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 September 30,
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)





None160;


(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 definitions 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
              
              4,861,779
      shares(class)
              
              (Outstanding
      at November 16, 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
                        34Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        44Item
      4T.
                        Controls
      and Procedures
                        45PART II – OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        46Item
      1A.
                        Risk
      Factors
                        46Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        48Item
      3.
                        Defaults
      Upon Senior Securities
                        49Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        49Item
      5.
                        Other
      Information
                        49Item
      6.
                        Exhibits
                        49Signatures
                        
                        50


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 and nine months ended September 30, 2009 are not necessarily
indicative of results for the complete year.


3


Rurban
Financial Corp.


Condensed
Consolidated Balance Sheets


September
30, 2009 and December 31, 2008





(Unaudited)September
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008AssetsCash
      and due from banks
                              
                              $
                              31,055,035
                              
                              
                              $
                              18,059,532Federal
      funds sold
                              
                              
                              -
                              
                              
                              
                              10,000,000Cash
      and cash equivalents
                              
                              
                              31,055,035
                              
                              
                              
                              28,059,532Available-for-sale
      securities
                              
                              
                              111,561,500
                              
                              
                              
                              102,606,475Loans
      held for sale
                              
                              
                              11,370,884
                              
                              
                              
                              3,824,499Loans,
      net of unearned income
                              
                              
                              448,392,963
                              
                              
                              
                              450,111,653Allowance
      for loan losses
                              
                              
                              (5,934,165
                              )
                              
                              
                              (5,020,197
                              )Premises
      and equipment
                              
                              
                              17,217,039
                              
                              
                              
                              17,621,262Purchased
      software
                              
                              
                              5,273,311
                              
                              
                              
                              5,867,395Federal
      Reserve and Federal Home Loan Bank stock
                              
                              
                              3,748,250
                              
                              
                              
                              4,244,100Foreclosed
      assets held for sale, net
                              
                              
                              1,748,376
                              
                              
                              
                              1,384,335Interest
      receivable
                              
                              
                              2,851,934
                              
                              
                              
                              2,964,663Goodwill
                              
                              
                              21,414,790
                              
                              
                              
                              21,414,790Core
      deposits and other intangibles
                              
                              
                              5,177,508
                              
                              
                              
                              5,835,936Cash
      value of life insurance
                              
                              
                              12,953,972
                              
                              
                              
                              12,625,015Other
                              
                              
                              6,917,729
                              
                              
                              
                              6,079,451Total
      assets
                              
                              $
                              673,749,126
                              
                              
                              $
                              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


September
30, 2009 and December 31, 2008




(Unaudited)September
      30,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008Liabilities
      and Stockholders’ EquityLiabilitiesDepositsDemand
                                  
                                  $
                                  54,149,280
                                  
                                  
                                  $
                                  52,242,626Savings,
      interest checking and money market
                                  
                                  
                                  213,738,928
                                  
                                  
                                  
                                  189,461,755Time
                                  
                                  
                                  224,404,005
                                  
                                  
                                  
                                  242,516,203Total
      deposits
                                  
                                  
                                  492,292,213
                                  
                                  
                                  
                                  484,220,584Notes
      payable
                                  
                                  
                                  2,357,816
                                  
                                  
                                  
                                  1,000,000Federal
      Home Loan Bank advances
                                  
                                  
                                  39,868,884
                                  
                                  
                                  
                                  36,646,854Repurchase
      agreements
                                  
                                  
                                  46,138,646
                                  
                                  
                                  
                                  43,425,978Trust
      preferred securities
                                  
                                  
                                  20,620,000
                                  
                                  
                                  
                                  20,620,000Interest
      payable
                                  
                                  
                                  1,382,015
                                  
                                  
                                  
                                  1,965,842Other
      liabilities
                                  
                                  
                                  6,421,448
                                  
                                  
                                  
                                  8,077,647Total
      liabilities
                                  
                                  
                                  609,081,022
                                  
                                  
                                  
                                  595,956,905Commitments
      and Contingent LiabilitiesStockholders’
      EquityCommon
      stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433
      shares; outstanding September 2009 – 4,861,779 shares, December 2008 –
      4,881,452 shares
                                  
                                  
                                  12,568,583
                                  
                                  
                                  
                                  12,568,583Additional
      paid-in capital
                                  
                                  
                                  15,132,715
                                  
                                  
                                  
                                  15,042,781Retained
      earnings
                                  
                                  
                                  36,737,207
                                  
                                  
                                  
                                  35,785,317Accumulated
      other comprehensive income (loss)
                                  
                                  
                                  1,998,910
                                  
                                  
                                  
                                  (121,657
                                  )Treasury
      Stock, at costCommon;
      September 2009 – 165,654 shares, December 2008 – 145,981
      shares
                                  
                                  
                                  (1,769,311
                                  )
                                  
                                  
                                  (1,613,020
                                  )Total
      stockholders’ equity
                                  
                                  
                                  64,668,104
                                  
                                  
                                  
                                  61,662,004Total
      liabilities and stockholders’ equity
                                  
                                  $
                                  673,749,126
                                  
                                  
                                  $
                                  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




September
      30,
                                          2009
                                        
                                        
                                        September
      30,
                                          2008Interest
      IncomeLoansTaxable
                                        
                                        $
                                        6,884,515
                                        
                                        
                                        $
                                        6,736,100Tax-exempt
                                        
                                        
                                        20,944
                                        
                                        
                                        
                                        22,125SecuritiesTaxable
                                        
                                        
                                        944,579
                                        
                                        
                                        
                                        1,135,931Tax-exempt
                                        
                                        
                                        294,716
                                        
                                        
                                        
                                        109,805Other
                                        
                                        
                                        41,621
                                        
                                        
                                        
                                        17,635Total
      interest income
                                        
                                        
                                        8,186,375
                                        
                                        
                                        
                                        8,021,596Interest
      ExpenseDeposits
                                        
                                        
                                        1,559,730
                                        
                                        
                                        
                                        2,258,470Other
      borrowings
                                        
                                        
                                        43,745
                                        
                                        
                                        
                                        16,803Repurchase
      agreements
                                        
                                        
                                        437,419
                                        
                                        
                                        
                                        465,452Federal
      Home Loan Bank advances
                                        
                                        
                                        417,359
                                        
                                        
                                        
                                        416,696Trust
      preferred securities
                                        
                                        
                                        391,407
                                        
                                        
                                        
                                        415,686Total
      interest expense
                                        
                                        
                                        2,849,660
                                        
                                        
                                        
                                        3,573,107Net
      Interest Income
                                        
                                        
                                        5,336,715
                                        
                                        
                                        
                                        4,448,489Provision
      for Loan Losses
                                        
                                        
                                        898,050
                                        
                                        
                                        
                                        146,173Net
      Interest Income After Provision for Loan Losses
                                        
                                        
                                        4,438,665
                                        
                                        
                                        
                                        4,302,316Non-interest
      IncomeData
      service fees
                                        
                                        
                                        4,806,359
                                        
                                        
                                        
                                        4,947,727Trust
      fees
                                        
                                        
                                        644,427
                                        
                                        
                                        
                                        780,726Customer
      service fees
                                        
                                        
                                        700,042
                                        
                                        
                                        
                                        626,008Net
      gains on loan sales
                                        
                                        
                                        722,234
                                        
                                        
                                        
                                        132,999Loan
      servicing fees
                                        
                                        
                                        126,265
                                        
                                        
                                        
                                        57,356Gain
      (loss) on sale of assets
                                        
                                        
                                        (52,976
                                        )
                                        
                                        
                                        222,815Other
                                        
                                        
                                        129,360
                                        
                                        
                                        
                                        221,081Total
      non-interest income
                                        
                                        $
                                        7,075,711
                                        
                                        
                                        $
                                        6,988,712




See
notes to condensed consolidated financial statements
(unaudited)


6




Rurban
Financial Corp.
 Condensed
Consolidated Statements of Income (Unaudited)
 Three
Months Ended




September
      30,
                                          2009
                                        
                                        
                                        September 30,
                                          2008Non-interest
      ExpenseSalaries
      and employee benefits
                                        
                                        $
                                        5,422,005
                                        
                                        
                                        $
                                        4,239,578Net
      occupancy expense
                                        
                                        
                                        752,532
                                        
                                        
                                        
                                        526,301Equipment
      expense
                                        
                                        
                                        2,041,339
                                        
                                        
                                        
                                        1,553,188Data
      processing fees
                                        
                                        
                                        151,320
                                        
                                        
                                        
                                        120,151Professional
      fees
                                        
                                        
                                        705,415
                                        
                                        
                                        
                                        489,910Marketing
      expense
                                        
                                        
                                        232,294
                                        
                                        
                                        
                                        247,120Printing
      and office supplies
                                        
                                        
                                        104,036
                                        
                                        
                                        
                                        115,667Telephone
      and communications
                                        
                                        
                                        406,673
                                        
                                        
                                        
                                        415,120Postage
      and delivery expense
                                        
                                        
                                        511,525
                                        
                                        
                                        
                                        511,522State,
      local and other taxes
                                        
                                        
                                        235,067
                                        
                                        
                                        
                                        235,647Employee
      expense
                                        
                                        
                                        293,634
                                        
                                        
                                        
                                        272,315Other
                                        
                                        
                                        598,275
                                        
                                        
                                        
                                        552,379Total
      non-interest expense
                                        
                                        
                                        11,454,115
                                        
                                        
                                        
                                        9,278,898Income
      Before Income Tax
                                        
                                        
                                        60,261
                                        
                                        
                                        
                                        2,012,130(Credit)
      Provision for Income Taxes
                                        
                                        
                                        (99,421
                                        )
                                        
                                        
                                        588,090Net
      Income
                                        
                                        $
                                        159,682
                                        
                                        
                                        $
                                        1,424,040Basic
      Earnings Per Share
                                        
                                        $
                                        0.03
                                        
                                        
                                        $
                                        0.29Diluted
      Earnings Per Share
                                        
                                        $
                                        0.03
                                        
                                        
                                        $
                                        0.29Dividends
      Declared Per Share
                                        
                                        $
                                        0.09
                                        
                                        
                                        $
                                        0.09





See
notes to condensed consolidated financial statements
(unaudited)


7


Rurban
Financial Corp.


Condensed
Consolidated Statements of Income (Unaudited)


Nine
Months Ended





September
      30,
                                      2009
                                    
                                    
                                    September
      30,
                                      2008Interest
      IncomeLoansTaxable
                                    
                                    $
                                    20,554,775
                                    
                                    
                                    $
                                    20,567,604Tax-exempt
                                    
                                    
                                    71,791
                                    
                                    
                                    
                                    63,944SecuritiesTaxable
                                    
                                    
                                    3,158,649
                                    
                                    
                                    
                                    3,266,395Tax-exempt
                                    
                                    
                                    766,931
                                    
                                    
                                    
                                    433,970Other
                                    
                                    
                                    71,498
                                    
                                    
                                    
                                    130,424Total
      interest income
                                    
                                    
                                    24,623,644
                                    
                                    
                                    
                                    24,462,337Interest
      ExpenseDeposits
                                    
                                    
                                    5,115,379
                                    
                                    
                                    
                                    7,973,962Other
      borrowings
                                    
                                    
                                    91,548
                                    
                                    
                                    
                                    43,792Repurchase
      agreements
                                    
                                    
                                    1,296,242
                                    
                                    
                                    
                                    1,376,767Federal
      Home Loan Bank advances
                                    
                                    
                                    1,221,487
                                    
                                    
                                    
                                    1,096,178Trust
      preferred securities
                                    
                                    
                                    1,185,021
                                    
                                    
                                    
                                    1,273,775Total
      interest expense
                                    
                                    
                                    8,909,677
                                    
                                    
                                    
                                    11,764,474Net
      Interest Income
                                    
                                    
                                    15,713,967
                                    
                                    
                                    
                                    12,697,863Provision
      for Loan Losses
                                    
                                    
                                    2,192,042
                                    
                                    
                                    
                                    551,388Net
      Interest Income After Provision for Loan Losses
                                    
                                    
                                    13,521,925
                                    
                                    
                                    
                                    12,146,475Non-interest
      IncomeData
      service fees
                                    
                                    
                                    14,734,942
                                    
                                    
                                    
                                    15,161,075Trust
      fees
                                    
                                    
                                    1,869,083
                                    
                                    
                                    
                                    2,451,567Customer
      service fees
                                    
                                    
                                    1,923,744
                                    
                                    
                                    
                                    1,825,040Net
      gains on loan sales
                                    
                                    
                                    2,738,626
                                    
                                    
                                    
                                    590,747Net
      realized gain on securities
                                    
                                    
                                    477,591
                                    
                                    
                                    
                                    -Net
      proceeds from VISA IPO
                                    
                                    
                                    -
                                    
                                    
                                    
                                    132,106Investment
      securities recoveries
                                    
                                    
                                    -
                                    
                                    
                                    
                                    197,487Loan
      servicing fees
                                    
                                    
                                    298,001
                                    
                                    
                                    
                                    175,516Gain
      (Loss) on sale of assets
                                    
                                    
                                    (95,390
                                    )
                                    
                                    
                                    151,393Other
                                    
                                    
                                    474,410
                                    
                                    
                                    
                                    620,452Total
      non-interest income
                                    
                                    $
                                    22,421,007
                                    
                                    
                                    $
                                    21,305,383


See
notes to condensed consolidated financial statements
(unaudited)


8


Rurban
Financial Corp.


Condensed
Consolidated Statements of Income (Unaudited)


Nine
Months Ended





September
      30,
                                            2009
                                          
                                          
                                          September
      30,
                                            2008Non-interest
      ExpenseSalaries
      and employee benefits
                                          
                                          $
                                          15,644,731
                                          
                                          
                                          $
                                          13,113,999Net
      occupancy expense
                                          
                                          
                                          2,336,652
                                          
                                          
                                          
                                          1,603,496Equipment
      expense
                                          
                                          
                                          5,353,637
                                          
                                          
                                          
                                          4,746,533Data
      processing fees
                                          
                                          
                                          495,782
                                          
                                          
                                          
                                          321,510Professional
      fees
                                          
                                          
                                          1,846,458
                                          
                                          
                                          
                                          1,345,133Marketing
      expense
                                          
                                          
                                          655,597
                                          
                                          
                                          
                                          584,957Printing
      and office supplies
                                          
                                          
                                          435,913
                                          
                                          
                                          
                                          421,405Telephone
      and communications
                                          
                                          
                                          1,212,901
                                          
                                          
                                          
                                          1,258,907Postage
      and delivery expense
                                          
                                          
                                          1,635,037
                                          
                                          
                                          
                                          1,649,969State,
      local and other taxes
                                          
                                          
                                          701,120
                                          
                                          
                                          
                                          602,833Employee
      expense
                                          
                                          
                                          810,776
                                          
                                          
                                          
                                          806,298Other
                                          
                                          
                                          1,908,592
                                          
                                          
                                          
                                          1,535,564Total
      non-interest expense
                                          
                                          
                                          33,037,196
                                          
                                          
                                          
                                          27,990,604Income
      Before Income Tax
                                          
                                          
                                          2,905,736
                                          
                                          
                                          
                                          5,461,254Provision
      for Income Taxes
                                          
                                          
                                          638,915
                                          
                                          
                                          
                                          1,572,034Net
      Income
                                          
                                          $
                                          2,266,821
                                          
                                          
                                          $
                                          3,889,220Basic
      Earnings Per Share
                                          
                                          $
                                          0.46
                                          
                                          
                                          $
                                          0.79Diluted
      Earnings Per Share
                                          
                                          $
                                          0.46
                                          
                                          
                                          $
                                          0.79Dividends
      Declared Per Share
                                          
                                          $
                                          0.27
                                          
                                          
                                          $
                                          0.25




See
notes to condensed consolidated financial statements
(unaudited)


9





RURBAN
FINANCIAL CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’


EQUITY
(UNAUDITED)





Three
      Months Ended
                
                
                Nine
      Months EndedSept
      30, 2009
                
                
                Sept
      30, 2008
                
                
                Sept
      30, 2009
                
                
                Sept
      30, 2008Balance
      at beginning of period
                
                $
                63,412,713
                
                
                $
                59,361,729
                
                
                $
                61,662,004
                
                
                $
                59,325,235Cumulative
      effect adjustment for split dollar BOLI
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (116,303
                )Net
      Income
                
                
                159,682
                
                
                
                1,424,040
                
                
                
                2,266,821
                
                
                
                3,889,220Unrealized
      gains (losses) on securitiesUnrealized
      holding gains (losses) arising during the year, net of tax
                
                
                1,520,345
                
                
                
                (183,016
                )
                
                
                2,402,777
                
                
                
                (1,026,753
                )Less:
      reclassification adjustment for gains realized in net income, net of
      tax
                
                
                -
                
                
                
                -
                
                
                
                282,210
                
                
                
                -Total
      comprehensive income
                
                
                1,680,027
                
                
                
                1,241,024
                
                
                
                4,387,388
                
                
                
                2,862,467Cash
      dividend
                
                
                (437,641
                )
                
                
                (442,254
                )
                
                
                (1,314,932
                )
                
                
                (1,235,524
                )Purchase
      of treasury shares
                
                
                (16,797
                )
                
                
                (74,758
                )
                
                
                (156,291
                )
                
                
                (791,358
                )Share-based
      compensation
                
                
                29,802
                
                
                
                31,392
                
                
                
                89,935
                
                
                
                72,616Balance
      at end of period
                
                $
                64,668,104
                
                
                $
                60,117,133
                
                
                $
                64,668,104
                
                
                $
                60,117,133





See
notes to condensed consolidated financial statements
(unaudited)


10





Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


Nine
Months Ended




September 30, 2009
                                
                                
                                September 30, 2008Operating
      ActivitiesNet
      income
                                
                                $
                                2,266,821
                                
                                
                                $
                                3,889,220Items
      not requiring (providing) cashDepreciation
      and amortization
                                
                                
                                3,077,533
                                
                                
                                
                                2,752,284Provision
      for loan losses
                                
                                
                                2,192,042
                                
                                
                                
                                551,388Expense
      of share-based compensation plan
                                
                                
                                89,935
                                
                                
                                
                                72,616Amortization
      of premiums and discounts on securities
                                
                                
                                476,693
                                
                                
                                
                                91,901Amortization
      of intangible assets
                                
                                
                                658,428
                                
                                
                                
                                520,144Deferred
      income taxes
                                
                                
                                (1,231,352
                                )
                                
                                
                                528,933FHLB
      Stock Dividends
                                
                                
                                -
                                
                                
                                
                                (127,200
                                )Proceeds
      from sale of loans held for sale
                                
                                
                                258,045,357
                                
                                
                                
                                31,021,863Originations
      of loans held for sale
                                
                                
                                (262,853,116
                                )
                                
                                
                                (30,259,691
                                )Gain
      from sale of loans
                                
                                
                                (2,738,626
                                )
                                
                                
                                (590,747
                                )Gain
      on sale of available for sale securities
                                
                                
                                (477,591
                                )
                                
                                
                                -Loss
      on sale of foreclosed assets
                                
                                
                                66,116
                                
                                
                                
                                5,066Gain
      on sale of branch office building
                                
                                
                                -
                                
                                
                                
                                (243,000
                                )Loss
      on sales of fixed assets
                                
                                
                                29,274
                                
                                
                                
                                86,541Changes
      inInterest
      receivable
                                
                                
                                112,729
                                
                                
                                
                                173,416Other
      assets
                                
                                
                                (1,017,991
                                )
                                
                                
                                1,491,304Interest
      payable and other liabilities
                                
                                
                                (2,101,088
                                )
                                
                                
                                (957,768
                                )Net
      cash provided by (used in) operating activities
                                
                                
                                (3,404,836
                                )
                                
                                
                                9,006,270Investing
      ActivitiesPurchases
      of available-for-sale securities
                                
                                
                                (49,982,386
                                )
                                
                                
                                (46,231,265
                                )Proceeds
      from maturities of available-for-sale securities
                                
                                
                                28,400,454
                                
                                
                                
                                42,808,714Proceeds
      from sales of available-for-sale securities
                                
                                
                                15,790,787
                                
                                
                                
                                -Proceeds
      from sales of Fed Stock
                                
                                
                                700,000
                                
                                
                                
                                -Purchase
      of FHLB Stock
                                
                                
                                (204,150
                                )
                                
                                
                                -Net
      change in loans
                                
                                
                                (494,016
                                )
                                
                                
                                (12,983,338
                                )Purchase
      of premises and equipment and software
                                
                                
                                (2,167,462
                                )
                                
                                
                                (6,843,233
                                )Proceeds
      from sales of premises and equipment
                                
                                
                                58,962
                                
                                
                                
                                2,041,511Proceeds
      from sale of foreclosed assets
                                
                                
                                405,230
                                
                                
                                
                                174,722Net
      cash used in investing activities
                                
                                $
                                (7,492,581
                                )
                                
                                $
                                (21,032,889
                                )





See
notes to condensed consolidated financial statements
(unaudited)


11




Rurban
Financial Corp.


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


Nine
Months Ended




September 30, 2009
                                      
                                      
                                      September 30, 2008Financing
      ActivitiesNet
      increase in demand deposits, money market, interest checking and savings
      accounts
                                      
                                      $
                                      26,183,827
                                      
                                      
                                      $
                                      18,604,838Net
      decrease in certificates of deposit
                                      
                                      
                                      (18,112,198
                                      )
                                      
                                      
                                      (18,181,676
                                      )Net
      increase in securities sold under agreements to repurchase
                                      
                                      
                                      2,712,668
                                      
                                      
                                      
                                      1,547,417Net
      increase in federal funds purchased
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,000,000Proceeds
      from Federal Home Loan Bank advances
                                      
                                      
                                      7,500,000
                                      
                                      
                                      
                                      24,000,000Repayment
      of Federal Home Loan Bank advances
                                      
                                      
                                      (4,277,970
                                      )
                                      
                                      
                                      (7,770,077
                                      )Proceeds
      from notes payable
                                      
                                      
                                      4,200,000
                                      
                                      
                                      
                                      -Repayment
      of notes payable
                                      
                                      
                                      (2,842,184
                                      )
                                      
                                      
                                      (922,457
                                      )Purchase
      of treasury stock
                                      
                                      
                                      (156,291
                                      )
                                      
                                      
                                      (791,358
                                      )Dividends
      paid
                                      
                                      
                                      (1,314,932
                                      )
                                      
                                      
                                      (1,235,524
                                      )Net
      cash provided by financing activities
                                      
                                      
                                      13,892,920
                                      
                                      
                                      
                                      20,251,163Increase
      in Cash and Cash Equivalents
                                      
                                      
                                      2,995,503
                                      
                                      
                                      
                                      8,224,544Cash
      and Cash Equivalents, Beginning of Year
                                      
                                      
                                      28,059,532
                                      
                                      
                                      
                                      17,183,627Cash
      and Cash Equivalents, End of Period
                                      
                                      $
                                      31,055,035
                                      
                                      
                                      $
                                      25,408,171Supplemental
      Cash Flows InformationInterest
      paid
                                      
                                      $
                                      9,493,504
                                      
                                      
                                      $
                                      12,722,242Transfer
      of loans to foreclosed assets
                                      
                                      $
                                      822,113
                                      
                                      
                                      $
                                      1,856,977Income
      Taxes Paid
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      556,000





See
notes to condensed consolidated financial statements
(unaudited)


12


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 and nine months
ended September 30, 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 September
30, 2009 and 2008, share based awards totaling 311,713 and 316,263 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 Ended
                
                
                Nine
      Months EndedSeptember 30
                
                
                September 302009
                
                
                2008
                
                
                2009
                
                
                2008Basic
      earnings per share
                
                
                4,862,574
                
                
                
                4,911,015
                
                
                
                4,868,800
                
                
                
                4,935,804Diluted
      earnings per share
                
                
                4,866,563
                
                
                
                4,911,015
                
                
                
                4,871,574
                
                
                
                4,935,881




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





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





September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008Commercial
                      
                      $
                      82,147,159
                      
                      
                      $
                      83,645,408Commercial
      real estate
                      
                      
                      174,944,881
                      
                      
                      
                      161,566,005Agricultural
                      
                      
                      44,683,395
                      
                      
                      
                      43,641,132Residential
      real estate
                      
                      
                      91,840,233
                      
                      
                      
                      107,905,198Consumer
                      
                      
                      54,708,658
                      
                      
                      
                      53,338,523Lease
      financing
                      
                      
                      354,110
                      
                      
                      
                      266,348Total
      loans
                      
                      
                      448,678,436
                      
                      
                      
                      450,362,614LessNet
      deferred loan fees, premiums and discounts
                      
                      
                      (285,473
                      )
                      
                      
                      (250,961
                      )Loans,
      net of unearned income
                      
                      $
                      448,392,963
                      
                      
                      $
                      450,111,653Allowance
      for loan losses
                      
                      $
                      (5,934,165
                      )
                      
                      $
                      (5,020,197
                      )


13


The
following is a summary of the activity in the allowance for loan losses account
for the three and nine months ended September 30, 2009 and 2008.





Three
      Months Ended
                
                
                Nine
      Months EndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Balance,
      beginning of period
                
                $
                5,873,146
                
                
                $
                4,246,794
                
                
                $
                5,020,197
                
                
                $
                3,990,455Provision
      charged to expense
                
                
                898,050
                
                
                
                146,173
                
                
                
                2,192,042
                
                
                
                551,388Recoveries
                
                
                45,528
                
                
                
                64,475
                
                
                
                127,443
                
                
                
                123,472Loans
      charged off
                
                
                (882,559
                )
                
                
                (400,229
                )
                
                
                (1,405,517
                )
                
                
                (608,103
                )Balance,
      end of period
                
                $
                5,934,165
                
                
                $
                4,057,213
                
                
                $
                5,934,165
                
                
                $
                4,057,213




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





September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008Non-accrual
      loans
                      
                      $
                      9,645,886
                      
                      
                      $
                      5,177,694Accruing
      loans which are contractuallypast
      due 90 days or more as to interest orprincipal
      payments
                      
                      
                      161
                      
                      
                      
                      -Total
      non-performing loans
                      
                      $
                      9,646,047
                      
                      
                      $
                      5,177,694





In
addition to the above mentioned non-performers, management was very proactive in
reaching out to customers to restructure loans.  On September 30,
2009, approximately $6.90 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:





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Loans
      with no allowance for loan losses allocated
                  
                  $
                  7,940,000
                  
                  
                  $
                  1,857,000Loans
      with allowance for loan losses allocated
                  
                  
                  6,688,000
                  
                  
                  
                  866,000Total
      impaired loans
                  
                  $
                  14,628,000
                  
                  
                  $
                  2,723,000Amount
      of allowance allocated
                  
                  $
                  2,023,000
                  
                  
                  $
                  322,000


14




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 September 30,
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 September 30, 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 September 30, 2009Total
      Capital
                                (to
      Risk-Weighted Assets)Consolidated
                              
                              $
                              61.9
                              
                              
                              
                              13.1
                              %
                              
                              $
                              37.9
                              
                              
                              
                              8.0
                              %
                              
                              $
                              —
                              
                              
                              
                              N/AState
      Bank
                              
                              
                              52.0
                              
                              
                              
                              11.3
                              
                              
                              
                              36.7
                              
                              
                              
                              8.0
                              
                              
                              
                              45.9
                              
                              
                              
                              10.0Tier
      I Capital
                                (to
      Risk-Weighted Assets)Consolidated
                              
                              
                              57.7
                              
                              
                              
                              12.2
                              
                              
                              
                              18.9
                              
                              
                              
                              4.0
                              
                              
                              
                              —
                              
                              
                              
                              N/AState
      Bank
                              
                              
                              46.2
                              
                              
                              
                              10.1
                              
                              
                              
                              18.3
                              
                              
                              
                              4.0
                              
                              
                              
                              27.5
                              
                              
                              
                              6.0Tier
      I Capital
                                (to
      Average Assets)Consolidated
                              
                              
                              57.7
                              
                              
                              
                              8.7
                              
                              
                              
                              26.6
                              
                              
                              
                              4.0
                              
                              
                              
                              —
                              
                              
                              
                              N/AState
      Bank
                              
                              
                              46.2
                              
                              
                              
                              7.2
                              
                              
                              
                              25.7
                              
                              
                              
                              4.0
                              
                              
                              
                              32.2
                              
                              
                              
                              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





15




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





The
Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Codification (“ASC” 105), Generally Accepted Accounting
Principles(“GAAP”), which established the FASB Accounting Standards
Codification (the “Codification” or “ASC”) as the single source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants.  The Codification
superseded all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative.  The
Codification was made effective by the FASB for periods ending on or after
September 15, 2009.  This quarterly report reflects the guidance in
the Codification.





FASB ASC
805-10 concerning business combinations seeks to improve the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects.  This guidance introduces new accounting concepts, and
several of these changes have the potential to generate greater earnings
volatility, in connection with and after an acquisition.  Some of the more
significant changes include:




·
              Transaction
      costs and restructuring charges will now be
  expensed.




·
              The
      accounting for certain assets acquired and liabilities assumed will change
      significantly.  The most significant to the Company being that
      allowance for loan losses at acquisition date will be
      eliminated.




·
              Contingent
      consideration will be measured at fair value until
  settled.




·
              Equity
      issued in an acquisition will be valued at the closing date, as opposed to
      the announcement date.




·
              Material
      adjustments made to the initial acquisition will be recorded back to the
      acquisition date.


16


FASB ASC
805-10 applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and may not be applied before that
date.  The Company adopted FASB ASC 805-10 effective January 1, 2009,
as required, without material effect on the Company’s financial position or
results of operations.





In May
2009, the FASB issued guidance establishing principles and requirements for
subsequent events accounting and disclosure, setting forth general principles of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This
guidance does not apply to subsequent events or transactions that are within the
scope of other applicable GAAP that provide specific guidance on the accounting
treatment for subsequent events or transactions. This guidance is effective
prospectively for interim or annual financial periods ending after June 15,
2009. We adopted this guidance, and it did not have a material impact on our
consolidated financial statements.





FASB ASC
820-10 concerns determining fair value when the volume and level of activity for
the asset or liability have significantly decreased and identifying transactions
that are not orderly.  The guidance was issued on April 9, 2009
and provides additional guidance for estimating fair value when the volume and
level of activity for the asset or liability have significantly decreased. 
FASB ASC 820-10 also includes guidance on identifying circumstances that
indicate a transaction is not orderly.   Even if there has been a
significant decrease in the volume and level of activity regardless of valuation
technique, the objective of a fair value measurement remains the same. 
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions.  FASB ASC 820-10 is effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009, only if FASB ASC 320-10
and FASB ASC 825-10 are adopted concurrently.  FASB ASC 820-10 does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. The Company adopted FASB ASC 820-10 effective June 30, 2009,
as required, without material effect on the Company’s financial position or
results of operations.





On June
16, 2008, the FASB issued guidance on 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.  The guidance is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008.  The adoption of this guidance has not
impacted the Corporation’s consolidated financial statements.





FASB ASC
815-10 concerning disclosures about derivative instruments and hedging
activities was issued in March 2008 and amends and expands the disclosure
requirements of previous guidance to provide greater transparency about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedge items are accounted for under FASB ASC
815-10 and its related interpretations and (iii) how derivative instruments
and related hedged items affect an entity’s financial position, results of
operations and cash flows.  To meet those objectives, FASB ASC 815-10
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements.  FASB ASC 815-10 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged.  The Company adopted FASB ASC 815-10 effective January 1,
2009, as required, without material effect on the Company’s financial position
or results of operations.


17








FASB ASC
810-10 concerning noncontrolling interests in consolidated financial statements
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  Before this statement was issued, limited guidance
existed for reporting noncontrolling interests.  As a result, considerable
diversity in practice existed.  So called minority interests were reported
in the consolidated statement of financial position as liabilities or in the
mezzanine section between liabilities and equity.  This guidance improves
comparability by eliminating that diversity.  The FASB ASC 810-10 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  The Company adopted FASB ASC
810-10 effective January 1, 2009, as required, without material effect on the
Company’s financial position or results of operations.





FASB ASC
805-20 concerns accounting for assets acquired and liabilities assumed in a
business combination that arise from contingencies and clarifies previous
guidance regarding the initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. FASB ASC 805-20 eliminates the
distinction between contractual and noncontractual contingencies discussed in
FASB ASC 805-10, specifies whether contingencies should be measured at fair
value or in accordance with FASB ASC 450-10, provides application guidance on
subsequent accounting for assets acquired and liabilities assumed in a business
combination that arise from contingencies and establishes new disclosure
requirements.  FASB ASC 805-20 is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  The Company adopted FASB ASC
805-20 effective January 1, 2009, as required, without material effect on the
Company’s financial position or results of operations.





FASB ASC
320-10 concerns recognition and presentation of other-than-temporary impairments
and was issued on April 9, 2009.  The guidance requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial
statements.  FASB ASC 320-10 is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009, only if FASB ASC 820-10 and FASB ASC 825-10
are adopted concurrently.  FASB ASC 320-10 does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. The
Company adopted FASB ASC 320-10 effective June 30, 2009, as required, without
material effect on the Company’s financial position or results of
operations.





FASB ASC
825-10 concerning interim disclosures about fair value of financial instruments
was issued on April 9, 2009 and amends the other-than-temporary guidance in
United States generally accepted accounting principles for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements.  FASB ASC 825-10 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities and does not require disclosures for earlier periods
presented for comparative purposes at initial adoption.  Effective for
interim reporting periods ending after June 15, 2009, early adoption is
permitted for periods ending after March 15, 2009, only if FASB ASC 820-10
and FASB ASC 320-10 are adopted concurrently.  The Company adopted
FASB ASC 825-10 effective June 30, 2009, as required, without material effect on
the Company’s financial position or results of operations.


18








At its
September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
consensus on the 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. The consensus concludes that the
purchase of a split-dollar life insurance policy does not constitute a
settlement and, therefore, a liability for the postretirement obligation must be
recognized if the benefit is offered under an arrangement that constitutes a
plan. This guidance 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 the consensus.





FASB ASC
860-10 concerning accounting for transfers of financial assets was issued in
June 2009 and changes the derecognition guidance for transferors of financial
assets, including entities that sponsor securitizations, to align that guidance
with the original intent of previous guidance.  FASB ASC 860-10 also
eliminates the exemption from consolidation for qualifying special-purpose
entities (QSPEs).  As a result, all existing QSPEs need to be
evaluated to determine whether the QSPE should be consolidated in accordance
with FASB ASC 860-10.





FASB ASC
860-10 is effective as of the beginning of a reporting entity’s first annual
reporting period beginning after November 15, 2009 (January 1, 2010, as to the
Company), for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The recognition and measurement
provisions of FASB ASC 860-10 must be applied to transfers that occur on or
after the effective date.  Early application is
prohibited.  FASB ASC 860-10 also requires additional disclosures
about transfers of financial assets that occur both before and after the
effective date.  The Company does not believe that the adoption of
FASB ASC 860-10 will have a significant effect on its consolidated financial
statements.





FASB ASC
860-10 also improves how enterprises account for and disclose their involvement
with variable interest entities (VIE’s), which are special-purpose entities, and
other entities whose equity at risk is insufficient or lack certain
characteristics.  Among other things, FASB ASC 860-10 changes how an
entity determines whether it is the primary beneficiary of a variable interest
entity (VIE) and whether that VIE should be consolidated.  FASB ASC
860-10 requires an entity to provide significantly more disclosures about its
involvement with VIEs.  As a result, the Company must comprehensively
review its involvements with VIEs and potential VIEs, including entities
previously considered to be qualifying special purpose entities, to determine
the effect on its consolidated financial statements and related
disclosures.  FASB ASC 860-10 is effective as of the beginning of a
reporting entity’s first annual reporting period that begins after November 15,
2009 (January 1, 2010, as to the Company), and for interim periods within the
first annual reporting period.  Earlier application is
prohibited.  The Company does not believe that the adoption of FASB
ASC 860-10 will have a significant effect on its consolidated financial
statements.





NOTE
G – COMMITMENTS AND CREDIT RISK





As of
September 30, 2009, loan commitments and unused lines of credit totaled
$82,216,000, standby letters of credit totaled $279,000 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.


19





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.


20


NOTE H —
SEGMENT INFORMATION (Continued)





As of and
for the three months ended September 30, 2009





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  5,771,303
                  
                  
                  $
                  (43,344
                  )
                  
                  $
                  (391,244
                  )
                  
                  $
                  5,336,715
                  
                  
                  
                  
                  
                  $
                  5,336,715Non-interest
      income - external customers
                  
                  
                  2,249,206
                  
                  
                  
                  4,806,359
                  
                  
                  
                  20,146
                  
                  
                  
                  7,075,711
                  
                  
                  
                  
                  
                  
                  7,075,711Non-interest
      income - other segments
                  
                  
                  23,560
                  
                  
                  
                  395,071
                  
                  
                  
                  388,747
                  
                  
                  
                  807,378
                  
                  
                  
                  (807,378
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  8,044,069
                  
                  
                  
                  5,158,086
                  
                  
                  
                  17,649
                  
                  
                  
                  13,219,804
                  
                  
                  
                  (807,378
                  )
                  
                  
                  12,412,426Non-interest
      expense
                  
                  
                  6,256,451
                  
                  
                  
                  5,144,578
                  
                  
                  
                  860,464
                  
                  
                  
                  12,261,493
                  
                  
                  
                  (807,378
                  )
                  
                  
                  11,454,115Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  254,768
                  
                  
                  
                  966,758
                  
                  
                  
                  25,037
                  
                  
                  
                  1,246,563
                  
                  
                  
                  -
                  
                  
                  
                  1,246,563Provision
      for loan losses
                  
                  
                  898,050
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  898,050
                  
                  
                  
                  -
                  
                  
                  
                  898,050Income
      tax expense (benefit)
                  
                  
                  177,837
                  
                  
                  
                  5,459
                  
                  
                  
                  (282,717
                  )
                  
                  
                  (99,421
                  )
                  
                  
                  -
                  
                  
                  
                  (99,421
                  )Segment
      profit (loss)
                  
                  $
                  711,731
                  
                  
                  $
                  8,049
                  
                  
                  $
                  (560,098
                  )
                  
                  $
                  159,682
                  
                  
                  $
                  -
                  
                  
                  $
                  159,682Balance
      sheet information:Total
      assets
                  
                  $
                  652,343,870
                  
                  
                  $
                  22,658,239
                  
                  
                  $
                  3,211,396
                  
                  
                  $
                  678,213,505
                  
                  
                  $
                  (4,464,379
                  )
                  
                  $
                  673,749,126Goodwill
      and intangibles
                  
                  $
                  19,632,662
                  
                  
                  $
                  6,959,636
                  
                  
                  $
                  -
                  
                  
                  $
                  26,592,298
                  
                  
                  $
                  -
                  
                  
                  $
                  26,592,298Premises
      and equipment expenditures
                  
                  $
                  157,579
                  
                  
                  $
                  1,388,936
                  
                  
                  $
                  7,350
                  
                  
                  $
                  1,553,865
                  
                  
                  $
                  -
                  
                  
                  $
                  1,553,865


21





NOTE H —
SEGMENT INFORMATION (Continued)





As of and
for the three months ended September 30, 2008





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  4,891,436
                  
                  
                  $
                  (21,947
                  )
                  
                  $
                  (421,000
                  )
                  
                  $
                  4,448,489
                  
                  
                  
                  
                  
                  $
                  4,448,489Non-interest
      income - external customers
                  
                  
                  1,974,017
                  
                  
                  
                  4,947,727
                  
                  
                  
                  66,968
                  
                  
                  
                  6,988,712
                  
                  
                  
                  
                  
                  
                  6,988,712Non-interest
      income - other segments
                  
                  
                  10,417
                  
                  
                  
                  366,995
                  
                  
                  
                  360,685
                  
                  
                  
                  738,097
                  
                  
                  
                  (738,097
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  6,875,870
                  
                  
                  
                  5,292,775
                  
                  
                  
                  6,653
                  
                  
                  
                  12,175,298
                  
                  
                  
                  (738,097
                  )
                  
                  
                  11,437,201Non-interest
      expense
                  
                  
                  5,002,593
                  
                  
                  
                  4,285,797
                  
                  
                  
                  728,605
                  
                  
                  
                  10,016,995
                  
                  
                  
                  (738,097
                  )
                  
                  
                  9,278,898Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  260,253
                  
                  
                  
                  518,659
                  
                  
                  
                  52,260
                  
                  
                  
                  831,172
                  
                  
                  
                  -
                  
                  
                  
                  831,172Provision
      for loan losses
                  
                  
                  146,173
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  146,173
                  
                  
                  
                  -
                  
                  
                  
                  146,173Income
      tax expense (benefit)
                  
                  
                  493,656
                  
                  
                  
                  342,376
                  
                  
                  
                  (247,942
                  )
                  
                  
                  588,090
                  
                  
                  
                  -
                  
                  
                  
                  588,090Segment
      profit (loss)
                  
                  $
                  1,233,448
                  
                  
                  $
                  664,602
                  
                  
                  $
                  (474,010
                  )
                  
                  $
                  1,424,040
                  
                  
                  $
                  -
                  
                  
                  $
                  1,424,040Balance
      sheet information:Total
      assets
                  
                  $
                  564,608,095
                  
                  
                  $
                  20,602,272
                  
                  
                  $
                  5,259,746
                  
                  
                  $
                  590,470,113
                  
                  
                  $
                  (5,448,337
                  )
                  
                  $
                  585,021,776Goodwill
      and intangibles
                  
                  $
                  11,356,438
                  
                  
                  $
                  7,199,264
                  
                  
                  $
                  -
                  
                  
                  $
                  18,555,702
                  
                  
                  $
                  -
                  
                  
                  $
                  18,555,702Premises
      and equipment expenditures
                  
                  $
                  518,769
                  
                  
                  $
                  3,701,633
                  
                  
                  $
                  40,831
                  
                  
                  $
                  4,261,233
                  
                  
                  $
                  -
                  
                  
                  $
                  4,261,233


22




NOTE H —
SEGMENT INFORMATION (Continued)





As of and
for the nine months ended September 30, 2009





Data
                    
                    
                    
                    
                    
                    Total
                    
                    
                    Intersegment
                    
                    
                    ConsolidatedIncome
      statement information:
                    
                    Banking
                    
                    
                    Processing
                    
                    
                    Other
                    
                    
                    Segments
                    
                    
                    Elimination
                    
                    
                    TotalsNet
      interest income (expense)
                    
                    $
                    17,000,819
                    
                    
                    $
                    (102,422
                    )
                    
                    $
                    (1,184,430
                    )
                    
                    $
                    15,713,967
                    
                    
                    
                    
                    
                    $
                    15,713,967Non-interest
      income - external customers
                    
                    
                    7,648,452
                    
                    
                    
                    14,710,064
                    
                    
                    
                    62,491
                    
                    
                    
                    22,421,007
                    
                    
                    
                    
                    
                    
                    22,421,007Non-interest
      income - other segments
                    
                    
                    67,596
                    
                    
                    
                    1,214,526
                    
                    
                    
                    1,122,342
                    
                    
                    
                    2,404,464
                    
                    
                    
                    (2,404,464
                    )
                    
                    
                    -Total
      revenue
                    
                    
                    24,716,867
                    
                    
                    
                    15,822,168
                    
                    
                    
                    403
                    
                    
                    
                    40,539,438
                    
                    
                    
                    (2,404,464
                    )
                    
                    
                    38,134,974Non-interest
      expense
                    
                    
                    19,070,894
                    
                    
                    
                    13,723,716
                    
                    
                    
                    2,647,050
                    
                    
                    
                    35,441,660
                    
                    
                    
                    (2,404,464
                    )
                    
                    
                    33,037,196Significant
      non-cash items:Depreciation
      and amortization
                    
                    
                    785,852
                    
                    
                    
                    2,217,131
                    
                    
                    
                    74,550
                    
                    
                    
                    3,077,533
                    
                    
                    
                    -
                    
                    
                    
                    3,077,533Provision
      for loan losses
                    
                    
                    2,192,042
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,192,042
                    
                    
                    
                    -
                    
                    
                    
                    2,192,042Income
      tax expense (benefit)
                    
                    
                    832,145
                    
                    
                    
                    714,340
                    
                    
                    
                    (907,570
                    )
                    
                    
                    638,915
                    
                    
                    
                    -
                    
                    
                    
                    638,915Segment
      profit (loss)
                    
                    $
                    2,621,786
                    
                    
                    $
                    1,384,112
                    
                    
                    $
                    (1,739,077
                    )
                    
                    $
                    2,266,821
                    
                    
                    $
                    -
                    
                    
                    $
                    2,266,821Balance
      sheet information:Total
      assets
                    
                    $
                    652,343,870
                    
                    
                    $
                    22,658,239
                    
                    
                    $
                    3,211,396
                    
                    
                    $
                    678,213,505
                    
                    
                    $
                    (4,464,379
                    )
                    
                    $
                    673,749,126Goodwill
      and intangibles
                    
                    $
                    19,632,662
                    
                    
                    $
                    6,959,636
                    
                    
                    $
                    -
                    
                    
                    $
                    26,592,298
                    
                    
                    $
                    -
                    
                    
                    $
                    26,592,298Premises
      and equipment expenditures
                    
                    $
                    480,715
                    
                    
                    $
                    1,640,225
                    
                    
                    $
                    46,522
                    
                    
                    $
                    2,167,462
                    
                    
                    $
                    -
                    
                    
                    $
                    2,167,462


23




NOTE H —
SEGMENT INFORMATION (Continued)





As of and
for the nine months ended September 30, 2008





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  14,067,748
                  
                  
                  $
                  (97,496
                  )
                  
                  $
                  (1,272,389
                  )
                  
                  $
                  12,697,863
                  
                  
                  
                  
                  
                  $
                  12,697,863Non-interest
      income - external customers
                  
                  
                  5,965,120
                  
                  
                  
                  15,155,795
                  
                  
                  
                  184,468
                  
                  
                  
                  21,305,383
                  
                  
                  
                  
                  
                  
                  21,305,383Non-interest
      income - other segments
                  
                  
                  35,628
                  
                  
                  
                  1,125,947
                  
                  
                  
                  1,052,267
                  
                  
                  
                  2,213,842
                  
                  
                  
                  (2,213,842
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  20,068,496
                  
                  
                  
                  16,184,246
                  
                  
                  
                  (35,654
                  )
                  
                  
                  36,217,088
                  
                  
                  
                  (2,213,842
                  )
                  
                  
                  34,003,246Non-interest
      expense
                  
                  
                  14,833,645
                  
                  
                  
                  12,995,624
                  
                  
                  
                  2,375,177
                  
                  
                  
                  30,204,446
                  
                  
                  
                  (2,213,842
                  )
                  
                  
                  27,990,604Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  756,546
                  
                  
                  
                  1,884,267
                  
                  
                  
                  111,471
                  
                  
                  
                  2,752,284
                  
                  
                  
                  -
                  
                  
                  
                  2,752,284Provision
      for loan losses
                  
                  
                  551,388
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  551,388
                  
                  
                  
                  -
                  
                  
                  
                  551,388Income
      tax expense (benefit)
                  
                  
                  1,316,387
                  
                  
                  
                  1,084,135
                  
                  
                  
                  (828,488
                  )
                  
                  
                  1,572,034
                  
                  
                  
                  -
                  
                  
                  
                  1,572,034Segment
      profit (loss)
                  
                  $
                  3,367,076
                  
                  
                  $
                  2,104,487
                  
                  
                  $
                  (1,582,343
                  )
                  
                  $
                  3,889,220
                  
                  
                  $
                  -
                  
                  
                  $
                  3,889,220Balance
      sheet information:Total
      assets
                  
                  $
                  564,608,095
                  
                  
                  $
                  20,602,272
                  
                  
                  $
                  5,259,746
                  
                  
                  $
                  590,470,113
                  
                  
                  $
                  (5,448,337
                  )
                  
                  $
                  585,021,776Goodwill
      and intangibles
                  
                  $
                  11,356,438
                  
                  
                  $
                  7,199,264
                  
                  
                  $
                  -
                  
                  
                  $
                  18,555,702
                  
                  
                  $
                  -
                  
                  
                  $
                  18,555,702Premises
      and equipment expenditures
                  
                  $
                  1,423,734
                  
                  
                  $
                  5,321,346
                  
                  
                  $
                  98,153
                  
                  
                  $
                  6,843,233
                  
                  
                  $
                  -
                  
                  
                  $
                  6,843,233


24


NOTE
I – FAIR VALUE OF ASSETS AND LIABILITIES





The
Company adopted the guidance on fair value measurements now codified as FASB ASC
Topic 820, on January 1, 2008.  ASC 820 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  ASC 820 has been applied prospectively as of
the beginning of the period.





ASC 820
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.  ASC 820 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.  Level 2 inputs do not include quoted prices for
individual securities in active markets; however, they do include inputs that
are either directly or indirectly observable for the individual security being
valued.  Such observable inputs include interest rates and yield
curves at commonly quoted intervals, volatilities, prepayment speeds, credit
risks and default rates.  Also included are inputs derived principally
from or corroborated by observable market data by correlation or other
means.





The
following table presents the fair value measurements of assets measured at fair
value on a recurring basis and the level within ASC 820 fair value hierarchy in
which the fair value measurements fall at September 30, 2009, December 31, 2008
and September 30, 2008:


25





Fair Value Measurements
    Using:Description
                
                Fair Values at
                  9/30/2009
                
                
                Quoted Prices
                  in Active
                  Markets for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant Other
                  Observable
                  Inputs (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)Available-for-Sale
      SecuritiesU.S.
      Treasury and Government Agencies
                
                $
                11,137,540
                
                
                
                -
                
                
                $
                11,137,540
                
                
                
                -Mortgage-backed
      securities
                
                $
                67,538,135
                
                
                
                -
                
                
                $
                67,538,135
                
                
                
                -State
      and political subdivisions
                
                $
                31,887,348
                
                
                
                -
                
                
                $
                31,887,348
                
                
                
                -Equity
      securities
                
                $
                23,000
                
                
                
                -
                
                
                $
                23,000
                
                
                
                -Other
      securities
                
                $
                975,477
                
                
                
                -
                
                
                $
                975,477
                
                
                
                -





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
      SecuritiesU.S.
      Treasury and Government Agencies
                
                $
                15,183,883
                
                
                
                -
                
                
                $
                15,183,883
                
                
                
                -Mortgage-backed
      securities
                
                $
                64,546,425
                
                
                
                -
                
                
                $
                64,546,425
                
                
                
                -State
      and political subdivisions
                
                $
                22,801,431
                
                
                
                -
                
                
                $
                22,801,431
                
                
                
                -Equity
      securities
                
                $
                23,000
                
                
                
                -
                
                
                $
                23,000
                
                
                
                -Other
      securities
                
                $
                51,736
                
                
                
                -
                
                
                $
                51,736
                
                
                
                -





Fair Value Measurements
    Using:Description
                
                Fair Values at
                  9/30/2008
                
                
                Quoted Prices
                  in Active
                  Markets for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant Other
                  Observable
                  Inputs (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)Available-for-Sale
      SecuritiesU.S.
      Treasury and Government Agencies
                
                $
                14,961,794
                
                
                
                -
                
                
                $
                14,961,794
                
                
                
                -Mortgage-backed
      securities
                
                $
                63,603,648
                
                
                
                -
                
                
                $
                63,603,648
                
                
                
                -State
      and political subdivisions
                
                $
                15,796,794
                
                
                
                -
                
                
                $
                15,796,794
                
                
                
                -Equity
      securities
                
                $
                23,000
                
                
                
                -
                
                
                $
                23,000
                
                
                
                -Other
      securities
                
                $
                51,114
                
                
                
                -
                
                
                $
                51,114
                
                
                
                -





26




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.  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.  All impaired loans
held by the Company were collateral dependent at September 30, 2009, December
31, 2008 and September 30, 2008.





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 associated with the servicing rights and discounting the cash flows
using market discount rates.  The servicing portfolio has been valued
using all relevant positive and negative cash flows including servicing fees,
miscellaneous income and float; marginal costs of servicing; the cost of carry
on advances; and foreclosure losses; and applying certain prevailing assumptions
used in the marketplace.  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 September 30, 2009,
December 31, 2008 and September 30, 2008:





Fair Value Measurements
    Using:Description
                    
                    Fair Values at
                      9/30/2009
                    
                    
                    Quoted Prices
                      in Active
                      Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable
                      Inputs (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs (Level 3)Impaired loans
                    
                    $
                    4,547,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    4,547,000Mortgage
      Servicing Rights
                    
                    $
                    1,715,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    1,715,000Foreclosed
      Assets
                    
                    $
                    759,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    759,000


27




Fair Value Measurements Using:Description
                        
                        Fair Values at
                          12/31/2008
                        
                        
                        Quoted Prices
                          inActive
                          Marketsfor
                          IdenticalAssets
                          (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





Fair Value Measurements Using:Description
                        
                        Fair Values at
                          9/30/2008
                        
                        
                        Quoted Prices
                          inActive
                          Marketsfor
                          IdenticalAssets
                          (Level 1)
                        
                        
                        Significant Other
                          Observable
                          Inputs(Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs(Level 3)Impaired
      loans
                        
                        $
                        141,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        141,000





There
were no changes in the inputs or methodologies used to determine fair value
during the quarter ended September 30, 2009 as compared to the quarters ended
December 31, 2008 and September 30, 2008.





The
following table presents estimated fair values of the Company’s financial
instruments.  The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties.  Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale.  Because no market exists for certain of these
financial instruments, and because management does not intend to sell these
financial instruments, the Company does not know whether the fair values shown
below represent values at which the respective financial instruments could be
sold individually or in the aggregate.




Cash and Cash Equivalents
and Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest
Payable and Receivable




The
carrying amount approximates the fair value.





Loans




The
estimated fair value for loans receivable, including loans held for sale, net,
is based on estimates of the rate State Bank would charge for similar loans at
September 30, 2009 and December 31, 2008, applied for the time period until the
loans are assumed to re-price or be paid.




Deposits & Other
Borrowings




Deposits
include demand deposits, savings accounts, NOW accounts and certain money market
deposits. The carrying amount approximates the fair value. The estimated fair
value for fixed-maturity time deposits, as well as borrowings, is based on
estimates of the rate State Bank could pay on similar instruments with similar
terms and maturities at September 30, 2009 and December 31, 2008.




28




The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties.  The estimated
fair value for other financial instruments and off-balance-sheet loan
commitments approximate cost at September 30, 2009 and are not considered
significant to this presentation.




September
      30, 2009Carrying
                  
                  
                  FairAmount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  31,055,035
                  
                  
                  $
                  31,055,000Available-for-sale
      securities
                  
                  
                  111,561,500
                  
                  
                  
                  111,562,000Loans,
      net of allowance for loan losses
                  
                  
                  453,829,682
                  
                  
                  
                  456,547,080Federal
      Reserve and FHLB Bank stock
                  
                  
                  3,748,250
                  
                  
                  
                  3,748,000Accrued
      interest receivable
                  
                  
                  2,851,934
                  
                  
                  
                  2,852,000Financial
      liabilitiesDeposits
                  
                  $
                  492,292,213
                  
                  
                  $
                  494,287,000Securities
      sold under agreements to repurchase
                  
                  
                  46,138,646
                  
                  
                  
                  47,320,000Notes
      payable
                  
                  
                  2,357,816
                  
                  
                  
                  2,358,000FHLB
      advances
                  
                  
                  39,868,884
                  
                  
                  
                  41,477,000Trust
      preferred securities
                  
                  
                  20,620,000
                  
                  
                  
                  20,239,000Accrued
      interest payable
                  
                  
                  1,382,015
                  
                  
                  
                  1,382,000
 
 29
  December
      31, 2008Carrying
                  
                  
                  FairAmount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  28,059,532
                  
                  
                  $
                  28,060,000Available-for-sale
      securities
                  
                  
                  102,606,475
                  
                  
                  
                  102,606,000Loans,
      net of allowance for loan losses
                  
                  
                  448,915,955
                  
                  
                  
                  455,629,000Federal
      Reserve and FHLB Bank stock
                  
                  
                  4,244,100
                  
                  
                  
                  4,244,000Accrued
      interest receivable
                  
                  
                  2,964,663
                  
                  
                  
                  2,965,000Financial
      liabilitiesDeposits
                  
                  $
                  484,220,584
                  
                  
                  $
                  486,787,000Securities
      sold under agreements to repurchase
                  
                  
                  43,425,978
                  
                  
                  
                  45,976,000Notes
      payable
                  
                  
                  1,000,000
                  
                  
                  
                  1,000,000FHLB
      advances
                  
                  
                  36,646,854
                  
                  
                  
                  38,196,000Trust
      preferred securities
                  
                  
                  20,620,000
                  
                  
                  
                  19,996,000Accrued
      interest payable
                  
                  
                  1,965,842
                  
                  
                  
                  1,966,000
 
 Note
J - Securities
 
 The
amortized cost and approximate fair value of securities were as
follows:
 
 Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        ApproximateCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Fair ValueAvailable-for-Sale
      Securities:September
      30, 2009U.S.
      Treasury andGovernment
      agencies
                        
                        $
                        11,114,769
                        
                        
                        $
                        23,407
                        
                        
                        $
                        (636
                        )
                        
                        $
                        11,137,540Mortgage-backed
      securities
                        
                        
                        65,781,261
                        
                        
                        
                        2,258,149
                        
                        
                        
                        (501,275
                        )
                        
                        
                        67,538,135State
      and political subdivisions
                        
                        
                        30,638,151
                        
                        
                        
                        1,286,440
                        
                        
                        
                        (37,243
                        )
                        
                        
                        31,887,348Equity
      securities
                        
                        
                        23,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23,000Other
      securities
                        
                        
                        975,477
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        975,477$
                        108,532,658
                        
                        
                        $
                        3,567,996
                        
                        
                        $
                        (539,154
                        )
                        
                        $
                        111,561,500
  30
  Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        ApproximateCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Fair ValueAvailable-for-Sale
      Securities:December
      31, 2008U.S.
      Treasury andGovernment
      agencies
                        
                        $
                        15,146,301
                        
                        
                        $
                        65,978
                        
                        
                        $
                        (28,396
                        )
                        
                        $
                        15,183,883Mortgage-backed
      securities
                        
                        
                        64,329,865
                        
                        
                        
                        1,014,453
                        
                        
                        
                        (797,893
                        )
                        
                        
                        64,546,425State
      and political subdivisions
                        
                        
                        23,241,636
                        
                        
                        
                        22,010
                        
                        
                        
                        (462,215
                        )
                        
                        
                        22,801,431Equity
      securities
                        
                        
                        23,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23,000Other
      securities
                        
                        
                        50,000
                        
                        
                        
                        1,736
                        
                        
                        
                        -
                        
                        
                        
                        51,736$
                        102,790,802
                        
                        
                        $
                        1,104,177
                        
                        
                        $
                        (1,288,504
                        )
                        
                        $
                        102,606,475
 
 The
amortized cost and fair value of securities available for sale at September 30,
2009, by contractual maturity, are shown below.  Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
 
 Available
      for SaleAmortized
                                                  
                                                  
                                                  FairCost
                                                  
                                                  
                                                  ValueWithin
      one year
                                                  
                                                  $
                                                  3,405,830
                                                  
                                                  
                                                  $
                                                  3,413,753Due
      after one year through five years
                                                  
                                                  
                                                  4,547,924
                                                  
                                                  
                                                  
                                                  4,733,308Due
      after five years through ten years
                                                  
                                                  
                                                  8,525,567
                                                  
                                                  
                                                  
                                                  8,755,174Due
      after ten years
                                                  
                                                  
                                                  25,273,599
                                                  
                                                  
                                                  
                                                  26,122,65341,752,920
                                                  
                                                  
                                                  
                                                  43,024,888Mortgage-backed
      securities & equity and other securities
                                                  
                                                  
                                                  66,779,738
                                                  
                                                  
                                                  
                                                  68,536,612Totals
                                                  
                                                  $
                                                  108,532,658
                                                  
                                                  
                                                  $
                                                  111,561,500
 
 The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $27,744,885 at September 30, 2009 and $45,770,494 at
December 31, 2008.  The securities delivered for repurchase agreements
were $55,169,486 at September 30, 2009 and 51,419,727 at December 31,
2008.
 
 Gross
gains of $477,591 resulting from sales of available-for-sale securities were
realized as of September 30, 2009.  The tax expense for net security
gains for September 30, 2009 was $162,381.
  31
  Certain
investments in debt securities are reported in the financial statements at an
amount less than their historical cost.  Total fair value of these
investments was $8,140,308 at September 30, 2009 and $26,135,897 at December 31,
2008 which was approximately 7 and 25 percent, respectively, of the Company’s
available-for-sale investment portfolio at such dates.  Based on
evaluation of available evidence, including recent changes in market interest
rates, credit rating information and information obtained from regulatory
filings, management believes the declines in fair value for these securities are
temporary.  Should the impairment of any of these securities become
other than temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the other-than-temporary
impairment is identified.
 
 Securities
with unrealized losses at September 30, 2009 and December 31, 2008 are as
follows:
 September
      30, 2009
                                                      
                                                      Less
      than 12 Months
                                                      
                                                      
                                                      12
      Months or Longer
                                                      
                                                      
                                                      TotalUnrealized
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Unrealized
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      UnrealizedFair
      Value
                                                      
                                                      
                                                      Losses
                                                      
                                                      
                                                      Fair
      Value
                                                      
                                                      
                                                      Losses
                                                      
                                                      
                                                      Fair
      Value
                                                      
                                                      
                                                      LossesAvailable-for-SaleSecurities:U.S.
      Treasury andGovernment
      agencies
                                                      
                                                      $
                                                      2,299,745
                                                      
                                                      
                                                      $
                                                      (636
                                                      )
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      2,299,745
                                                      
                                                      
                                                      $
                                                      (636
                                                      )Mortgage-backedsecurities
                                                      
                                                      
                                                      1,715,872
                                                      
                                                      
                                                      
                                                      (7,102
                                                      )
                                                      
                                                      
                                                      2,636,910
                                                      
                                                      
                                                      
                                                      (494,173
                                                      )
                                                      
                                                      
                                                      4,352,782
                                                      
                                                      
                                                      
                                                      (501,275
                                                      )State
      and politicalsubdivisions
                                                      
                                                      
                                                      475,337
                                                      
                                                      
                                                      
                                                      (7,460
                                                      )
                                                      
                                                      
                                                      1,012,239
                                                      
                                                      
                                                      
                                                      (29,783
                                                      )
                                                      
                                                      
                                                      1,487,576
                                                      
                                                      
                                                      
                                                      (37,243
                                                      )$
                                                      4,490,954
                                                      
                                                      
                                                      $
                                                      (15,198
                                                      )
                                                      
                                                      $
                                                      3,649,149
                                                      
                                                      
                                                      $
                                                      (523,956
                                                      )
                                                      
                                                      $
                                                      8,140,103
                                                      
                                                      
                                                      $
                                                      (539,154
                                                      )
 
 December
      31, 2008
                                              
                                              Less
      than 12 Months
                                              
                                              
                                              12
      Months or Longer
                                              
                                              
                                              TotalUnrealized
                                              
                                              
                                              
                                              
                                              
                                              Unrealized
                                              
                                              
                                              
                                              
                                              
                                              UnrealizedFair
      Value
                                              
                                              
                                              Losses
                                              
                                              
                                              Fair
      Value
                                              
                                              
                                              Losses
                                              
                                              
                                              Fair
      Value
                                              
                                              
                                              LossesAvailable-for-SaleU.S.
      Treasury andGovernment
      agencies
                                              
                                              $
                                              974,720
                                              
                                              
                                              $
                                              (28,396
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              974,720
                                              
                                              
                                              $
                                              (28,396
                                              )Mortgage-backedsecurities
                                              
                                              
                                              9,619,369
                                              
                                              
                                              
                                              (571,239
                                              )
                                              
                                              
                                              1,590,836
                                              
                                              
                                              
                                              (226,654
                                              )
                                              
                                              
                                              11,210,205
                                              
                                              
                                              
                                              (797,893
                                              )State
      and politicalsubdivisions
                                              
                                              
                                              12,756,053
                                              
                                              
                                              
                                              (441,439
                                              )
                                              
                                              
                                              1,194,919
                                              
                                              
                                              
                                              (20,776
                                              )
                                              
                                              
                                              13,950,972
                                              
                                              
                                              
                                              (462,215
                                              )$
                                              23,350,142
                                              
                                              
                                              $
                                              (1,041,074
                                              )
                                              
                                              $
                                              2,785,755
                                              
                                              
                                              $
                                              (247,430
                                              )
                                              
                                              $
                                              26,135,897
                                              
                                              
                                              $
                                              (1,288,504
                                              )
  The total
unrealized losses on the mortgage-backed securities portfolio are derived from
three private label senior tranche CMO securities.  Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concern warrants such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent of the
Company to not sell the investment and whether it is more likely than not that
the Company will be required to sell the security before recovery of its
amortized cost.  Management has determined there to be no
other-than-temporary-impairment on these CMO securities.
  32
  The total
unrealized loss on the municipal security portfolio is due to the holding of
several municipal securities, all with individually insignificant
losses.
 
 Note
K – Strategic Partnership
 
 On April
27, 2009, the Company announced a strategic partnership between RDSI and 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 entered into a Reseller Software License and Support Agreement
pursuant to which RDSI was granted rights as the exclusive provider of New
Core’s Single SourceTM software.  RDSI and New Core also entered into
an agreement and plan of merger pursuant to which New Core would be merged with
a newly-created subsidiary of RDSI and become a wholly-owned subsidiary of
RDSI.  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.   On October 22, 2009, the Company announced that its Board
of Directors had approved proceeding with the appropriate filings with the SEC
in connection with the contemplated spin-off of RDSI.  The Company
anticipates that the spin-off would be completed in the first quarter of 2010,
subject to the satisfaction of a number of conditions, including final approval
by the Company’s Board of Directors of the spin-off and its
terms.
  Note
L – Dividends on Common Stock
 
 On
October 21, 2009, the Company’s Board of Directors approved a quarterly cash
dividend of $0.09 per share for the third quarter of 2009, payable on November
20, 2009 to all shareholders of record on November 6, 2009.
  Note
M – Subsequent Events
  Subsequent
events have been evaluated through November 16, 2009, which is the date the
financial statements were issued.
  33
  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 and under the heading “Item 1A. Risk Factors” of
Part II of this Quarterly Report on form 10-Q”.  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.
  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.
  34
  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
 
 FDIC Insurance
Assessments.  On May 22, 2009, The Board of Directors of the
Federal Deposit Insurance Corporation (the “FDIC”) issued a final rule imposing
a special assessment on insured institutions as part of the agency's efforts to
rebuild the Deposit Insurance Fund (DIF) and help maintain public confidence in
the banking system. The final rule established a special assessment of five
basis points on each FDIC-insured depository institution's assets, minus its
Tier 1 capital, as of June 30, 2009. The special assessment, in the amount of
$300,000, was expensed during the second quarter and was collected from State
Bank on September 30, 2009.  In its May 22, 2009 final rule, the FDIC
also announced that an additional assessment of approximately the same amount
later in 2009 was probable.
  On
September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking that would
require insured institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012,
in lieu of a second FDIC special assessment. On November 12, 2009, the FDIC
adopted a final rule implementing the proposed prepaid
assessments.  The prepaid assessments for these periods will be
collected on December 30, 2009, along with the regular quarterly risk-based
deposit insurance assessment for the third quarter of 2009. For the fourth
quarter of 2009 and for all of 2010, the prepaid assessment rate will be based
on each institution’s total base assessment rate for the third quarter of 2009,
modified to assume that the assessment rate in effect for the institution on
September 30, 2009, has been in effect for the entire third quarter of 2009. The
prepaid assessment rate for 2011 and 2012 will be equal to that institution’s
modified third quarter 2009 total base assessment rate plus 3 basis points. Each
institution’s prepaid assessment base would be calculated using its third
quarter 2009 assessment base, adjusted quarterly for a five percent annual
growth rate in the assessment base through the end of 2012.  The
Company estimates that the three year prepayment will be approximately $2.8
million for State Bank, which will be expensed over the three-year life of the
asset.
  Troubled Asset Relief
Program.  On October 3, 2008, President Bush signed into law
the Emergency Economic Stabilization Act of 2008 (EESA), which created the
Troubled Asset Relief Program (“TARP”) to provided 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 was authorized to 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.  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.
  35
  Temporary Liquidity Guarantee
Program.  EESA also instituted a Temporary Liquidity Guarantee
Program (TLGP) through December 31, 2009 to further insure customer deposits at
FDIC member institutions.  The TLGP consists of two programs – the
Debt Guarantee Program and the Transaction Account Guarantee
Program.  Pursuant to the Debt Guarantee Program, the FDIC 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 concluded that it would
not participate in the program.
 Pursuant
to the Transaction Account Guarantee Program, the FDIC will provide a temporary
100% guarantee of all balances (unlimited coverage) in noninterest bearing
transaction accounts.    The expanded coverage under the
FDIC's Transaction Account Guarantee Program has been extended through June 30,
2010. 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 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.
  36
  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.
 
 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.  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 September
30, 2009 compared to Three Months Ended September 30, 2008
 
 Net
Income: Net income for the third quarter of 2009 was $160 thousand or
$0.03 per diluted share, compared to $1.42 million, or $0.29 per diluted share,
for the third quarter of 2008.  The quarter reflects an increase in
non-interest expense of $2.18 million and an increase in the provision for loan
losses of $752 thousand.  These items are partially offset by an $888
thousand increase in net interest income and an $87 thousand increase in
non-interest income.  The primary driver of the increase in net
interest income was an increase of $62.3 million in average earning assets,
acquired mainly in the acquisition of National Bank of Montpelier (NBM), coupled
with a 31 basis point increase in the net interest margin.  The main
driver behind the increase in non-interest income was mortgage banking and
associated fees and loan sale gains, as production for the third quarter of 2009
was $42.1 million compared with $7.2 million for the 2008 third
quarter.  The increase in non-interest expense was driven by the
addition of four retail branches associated with the purchase of NBM, legal fees
of $155 thousand associated with the planned RDSI spin-off, accelerated
depreciation of the ITI software used at RDSI of $360 thousand and $335 thousand
in expense related to the ramp up by RDSI to convert clients to the new Single
SourceTM software.
  37
  Net
Interest Income: Net interest income for the third quarter of 2009 was
$5.34 million, an increase of $888,000, or 20.0 percent, from the 2008 third
quarter.  As previously mentioned, average earning assets increased
$62.3 million, or 12.3 percent, over the prior year third
quarter.  The increase in earning assets is a result of loan growth
over the past twelve months of $48.5 million, or 12.1 percent, reaching $448.4
million at September 30, 2009.  This growth was due mainly to the
$43.7 million in loans acquired in the NBM transaction. Sixty-seven percent of
State Bank’s loan portfolio is commercial, and $32.5 million of the Bank’s
growth was derived from this sector, with $10.9 million derived from residential
growth.  Loan balances declined during the third quarter of 2009,
decreasing $1.72 million from the fourth quarter of 2008.  The
decrease in loans is largely attributable to residential loans, which decreased
$16.1 million during the first nine months of 2009.  This was due to
refinancing activities, as the Company refinanced portfolio loans and sold them
into the secondary market.  Commercial loans increased $12.9 million
from the previous year-end.  Year-over-year, the net interest margin
increased 31 basis points from 3.56 percent for the third quarter 2008 to 3.87
percent for the third quarter 2009.  The 3.87 percent represents a 5
basis point increase from the linked quarter of 3.82 percent.  The
year-over-year increase is a result of being liability sensitive in a decreasing
rate environment.
 
 Provision
for Loan Losses: The provision for loan losses was $898,000 for the third
quarter of 2009 compared to a $146,000 provision for the third quarter of
2008.  The Company experienced an increase in losses
quarter-over-quarter, which is reflected in net charge-offs of $837,000 compared
to $336,000 of net charge-offs in the 2008 third quarter.  For the
third quarter ended September 30, 2009, net charge-offs as a percentage of
average loans was 0.73 percent annualized.  At quarter-end,
consolidated non-performing assets were $11.4 million, or 1.69 percent of total
assets, compared with $6.27 million, or 1.07 percent of total assets for the
prior-year third quarter.
 
 ($
      in Thousands)
                          
                          Sept. 30,
                            2009
                          
                          
                          December 31,
                            2008
                          
                          
                          Sept. 30,
                            2008Net
      charge-offs
                          
                          $
                          837
                          
                          
                          $
                          280
                          
                          
                          $
                          336Non-performing
      loans
                          
                          $
                          9,646
                          
                          
                          $
                          5,178
                          
                          
                          $
                          4,659OREO
      / OAO
                          
                          $
                          1,748
                          
                          
                          $
                          1,409
                          
                          
                          $
                          1,611Non-performing
      assets
                          
                          $
                          11,394
                          
                          
                          $
                          6,587
                          
                          
                          $
                          6,270Non-performing
      assets / Total assets
                          
                          
                          1.69
                          %
                          
                          
                          1.00
                          %
                          
                          
                          1.07
                          %Allowance
      for loan losses / Total loans
                          
                          
                          1.32
                          %
                          
                          
                          1.12
                          %
                          
                          
                          1.01
                          %Allowance
      for loan losses / Non-performing assets
                          
                          
                          52.1
                          %
                          
                          
                          76.2
                          %
                          
                          
                          64.7
                          %
 
 Non-interest
Income: Non-interest income was $7.08 million for the third quarter of
2009 compared with $6.99 million for the prior-year third quarter, an increase
of $87,000, or 1.24 percent.  The third quarter results were primarily
driven by the increase in the gain on sale of loans of $589 thousand, customer
service fees of $74 thousand and loan servicing fees of $69
thousand.  These increases were partially offset by trust fees which
decreased $136,000 and data service fees which decreased $141
thousand.
  38
  On July
28, 2009 RDSI reached an agreement with Information Technology, Inc. and Fiserv
Solutions, Inc. (collectively, “Fiserv”) to wind down their licensing
relationship.  After December 31, 2010, Fiserv will no longer license
its Premier suite of products to RDSI and RDSI will exclusively market New Core
Banking Systems’ Single SourceTM.  RDSI customers which presently rely
on the Premier platform will be provided the opportunity to continue their
processing with RDSI and convert to Single SourceTM, or to move their processing
to Fiserv and continue to use Premier.  RDSI and Fiserv have agreed to
cooperate in transitioning RDSI clients to their choice of core software prior
to December 31, 2010.
 
 In
accordance with the above-referenced agreement, on July 30, 2009, Fiserv
dismissed the civil action it filed against RDSI relating to the Premier license
agreements.  The civil action, which was filed by Fiserv on May 20,
2009 in the United States District Court for the District of Nebraska, was
previously disclosed on the Form 8-K filed by the Company on May 29,
2009.
 
 Non-interest
Expense: Non-interest expense was $11.5 million for the third quarter of
2009, compared with $9.28 million for the third quarter of 2008.  The
acquisition of NBM contributed approximately $429,000 of this
increase.  $155 thousand of legal expenses were incurred related to
the potential RDSI spin-off and merger with New Core.  Accelerated
amortization of the ITI software accounted for $360
thousand.  Mortgage banking expenses increased $545,000
quarter-over-quarter.
 
 Nine Months Ended September
30, 2009 compared to Nine Months Ended September 30, 2008
 
 Net
Income: Rurban had net income of $2.27 million or $0.46 per diluted share
for the nine months ended September 30, 2009, compared to $3.89 million or $0.79
per diluted share for the nine months ended September 30, 2008.  This
represents a $1.62 million, or 41.7 percent, decrease in comparison of the
nine-month periods.  Significant changes from period to period include
an increase in non-interest expenses of $5.05 million and an increase in loan
loss provision of $1.64 million.  Offsetting these items are an
increase in net interest income of $3.02 million and a $1.12 million increase in
non-interest income.
 
 Net
Interest Income: For the nine months ended September 30, 2009, net
interest income was $15.7 million, an increase of $3.02 million or 23.8 percent,
from the nine-month period ended September 30, 2008.  This increase is
primarily the result of the acquisition of four banking centers in Williams
County in the NBM transaction, coupled with a 45 basis point increase in the
year-over-year net interest margin.  The ability to restructure the
balance sheet from a negative gap to a positive gap over the past nine to twelve
months has been instrumental to the increase in the net interest margin over
that time frame.
 
 Provision
for Loan Losses: The provision for loan losses was $2.19 million for the
nine months ended September 30, 2009, compared to $551 thousand for the nine
months ended September 30, 2008.  The loan loss provision is
reflective of a $5.12 million increase in non-performers on a year-over-year
basis.  Non-performers decreased $125 thousand on a linked quarter
basis. Net charge-offs for the year total $1.28 million or 38 basis points on an
annualized basis.
 
 Non-interest
Income: Non-interest income was $22.4 million for the nine months ended
September 30, 2009, compared with $21.3 million for the nine months ended
September 30, 2008.  The first nine months of 2009 saw a $2.15 million
increase in gains on sale of loans and mortgage servicing rights associated with
sold loans.  Gains on the sale of securities contributed an additional
$478 thousand.  Offsetting these items were trust fee income, which
decreased $582 thousand from the prior year due to the poor equity markets, data
processing fees, which decreased $426 thousand, due to the loss of one of RDSI’s
largest client banks, proceeds from the VISA IPO of $132,000 and investment
security recoveries of $197,000, both of which were one-time items in
2008.
  39
  Non-interest
Expense: For the nine months ended September 30, 2009, total non-interest
expense was $33.0 million compared with 28.0 million for the nine months ended
September 30, 2008.  This represents a $5.05 million, or 18.0 percent,
increase period over period.  Of the overall increase, salary and
benefits expense accounted for $2.53 million, due primarily to the addition of
the four Williams County branches in the NBM transaction and growth within
mortgage banking production and other growth initiatives.  Occupancy
expenses were $733 thousand more than the prior year nine month period, again
due to the addition of the four Williams County branches.  Legal fees
of $411 thousand associated with the contemplated RDSI spin-off and potential
merger of RDSI with New Core and the one-time FDIC assessment of $300 thousand
were the main contributors to the year-over-year increase in professional fees
of $501 thousand.
 
 Changes in Financial
Condition
 
 September
30, 2009 vs. December 31, 2008
 
 At
September 30, 2009, total assets were $673.7 million, representing an increase
of $16.1 million, or 2.45 percent, from December 31, 2008.  The
increase is primarily attributable to an increase of $8.96 million, or 8.73
percent in available-for-sale securities, and an increase in loans held for sale
of $7.55 million.  Cash and cash equivalents increased $3.00 million,
or 10.7 percent.  Loan balances decreased $1.72 million, or 0.38
percent.
 
 Year-
over-year, average assets increased $89.1 million, or 15.5
percent.  Loan growth over the past twelve months was approximately
$48.5 million, or 12.1 percent, reaching $448.4 million at September 30, 2009;
this growth was primarily due to the acquisition of NBM.  Commercial
loan growth accounted for $32.5 million of the Bank’s growth, with $10.9 million
derived from residential growth.
 
 At
September 30, 2009, liabilities totaled $609.1 million, an increase of $13.1
million since December 31, 2008.  Of this increase, significant
changes include an increase of $8.07 million in total deposits, as savings,
interest checking and money market deposits increased $26.2 million, while time
deposits decreased $18.1 million.  Advances from the Federal Home Loan
Bank accounted for $3.22 million of the increase, repurchase agreements
increased $2.71 million and notes payable increased $1.36
million.  Offsetting the increases was a decrease of $1.66 million in
other liabilities and $584 thousand in interest payable.
 
 From
December 31, 2008 to September 30, 2009, total shareholders’ equity increased
$3.01 million, or 4.88 percent, to $64.7 million.  Of this increase,
retained earnings increased $952 thousand, which is the result of $2.27 million
in net income less $1.31 million in cash dividends to
shareholders.  Additional paid-in-capital increased $90 thousand as
the result of share-based compensation expense incurred during the
year.  Accumulated other comprehensive income increased $2.12 million
as the result of an increase in market value of the available-for-sale
securities portfolio.  The stock repurchase plan reduced capital by
$156 thousand during the first nine months of 2009.
  40
  Capital
Resources
 
 At
September 30, 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
                      
                      $
                      61.9
                      
                      
                      
                      13.1
                      %
                      
                      $
                      37.9
                      
                      
                      
                      8.0
                      %
                      
                      $
                      -
                      
                      
                      
                      N/AState
      Bank
                      
                      
                      52.0
                      
                      
                      
                      11.3
                      
                      
                      
                      36.7
                      
                      
                      
                      8.0
                      
                      
                      
                      45.9
                      
                      
                      
                      10.0
 
 Both the
Company and State Bank were categorized as well capitalized at September 30,
2009.
 
 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 $154.0 million at September 30, 2009
compared to $134.5 million at December 31, 2008.
 
 The
Company’s commercial real estate, multi-family and residential first mortgage
portfolio of $266.8 million at September 30, 2009 and $269.5 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 September 30, 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 nine months ended September 30, 2009 and 2008
follows.
 
 The
Company experienced negative cash flows from operating activities for the nine
months ended September 30, 2009 and positive cash flows for the nine months
ended September 30, 2008.  Net cash used in operating activities was
$3.40 million for the nine months ended September 30, 2009.  Net cash
provided in operating activities was $9.01 million for the nine months ended
September 30, 2008.
  41
  Net cash
flow from investing activities was a use of cash of $7.49 million and $21.0
million for the nine months ended September 30, 2009 and 2008,
respectively.  The changes in net cash from investing activities at
September 30, 2009 included available-for-sale securities purchases totaling
$50.0 million and purchases of equipment and software of $2.17
million.  These cash payments were offset by $28.4 million in proceeds
from maturities of securities and $15.8 million in proceeds from the sales of
securities.  The changes in net cash from investing activities at
September 30, 2008 included the purchase of securities of $46.2 million, net
changes in loans of 13.0 million and the purchases of equipment and software of
$6.84 million.  This was partially offset by the proceeds from
maturities or calls of securities of $42.8 million and proceeds from the sale of
premises and equipment of $2.04 million.
 
 Net cash
flow from financing activities was $13.9 million and $20.3 million for the nine
month periods ended September 30, 2009 and 2008, respectively.  The
2009 financing activities included a $26.2 million increase in demand deposits,
money market, interest checking and savings accounts, which were offset by an
$18.1 million decrease in certificates of deposit.  Proceeds from
advances from the FHLB totaled $7.50 million, repurchase agreements increased
$2.71 million and proceeds from notes payable totaled $4.2
million.  Offsetting this increase were repayments of Federal Home
Loan Bank advances of $4.28 million, repayment of notes payable of $2.84 million
and cash dividends paid to shareholders of $1.31 million.  The net
cash provided by financing activities at September 30, 2008 was primarily due to
proceeds from advances from the FHLB which totaled $24.0 million; federal funds
purchased totaling $5.00 million and a $1.55 million increase in repurchase
agreements.  Deposits increased $423 thousand, with demand deposits,
money market, interest checking and savings accounts increasing $18.6 million
and certificate of deposit balances decreasing $18.2
million.  Partially offsetting these increases were repayment of FHLB
advances of $7.77 million and cash dividends paid to shareholders of $1.24
million.
 
 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 a line of
credit with a regional bank.  Management expects the risk of changes
in off-balance-sheet arrangements to be immaterial to earnings.
 
 Approximately
$140.0 million of the Company’s $266.8 million commercial real estate,
multi-family and residential first mortgage loans qualify to collateralize FHLB
borrowings and have been pledged to meet FHLB collateralization requirements as
of September 30, 2009.  Based on the current collateralization
requirements of the FHLB, approximately $1.4 million of additional borrowing
capacity existed at September 30, 2009. The Company also had $21.9 million in
unpledged securities that may be used to pledge for additional
borrowings.
 
 At
September 30, 2009, the Company had unused federal funds lines totaling $20.5
million.  At December 31, 2008, the Company had $25.5 million in
federal funds lines.  Federal funds borrowed at September 30, 2009 and
December 31, 2008 totaled $0 and $0, respectively.  The Company also
has a $15.0 million line of credit with a regional bank.  Advances on
this line totaled $0 and $0 at September 30, 2009 and December 31, 2008
respectively.
 
 The
Company’s contractual obligations as of September 30, 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 $39.9 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 RDSI/DCM Lansing facility of $61,000 per
year.  Other long-term liabilities were comprised of time deposits of
$224.4 million.
  42
  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.
 
 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.
  43
  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 September 30, 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.
 
 Principal/Notional
Amount Maturing or Assumed to Withdraw In:
 (Dollars
in Thousands)
 
 First
                                
                                
                                YearsComparison
      of 2009 to 2008:
                                
                                Year
                                
                                
                                2 – 5
                                
                                
                                Thereafter
                                
                                
                                TotalTotal
      rate-sensitive assets:At
      Sept. 30, 2009
                                
                                $
                                178,179
                                
                                
                                $
                                256,613
                                
                                
                                $
                                140,282
                                
                                
                                $
                                575,074At
      December 31, 2008
                                
                                
                                182,795
                                
                                
                                
                                227,333
                                
                                
                                
                                160,659
                                
                                
                                
                                570,787Increase
      (decrease)
                                
                                $
                                (4,616
                                )
                                
                                $
                                29,280
                                
                                
                                $
                                (20,377
                                )
                                
                                $
                                4,278Total
      rate-sensitive liabilities:At
      Sept. 30, 2009
                                
                                $
                                207,586
                                
                                
                                $
                                370,829
                                
                                
                                $
                                22,863
                                
                                
                                $
                                601,278At
      December 31, 2008
                                
                                
                                220,481
                                
                                
                                
                                338,260
                                
                                
                                
                                27,173
                                
                                
                                
                                585,914Increase
      (decrease)
                                
                                $
                                (12,895
                                )
                                
                                $
                                32,569
                                
                                
                                $
                                (4,310
                                )
                                
                                $
                                15,364
  44
 
 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 Federal Reserve Board 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:
 
 ·
              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 September 30, 2009, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
  45
  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.
 
 As
previously disclosed in the Form 8-K filed by the Company on August 3, 2009, the
civil action filed against RDSI by Information Technology, Inc. and Fiserv
Solutions, Inc. (collectively, “Fiserv”) on May 20, 2009 in the United States
District Court for the District of Nebraska, was dismissed by Fiserv on July 30,
2009.
 
 Item 1A. Risk
Factors
 
 There are
certain risks and uncertainties in our business that could cause our actual
results to differ materially from those anticipated.  A detailed
discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I
of the Company’s Annual Report on Form 10-K for the year ended December 31,
2008.  The following information updates certain of our risk factors
and should be read in conjunction with the risk factors disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
 
 Increases in FDIC insurance premiums
may negatively affect our profitability.
 
 The FDIC
insures deposits at FDIC insured financial institutions, including State Bank.
The FDIC charges the insured financial institutions premiums to maintain the
Deposit Insurance Fund at a certain level.  Current economic
conditions have increased bank failures and expectations for further failures,
in which case the FDIC insures payment of deposits up to insured limits from the
Deposit Insurance Fund.  In late 2008, the FDIC announced an increase
in insurance premium rates of seven basis points, beginning with the first
quarter of 2009.  Additional changes, beginning April 1, 2009, were to
require riskier institutions to pay a larger share of premiums by factoring in
rate adjustments based on secured liabilities and unsecured debt
levels.
 
 On May
22, 2009, the FDIC adopted a final rule that imposed a special assessment for
the second quarter of 2009 of five basis points on each insured depository
institution’s assets minus its Tier 1 capital as of June 30, 2009, which was to
be collected on September 30, 2009.  The Corporation expensed $300,000
during the second quarter for this special assessment.  In its May 22,
2009 final rule, the FDIC also announced that an additional assessment of
approximately the same amount later in 2009 is probable.
  On
September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking that would
require insured institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012,
in lieu of a second FDIC special assessment. On November 12, 2009, the FDIC
adopted a final rule implementing the proposed prepaid
assessments.  The prepaid assessments for these periods will be
collected on December 30, 2009, along with the regular quarterly risk-based
deposit insurance assessment for the third quarter of 2009. For the fourth
quarter of 2009 and for all of 2010, the prepaid assessment rate will be based
on each institution’s total base assessment rate for the third quarter of 2009,
modified to assume that the assessment rate in effect for the institution on
September 30, 2009, has been in effect for the entire third quarter of 2009. The
prepaid assessment rate for 2011 and 2012 will be equal to that institution’s
modified third quarter 2009 total base assessment rate plus 3 basis points. Each
institution’s prepaid assessment base will be calculated using its third quarter
2009 assessment base, adjusted quarterly for a five percent annual growth rate
in the assessment base through the end of 2012.  The Company estimates
that the three year prepayment will be approximately $2.8 million for State
Bank, which will be expensed over the three-year life of the asset.
  46
  In
general, we are unable to control the amount of premiums that we are required to
pay for FDIC insurance.  If there are additional failures of
FDIC-insured institutions, we may be required to pay even higher FDIC
premiums.  The announced increases and any future increases in FDIC
insurance premiums may materially adversely affect our results of operations and
our ability to continue to pay dividends on our common shares.
 
 Adverse
economic conditions in our markets could adversely affect our financial
condition and results of operations, as our borrowers’ ability to repay loans
and the value of the collateral securing our loans decline.
 
 As a
consequence of the current U.S. recession, businesses across a wide range of
industries face serious difficulties due to the lack of consumer spending and
the lack of liquidity in the global credit markets.  Unemployment has
also increased significantly.  A sustained weakness or weakening in
business and economic conditions generally or specifically in the markets in
which we do business could adversely affect our businesses by, among other
things, decreasing the demand for loans and other products and services that we
offer, causing impairment of certain intangible assets, such as goodwill, and
increasing the number of borrowers who become delinquent, file for protection
under bankruptcy laws or default on their loans or other obligations to
us.
 
 Because
we have a significant amount of real estate loans, additional decreases in real
estate values could adversely affect the value of property used as collateral
and our ability to sell the collateral upon foreclosure. Adverse changes in the
economy may also have a negative effect on the ability of our borrowers to make
timely repayments of their loans, which would have an adverse impact on our
earnings and cash flows. The substantial majority of the loans made by State
Bank are to individuals and businesses in Ohio. Consequently, a significant
continued decline in the economy in Ohio could have a materially adverse effect
on our financial condition and results of operations.
 
 RDSI
may lose existing customers to Fiserv or other competitors.
  On July
28, 2009, RDSI reached an agreement with Fiserv to wind down their licensing
relationship.  Pursuant to this agreement, after December 31, 2010,
Fiserv will no longer license its Premier suite of products to RDSI and RDSI
will exclusively market New Core’s Single SourceTM software
system.  RDSI customers which presently rely on the Premier platform
will be provided the opportunity to continue their processing with RDSI and
convert to Single SourceTM, or to move their processing to Fiserv and continue to
use Premier.  As of November 6, 2009, RDSI had 73 customers using
Fiserv’s Premier software.  RDSI has increased its marketing efforts
to offer New Core’s Single SourceTM software to its current data processing
customers who are now being serviced using Premier software.  However,
RDSI anticipates the loss of some banking clients who elect to move their
processing to Fiserv and continue to use the Premier platform, as well as some
customers who elect to move their processing to other
competitors.  Because individual bank decisions may be made as late as
March 31, 2010, RDSI is currently unable to determine the number of banks that
will ultimately choose to leave RDSI.  As of November 6, 2009, 15
client banks (of which three are owned by the same bank holding company) had
notified RDSI of their intention to convert to Fiserv software. There have been
12 clients who have notified RDSI of their intent to stay with RDSI and convert
to Single SourceTM.  The loss of a significant number of existing bank
clients could have a material adverse effect on the results of operations and
financial condition of RDSI, which could also have a material adverse effect on
the results of operations and financial condition of the Company prior to the
contemplated spin-off of RDSI.
  47
  Failure
to complete the contemplated spin-off of RDSI and the merger of RDSI and New
Core could adversely impact the market price of our common shares as well our
business and operating results.
  If the
contemplated spin-off of RDSI and the merger of RDSI and New Core are not
completed for any reason, the price of the Company’s common shares may decline
to the extent that the market price reflects positive market assumptions that
the spin-off and the merger will be completed and the anticipated benefits of
these transactions will be realized.  The Company and RDSI have and
will continue to incur substantial costs related to the spin-off and the merger,
including fees for financial advisors, attorneys and auditors, printing costs
and costs associated with the agreements related to the
transactions.  In addition, the Company and RDSI may be subject to
other risks if the spin-off and the merger are not completed, such as potential
disruption to the businesses of the Company and RDSI and the distraction of
their respective workforce and management teams.
  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 September 30,
      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)July
      1 through July 31, 2009
                        
                        
                        2,381
                        
                        
                        $
                        7.41
                        
                        
                        
                        1,300
                        
                        
                        
                        85,246August
      1 through August 31, 2009
                        
                        
                        200
                        
                        
                        $
                        8.00
                        
                        
                        
                        200
                        
                        
                        
                        85,046September
      1 through September 30, 2009
                        
                        
                        700
                        
                        
                        $
                        7.83
                        
                        
                        
                        700
                        
                        
                        
                        84,346
 
 (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.
  48
 (2)
                  On
      July 15, 2009, the Company announced that its Board of Directors had
      authorized an extension to the stock repurchase program for an additional
      fifteen months.  The original stock repurchase program was
      announced in April, 2007 for fifteen months authorizing the purchase of
      250,000 common shares.
 
 Item 3. Defaults Upon Senior
Securities
 
 Not
applicable
 
 Item 4. Submission of
Matters to a Vote of Security Holders
 
 Not
applicable
 
 Item 5. Other
Information
 
 Not
applicable
 
 Item 6.
Exhibits
 
 Exhibits2.1
                    –
                    Agreement
      and Plan of Merger, dated as of April 25, 2009, by and among
      Rurbanc  Data Services, Inc., NC Merger Corp. and New Core
      Holdings, Inc. (Incorporated herein by reference to Exhibit 2.1 to Rurban
      Financial Corp.’s Current Report on Form 8-K filed April 29,
      2009)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)
  49
 
 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:  November
      16, 2009
                    By
                    /s/
      Kenneth A. JoyceKenneth
      A. JoycePresident
      & Chief Executive OfficerBy
                    /s/
      Duane L. SinnDuane
      L. SinnExecutive
      Vice President &Chief
      Financial
Officer
  50