UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended June
30, 2009




OR





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





For the
transition period from
_________________to___________________________





Commission file number0-13507





RURBAN
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)




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


401 Clinton Street,
Defiance, Ohio 43512


(Address
of principal executive offices)


(Zip
Code)




(419)
783-8950 (Registrant’s
telephone number, including area code)





None (Former
name, former address and former fiscal year, if changed since last
report.)





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




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  Large Accelerate Filer oAccelerated Filer oNon-Accelerated Filer
oSmaller 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 oNo 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
              4,862,679
      shares(class)
              (Outstanding
      at August 13, 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
            
            29Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            39Item
      4T.
            Controls
      and Procedures
            
            40PART
      II – OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            
            41Item
      1A.
            Risk
      Factors
            
            41Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            42Item
      3.
            Defaults
      Upon Senior Securities
            
            42Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            42Item
      5.
            Other
      Information
            
            42Item
      6.
            Exhibits
            
            43Signatures
            
            
            44




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 six months ended June 30, 2009 are not necessarily indicative
of results for the complete year.




3




Rurban
Financial Corp.
 Condensed
Consolidated Balance Sheets
 June
30, 2009 and December 31, 2008


(Unaudited)June
      30,
            
            
            December
      31,2009
            
            
            2008AssetsCash
      and due from banks
            
            $
            25,617,514
            
            
            $
            18,059,532Federal
      funds sold
            
            
            -
            
            
            
            10,000,000Cash
      and cash equivalents
            
            
            25,617,514
            
            
            
            28,059,532Available-for-sale
      securities
            
            
            109,988,049
            
            
            
            102,606,475Loans
      held for sale
            
            
            13,310,045
            
            
            
            3,824,499Loans,
      net of unearned income
            
            
            441,217,413
            
            
            
            450,111,653Allowance
      for loan losses
            
            
            (5,873,146
            )
            
            
            (5,020,197
            )Premises
      and equipment
            
            
            16,636,308
            
            
            
            17,621,262Purchased
      software
            
            
            5,567,099
            
            
            
            5,867,395Federal
      Reserve and Federal Home Loan Bank stock
            
            
            3,748,250
            
            
            
            4,244,100Foreclosed
      assets held for sale, net
            
            
            1,346,449
            
            
            
            1,384,335Interest
      receivable
            
            
            2,512,786
            
            
            
            2,964,663Goodwill
            
            
            21,414,790
            
            
            
            21,414,790Core
      deposits and other intangibles
            
            
            5,392,114
            
            
            
            5,835,936Cash
      value of life insurance
            
            
            12,845,586
            
            
            
            12,625,015Other
            
            
            7,821,698
            
            
            
            6,079,451Total
      assets
            
            $
            661,544,955
            
            
            $
            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 June
30, 2009 and December 31, 2008


(Unaudited)June
      30,
            
            
            December
      31,2009
            
            
            2008Liabilities
      and Stockholders’ EquityLiabilitiesDepositsDemand
            
            $
            52,755,779
            
            
            $
            52,242,626Savings,
      interest checking and money market
            
            
            200,679,708
            
            
            
            189,461,755Time
            
            
            219,558,052
            
            
            
            242,516,203Total
      deposits
            
            
            472,993,539
            
            
            
            484,220,584Notes
      payable
            
            
            2,563,687
            
            
            
            1,000,000Federal
      Home Loan Bank advances
            
            
            40,466,373
            
            
            
            36,646,854Fed
      Funds Purchased
            
            
            10,000,000
            
            
            
            -Repurchase
      agreements
            
            
            42,703,632
            
            
            
            43,425,978Trust
      preferred securities
            
            
            20,620,000
            
            
            
            20,620,000Interest
      payable
            
            
            1,750,093
            
            
            
            1,965,842Other
      liabilities
            
            
            7,034,918
            
            
            
            8,077,647Total
      liabilities
            
            
            598,132,242
            
            
            
            595,956,905Commitments
      and Contingent LiabilitiesStockholders’
      EquityCommon
      stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433
      shares; outstanding June 2009 – 4,863,979 shares, December 2008 –
      4,881,452 shares
            
            
            12,568,583
            
            
            
            12,568,583Additional
      paid-in capital
            
            
            15,102,913
            
            
            
            15,042,781Retained
      earnings
            
            
            37,015,166
            
            
            
            35,785,317Accumulated
      other comprehensive income (loss)
            
            
            478,565
            
            
            
            (121,657
            )Treasury
      Stock, at costCommon;
      June 2009 – 163,454 shares, December 2008 – 145,981 shares
            
            
            (1,752,514
            )
            
            
            (1 ,613,020
            )Total
      stockholders’ equity
            
            
            63,412,713
            
            
            
            61,662,004Total
      liabilities and stockholders’ equity
            
            $
            661,544,955
            
            
            $
            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


June
      30,
              2009
            
            
            June
      30,
              2008Interest
      IncomeLoansTaxable
            
            $
            6,855,627
            
            
            $
            7,023,308Tax-exempt
            
            
            25,390
            
            
            
            20,469SecuritiesTaxable
            
            
            1,134,573
            
            
            
            1,090,570Tax-exempt
            
            
            244,331
            
            
            
            165,798Other
            
            
            29,745
            
            
            
            15,380Total
      interest income
            
            
            8,289,666
            
            
            
            8,315,525Interest
      ExpenseDeposits
            
            
            1,657,345
            
            
            
            2,623,590Other
      borrowings
            
            
            33,411
            
            
            
            9,483Repurchase
      agreements
            
            
            431,336
            
            
            
            450,763Federal
      Home Loan Bank advances
            
            
            411,556
            
            
            
            377,146Trust
      preferred securities
            
            
            394,629
            
            
            
            422,385Total
      interest expense
            
            
            2,928,277
            
            
            
            3,883,367Net
      Interest Income
            
            
            5,361,389
            
            
            
            4,432,158Provision
      for Loan Losses
            
            
            798,850
            
            
            
            212,997Net
      Interest Income After Provision for Loan Losses
            
            
            4,562,539
            
            
            
            4,219,161Non-interest
      IncomeData
      service fees
            
            
            4,956,034
            
            
            
            4,948,783Trust
      fees
            
            
            641,033
            
            
            
            815,734Customer
      service fees
            
            
            649,003
            
            
            
            612,825Net
      gains on loan sales
            
            
            938,345
            
            
            
            183,145Net
      realized gain on sales of securities
            
            
            423,784
            
            
            
            -Loan
      servicing fees
            
            
            103,863
            
            
            
            55,220Gain
      (loss) on sale of assets
            
            
            16,241
            
            
            
            (390
            )Other
            
            
            169,488
            
            
            
            185,841Total
      non-interest income
            
            $
            7,897,791
            
            
            $
            6,801,158




See
notes to condensed consolidated financial statements (unaudited)




6


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


June
      30,
              2009
            
            
            June
      30,
              2008Non-interest
      ExpenseSalaries
      and employee benefits
            
            $
            5,298,604
            
            
            $
            4,435,657Net
      occupancy expense
            
            
            911,719
            
            
            
            511,179Equipment
      expense
            
            
            1,698,905
            
            
            
            1,625,708Data
      processing fees
            
            
            208,726
            
            
            
            104,792Professional
      fees
            
            
            642,988
            
            
            
            284,536Marketing
      expense
            
            
            234,557
            
            
            
            156,090Printing
      and office supplies
            
            
            117,335
            
            
            
            119,686Telephone
      and communications
            
            
            399,835
            
            
            
            421,858Postage
      and delivery expense
            
            
            514,490
            
            
            
            535,813State,
      local and other taxes
            
            
            233,157
            
            
            
            186,418Employee
      expense
            
            
            257,204
            
            
            
            303,372Other
            
            
            590,537
            
            
            
            425,237Total
      non-interest expense
            
            
            11,108,057
            
            
            
            9,110,346Income
      Before Income Tax
            
            
            1,352,273
            
            
            
            1,909,973Provision
      for Income Taxes
            
            
            348,687
            
            
            
            554,149Net
      Income
            
            $
            1,003,586
            
            
            $
            1,355,824Basic
      Earnings Per Share
            
            $
            0.20
            
            
            $
            0.28Diluted
      Earnings Per Share
            
            $
            0.20
            
            
            $
            0.28Dividends
      Declared Per Share
            
            $
            0.09
            
            
            $
            0.08




See
notes to consolidated financial statements (unaudited)




7




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


June
      30,
              2009
            
            
            June
      30,
              2008Interest
      IncomeLoansTaxable
            
            $
            13,670,260
            
            
            $
            13,831,504Tax-exempt
            
            
            50,847
            
            
            
            41,819SecuritiesTaxable
            
            
            2,214,070
            
            
            
            2,130,464Tax-exempt
            
            
            472,215
            
            
            
            324,165Other
            
            
            29,877
            
            
            
            112,789Total
      interest income
            
            
            16,437,269
            
            
            
            16,440,741Interest
      ExpenseDeposits
            
            
            3,555,649
            
            
            
            5,715,492Other
      borrowings
            
            
            47,803
            
            
            
            26,989Repurchase
      agreements
            
            
            858,823
            
            
            
            911,315Federal
      Home Loan Bank advances
            
            
            804,128
            
            
            
            679,482Trust
      preferred securities
            
            
            793,614
            
            
            
            858,089Total
      interest expense
            
            
            6,060,017
            
            
            
            8,191,367Net
      Interest Income
            
            
            10,377,252
            
            
            
            8,249,374Provision
      for Loan Losses
            
            
            1,293,992
            
            
            
            405,215Net
      Interest Income After Provision for Loan Losses
            
            
            9,083,260
            
            
            
            7,844,159Non-interest
      IncomeData
      service fees
            
            
            9,928,583
            
            
            
            10,213,348Trust
      fees
            
            
            1,224,656
            
            
            
            1,670,841Customer
      service fees
            
            
            1,223,702
            
            
            
            1,199,032Net
      gains on loan sales
            
            
            2,016,392
            
            
            
            457,748Net
      realized gain on sales of securities
            
            
            477,591
            
            
            
            -Net
      proceeds from VISA IPO
            
            
            -
            
            
            
            132,106Investment
      securities recoveries
            
            
            -
            
            
            
            197,487Loan
      servicing fees
            
            
            171,736
            
            
            
            118,160Loss
      on sale of assets
            
            
            (42,414
            )
            
            
            (71,422
            )Other
            
            
            345,050
            
            
            
            399,371Total
      non-interest income
            
            $
            15,345,296
            
            
            $
            14,316,671




See
notes to condensed consolidated financial statements (unaudited)




8


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


June
      30,
              2009
            
            
            June
      30,
              2008Non-interest
      ExpenseSalaries
      and employee benefits
            
            $
            10,222,726
            
            
            $
            8,874,421Net
      occupancy expense
            
            
            1,584,120
            
            
            
            1,077,195Equipment
      expense
            
            
            3,312,298
            
            
            
            3,193,345Data
      processing fees
            
            
            344,462
            
            
            
            201,359Professional
      fees
            
            
            1,141,043
            
            
            
            855,223Marketing
      expense
            
            
            423,303
            
            
            
            337,837Printing
      and office supplies
            
            
            331,877
            
            
            
            305,738Telephone
      and communications
            
            
            806,228
            
            
            
            843,787Postage
      and delivery expense
            
            
            1,123,512
            
            
            
            1,138,447State,
      local and other taxes
            
            
            466,053
            
            
            
            367,186Employee
      expense
            
            
            517,142
            
            
            
            533,983Other
            
            
            1,310,317
            
            
            
            983,185Total
      non-interest expense
            
            
            21,583,081
            
            
            
            18,711,706Income
      Before Income Tax
            
            
            2,845,475
            
            
            
            3,449,124Provision
      for Income Taxes
            
            
            738,336
            
            
            
            983,944Net
      Income
            
            $
            2,107,139
            
            
            $
            2,465,180Basic
      Earnings Per Share
            
            $
            0.43
            
            
            $
            0.50Diluted
      Earnings Per Share
            
            $
            0.43
            
            
            $
            0.50Dividends
      Declared Per Share
            
            $
            0.18
            
            
            $
            0.16




See
notes to condensed consolidated financial statements (unaudited)




9




RURBAN
FINANCIAL CORP. CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2009
            
            
            June
      30, 2008
            
            
            June
      30, 2009
            
            
            June
      30, 2008Balance
      at beginning of period
            
            $
            63,620,510
            
            
            $
            59,870,312
            
            
            $
            61,662,004
            
            
            $
            59,325,235Cumulative
      effect adjustment for split dollar BOLI
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (116,303
            )Net
      Income
            
            
            1,003,586
            
            
            
            1,355,824
            
            
            
            2,107,139
            
            
            
            2,465,180Unrealized
      gains (losses) on securitiesUnrealized
      holding gains (losses) arising during the year
            
            
            (464,173
            )
            
            
            (1,193,931
            )
            
            
            915,432
            
            
            
            (843,737
            )Less:
      reclassification adjustment for gains (losses) realized in net
      income
            
            
            279,697
            
            
            
            -
            
            
            
            315,210
            
            
            
            -Total
      comprehensive income
            
            
            259,716
            
            
            
            161,893
            
            
            
            2,707,361
            
            
            
            1,621,443Cash
      dividend
            
            
            (438,333
            )
            
            
            (395,356
            )
            
            
            (877,291
            )
            
            
            (793,269
            )Purchase
      of treasury shares
            
            
            (59,246
            )
            
            
            (295,600
            )
            
            
            (139,494
            )
            
            
            (716,600
            )Share-based
      compensation
            
            
            30,066
            
            
            
            20,480
            
            
            
            60,133
            
            
            
            41,223Balance
      at end of period
            
            $
            63,412,713
            
            
            $
            59,361,729
            
            
            $
            63,412,713
            
            
            $
            59,361,729




See
notes to condensed consolidated financial statements (unaudited)




10




Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


Six
Months Ended




June 30, 2009
            
            
            June 30, 2008Operating
      ActivitiesNet
      income
            
            $
            2,107,139
            
            
            $
            2,465,180Items
      not requiring (providing) cashDepreciation
      and amortization
            
            
            1,830,970
            
            
            
            1,921,112Provision
      for loan losses
            
            
            1,293,922
            
            
            
            405,215Expense
      of share-based compensation plan
            
            
            60,133
            
            
            
            41,224Amortization
      of premiums and discounts on securities
            
            
            324,964
            
            
            
            57,364Amortization
      of intangible assets
            
            
            443,822
            
            
            
            346,763Deferred
      income taxes
            
            
            (984,182
            )
            
            
            434,652FHLB
      Stock Dividends
            
            
            -
            
            
            
            (83,800
            )Proceeds
      from sale of loans held for sale
            
            
            204,379,921
            
            
            
            15,212,601Originations
      of loans held for sale
            
            
            (211,849,075
            )
            
            
            (15,749,144
            )Gain
      from sale of loans
            
            
            (2,016,392
            )
            
            
            (457,748
            )Gain
      on available for sale securities
            
            
            (477,591
            )
            
            
            -(Gain)
      loss on sale of foreclosed assets
            
            
            15,414
            
            
            
            (10,097
            )Loss
      on sales of fixed assets
            
            
            27,000
            
            
            
            71,422Changes
      inInterest
      receivable
            
            
            451,877
            
            
            
            251,445Other
      assets
            
            
            (1,903,768
            )
            
            
            619,093Interest
      payable and other liabilities
            
            
            (583,503
            )
            
            
            630,415Net
      cash provided by (used in) operating activities
            
            
            (6,879,349
            )
            
            
            6,155,697Investing
      ActivitiesPurchases
      of available-for-sale securities
            
            
            (44,042,933
            )
            
            
            (46,231,265
            )Proceeds
      from maturities of available-for-sale securities
            
            
            21,932,628
            
            
            
            40,850,667Proceeds
      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
            
            
            8,095,458
            
            
            
            (16,955,034
            )Purchase
      of premises and equipment and software
            
            
            (613,597
            )
            
            
            (2,582,000
            )Proceeds
      from sales of premises and equipment
            
            
            40,877
            
            
            
            286,816Proceeds
      from sale of foreclosed assets
            
            
            321,231
            
            
            
            162,385Net
      cash provided by (used in) investing activities
            
            $
            2,020,301
            
            
            $
            (24,468,431
            )




See
notes to condensed consolidated financial statements (unaudited)




11




Rurban
Financial Corp.


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


Six
Months Ended




June 30, 2009
            
            
            June 30, 2008Financing
      ActivitiesNet
      increase in demand deposits, money market, interest checking and savings
      accounts
            
            $
            11,731,106
            
            
            $
            13,008,870Net
      decrease in certificates of deposit
            
            
            (22,958,151
            )
            
            
            (16,482,135
            )Net
      increase (decrease) in securities sold under agreements to
      repurchase
            
            
            (722,346
            )
            
            
            1,503,073Net
      increase in federal funds purchased
            
            
            10,000,000
            
            
            
            3,600,000Proceeds
      from Federal Home Loan Bank advances
            
            
            7,500,000
            
            
            
            21,000,000Repayment
      of Federal Home Loan Bank advances
            
            
            (3,680,481
            )
            
            
            (7,191,736
            )Proceeds
      from notes payable
            
            
            4,200,000
            
            
            
            -Repayment
      of notes payable
            
            
            (2,636,313
            )
            
            
            (922,457
            )Purchase
      of treasury stock
            
            
            (139,494
            )
            
            
            (716,600
            )Dividends
      paid
            
            
            (877,291
            )
            
            
            (793,269
            )Net
      cash provided by financing activities
            
            
            2,417,030
            
            
            
            13,005,746Decrease
      in Cash and Cash Equivalents
            
            
            (2,442,018
            )
            
            
            (5,306,988
            )Cash
      and Cash Equivalents, Beginning of Year
            
            
            28,059,532
            
            
            
            17,183,627Cash
      and Cash Equivalents, End of Period
            
            $
            25,617,514
            
            
            $
            11,876,639Supplemental
      Cash Flows InformationInterest
      paid
            
            $
            6,275,766
            
            
            $
            8,565,333Transfer
      of loans to foreclosed assets
            
            $
            297,042
            
            
            $
            1,640,007Income
      Taxes Paid
            
            $
            -
            
            
            $
            414,000




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 six months ended
June 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 June 30,
2009 and 2008, share based awards totaling 327,263 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
            
            
            Six
      Months EndedJune 30
            
            
            June 302009
            
            
            2008
            
            
            2009
            
            
            2008Basic
      earnings per share
            
            
            4,868,063
            
            
            
            4,934,241
            
            
            
            4,871,978
            
            
            
            4,948,334Diluted
      earnings per share
            
            
            4,868,063
            
            
            
            4,934,241
            
            
            
            4,871,978
            
            
            
            4,948,334




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





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




June
      30,
              
              
              December
      31,2009
              
              
              2008Commercial
              
              $
              82,365,308
              
              
              $
              83,645,408Commercial
      real estate
              
              
              167,217,842
              
              
              
              161,566,005Agricultural
              
              
              43,197,218
              
              
              
              43,641,132Residential
      real estate
              
              
              94,595,196
              
              
              
              107,905,198Consumer
              
              
              53,782,826
              
              
              
              53,338,523Lease
      financing
              
              
              308,500
              
              
              
              266,348Total
      loans
              
              
              441,466,890
              
              
              
              450,362,614LessNet
      deferred loan fees, premiums and discounts
              
              
              (249,477
              )
              
              
              (250,961
              )Loans,
      net of unearned income
              
              $
              441,217,413
              
              
              $
              450,111,653Allowance
      for loan losses
              
              $
              (5,873,146
              )
              
              $
              (5,020,197
              )




13




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





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance,
      beginning of period
            
            $
            5,348,952
            
            
            $
            4,016,230
            
            
            $
            5,020,197
            
            
            $
            3,990,455Provision
      charged to expense
            
            
            798,850
            
            
            
            212,997
            
            
            
            1,293,992
            
            
            
            405,215Recoveries
            
            
            60,921
            
            
            
            28,150
            
            
            
            81,915
            
            
            
            58,998Loans
      charged off
            
            
            (335,577
            )
            
            
            (10,583
            )
            
            
            (522,958
            )
            
            
            (207,874
            )Balance,
      end of period
            
            $
            5,873,146
            
            
            $
            4,246,794
            
            
            $
            5,873,146
            
            
            $
            4,246,794




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




June
      30,
              
              
              December
      31,2009
              
              
              2008Non-accrual
      loans
              
              $
              10,172,511
              
              
              $
              5,177,694Accruing
      loans which are contractually past due 90 days or more as to interest or
      principal payments
              
              
              -
              
              
              
              -Total
      non-performing loans
              
              $
              10,172,511
              
              
              $
              5,177,694




In
addition to the above mentioned non-performers, management was very proactive in
reaching out to customers to restructure loans.  On June 30, 2009,
approximately $7.06 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:




June
      30,
              
              
              December
      31,2009
              
              
              2008Loans
      with no allowance for loan losses allocated
              
              $
              2,223,000
              
              
              $
              1,857,000Loans
      with allowance for loan losses allocated
              
              
              7,535,000
              
              
              
              866,000Total
      impaired loans
              
              $
              9,758,000
              
              
              $
              2,723,000Amount
      of allowance allocated
              
              $
              2,136,000
              
              
              $
              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 June 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 June 30, 2009 and December 31, 2008, are also presented in the
following table.




Actual
            
            
            Minimum
      Required For
              Capital
      Adequacy Purposes
            
            
            To
      Be Well Capitalized
              UnderPrompt
      Corrective
              Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of June 30, 2009Total
      Capital(to
      Risk-Weighted Assets)Consolidated
            
            $
            63.2
            
            
            
            13.7
            %
            
            $
            36.8
            
            
            
            8.0
            %
            
            $
            —
            
            
            
            N/AState
      Bank
            
            
            51.5
            
            
            
            11.6
            
            
            
            35.6
            
            
            
            8.0
            
            
            
            44.5
            
            
            
            10.0Tier
      I Capital(to
      Risk-Weighted Assets)Consolidated
            
            
            57.5
            
            
            
            12.2
            
            
            
            18.4
            
            
            
            4.0
            
            
            
            —
            
            
            
            N/AState
      Bank
            
            
            46.0
            
            
            
            10.3
            
            
            
            17.8
            
            
            
            4.0
            
            
            
            26.7
            
            
            
            6.0Tier
      I Capital(to
      Average Assets)Consolidated
            
            
            57.5
            
            
            
            9.0
            
            
            
            25.5
            
            
            
            4.0
            
            
            
            —
            
            
            
            N/AState
      Bank
            
            
            46.0
            
            
            
            7.2
            
            
            
            25.6
            
            
            
            4.0
            
            
            
            32.1
            
            
            
            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





In June
of 2009, the FASB issued FASB Statement 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles.Statement 168 establishes the FASB Accounting Standards
Codification(Codification) as the single source of authoritative U.S.
generally accepted accounting principles (U.S. GAAP) recognized by the FASB to
be applied by nongovernmental entities.  Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.  Statement 168 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009.  When effective, the
Codification will supersede all existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become
nonauthoritative.  Following Statement 168, the FASB will not issue
new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts.  Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: (a)update the Codification;
(b) provide background
information about the guidance; and (c)provide the bases for
conclusions on the change(s) in the Codification.  Adoption of this
Statement is not expected to have a material effect on the Company’s financial
position or results of operations.





In May of
2009 the FASB issued Statement 165, Subsequent
Events.  Statement 165 establishes general standards 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.  Specifically, Statement 165 provides:




The
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements;





The
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements;
and





The
disclosure that an entity should make about events or transactions that occurred
after the balance sheet date.





Statement
165 is effective for interim or annual financial periods ending after June 15,
2009, and shall be applied prospectively.  Adoption of statement 165
has not had a material effect on the Company’s financial position or results of
operations.





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





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




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




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





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





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





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





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





16


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





In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115 (SFAS No. 159).  SFAS No. 159 permits the Company to choose
to measure certain financial assets and liabilities at fair value that are not
currently required to be measured at fair value (the “Fair Value
Option”).  Election of the Fair Value Option is made on an
instrument-by-instrument basis and is irrevocable.  At the adoption
date, unrealized gains and losses on financial assets and liabilities for which
the Fair Value Option has been elected would be reported as a cumulative
adjustment to beginning retained earnings.  If the Company elects the
Fair Value Option for certain financial assets and liabilities, the Company will
report unrealized gains and losses due to changes in their fair value in
earnings at each subsequent reporting date. SFAS No. 159 is effective as of
January 1, 2008.  The Company has not elected the Fair Value Option
for any financial assets or liabilities at June 30, 2009.







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





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





17




NOTE
G – COMMITMENTS AND CREDIT RISK





As of
June 30, 2009, loan commitments and unused lines of credit totaled $75,170,000,
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.





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.


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


Income
      statement information:
              
              Banking
              
              
              Data
                Processing
              
              
              Other
              
              
              Total
                Segments
              
              
              Intersegment
                Elimination
              
              
              Consolidated
                TotalsNet
      interest income (expense)
              
              $
              5,789,863
              
              
              $
              (34,003
              )
              
              $
              (394,471
              )
              
              $
              5,361,389
              
              
              
              
              
              $
              5,361,389Non-interest
      income - external customers
              
              
              2,917,326
              
              
              
              4,959,034
              
              
              
              21,431
              
              
              
              7,897,791
              
              
              
              
              
              
              7,897,791Non-interest
      income - other segments
              
              
              24,164
              
              
              
              391,439
              
              
              
              355,002
              
              
              
              770,605
              
              
              
              (770,605
              )
              
              
              -Total
      revenue
              
              
              8,731,353
              
              
              
              5,316,470
              
              
              
              (18,038
              )
              
              
              14,029,785
              
              
              
              (770,605
              )
              
              
              13,259,180Non-interest
      expense
              
              
              6,506,659
              
              
              
              4,394,358
              
              
              
              977,645
              
              
              
              11,878,662
              
              
              
              (770,605
              )
              
              
              11,108,057Significant
      non-cash items:Depreciation
      and amortization
              
              
              260,966
              
              
              
              638,417
              
              
              
              25,027
              
              
              
              924,410
              
              
              
              -
              
              
              
              924,410Provision
      for loan losses
              
              
              798,850
              
              
              
              -
              
              
              
              -
              
              
              
              798,850
              
              
              
              -
              
              
              
              798,850Income
      tax expense (benefit)
              
              
              379,246
              
              
              
              313,518
              
              
              
              (344,077
              )
              
              
              348,687
              
              
              
              -
              
              
              
              348,687Segment
      profit (loss)
              
              $
              1,046,598
              
              
              $
              608,594
              
              
              $
              (651,606
              )
              
              $
              1,003,586
              
              
              $
              -
              
              
              $
              1,003,586Balance
      sheet information:Total
      assets
              
              $
              639,781,723
              
              
              $
              22,837,374
              
              
              $
              3,753,803
              
              
              $
              666,372,900
              
              
              $
              (4,827,945
              )
              
              $
              661,544,955Goodwill
      and intangibles
              
              $
              19,792,840
              
              
              $
              7,014,064
              
              
              $
              -
              
              
              $
              26,806,904
              
              
              $
              -
              
              
              $
              26,806,904Premises
      and equipment expenditures
              
              $
              226,491
              
              
              $
              25,854
              
              
              $
              13,981
              
              
              $
              266,326
              
              
              $
              -
              
              
              $
              266,326





18


NOTE H – SEGMENT INFORMATION
(Continued)
  As of and
for the three months ended June 30, 2008
  Income
      statement information:
                  
                  Banking
                  
                  
                  Data
                    Processing
                  
                  
                  Other
                  
                  
                  Total
                    Segments
                  
                  
                  Intersegment
                    Elimination
                  
                  
                  Consolidated
                    TotalsNet
      interest income (expense)
                  
                  $
                  4,880,961
                  
                  
                  $
                  (32,309
                  )
                  
                  $
                  (416,494
                  )
                  
                  $
                  4,432,158
                  
                  
                  
                  
                  
                  $
                  4,432,158Non-interest
      income - external customers
                  
                  
                  1,831,915
                  
                  
                  
                  4,948,502
                  
                  
                  
                  20,741
                  
                  
                  
                  6,801,158
                  
                  
                  
                  
                  
                  
                  6,801,158Non-interest
      income - other segments
                  
                  
                  15,845
                  
                  
                  
                  369,549
                  
                  
                  
                  381,584
                  
                  
                  
                  766,978
                  
                  
                  
                  (766,978
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  6,728,721
                  
                  
                  
                  5,285,742
                  
                  
                  
                  (14,169
                  )
                  
                  
                  12,000,294
                  
                  
                  
                  (766,978
                  )
                  
                  
                  11,233,316Non-interest
      expense
                  
                  
                  4,813,165
                  
                  
                  
                  4,316,685
                  
                  
                  
                  747,474
                  
                  
                  
                  9,877,324
                  
                  
                  
                  (766,978
                  )
                  
                  
                  9,110,346Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  226,187
                  
                  
                  
                  698,446
                  
                  
                  
                  19,453
                  
                  
                  
                  944,086
                  
                  
                  
                  -
                  
                  
                  
                  944,086Provision
      for loan losses
                  
                  
                  212,997
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  212,997
                  
                  
                  
                  -
                  
                  
                  
                  212,997Income
      tax expense (benefit)
                  
                  
                  486,384
                  
                  
                  
                  329,479
                  
                  
                  
                  (261,714
                  )
                  
                  
                  554,149
                  
                  
                  
                  -
                  
                  
                  
                  554,149Segment
      profit (loss)
                  
                  $
                  1,216,175
                  
                  
                  $
                  639,578
                  
                  
                  $
                  (499,929
                  )
                  
                  $
                  1,355,824
                  
                  
                  $
                  -
                  
                  
                  $
                  1,355,824Balance
      sheet information:Total
      assets
                  
                  $
                  557,808,821
                  
                  
                  $
                  20,118,493
                  
                  
                  $
                  6,284,412
                  
                  
                  $
                  584,211,726
                  
                  
                  $
                  (7,698,900
                  )
                  
                  $
                  576,512,826Goodwill
      and intangibles
                  
                  $
                  11,468,086
                  
                  
                  $
                  7,260,997
                  
                  
                  $
                  -
                  
                  
                  $
                  18,729,083
                  
                  
                  $
                  -
                  
                  
                  $
                  18,729,083Premises
      and equipment expenditures
                  
                  $
                  350,170
                  
                  
                  $
                  1,279,652
                  
                  
                  $
                  3,688
                  
                  
                  $
                  1,633,510
                  
                  
                  $
                  -
                  
                  
                  $
                  1,633,510
 19
  NOTE
H – SEGMENT INFORMATION (Continued)
  As of and
for the six months ended June 30, 2009
  Income
      statement information:
                
                Banking
                
                
                Data
                  Processing
                
                
                Other
                
                
                Total
                  Segments
                
                
                Intersegment
                  Elimination
                
                
                Consolidated
                  TotalsNet
      interest income (expense)
                
                $
                11,229,516
                
                
                $
                (59,078
                )
                
                $
                (793,186
                )
                
                $
                10,377,252
                
                
                
                
                
                $
                10,377,252Non-interest
      income - external customers
                
                
                5,399,246
                
                
                
                9,903,705
                
                
                
                42,345
                
                
                
                15,345,296
                
                
                
                
                
                
                15,345,296Non-interest
      income - other segments
                
                
                44,036
                
                
                
                819,455
                
                
                
                733,595
                
                
                
                1,597,086
                
                
                
                (1,597,086
                )
                
                
                -Total
      revenue
                
                
                16,672,798
                
                
                
                10,664,082
                
                
                
                (17,246
                )
                
                
                27,319,634
                
                
                
                (1,597,086
                )
                
                
                25,722,548Non-interest
      expense
                
                
                12,814,443
                
                
                
                8,579,138
                
                
                
                1,786,586
                
                
                
                23,180,167
                
                
                
                (1,597,086
                )
                
                
                21,583,081Significant
      non-cash items:Depreciation
      and amortization
                
                
                531,084
                
                
                
                1,250,373
                
                
                
                49,513
                
                
                
                1,830,970
                
                
                
                -
                
                
                
                1,830,970Provision
      for loan losses
                
                
                1,293,992
                
                
                
                -
                
                
                
                -
                
                
                
                1,293,992
                
                
                
                -
                
                
                
                1,293,992Income
      tax expense (benefit)
                
                
                654,308
                
                
                
                708,881
                
                
                
                (624,853
                )
                
                
                738,336
                
                
                
                -
                
                
                
                738,336Segment
      profit (loss)
                
                $
                1,910,055
                
                
                $
                1,376,063
                
                
                $
                (1,178,979
                )
                
                $
                2,107,139
                
                
                $
                -
                
                
                $
                2,107,139Balance
      sheet information:Total
      assets
                
                $
                639,781,723
                
                
                $
                22,837,374
                
                
                $
                3,753,803
                
                
                $
                666,372,900
                
                
                $
                (4,827,945
                )
                
                $
                661,544,955Goodwill
      and intangibles
                
                $
                19,792,840
                
                
                $
                7,014,064
                
                
                $
                -
                
                
                $
                26,806,904
                
                
                $
                -
                
                
                $
                26,806,904Premises
      and equipment expenditures
                
                $
                323,136
                
                
                $
                251,289
                
                
                $
                39,172
                
                
                $
                613,597
                
                
                $
                -
                
                
                $
                613,597
  20
  NOTE
H – SEGMENT INFORMATION (Continued)
  As of and
for the six months ended June 30, 2008
  Income
      statement information:
                
                Banking
                
                
                Data
                  Processing
                
                
                Other
                
                
                Total
                  Segments
                
                
                Intersegment
                  Elimination
                
                
                Consolidated
                  TotalsNet
      interest income (expense)
                
                $
                9,176,312
                
                
                $
                (75,549
                )
                
                $
                (851,389
                )
                
                $
                8,249,374
                
                
                
                
                
                $
                8,249,374Non-interest
      income - external customers
                
                
                3,991,103
                
                
                
                10,208,068
                
                
                
                117,500
                
                
                
                14,316,671
                
                
                
                
                
                
                14,316,671Non-interest
      income - other segments
                
                
                25,211
                
                
                
                758,952
                
                
                
                691,582
                
                
                
                1,475,745
                
                
                
                (1,475,745
                )
                
                
                -Total
      revenue
                
                
                13,192,626
                
                
                
                10,891,471
                
                
                
                (42,307
                )
                
                
                24,041,790
                
                
                
                (1,475,745
                )
                
                
                22,566,045Non-interest
      expense
                
                
                9,831,052
                
                
                
                8,709,827
                
                
                
                1,646,572
                
                
                
                20,187,451
                
                
                
                (1,475,745
                )
                
                
                18,711,706Significant
      non-cash items:Depreciation
      and amortization
                
                
                496,293
                
                
                
                1,365,608
                
                
                
                59,211
                
                
                
                1,921,112
                
                
                
                -
                
                
                
                1,921,112Provision
      for loan losses
                
                
                405,215
                
                
                
                -
                
                
                
                -
                
                
                
                405,215
                
                
                
                -
                
                
                
                405,215Income
      tax expense (benefit)
                
                
                822,731
                
                
                
                741,759
                
                
                
                (580,546
                )
                
                
                983,944
                
                
                
                -
                
                
                
                983,944Segment
      profit (loss)
                
                $
                2,133,628
                
                
                $
                1,439,885
                
                
                $
                (1,108,333
                )
                
                $
                2,465,180
                
                
                $
                -
                
                
                $
                2,465,180Balance
      sheet information:Total
      assets
                
                $
                557,808,821
                
                
                $
                20,118,493
                
                
                $
                6,284,412
                
                
                $
                584,211,726
                
                
                $
                (7,698,900
                )
                
                $
                576,512,826Goodwill
      and intangibles
                
                $
                11,468,086
                
                
                $
                7,260,997
                
                
                $
                -
                
                
                $
                18,729,083
                
                
                $
                -
                
                
                $
                18,729,083Premises
      and equipment expenditures
                
                $
                904,965
                
                
                $
                1,619,713
                
                
                $
                57,322
                
                
                $
                2,582,000
                
                
                $
                -
                
                
                $
                2,582,000
  21




NOTE
I – FAIR VALUE OF ASSETS AND LIABILITIES





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





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





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





Level
      2
              Observable
      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
      3
              Unobservable
      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.





22


The
following table presents the fair value measurements of assets measured at fair
value on a recurring basis and the level within FAS 157 fair value hierarchy in
which the fair value measurements fall at June 30, 2009 and June 30,
2008:





Fair
      Value Measurements Using:Description
            
            Fair
      Values at 6/30/2009
            
            
            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
            
            $
            10,381,021
            
            
            
            -
            
            
            $
            10,381,021
            
            
            
            -Mortgage-backed
      securities
            
            $
            71,042,680
            
            
            
            -
            
            
            $
            71,042,680
            
            
            
            -State
      and political subdivisions
            
            $
            27,666,682
            
            
            
            -
            
            
            $
            27,666,682
            
            
            
            -Equity
      securities
            
            $
            23,000
            
            
            
            -
            
            
            $
            23,000
            
            
            
            -Other
      securities
            
            $
            874,666
            
            
            
            -
            
            
            $
            874,666
            
            
            
            -





Fair
      Value Measurements Using:Description
            
            Fair
      Values at 6/30/2008
            
            
            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
            
            $
            15,008,616
            
            
            
            -
            
            
            $
            15,008,616
            
            
            
            -Mortgage-backed
      securities
            
            $
            65,273,870
            
            
            
            -
            
            
            $
            65,273,870
            
            
            
            -State
      and political subdivisions
            
            $
            16,349,710
            
            
            
            -
            
            
            $
            16,349,710
            
            
            
            -Equity
      securities
            
            $
            23,000
            
            
            
            -
            
            
            $
            23,000
            
            
            
            -Other
      securities
            
            $
            51,035
            
            
            
            -
            
            
            $
            51,035
            
            
            
            -





Impaired
Loans





Loans for
which it is probable the Company will not collect all principal and interest due
according to contractual terms are measured for impairment in accordance with
the provisions of Financial Accounting Standard No. 114, “Accounting by Creditors for
Impairment of a Loan.”  Allowable methods for estimating fair
value include using the fair value of the collateral for collateral dependent
loans, or where a loan is determined not to be collateral dependent, using the
discounted cash flow method.  If the impaired loan is collateral
dependent, then the fair value method of measuring the amount of impairment is
utilized.  This method requires obtaining an independent appraisal of
the collateral and applying a discount factor to the value based on the
Company’s loan review policy.  All impaired loans held by the Company
were collateral dependent at June 30, 2009 and 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.





23


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 June 30, 2009 and June
30, 2008:





Fair
      Value Measurements Using:Description
            
            Fair
      Values at 6/30/2009
            
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Impaired
      loans
            
            $
            5,547,000
            
            
            
            -
            
            
            
            -
            
            
            $
            5,547,000Mortgage
      Servicing Rights
            
            $
            1,446,000
            
            
            
            -
            
            
            
            -
            
            
            $
            1,446,000Foreclosed
      Assets
            
            $
            171,000
            
            
            
            -
            
            
            
            -
            
            
            $
            171,000





Fair
      Value Measurements Using:Description
            
            Fair
      Values at 06/30/2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Impaired
      loans
            
            $
            248,000
            
            
            
            -
            
            
            
            -
            
            
            $
            248,000





There
were no changes in the inputs or methodologies used to determine fair value
during the quarter ended June 30, 2009 as compared to the quarter ended
June 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.




24


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
June 30, 2009, 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 June 30, 2009.




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 June 30, 2009 and are not considered significant
to this presentation.




June
      30, 2009Carrying
              
              
              FairAmount
              
              
              ValueFinancial
      assetsCash
      and cash equivalents
              
              $
              25,617,514
              
              
              $
              25,618,000Available-for-sale
      securities
              
              
              109,988,049
              
              
              
              109,988,000Loans,
      net of allowance for loan losses
              
              
              435,344,267
              
              
              
              443,540,000Federal
      Reserve and FHLB Bank stock
              
              
              3,748,250
              
              
              
              3,748,000Accrued
      interest receivable
              
              
              2,512,786
              
              
              
              2,513,000Financial
      liabilitiesDeposits
              
              $
              472,993,539
              
              
              $
              476,465,000Federal
      Funds Borrowed and Securities sold under agreements to
      repurchase
              
              
              52,703,632
              
              
              
              54,588,000Notes
      payable
              
              
              2,563,687
              
              
              
              2,564,000FHLB
      advances
              
              
              40,466,373
              
              
              
              42,100,000Trust
      preferred securities
              
              
              20,620,000
              
              
              
              18,398,000Accrued
      interest payable
              
              
              1,750,093
              
              
              
              1,750,000




25




Note J -
Securities





The
amortized cost and approximate fair value of securities were as
follows:




Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Approximate
                Fair
      ValueAvailable-for-Sale
      Securities:June
      30, 2009U.S.
      Treasury and Government agencies
              
              $
              10,408,104
              
              
              $
              14,073
              
              
              $
              (41,156
              )
              
              $
              10,381,021Mortgage-backed
      securities
              
              
              70,046,120
              
              
              
              1,574,437
              
              
              
              (577,877
              )
              
              
              71,042,680State
      and political subdivisions
              
              
              27,913,364
              
              
              
              306,489
              
              
              
              (553,171
              )
              
              
              27,666,682Equity
      securities
              
              
              23,000
              
              
              
              -
              
              
              
              -
              
              
              
              23,000Other
      securities
              
              
              872,361
              
              
              
              2,305
              
              
              
              -
              
              
              
              874,666$
              109,262,949
              
              
              $
              1,897,304
              
              
              $
              (1,172,204
              )
              
              $
              109,988,049




26


The
amortized cost and fair value of securities available for sale at June 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
            
            $
            1,907,163
            
            
            $
            1,916,798Due
      after one year through five years
            
            
            4,799,217
            
            
            
            4,927,133Due
      after five years through ten years
            
            
            9,125,293
            
            
            
            9,173,475Due
      after ten years
            
            
            22,489,795
            
            
            
            22,030,29738,321,468
            
            
            
            38,047,703Mortgage-backed
      securities & Equity Securities
            
            
            70,941,481
            
            
            
            71,940,346Totals
            
            $
            109,262,949
            
            
            $
            109,988,049




The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $23,317,108 at June 30, 2009.  The
securities delivered for repurchase agreements were $54,667,009 at June 30,
2009.





Gross
gains of $477,591 resulting from sales of available-for-sale securities were
realized as of June 30, 2009.  The tax expense for net security gains
for June 30, 2009 was $162,381.





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 at June 30, 2009 was $24,210,095, which is approximately 22 percent
of the Company’s available-for-sale investment portfolio.  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.





27




Securities
with unrealized losses at June 30, 2009 are as follows:


Less
      than 12 Months
              
              
              12
      Months or Longer
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                LossesAvailable-for-Sale
      Securities:U.S.
      Treasury and Government agencies
              
              $
              6,487,985
              
              
              $
              (41,156
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              6,487,985
              
              
              $
              (41,156
              )Mortgage-backed
      securities
              
              
              254,754
              
              
              
              (2,223
              )
              
              
              2,592,343
              
              
              
              (575,652
              )
              
              
              2,847,097
              
              
              
              (577,875
              )State
      and political subdivisions
              
              
              13,469,697
              
              
              
              (421,067
              )
              
              
              1,405,098
              
              
              
              (132,104
              )
              
              
              14,874,795
              
              
              
              (553,171
              )Other
              
              
              
              
              
              
              
              
              
              
              218
              
              
              
              (2
              )
              
              
              218
              
              
              
              (2
              )$
              20,212,436
              
              
              $
              (464,446
              )
              
              $
              3,997,659
              
              
              $
              (707,758
              )
              
              $
              24,210,095
              
              
              $
              (1,172,204
              )




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 OTTI on
these CMO securities.





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




Note
L – Dividends on Common Stock





On July
15, 2009, the Company’s Board of Directors approved a quarterly cash dividend of
$0.09 per share for the second quarter of 2009, payable on August 21, 2009 to
all shareholders of record on August 7, 2009.




28


Note
M – Subsequent Events




Subsequent
events have been evaluated through August 13, 2009, which is the date the
financial statements were issued.




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 in “Item 1A. Risk Factors” of Part II
of the 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.




29





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





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





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





Recent Regulatory
Developments





On 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 will be collected September 30, 2009.  State
Bank and Trust expensed $300,000 for this assessment during the second quarter
of 2009.   In its final rule, the FDIC also announced that
another five basis point special assessment later in 2009 is
probable.





On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which creates the Troubled Asset Relief
Program ( “TARP”) and provides the U.S. Treasury with broad authority to
implement certain actions to help restore stability and liquidity to U.S.
markets.  On October 14, 2008 the U.S. Treasury announced a voluntary
Capital Purchase Program pursuant to TARP to encourage U.S. financial
institutions to build capital to increase the flow of financing to U.S.
businesses and consumers and to support the U.S. economy.  Under the
program, Treasury 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 engaged only in financial activities that applied to participate
before 5:00 pm (EDT) on November 14, 2008.





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




30





Also
announced on October 14, 2008 by the FDIC was a Temporary Liquidity Guarantee
Program (TLGP) designed to strengthen confidence and encourage liquidity in the
banking system.  The new program will guarantee newly issued senior
unsecured debt of eligible institutions, including FDIC-insured banks and
thrifts, as well as certain holding companies.  After careful
consideration of the risks and benefits of the Temporary Liquidity Guarantee
Program, the Company concluded that it would not participate in the
program.





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




31





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





Impact of Accounting
Changes




None





Three Months Ended June 30,
2009 compared to Three Months Ended June 30, 2008





Net
Income: Net income for the second quarter of 2009 was $1.00 million, or
$0.20 per diluted share, compared to $1.36 million, or $0.28 per diluted share,
for the second quarter of 2008.  The quarter reflects an increase in
non-interest expense of $2.00 million and an increase in the provision for loan
losses of $586 thousand.  These items are partially offset by a $929
thousand increase in net interest income and a $1.10 million increase in
non-interest income.  The primary driver of the increase in net
interest income was an increase of $64.7 million in average earning assets,
acquired mainly in the acquisition of National Bank of Montpelier (NBM), coupled
with a 27 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 second quarter of
2009 was $66.7 million compared with $11.5 million for the 2008 second
quarter.  The increase in non-interest expense was driven by the
addition of five retail branches associated with the purchase of NBM, additional
expenses associated with mortgage banking and the one-time $300 thousand FDIC
assessment.





Net
Interest Income: Net interest income was $5.36 million, an increase of
$929,000, or 21.0 percent, from the 2008 second quarter.  As
previously mentioned, average earning assets increased $64.7 million, or 12.7
percent, over the prior year second quarter.  The increase in earning
assets is a result of loan growth over the past twelve months of $36.8 million,
or 9.1 percent, reaching $441.2 million at June 30, 2009.  This growth
was due mainly to NBM as $43.7 million in loans were acquired. Sixty-six percent
of State Bank’s loan portfolio is commercial, and $17.9 million of the Bank’s
growth was derived from this sector, with $14.0 million derived from residential
growth.  Loan balances declined during the second quarter of 2009,
decreasing $8.90 million, or 3.9 percent annualized, from the fourth quarter of
2008.  The decrease in loans is largely attributable to residential
loans, which decreased $13.3 million during the first half of
2009.  This was due to refinancing activities, as the Company
refinanced portfolio loans and sold them into the secondary
market.  Commercial loans increased $10.4 million from the previous
quarter end.  Year-over-year, the net interest margin increased 27
basis points from 3.55 percent for the second quarter 2008 to 3.82 percent for
the second quarter 2009.  The 3.82 percent represents a 15 basis point
increase from the linked quarter of 3.67 percent.  The year-over-year
increase is a result of being liability sensitive in a decreasing rate
environment.  Management’s focus will now turn to becoming asset
sensitive as we feel rates are nearing their low points and that rates will
start to increase into the future.




32





Provision
for Loan Losses: The provision for loan losses was $799,000 for the
second quarter of 2009 compared to a $213,000 provision for the second quarter
of 2008.  The Company experienced an increase in losses quarter over
quarter, which is reflected in net charge-offs of $275,000 compared to $18,000
of net recoveries in the 2008 second quarter.  For the second quarter
ended June 30, 2009, net charge-offs as a percentage of average loans was 0.25
percent annualized.  At quarter end, consolidated non-performing
assets were $11.5 million, or 1.74 percent of total assets compared with $6.71
million, or 1.16 percent of total assets for the prior-year second
quarter.





($
      in Thousands)
            
            June 30,
              2009
            
            
            December 31,
              2008
            
            
            June 30,
              2008Net
      charge-offs
            
            $
            275
            
            
            $
            280
            
            
            $
            (18
            )Non-performing
      loans
            
            $
            10,173
            
            
            $
            5,178
            
            
            $
            5,141OREO
      / OAO
            
            $
            1,346
            
            
            $
            1,409
            
            
            $
            1,566Non-performing
      assets
            
            $
            11,519
            
            
            $
            6,587
            
            
            $
            6,707Non-performing
      assets / Total assets
            
            
            1.74
            %
            
            
            1.00
            %
            
            
            1.16
            %Allowance
      for loan losses / Total loans
            
            
            1.33
            %
            
            
            1.12
            %
            
            
            1.04
            %Allowance
      for loan losses / Non-performing assets
            
            
            51.0
            %
            
            
            76.2
            %
            
            
            63.3
            %





Non-interest
Income: Non-interest income was $7.90 million for the second quarter of
2009 compared with $6.80 million for the prior-year second quarter,
an increase of $1.10 million, or 16.1 percent.  The second
quarter results were primarily driven by the increase in the gain on sale of
loans of $755,000 and gains on the sale of securities of
$424,000.  The increases were partially offset by trust fees which
decreased $175,000 quarter over quarter.  Non-interest income
accounted for approximately 63 percent of Rurban’s total second quarter 2009
revenue. Offsetting projected new business at RDSI is the loss of RDSI’s
largest client bank in the third quarter of 2009.





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.




33





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 $11.1 million for the second quarter of
2009, compared with $9.11 million for the second quarter of 2008.  The
acquisition of NBM contributed approximately $407,000 of this
increase.  The special FDIC assessment was $300,000, and $190,000 of
expenses was incurred related to the potential RDSI spin-off and merger with New
Core.  Mortgage banking expenses increased $572,000
quarter-over-quarter.  Offsetting these expenses was the recovery of
impairment on mortgage servicing rights associated with the Company’s serviced
loan portfolio of $125,000.





Six Months Ended June 30,
2009 compared to Six Months Ended June 30, 2008





Net
Income: Rurban had net income of $2.11 million or $0.43 per diluted share
for the six months ended June 30, 2009, compared to $2.47 million or $0.50 per
diluted share for the six months ended June 30, 2008.  This represents
a $358,000, or 14.5 percent, decrease in comparison of the six-month
periods.  Significant changes from period to period include an
increase in non-interest expenses of $2.87 million and an increase in loan loss
provision of $889 thousand.  Offsetting these items are an increase in
net interest income of $2.13 million and a $1.03 million increase in
non-interest income.





Net
Interest Income: For the six months ended June 30, 2009, net interest
income was $10.4 million, an increase of $2.13 million or 25.8 percent, from the
six-month period ended June 30, 2008.  This increase is primarily the
result of the acquisition of the five banking centers in Williams County,
coupled with a 40 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 six to nine 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 $1.29 million for the
six months ended June 30, 2009, compared to $405,000 for the six months ended
June 30, 2008.  The additional loan loss is reflective of
deterioration of four specific credits.  While an additional $1.10
million was allocated to these four credits, several other credits improved and
the associated reserves were accordingly reduced.





Non-interest
Income: Non-interest income was $15.3 million for the six months ended
June 30, 2009, compared with $14.3 million for the six months ended June 30,
2008.  The first six months of 2009 saw a $1.56 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
$478,000.  Offsetting these items were trust fee income, which
decreased $446,000 from the prior year, due to the poor equity markets, and
proceeds from the VISA IPO of $132,000 and investment security recoveries of
$197,000, both of which were one-time items in 2008.




34





Non-interest
Expense: For the six months ended June 30, 2009, total non-interest
expense was $21.6 million compared with 18.7 million for the six months ended
June 30, 2008.  This represents a $2.87 million, or 15.4 percent,
increase period over period.  Of the overall increase, salary and
benefits expense accounted for $1.35 million, due primarily to the addition of
the five Williams County branches and numerous growth
initiatives.  Occupancy expenses were $507,000 more than the prior
year six month period, again due to the addition of the five Williams County
branches.  Professional fees increased $286,000 year-over-year,
primarily due to the one-time FDIC assessment of $300,000 and legal fees of
$190,000 associated with the contemplated RDSI spin-off and potential merger of
RDSI with New Core.





Changes in Financial
Condition





June
30, 2009 vs. December 31, 2008





At June
30, 2009, total assets were $661.5 million, representing an increase of $3.93
million, or 0.60 percent, from December 31, 2008.  The increase is
primarily attributable to an increase of $7.38 million, or 7.19 percent in
available-for-sale securities, and an increase in loans held for sale of $9.49
million.  Loan balances decreased $8.89 million, or 1.98
percent.  Cash and cash equivalents decreased $2.44 million, or 8.70
percent.





Year-
over-year, average assets increased $90.3 million, or 15.8
percent.  Loan growth over the past twelve months was approximately
$36.8 million, or 9.09 percent, reaching $441.2 million at June 30, 2009; this
growth was primarily due to the acquisition of NBM.  Commercial loan
growth accounted for $17.9 million of the Bank’s growth, with $14.0 million
derived from residential growth.





At June
30, 2009, liabilities totaled $598.1 million, an increase of $2.18 million since
December 31, 2008.  Of this increase, significant changes include
federal funds purchased, which increased $10.0 million, advances from the
Federal Home Loan Bank, which increased $3.82 million and notes payable, which
increased $1.56 million.  Offsetting the increases was a decrease of
$11.2 million in total deposits, as time deposits decreased $23.0 million, while
savings, interest checking and money market deposits increased $11.7
million.  The decrease in time deposits was due to excess liquidity
which allowed management to run off higher cost municipal deposits.





From
December 31, 2008 to June 30, 2009, total shareholders’ equity increased $1.75
million, or 2.84 percent, to $63.4 million.  Of this increase,
retained earnings increased $1.23 million, which is the result of $2.11 million
in net income less $877,000 in cash dividends to
shareholders.  Additional paid-in-capital increased $60,000 as the
result of share-based compensation expense incurred during the
year.  Accumulated other comprehensive income increased $600,000 as
the result of an increase in market value of the available-for-sale securities
portfolio.  The stock repurchase plan reduced capital by $139,000
during the first six months of 2009.





35




Capital
Resources





At June
30, 2009, actual capital levels (in millions) and minimum required levels were
as follows:




Actual
              
              
              Minimum
      Required For Capital Adequacy Purposes
              
              
              Minimum
      Required To Be Well Capitalized Under Prompt Corrective Action
      RegulationsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioTotal
      capital (to risk weighted assets)Consolidated
              
              $
              63.2
              
              
              
              13.7
              %
              
              $
              36.8
              
              
              
              8.0
              %
              
              $
              -
              
              
              
              N/AState
      Bank
              
              
              51.5
              
              
              
              11.6
              
              
              
              35.6
              
              
              
              8.0
              
              
              
              44.5
              
              
              
              10.0




Both the
Company and State Bank were categorized as well capitalized at June 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 $148.9 million at June 30, 2009 compared
to $134.5 million at December 31, 2008.





The
Company’s commercial real estate and residential first mortgage portfolio of
$261.8 million at June 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 June 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 six months ended June 30, 2009 and 2008
follows.





The
Company experienced negative cash flows from operating activities for the six
months ended June 30, 2009 and positive cash flows for the three months ended
June 30, 2008.  Net cash used in operating activities was $6.88
million for the three months ended June 30, 2009.  Net cash provided
in operating activities was $6.16 million for the three months ended June 30,
2008.





Net cash
flow from investing activities was $2.02 million and a use of cash of $24.5
million for the three months ended June 30, 2009 and 2008,
respectively.  The changes in net cash from investing activities at
June 30, 2009 included available-for-sale securities purchases totaling $44.0
million.  These cash payments were offset by $21.9 million in proceeds
from maturities of securities and 15.8 million in proceeds from the sales of
securities. Changes in net loans were $8.10 million. The changes in net cash
from investing activities at June 30, 2008 included the purchase of securities
of $46.2 million, net changes in loans of 17.0 million and the purchases of
equipment and software of $2.58 million.  This was partially offset by
the proceeds from maturities or calls of securities of $40.9
million.




36





Net cash
flow from financing activities was $2.42 million and $13.0 million for the three
month periods ended June 30, 2009 and 2008, respectively.  The 2009
financing activities included a $11.7 million increase in demand deposits, money
market, interest checking and savings accounts, which were offset by a $23.0
million decrease in certificates of deposit.  Proceeds from advances
from the Federal Home Loan Bank totaled $7.50 million, federal funds purchased
totaled $10.0 million and proceeds from notes payable totaled $4.2
million.  Offsetting this increase were repayments of Federal Home
Loan Bank advances of $3.68 million, repayment of notes payable of $2.64 million
and cash dividends paid to shareholders of $877,000.  The net cash
provided by financing activities at June 30, 2008 was primarily due to proceeds
from advances from the FHLB which totaled $21.0 million, federal funds purchased
totaling $3.6 million and a $1.50 million increase in repurchase
agreements.  This was partially offset by a net decrease in deposits
of $3.47 million and repayment of FHLB advances of $7.19 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
$130.8 million of the Company’s $261.8 million commercial real estate and
residential first mortgage loans qualify to collateralize FHLB borrowings and
have been pledged to meet FHLB collateralization requirements as of June 30,
2009.  Based on the current collateralization requirements of the
FHLB, approximately $2.2 million of additional borrowing capacity existed at
June 30, 2009. The Company also had $27.7 million in unpledged securities that
may be used to pledge for additional borrowings.





At June
30, 2009, the Company had unused federal funds lines totaling $13.5
million.  At December 31, 2008, the Company had $25.5 million in
federal funds lines.  Federal funds borrowed at June 30, 2009 and
December 31, 2008 totaled $10.0 million and $0, respectively.  The
Company also has a $15 million line of credit with a regional
bank.  Advances on this line totaled $0 and $0 at June 30, 2009 and
December 31, 2008 respectively.





The
Company’s contractual obligations as of June 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 $40.5 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 $219.6
million.





ASSET LIABILITY
MANAGEMENT





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




37





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.





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.




38





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 June 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)




Comparison
      of 2009 to 2008:
              
              First
              
              
              YearsTotal
      rate-sensitive assets:
              
              Year
              
              
              
              2 –
      5
              
              
              Thereafter
              
              
              TotalAt
      June 30, 2009
              
              $
              184,189
              
              
              $
              245,619
              
              
              $
              138,456
              
              
              $
              568,264At
      December 31, 2008
              
              
              182,795
              
              
              
              227,333
              
              
              
              160,659
              
              
              
              570,787Increase
      (decrease)
              
              $
              1,394
              
              
              $
              18,286
              
              
              $
              (22,203
              )
              
              $
              (2,523
              )Total
      rate-sensitive liabilities:At
      June 30, 2009
              
              $
              216,931
              
              
              $
              349,332
              
              
              $
              23,084
              
              
              $
              589,347At
      December 31, 2008
              
              
              220,481
              
              
              
              338,260
              
              
              
              27,173
              
              
              
              585,914Increase
      (decrease)
              
              $
              (3,550
              )
              
              $
              11,072
              
              
              $
              (4,089
              )
              
              $
              3,433




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




39





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 June 30, 2009, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.




40




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 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
will 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.





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.





41





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 June 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)April
      1 through April 30, 2009
            
            
            3,454
            
            
            $
            8.28
            
            
            
            1,543
            
            
            
            92,397May
      1 through  May 31, 2009
            
            
            4,026
            
            
            $
            8.05
            
            
            
            3,100
            
            
            
            89,297June
      1 through June 30, 2009
            
            
            3,226
            
            
            $
            7.80
            
            
            
            2,751
            
            
            
            86,546





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


(2)
            On
      July 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





42




Item 6.
Exhibits





Exhibits




2.1  
       –
            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)





43




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:  August 13,
      2009
              By
              /s/ Kenneth
      A. JoyceKenneth
      A. JoycePresident
      & Chief Executive Officer
  By
              /s/ Duane
      L. SinnDuane
      L. SinnExecutive
      Vice President & Chief Financial Officer




44