UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





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


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      quarterly period ended September
      30, 2008




OR





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from
      _________________to___________________________





Commission
      file number 0-13507





RURBAN
      FINANCIAL CORP.


(Exact
      name of registrant as specified in its charter)


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


401
      Clinton Street, Defiance, Ohio 43512


(Address
      of principal executive offices)


(Zip
      Code)




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





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes x  No 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 definition of “large accelerated filer, accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerate Filer
o Accelerated Filer o
      Non-Accelerated Filer o Smaller Reporting Company x




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




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


**Common
                  Shares, without par value**
              **4,900,076
                  shares****(class)**
              **(Outstanding
                  at November 14,
                  2008)**










**RURBAN
      FINANCIAL CORP.**





**FORM
      10-Q**





**TABLE
      OF CONTENTS**




**PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              
              Financial
                  Statements
              
              3Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              25Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              34Item
                  4T.
              
              Controls
                  and Procedures
              
              35**PART
                  II - OTHER INFORMATION**Item
                  1.
              
              Legal
                  Proceedings
              
              37Item
                  1A.
              
              Risk
                  Factors
              
              37Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              38Item
                  3.
              
              Defaults
                  Upon Senior Securities
              
              38Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              38Item
                  5.
              
              Other
                  Information
              
              38Item
                  6.
              
              Exhibits
              
              39Signatures
              
              
              
              40




2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





The
      interim condensed consolidated financial statements of Rurban Financial Corp.
      (“Rurban” or the “Company”) are unaudited; however, the information contained
      herein reflects all adjustments which are, in the opinion of management,
      necessary for a fair presentation of financial condition and results of
      operations for the interim periods presented. All adjustments reflected in
      these
      financial statements are of a normal recurring nature in accordance with Rule
      10-01 of Regulation S-X. Results of operations for the three and nine months
      ended September 30, 2008 are not necessarily indicative of results for the
      complete year.


3


**Rurban
        Financial Corp.**
 **Condensed
        Consolidated Balance Sheets**
 **September
        30, 2008 and December 31, 2007**


**(Unaudited)****September
                30,**
            
            **December
                31,****2008**
            
            **2007****Assets**Cash
                and due from banks
            
            $
            25,408,171
            
            $
            15,183,627Federal
                funds sold
            
            
            —
            
            
            2,000,000Cash
                and cash equivalents
            
            
            25,408,171
            
            
            17,183,627Available-for-sale
                securities
            
            
            94,436,350
            
            
            92,661,386Loans
                held for sale
            
            
            1,478,333
            
            
            1,649,758Loans,
                net of unearned income
            
            
            399,910,475
            
            
            389,268,744Allowance
                for loan losses
            
            
            (4,057,213
            )
            
            (3,990,455
            )Premises
                and equipment
            
            
            15,496,474
            
            
            15,128,754Purchased
                software
            
            
            5,964,281
            
            
            4,282,563Federal
                Reserve and Federal Home Loan Bank stock
            
            
            4,148,400
            
            
            4,021,200Foreclosed
                assets held for sale, net
            
            
            1,534,207
            
            
            124,131Interest
                receivable
            
            
            2,835,552
            
            
            3,008,968Goodwill
            
            
            13,940,618
            
            
            13,940,618Core
                deposits and other intangibles
            
            
            4,615,084
            
            
            5,135,228Cash
                value of life insurance
            
            
            12,513,124
            
            
            12,160,581Other
            
            
            6,797,920
            
            
            6,638,895Total
                assets
            
            $
            585,021,776
            
            $
            561,213,998




*See
      notes to condensed consolidated financial statements
      (unaudited)*





*Note:
      The balance sheet at December 31, 2007 has been derived from
      the* **** *audited
      consolidated financial statements at that date*




4




**Rurban
        Financial Corp.**
 **Condensed
        Consolidated Balance Sheets**
 **September
        30, 2008 and December 31, 2007**


**(Unaudited)****September
                30,**
            
            **December
                31,****2008**
            
            **2007****Liabilities
                and Stockholders’ Equity****Liabilities**DepositsDemand
            
            $
            40,952,936
            
            $
            41,541,297Savings,
                interest checking and money market
            
            
            160,202,242
            
            
            141,009,043Time
            
            
            205,299,166
            
            
            223,480,842Total
                deposits
            
            
            406,454,344
            
            
            406,031,182Notes
                payable
            
            
            —
            
            
            922,457Federal
                Home Loan Bank advances
            
            
            40,229,923
            
            
            24,000,000Federal
                Funds Purchased
            
            
            5,000,000
            
            
            —Retail
                repurchase agreements
            
            
            44,553,855
            
            
            43,006,438Trust
                preferred securities
            
            
            20,620,000
            
            
            20,620,000Interest
                payable
            
            
            1,575,146
            
            
            2,532,914Other
                liabilities
            
            
            6,471,375
            
            
            4,775,773Total
                liabilities
            
            
            524,904,643
            
            
            501,888,764**Commitments
                and Contingent Liabilities****Stockholders’
                Equity**Common
                stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433
                shares; outstanding September 2008 - 4,906,026 shares, December 2007
                -
                4,978,933 shares
            
            
            12,568,583
            
            
            12,568,583Additional
                paid-in capital
            
            
            14,996,187
            
            
            14,923,571Retained
                earnings
            
            
            34,898,499
            
            
            32,361,106Accumulated
                other comprehensive income (loss)
            
            
            (944,518
            )
            
            82,235Treasury
                Stock, at costCommon;
                Sep. 2008 - 121,407 shares, Dec. 2007 - 48,500 shares
            
            
            (1,401,618
            )
            
            (610,260
            )Total
                stockholders’ equity
            
            
            60,117,133
            
            
            59,325,235Total
                liabilities and stockholders’ equity
            
            $
            585,021,776
            
            $
            561,213,998




*See
      notes to condensed consolidated financial statements
      (unaudited)*





*Note:
      The balance sheet at December 31, 2007 has been derived from
      the* **** *audited
      consolidated financial statements at that date.*


5


**Rurban
      Financial Corp.**




**Condensed
      Consolidated Statements of Income (Unaudited)**


**Three
      Months Ended**




**September
                30,**
              **2008**
            
            **September
                30,**
              **2007****Interest
                Income**LoansTaxable
            
            $
            6,736,100
            
            $
            7,072,488Tax-exempt
            
            
            22,125
            
            
            16,668SecuritiesTaxable
            
            
            1,135,931
            
            
            1,041,177Tax-exempt
            
            
            109,805
            
            
            169,719Other
            
            
            17,635
            
            
            50,288Total
                interest income
            
            
            8,021,596
            
            
            8,350,340**Interest
                Expense**Deposits
            
            
            2,258,470
            
            
            3,497,275Other
                borrowings
            
            
            16,803
            
            
            32,026Retail
                repurchase agreements
            
            
            465,452
            
            
            435,216Federal
                Home Loan Bank advances
            
            
            416,696
            
            
            268,289Trust
                preferred securities
            
            
            415,686
            
            
            456,582Total
                interest expense
            
            
            3,573,107
            
            
            4,689,389**Net
                Interest Income**
            
            
            4,448,489
            
            
            3,660,951**Provision
                for Loan Losses**
            
            
            146,173
            
            
            140,409**Net
                Interest Income After Provision for Loan Losses**
            
            
            4,302,316
            
            
            3,520,543**Non-interest
                Income**Data
                service fees
            
            
            4,947,727
            
            
            5,004,394Trust
                fees
            
            
            780,726
            
            
            819,989Customer
                service fees
            
            
            626,008
            
            
            588,447Net
                gains on loan sales
            
            
            132,999
            
            
            128,947Loan
                servicing fees
            
            
            57,356
            
            
            27,284Gain
                on sale of assets
            
            
            222,815
            
            
            11,862Other
            
            
            221,081
            
            
            201,920Total
                non-interest income
            
            
            6,988,712
            
            
            6,782,842







*See
        notes to condensed consolidated financial statements
        (unaudited)*




6




**Rurban
      Financial Corp.**


**Condensed
      Consolidated Statements of Income (Unaudited)**


**Three
      Months Ended**




**September
                30,**
              **2008**
            
            **September
                30,**
              **2007****Non-interest
                Expense**Salaries
                and employee benefits
            
            $
            4,239,578
            
            $
            4,290,961Net
                occupancy expense
            
            
            526,301
            
            
            514,742Equipment
                expense
            
            
            1,553,188
            
            
            1,625,762Data
                processing fees
            
            
            120,151
            
            
            102,292Professional
                fees
            
            
            489,910
            
            
            461,844Marketing
                expense
            
            
            247,120
            
            
            259,196Printing
                and office supplies
            
            
            115,667
            
            
            130,363Telephone
                and communications
            
            
            415,120
            
            
            446,465Postage
                and delivery expense
            
            
            511,522
            
            
            392,211State,
                local and other taxes
            
            
            235,647
            
            
            103,674Employee
                expense
            
            
            272,315
            
            
            266,227Other
            
            
            552,379
            
            
            512,663Total
                non-interest expense
            
            
            9,278,898
            
            
            9,106,400**Income
                Before Income Tax**
            
            
            2,012,130
            
            
            1,196,984**Provision
                for Income Taxes**
            
            
            588,090
            
            
            333,384,**Net
                Income**
            
            $
            1,424,040
            
            $
            863,600**Basic
                Earnings Per Share**
            
            $
            0.29
            
            $
            0.17**Diluted
                Earnings Per Share**
            
            $
            0.29
            
            $
            0.17**Dividends
                Declared Per Share**
            
            $
            0.09
            
            $
            0.07





*See
      notes to consolidated financial statements (unaudited)*


7


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


**September
                30,**
              **2008**
            
            **September
                30,**
              **2007****Interest
                Income**LoansTaxable
            
            $
            20,567,604
            
            $
            20,725,807Tax-exempt
            
            
            63,944
            
            
            51,211SecuritiesTaxable
            
            
            3,266395
            
            
            3,176,674Tax-exempt
            
            
            433,970
            
            
            483,621Other
            
            
            130,424
            
            
            163,894Total
                interest income
            
            
            24,462,337
            
            
            24,601,207**Interest
                Expense**Deposits
            
            
            7,973,962
            
            
            10,212,672Other
                borrowings
            
            
            43,792
            
            
            140,644Retail
                repurchase agreements
            
            
            1,376,767
            
            
            1,130,898Federal
                Home Loan Bank advances
            
            
            1,096,178
            
            
            760,534Trust
                preferred securities
            
            
            1,273,775
            
            
            1,352,093Total
                interest expense
            
            
            11,764,474
            
            
            13,596,842**Net
                Interest Income**
            
            
            12,697,863
            
            
            11,004,365**Provision
                for Loan Losses**
            
            
            551,388
            
            
            378,643**Net
                Interest Income After Provision for Loan Losses**
            
            
            12,146,475
            
            
            10,625,723**Non-interest
                Income**Data
                service fees
            
            
            15,161,075
            
            
            14,467,788Trust
                fees
            
            
            2,451,567
            
            
            2,512,251Customer
                service fees
            
            
            1,825,040
            
            
            1,650,080Net
                gains on loan sales
            
            
            590,747
            
            
            436,390Net
                realized gains on sales of securities
            
            
            —
            
            
            367Net
                proceeds from liquidation of equity securities
            
            
            132,106
            
            
            —Investment
                security recoveries
            
            
            197,487
            
            
            —Loan
                servicing fees
            
            
            175,516
            
            
            146,427Gain
                on sale of assets
            
            
            151,393
            
            
            61,839Other
            
            
            620,452
            
            
            754,144Total
                non-interest income
            
            
            21,305,383
            
            
            20,029,285*See
                notes to condensed consolidated financial statements
                (unaudited)*







8




**Rurban
      Financial Corp.**




**Condensed
      Consolidated Statements of Income (Unaudited)**


**Nine
      Months Ended**




**September
                30,**
              **2008**
            
            **September
                30,**
              **2007****Non-interest
                Expense**Salaries
                and employee benefits
            
            $
            13,113,999
            
            $
            12,873,072Net
                occupancy expense
            
            
            1,603,496
            
            
            1,547,800Equipment
                expense
            
            
            4,746,533
            
            
            4,908,311Data
                processing fees
            
            
            321,510
            
            
            372,716Professional
                fees
            
            
            1,345,133
            
            
            1,640,250Marketing
                expense
            
            
            584,957
            
            
            601,979Printing
                and office supplies
            
            
            421,405
            
            
            509,817Telephone
                and communications
            
            
            1,258,907
            
            
            1,329,359Postage
                and delivery expense
            
            
            1,649,969
            
            
            1,168,563State,
                local and other taxes
            
            
            602,833
            
            
            468,590Employee
                expense
            
            
            806,298
            
            
            801,374Other
            
            
            1,535,564
            
            
            1,250,192Total
                non-interest expense
            
            
            27,990,604
            
            
            27,472,023**Income
                Before Income Tax**
            
            
            5,461,254
            
            
            3,182,984**Provision
                for Income Taxes**
            
            
            1,572,034
            
            
            831,885**Net
                Income**
            
            $
            3,889,220
            
            $
            2,351,099**Basic
                Earnings Per Share**
            
            $
            0.79
            
            $
            0.47**Diluted
                Earnings Per Share**
            
            $
            0.
                79
            
            $
            0.47**Dividends
                Declared Per Share**
            
            $
            0.25
            
            $
            0.19*See
                notes to condensed consolidated financial statements
                (unaudited)*




9





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




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30, 2008
            
            September
                30, 2007
            
            September
                30, 2008
            
            September
                30, 2007Balance
                at beginning of period
            
            $
            59,361,729
            
            $
            57,349,495
            
            $
            59,325,235
            
            $
            56,955,153Cumulative
                effect adjustment for split dollar BOLI
            
            
            -
            
            
            -
            
            
            (116,303
            )
            
            -Net
                Income
            
            
            1,424,040
            
            
            863,601
            
            
            3,889,220
            
            
            2,351,099Other
                comprehensive loss:Net
                change in unrealized gains (losses)****On
                securities available for sale, net
            
            
            (183,016
            )
            
            821,754
            
            
            (1,026,753
            )
            
            458,172Total
                comprehensive income
            
            
            1,241,024
            
            
            1,685,355
            
            
            2,862,467
            
            
            2,809,271Cash
                dividend
            
            
            (442,254
            )
            
            (349,960
            )
            
            (1,235,524
            )
            
            (953,252
            )Purchase
                of treasury shares
            
            
            (74,758
            )
            
            (201,280
            )
            
            (791,358
            )
            
            (350,480
            )Stock
                option expense
            
            
            31,392
            
            
            20,744
            
            
            72,616
            
            
            43,662Balance
                at end of period
            
            $
            60,117,133
            
            $
            58,504,354
            
            $
            60,117,133
            
            $
            58,504,354




*See
      notes to condensed consolidated financial statements
      (unaudited)*




10




**Rurban
      Financial Corp.**


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


**Nine
      Months Ended**




**September
                30, 2008**
            
            **September
                30, 2007****Operating
                Activities**Net
                income
            
            $
            3,889,220
            
            $
            2,351,099Items
                not requiring (providing) cashDepreciation
                and amortization
            
            
            2,752,284
            
            
            3,222,666Provision
                for loan losses
            
            
            551,388
            
            
            378,643Expense
                of stock option plan
            
            
            72,616
            
            
            43,662Amortization
                of premiums and discounts on securities
            
            
            91,901
            
            
            36,137Amortization
                of intangible assets
            
            
            520,144
            
            
            536,335Deferred
                income taxes
            
            
            528,933
            
            
            682,352FHLB
                Stock Dividends
            
            
            (127,200
            )
            
            (47,250
            )Proceeds
                from sale of loans held for sale
            
            
            31,021,863
            
            
            12,902,818Originations
                of loans held for sale
            
            
            (30,259,691
            )
            
            (12,210,691
            )Gain
                from sale of loans
            
            
            (590,747
            )
            
            (436,390
            )Gain
                on sale of foreclosed assets
            
            
            5,066
            
            
            15,244Gain
                on sale of branch office building
            
            
            (243,000
            )
            
            __Loss
                on sales of fixed assets
            
            
            86,541
            
            
            16,107Changes
                inInterest
                receivable
            
            
            173,416
            
            
            (244,491
            )Other
                assets
            
            
            1,491,304
            
            
            (649,149
            )Interest
                payable and other liabilities
            
            
            (957,768
            )
            
            (2,529,428
            )Net
                cash provided by operating activities
            
            
            9,006,270
            
            
            4,067,664**Investing
                Activities**Purchases
                of available-for-sale securities
            
            
            (46,231,265
            )
            
            (29,399,315
            )Proceeds
                from maturities of available-for-sale securities
            
            
            42,808,714
            
            
            27,350,999Proceeds
                from sales of available-for-sale securities
            
            
            __
            
            
            2,408,608Proceeds
                from sales of Fed Stock
            
            
            __
            
            
            19,500Net
                change in interest bearing deposits
            
            
            __
            
            
            150,000Net
                change in loans
            
            
            (12,983,338
            )
            
            (18,386,570
            )Purchase
                of Bank Owned Life Insurance
            
            
            __
            
            
            (1,000,000
            )Purchase
                of premises and equipment and software
            
            
            (6,843,233
            )
            
            (3,249,937
            )Proceeds
                from sales of premises and equipment
            
            
            2,041,511
            
            
            257,928Proceeds
                from sale of foreclosed assets
            
            
            174,722
            
            
            —Cash
                paid for Diverse Computer Marketers, Inc. acquisition
            
            
            —
            
            
            (266,560
            )Net
                cash used in investing activities
            
            
            (21,032,889
            )
            
            (22,115,347
            )




*See
      notes to condensed consolidated financial statements
      (unaudited)*




11




**Rurban
      Financial Corp.**


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


**Nine
      Months Ended**




**September
                30, 2008**
            
            **September
                30, 2007****Financing
                Activities**Net
                increase in demand deposits, money market, interest checking and
                savings
                accounts
            
            $
            18,604,838
            
            $
            2,749,134Net
                decrease in certificates of deposit
            
            
            (18,181,676
            )
            
            (4,152,160
            )Net
                increase in securities sold under agreements to repurchase
            
            
            1,547,417
            
            
            10,295,127Net
                increase in federal funds purchased
            
            
            5,000,000
            
            
            4,400,000Proceeds
                from Federal Home Loan Bank advances
            
            
            24,000,000
            
            
            9,000,000Repayment
                of Federal Home Loan Bank advances
            
            
            (7,770,077
            )
            
            (11,000,000
            )Repayment
                of notes payable
            
            
            (922,457
            )
            
            (1,563,214
            )Purchase
                of treasury stock
            
            
            (791,358
            )
            
            (350,480
            )Dividends
                paid
            
            
            (1,235,524
            )
            
            (953,252
            )Net
                cash provided by financing activities
            
            
            20,251,163
            
            
            8,425,155**Increase
                (Decrease) in Cash and Cash Equivalents**
            
            
            8,224,544
            
            
            (9,622,528
            )**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            17,183,627
            
            
            22,481,791**Cash
                and Cash Equivalents, End of Period**
            
            $
            25,408,171
            
            $
            12,859,263**Supplemental
                Cash Flows Information**Interest
                paid
            
            $
            12,722,242
            
            $
            13,411,731Transfer
                of loans to foreclosed assets
            
            $
            1,856,977
            
            $
            82,397Federal
                Income Taxes Paid
            
            $
            556,000
            
            $
            1,420,000




*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 of the information and footnotes required by generally
      accepted accounting principles for complete financial statements. The financial
      statements reflect all adjustments that are, in the opinion of management,
      necessary to fairly present the financial position, results of operations and
      cash flows of the Company. Those adjustments consist only of normal recurring
      adjustments. Results of operations for the three and nine months ended September
      30, 2008 are not necessarily indicative of results for the complete
      year.





The
      condensed consolidated balance sheet of the Company as of December 31, 2007
      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, 2007.





**NOTE
      B—EARNINGS PER SHARE**





Earnings
      per share (EPS) have been computed based on the weighted average number of
      shares outstanding during the periods presented. For the periods ended September
      30, 2008 and 2007, share based awards totaling 326,263 and 247,352 common
      shares, respectively, were not considered in computing EPS as they were
      anti-dilutive. The number of shares used in the computation of basic and diluted
      earnings per share were:





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30
            
            September
                302008
            
            2007
            
            2008
            
            2007Basic
                earnings per share
            
            
            4,911,015
            
            
            5,003,433
            
            
            4,935,804
            
            
            5,018,567Diluted
                earnings per share
            
            
            4,911,015
            
            
            5,008,334
            
            
            4,935,881
            
            
            5,021,939





**NOTE
      C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES**





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


September
                  30,
              
              December
                  31,2008
              
              2007Commercial
              
              $
              82,858,998
              
              $
              83,048,522Commercial
                  real estate
              
              
              140,970,047
              
              
              126,784,483Agricultural
              
              
              45,465,134
              
              
              43,369,266Residential
                  real estate
              
              
              80,903,283
              
              
              84,620,992Consumer
              
              
              49,618,313
              
              
              51,357,419Lease
                  financing
              
              
              330,000
              
              
              330,000Total
                  loans
              
              
              400,145,775
              
              
              389,510,682LessNet
                  deferred loan fees, premiums and discounts
              
              
              (235,300
              )
              
              (241,938
              )Loans,
                  net of unearned income
              
              $
              399,910,475
              
              $
              389,268,744Allowance
                  for loan losses
              
              $
              (4,057,213
              )
              $
              (3,990,455
              )





13




The
      following is a summary of the activity in the allowance for loan losses account
      for the three and nine months ended September 30, 2008 and 2007.





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2008
            
            2007
            
            2008
            
            2007Balance,
                beginning of period
            
            $
            4,246,794
            
            $
            3,824,445
            
            $
            3,990,455
            
            $
            3,717,377Provision
                charged to expense
            
            
            146,173
            
            
            140,409
            
            
            551,388
            
            
            378,643Recoveries
            
            
            64,475
            
            
            40,221
            
            
            123,472
            
            
            140,712Loans
                charged off
            
            
            (400,229
            )
            
            (68,530
            )
            
            (608,103
            )
            
            (300,187
            )Balance,
                end of period
            
            $
            4,057,213
            
            $
            3,936,545
            
            $
            4,057,213
            
            $
            3,936,545





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




September
                  30,
              
              December
                  31,2008
              
              2007Non-accrual
                  loans
              
              $
              4,659,442
              
              $
              5,990,483Accruing
                  loans which are contractuallypast
                  due 90 days or more as to interest orprincipal
                  payments
              
              
              —
              
              
              —Total
                  non-performing loans
              
              $
              4,659,442
              
              $
              5,990,483




Individual
      loans determined to be impaired were as follows:


September
                    30,2008
              
              December
                    31,2007Loans
                  with no allowance for loan losses allocated
              
              $
              1,211,000
              
              $
              1,787,000Loans
                  with allowance for loan losses allocated
              
              
              540,000
              
              
              1,898,000Total
                  impaired loans
              
              $
              1,751,000
              
              $
              3,685,000Amount
                  of allowance allocated
              
              $
              241,000
              
              $
              333,000


**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.




14




Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and State Bank to maintain minimum amounts and ratios (set forth in
      the
      table below) of total and Tier I capital (as defined in the regulations) to
      risk-weighted assets (as defined in the regulations), and of Tier I capital
      to
      average assets (as defined in the regulations). ** As
      of
      September 30, 2008 and December 31, 2007, the Company and State Bank exceeded
      all “well-capitalized” requirements to which they were subject.




As
      of
      December 31, 2007, the most recent notification to the regulators categorized
      State Bank as well-capitalized under the regulatory framework for prompt
      corrective action. To be categorized as well-capitalized, State Bank must
      maintain capital ratios as set forth in the following table. There are no
      conditions or events since that notification that management believes have
      changed State Bank’s categorization as well capitalized.




The
      Company’s consolidated, and State Bank’s actual, capital amounts (in millions)
      and ratios, as of September 30, 2008 and December 31, 2007, are also presented
      in the following table.




**Actual**
            
            **Minimum
                Required For Capital Adequacy Purposes**
            
            **To
                Be Well Capitalized Under Prompt Corrective Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**As
                of September 30, 2008Total
                Capital(to
                Risk-Weighted Assets)Consolidated
            
            $
            66.6
            
            
            16.5
            %
            $
            32.3
            
            
            8.0
            %
            $
            —
            
            
            N/AState
                Bank
            
            
            52.8
            
            
            13.5
            
            
            31.2
            
            
            8.0
            
            
            39.0
            
            
            10.0Tier
                I Capital(to
                Risk-Weighted Assets)Consolidated
            
            
            62.8
            
            
            15.5
            
            
            16.2
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            48.7
            
            
            12.5
            
            
            15.6
            
            
            4.0
            
            
            23.4
            
            
            6.0Tier
                I Capital(to
                Average Assets)Consolidated
            
            
            62.8
            
            
            10.9
            
            
            23.1
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            48.7
            
            
            8.8
            
            
            22.2
            
            
            4.0
            
            
            27.8
            
            
            5.0As
                of December 31, 2007Total
                Capital(to
                Risk-Weighted Assets)Consolidated
            
            $
            64.2
            
            
            15.9
            %
            $
            32.2
            
            
            8.0
            %
            $
            —
            
            
            N/AState
                Bank
            
            
            49.5
            
            
            12.7
            
            
            31.3
            
            
            8.0
            
            
            39.1
            
            
            10.0Tier
                I Capital(to
                Risk-Weighted Assets)Consolidated
            
            
            59.9
            
            
            14.9
            
            
            16.1
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            45.5
            
            
            11.6
            
            
            15.6
            
            
            4.0
            
            
            23.5
            
            
            6.0Tier
                I Capital(to
                Average Assets)Consolidated
            
            
            59.9
            
            
            11.0
            
            
            21.9
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            45.5
            
            
            8.4
            
            
            21.8
            
            
            4.0
            
            
            27.3
            
            
            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**





On
      December 4, 2007, the FASB issued FASB Statement No. 160, *“Noncontrolling
      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 noncontrolling 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 do 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 and will be applied to
      future acquisitions.





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





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





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. We have
      adopted FAS 157 effective for the first quarter of 2008.





16




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.




At
      its
      March 2007 meeting, the EITF reached a final consensus on Issue No. 06-10,
      Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.
      A
      consensus was reached that an employer should recognize a liability for the
      postretirement benefit related to a collateral assignment split-dollar life
      insurance arrangement in accordance with either FASB Statement No. 106 or APB
      Opinion No. 12, as appropriate, if the employer has agreed to maintain a life
      insurance policy during the employee’s retirement or provide the employee with a
      death benefit based on the substantive agreement with the employee. A consensus
      also was reached that an employer should recognize and measure an asset based
      on
      the nature and substance of the collateral assignment split-dollar life
      insurance arrangement. The consensuses are effective for fiscal years beginning
      after December 15, 2007, including interim periods within those fiscal years,
      with early application permitted. The Company has endorsement split-dollar
      life
      insurance policies. The implementation of EITF 06-10 will not have a material
      impact on the financial position and results of operations of the Company.





**NOTE
      G - COMMITMENTS AND CREDIT RISK**





As
      of
      September 30, 2008, loan commitments and unused lines of credit totaled
      $67,878,000, standby letters of credit totaled $5,677,000 and no commercial
      letters of credit were outstanding. At December 31, 2007, loan commitments
      and
      unused lines of credit totaled $81,649,000, standby letters of credit totaled
      $377,000 and no commercial letters of credit were outstanding.




17




**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.




18




NOTE
                H -- SEGMENT INFORMATION (Continued)As
                of and for the three months ended September 30, 2008Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            4,891,436
            
            $
            (21,947
            )
            $
            (421,000
            )
            $
            4,448,489
            
            
            
            
            $
            4,448,489Non-interest
                income - externalcustomers
            
            
            1,974,017
            
            
            4,947,727
            
            
            66,968
            
            
            6,988,712
            
            
            
            
            
            6,988,712Non-interest
                income - other segments
            
            
            10,417
            
            
            366,995
            
            
            360,685
            
            
            738,097
            
            
            (738,097
            )
            
            —Total
                revenue
            
            
            6,875,870
            
            
            5,292,775
            
            
            6,653
            
            
            12,175,298
            
            
            (738,097
            )
            
            11,437,201Non-interest
                expense
            
            
            5,002,593
            
            
            4,285,797
            
            
            728,605
            
            
            10,016,995
            
            
            (738,097
            )
            
            9,278,898Significant
                non-cash items:Depreciation
                andamortization
            
            
            260,253
            
            
            518,659
            
            
            52,260
            
            
            831,172
            
            
            —
            
            
            831,172Provision
                for loan losses
            
            
            146,173
            
            
            —
            
            
            —
            
            
            146,173
            
            
            —
            
            
            146,173Income
                tax expense (benefit)
            
            
            493,656
            
            
            342,376
            
            
            (247,942
            )
            
            588,090
            
            
            —
            
            
            588,090Segment
                profit (loss)
            
            $
            1,233,448
            
            $
            664,602
            
            $
            (474,010
            )
            $
            1,424,040
            
            $
            —
            
            $
            1,424,040Balance
                sheet information:Total
                assets
            
            $
            564,608,095
            
            $
            20,602,272
            
            $
            5,259,746
            
            $
            590,470,113
            
            $
            (5,448,337
            )
            $
            585,021,776Goodwill
                and intangibles
            
            $
            11,356,438
            
            $
            7,199,264
            
            $
            —
            
            $
            18,555,702
            
            $
            —
            
            $
            18,555,702Premises
                and equipment expenditures
            
            $
            518,769
            
            $
            3,701,633
            
            $
            40,831
            
            $
            4,261,233
            
            $
            —
            
            $
            4,261,233


19


NOTE
                  H -- SEGMENT INFORMATION (Continued)As
                  of and for the three months ended September 30, 2007Data
              
              
              
              Total
              
              Intersegment
              
              ConsolidatedIncome
                  statement information:
              
              Banking
              
              Processing
              
              Other
              
              Segments
              
              Elimination
              
              TotalsNet
                  interest income (expense)
              
              $
              4,169,772
              
              $
              (53,123
              )
              $
              (455,698
              )
              $
              3,660,951
              
              
              
              
              $
              3,660,951Non-interest
                  income - externalcustomers
              
              
              1,756,535
              
              
              5,004,394
              
              
              21,913
              
              
              6,782,842
              
              
              
              
              
              6,782,842Non-interest
                  income - other segments
              
              
              12,328
              
              
              380,968
              
              
              333,880
              
              
              727,176
              
              
              (727,176
              )
              
              —Total
                  revenue
              
              
              5,938,635
              
              
              5,332,239
              
              
              (99,905
              )
              
              11,170,969
              
              
              (727,176
              )
              
              10,443,793Non-interest
                  expense
              
              
              4,873,670
              
              
              4,333,698
              
              
              626,207
              
              
              9,833,575
              
              
              (727,176
              )
              
              9,106,399Significant
                  non-cash items:Depreciation
                  andamortization
              
              
              254,631
              
              
              971,425
              
              
              34,307
              
              
              1,260,363
              
              
              —
              
              
              1,260,363Provision
                  for loan losses
              
              
              140,409
              
              
              —
              
              
              —
              
              
              140,409
              
              
              —
              
              
              140,409Income
                  tax expense (benefit)
              
              
              250,325
              
              
              339,505
              
              
              (256,446
              )
              
              333,384
              
              
              —
              
              
              333,384Segment
                  profit (loss)
              
              $
              674,231
              
              $
              659,036
              
              $
              (469,666
              )
              $
              863,601
              
              $
              —
              
              $
              863,601Balance
                  sheet information:Total
                  assets
              
              $
              546,412,401
              
              $
              19,684,894
              
              $
              7,700,083
              
              $
              573,797,378
              
              $
              (8,123,087
              )
              $
              565,674,291Goodwill
                  and intangibles
              
              $
              11,812,295
              
              $
              7,450,970
              
              $
              —
              
              $
              19,263,265
              
              $
              —
              
              $
              19,263,265Premises
                  and equipment expenditures
              
              $
              9,045
              
              $
              711,536
              
              $
              75,880
              
              $
              796,461
              
              $
              —
              
              $
              796,461


20


NOTE
                H -- SEGMENT INFORMATION (Continued)As
                of and for the nine months ended September 30, 2008Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            14,067,748
            
            $
            (97,496
            )
            $
            (1,272,389
            )
            $
            12,697,863
            
            
            
            
            $
            12,697,863Non-interest
                income - externalcustomers
            
            
            5,965,120
            
            
            15,155,795
            
            
            184,468
            
            
            21,305,383
            
            
            
            
            
            21,305,383Non-interest
                income - other segments
            
            
            35,628
            
            
            1,125,947
            
            
            1,052,267
            
            
            2,213,842
            
            
            (2,213,842
            )
            
            —Total
                revenue
            
            
            20,068,496
            
            
            16,184,246
            
            
            (35,654
            )
            
            36,217,088
            
            
            (2,213,842
            )
            
            34,003,246Non-interest
                expense
            
            
            14,833,645
            
            
            12,995,624
            
            
            2,375,177
            
            
            30,204,446
            
            
            (2,213,842
            )
            
            27,990,604Significant
                non-cash items:Depreciation
                andamortization
            
            
            756,546
            
            
            1,884,267
            
            
            111,471
            
            
            2,752,284
            
            
            —
            
            
            2,752,284Provision
                for loan losses
            
            
            551,388
            
            
            —
            
            
            —
            
            
            551,388
            
            
            —
            
            
            551,388Income
                tax expense (benefit)
            
            
            1,316,387
            
            
            1,084,135
            
            
            (828,488
            )
            
            1,572,034
            
            
            —
            
            
            1,572,034Segment
                profit (loss)
            
            $
            3,367,076
            
            $
            2,104,487
            
            $
            (1,582,343
            )
            $
            3,889,220
            
            $
            —
            
            $
            3,889,220Balance
                sheet information:Total
                assets
            
            $
            564,608,095
            
            $
            20,602,272
            
            $
            5,259,746
            
            $
            590,470,113
            
            $
            (5,448,337
            )
            $
            585,021,776Goodwill
                and intangibles
            
            $
            11,356,438
            
            $
            7,199,264
            
            $
            —
            
            $
            18,555,702
            
            $
            —
            
            $
            18,555,702Premises
                and equipment expenditures
            
            $
            1,423,734
            
            $
            5,321,346
            
            $
            98,153
            
            $
            6,843,233
            
            $
            —
            
            $
            6,843,233


21


NOTE
                  H -- SEGMENT INFORMATION (Continued)As
                  of and for the nine months ended September 30, 2007Data
              
              
              
              Total
              
              Intersegment
              
              ConsolidatedIncome
                  statement information:
              
              Banking
              
              Processing
              
              Other
              
              Segments
              
              Elimination
              
              TotalsNet
                  interest income (expense)
              
              $
              12,574,116
              
              $
              (220,225
              )
              $
              (1,349,526
              )
              $
              11,004,365
              
              
              
              
              $
              11,004,365Non-interest
                  income - externalcustomers
              
              
              5,503,066
              
              
              14,467,788
              
              
              58,430
              
              
              20,029,284
              
              
              
              
              
              20,029,284Non-interest
                  income - other segments
              
              
              539,276
              
              
              1,188,208
              
              
              992,321
              
              
              2,719,805
              
              
              (2,719,805
              )
              
              —Total
                  revenue
              
              
              18,616,458
              
              
              15,435,771
              
              
              (298,775
              )
              
              33,753,454
              
              
              (2,719,805
              )
              
              31,033,649Non-interest
                  expense
              
              
              15,431,283
              
              
              12,670,567
              
              
              2,089,977
              
              
              30,191,827
              
              
              (2,719,805
              )
              
              27,472,022Significant
                  non-cash items:Depreciation
                  andamortization
              
              
              751,206
              
              
              2,379,089
              
              
              92,371
              
              
              3,222,666
              
              
              —
              
              
              3,222,666Provision
                  for loan losses
              
              
              378,643
              
              
              —
              
              
              —
              
              
              378,643
              
              
              —
              
              
              378,643Income
                  tax expense (benefit)
              
              
              730,451
              
              
              940,170
              
              
              (838,736
              )
              
              831,885
              
              
              —
              
              
              831,885Segment
                  profit (loss)
              
              $
              2,076,081
              
              $
              1,825,034
              
              $
              (1,550,016
              )
              $
              2,351,099
              
              $
              —
              
              $
              2,351,099Balance
                  sheet information:Total
                  assets
              
              $
              546,412,401
              
              $
              19,684,894
              
              $
              7,700,083
              
              $
              573,797,378
              
              $
              (8,123,087
              )
              $
              565,674,291Goodwill
                  and intangibles
              
              $
              11,812,295
              
              $
              7,450,970
              
              $
              —
              
              $
              19,263,265
              
              $
              —
              
              $
              19,263,265Premises
                  and equipment expenditures
              
              $
              1,009,075
              
              $
              2,103,791
              
              $
              137,071
              
              $
              3,249,937
              
              $
              —
              
              $
              3,249,937




22


**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.





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 September 30, 2008:


Fair
                  Value Measurements Using:Description
              
              Fair
                  Values at 9/30/2008
              
              Quoted
                  Prices in Active Markets for Identical Assets (Level 1)
              
              Significant
                  Other Observable Inputs (Level 2)
              
              Significant
                  Unobservable Inputs (Level 3)Available-for-Sale
                  Securities
              
              $
              94,436,350
              
              
              —
              
              $
              94,436,350
              
              
              —




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.




23





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




Fair
                  Value Measurements Using:Description
              
              Fair
                  Values at 9/30/2008
              
              Quoted
                  Prices in Active Markets for Identical Assets (Level 1)
              
              Significant
                  Other Observable Inputs (Level 2)
              
              Significant
                  Unobservable Inputs (Level 3)Impaired
                  loans
              
              $
              141,000
              
              
              —
              
              
              —
              
              $
              141,000




**Note
      J - Acquisitions**





On
      May
      22, 2008, the Company announced the execution of a definitive agreement to
      acquire NBM Bancorp, Incorporated and its wholly-owned subsidiary, National
      Bank
      of Montpelier, which is headquartered in Montpelier Ohio. As of September 30,
      2008, NBM Bancorp had $106 million in assets, $46 million in loans and $88
      million in deposits at its five banking offices. The transaction is expected
      to
      be completed in the fourth quarter of 2008, pending regulatory approvals and
      the
      completion of customary closing conditions.




**Note
      K - Dividends on Common Stock**




On
      July
      16, 2008, the Company’s Board of Directors approved a quarterly cash dividend of
      $0.09 per share for the third quarter of 2008, payable on November 17, 2008
      to
      all shareholders of record on November 3, 2008.




**Note
      L - Share Based Compensation Plan**





On
      April
      17, 2008 the shareholders of the Company approved the Rurban Financial Corp.
      2008 Stock Incentive Plan (the “2008 Plan”). The 2008 Plan authorizes the grant
      or award of Incentive Stock Options, Nonqualified Stock Options, Stock
      Appreciation Rights and Restricted Stock to employees, directors and advisory
      board members of the Company and its subsidiaries. Subject to certain
      adjustments set forth in the 2008 Plan, a maximum of 250,000 common shares
      of
      the Company are authorized for issuance to participants pursuant to awards
      under
      the 2008 Plan.


24




**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 “believes,” “anticipates,” “expects,” “intends,”
“targets,” “plans,” “projects,” “estimates,” and 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,
      2007, and the disclosure under the heading “Item 1A. Risk Factors” of Part II of
      this 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 subsidiary, Rurbanc Data
      Services, Inc. (“RDSI”), provides computerized data and item processing services
      to community banks and businesses. On March 24, 2007, The Exchange Bank and
      Reliance Financial Services, N.A. (“Reliance”) were merged with and into the
      lead bank, State Bank. Reliance’s trust and investment operations are now
      conducted through a division of State Bank, doing business under the name
      Reliance Financial Services. On December 31, 2007, Diverse Computer Marketers,
      Inc. (DCM) was merged with and into RDSI. DCM continues to operate as a division
      of RDSI, continuing to do business under the name Diverse Computer
      Marketers.





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.


25


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.


**Recent
      Regulatory Developments**





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





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 has elected not to apply or participate in the U.S. Treasury’s Capital
      Purchase Program.





Also
      announced on October 14, 2008 by the FDIC was a Temporary Liquidity Guarantee
      Program (TLGP) designed to strengthen confidence and encourage liquidity in
      the
      banking system. The new program will guarantee newly issued senior unsecured
      debt of eligible institutions, including FDIC-insured banks and thrifts, as
      well
      as certain holding companies. The program will also provide full deposit
      coverage for non-interest bearing deposit transaction accounts in FDIC-insured
      institutions, regardless of the dollar amount.





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




26





Finally,
      the FDIC has announced that it will provide 100% deposit insurance coverage
      for
      non-interest-bearing transaction accounts. (“Transaction Account Guarantee
      Program” or “TAG”) This coverage is for traditional checking accounts that don't
      earn interest. The extended coverage is effective immediately under the FDIC's
      Transaction Account Guarantee Program (TAGP), and will continue through December
      31, 2009.





The
      Company has evaluated the benefits of the Transaction Account Guarantee Program
      and has concluded that it will participate in the program.





**Critical
      Accounting Policies**




Note
      1 to
      the Notes to the Consolidated Financial Statements included in the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2007 describes
      the significant accounting policies used in the development and presentation
      of
      the Company’s financial statements. The accounting and reporting policies of the
      Company are in accordance with accounting principles generally accepted in
      the
      United States and conform to general practices within the banking industry.
      The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions.
      The
      Company’s financial position and results of operations can be affected by these
      estimates and assumptions and are integral to the understanding of reported
      results. Critical accounting policies are those policies that management
      believes are the most important to the portrayal of the Company’s financial
      condition and results, and they require management to make estimates that are
      difficult, subjective, or complex.





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





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





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




27




**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 September 30, 2008 compared to Three Months Ended September 30,
      2007**





***Net
      Income:*** Net
      income for the third quarter of 2008 was $1.42 million, or $0.29 per diluted
      share, compared to $864,000, or $0.17 per diluted share, for the third quarter
      of 2007. This quarterly increase in net income was driven by a $788,000 increase
      in net interest income and a $206,000 increase in non-interest income. These
      increases were offset by an increase of $172,000 in non-interest expense. The
      primary driver of the increase in net interest income was an increase of $18.0
      million in average earning assets, coupled with a 43 basis point increase in
      the
      net interest margin. The increase in non-interest income was driven by the
      sale
      of the real estate of a closed branch office for $243,000.





***Net
      Interest Income:*** Net
      interest income was $4.45 million, an increase of $788,000 or 21.5 percent,
      from
      the 2007 third quarter. As previously mentioned average earning assets increased
      $18.0 million or 3.7 percent over the 12-month period. The increase in earning
      assets is a result of loan growth over the past twelve months of $11.6 million,
      or 3.0 percent, reaching $399.9 million at September 30, 2008. This growth
      was
      entirely organic. Nearly 68 percent of State Bank’s loan portfolio is
      commercial, and virtually all of the Bank’s growth was derived from this sector.
      Loan balances declined during the third quarter of 2008, decreasing $4.52
      million, or 4.48 percent annualized, from the second quarter of 2008. As of
      September 30, 2008, loans were $10.6 million higher than year-end, with
      commercial loan growth leading the way. Year-over-year, the net interest margin
      increased 60 basis points from 2.96 percent for the third quarter 2007 to 3.56
      percent for the third quarter 2008. The 3.56 percent represents a 1 basis point
      increase from the linked quarter of 3.55 percent. This 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.




28





***Provision
      for Loan Losses:*** The
      provision for loan losses was $146,000 in the third quarter of 2008 compared
      to
      a $140,000 provision for the third quarter of 2007. The Company experienced
      an
      increase in losses quarter over quarter, which is reflected in net chargeoffs
      of
      $336,000 compared to $28,000 of net charge-offs in the 2007 third quarter.
      For
      the third quarter ended September 30, 2008, net charge-offs as a percentage
      of
      average loans was 0.33 percent annualized. At quarter end, consolidated
      non-performing assets, including those of RFCBC (the loan workout subsidiary),
      were $6.27 million, or 1.07 percent of total assets compared with $6.43 million,
      or 1.14 percent of total assets for the prior-year third quarter.





*($
                  in Thousands)*
              
              Sept.
                  30,
                2008
              
              June
                  30,
                2008
              
              Sept.
                  30,
                2007Net
                  charge-offs
              
              $
              336
              
              $
              (18
              )
              $
              28Non-performing
                  loans
              
              
              4,659
              
              
              5,141
              
              
              6,361OREO
                  / OAO
              
              
              1,611
              
              
              1,566
              
              
              71Non-performing
                  assets
              
              
              6,270
              
              
              6,707
              
              
              6,432Non-performing
                  assets / Total assets
              
              
              1.07
              %
              
              1.16
              %
              
              1.14
              %Allowance
                  for loan losses / Total loans
              
              
              1.01
              %
              
              1.04
              %
              
              1.01
              %Allowance
                  for loan losses / Non-performing assets
              
              
              64.7
              %
              
              63.3
              %
              
              61.2
              %








***Non-interest
      Income:***  Non-interest
      income was $6.99 million for the third quarter of 2008 compared with $6.78
      million for the prior-year third quarter, an increase of $206,000, or 3.0
      percent. The increase was primarily driven by the increase in the gain on sale
      of assets of $211,000. Customer service fees increased $38,000, or 6.38 percent.
      Non-interest income accounted for approximately 61 percent of Rurban’s total
      third quarter 2008 revenue.





***Non-interest
      Expense:*** Non-interest expense was $9.28 million for the third quarter of 2008, compared
      with $9.11 million for the third quarter of 2007. RDSI took billing for postage
      in-house at the beginning of 2008. The third quarter 2008 expense associated
      with these billings was $179,000, and is offset by non-interest income.
      Additionally, an OREO property was written down to fair market value based
      on a
      current appraisial.




29




**Nine
      Months Ended September 30, 2008 compared to Nine Months Ended September 30,
      2007**




***Net
      Income:*** Rurban
      had net income of $3.89 million, or $0.79 per diluted share, for the nine months
      ended September 30, 2008 compared to $2.35 million or $0.47 per diluted share
      for the nine months ended September 30, 2007. This represents a $1.54 million,
      or 65.4 percent, increase in comparison of the nine-month periods. Significant
      changes from period to period include an increase in net interest income of
      $1.69 million, a $1.28 million increase in non-interest income and a $519,000
      increase in non-interest expense. The increase in net-interest income is due
      to
      significant loan growth and a 32 basis point increase in the margin over the
      last twelve months. The increase in non-interest income and non-interest expense
      is primarily due to the postage revenue and expense taken in-house by RDSI
      at
      the start of 2008. Non-interest income is also bolstered by the addition of
      3
      client banks, signed by RDSI since the end of the 2007 third
      quarter.





***Net
      Interest Income:*** For the
      nine months ended September 30, 2008, net interest income was $12.7 million,
      an
      increase of $1.69 million, or 15.4 percent, from the nine-month period ended
      September 30, 2007. This increase is primarily the result of a 32 basis point
      increase in the year-to-date net interest margin. The strategic decision to
      restructure the balance sheet is benefiting the Company as the net interest
      margin has improved the past four quarters. As mentioned previously, the loan
      portfolio continues to grow, currently funded by low cost FHLB advances. The
      pending acquisition of the National Bank of Montpelier will provide an
      additional source of liquidity and offer Rurban the ability to fund loan growth
      with low cost deposits.





***Provision
      for Loan Losses:*** The
      provision for loan losses was $551,000 for the nine months ended September
      30,
      2008 compared to $379,000 for the nine months ended September 30, 2007. The
      increase in the provision is principally due to loan growth.





***Non-interest
      Income:*** Non-interest income was $21.3 million for the nine months ended September 30,
      2008 compared with $20.0 million for the nine months ended September 30, 2007.
      Of the $1.28 million increase, RDSI contributed $693,000. Approximately $1.46
      million of RDSI’s income is due to the in-house postage billings discussed
      previously. The first nine months of 2008 were also positively impacted by
      the
      one-time recovery of $197,000, $132,000 and $243,000 respectively, from the
      partial recovery of previously written off WorldCom securities, proceeds from
      the sale of equity securities derived from VISA Inc.’s Initial Public Offering
      and the sale of the real estate of a closed branch office.





***Non-interest
      Expense:*** For the
      nine months ended September 30, 2008, total non-interest expense was $28.0
      million compared with $27.5 million for the nine months ended September 30,
      2007. This represents a $519,000, or 1.9 percent, increase period over period.
      Of the overall increase, postage and delivery expenses increased $481,000,
      due
      primarily to the in-house billing expense at RDSI, and salaries and benefits
      increased $241,000. Offsetting these increases were decreases in professional
      fees of $295,000.





**Changes
      in Financial Condition**





**September
      30, 2008 vs. December 31, 2007**





At
      September 30, 2008, total assets were $585.0 million, representing an increase
      of $23.8 million, or 4.2 percent, from December 31, 2007. The increase is
      primarily attributable to an increase of $8.22 million, or 47.9 percent in
      cash
      and cash equivalents. The Company elected to test its liquidity sources over
      the
      end of the quarter as it borrowed money from its corresponding banks and FHLB.
      The funds were left at the Federal Reserve increasing Cash and Due from Banks
      by
      approximately $14.0 million at quarter end. Loan balances increased $10.6
      million , or 2.7 percent. Available-for-sale securities increased $1.77 million,
      or 1.9 percent.




30





Year-
      over-year, average assets increased $21.3 million, or 3.8 percent. Loan growth
      over the past twelve months was approximately $11.6 million, or 3.0 percent,
      reaching $399.9 million at September 30, 2008; this growth was entirely organic.
      Virtually all of the growth in the Bank’s loan portfolio over this period was
      derived from the commercial sector.





At
      September 30, 2008, liabilities totaled $524.9 million, an increase of $23.0
      million since December 31, 2007. Of this increase, significant changes include
      Federal Home Loan Bank advances, which increased $16.2 million (67.6 percent);
      fed funds purchased increased to $5.0 million (there were no fed funds purchased
      at December 31, 2007); repurchase agreements increased $1.5 million (3.6
      percent); other liabilities increased $1.70 million (35.5 percent) and total
      deposits increased $423,000 (0.1 percent). Notes payable decreased $922,000
      (100
      percent). Of the $423,000 increase in total deposits, savings, interest checking
      and money market deposits increased $18.6 million while time deposits decreased
      $18.2 million. The decrease in time deposits was due to excess liquidity which
      allowed management to run off higher cost municipal deposits.





From
      December 31, 2007 to September 30, 2008, total shareholders’ equity increased
      $792,000, or 1.33 percent, to $60.1 million. Of this increase, retained earnings
      increased $2.54 million, which is the result of $3.89 million in net income
      less
      $1.24 million in cash dividends to shareholders. Additional paid-in-capital
      increased $73,000 as the result of stock option expense incurred during the
      year. Accumulated other comprehensive income decreased $1.03 million as the
      result of a decrease in market value of the available-for-sale securities
      portfolio. The stock repurchase plan also reduced capital by $791,000 during
      the
      first nine months of 2008.





**Capital
      Resources**





At
      September 30, 2008, 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
                
                $
                66.6
                
                
                16.5
                %
                $
                32.3
                
                
                8.0
                %
                $
                —
                
                
                N/AState
                    Bank
                
                
                52.8
                
                
                13.5
                
                
                31.2
                
                
                8.0
                
                
                39.0
                
                
                10.0





Both
      the
      Company and State Bank were categorized as well capitalized at September 30,
      2008.




**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 $121.3 million at September 30, 2008
      compared to $111.5 million at December 31, 2007.





The
      Company’s commercial real estate and residential first mortgage portfolio of
      $227.3 million at September 30, 2008 and $211.4 million at December 31, 2007,
      which can and has been used to collateralize borrowings, is an additional source
      of liquidity. Management believes the Company’s current liquidity level, without
      these borrowings, is sufficient to meet its liquidity needs. At September 30,
      2008, all eligible commercial real estate and first mortgage loans were pledged
      under an FHLB blanket lien.




31





The
      cash
      flow statements for the periods presented provide an indication of the Company’s
      sources and uses of cash, as well as an indication of the ability of the Company
      to maintain an adequate level of liquidity. A discussion of the cash flow
      statements for the nine months ended September 30, 2008 and 2007
      follows.





The
      Company experienced positive cash flows from operating activities for the nine
      months ended September 30, 2008 and 2007. Net cash provided from operating
      activities was $9.01 million and $4.07 million, respectively, for the nine
      months ended September 30, 2008 and 2007.





Net
      cash
      flow from investing activities was $(21.0) million and $(22.1) million for
      the
      nine months ended September 30, 2008 and 2007, respectively. The changes in
      net
      cash from investing activities at September 30, 2008 included net change in
      loans of $13.0 million, available-for-sale securities purchases totaling $46.2
      million and purchases of premises, equipment and software totaling $6.84
      million. These cash payments were offset by $42.8 million in proceeds from
      maturities of available-for-sale securities and $2.04 million in proceeds from
      the sale of premises and equipment. The changes in net cash from investing
      activities at September 30, 2007 included net change in loans of $18.4 million,
      available-for-sale security purchases totaling $29.4 million and purchase of
      premises, equipment and software totaling $3.25 million. This was partially
      offset by proceeds from the sales and maturities of available-for-sale
      securities totaling $29.8 million.





Net
      cash
      flow from financing activities was $20.2 million and $8.43 million for the
      nine
      month periods ended September 30, 2008 and 2007, respectively. The 2008
      financing activities included a $18.6 million increase in demand deposits,
      money
      market, interest checking and savings accounts, which was more than offset
      by a
      $18.2 million decrease in certificates of deposits. Proceeds from advances
      from
      the Federal Home Loan Bank totaled $24.0 million, federal funds purchased
      totaled $5.0 million and repurchase agreements increased $1.55 million.
      Offsetting this increase were repayments of Federal Home Loan Bank advances
      of
      $7.77 million, the repayment of notes payable of $922,000, the purchase of
      treasury stock of $791,000 and cash dividends paid to shareholders of $1.24
      million. The net cash provided by financing activities at September 30, 2007
      was
      primarily due to the increase in repurchase agreements of $10.3 million,
      proceeds from Federal Home Loan Bank advances of $9.00 million, federal funds
      purchased totaled $4.40 million and demand deposits, money market, interest
      checking and savings accounts increased $2.75 million. Offsetting this increase
      were repayments of Federal Home Loan Bank advances of $11.0 million,
      certificates of deposits decreased $4.15 million, the repayment of notes payable
      totaling $1.56 million and cash dividends paid to shareholders of $953,000.





**Off-Balance-Sheet
      Borrowing Arrangements:**





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





Approximately
      $121.3 million of the Company’s $227.3 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 September
      30, 2008. Based on the current collateralization requirements of the FHLB,
      approximately $9.2 million of additional borrowing capacity existed at September
      30, 2008.




32




At
      September 30, 2008, the Company had unused federal funds lines totaling $20.5
      million. At December 31, 2007, the Company had $20.9 million in federal fund
      lines. Federal funds borrowed at September 30, 2008 and December 31, 2007
      totaled $5.0 million and $0, respectively. The Company also had $10.2 million
      in
      unpledged securities of which $1.4 million may be used to pledge for additional
      borrowings.





The
      Company’s contractual obligations as of September 30, 2008 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 $40.2 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 new
      Northtowne branch of State Bank of $60,000 per year and a lease on the DCM
      Lansing facility of $108,000 per year. Other long-term liabilities were
      comprised of time deposits of $205.3 million.





**ASSET
      LIABILITY MANAGEMENT**





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





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





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).




33





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





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





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




**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





The
      following table provides information about the Company’s financial instruments
      used for purposes other than trading that are sensitive to changes in interest
      rates as of September 30, 2008. 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.




34





**Principal/Notional
      Amount Maturing or Assumed to Withdraw In:**


**(Dollars
      in Thousands)**


First
                  Year
              
              Years
                  2
                    -
                    5
              
              Thereafter
              
              TotalComparison
                  of 2008 to 2007:Total
                  rate-sensitive assets:At
                  September 30, 2008
              
              $
              162,953
              
              $
              203,109
              
              $
              133,912
              
              $
              499,974At
                  December 31, 2007
              
              
              176,907
              
              
              179,502
              
              
              133,191
              
              
              489,601Increase
                  (decrease)
              
              $
              (13,955
              )
              $
              23,606
              
              $
              721
              
              $
              10,373Total
                  rate-sensitive liabilities:At
                  September 30, 2008
              
              $
              197,622
              
              $
              297,242
              
              $
              21,994
              
              $
              516,858At
                  December 31, 2007
              
              
              231,589
              
              
              241,378
              
              
              21,612
              
              
              494,579Increase
                  (decrease)
              
              $
              (33,967
              )
              $
              55,864
              
              $
              382
              
              $
              22,279





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
      has pushed loan rates lower, necessitating the Company’s ability to generate and
      reprice core deposits downward which has enabled the Company to reduce overall
      funding costs.





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




**Item
      4T. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures





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


35


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





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





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





Changes
      in Internal Control Over Financial Reporting





There
      were no changes in the Company’s internal control over financial reporting (as
      defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
      Company’s fiscal quarter ended September 30, 2008, that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.


36




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




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





**Item
      1A. Risk Factors**




An
      investment in our common shares involves certain risks, including those
      identified and described in “Item 1A. Risk Factors” of Part I of the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2007. These
      risk factors could materially affect the Company’s business, financial condition
      or future results. The
      following are additional risk factors which should be considered along with
      the
      risk factors described in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007.





**Adverse
      conditions in the financial markets may adversely affect our business and
      results of operations.**





The
      U.S.
      economy is experiencing a historic disruption in the financial system which
      has
      impaired generally the availability of credit, reduced confidence in the
      financial and banking sectors, and created significant volatility in all
      financial markets. Continued problems in the U.S. financial markets generally
      and housing markets more specifically, issues related to the availability of
      credit and capital, and related conditions in the financial markets or other
      market issues, could cause further deterioration in economic conditions
      generally, or in the condition of the local markets in which we operate. These
      conditions could materially impact the credit quality of our existing loan
      portfolios and/or our ability to generate loans in the future, which would
      adversely affect our business and results of operations.





**Increases
      in FDIC insurance premiums may adversely affect our net
      income.**





The
      FDIC
      insures deposits at FDIC-insured financial institutions, including State Bank,
      and charges 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 ensures payments of deposits up to
      insured limits from the Deposit Insurance Fund. In October 2008, the FDIC issued
      a proposed rule that would increase premiums paid by insured institutions and
      make other changes to the assessment system. In addition, the FDIC also
      announced the Temporary Liquidity Guarantee Program, pursuant to which it will
      provide 100% deposit insurance coverage for non-interest-bearing transaction
      accounts. The extended coverage is effective immediately and will continue
      through December 31, 2009 unless an institution elects to opt out of the
      extended coverage prior to December 5, 2008. Institutions that remain in the
      program will pay a 10 basis point surcharge on the insured deposits. Increases
      in FDIC insurance premiums will increase our expenses and may adversely affect
      our net income .




37




**New
      laws or regulations adopted in response to the current credit conditions could
      adversely affect our ability to collect on loans.**





In
      response to the current problems in the U.S. financial and housing markets,
      federal or state governments might adopt legislation or regulations reducing
      the
      amount that our customers are required to pay under existing loans or limiting
      our ability to foreclose on collateral .




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




a.
            Not
                applicable




b.
            Not
                applicable




c.
            The
                following table provides information regarding repurchases of the
                Company’s common shares during the three months ended September 30,
                2008:





Period
            
            Total
                Number of Shares Purchased (1)
            
            Average
                Price Paid per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            
            Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plans or Programs (2)July
                1 through July 31, 2008
            
            
            1,517
            
            $
            10.00
            
            
            —
            
            
            136,500August
                1 through August 31, 2008
            
            
            7,507
            
            $
            9.51
            
            
            7,107
            
            
            129,393September
                1 through September 30, 2008
            
            
            1,200
            
            $
            8.98
            
            
            1,200
            
            
            128,193




(1)
            Includes
                shares purchased in the open market by Reliance Financial Services,
                which
                operates as a DBA under the framework of The State Bank and Trust
                Company,
                in its capacity as the administrator of the Company’s Employee Stock
                Ownership and Savings Plan and shares repurchased as part of the
                Company’s
                publicly announced repurchase
                program.




(2)
            On
                April 12, 2007, the Company announced that its Board of Directors
                had
                authorized a stock repurchase program pursuant to which the Company
                may
                purchase up to 250,000 common shares over the ensuing 15-month period.
                On
                July 22, 2008, the repurchase program was extended for an additional
                twelve months with no change in the number of shares the Company
                is
                authorized to repurchase.





**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




38





**Item
      6. Exhibits**





Exhibits





31.1
      -
      Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
      Officer)




31.2
      -
      Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
      Officer)




32.1
      -
      Section 1350 Certification (Principal Executive Officer)




32.2
      -
      Section 1350 Certification (Principal Financial Officer)


39





**SIGNATURES**





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


RURBAN
                FINANCIAL CORP.Date:
              November
              14, 2008
            By
            /s/
              Kenneth A. JoyceKenneth
                A. Joyce
              President
                & Chief Executive Officer


By
            /s/
                Duane L. SinnDuane
                  L. Sinn
                Executive
                  Vice President &
                Chief
                  Financial Officer


40