares
                        
                        
                        (1,693,267
                        )
                        
                        
                        (1 ,613,020
                        )Total
      stockholders’ equity
                        
                        
                        63,620,510
                        
                        
                        
                        61,662,004Total
      liabilities and stockholders’ equity
                        
                        $
                        665,812,606
                        
                        
                        $
                        657,618,909





See
notes to condensed consolidated financial statements (unaudited)





Note: The balance
sheet at December 31, 2008 has been derived from the audited consolidated financial
statements at that date


5


Rurban
Financial Corp.


Condensed
Consolidated Statements of Income (Unaudited)


Three
Months Ended





March 31,
                                        2009
                                      
                                      
                                      March 31,
                                        2008Interest
      IncomeLoansTaxable
                                      
                                      $
                                      6,814,633
                                      
                                      
                                      $
                                      6,808,196Tax-exempt
                                      
                                      
                                      25,457
                                      
                                      
                                      
                                      21,350SecuritiesTaxable
                                      
                                      
                                      1,079,497
                                      
                                      
                                      
                                      1,039,894Tax-exempt
                                      
                                      
                                      227,884
                                      
                                      
                                      
                                      158,367Other
                                      
                                      
                                      132
                                      
                                      
                                      
                                      97,409Total
      interest income
                                      
                                      
                                      8,147,603
                                      
                                      
                                      
                                      8,125,216Interest
      ExpenseDeposits
                                      
                                      
                                      1,898,304
                                      
                                      
                                      
                                      3,091,902Other
      borrowings
                                      
                                      
                                      14,392
                                      
                                      
                                      
                                      17,506Retail
      repurchase agreements
                                      
                                      
                                      427,487
                                      
                                      
                                      
                                      460,552Federal
      Home Loan Bank advances
                                      
                                      
                                      392,572
                                      
                                      
                                      
                                      302,336Trust
      preferred securities
                                      
                                      
                                      398,985
                                      
                                      
                                      
                                      435,704Total
      interest expense
                                      
                                      
                                      3,131,740
                                      
                                      
                                      
                                      4,308,000Net
      Interest Income
                                      
                                      
                                      5,015,863
                                      
                                      
                                      
                                      3,817,216Provision
      for Loan Losses
                                      
                                      
                                      495,142
                                      
                                      
                                      
                                      192,218Net
      Interest Income After Provision for Loan Losses
                                      
                                      
                                      4,520,721
                                      
                                      
                                      
                                      3,624,998Non-interest
      IncomeData
      service fees
                                      
                                      
                                      4,972,549
                                      
                                      
                                      
                                      5,264,565Trust
      fees
                                      
                                      
                                      583,623
                                      
                                      
                                      
                                      855,107Customer
      service fees
                                      
                                      
                                      574,699
                                      
                                      
                                      
                                      586,207Net
      gains on loan sales
                                      
                                      
                                      1,078,047
                                      
                                      
                                      
                                      274,603Net
      realized gain on sales of securities
                                      
                                      
                                      53,807
                                      
                                      
                                      
                                      -Net
      proceeds from VISA IPO
                                      
                                      
                                      -
                                      
                                      
                                      
                                      132,106Investment
      securities recoveries
                                      
                                      
                                      -
                                      
                                      
                                      
                                      197,487Loan
      servicing fees
                                      
                                      
                                      67,873
                                      
                                      
                                      
                                      62,940Loss
      on sale of assets
                                      
                                      
                                      (58,655
                                      )
                                      
                                      
                                      (71,032
                                      )Other
                                      
                                      
                                      175,562
                                      
                                      
                                      
                                      213,530Total
      non-interest income
                                      
                                      
                                      7,447,505
                                      
                                      
                                      
                                      7,515,513




See
notes to condensed consolidated financial statements


6





Rurban
Financial Corp.


Condensed
Consolidated Statements of Income (Unaudited)


Three
Months Ended





March 31,
                                          2009
                                        
                                        
                                        March 31,
                                          2008Non-interest
      ExpenseSalaries
      and employee benefits
                                        
                                        $
                                        4,924,122
                                        
                                        
                                        $
                                        4,438,764Net
      occupancy expense
                                        
                                        
                                        672,401
                                        
                                        
                                        
                                        566,016Equipment
      expense
                                        
                                        
                                        1,613,393
                                        
                                        
                                        
                                        1,567,637Data
      processing fees
                                        
                                        
                                        135,736
                                        
                                        
                                        
                                        96,567Professional
      fees
                                        
                                        
                                        498,055
                                        
                                        
                                        
                                        570,687Marketing
      expense
                                        
                                        
                                        188,746
                                        
                                        
                                        
                                        181,747Printing
      and office supplies
                                        
                                        
                                        214,542
                                        
                                        
                                        
                                        186,052Telephone
      and communications
                                        
                                        
                                        406,393
                                        
                                        
                                        
                                        421,929Postage
      and delivery expense
                                        
                                        
                                        609,022
                                        
                                        
                                        
                                        602,634State,
      local and other taxes
                                        
                                        
                                        232,896
                                        
                                        
                                        
                                        180,768Employee
      expense
                                        
                                        
                                        259,938
                                        
                                        
                                        
                                        230,611Other
                                        
                                        
                                        719,780
                                        
                                        
                                        
                                        557,948Total
      non-interest expense
                                        
                                        
                                        10,475,024
                                        
                                        
                                        
                                        9,601,360Income
      Before Income Tax
                                        
                                        
                                        1,493,202
                                        
                                        
                                        
                                        1,539,151Provision
      for Income Taxes
                                        
                                        
                                        389,649
                                        
                                        
                                        
                                        429,795Net
      Income
                                        
                                        $
                                        1,103,553
                                        
                                        
                                        $
                                        1,109,356Basic
      Earnings Per Share
                                        
                                        $
                                        0.23
                                        
                                        
                                        $
                                        0.22Diluted
      Earnings Per Share
                                        
                                        $
                                        0.23
                                        
                                        
                                        $
                                        0.22Dividends
      Declared Per Share
                                        
                                        $
                                        0.09
                                        
                                        
                                        $
                                        0.08





See
notes to consolidated financial statements (unaudited)


7





RURBAN
FINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’


EQUITY
(UNAUDITED)





Three Months EndedMarch 31, 2009
                
                
                March 31, 2008Balance
      at beginning of period
                
                $
                61,662,004
                
                
                $
                59,325,235Cumulative
      effect adjustment for split dollar BOLI
                
                
                -
                
                
                
                (116,303
                )Net
      Income
                
                
                1,103,553
                
                
                
                1,109,356Other
      comprehensive loss:Net
      change in unrealized gains (losses)On
      securities available for sale, net
                
                
                1,344,092
                
                
                
                350,193Total
      comprehensive income
                
                
                2,447,645
                
                
                
                1,459,549Cash
      dividend
                
                
                (438,958
                )
                
                
                (397,914
                )Purchase
      of treasury shares
                
                
                (80,247
                )
                
                
                (421,000
                )Share-based
      compensation expense
                
                
                30,066
                
                
                
                20,744Balance
      at end of period
                
                $
                63,620,510
                
                
                $
                59,870,311




See
notes to condensed consolidated financial statements
(unaudited)


8


Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


Three
Months Ended




March 31, 2009
                              
                              
                              March 31, 2008Operating
      ActivitiesNet
      income
                              
                              $
                              1,103,553
                              
                              
                              $
                              1,109,356Items
      not requiring (providing) cashDepreciation
      and amortization
                              
                              
                              906,560
                              
                              
                              
                              976,290Provision
      for loan losses
                              
                              
                              495,142
                              
                              
                              
                              192,218Expense
      of share-based compensation plan
                              
                              
                              30,066
                              
                              
                              
                              20,744Amortization
      of premiums and discounts on securities
                              
                              
                              126,959
                              
                              
                              
                              15,842Amortization
      of intangible assets
                              
                              
                              221,911
                              
                              
                              
                              173,382Deferred
      income taxes
                              
                              
                              (1,367,386
                              )
                              
                              
                              (180,403
                              )FHLB
      Stock Dividends
                              
                              
                              -
                              
                              
                              
                              (40,900
                              )Proceeds
      from sale of loans held for sale
                              
                              
                              75,954,853
                              
                              
                              
                              15,208,863Originations
      of loans held for sale
                              
                              
                              (80,148,083
                              )
                              
                              
                              (15,749,144
                              )Gain
      from sale of loans
                              
                              
                              (1,078,047
                              )
                              
                              
                              (274,603
                              )Gain
      on available for sale securities
                              
                              
                              (53,807
                              )
                              
                              
                              -(Gain)
      loss on sale of foreclosed assets
                              
                              
                              58,655
                              
                              
                              
                              (3,180
                              )Loss
      on sales of fixed assets
                              
                              
                              27,878
                              
                              
                              
                              71,032Changes
      inInterest
      receivable
                              
                              
                              100,473
                              
                              
                              
                              256,716Other
      assets
                              
                              
                              (662,788
                              )
                              
                              
                              656,421Interest
      payable and other liabilities
                              
                              
                              (1,884,229
                              )
                              
                              
                              (248,376
                              )Net
      cash provided by (used in) operating activities
                              
                              
                              (6,168,290
                              )
                              
                              
                              2,184,258Investing
      ActivitiesPurchases
      of available-for-sale securities
                              
                              
                              (37,662,358
                              )
                              
                              
                              (36,191,291
                              )Proceeds
      from maturities of available-for-sale securities
                              
                              
                              10,851,012
                              
                              
                              
                              34,989,055Proceeds
      from sales of available-for-sale securities
                              
                              
                              3,501,640
                              
                              
                              
                              -Proceeds
      from sales of Fed Stock
                              
                              
                              700,000
                              
                              
                              
                              -Net
      change in loans
                              
                              
                              15,677,493
                              
                              
                              
                              (4,461,937
                              )Purchase
      of premises and equipment and software
                              
                              
                              (347,271
                              )
                              
                              
                              (1,196,249
                              )Proceeds
      from sales of premises and equipment
                              
                              
                              645
                              
                              
                              
                              301,314Proceeds
      from sale of foreclosed assets
                              
                              
                              127,090
                              
                              
                              
                              62,385Net
      cash used in investing activities
                              
                              
                              (7,151,749
                              )
                              
                              
                              (6,496,723
                              )




See
notes to condensed consolidated financial statements
(unaudited)


9




Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited) (continued)


Three
Months Ended




March 31, 2009
                                      
                                      
                                      March 31, 2008Financing
      ActivitiesNet
      increase in demand deposits, money market, interest checking and savings
      accounts
                                      
                                      $
                                      12,791,810
                                      
                                      
                                      $
                                      15,712,413Net
      decrease in certificates of deposit
                                      
                                      
                                      (9,378,442
                                      )
                                      
                                      
                                      (5,031,327
                                      )Net
      increase in securities sold under agreements to repurchase
                                      
                                      
                                      4,468,865
                                      
                                      
                                      
                                      530,132Proceeds
      from Federal Home Loan Bank advances
                                      
                                      
                                      2,000,000
                                      
                                      
                                      
                                      1,000,000Repayment
      of Federal Home Loan Bank advances
                                      
                                      
                                      (2,587,836
                                      )
                                      
                                      
                                      (2,000,000
                                      )Proceeds
      from notes payable
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      -Repayment
      of notes payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (104,873
                                      )Purchase
      of treasury stock
                                      
                                      
                                      (80,247
                                      )
                                      
                                      
                                      (421,000
                                      )Dividends
      paid
                                      
                                      
                                      (438,958
                                      )
                                      
                                      
                                      (397,914
                                      )Net
      cash provided by financing activities
                                      
                                      
                                      8,275,192
                                      
                                      
                                      
                                      9,287,431Increase
      (Decrease) in Cash and Cash Equivalents
                                      
                                      
                                      (5,044,847
                                      )
                                      
                                      
                                      4,974,966Cash
      and Cash Equivalents, Beginning of Year
                                      
                                      
                                      28,059,532
                                      
                                      
                                      
                                      17,183,627Cash
      and Cash Equivalents, End of Period
                                      
                                      $
                                      23,014,685
                                      
                                      
                                      $
                                      22,158,593Supplemental
      Cash Flows InformationInterest
      paid
                                      
                                      $
                                      3,373,057
                                      
                                      
                                      $
                                      4,359,285Transfer
      of loans to foreclosed assets
                                      
                                      $
                                      190,158
                                      
                                      
                                      $
                                      1,507,718





See
notes to condensed consolidated financial statements
(unaudited)


10


RURBAN
FINANCIAL CORP.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




NOTE
A—BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form
10-Q.  Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  The financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly present
the financial position, results of operations and cash flows of the
Company.  Those adjustments consist only of normal recurring
adjustments.  Results of operations for the three months ended March
31, 2009 are not necessarily indicative of results for the complete
year.





The
condensed consolidated balance sheet of the Company as of December 31, 2008 has
been derived from the audited consolidated balance sheet of the Company as of
that date.





For
further information, refer to the consolidated financial statements and
footnotes included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.





NOTE
B—EARNINGS PER SHARE





Earnings
per share (EPS) have been computed based on the weighted average number of
shares outstanding during the periods presented. For the periods ended March 31,
2009 and 2008, share based awards totaling 327,263 and 329,640 common shares,
respectively, were not considered in computing EPS as they were anti-dilutive.
The number of shares used in the computation of basic and diluted earnings per
share were:





Three Months EndedMarch 312009
                  
                  
                  2008Basic
      earnings per share
                  
                  
                  4,875,936
                  
                  
                  
                  4,962,428Diluted
      earnings per share
                  
                  
                  4,875,936
                  
                  
                  
                  4,962,511





NOTE
C – LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES





Total
loans on the balance sheet are comprised of the following classifications
at:





March 31,
                
                
                December 31,2009
                
                
                2008Commercial
                
                $
                82,912,530
                
                
                $
                83,645,408Commercial
      real estate
                
                
                157,986,340
                
                
                
                161,566,005Agricultural
                
                
                41,506,827
                
                
                
                43,641,132Residential
      real estate
                
                
                99,798,225
                
                
                
                107,905,198Consumer
                
                
                51,798,301
                
                
                
                53,338,523Lease
      financing
                
                
                288,500
                
                
                
                266,348Total
      loans
                
                
                434,290,723
                
                
                
                450,362,614LessNet
      deferred loan fees, premiums and discounts
                
                
                (238,869
                )
                
                
                (250,961
                )Loans,
      net of unearned income
                
                $
                434,051,854
                
                
                $
                450,111,653Allowance
      for loan losses
                
                $
                (5,348,952
                )
                
                $
                (5,020,197
                )




11


The
following is a summary of the activity in the allowance for loan losses account
for the three months ended March 31, 2009 and 2008.





Three Months EndedMarch 31,2009
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  5,020,197
                  
                  
                  $
                  3,990,455Provision
      charged to expense
                  
                  
                  495,142
                  
                  
                  
                  192,218Recoveries
                  
                  
                  20,994
                  
                  
                  
                  30,848Loans
      charged off
                  
                  
                  (187,381
                  )
                  
                  
                  (197,291
                  )Balance,
      end of period
                  
                  $
                  5,348,952
                  
                  
                  $
                  4,016,230





The
following schedule summarizes nonaccrual, past due and impaired loans
at:





March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008Non-accrual
      loans
                      
                      $
                      9,163,368
                      
                      
                      $
                      5,177,694Accruing
      loans which are contractuallypast
      due 90 days or more as to interest orprincipal
      payments
                      
                      
                      7,350
                      
                      
                      
                      -Total
      non-performing loans
                      
                      $
                      9,170,718
                      
                      
                      $
                      5,177,694





In
addition to the above mentioned non-performers, management was very proactive in
reaching out to customers to restructure loans.  On March 31, 2009,
approximately $6.87 million in loans were restructured and are currently paying
under the new terms.  At December 31, 2008, $151,000 in loans were
restructured and paying under the new terms.





Individual
loans determined to be impaired were as follows:





March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Loans
      with no allowance for loan losses allocated
                  
                  $
                  8,137,000
                  
                  
                  $
                  1,857,000Loans
      with allowance for loan losses allocated
                  
                  
                  4,138,000
                  
                  
                  
                  866,000Total
      impaired loans
                  
                  $
                  12,275,000
                  
                  
                  $
                  2,723,000Amount
      of allowance allocated
                  
                  $
                  630,000
                  
                  
                  $
                  322,000




12




NOTE
D – REGULATORY MATTERS




The
Company and The State Bank and Trust Company (“State Bank”) are subject to
various regulatory capital requirements administered by federal and state
banking agencies.  Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional, discretionary actions by
regulators.  If undertaken, these actions could have a direct material
adverse effect on the Company’s financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and State Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices.  The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.




Quantitative
measures established by regulation to ensure capital adequacy require the
Company and State Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier I capital to
average assets (as defined in the regulations).  As of March 31, 2009
and December 31, 2008, the Company and State Bank exceeded all
“well-capitalized” requirements to which they were subject.




As of
December 31, 2008, the most recent notification to the regulators categorized
State Bank as well-capitalized under the regulatory framework for prompt
corrective action.  To be categorized as well-capitalized, State Bank
must maintain capital ratios as set forth in the following
table.  There are no conditions or events since that notification that
management believes have changed State Bank’s categorization as well
capitalized.




The
Company’s consolidated, and State Bank’s actual, capital amounts (in millions)
and ratios, as of March 31, 2009 and December 31, 2008, are also presented in
the following table.




Actual
                                              
                                              
                                              Minimum Required For
                                                Capital Adequacy Purposes
                                              
                                              
                                              To Be Well Capitalized Under
                                                Prompt Corrective Action
                                                ProvisionsAmount
                                              
                                              
                                              Ratio
                                              
                                              
                                              Amount
                                              
                                              
                                              Ratio
                                              
                                              
                                              Amount
                                              
                                              
                                              RatioAs
      of March 31, 2009Total
      Capital
                                                (to
      Risk-Weighted Assets)Consolidated
                                              
                                              $
                                              60.7
                                              
                                              
                                              
                                              13.5
                                              %
                                              
                                              $
                                              36.0
                                              
                                              
                                              
                                              8.0
                                              %
                                              
                                              $
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              50.7
                                              
                                              
                                              
                                              11.6
                                              
                                              
                                              
                                              35.1
                                              
                                              
                                              
                                              8.0
                                              
                                              
                                              
                                              43.9
                                              
                                              
                                              
                                              10.0Tier
      I Capital
                                                (to
      Risk-Weighted Assets)Consolidated
                                              
                                              
                                              55.3
                                              
                                              
                                              
                                              12.3
                                              
                                              
                                              
                                              18.0
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              45.4
                                              
                                              
                                              
                                              10.3
                                              
                                              
                                              
                                              17.6
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              26.3
                                              
                                              
                                              
                                              6.0Tier
      I Capital
                                                (to
      Average Assets)Consolidated
                                              
                                              
                                              55.3
                                              
                                              
                                              
                                              8.3
                                              
                                              
                                              
                                              26.7
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              45.4
                                              
                                              
                                              
                                              6.9
                                              
                                              
                                              
                                              26.2
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              32.8
                                              
                                              
                                              
                                              5.0As
      of December 31, 2008Total
      Capital
                                                (to
      Risk-Weighted Assets)Consolidated
                                              
                                              $
                                              59.5
                                              
                                              
                                              
                                              13.0
                                              %
                                              
                                              $
                                              36.5
                                              
                                              
                                              
                                              8.0
                                              %
                                              
                                              $
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              50.0
                                              
                                              
                                              
                                              11.3
                                              
                                              
                                              
                                              35.4
                                              
                                              
                                              
                                              8.0
                                              
                                              
                                              
                                              44.3
                                              
                                              
                                              
                                              10.0Tier
      I Capital
                                                (to
      Risk-Weighted Assets)Consolidated
                                              
                                              
                                              54.5
                                              
                                              
                                              
                                              11.9
                                              
                                              
                                              
                                              18.3
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              45.0
                                              
                                              
                                              
                                              10.2
                                              
                                              
                                              
                                              17.7
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              26.6
                                              
                                              
                                              
                                              6.0Tier
      I Capital
                                                (to
      Average Assets)Consolidated
                                              
                                              
                                              54.5
                                              
                                              
                                              
                                              9.5
                                              
                                              
                                              
                                              23.1
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              N/AState
      Bank
                                              
                                              
                                              45.0
                                              
                                              
                                              
                                              7.7
                                              
                                              
                                              
                                              23.5
                                              
                                              
                                              
                                              4.0
                                              
                                              
                                              
                                              29.3
                                              
                                              
                                              
                                              5.0




13





NOTE
E – CONTINGENT LIABILITIES





There are
various contingent liabilities that are not reflected in the consolidated
financial statements, including claims and legal actions arising in the ordinary
course of business.  In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on the Company’s consolidated financial condition or
results of operations.





NOTE
F - NEW ACCOUNTING PRONOUNCEMENTS





On April
9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”) regarding the
accounting treatment for investments including mortgage-backed
securities.  These FSPs changed the method for determining if an
Other-Than-Temporary Impairment (“OTTI”) exists and the amount of OTTI to be
recorded through an entity’s income statement.  The changes brought
about by the FSPs provide greater clarity and reflect a more accurate
representation of the credit and noncredit components of an OTTI
event.  The three FSPs are as follows:





·         FSP
“SFAS 157-4 Determining Fair
Value When the Volume and Level of Activity for the Assets or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly” addresses the criteria to be used in the determination of an
active market in determining whether observable transactions are Level 1 or
Level 2 under the framework established by SFAS 157, “Fair Value
Measurements.”  The FSP reiterates that fair value is based on
the notion of exit price in an orderly transaction between willing market
participants at the valuation date.


·         FSP
“SFAS 115-2 and SFAS 124-2,
Recognition and Presentation of Other-than-Temporary Impairments”provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on debt
securities.


·         FSP
“SFAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments”enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures.





These
staff positions are effective for financial statements issued for periods ending
after June 15, 2009, with early application possible for the quarter ended March
31, 2009.  The Company elected not to adopt any of the above positions
early.  Adoption of these staff positions is not expected to have a
material effect on the Company’s financial position or results of
operations.





On June
16, 2008, the FASB issued Staff Position EITF 03-6-1 “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”).  The FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method described in paragraphs 60 and 61
of FASB Statement No. 128, Earnings per Share.  FSP EITF 03-6-1
is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008.  The adoption of FSP
EITF 03-6-1 has not impacted the Corporation’s consolidated financial
statements.


14





Accounting
Standards No. 161 “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (“SFAS No. 161”).  SFAS No. 161
requires enhanced disclosures about an entity’s derivative and hedging
activities and thereby, improves the transparency of financial
reporting.  SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  Management has determined there is no impact from SFAS
No. 161 on the Corporation’s disclosures.





On
December 4, 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51.”SFAS No.
160 amends ARB No. 51 to establish new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS No. 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that does not result in deconsolidation are
equity transactions.  The statement also requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated.  SFAS No. 160 is effective for fiscal years and
interim periods within those fiscal years, beginning on or after December 15,
2008.  Early application is prohibited.  SFAS No. 160 is
effective for the Company’s fiscal year that begins on January 1,
2009.





On
December 4, 2007, the FASB amended SFAS No. 141 (revised 2007), “Business
Combinations.”SFAS No. 141R, establishes requirements and
principles for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree.  SFAS No. 141R will apply to
business combinations for which the acquisition date is on or after the
beginning of the first reporting period for fiscal year beginning on or after
December 15, 2008.  Earlier adoption is
prohibited.  Accordingly, a calendar year-end company is required to
record and disclose business combinations following existing GAAP until January
1, 2009.  Management has adopted SFAS 141R effective January 1,
2009.





In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115 (SFAS No. 159).  SFAS No. 159 permits the Company to choose
to measure certain financial assets and liabilities at fair value that are not
currently required to be measured at fair value (i.e. the Fair Value
Option).  Election of the Fair Value Option is made on an
instrument-by-instrument basis and is irrevocable.  At the adoption
date, unrealized gains and losses on financial assets and liabilities for which
the Fair Value Option has been elected would be reported as a cumulative
adjustment to beginning retained earnings.  If the Company elects the
Fair Value Option for certain financial assets and liabilities, the Company will
report unrealized gains and losses due to changes in their fair value in
earnings at each subsequent reporting date. SFAS No. 159 is effective as of
January 1, 2008.  The Company has not elected the Fair Value Option
for any financial assets or liabilities at March 31, 2009.







In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (FAS 157).  FAS 157 enhances existing guidance for
measuring assets and liabilities using fair value. Prior to the issuance of FAS
157, guidance for applying fair value was incorporated in several accounting
pronouncements.  FAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities.  FAS
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets.  Under FAS
157, fair value measurements are disclosed by level within that
hierarchy.  While FAS 157 does not add any new fair value
measurements, it does change current practice.  Changes to practice
include: (1) a requirement for an entity to include its own credit standing
in the measurement of its liabilities; (2) a modification of the
transaction price presumption; (3) a prohibition on the use of block
discounts when valuing large blocks of securities for broker-dealers and
investment companies; and (4) a requirement to adjust the value of
restricted stock for the effect of the restriction even if the restriction
lapses within one year. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years.  The Company adopted FAS 157 effective for the
first quarter of 2008.


15





At its
September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  The consensus stipulates that an agreement by an
employer to share a portion of the proceeds of a life insurance policy with an
employee during the postretirement period is a postretirement benefit
arrangement required to be accounted for under Statement No. 106 (“SFAS No.
106”) or Accounting Principles Board (APB) Opinion No. 12, Omnibus
Opinion-1967.  The consensus concludes that the purchase of a
split-dollar life insurance policy does not constitute a settlement under SFAS
No. 106 and, therefore, a liability for the postretirement obligation must be
recognized under SFAS No. 106 if the benefit is offered under an arrangement
that constitutes a plan or under APB No. 12 if it is not part of a
plan.  Issue 06-04 is effective for annual or interim reporting
periods beginning after December 15, 2007.  The Company has
endorsement split-dollar life insurance policies.  A liability has
been recorded through a cumulative-effect adjustment to retained earnings as of
January 1, 2008 in the amount of $116,303.  There was no material
impact to the financial position and results of operations as a result of the
implementation of EITF 06-04.





NOTE
G – COMMITMENTS AND CREDIT RISK





As of
March 31, 2009, loan commitments and unused lines of credit totaled $72,865,000,
standby letters of credit totaled $5,308,000 and no commercial letters of credit
were outstanding.  At December 31, 2008, loan commitments and unused
lines of credit totaled $67,785,000, standby letters of credit totaled
$5,436,000 and no commercial letters of credit were outstanding.





NOTE
H – SEGMENT INFORMATION




The
reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing
operations.  “Other” segment information includes the accounts of the
holding company, Rurban, which combined, provides management and operational
services to its subsidiaries.  Information reported internally for
performance assessment follows.


16


NOTE H —
SEGMENT INFORMATION (Continued)
  As of and
for the three months ended March 31, 2009
 
 Income statement information:
                        
                        Banking
                        
                        
                        Data
                          Processing
                        
                        
                        Other
                        
                        
                        Total
                          Segments
                        
                        
                        Intersegment
                          Elimination
                        
                        
                        Consolidated
                          TotalsNet
      interest income (expense)
                        
                        $
                        5,439,653
                        
                        
                        $
                        (25,075
                        )
                        
                        $
                        (398,715
                        )
                        
                        $
                        5,015,863
                        
                        
                        
                        
                        
                        $
                        5,015,863Non-interest
      income -external customers
                        
                        
                        2,481,920
                        
                        
                        
                        4,944,671
                        
                        
                        
                        20,914
                        
                        
                        
                        7,447,505
                        
                        
                        
                        
                        
                        
                        7,447,505Non-interest
      income - other segments
                        
                        
                        19,872
                        
                        
                        
                        428,016
                        
                        
                        
                        378,593
                        
                        
                        
                        826,481
                        
                        
                        
                        (826,481
                        )
                        
                        
                        -Total
      revenue
                        
                        
                        7,941,445
                        
                        
                        
                        5,347,612
                        
                        
                        
                        792
                        
                        
                        
                        13,289,849
                        
                        
                        
                        (826,481
                        )
                        
                        
                        12,463,368Non-interest
      expense
                        
                        
                        6,307,784
                        
                        
                        
                        4,184,780
                        
                        
                        
                        808,941
                        
                        
                        
                        11,301,505
                        
                        
                        
                        (826,481
                        )
                        
                        
                        10,475,024Significant
      non-cash items:Depreciation
      and amortization
                        
                        
                        270,118
                        
                        
                        
                        611,956
                        
                        
                        
                        24,486
                        
                        
                        
                        906,560
                        
                        
                        
                        -
                        
                        
                        
                        906,560Provision
      for loan losses
                        
                        
                        495,142
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        495,142
                        
                        
                        
                        -
                        
                        
                        
                        495,142Income
      tax expense (benefit)
                        
                        
                        275,062
                        
                        
                        
                        395,363
                        
                        
                        
                        (280,776
                        )
                        
                        
                        389,649
                        
                        
                        
                        -
                        
                        
                        
                        389,649Segment
      profit (loss)
                        
                        $
                        863,457
                        
                        
                        $
                        767,469
                        
                        
                        $
                        (527,373
                        )
                        
                        $
                        1,103,553
                        
                        
                        $
                        -
                        
                        
                        $
                        1,103,553Balance sheet information:Total
      assets
                        
                        $
                        644,158,701
                        
                        
                        $
                        20,244,226
                        
                        
                        $
                        3,203,320
                        
                        
                        $
                        667,606,247
                        
                        
                        $
                        (1,793,641
                        )
                        
                        $
                        665,812,606Goodwill
      and intangibles
                        
                        $
                        19,953,018
                        
                        
                        $
                        7,075,797
                        
                        
                        $
                        -
                        
                        
                        $
                        27,028,815
                        
                        
                        $
                        -
                        
                        
                        $
                        27,028,815Premises
      and equipment expenditures
                        
                        $
                        96,645
                        
                        
                        $
                        225,435
                        
                        
                        $
                        25,191
                        
                        
                        $
                        347,271
                        
                        
                        $
                        -
                        
                        
                        $
                        347,271
  17
  NOTE H —
SEGMENT INFORMATION (Continued)
 
 As of and
for the three months ended March 31, 2008
 
 Income statement information:
                      
                      Banking
                      
                      
                      Data
                        Processing
                      
                      
                      Other
                      
                      
                      Total
                        Segments
                      
                      
                      Intersegment
                        Elimination
                      
                      
                      Consolidated
                        TotalsNet
      interest income (expense)
                      
                      $
                      4,295,351
                      
                      
                      $
                      (43,240
                      )
                      
                      $
                      (434,895
                      )
                      
                      $
                      3,817,216
                      
                      
                      
                      
                      
                      $
                      3,817,216Non-interest
      income - external customers
                      
                      
                      2,159,188
                      
                      
                      
                      5,259,566
                      
                      
                      
                      96,759
                      
                      
                      
                      7,515,513
                      
                      
                      
                      
                      
                      
                      7,515,513Non-interest
      income - other segments
                      
                      
                      9,366
                      
                      
                      
                      389,403
                      
                      
                      
                      309,998
                      
                      
                      
                      708,767
                      
                      
                      
                      (708,767
                      )
                      
                      
                      -Total
      revenue
                      
                      
                      6,463,905
                      
                      
                      
                      5,605,729
                      
                      
                      
                      (28,138
                      )
                      
                      
                      12,041,496
                      
                      
                      
                      (708,767
                      )
                      
                      
                      11,332,729Non-interest
      expense
                      
                      
                      5,017,887
                      
                      
                      
                      4,393,142
                      
                      
                      
                      899,098
                      
                      
                      
                      10,310,127
                      
                      
                      
                      (708,767
                      )
                      
                      
                      9,601,360Significant
      non-cash items:Depreciation
      and amortization
                      
                      
                      269,370
                      
                      
                      
                      667,162
                      
                      
                      
                      39,758
                      
                      
                      
                      976,290
                      
                      
                      
                      -
                      
                      
                      
                      976,290Provision
      for loan losses
                      
                      
                      192,218
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      192,218
                      
                      
                      
                      -
                      
                      
                      
                      192,218Income
      tax expense (benefit)
                      
                      
                      336,347
                      
                      
                      
                      412,280
                      
                      
                      
                      (318,832
                      )
                      
                      
                      429,795
                      
                      
                      
                      -
                      
                      
                      
                      429,795Segment
      profit (loss)
                      
                      $
                      917,453
                      
                      
                      $
                      800,307
                      
                      
                      $
                      (608,404
                      )
                      
                      $
                      1,109,356
                      
                      
                      $
                      -
                      
                      
                      $
                      1,109,356Balance
      sheet information:Total
      assets
                      
                      $
                      552,918,637
                      
                      
                      $
                      20,353,899
                      
                      
                      $
                      6,588,372
                      
                      
                      $
                      579,860,908
                      
                      
                      $
                      (8,127,560
                      )
                      
                      $
                      571,733,348Goodwill
      and intangibles
                      
                      $
                      11,579,734
                      
                      
                      $
                      7,322,730
                      
                      
                      $
                      -
                      
                      
                      $
                      18,902,464
                      
                      
                      $
                      -
                      
                      
                      $
                      18,902,464Premises
      and equipment expenditures
                      
                      $
                      57,314
                      
                      
                      $
                      1,046,388
                      
                      
                      $
                      92,547
                      
                      
                      $
                      1,196,249
                      
                      
                      $
                      -
                      
                      
                      $
                      1,196,249


18


NOTE
I – FAIR VALUE OF ASSETS AND LIABILITIES





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (FAS 157).  FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.  FAS 157 has been applied prospectively
as of the beginning of the period.





FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The
standard describes three levels of inputs that may be used to measure fair
value:





Level
      1Quoted prices in active markets for identical assets
      or liabilities





Level
      2Observable inputs other than Level 1 prices, such as
      quoted prices for similar assets or liabilities; quoted prices in markets
      that are not active; or other inputs that are observable or can be
      corroborated by observable market data for substantially the full term of
      the assets or liabilities





Level
      3Unobservable inputs that are supported by little or no
      market activity and that are significant to the fair value of the assets
      or liabilities





Available-for-Sale
Securities





The fair
value of available-for-sale securities are determined by various valuation
methodologies.  Level 2 securities include U.S. government agencies,
mortgage-backed securities, and obligations of political and state
subdivisions.





The
following table presents the fair value measurements of assets measured at fair
value on a recurring basis and the level within FAS 157 fair value hierarchy in
which the fair value measurements fall at March 31, 2009 and December 31,
2008:





Fair Value Measurements Using:Description
                      
                      Fair Values at
                        3/31/2009
                      
                      
                      Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Assets
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)Available-for-Sale
      Securities
                      
                      $
                      127,879,529
                      
                      
                      
                      -
                      
                      
                      $
                      127,879,529
                      
                      
                      
                      -





19





Fair Value Measurements Using:Description
                      
                      Fair Values at
                        12/31/2008
                      
                      
                      Quoted Prices
                        in Active
                        Markets for
                        Identical
                        Assets
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)Available-for-Sale
      Securities
                      
                      $
                      102,606,475
                      
                      
                      
                      -
                      
                      
                      $
                      102,606,475
                      
                      
                      
                      -





Impaired
Loans





Loans for
which it is probable the Company will not collect all principal and interest due
according to contractual terms are measured for impairment in accordance with
the provisions of Financial Accounting Standard No. 114, “Accounting by Creditors for
Impairment of a Loan.”  Allowable methods for estimating fair
value include using the fair value of the collateral for collateral dependent
loans, or where a loan is determined not to be collateral dependent, using the
discounted cash flow method.  If the impaired loan is collateral
dependent, then the fair value method of measuring the amount of impairment is
utilized.  This method requires obtaining an independent appraisal of
the collateral and applying a discount factor to the value based on the
Company’s loan review policy.





Mortgage Servicing
Rights





Mortgage
servicing rights do not trade in an active, open market with readily observable
prices.  Accordingly, fair value is estimated using discounted cash
flow models.  Due to the nature of the valuation inputs, mortgage
servicing rights are classified within Level 3 of the hierarchy.





Foreclosed Assets Held For
Sale





Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value (based on current appraised value) at the date
of foreclosure, establishing a new cost basis.  Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less cost to
sell.  Management has determined fair value measurements on other real
estate owned primarily through evaluations of appraisals performed, and current
and past offers for the other real estate under evaluation.





The
following table presents the fair value measurements of assets measured at fair
value on a nonrecurring basis and the level within the FAS 157 fair value
hierarchy in which the fair value measurements fall at March 31, 2009 and
December 31, 2008:





Fair Value Measurements Using:Description
                      
                      Fair Values at
                        3/31/2009
                      
                      
                      Quoted Prices
                        in Active
                        Markets for
                        Identical Assets
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs (Level 3)Impaired
      loans
                      
                      $
                      3,471,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      3,471,000Mortgage
      Servicing Rights
                      
                      $
                      980,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      980,000Foreclosed
      Assets
                      
                      $
                      80,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      80,000





Fair Value Measurements Using:Description
                      
                      Fair Values at
                        12/31/2008
                      
                      
                      Quoted Prices
                        in Active
                        Markets for
                        Identical Assets
                        (Level 1)
                      
                      
                      Significant Other
                        Observable
                        Inputs (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs (Level 3)Impaired
      loans
                      
                      $
                      457,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      457,000Mortgage
      Servicing Rights
                      
                      $
                      607,078
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      607,078


20


Note
J – Strategic Partnership





On April
27, 2009, the Company announced a strategic partnership with New Core Holdings,
Inc. d/b/a New Core Banking Systems, headquartered in Birmingham, AL (“New
Core”).  As part of this partnership, RDSI and New Core Banking
Systems have also entered into a plan of merger that, if completed, would be
consummated by the end of 2010.  A prerequisite of this merger would
be the spin-off of RDSI from Rurban, resulting in RDSI becoming a separate
independent public company.  This would be followed immediately by the
merger of RDSI and New Core.  It is anticipated that New Core
shareholders would receive between 151⁄2% and 31% of the shares of the separately
reorganized RDSI.  The Board of Directors of Rurban will decide at a
later date whether to spin off RDSI and the timing and terms of that
spin-off.




Note
K – Dividends on Common Stock





On April
15, 2009, the Company’s Board of Directors approved a quarterly cash dividend of
$0.09 per share for the first quarter of 2009, payable on May 15, 2009 to all
shareholders of record on May 1, 2009.





Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





Cautionary Statement
Regarding Forward-Looking Information




Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are provided to assist in the
understanding of anticipated future financial
performance.  Forward-looking statements provide current expectations
or forecasts of future events and are not guarantees of future
performance.  Examples of forward-looking statements include: (a)
projections of income or expense, earnings per share, the payments or
non-payments of dividends, capital structure and other financial items; (b)
statements of plans and objectives of the Company or our management or Board of
Directors, including those relating to products or services; (c) statements of
future economic performance; and (d) statements of assumptions underlying such
statements.  Words such as “anticipates,” “believes,” “plans,”
“intends,” “expects,” “projects,” “estimates,” “should,” “may,” “would be,”
“will allow,” “will likely result,” “ will continue,” “will remain,” or other
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying those
statements.  Forward-looking statements are based on management’s
expectations and are subject to a number of risks and
uncertainties.  Although management believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from those expressed or implied in such
statements.  Risks and uncertainties that could cause actual results
to differ materially include, without limitation, changes in interest rates,
changes in the competitive environment, and changes in banking regulations or
other regulatory or legislative requirements affecting bank holding
companies.  Additional detailed information concerning a number of
important factors which could cause actual results to differ materially from the
forward-looking statements contained in Management’s Discussion and Analysis of
Financial Condition and Results of Operations is available in the Company’s
filings with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934, including the disclosure under the heading “Item 1A.
Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.  Undue reliance should not be
placed on the forward-looking statements, which speak only as of the date
hereof.  Except as may be required by law, the Company undertakes no
obligation to update any forward-looking statement to reflect unanticipated
events or circumstances after the date on which the statement is
made.




21


Overview of
Rurban





Rurban is
a bank holding company registered with the Federal Reserve
Board.  Rurban’s wholly-owned subsidiary, The State Bank and Trust
Company (“State Bank” or “The Bank”), is engaged in commercial
banking.  Rurban’s technology subsidiary, Rurbanc Data Services, Inc.
(“RDSI”), provides computerized data and item processing services to community
banks and businesses.





Rurban
Statutory Trust I (“RST”) was established in August 2000.  In
September 2000, RST completed a pooled private offering of 10,000 Capital
Securities with a liquidation amount of $1,000 per security.  The
proceeds of the offering were loaned to the Company in exchange for junior
subordinated debentures of the Company with terms substantially similar to the
Capital Securities.  The sole assets of RST are the junior
subordinated debentures, and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Company of the obligations
of RST under the Capital Securities.





Rurban
Statutory Trust II (“RST II”) was established in August 2005.  In
September 2005, RST II completed a pooled private offering of 10,000 Capital
Securities with a liquidation amount of $1,000 per security.  The
proceeds of the offering were loaned to the Company in exchange for junior
subordinated debentures of the Company with terms substantially similar to the
Capital Securities.  The sole assets of RST II are the junior
subordinated debentures, and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Company of the obligations
of RST II under the Capital Securities.





RFCBC,
Inc. (“RFCBC”) is an Ohio corporation and wholly-owned subsidiary of the Company
that was incorporated in August 2004. RFCBC operates as a loan subsidiary
in servicing and working out problem loans.





Rurban
Investments, Inc. (“RII”) is a Delaware corporation and a wholly-owned
subsidiary of the Bank that was incorporated in January 2009.  RII
holds mortgage backed and municipal securities.




Recent Regulatory
Developments





On
February 27, 2009, the Board of Directors of the Federal Deposit Insurance
Corporation (“FDIC”) voted to amend the restoration plan for the Deposit
Insurance Fund.  The changes that are expected to affect the Company
include a special assessment, a change in the assessment rates and a change to
the assessment system, which includes higher rates for institutions that rely
significantly on secured liabilities.





22


The FDIC
proposed to impose a special assessment on insured institutions of 20 basis
points on outstanding deposits as of June 30, 2009.  This assessment
is to be collected on September 30, 2009.  The interim rule would also
permit the Board to impose an emergency special assessment after June 30, 2009,
of up to 10 basis points on outstanding deposits, if deemed necessary by the
Board.  This interim rule was subject to a 30 day comment period and
is subject to change.  On March 5, 2009, the FDIC announced its
intention to cut the agency’s planned special emergency assessment in half, from
20 to 10 basis points, provided that Congress clears legislation expanding the
FDIC’s line of credit with the Treasury to $100 billion.





Previously,
most banks in the best risk category paid anywhere from 12 cents per $100 of
deposits to 14 cents per $100 of deposits for insurance.  Under the
final rule, beginning April 1, 2009, banks in this category will pay initial
base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual
basis.





Finally, changes to the assessment
system include higher rates for institutions that rely significantly on secured
liabilities.  These liabilities can include brokered deposits and FHLB
advances.  The Company had no brokered deposits at March 31, 2009, and
has not utilized brokered deposits in the past.  The Company does,
however, utilize FHLB advances and, as such, could experience higher assessments
as a result.





On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which creates the Troubled Asset Relief
Program ( “TARP”) and provides the U.S. Treasury with broad authority to
implement certain actions to help restore stability and liquidity to U.S.
markets.  On October 14, 2008 the U.S. Treasury announced a voluntary
Capital Purchase Program pursuant to TARP to encourage U.S. financial
institutions to build capital to increase the flow of financing to U.S.
businesses and consumers and to support the U.S. economy.  Under the
program, Treasury will purchase up to $250 billion of senior preferred shares on
standardized terms as described in the program's term sheet.  The
program was made available to qualifying U.S. controlled banks, savings
associations, and certain bank and savings and loan holding companies engaged
only in financial activities that applied to participate before 5:00 pm (EDT) on
November 14, 2008.





On
November 12, 2008, the Company announced that, after a careful review of the
Company’s strategic plan, its capital position, and the constraints and
uncertainties of the TARP Capital Purchase Program, the Company’s Board of
Directors elected not to apply or participate in the U.S. Treasury’s Capital
Purchase Program.





Also
announced on October 14, 2008 by the FDIC was a Temporary Liquidity Guarantee
Program (TLGP) designed to strengthen confidence and encourage liquidity in the
banking system.  The new program will guarantee newly issued senior
unsecured debt of eligible institutions, including FDIC-insured banks and
thrifts, as well as certain holding companies.





After
careful consideration of the risks and benefits of the Temporary Liquidity
Guarantee Program the Company has concluded that it will not participate in the
program.





Finally,
as part of the TLGP the FDIC also announced that it would provide a temporary
100% guarantee of all balances in non-interest-bearing transaction accounts
(“Transaction Account Guarantee Program”).  This coverage is for
traditional checking accounts that don't earn interest.  The extended
coverage under the FDIC's Transaction Account Guarantee Program will continue
through December 31, 2009.


23





The
Company evaluated the benefits of the Transaction Account Guarantee Program and
elected to participate in the program.





Critical Accounting
Policies





Note 1 to
the Notes to the Consolidated Financial Statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 describes
the significant accounting policies used in the development and presentation of
the Company’s financial statements.  The accounting and reporting
policies of the Company are in accordance with accounting principles generally
accepted in the United States and conform to general practices within the
banking industry.  The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions.  The Company’s financial position and
results of operations can be affected by these estimates and assumptions and are
integral to the understanding of reported results.  Critical
accounting policies are those policies that management believes are the most
important to the portrayal of the Company’s financial condition and results, and
they require management to make estimates that are difficult, subjective, or
complex.





Allowance for Loan Losses -The allowance for loan losses provides coverage for probable losses
inherent in the Company’s loan portfolio.  Management evaluates the
adequacy of the allowance for loan losses each quarter based on changes, if any,
in underwriting activities, loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, regulatory guidance and economic factors.  This
evaluation is inherently subjective, as it requires the use of significant
management estimates.  Many factors can affect management’s estimates
of specific and expected losses, including volatility of default probabilities,
rating migrations, loss severity and economic and political
conditions.  The allowance is increased through provisions charged to
operating earnings and reduced by net charge-offs.





The
Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio.  The allowance recorded for
commercial loans is based on reviews of individual credit relationships and an
analysis of the migration of commercial loans and actual loss
experience.  The allowance recorded for homogeneous consumer loans is
based on an analysis of loan mix, risk characteristics of the portfolio, fraud
loss and bankruptcy experiences, and historical losses, adjusted for current
trends, for each homogeneous category or group of loans.  The
allowance for credit losses relating to impaired loans is based on the loan’s
observable market price, the collateral for certain collateral-dependent loans,
or the discounted cash flows using the loan’s effective interest
rate.





Regardless
of the extent of the Company’s analysis of customer performance, portfolio
trends or risk management processes, certain inherent but undetected losses are
probable within the loan portfolio.  This is due to several factors,
including inherent delays in obtaining information regarding a customer’s
financial condition or changes in their unique business conditions, the
subjective nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends.  Volatility of economic or
customer-specific conditions affecting the identification and estimation of
losses for larger non-homogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogenous groups of loans are also
factors.  The Company estimates a range of inherent losses related to
the existence of these exposures.  The estimates are based upon the
Company’s evaluation of imprecise risk associated with the commercial and
consumer allowance levels and the estimated impact of the current economic
environment.  To the extent that actual results differ from
management’s estimates, additional loan loss provisions may be required that
could adversely impact earnings for future periods.


24





Goodwill and Other Intangibles-The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as
required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for
impairment.  Other intangible assets are amortized over their
estimated useful lives using straight-line or accelerated methods, and are
subject to impairment if events or circumstances indicate a possible inability
to realize the carrying amount. The initial goodwill and other intangibles
recorded and subsequent impairment analysis requires management to make
subjective judgments concerning estimates of how the acquired asset will perform
in the future.  Events and factors that may significantly affect the
estimates include, among others, customer attrition, changes in revenue growth
trends, specific industry conditions and changes in competition.  A
decrease in earnings resulting from these or other factors could lead to an
impairment of goodwill that could adversely impact earnings of future
periods.





Impact of Accounting
Changes




None





Three Months Ended March 31,
2009 compared to Three Months Ended March 31, 2008





Net
Income: Net income for the first quarter of 2009 was $1.10 million, or
$0.23 per diluted share, compared to $1.11 million, or $0.22 per diluted share,
for the first quarter of 2008.  The quarter reflects a $1.20 million
increase in net interest income.  This increase is partially offset by
an increase in the provision for loan losses of $303,000, a decrease of $68,000
in non-interest income, and an increase of $874,000 in non-interest
expense.  The primary driver of the increase in net interest income
was an increase of $62.8 million in average earning assets, acquired mainly in
the acquisition of National Bank of Montpelier (NBM), coupled with a 41 basis
point increase in the net interest margin.  The increase in
non-interest expense was driven by the addition of five retail branches
associated with the purchase of NBM.





Net
Interest Income: Net interest income was $5.02 million, an increase of
$1.20 million, or 31.4 percent, from the 2008 first quarter.  As
previously mentioned average earning assets increased $62.8 million, or 12.6
percent, over the 12-month period.  The increase in earning assets is
a result of loan growth over the past twelve months of $42.1 million, or 10.7
percent, reaching $434.1 million at March 31, 2009.  This growth was
due mainly to NBM as $43.7 million in loans were acquired. Sixty-five percent of
State Bank’s loan portfolio is commercial, and $22.9 million of the Bank’s
growth was derived from this sector, with $16.8 million derived from residential
growth.  Loan balances declined during the first quarter of 2009,
decreasing $16.1 million, or 14.3 percent annualized, from the fourth quarter of
2008.  The decrease in loans is largely attributable to residential
loans, which decreased $8.11 million during the quarter.  This was due
to refinancing activities, as the Company refinanced portfolio loans and sold
them into the secondary market.  Commercial loans accounted for an
additional $6.45 million decrease from year end.  This was due to
several pay downs and pay-offs of commercial credits where the borrower was
deleveraging, or sold a portion of their company.  Year-over-year, the
net interest margin increased 41 basis points from 3.26 percent for the first
quarter 2008 to 3.67 percent for the first quarter 2009.  The 3.67
percent represents a 16 basis point decrease from the linked quarter of 3.83
percent.  The year-over-year increase is a result of being liability
sensitive in a decreasing rate environment.  Management’s focus will
now turn to becoming asset sensitive as we feel rates are nearing their low
points and that rates will start to increase into the future.


25





Provision
for Loan Losses: The provision for loan losses was $495,000 in the first
quarter of 2009 compared to a $192,000 provision for the first quarter of
2008.  The Company experienced a slight increase in losses quarter
over quarter, which is reflected in net charge-offs of $167,000 compared to
$166,000 of net charge-offs in the 2008 first quarter.  For the first
quarter ended March 31, 2009, net charge-offs as a percentage of average loans
was 0.15 percent annualized.  At quarter end, consolidated
non-performing assets, including those of RFCBC (the loan workout subsidiary),
were $10.6 million, or 1.59 percent of total assets compared with $7.00 million,
or 1.22 percent of total assets for the prior-year first quarter.





($ in Thousands)
                  
                  March 31,
                    2009
                  
                  
                  December 31,
                    2008
                  
                  
                  March 31,
                    2008Net
      charge-offs
                  
                  $
                  167
                  
                  
                  $
                  280
                  
                  
                  $
                  166Non-performing
      loans
                  
                  
                  9,163
                  
                  
                  
                  5,178
                  
                  
                  
                  5,305OREO
      / OAO
                  
                  
                  1,426
                  
                  
                  
                  1,409
                  
                  
                  
                  1,662Non-performing
      assets
                  
                  
                  10,589
                  
                  
                  
                  6,587
                  
                  
                  
                  6,967Non-performing
      assets / Total assets
                  
                  
                  1.59
                  %
                  
                  
                  1.00
                  %
                  
                  
                  1.22
                  %Allowance
      for loan losses / Total loans
                  
                  
                  1.23
                  %
                  
                  
                  1.12
                  %
                  
                  
                  1.02
                  %Allowance
      for loan losses / Non-performing assets
                  
                  
                  50.5
                  %
                  
                  
                  76.2
                  %
                  
                  
                  57.6
                  %





Non-performing
assets (loans + OREO + OAO = NPA) were $10.6 million, or 1.59 percent, of total
assets at March 31, 2009, an increase of $3.6 million from a year-ago and $4.00
million from the linked quarter.  The acquisition of the National Bank
of Montpelier has increased non-performing assets, adding 28 basis point to our
ratio compared to the linked quarter.  Management has been aggressive
in classifying and collecting these problem loans.  The Company also
had a $1.8 million loan go ninety days past due and was moved into
non-performing status.  Management has aggressively reserved for what
is seen as the potential loss on this credit during the first
quarter.  In addition to the above mentioned non-performers,
management was very proactive in reaching out to customers to restructure
loans.  During the first quarter, approximately $6.8 million in loans
were restructured and are currently paying under the new terms.





Non-interest
Income: Non-interest income was $7.45 million for the first quarter of
2009 compared with $7.52 million for the prior-year first quarter, a decrease of
$68,000, or 0.90 percent.  The flat results were primarily driven by the
increase in the gain on sale of loans of $803,000, data service fees decreased
$292,000, and Trust Fees decreased $271,000.  Also accounting for the
year-over-year decrease are net proceeds from the VISA IPO of $132,000 and the
recovery on investment securities of $197,000, which were received in the first
quarter of 2008.  Non-interest income accounted for approximately 60
percent of Rurban’s total first quarter 2009 revenue. RDSI also has a
strong pipeline of prospects, but this will be a challenging year, as we expect
to have offsetting client losses as banks seek to lower their
costs.  Offsetting our projected new business is the loss of our
largest client bank in the fourth quarter of 2009.  We continue to
position RDSI for a strong recovery on the other side of this economic
environment.





Non-interest
Expense: Non-interest expense was $10.5 million for the first quarter of
2009, compared with $9.60 million for the first quarter of 2008.  The
acquisition of NBM contributed approximately $488,000 of this
increase.  Incentive salaries linked to mortgage production totaled
$400,000 for the quarter.  Additionally, an impairment charge of
$150,000 on mortgage servicing rights associated with the Company’s serviced
loan portfolio was taken in the first quarter of 2009.


26




Changes in Financial
Condition





March
31, 2009 vs. December 31, 2008





At March
31, 2009, total assets were $665.8 million, representing an increase of $8.19
million, or 1.3 percent, from December 31, 2008.  The increase is
primarily attributable to an increase of $25.3 million, or 24.6 percent in
available-for-sale securities, and an increase in loans held for sale of $5.27
million or 137.8 percent.  Loan balances decreased $16.1 million, or
3.6 percent.  Cash and cash equivalents decreased $5.04 million, or
18.0 percent.





Year-
over-year, average assets increased $99.2 million, or 17.5 percent. Loan growth
over the past twelve months was approximately $42.1 million, or 10.7 percent,
reaching $434.1 million at March 31, 2009; this growth was primarily due to the
acquisition of NBM.  Commercial loan growth accounted for $22.9
million of the Bank’s growth, with $16.8 million derived from residential
growth.





At March
31, 2009, liabilities totaled $602.2 million, an increase of $6.24 million since
December 31, 2008.  Of this increase, significant changes include
customer repurchase agreements, which increased $4.47 million (10.3 percent);
total deposits increased $3.41 million (0.70 percent) and notes payable
increased $1.5 million (150 percent).  Other liabilities decreased
$2.32 million (28.7 percent).  Of the $3.41 million increase in total
deposits, savings, interest checking and money market deposits increased $12.8
million while time deposits decreased $9.38 million.  The decrease in
time deposits was due to excess liquidity which allowed management to run off
higher cost municipal deposits.





From
December 31, 2008 to March 31, 2009, total shareholders’ equity increased $1.96
million, or 3.18 percent, to $63.6 million.  Of this increase,
retained earnings increased $665,000, which is the result of $1.10 million in
net income less $439,000 in cash dividends to
shareholders.  Additional paid-in-capital increased $30,000 as the
result of share-based compensation expense incurred during the
year.  Accumulated other comprehensive income increased $1.34 million
as the result of an increase in market value of the available-for-sale
securities portfolio.  The stock repurchase plan also reduced capital
by $80,000 during the first three months of 2009.





Capital
Resources





At March
31, 2009, actual capital levels (in millions) and minimum required levels were
as follows:





Minimum RequiredMinimum Required
                
                
                To Be Well CapitalizedFor Capital
                
                
                Under Prompt CorrectiveActual
                
                
                Adequacy Purposes
                
                
                Action RegulationsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital (to risk weighted assets)Consolidated
                
                $
                60.7
                
                
                
                13.5
                %
                
                $
                36.0
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                N/AState
      Bank
                
                
                50.7
                
                
                
                11.6
                
                
                
                35.1
                
                
                
                8.0
                
                
                
                43.9
                
                
                
                10.0





Both the
Company and State Bank were categorized as well capitalized at March 31,
2009.


27





LIQUIDITY





Liquidity
relates primarily to the Company’s ability to fund loan demand, meet deposit
customers’ withdrawal requirements and provide for operating
expenses.  Assets used to satisfy these needs consist of cash and due
from banks, federal funds sold, interest earning deposits in other financial
institutions, securities available-for-sale and loans held for
sale.  These assets are commonly referred to as liquid
assets.  Liquid assets were $160.0 million at March 31, 2009 compared
to $134.5 million at December 31, 2008.





The
Company’s commercial real estate and residential first mortgage portfolio of
$257.8 million at March 31, 2009 and $211.4 million at December 31, 2008, which
can and has been used to collateralize borrowings, is an additional source of
liquidity.  Management believes the Company’s current liquidity level,
without these borrowings, is sufficient to meet its liquidity
needs.  At March 31, 2009, all eligible commercial real estate and
first mortgage loans were pledged under an FHLB blanket lien.





The cash
flow statements for the periods presented provide an indication of the Company’s
sources and uses of cash, as well as an indication of the ability of the Company
to maintain an adequate level of liquidity.  A discussion of the cash
flow statements for the three months ended March 31, 2009 and 2008
follows.





The
Company experienced negative cash flows from operating activities for the three
months ended March 31, 2009 and positive cash flows for the three months ended
March 31, 2008.  Net cash used in operating activities was $6.17
million for the three months ended March 31, 2009.  Net cash provided
in operating activities was $2.18 million for the three months ended March 31,
2008.





Net cash
flow from investing activities was a use of cash of $7.15 million and $6.50
million for the three months ended March 31, 2009 and 2008,
respectively.  The changes in net cash from investing activities at
March 31, 2009 included available-for-sale securities purchases totaling $37.7
million.  These cash payments were offset by $10.9 million in proceeds
from maturities of available-for-sale securities, $15.7 million in net changes
from loans and $3.39 million in proceeds from the sale of available-for-sale
securities.  The changes in net cash from investing activities at
March 31, 2008 included the purchase of available-for-sale securities of $36.2
million, partially offset by the proceeds from maturities or calls of
available-for-sale securities of $35.0 million, the net change in loans of $4.5
million, and the purchases of premises and equipment of $1.2
million.





Net cash
flow from financing activities was $8.28 million and $9.29 million for the three
month periods ended March 31, 2009 and 2008, respectively.  The 2009
financing activities included a $12.8 million increase in demand deposits, money
market, interest checking and savings accounts, which were offset by a $9.38
million decrease in certificates of deposits.  Proceeds from advances
from the Federal Home Loan Bank totaled $2.0 million, repurchase agreements
increased $4.47 million and proceeds from notes payable totaled $1.5
million.  Offsetting this increase were repayments of Federal Home
Loan Bank advances of $2.59 million and cash dividends paid to shareholders of
$439,000.  The net cash provided by financing activities at March 31,
2008 was primarily due to a net increase in deposits of $10.7 million, partially
offset by proceeds from FHLB advances of $1.0 million.


28


Off-Balance-Sheet
Borrowing Arrangements:





Significant
additional off-balance-sheet liquidity is available in the form of FHLB
advances, unused federal funds lines from correspondent banks, and the national
certificate of deposit market.  Management expects the risk of changes
in off-balance-sheet arrangements to be immaterial to earnings.





Approximately
$130.8 million of the Company’s $257.8 million commercial real estate and
residential first mortgage loans qualify to collateralize FHLB borrowings and
have been pledged to meet FHLB collateralization requirements as of March 31,
2009.  Based on the current collateralization requirements of the
FHLB, approximately $10.2 million of additional borrowing capacity existed at
March 31, 2009.





At March
31, 2009, the Company had unused federal funds lines totaling $23.5
million.  At December 31, 2008, the Company had $25.5 million in
federal fund lines.  Federal funds borrowed at March 31, 2009 and
December 31, 2008 totaled $0 and $0, respectively.  The Company also
had $39.5 million in unpledged securities that may be used to pledge for
additional borrowings.





The
Company’s contractual obligations as of March 31, 2009 consisted of long-term
debt obligations, other debt obligations, operating lease obligations and other
long-term liabilities.  Long-term debt obligations were comprised of
FHLB advances of $36.1 million.  Other debt obligations were comprised
of Trust Preferred Securities of $20.6 million.  The Company’s
operating lease obligations consist of a lease on the State Bank operations
building of $99,600 per year, a lease on the RDSI-North building of $162,000 per
year, a lease on the Northtowne branch of State Bank of $60,000 per year and a
lease on the DCM Lansing facility of $61,000 per year.  Other
long-term liabilities were comprised of time deposits of $233.1
million.





ASSET LIABILITY
MANAGEMENT





Asset
liability management involves developing and monitoring strategies to maintain
sufficient liquidity, maximize net interest income and minimize the impact that
significant fluctuations in market interest rates would have on
earnings.  The business of the Company and the composition of its
balance sheet consist of investments in interest-earning assets (primarily
loans, mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and
borrowings).  With the exception of specific loans, which are
originated and held for sale, all of the financial instruments of the Company
are for other than trading purposes.  All of the Company’s
transactions are denominated in U.S. dollars with no specific foreign exchange
exposure.  In addition, the Company has limited exposure to commodity
prices related to agricultural loans.  The impact of changes in
foreign exchange rates and commodity prices on interest rates are assumed to be
insignificant.  The Company’s financial instruments have varying
levels of sensitivity to changes in market interest rates resulting in market
risk.  Interest rate risk is the Company’s primary market risk
exposure; to a lesser extent, liquidity risk also impacts market risk
exposure.





Interest
rate risk is the exposure of a banking institution’s financial condition to
adverse movements in interest rates.  Accepting this risk can be an
important source of results and profitability and stockholder value; however,
excessive levels of interest rate risk could pose a significant threat to the
Company’s earnings and capital base.  Accordingly, effective risk
management that maintains interest rate risks at prudent levels is essential to
the Company’s safety and soundness.


29


Evaluating
a financial institution’s exposure to changes in interest rates includes
assessing both the adequacy of the management process used to control interest
rate risk and the organization’s quantitative level of exposure.  When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems, and
internal controls are in place to maintain interest rate risks at prudent levels
of consistency and continuity.  Evaluating the quantitative level of
interest rate risk exposure requires the Company to assess the existing and
potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and asset
quality (when appropriate).





The
Federal Reserve Board, together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Company, adopted a Joint Agency
Policy Statement on interest rate risk effective June 26, 1996.  The
policy statement provides guidance to examiners and bankers on sound practices
for managing interest rate risk, which will form the basis for ongoing
evaluation of the adequacy of interest rate risk management at supervised
institutions. The policy statement also outlines fundamental elements of sound
management that have been identified in prior Federal Reserve guidance and
discusses the importance of these elements in the context of managing interest
rate risk.  Specifically, the guidance emphasizes the need for active
Board of Director and senior management oversight and a comprehensive risk
management process that effectively identifies, measures, and controls interest
rate risk.





Financial
institutions derive their income primarily from the excess of interest collected
over interest paid.  The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time.  Since market interest rates change over time, an
institution is exposed to lower profit margins (or losses) if it cannot adapt to
interest rate changes.  For example, assume that an institution’s
assets carry intermediate or long-term fixed rates and that those assets are
funded with short-term liabilities.  If market interest rates rise by
the time the short-term liabilities must be refinanced, the increase in the
institution’s interest expense on its liabilities may not be sufficiently offset
if assets continue to earn at the long-term fixed rates.  Accordingly,
an institution’s profits could decrease on existing assets because the
institution will either have lower net interest income or possibly, net interest
expense.  Similar risks exist when assets are subject to contractual
interest rate ceilings, or rate sensitive assets are funded by longer-term,
fixed-rate liabilities in a declining rate environment.





There are
several ways an institution can manage interest rate risk including: 1) matching
repricing periods for new assets and liabilities, for example, by shortening
terms of new loans or investments; 2) selling existing assets or repaying
certain liabilities; and 3) hedging existing assets, liabilities, or anticipated
transactions.  An institution might also invest in more complex
financial instruments intended to hedge or otherwise change interest rate risk.
Interest rate swaps, futures contacts, options on futures contracts, and other
such derivative financial instruments can be used for this
purpose.  Because these instruments are sensitive to interest rate
changes, they require management’s expertise to be effective. The Company has
not purchased derivative financial instruments in the past but may purchase such
instruments in the future if market conditions are favorable.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





The
following table provides information about the Company’s financial instruments
used for purposes other than trading that are sensitive to changes in interest
rates as of March 31, 2009.  It does not present when these items may
actually reprice.  For loans receivable, securities, and liabilities
with contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
historical impact of interest rate fluctuations on the prepayment of loans and
mortgage backed securities.  For core deposits (demand deposits,
interest-bearing checking, savings, and money market deposits) that have no
contractual maturity, the table presents principal cash flows and, as
applicable, related weighted-average interest rates based upon the Company’s
historical experience, management’s judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors.  The
current historical interest rates for core deposits have been assumed to apply
for future periods in this table as the actual interest rates that will need to
be paid to maintain these deposits are not currently known.  Weighted
average variable rates are based upon contractual rates existing at the
reporting date.


30





Principal/Notional
Amount Maturing or Assumed to Withdraw In:


(Dollars
in Thousands)





Comparison of 2009 to 2008:
                    
                    First
                    
                    
                    YearsTotal rate-sensitive assets:
                    
                    Year
                    
                    
                    2 – 5
                    
                    
                    Thereafter
                    
                    
                    TotalAt
      March 31, 2009
                    
                    $
                    196,256
                    
                    
                    $
                    247,250
                    
                    
                    $
                    139,265
                    
                    
                    $
                    582,771At
      December 31, 2008
                    
                    
                    182,795
                    
                    
                    
                    227,333
                    
                    
                    
                    160,659
                    
                    
                    
                    570,787Increase
      (decrease)
                    
                    $
                    13,461
                    
                    
                    $
                    19,917
                    
                    
                    $
                    (21,394
                    )
                    
                    $
                    11,985Total
      rate-sensitive liabilities:At
      March 31, 2009
                    
                    $
                    214,765
                    
                    
                    $
                    356,562
                    
                    
                    $
                    23,381
                    
                    
                    $
                    594,708At
      December 31, 2008
                    
                    
                    220,481
                    
                    
                    
                    338,260
                    
                    
                    
                    27,173
                    
                    
                    
                    585,914Increase
      (decrease)
                    
                    $
                    (5,716
                    )
                    
                    $
                    18,302
                    
                    
                    $
                    (3,792
                    )
                    
                    $
                    8,794





The above
table reflects expected maturities, not expected repricing.  The
contractual maturities adjusted for anticipated prepayments and anticipated
renewals at current interest rates, as shown in the preceding table, are only
part of the Company’s interest rate risk profile.  Other important
factors include the ratio of rate-sensitive assets to rate-sensitive liabilities
(which takes into consideration loan repricing frequency, but not when deposits
may be repriced) and the general level and direction of market interest
rates.  For core deposits, the repricing frequency is assumed to be
longer than when such deposits actually reprice.  For some rate
sensitive liabilities, their repricing frequency is the same as their
contractual maturity.  For variable rate loans receivable, repricing
frequency can be daily or monthly.  For adjustable rate loans
receivable, repricing can be as frequent as annually for loans whose contractual
maturities range from one to thirty years. Recent Fed actions, economic
conditions and increasingly aggressive local market competition in lending rates
have pushed loan rates lower, necessitating the Company’s ability to generate
and reprice core deposits downward, which has enabled the Company to reduce
overall funding costs.





The
Company manages its interest rate risk by the employment of strategies to assure
that desired levels of both interest-earning assets and interest-bearing
liabilities mature or reprice with similar time frames.  Such
strategies include: 1) loans receivable which are renewed (and repriced)
annually, 2) variable rate loans, 3) certificates of deposit with terms from one
month to six years, 4) securities available-for-sale which mature at various
times primarily, from one through ten years, 5) federal funds borrowings with
terms of one day to 30 days, and 6) FHLB borrowings with terms of one day to ten
years.





Item 4T. Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures





With the
participation of the President and Chief Executive Officer (the principal
executive officer) and the Executive Vice President and Chief Financial Officer
(the principal financial officer) of the Company, the Company’s management has
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the quarterly period covered by
this Quarterly Report on Form 10-Q.  Based on that evaluation, the
Company’s President and Chief Executive Officer and the Company’s Executive Vice
President and Chief Financial Officer have concluded that:


31





·
            information
      required to be disclosed by the Company in this Quarterly Report on Form
      10-Q and other reports which the Company files or submits under the
      Exchange Act would be accumulated and communicated to the Company’s
      management, including its principal executive officer and principal
      financial officer, as appropriate to allow timely decisions regarding
      required disclosure;





·
            information
      required to be disclosed by the Company in this Quarterly Report on Form
      10-Q and other reports which the Company files or submits under the
      Exchange Act would be recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms;
    and





·
            the
      Company’s disclosure controls and procedures were effective as of the end
      of the quarterly period covered by this Quarterly Report on Form
      10-Q.





Changes in Internal Control
Over Financial Reporting





There
were no changes in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
Company’s fiscal quarter ended March 31, 2009, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.


32


PART II – OTHER
INFORMATION





Item 1. Legal
Proceedings


There are
no material pending legal proceedings against the Company or any of its
subsidiaries other than ordinary, routine litigation incidental to their
respective businesses.  In the opinion of management, this litigation
should not, individually or in the aggregate, have a material adverse effect on
the Company’s results of operations or financial condition.





Item 1A. Risk
Factors


An
investment in our common shares involves certain risks, including those
identified and described in “Item 1A. Risk Factors” of Part I of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as well
as in the Cautionary Statements Regarding Forward-Looking Information contained
on page 22 of this Form 10-Q.  These risk factors could materially
affect the Company’s business, financial condition or future
results.  There have been no material change in the risk factors
previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.





Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds


a.
            Not
      applicable


b.
            Not
      applicable


c.
            The
      following table provides information regarding repurchases of the
      Company’s common shares during the three months ended March 31,
      2009:





Period
                    
                    Total Number of
                      Shares Purchased
                      (1)
                    
                    
                    Average Price
                      Paid per Share
                    
                    
                    Total Number of
                      Shares Purchased
                      as Part of Publicly
                      Announced Plans
                      or Programs
                    
                    
                    Maximum
                      Number (or
                      Approximate
                      Dollar Value) of
                      Shares that May
                      Yet Be Purchased
                      Under the Plans or
                      Programs (2)January
      1 through January 31, 2009
                    
                    
                    4,145
                    
                    
                    $
                    7.92
                    
                    
                    
                    4,145
                    
                    
                    
                    99,874February
      1 through February 28, 2009
                    
                    
                    5,394
                    
                    
                    $
                    8.12
                    
                    
                    
                    2,456
                    
                    
                    
                    97,418March
      1 through March 31, 2009
                    
                    
                    3,527
                    
                    
                    $
                    7.91
                    
                    
                    
                    3,478
                    
                    
                    
                    93,940





(1)
            All
      of the repurchased shares, other than the shares repurchased as part of
      the publicly announced plan, were purchased in the open market by Reliance
      Financial Services, an indirect subsidiary of the Company, in its capacity
      as the administrator of the Company’s Employee Stock Ownership and Savings
      Plan.


(2)
            On
      July 22, 2008, the Company announced that its Board of Directors had
      authorized an extension to the stock repurchase program for an additional
      twelve months.  The original stock repurchase program was
      announced in April, 2007 for fifteen months authorizing the purchase of
      250,000 common shares.


33


Item 3. Defaults Upon Senior
Securities





Not
applicable





Item 4. Submission of
Matters to a Vote of Security Holders





The 2009
Annual Meeting of Shareholders of Rurban Financial Corp. was held on April 16,
2009, in Defiance, Ohio.  Mark A. Klein, serving as Chairman of the
Annual Meeting, presided.





At the
close of business on the February 18, 2009 record date for the Annual Meeting, a
total of 4,876,255 common shares of the Company were outstanding and entitled to
vote.  A total of 3,655,311, or 74.96% of the outstanding common
shares entitled to vote, were represented by proxy or in person at the Annual
Meeting.  Therefore, a quorum was present.





At the
Annual Meeting, the shareholders approved the proposed amendment to Section 2.01
of the Company’s Amended and Restated Regulations to remove the 70-year age
limit with respect to a person’s election or re-election as a director of the
Company.  In addition, each of the following directors was re-elected
by the shareholders of the Company to serve for a three-year term expiring in
2012:  Thomas A. Buis; Kenneth A. Joyce; Thomas L. Sauer; and J.
Michael Walz.  The voting results for the Annual Meeting are provided
below.





Summary
      of Matters Voted Upon by
Shareholders





1.
            To
      adopt the proposed amendment to Section 2.01 of the Company’s Amended and
      Restated Regulations, which would remove the 70-year age limit with
      respect to a person’s election or re-election as a director of the
      Company:





Number of Shares Voted:For
                              
                              Against
                              
                              Abstain3,086,875
                              
                              498,539
                              
                              69,897





2.
            Election
      of Directors:





Number of Shares Voted:Nominee
                            
                            For
                            
                            WithheldThomas
      A. Buis
                            
                            3,381,391
                            
                            273,920Kenneth
      A. Joyce
                            
                            3,522,231
                            
                            133,080Thomas
      L. Sauer
                            
                            3,536,283
                            
                            119,028J.
      Michael Walz
                            
                            3,521,266
                            
                            134,045





Directors
whose term of office continued after the Annual Meeting:





Term of Office Expires in:Thomas
      A. Callan
                
                2010Richard
      L. Hardgrove
                
                2010Steven
      D. VanDemark
                
                2010John
      R. Compo
                
                2011Robert
      A. Fawcett, Jr.
                
                2011Rita
      A. Kissner
                
                2011


34





Item 5. Other
Information





Not
applicable





Item 6.
Exhibits





Exhibits





31.1
                  –
      Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
      Officer)31.2
                  –
      Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
      Officer)32.1
                  –
      Section 1350 Certification (Principal Executive
Officer)32.2
                  –
      Section 1350 Certification (Principal Financial
  Officer)


35





SIGNATURES





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





RURBAN
      FINANCIAL CORP.Date:  May 14,
      2009
                By
                /s/ Kenneth A. JoyceKenneth
      A. JoycePresident
      & Chief Executive OfficerBy
                /s/ Duane L. SinnDuane
      L. SinnExecutive
      Vice President &Chief
      Financial Officer




36