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,
2010


OR





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


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from
_________________to___________________________





Commission
file number 0-13507





RURBAN
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





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





401 Clinton Street,
Defiance, Ohio 43512


(Address
of principal executive offices)


(Zip
Code)





(419)
783-8950


(Registrant’s
telephone number, including area code)





None


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





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




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




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




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




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





Common
      Shares, without par value
              4,861,779
      shares(Class)
              (Outstanding
      at November 15, 2010)










RURBAN
FINANCIAL CORP.





FORM
10-Q





TABLE
OF CONTENTS








PART I – FINANCIAL
    INFORMATIONItem
      1.
                      Financial
      Statements
                      3Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      30Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      38Item
      4.
                      Controls
      and Procedures
                      39PART II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      40Item
      1A.
                      Risk
      Factors
                      40Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      41Item
      3.
                      Defaults
      Upon Senior Securities
                      41Item
      4.
                      [Reserved]
                      42Item
      5.
                      Other
      Information
                      42Item
      6.
                      Exhibits
                      42Signatures
                      43




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, results of operations
and cash flows for the interim periods presented. Results for the nine months
ended September 30, 2010 are impacted by significant software and equipment
impairments related to the Company’s data processing subsidiary. Results of
operations for the three and nine months ended September 30, 2010 are not
necessarily indicative of results for the complete year.


3


Rurban
Financial Corp.




Condensed
Consolidated Balance Sheets


September
30, 2010 and December 31, 2009




September 30
                  
                  
                  December 312010
                  
                  
                  2009(Unaudited)ASSETSCash
      and due from banks
                  
                  $
                  60,600,672
                  
                  
                  $
                  24,824,785Available-for-sale
      securities
                  
                  
                  115,993,828
                  
                  
                  
                  105,083,112Loans
      held for sale
                  
                  
                  13,453,782
                  
                  
                  
                  16,857,648Loans,
      net of unearned income
                  
                  
                  424,995,825
                  
                  
                  
                  452,557,581Allowance
      for loan losses
                  
                  
                  (6,451,422
                  )
                  
                  
                  (7,030,178
                  )Premises
      and equipment, net
                  
                  
                  14,999,354
                  
                  
                  
                  16,993,640Purchased
      software
                  
                  
                  545,606
                  
                  
                  
                  5,338,319Federal
      Reserve and Federal Home Loan Bank Stock
                  
                  
                  3,748,250
                  
                  
                  
                  3,748,250Foreclosed
      assets held for sale, net
                  
                  
                  1,946,653
                  
                  
                  
                  1,767,953Accrued
      interest receivable
                  
                  
                  2,560,938
                  
                  
                  
                  2,324,868Goodwill
                  
                  
                  21,414,790
                  
                  
                  
                  21,414,790Core
      deposits and other intangibles
                  
                  
                  4,377,111
                  
                  
                  
                  4,977,513Cash
      value of life insurance
                  
                  
                  13,107,086
                  
                  
                  
                  12,792,045Other
      assets
                  
                  
                  9,897,284
                  
                  
                  
                  11,398,776Total
      assets
                  
                  $
                  681,189,757
                  
                  
                  $
                  673,049,102





See
notes to condensed consolidated financial statements (unaudited)





Note:
The balance sheet at December 31, 2009 has been derived from the audited
consolidated financial statements at that date


4


Rurban
Financial Corp.




Condensed
Consolidated Balance Sheets


September
30, 2010 and December 31, 2009




September 30
                        
                        
                        December 312010
                        
                        
                        2009(Unaudited)LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNon
      interest bearing demand
                        
                        $
                        64,671,378
                        
                        
                        $
                        57,229,795Interest
      bearing NOW
                        
                        
                        99,647,367
                        
                        
                        
                        87,511,973Savings
                        
                        
                        46,092,866
                        
                        
                        
                        43,321,364Money
      Market
                        
                        
                        87,407,976
                        
                        
                        
                        86,621,953Time
      Deposits
                        
                        
                        224,501,334
                        
                        
                        
                        216,557,067Total
      deposits
                        
                        
                        522,320,921
                        
                        
                        
                        491,242,152Notes
      payable
                        
                        
                        3,368,266
                        
                        
                        
                        2,146,776Advances
      from Federal Home Loan Bank
                        
                        
                        25,429,671
                        
                        
                        
                        35,266,510Fed
      Funds Purchased
                        
                        
                        -
                        
                        
                        
                        5,000,000Repurchase
      Agreements
                        
                        
                        50,117,031
                        
                        
                        
                        47,042,820Trust
      preferred securities
                        
                        
                        20,620,000
                        
                        
                        
                        20,620,000Accrued
      interest payable
                        
                        
                        1,683,116
                        
                        
                        
                        1,507,521Other
      liabilities
                        
                        
                        3,582,414
                        
                        
                        
                        8,515,668Total
      liabilities
                        
                        
                        627,121,419
                        
                        
                        
                        611,341,447Shareholders'
      EquityCommon
      stock
                        
                        
                        12,568,583
                        
                        
                        
                        12,568,583Additional
      paid-in capital
                        
                        
                        15,208,434
                        
                        
                        
                        15,186,042Retained
      earnings
                        
                        
                        25,386,403
                        
                        
                        
                        34,415,316Accumulated
      other comprehensive income (loss)
                        
                        
                        2,674,229
                        
                        
                        
                        1,307,025Treasury
      stock
                        
                        
                        (1,769,311
                        )
                        
                        
                        (1,769,311
                        )Total
      shareholders' equity
                        
                        
                        54,068,338
                        
                        
                        
                        61,707,655Total
      liabilities and shareholders' equity
                        
                        $
                        681,189,757
                        
                        
                        $
                        673,049,102




See
notes to condensed consolidated financial statements (unaudited)





Note:
The balance sheet at December 31, 2009 has been derived from the audited
consolidated financial statements at that date.


5


Rurban
Financial Corp.




Condensed
Consolidated Statements of Operations (Unaudited)


Three
Months Ended




Three Months EndedSeptember 30,2010
                      
                      
                      2009Interest
      incomeLoansTaxable
                      
                      $
                      6,281,157
                      
                      
                      $
                      6,884,515Tax-exempt
                      
                      
                      13,664
                      
                      
                      
                      20,944SecuritiesTaxable
                      
                      
                      596,362
                      
                      
                      
                      944,579Tax-exempt
                      
                      
                      353,755
                      
                      
                      
                      294,716Other
                      
                      
                      24
                      
                      
                      
                      41,621Total
      interest income
                      
                      
                      7,244,962
                      
                      
                      
                      8,186,375Interest
      expenseDeposits
                      
                      
                      1,275,607
                      
                      
                      
                      1,559,730Other
      borrowings
                      
                      
                      32,367
                      
                      
                      
                      43,745Retail
      Repurchase Agreements
                      
                      
                      436,369
                      
                      
                      
                      437,419Federal
      Home Loan Bank advances
                      
                      
                      231,122
                      
                      
                      
                      417,359Trust
      preferred securities
                      
                      
                      388,854
                      
                      
                      
                      391,407Total
      interest expense
                      
                      
                      2,364,319
                      
                      
                      
                      2,849,660Net
      interest income
                      
                      
                      4,880,643
                      
                      
                      
                      5,336,715Provision
      for loan losses
                      
                      
                      898,570
                      
                      
                      
                      898,050Net
      interest income after provision for loan losses
                      
                      
                      3,982,073
                      
                      
                      
                      4,438,665Non-interest
      incomeData
      service fees
                      
                      
                      2,044,400
                      
                      
                      
                      4,806,359Trust
      fees
                      
                      
                      650,511
                      
                      
                      
                      644,427Customer
      service fees
                      
                      
                      643,816
                      
                      
                      
                      700,042Net
      gain on sales of loans
                      
                      
                      1,560,703
                      
                      
                      
                      722,234Loan
      servicing fees
                      
                      
                      188,334
                      
                      
                      
                      126,265Loss
      on sale or disposal of assets
                      
                      
                      (128,985
                      )
                      
                      
                      (52,976
                      )Other
      income
                      
                      
                      168,158
                      
                      
                      
                      129,360Total
      non-interest income
                      
                      
                      5,126,937
                      
                      
                      
                      7,075,711




See notes to condensed consolidated
financial statements (unaudited)




6




Rurban
Financial Corp.




Condensed
Consolidated Statements of Operations (Unaudited)


Three
Months Ended





Three
      Months EndedSeptember 30,2010
                    
                    
                    2009Non-interest
      expenseSalaries
      and employee benefits
                    
                    $
                    4,058,316
                    
                    
                    $
                    5,422,005Net
      occupancy expense
                    
                    
                    486,695
                    
                    
                    
                    568,597FDIC
      Insurance expense
                    
                    
                    259,646
                    
                    
                    
                    183,935Equipment
      expense
                    
                    
                    872,681
                    
                    
                    
                    2,041,339Data
      processing fees
                    
                    
                    211,129
                    
                    
                    
                    151,320Professional
      fees
                    
                    
                    619,430
                    
                    
                    
                    705,415Marketing
      expense
                    
                    
                    139,987
                    
                    
                    
                    232,294Printing
      and office supplies
                    
                    
                    111,414
                    
                    
                    
                    104,036Telephone
      and communication
                    
                    
                    267,344
                    
                    
                    
                    406,673Postage
      and delivery expense
                    
                    
                    388,666
                    
                    
                    
                    511,525State,
      local and other taxes
                    
                    
                    154,391
                    
                    
                    
                    235,067Employee
      expense
                    
                    
                    147,739
                    
                    
                    
                    293,634Other
      expenses
                    
                    
                    1,613,353
                    
                    
                    
                    598,275Total
      non-interest expense
                    
                    
                    9,330,791
                    
                    
                    
                    11,454,115Income
      (loss) before income tax expense
                    
                    
                    (221,781
                    )
                    
                    
                    60,261Income
      tax expense benefit
                    
                    
                    (247,696
                    )
                    
                    
                    (99,421
                    )Net
      income (loss)
                    
                    $
                    25,915
                    
                    
                    $
                    159,682Earnings
      (loss) per common share:Basic
                    
                    $
                    0.01
                    
                    
                    $
                    0.03Diluted
                    
                    $
                    0.01
                    
                    
                    $
                    0.03





See
notes to condensed consolidated financial statements
(unaudited)


7


Rurban
Financial Corp.




Condensed
Consolidated Statements of Operations (Unaudited)


Nine
Months Ended





Nine Months EndedSeptember 30,2010
                          
                          
                          2009Interest
      incomeLoansTaxable
                          
                          $
                          19,442,383
                          
                          
                          $
                          20,554,775Tax-exempt
                          
                          
                          49,960
                          
                          
                          
                          71,791SecuritiesTaxable
                          
                          
                          1,679,203
                          
                          
                          
                          3,158,649Tax-exempt
                          
                          
                          1,055,707
                          
                          
                          
                          766,931Other
                          
                          
                          211
                          
                          
                          
                          71,498Total
      interest income
                          
                          
                          22,227,464
                          
                          
                          
                          24,623,644Interest
      expenseDeposits
                          
                          
                          3,935,731
                          
                          
                          
                          5,115,379Other
      borrowings
                          
                          
                          101,145
                          
                          
                          
                          91,548Retail
      Repurchase Agreements
                          
                          
                          1,295,994
                          
                          
                          
                          1,296,242Federal
      Home Loan Bank advances
                          
                          
                          872,947
                          
                          
                          
                          1,221,487Trust
      preferred securities
                          
                          
                          1,178,502
                          
                          
                          
                          1,185,021Total
      interest expense
                          
                          
                          7,384,319
                          
                          
                          
                          8,909,677Net
      interest income
                          
                          
                          14,843,145
                          
                          
                          
                          15,713,967Provision
      for loan losses - Bank Only
                          
                          
                          5,788,713
                          
                          
                          
                          2,192,042Provision
      for loan losses - RDSI
                          
                          
                          3,000,000
                          
                          
                          
                          -Net
      interest income after provisionfor
      loan losses
                          
                          
                          6,054,432
                          
                          
                          
                          13,521,925Non-interest
      incomeData
      service fees
                          
                          
                          8,682,575
                          
                          
                          
                          14,734,942Trust
      fees
                          
                          
                          1,883,994
                          
                          
                          
                          1,869,083Customer
      service fees
                          
                          
                          1,846,161
                          
                          
                          
                          1,923,744Net
      gain on sales of loans
                          
                          
                          2,886,764
                          
                          
                          
                          2,738,626Net
      realized gain on sales of securities
                          
                          
                          451,474
                          
                          
                          
                          477,591Investment
      securities recoveries
                          
                          
                          73,774
                          
                          
                          
                          -Loan
      servicing fees
                          
                          
                          472,424
                          
                          
                          
                          298,001Loss
      on sale or disposal of assets
                          
                          
                          (159,066
                          )
                          
                          
                          (95,390
                          )Other
      income
                          
                          
                          482,691
                          
                          
                          
                          474,410Total
      non-interest income
                          
                          
                          16,620,791
                          
                          
                          
                          22,421,007




See
notes to condensed consolidated financial statements
(unaudited)


8


Rurban
Financial Corp.




Condensed
Consolidated Statements of Operations (Unaudited)


Nine
Months Ended





Nine Months EndedSeptember 30,2010
                  
                  
                  2009Non-interest
      expenseSalaries
      and employee benefits
                  
                  
                  14,064,591
                  
                  
                  
                  15,644,731Net
      occupancy expense
                  
                  
                  1,639,386
                  
                  
                  
                  1,764,054FDIC
      Insurance expense
                  
                  
                  676,462
                  
                  
                  
                  572,598Equipment
      expense
                  
                  
                  5,423,343
                  
                  
                  
                  5,353,637Fixed
      asset impairment expense
                  
                  
                  4,892,231
                  
                  
                  
                  -Data
      processing fees
                  
                  
                  635,393
                  
                  
                  
                  495,782Professional
      fees
                  
                  
                  1,823,449
                  
                  
                  
                  1,846,458Marketing
      expense
                  
                  
                  330,213
                  
                  
                  
                  655,597Printing
      and office supplies
                  
                  
                  369,842
                  
                  
                  
                  435,913Telephone
      and communication
                  
                  
                  992,891
                  
                  
                  
                  1,212,901Postage
      and delivery expense
                  
                  
                  1,415,529
                  
                  
                  
                  1,635,037State,
      local and other taxes
                  
                  
                  118,835
                  
                  
                  
                  701,120Employee
      expense
                  
                  
                  654,968
                  
                  
                  
                  810,776OREO
      Impairment
                  
                  
                  215,000
                  
                  
                  
                  -Other
      expenses
                  
                  
                  3,959,958
                  
                  
                  
                  1,908,592Total
      non-interest expense
                  
                  
                  37,212,091
                  
                  
                  
                  33,037,196Income
      (loss) before income tax expense
                  
                  
                  (14,536,868
                  )
                  
                  
                  2,905,736Income
      tax expense (benefit)
                  
                  
                  (5,507,954
                  )
                  
                  
                  638,915Net income
      (loss)
                  
                  $
                  (9,028,914
                  )
                  
                  $
                  2,266,821Earnings
      (loss) per common share:Basic
                  
                  $
                  (1.86
                  )
                  
                  $
                  0.46Diluted
                  
                  $
                  (1.86
                  )
                  
                  $
                  0.46





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,
                      2010
                    
                    
                    September
                      30, 2009
                    
                    
                    September
                      30, 2010
                    
                    
                    September 30,
                      2009Balance
      at beginning of period
                    
                    $
                    53,201,167
                    
                    
                    $
                    63,412,713
                    
                    
                    $
                    61,707,655
                    
                    
                    $
                    61,662,004Net
      Income / (Loss)
                    
                    
                    25,915
                    
                    
                    
                    159,682
                    
                    
                    
                    (9,028,914
                    )
                    
                    
                    2,266,821Unrealized
      gains (losses) on securitiesUnrealized
      holding gains (losses) arising during the year, net of tax
                    
                    
                    811,939
                    
                    
                    
                    1,520,345
                    
                    
                    
                    1,665,178
                    
                    
                    
                    2,402,777Less:
      reclassification adjustment for gains realized in net income, net of
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    297,974
                    
                    
                    
                    282,210Total
      comprehensive income / (loss)
                    
                    
                    837,854
                    
                    
                    
                    1,680,027
                    
                    
                    
                    (7,661,710
                    )
                    
                    
                    4,387,388Cash
      dividend
                    
                    
                    -
                    
                    
                    
                    (437,641
                    )
                    
                    
                    -
                    
                    
                    
                    (1,314,932
                    )Purchase
      of treasury shares
                    
                    
                    -
                    
                    
                    
                    (16,797
                    )
                    
                    
                    -
                    
                    
                    
                    (156,291
                    )Share-based
      compensation
                    
                    
                    29,317
                    
                    
                    
                    29,802
                    
                    
                    
                    22,393
                    
                    
                    
                    89,935Balance
      at end of period
                    
                    $
                    54,068,338
                    
                    
                    $
                    64,668,104
                    
                    
                    $
                    54,068,338
                    
                    
                    $
                    64,668,104Dividends
      declared per share
                    
                    $
                    -
                    
                    
                    $
                    0.09
                    
                    
                    $
                    -
                    
                    
                    $
                    0.27





See
notes to condensed consolidated financial statements
(unaudited)


10


Rurban
Financial Corp.




Condensed
Consolidated Statements of Cash Flows (Unaudited)


Nine
Months Ended




Nine Months EndedSeptember30,2010
                
                
                September30,2009Operating
      ActivitiesNet
      Income/(loss)
                
                $
                (9,028,914
                )
                
                $
                2,266,821Items
      not requiring (providing) cashDepreciation
      and amortization
                
                
                3,554,271
                
                
                
                3,077,533Provision
      for loan losses
                
                
                8,788,713
                
                
                
                2,192,042Expense
      of share-based compensation plan
                
                
                22,392
                
                
                
                89,935Amortization
      of premiums and discounts on securities
                
                
                1,091,077
                
                
                
                476,693Amortization
      of intangible assets
                
                
                600,402
                
                
                
                658,428Deferred
      income taxes
                
                
                (3,537,222
                )
                
                
                (1,231,352
                )Proceeds
      from sale of loans held for sale
                
                
                171,718,730
                
                
                
                258,045,357Originations
      of loans held for sale
                
                
                (165,428,100
                )
                
                
                (262,853,116
                )Gain
      from sale of loans
                
                
                (2,886,764
                )
                
                
                (2,738,626
                )Gain
      on available for sale securities
                
                
                (451,474
                )
                
                
                (477,591
                )Software
      and fixed asset impairment
                
                
                4,892,231
                
                
                
                -OREO
      Impairment
                
                
                215,000
                
                
                
                -Loss
      on sale of foreclosed assets
                
                
                139,699
                
                
                
                66,116Loss
      on sale of fixed assets
                
                
                19,367
                
                
                
                29,274Changes
      inInterest
      receivable
                
                
                (236,070
                )
                
                
                112,729Other
      assets
                
                
                1,069,273
                
                
                
                (1,017,991
                )Interest
      payable and other liabilities
                
                
                (2,041,941
                )
                
                
                (2,101,088
                )Net
      cash from / (used in) operating activities
                
                
                8,500,670
                
                
                
                (3,404,836
                )Investing
      ActivitiesPurchase
      of available-for-sale securities
                
                
                (52,231,341
                )
                
                
                (49,982,386
                )Proceeds
      from maturities of available-for-sale securities
                
                
                32,756,818
                
                
                
                28,400,454Proceeds
      from sales of available-for-sale-securities
                
                
                9,995,724
                
                
                
                15,790,787Proceeds
      from sales of Fed Stock
                
                
                -
                
                
                
                700,000Purchase
      of FHLB Stock
                
                
                -
                
                
                
                (204,150
                )Net
      change in loans
                
                
                13,572,294
                
                
                
                (494,016
                )Purchase
      of premises and equipment and software
                
                
                (1,564,571
                )
                
                
                (2,167,462
                )Proceeds
      from sales of premises and equipment
                
                
                (94,932
                )
                
                
                58,962Proceeds
      from sale of foreclosed assets
                
                
                4,303,594
                
                
                
                405,230Net
      cash from / (used in) investing activities
                
                $
                6,737,586
                
                
                $
                (7,492,581
                )




See
notes to condensed consolidated financial statements (unaudited)





11




Rurban
Financial Corp.




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


Nine
Months Ended





Nine Months EndedSeptember 30, 2010
                    
                    
                    September 30, 2009Financing
      ActivitiesNet
      increase (decrease) in demand deposits, money market, interest
      checking and savings accounts
                    
                    $
                    23,134,502
                    
                    
                    $
                    26,183,827Net
      decrease in certificates of deposit
                    
                    
                    7,944,267
                    
                    
                    
                    (18,112,198
                    )Net
      decrease in securities sold under agreements to repurchase
                    
                    
                    3,074,211
                    
                    
                    
                    2,712,668Net
      decrease in federal funds purchased
                    
                    
                    (5,000,000
                    )
                    
                    
                    -Proceeds
      from Federal Home Loan Bank advances
                    
                    
                    2,000,000
                    
                    
                    
                    7,500,000Repayment
      of Federal Home Loan Bank advances
                    
                    
                    (11,836,839
                    )
                    
                    
                    (4,277,970
                    )Proceeds
      from notes payable
                    
                    
                    2,250,000
                    
                    
                    
                    4,200,000Repayment
      of notes payable
                    
                    
                    (1,028,510
                    )
                    
                    
                    (2,842,184
                    )Purchase
      of treasury stock
                    
                    
                    -
                    
                    
                    
                    (156,291
                    )Dividends
      paid
                    
                    
                    -
                    
                    
                    
                    (1,314,932
                    )Net
      cash from / (used in) financing activities
                    
                    
                    20,537,631
                    
                    
                    
                    13,892,920Increase
      in Cash and Cash Equivalents
                    
                    
                    35,775,887
                    
                    
                    
                    2,995,503Cash
      and Cash Equivalents, Beginning of Year
                    
                    
                    24,824,785
                    
                    
                    
                    28,059,532Cash
      and Cash Equivalents, End of Period
                    
                    $
                    60,600,672
                    
                    
                    $
                    31,055,035Supplemental
      Cash Flows InformationInterest
      Paid
                    
                    $
                    7,208,724
                    
                    
                    $
                    9,493,504Transfer
      of loans to foreclosed assets
                    
                    $
                    4,621,993
                    
                    
                    $
                    822,113




See
notes to condensed consolidated financial statements
(unaudited)


12


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE
A—BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The financial
statements reflect all adjustments that are, in the opinion of management,
necessary to fairly present the financial position, results of operations and
cash flows of Rurban Financial Corp. (the “Company”). Results for the nine
months ended September 30, 2010 are impacted by significant software and
equipment impairments related to the Company’s data processing subsidiary.
Results of operations for the three and nine months ended September 30, 2010 are
not necessarily indicative of results for the complete year.





The
condensed consolidated balance sheet of the Company as of December 31, 2009 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, 2009.





NOTE
B—EARNINGS PER SHARE





Earnings
per share (EPS) has been computed based on the weighted average number of shares
outstanding during the periods presented. For the periods ended September 30,
2010 and 2009, share based awards totaling 365,102 and 311,713 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 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Basic
      earnings per share
                  
                  
                  4,861,779
                  
                  
                  
                  4,862,574
                  
                  
                  
                  4,861,779
                  
                  
                  
                  4,868,800Diluted
      earnings per share
                  
                  
                  4,861,779
                  
                  
                  
                  4,866,563
                  
                  
                  
                  4,861,779
                  
                  
                  
                  4,871,574





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





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





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Commercial
                    
                    $
                    72,402,590
                    
                    
                    $
                    84,462,860Commercial
      real estate
                    
                    
                    177,048,827
                    
                    
                    
                    179,909,135Agricultural
                    
                    
                    37,222,877
                    
                    
                    
                    41,485,301Residential
      real estate
                    
                    
                    86,134,638
                    
                    
                    
                    92,971,599Consumer
                    
                    
                    52,206,188
                    
                    
                    
                    53,655,238Lease
      financing
                    
                    
                    249,273
                    
                    
                    
                    221,190Total
      loans
                    
                    
                    425,264,393
                    
                    
                    
                    452,885,323LessNet
      deferred loan fees, premiums and discounts
                    
                    
                    (268,568
                    )
                    
                    
                    (327,742
                    )Loans,
      net of unearned income
                    
                    $
                    424,995,825
                    
                    
                    $
                    452,557,581Allowance
      for loan losses
                    
                    $
                    (6,451,422
                    )
                    
                    $
                    (7,030,178
                    )




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, 2010 and 2009:





Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Balance,
      beginning of period
                
                $
                7,000,513
                
                
                $
                5,873,146
                
                
                $
                7,030,178
                
                
                $
                5,020,197Provision
      charged to expense
                
                
                898,570
                
                
                
                898,050
                
                
                
                8,788,713
                
                
                
                2,192,042Recoveries
                
                
                134,869
                
                
                
                45,528
                
                
                
                375,375
                
                
                
                127,443Loans
      charged off
                
                
                (1,582,530
                )
                
                
                (882,559
                )
                
                
                (9,742,844
                )
                
                
                (1,405,517
                )Balance,
      end of period
                
                $
                6,451,422
                
                
                $
                5,934,165
                
                
                $
                6,451,422
                
                
                $
                5,934,165





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





September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Non-accrual
      loans
                  
                  $
                  10,106,547
                  
                  
                  $
                  18,543,368Accruing
      loans which are contractually past due 90 days or more as to interest or
      principal payments
                  
                  
                  0
                  
                  
                  
                  0Total
      non-performing loans
                  
                  $
                  10,106,547
                  
                  
                  $
                  18,543,368





Individual
loans determined to be impaired were as follows:





September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Loans
      with no allowance for loan losses allocated
                  
                  $
                  3,549,173
                  
                  
                  $
                  1,099,912Loans
      with allowance for loan losses allocated
                  
                  
                  4,147,730
                  
                  
                  
                  14,912,035Total
      impaired loans
                  
                  $
                  7,696,903
                  
                  
                  $
                  16,011,947Amount
      of allowance for loan losses allocated
                  
                  $
                  1,616,351
                  
                  
                  $
                  3,041,967




NOTE
D – NEW ACCOUNTING PRONOUNCEMENTS




In
June 2009, the Financial Accounting Standards Board (the “FASB”) issued new
guidance relating to the accounting for transfers of financial assets. The new
guidance was adopted into the FASB’s Accounting Standards Codification (“ASC”)
in December 2009 through the issuance of Accounting Standards Update
(“ASU”) 2009-16. The new standard provides guidance to improve the relevance,
representational faithfulness, and comparability of the information that an
entity provides in its financial statements about: a transfer of financial
assets; the effects of a transfer of financial assets on the entity’s financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. The Company has adopted
the new guidance for 2010 and has determined it to have no effect on the
consolidated financial statements.


14





FASB ASU
2010-20, “Receivables: Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses” (ASC Topic 310), issued on July
21, 2010, concerns improved disclosures regarding the credit quality in a
financial institution’s loan portfolio. The guidance requires additional
disaggregation of the credit portfolio by portfolio segment and class of
receivable, a revised roll forward of the allowance for credit losses,
presentation of the credit portfolio by credit quality indicators, an aging
schedule of past due receivables, disclosure of troubled debt restructurings and
purchases and sales of receivables by portfolio segment. The period-end
disclosures are effective for periods ending on or after December 15, 2010
(December 31, 2010 for the Company). The activity disclosures are effective for
periods beginning on or after December 15, 2010 (January 1, 2011 for the
Company). The adoption of FASB ASU 2010-20 is not expected to have a material
effect on the Company’s financial condition or results of
operations.




NOTE
E – SEGMENT INFORMATION




The
Company has two reportable segments: (1) banking; and (2) data processing, which
are determined by the products and services offered. “Other” segment information
includes the accounts of the holding company, Rurban Financial Corp., which
provides management and operational services to its subsidiaries. Segment
results for the three and nine months ended September 30, 2010 and 2009 were as
follows:


15


NOTE E —
SEGMENT INFORMATION





As of and
for the three months ended September 30, 2010





Data
                            
                            
                            
                            
                            
                            Total
                            
                            
                            Intersegment
                            
                            
                            ConsolidatedIncome statement
information
                            
                            Banking
                            
                            
                            Processing
                            
                            
                            Other
                            
                            
                            Segments
                            
                            
                            Elimination
                            
                            
                            TotalsNet
      interest income (expense)
                            
                            $
                            5,336,846
                            
                            
                            $
                            (95,642
                            )
                            
                            $
                            (360,561
                            )
                            
                            $
                            4,880,643
                            
                            
                            
                            
                            
                            $
                            4,880,643Non-interest
      income - externalcustomers
                            
                            
                            3,072,667
                            
                            
                            
                            2,033,803
                            
                            
                            
                            20,466
                            
                            
                            
                            5,126,936
                            
                            
                            
                            
                            
                            
                            5,126,936Non-interest
      income - other segments
                            
                            
                            23,399
                            
                            
                            
                            297,671
                            
                            
                            
                            -
                            
                            
                            
                            321,070
                            
                            
                            
                            (321,070
                            )
                            
                            
                            -Total
      revenue
                            
                            
                            8,432,912
                            
                            
                            
                            2,235,832
                            
                            
                            
                            (340,095
                            )
                            
                            
                            10,328,649
                            
                            
                            
                            (321,070
                            )
                            
                            
                            10,007,579Non-interest
      expense
                            
                            
                            6,985,683
                            
                            
                            
                            2,317,726
                            
                            
                            
                            348,452
                            
                            
                            
                            9,651,861
                            
                            
                            
                            (321,070
                            )
                            
                            
                            9,330,791Significant
      non-cash items:Depreciation
      and amortization
                            
                            
                            235,390
                            
                            
                            
                            555,208
                            
                            
                            
                            12,977
                            
                            
                            
                            803,575
                            
                            
                            
                            -
                            
                            
                            
                            803,575Provision
      for loan losses
                            
                            
                            898,570
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            898,570
                            
                            
                            
                            -
                            
                            
                            
                            898,570Income
      tax expense (benefit)
                            
                            
                            244
                            
                            
                            
                            (27,803
                            )
                            
                            
                            (220,137
                            )
                            
                            
                            (247,696
                            )
                            
                            
                            -
                            
                            
                            
                            (247,696
                            )Segment
      profit (loss)
                            
                            $
                            548,415
                            
                            
                            $
                            (54,091
                            )
                            
                            $
                            (468,410
                            )
                            
                            $
                            25,914
                            
                            
                            $
                            -
                            
                            
                            $
                            25,914Balance sheet informationTotal
      assets
                            
                            $
                            668,817,793
                            
                            
                            $
                            12,150,499
                            
                            
                            $
                            5,439,547
                            
                            
                            $
                            686,407,839
                            
                            
                            $
                            (5,218,082
                            )
                            
                            $
                            681,189,757Goodwill
      and intangibles
                            
                            $
                            18,991,531
                            
                            
                            $
                            6,800,370
                            
                            
                            $
                            -
                            
                            
                            $
                            25,791,901
                            
                            
                            $
                            -
                            
                            
                            $
                            25,791,901Premises
      and equipment expenditures
                            
                            $
                            253,022
                            
                            
                            $
                            17,250
                            
                            
                            $
                            -
                            
                            
                            $
                            270,272
                            
                            
                            $
                            -
                            
                            
                            $
                            270,272




16




NOTE E —
SEGMENT INFORMATION





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





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


17


NOTE E —
SEGMENT INFORMATION





As of and
for the nine months ended September 30, 2010





Data
                      
                      
                      
                      
                      
                      Total
                      
                      
                      Intersegment
                      
                      
                      ConsolidatedIncomestatementinformation
                      
                      Banking
                      
                      
                      Processing
                      
                      
                      Other
                      
                      
                      Segments
                      
                      
                      Elimination
                      
                      
                      TotalsNet
      interest income (expense)
                      
                      $
                      16,317,471
                      
                      
                      $
                      (367,603
                      )
                      
                      $
                      (1,106,723
                      )
                      
                      $
                      14,843,145
                      
                      
                      
                      
                      
                      $
                      14,843,145Non-interest
      income - externalcustomers
                      
                      
                      7,850,469
                      
                      
                      
                      8,671,978
                      
                      
                      
                      98,343
                      
                      
                      
                      16,620,790
                      
                      
                      
                      
                      
                      
                      16,620,790Non-interest
      income - other segments
                      
                      
                      73,209
                      
                      
                      
                      893,824
                      
                      
                      
                      428,773
                      
                      
                      
                      1,395,806
                      
                      
                      
                      (1,395,806
                      )
                      
                      
                      -Total
      revenue
                      
                      
                      24,241,149
                      
                      
                      
                      9,198,199
                      
                      
                      
                      (579,607
                      )
                      
                      
                      32,859,741
                      
                      
                      
                      (1,395,806
                      )
                      
                      
                      31,463,935Non-interest
      expense
                      
                      
                      19,687,929
                      
                      
                      
                      17,563,271
                      
                      
                      
                      1,356,697
                      
                      
                      
                      38,607,897
                      
                      
                      
                      (1,395,806
                      )
                      
                      
                      37,212,091Significant
      non-cash items:Depreciation
      and amortization
                      
                      
                      741,837
                      
                      
                      
                      3,120,117
                      
                      
                      
                      44,489
                      
                      
                      
                      3,906,443
                      
                      
                      
                      -
                      
                      
                      
                      3,906,443Fixed
      asset & software impairment
                      
                      
                      -
                      
                      
                      
                      4,892,231
                      
                      
                      
                      -
                      
                      
                      
                      4,892,231
                      
                      
                      
                      -
                      
                      
                      
                      4,892,231Provision
      for loan losses
                      
                      
                      5,788,713
                      
                      
                      
                      3,000,000
                      
                      
                      
                      -
                      
                      
                      
                      8,788,713
                      
                      
                      
                      -
                      
                      
                      
                      8,788,713Income
      tax expense (benefit)
                      
                      
                      (842,714
                      )
                      
                      
                      (3,986,484
                      )
                      
                      
                      (678,756
                      )
                      
                      
                      (5,507,954
                      )
                      
                      
                      -
                      
                      
                      
                      (5,507,954
                      )Segment
      profit (loss)
                      
                      $
                      (392,779
                      )
                      
                      $
                      (7,378,588
                      )
                      
                      $
                      (1,257,548
                      )
                      
                      $
                      (9,028,915
                      )
                      
                      $
                      -
                      
                      
                      $
                      (9,028,915
                      )Balance
      sheet informationTotal
      assets
                      
                      $
                      668,817,793
                      
                      
                      $
                      12,150,499
                      
                      
                      $
                      5,439,547
                      
                      
                      $
                      686,407,839
                      
                      
                      $
                      (5,218,082
                      )
                      
                      $
                      681,189,757Goodwill
      and intangibles
                      
                      $
                      18,991,531
                      
                      
                      $
                      6,800,370
                      
                      
                      $
                      -
                      
                      
                      $
                      25,791,901
                      
                      
                      $
                      -
                      
                      
                      $
                      25,791,901Premises
      and equipment expenditures
                      
                      $
                      411,571
                      
                      
                      $
                      1,153,000
                      
                      
                      $
                      -
                      
                      
                      $
                      1,564,571
                      
                      
                      $
                      -
                      
                      
                      $
                      1,564,571


18




NOTE E —
SEGMENT INFORMATION





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





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


19





NOTE
F – FAIR VALUE OF ASSETS AND LIABILITIES





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





ASC 820
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:





Level 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 in active markets; quoted prices for identical or similar
      assets or liabilities 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 the Company’s available-for-sale securities is determined by various
valuation methodologies. Level 2 securities include U.S. treasury and government
agencies, mortgage-backed securities, and obligations of political and state
subdivisions. Level 2 inputs do not include quoted prices for individual
securities in active markets; however, they do include inputs that are either
directly or indirectly observable for the individual security being valued. Such
observable inputs include interest rates and yield curves at commonly quoted
intervals, volatilities, prepayment speeds, credit risks and default rates. Also
included are inputs derived principally from or corroborated by observable
market data by correlation or other means.


20





The
following table presents the fair value measurements of the Company’s assets
measured at fair value on a recurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at September 30, 2010 and
December 31, 2009:





Fair Value Measurements Using:Description
                
                Fair Values at
                  9/30/2010
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Available-for-Sale
      Securities:U.S.
      Treasury and Government Agencies
                
                $
                36,389,342
                
                
                
                -
                
                
                $
                36,389,342
                
                
                
                -Mortgage-backed
      securities
                
                
                43,422,754
                
                
                
                -
                
                
                
                43,422,754
                
                
                
                -State
      and political subdivisions
                
                
                34,959,582
                
                
                
                -
                
                
                
                34,959,582
                
                
                
                -Money
      Market Mutual Funds
                
                
                1,199,150
                
                
                
                1,199,150
                
                
                
                -
                
                
                
                -Equity
      securities
                
                
                23,000
                
                
                
                23,000
                
                
                
                -
                
                
                
                -





Fair Value Measurements Using:Description
                
                Fair Values at
                  12/31/2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Available-for-Sale
      Securities:U.S.
      Treasury and Government Agencies
                
                $
                12,943,649
                
                
                
                -
                
                
                $
                12,943,649
                
                
                
                -Mortgage-backed
      securities
                
                
                52,246,278
                
                
                
                -
                
                
                
                52,246,278
                
                
                
                -State
      and political subdivisions
                
                
                31,537,006
                
                
                
                -
                
                
                
                31,537,006
                
                
                
                -Money
      Market Mutual Funds
                
                
                8,333,179
                
                
                
                8,333,179
                
                
                
                -
                
                
                
                -Equity
      securities
                
                
                23,000
                
                
                
                23,000
                
                
                
                -
                
                
                
                -





Impaired
Loans





Loans for
which it is probable the Company will not collect all principal and interest due
according to contractual terms are measured for impairment. Allowable methods
for estimating fair value include using the fair value of the collateral for
collateral dependent loans, or where a loan is determined not to be collateral
dependent, using the discounted cash flow method. If the impaired loan is
collateral dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining an independent appraisal
of the collateral and applying a discount factor to the value based on the
Company’s loan review policy. All impaired loans held by the Company were
collateral dependent at September 30, 2010 and December 31,
2009.


21


Mortgage Servicing
Rights





Mortgage
servicing rights do not trade in an active, open market with readily observable
prices. Accordingly, fair value is estimated using discounted cash flow models
associated with the servicing rights and discounting the cash flows using market
discount rates. The servicing portfolio has been valued using all relevant
positive and negative cash flows including servicing fees, miscellaneous income
and float; marginal costs of servicing; the cost of carry on advances; and
foreclosure losses; and applying certain prevailing assumptions used in the
marketplace. Due to the nature of the valuation inputs, mortgage servicing
rights are classified within Level 3 of the hierarchy.





Foreclosed Assets Held For
Sale





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





The
following table presents the fair value measurements of assets measured at fair
value on a nonrecurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2010 and December 31,
2009:





Fair Value Measurements Using:Description
                
                Fair Values at
                  09/30/10
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Impaired
      Loans
                
                $
                4,733,647
                
                
                
                -
                
                
                
                -
                
                
                $
                4,733,647Mortgage
      Servicing Rights
                
                $
                2,041,698
                
                
                
                -
                
                
                
                -
                
                
                $
                2,041,698Foreclosed
      Assets HFS
                
                $
                -
                
                
                
                -
                
                
                
                -
                
                
                $
                -





Fair Value Measurements Using:Description
                  
                  Fair Values at
                    12/31/2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Impaired
      Loans
                  
                  $
                  9,113,369
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  9,113,369Mortgage
      Servicing Rights
                  
                  $
                  1,955,133
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  1,955,133Foreclosed
      Assets HFS
                  
                  $
                  356,455
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  356,455





There
were no changes in the inputs or methodologies used to determine fair value
during the quarter ended September 30, 2010 as compared to the quarter
ended December 31, 2009.


22





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




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




The
carrying amount approximates the fair value.





Loans




The
estimated fair value for loans receivable, including loans held for sale, net,
is based on estimates of the interest rate that the Company’s wholly-owned
subsidiary, The State Bank and Trust Company (“State Bank”) would charge for
similar loans at September 30, 2010 and December 31, 2009, applied for the time
period until the loans are assumed to re-price or be paid.




Deposits and Other
Borrowings




Deposits
include demand deposits, savings accounts, NOW accounts and certain money market
deposits. The carrying amount approximates the fair value. The estimated fair
value for fixed-maturity time deposits, as well as borrowings, is based on
estimates of the interest rate State Bank could pay on similar instruments with
similar terms and maturities at September 30, 2010 and December 31,
2009.




The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. The estimated fair value
for other financial instruments and off-balance-sheet loan commitments were not
material at September 30, 2010 or December 31, 2009.


23




September
      30, 2010Carrying
                  
                  
                  FairAmount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  60,600,672
                  
                  
                  $
                  60,601,000Available-for-sale
      securities
                  
                  
                  115,993,828
                  
                  
                  
                  115,994,000Loans
      held for sale
                  
                  
                  13,453,782
                  
                  
                  
                  13,610,000Loans,
      net of allowance for loan losses
                  
                  
                  418,544,403
                  
                  
                  
                  422,378,000Federal
      Reserve and FHLB Bank stock
                  
                  
                  3,748,250
                  
                  
                  
                  3,748,000Accrued
      interest receivable
                  
                  
                  2,560,938
                  
                  
                  
                  2,561,000Financial
      liabilitiesDeposits
                  
                  $
                  522,320,921
                  
                  
                  $
                  525,858,000Short-term
      borrowings
                  
                  
                  50,117,031
                  
                  
                  
                  52,204,000Notes
      payable
                  
                  
                  3,368,266
                  
                  
                  
                  3,346,000FHLB
      advances
                  
                  
                  25,429,671
                  
                  
                  
                  26,169,000Trust
      preferred securities
                  
                  
                  20,620,000
                  
                  
                  
                  20,337,000Accrued
      interest payable
                  
                  
                  1,683,116
                  
                  
                  
                  1,683,000





December 31, 2009Carrying
                  
                  
                  FairAmount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  24,824,785
                  
                  
                  $
                  24,825,000Available-for-sale
      securities
                  
                  
                  105,083,112
                  
                  
                  
                  105,083,000Loans
      held for sale
                  
                  
                  16,857,648
                  
                  
                  
                  17,070,000Loans,
      net of allowance for loan losses
                  
                  
                  445,527,403
                  
                  
                  
                  446,266,000Federal
      Reserve and FHLB Bank stock
                  
                  
                  3,748,250
                  
                  
                  
                  3,748,000Accrued
      interest receivable
                  
                  
                  2,324,868
                  
                  
                  
                  2,325,000Financial
      liabilitiesDeposits
                  
                  $
                  491,242,152
                  
                  
                  $
                  494,536,000Short-term
      borrowings
                  
                  
                  52,042,820
                  
                  
                  
                  53,670,000Notes
      payable
                  
                  
                  2,146,776
                  
                  
                  
                  2,128,000FHLB
      advances
                  
                  
                  35,266,510
                  
                  
                  
                  36,476,000Trust
      preferred securities
                  
                  
                  20,620,000
                  
                  
                  
                  20,571,000Accrued
      interest payable
                  
                  
                  1,507,521
                  
                  
                  
                  1,508,000


24


NOTE
G - SECURITIES





The
amortized cost and approximate fair value of the Company’s available-for sale
securities at September 30, 2010 and December 31, 2009 were as
follows:





Gross
                
                
                GrossAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                ApproximateCost
                
                
                Gains
                
                
                Losses
                
                
                Fair ValueAvailable-for-Sale Securities:September
      30, 2010:U.S.
      Treasury and Government agencies
                
                $
                36,037,461
                
                
                $
                352,580
                
                
                $
                (699
                )
                
                $
                36,389,342Mortgage-backed
      securities
                
                
                42,132,762
                
                
                
                1,408,370
                
                
                
                (118,378
                )
                
                
                43,422,754State
      and political subdivisions
                
                
                32,549,593
                
                
                
                2,433,189
                
                
                
                (23,200
                )
                
                
                34,959,582Money
      Market Mutual Fund
                
                
                1,199,150
                
                
                
                -
                
                
                
                -
                
                
                
                1,199,150Equity
      securities
                
                
                23,000
                
                
                
                -
                
                
                
                -
                
                
                
                23,000$
                111,941,966
                
                
                $
                4,194,139
                
                
                $
                (142,277
                )
                
                $
                115,993,828





Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  ApproximateCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair ValueDecember
      31, 2009:U.S.
      Treasury and Government agencies
                  
                  $
                  13,215,086
                  
                  
                  $
                  5,359
                  
                  
                  $
                  (276,796
                  )
                  
                  $
                  12,943,649Mortgage-backed
      securities
                  
                  
                  50,877,903
                  
                  
                  
                  1,792,894
                  
                  
                  
                  (424,519
                  )
                  
                  
                  52,246,278State
      and political subdivisions
                  
                  
                  30,653,604
                  
                  
                  
                  984,833
                  
                  
                  
                  (101,431
                  )
                  
                  
                  31,537,006Money
      Market Mutual Fund
                  
                  
                  8,333,179
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,333,179Equity
      securities
                  
                  
                  23,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,000$
                  103,102,772
                  
                  
                  $
                  2,783,086
                  
                  
                  $
                  (802,746
                  )
                  
                  $
                  105,083,112


25


The
amortized cost and fair value of securities available for sale at September 30,
2010, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.





Available for SaleAmortized
                
                
                FairCost
                
                
                ValueWithin
      one year
                
                $
                5,174,660
                
                
                $
                5,195,879Due
      after one year through five years
                
                
                7,700,751
                
                
                
                7,955,138Due
      after five years through ten years
                
                
                21,431,574
                
                
                
                22,064,764Due
      after ten years
                
                
                34,280,069
                
                
                
                36,133,14368,587,054
                
                
                
                71,348,924Mortgage-backed
      securities, equity securities and money market mutual
funds
                
                
                43,354,912
                
                
                
                44,644,904Totals
                
                $
                111,941,966
                
                
                $
                115,993,828





The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $29,770,401 at September 30, 2010. The carrying
value of securities delivered for repurchase agreements was $58,065,608 at
September 30, 2010.





Gross
gains of $451,474 resulting from sales of available-for-sale securities were
realized as of September 30, 2010. The tax expense for net security gains for
September 30, 2010 was $153,501. For the first nine months of 2009, gross gains
of $477,591 were realized with tax expense of $162,381.





Certain
investments in debt securities are reported in the financial statements at an
amount less than their historical cost. At September 30, 2010 and December 31,
2009, the total fair value of these investments was $3,781,066 and $20,140,212,
respectively, which was approximately 3percent and 19 percent, respectively, of
the Company’s available-for-sale investment portfolio. Based on management’s
evaluation of available evidence, including recent changes in market interest
rates, credit rating information and information obtained from regulatory
filings, management believes the declines in fair value for these securities are
temporary. Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the resulting
loss recognized in net income in the period the other-than-temporary impairment
is identified.


26


Securities
with unrealized losses at September 30, 2010 and December 31, 2009 are as
follows:





September 30, 2010
                          
                          Less than 12 Months
                          
                          
                          12 Months or Longer
                          
                          
                          TotalFair Value
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Fair Value
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Fair Value
                          
                          
                          Unrealized
                            LossesAvailable-for-Sale Securities:U.S.
      Treasury andGovernment
      agencies
                          
                          $
                          561,720
                          
                          
                          $
                          (699
                          )
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          561,720
                          
                          
                          $
                          (699
                          )Mortgage-backed
      securities
                          
                          
                          1,049,930
                          
                          
                          
                          (7,112
                          )
                          
                          
                          1,331,913
                          
                          
                          
                          (111,265
                          )
                          
                          
                          2,381,843
                          
                          
                          
                          (118,377
                          )State
      and political subdivisions
                          
                          
                          469,431
                          
                          
                          
                          (17,227
                          )
                          
                          
                          368,072
                          
                          
                          
                          (5,973
                          )
                          
                          
                          837,503
                          
                          
                          
                          (23,201
                          )$
                          2,081,081
                          
                          
                          $
                          (25,038
                          )
                          
                          $
                          1,699,985
                          
                          
                          $
                          (117,238
                          )
                          
                          $
                          3,781,066
                          
                          
                          $
                          (142,277
                          )





December 31, 2009
                          
                          Less than 12 Months
                          
                          
                          12 Months or Longer
                          
                          
                          TotalFair Value
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Fair Value
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Fair Value
                          
                          
                          Unrealized
                            LossesAvailable-for-Sale Securities:U.S.
      Treasury andGovernment
      agencies
                          
                          $
                          12,837,085
                          
                          
                          $
                          (276,796
                          )
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          12,837,085
                          
                          
                          $
                          (276,796
                          )Mortgage-backed
      securities
                          
                          
                          1,263,285
                          
                          
                          
                          (15,539
                          )
                          
                          
                          2,255,050
                          
                          
                          
                          (408,980
                          )
                          
                          
                          3,518,335
                          
                          
                          
                          (424,519
                          )State
      and political subdivisions
                          
                          
                          2,792,842
                          
                          
                          
                          (56,693
                          )
                          
                          
                          991,950
                          
                          
                          
                          (44,738
                          )
                          
                          
                          3,784,792
                          
                          
                          
                          (101,431
                          )$
                          16,893,212
                          
                          
                          $
                          (349,028
                          )
                          
                          $
                          3,247,000
                          
                          
                          $
                          (453,718
                          )
                          
                          $
                          20,140,212
                          
                          
                          $
                          (802,746
                          )





The total
unrealized losses on the mortgage-backed securities portfolio were derived from
three private label senior tranche CMO securities. Management evaluates
securities for other-than-temporary impairment (OTTI) at least on a quarterly
basis, and more frequently when economic or market concern warrants such
evaluation. When the Company does not intend to sell a debt security, and it is
more likely than not that the Company will not have to sell the security before
recovery of its cost basis, it recognizes the credit component of an OTTI of the
debt security in earnings and the remaining portion in other comprehensive
income. For held-to-maturity debt securities, the amount of an OTTI recorded in
other comprehensive income for the noncredit portion of a previous OTTI is
amortized prospectively over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security. As of September 30,
2010, management has determined there to be no OTTI on these CMO
securities.





The total
unrealized loss on the municipal security portfolio was due to the holding of
several municipal securities, all with individually insignificant
losses.


27


NOTE
H – RDSI AND NEW CORE RELATIONSHIP





On April
27, 2009, the Company announced a transaction between its data and item
processing subsidiary, Rurbanc Data Services, Inc. d/b/a RDSI Banking Systems
(“RDSI”) and New Core Holdings, Inc. d/b/a New Core Banking Systems,
headquartered in Birmingham, AL (“New Core”). As part of this transaction, RDSI
and New Core entered into a Reseller Software License and Support Agreement
pursuant to which RDSI was granted rights as the exclusive provider of New
Core’s Single SourceTM software. RDSI and New Core also entered into an Agreement
and Plan of Merger pursuant to which New Core would be merged with a
newly-created subsidiary of RDSI and become a wholly-owned subsidiary of RDSI. A
prerequisite of this merger would be the spin-off of RDSI from Rurban, resulting
in RDSI becoming a separate independent public company. This would be followed
immediately by the merger of RDSI and New Core. On July 28, 2010, the Company
announced that it had determined that the planned spin-off of RDSI and merger
with New Core cannot be successfully completed. RDSI continues to work with New
Core to address a wind-down of their relationships to enable both companies to
pursue their strategic directions. As a result of this determination, together
with the loss of RDSI’s data processing client base and associated revenue, the
Company recorded a $5.6 million after-tax charge in the second quarter of 2010
for impairment and write-downs of software, hardware and development costs
related to the data processing business of RDSI.





NOTE
I: DEBT COVENANT





Pursuant
to a loan covenant agreement between the Company and First Tennessee Bank,
National Association (“FTB”), State Bank must maintain certain performance
ratios, including a minimum Tier 1 Capital ratio of 6 percent, a year-to-date
return on assets (ROA) of 50 basis points and a non-performing asset ratio
(calculated as non-performing loans plus OREO divided by total loans plus OREO)
of less than 2.25 percent. At September 30, 2010, the total amount of the loan
commitment was $5 million, with $1.7 million drawn.





As of
September 30, 2010, the Company was in violation of two debt covenants related
to this agreement, as State Bank’s year-to-date ROA was (0.08) percent and
non-performing asset ratio was 2.72 percent. The covenant violations could
result in the note being called by FTB. This loan commitment was renewed on June
30, 2010 and is scheduled to mature on June 30, 2011.





NOTE
J: GOODWILL





Goodwill
is related to both our banking and data processing segments. We evaluate the
fair value of our banking and data processing segments versus the carrying value
as of each fiscal year end or more frequently if events or changes in
circumstances indicate that the carrying value may exceed the fair value. The
discount factors used in present value calculations are updated annually. We
also use available market value information to evaluate fair value. The Company
chose to evaluate the fair value of both of our segments as of June 30, 2010.
The results of this independent fair value evaluation resulted in no impairment
in either segment.





For State
Bank, an Equity Value Analysis was completed using the expected net income and
free cash flow over the next five years. Based upon this analysis, the concluded
Fair Value of Equity exceeded the carrying value of equity.


28


For RDSI,
the Fair Value of Equity was less than the carrying value of equity which
required that a Step 2 Analysis of the goodwill on RDSI would need to be
reviewed for impairment. After the Step 2 analysis, which used the expected
future net income and cash flow for this business segment, no impairment of
goodwill was indicated. Should the cash flow and net income expectations for
RDSI change, a goodwill impairment may be determined.





NOTE
K:  TRUST PREFERRED SECURITIES





On
September 15, 2005, RST II, a wholly-owned subsidiary of the Company, closed 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 with terms similar to
the Capital Securities.  The sole assets of RST II are the junior
subordinated debentures of the Company and payments thereunder.  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.  Distributions on the Capital
Securities are payable quarterly at an interest rate that changes quarterly and
is based on the 3-month LIBOR and are included in interest expense in the
consolidated financial statements.  These securities are considered
Tier 1 capital (with certain limitations applicable) under current regulatory
guidelines.





On
September 7, 2000, RST I, a wholly-owned subsidiary of the Company, closed 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 with terms similar to
the Capital Securities.  The sole assets of RST I are the junior
subordinated debentures of the Company and payments thereunder.  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 I under the Capital Securities.  Distributions on the Capital
Securities are payable semi-annually at the annual rate of 10.6 percent and are
included in interest expense in the consolidated financial
statements.  These securities are considered Tier 1 capital (with
certain limitations applicable) under current regulatory
guidelines.





The
junior subordinated debentures are subject to mandatory redemption, in whole or
in part, upon repayment of the Capital Securities at maturity or their earlier
redemption at the liquidation amount.  Subject to the Company having
received prior approval of the Federal Reserve, if then required, the Capital
Securities are redeemable prior to the maturity date of September 7, 2030, at
the option of the Company; on or after September 7, 2020 at par; or on or after
September 7, 2010 at a premium; or upon occurrence of specific events defined
within the trust indenture.  The Company has the option to defer
distributions on the RST II Capital Securities from time to time for a period
not to exceed 20 consecutive quarterly periods, and the Company has the option
to defer distributions on the RST I Capital Securities from time to time for a
period not to exceed 10 consecutive semi-annual periods.





On August
5, 2010, the Company notified the trustees of the Capital Securities of the
Company’s election to defer (a) the next four quarterly interest payments on the
RST II Capital Securities, beginning on September 15, 2010 and extending through
September 15, 2011, and (b) the next two semi-annual interest payments on the
RST I Capital Securities, beginning on September 7, 2010 and extending through
September 7, 2011. During any interest deferral period, the trust preferred
indentures prohibit the Company from paying common stock dividends or
repurchasing shares of common stock.


29


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





Cautionary Statement
Regarding Forward-Looking Information




Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are provided to assist in the
understanding of anticipated future financial performance. Forward-looking
statements provide current expectations or forecasts of future events and are
not guarantees of future performance. Examples of forward-looking statements
include: (a) projections of income or expense, earnings per share, the payments
or non-payments of dividends, capital structure and other financial items; (b)
statements of plans and objectives of the Company or our management or Board of
Directors, including those relating to products or services; (c) statements of
future economic performance; and (d) statements of assumptions underlying such
statements.  Words such as “anticipates,” “believes,” “plans,”
“intends,” “expects,” “projects,” “estimates,” “should,” “may,” “would be,”
“will allow,” “will likely result,” “will continue,” “will remain,” or other
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying those statements. Forward-looking
statements are based on management’s expectations and are subject to a number of
risks and uncertainties. Although management believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from those expressed or implied in such statements. Risks and
uncertainties that could cause actual results to differ materially include,
without limitation, changes in interest rates, changes in the competitive
environment, and changes in banking regulations or other regulatory or
legislative requirements affecting bank holding companies. Additional detailed
information concerning a number of important factors which could cause actual
results to differ materially from the forward-looking statements contained in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations is available in the Company’s filings with the Securities and
Exchange Commission, 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, 2009, in “Item 1A. Risk Factors” of Part II of the
Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2010, in “Item 1A. Risk Factors” of Part II of the Company’s Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2010, and in “Item 1A. Risk
Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should
not be placed on the forward-looking statements, which speak only as of the date
hereof. Except as may be required by law, the Company undertakes no obligation
to update any forward-looking statement to reflect unanticipated events or
circumstances after the date on which the statement is made.




Overview of
Rurban





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





Rurban
Statutory Trust I (“RST”) was established in August 2000. In September 2000, RST
completed a pooled private offering of 10,000 Trust Preferred Securities with a
liquidation amount of $1,000 per security. The proceeds of the offering were
loaned to Rurban in exchange for junior subordinated debentures of Rurban with
terms substantially similar to the Trust Preferred 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 Rurban of the
obligations of RST.


30


Rurban
Statutory Trust II (“RST II”) was established in August 2005. In September 2005,
RST II completed a pooled private offering of 10,000 Trust Preferred Securities
with a liquidation amount of $1,000 per security. The proceeds of the offering
were loaned to Rurban in exchange for junior subordinated debentures of Rurban
with terms substantially similar to the Trust Preferred 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
Rurban of the obligations of RST II.





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





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





Unless
the context indicates otherwise, all references herein to “Rurban”, “we”, “us”,
“our”, or the “Company” refer to Rurban Financial Corp. and its consolidated
subsidiaries.





Recent Regulatory
Developments





On July
21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act represents a
sweeping reform of the regulatory framework for depository institutions, bank
and thrift holding companies and other U.S. financial institutions. The
Dodd-Frank Act includes a broad range of legislation intended to strengthen
oversight and regulation of banks and nonbank financial institutions, enhance
regulation of over-the-counter derivatives and asset-backed securities, impose
corporate governance and executive compensation reforms on all public companies,
create new requirements for hedge fund and private equity fund advisers and
establish new rules for credit rating agencies. Certain of the provisions of the
Dodd-Frank Act may significantly affect the business activities of State Bank
and Rurban. However, the Dodd-Frank Act is one of the most far-reaching
financial services laws ever enacted, and its enactment marks only the beginning
of a process that will take months, if not years, to fully develop. Many of the
significant provisions of the Dodd-Frank Act have extended implementation
periods and delayed effective dates, and will require regulatory action and
rulemaking by federal regulatory authorities to either implement the standards
set out in the legislation or adopt new standards. As a result, the full scope
and effect of the Dodd-Frank Act on the U.S. financial system may not be known
for several years, and we cannot predict the extent to which the business
activities of State Bank or Rurban could be affected by this
legislation.




31




Critical Accounting
Policies





Note 1 to
the Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 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.




32




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





Recent Developments Related
to RDSI





On April
27, 2009, the Company announced a transaction between RDSI and New Core
Holdings, Inc. d/b/a New Core Banking Systems, headquartered in Birmingham, AL
(“New Core”). As part of this transaction, RDSI and New Core entered into a
Reseller Software License and Support Agreement pursuant to which RDSI was
granted rights as the exclusive provider of New Core’s Single SourceTM software.
RDSI and New Core also entered into an Agreement and Plan of Merger pursuant to
which New Core would be merged with a newly-created subsidiary of RDSI and
become a wholly-owned subsidiary of RDSI. A prerequisite of this merger would be
the spin-off of RDSI from Rurban, resulting in RDSI becoming a separate
independent public company. This would be followed immediately by the merger of
RDSI and New Core.  On July 28, 2010, the Company announced that it
had determined that the planned spin-off of RDSI and merger with New Core could
not be successfully completed.  RDSI continues to work with New Core
to address a wind-down of their relationships.





The
Company expects that RDSI will lose all of its existing data processing clients
with the exception of State Bank, which intends to continue its data processing
and item processing services with RDSI using RDSI’s previous data processing
system. However, RDSI continues to offer item processing and network services,
and expects to maintain those primary businesses going forward. These services
have not been and are not expected to be materially impacted by recent
developments relating to RDSI’s data processing services. As of October 31,
2010, RDSI/DCM had relationships with 44 item processing and 10 network services
clients.





In view
of these recent developments relating to RDSI’s data processing services, the
Boards of Directors of Rurban and RDSI, and their respective management teams,
continue to evaluate various strategic alternatives for RDSI to address these
issues and uncertainties and to decide upon a strategic direction for RDSI which
will further the interests of shareholders, customers and other relevant
constituencies.





Impact of Accounting
Changes




None.





Nine Months Ended September
30, 2010 compared to Nine Months Ended September 30, 2009





Net
Income: For the nine months ended September 30, 2010, net loss for the
Company was $(9.0) million, or $(1.86) per diluted share, compared to $2.27
million in net income, or $0.46 per diluted share, for the first nine months of
2009. This reflects an increase in non-interest expense of $4.2 million and an
increase in the provision for loan losses of $3.60 million for State Bank and
$3.0 million for RDSI. RDSI had a net loss for the first nine months of 2010 of
$7.4 million.




33




Net
Interest Income: Net interest income was $14.8 million, a decrease of
$0.90 million, or 5.7 percent, from 2009. Earning assets decreased $16.9
million, or 3.0 percent, over the prior year third quarter. The decrease in
earning assets was a result of loan pay-downs over the past twelve months and
selective exit from undesirable loan relationships, offset by an increase in
securities balances.  Total loan balances at September 30, 2010
totaled $438.5 million.





Provision
for Loan Losses: The provision for loan losses was $8.79 million for the
first nine months of 2010 compared to a $2.2 million provision for the first
nine months of 2009. Included in the provision was a $3.0 million provision at
RDSI related to a loan for software development costs. The Company experienced
an increase in losses year over year, which is reflected in net charge-offs of
$9.37 million compared to $1.28 million of net charge-offs in 2009. At September
30, 2010, consolidated non-performing assets were $12.1 million, or 1.77 percent
of total assets, as compared with $11.7 million, or 1.74 percent of total assets
at September 30, 2009.





Non-interest
Income: Non-interest income was $16.6 million for the first nine months
of 2010 compared with $22.4 million for the first nine months of 2009, a
decrease of $5.8 million, or 25.9 percent. Data processing fees were down $6.0
million from the prior year, reflecting the loss of data processing clients at
RDSI.





Non-interest
Expense: Non-interest expense was $37.2 million for the first nine months
of 2010, compared with $33.0 million for the first nine months of 2009. Software
and fixed asset impairment increased $4.9 million due to the write-downs at
RDSI. Salary and benefit expense is down $1.5 million, or 9.6 percent, which
reflects the reduction in staff of 64 from the prior year. Year over year, OMSR
amortization expense is up $0.56 million.





Three Months Ended September
30, 2010 compared to Three Months Ended September 30, 2009





Net
Income:For the three months ended September 30, 2010, net income for the
Company was $0.03 million, or $0.01 per diluted share, compared to $0.16 million
in net income, or $0.03 per diluted share, for the third quarter of 2009. This
reflects a decrease in non-interest expense of $2.2 million and a decrease in
non-interest income of $2.0 million. RDSI had a net loss for the quarter of
$0.05 million.





Net
Interest Income: Net interest income was $4.9 million, a decrease of
$0.04 million, or 7.6 percent, from 2009.





Provision
for Loan Losses: The provision for loan losses was $0.90 million for the
third quarter of 2010, which was flat to the prior-year third quarter. The
Company experienced an increase in losses year over year, which is reflected in
net charge-offs for the quarter of $1.45 million compared to $0.84 million of
net charge-offs in the third quarter of 2009. For the third quarter of 2010, net
charge-offs as a percentage of average loans was 1.32 percent annualized,
compared to .73 percent annualized for the third quarter of 2009.




34




($
      in Thousands) (State Bank Results Only)
                      
                      Sept. 30,
                        2010
                      
                      
                      Sept. 30,
                        2009Net
      charge-offs
                      
                      $
                      1,448
                      
                      
                      $
                      837Non-performing
      loans
                      
                      $
                      10,107
                      
                      
                      $
                      9,646OREO
      / OAO
                      
                      $
                      1,947
                      
                      
                      $
                      1,748Non-performing
      assets
                      
                      $
                      12,054
                      
                      
                      $
                      11,394Non-performing
      assets / Total assets
                      
                      
                      1.77
                      %
                      
                      
                      1.69
                      %Allowance
      for loan losses / Total loans
                      
                      
                      1.47
                      %
                      
                      
                      1.29
                      %Allowance
      for loan losses / Non-performing loans
                      
                      
                      63.8
                      %
                      
                      
                      61.5
                      %





Non-interest
Income: Non-interest income was $5.13 million for the third quarter of
2010 compared with $7.08 million for the third quarter of 2009, a decrease of
$1.95 million, or 27.5 percent. Data processing fees were down $2.8 million from
the prior year, reflecting the loss of data processing clients at
RDSI.





Non-interest
Expense: Non-interest expense was $9.3 million for the third quarter of
2010, compared with $11.5 million in 2009.  Salary and benefit expense
was down $1.3 million, reflecting our lower staff level and equipment expense,
which was down $1.17 million due to lower RDSI depreciation expense. The
quarter’s results include a $0.04 million impairment of our mortgage servicing
rights.





Changes in Financial
Condition





September
30, 2010 vs. December 31, 2009





At
September 30, 2010, total assets were $681.2 million, representing an increase
of $8.2 million, or 1.22 percent, from December 31, 2009. The increase is
primarily attributable to an increase of $35.8 million in cash
balances.





At
September 30, 2010, liabilities totaled $627.1 million, an increase of $15.8
million since December 31, 2009. Of this increase, significant changes include
deposits, which increased $31.1 million. Offsetting the increase in deposits was
a decrease of $5.0 million in Fed Funds purchased, advances from the Federal
Home Loan Bank, which decreased $9.9 million, and other liabilities, which
decreased $5.0 million.





From
December 31, 2009 to September 30, 2010, total shareholders’ equity decreased
$7.6 million, or 12.32 percent, to $54.1 million.





Goodwill





As noted
in Note K, goodwill was reviewed for impairment for both State Bank and RDSI at
June 30, 2010. This independent review resulted in no impairment for either
business segment. At September 30, 2010 and December 31, 2009, goodwill
comprised $21.4 million of Rurban’s consolidated balance sheet. This included
$16.4 million at State Bank and $5.0 million at RDSI.




35




Capital
Resources





At
September 30, 2010, estimated capital levels and minimum required levels for the
Company and State Bank were as follows (in millions):





Minimum RequiredMinimum Required
                          
                          
                          To Be Well CapitalizedFor Capital
                          
                          
                          Under Prompt CorrectiveActual
                          
                          
                          Adequacy Purposes
                          
                          
                          Action RegulationsAmount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          RatioTotal
      risk-based capital(to
      risk weighted assets)Consolidated
                          
                          $
                          51.0
                          
                          
                          
                          11.6
                          %
                          
                          $
                          35.1
                          
                          
                          
                          8.0
                          %
                          
                          $
                          -
                          
                          
                          
                          N/AState
      Bank
                          
                          
                          50.2
                          
                          
                          
                          11.6
                          
                          
                          
                          34.7
                          
                          
                          
                          8.0
                          
                          
                          
                          43.3
                          
                          
                          
                          10.0





Both the
Company and State Bank had capital levels qualifying them to be deemed well
capitalized at September 30, 2010.





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 $190.1 million at September 30,
2010.





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, 2010 follows.





The
Company experienced positive cash flows from operating activities for the nine
months ended September 30, 2010 of $8.5 million. For the nine months ended
September 30, 2009, the Company experienced negative cash flows from operations
of $3.4 million.





Net cash
flow from investing activities was a positive $6.7 million and a negative $7.5
million for the nine months ended September 30, 2010 and 2009, respectively. The
changes in net cash from investing activities at September 30, 2010 included
available-for-sale securities purchases totaling $52.2 million. These cash
payments were offset by $32.8 million in proceeds from maturities of securities
and $10.0 million in proceeds from sales of securities. Changes in net loans
were $13.6 million. The changes in net cash from investing activities at
September 30, 2009 included the purchase of securities of $50.0 million and
changes in loans of a negative $0.5 million. This was partially offset by the
proceeds from maturities or calls and sales of securities of $44.2
million.





Net cash
flow from financing activities was a positive $20.5 million and a positive $13.9
million for the nine months ended September 30, 2010 and 2009, respectively. The
2010 financing activities included a $23.1 million increase in demand deposits,
money market, interest checking and savings accounts, and a $7.9 million
increase in certificates of deposit. Proceeds from advances from the Federal
Home Loan Bank totaled $2.0 million, and proceeds from notes payable totaled
$2.3 million. Offsetting this increase were repayments of Federal Home Loan Bank
advances of $11.8 million and repayment of notes payable of $1.0 million. The
net cash provided by financing activities at September 30, 2009 was primarily
due to proceeds from advances from the FHLB which totaled $7.5 million, and a
$4.2 million increase in notes payable. Deposits had a net increase of $8.1
million and repayment of FHLB advances totaled $4.3 million.




36




Off-Balance-Sheet
Borrowing Arrangements:





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





At
September 30, 2010, the Company had unused federal funds lines and lines of
credit totaling $14.8 million.





The
Company’s contractual obligations as of September 30, 2010 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 $26.0 million. Other debt obligations were comprised of Trust
Preferred Securities of $20.6 million. The Company’s operating lease obligations
consisted of a lease on the RDSI operations building of $99,600 per year, a
lease on the RDSI-North building of $162,000 per year, a lease on the Northtowne
branch of State Bank of $60,000 per year and a lease on the RDSI/DCM Lansing
facility of $61,000 per year.





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 (primarily deposits and borrowings). With the
exception of specific loans, that 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. The Company
also faces liquidity risk to a lesser extent.





Interest
rate risk is the exposure of a financial institution’s financial condition to
adverse movements in interest rates. Successfully managing this risk can be an
important source of operating 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.




37




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





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





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





Item 3. Quantitative and
Qualitative Disclosures About Market Risk





Management
believes there has been no material change in the Company’s market risk as
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009.




38




Item 4. Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are
designed to ensure that information required to be disclosed in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is 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 disclosures.





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





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





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





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




Changes to Internal Control
Over Financial Reporting





During
the Company’s fiscal quarter ended September 30, 2010, the Company took certain
remedial steps to address the material weakness in the Company’s internal
control over financial reporting, as disclosed in “Item 4. Controls and
Procedures” of Part I of the Company’s Quarterly Report on Form 10-Q for fiscal
quarter ended June 30, 2010.





Other
than these remedial steps, 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, 2010, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.





39





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, financial condition, or liquidity.





Item 1A. Risk
Factors





There are
certain risks and uncertainties in our business that could cause our actual
results to differ materially from those anticipated. A detailed discussion of
our risk factors is included in “Item 1A. Risk Factors” of Part I of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as
updated by “Item 1A. Risk Factors” of Part II of the Company’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2010, and as updated by “Item 1A.
Risk Factors” of Part II of the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010. The following information updates certain of our
risk factors and should be read in conjunction with the risk factors disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009, as updated by “Item 1A. Risk Factors” of Part II of the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, and as
updated by “Item 1A. Risk Factors” of Part II of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2010.





RDSI
expects to lose all or substantially all of its existing data processing
customers and associated revenue in connection with the wind-down of its
relationship with New Core, and this loss of customers and revenue is expected
to result in a net operating loss by RDSI through the remainder of
2010.





On July
28, 2010, the Company announced that it had determined that the planned spin-off
of RDSI and merger with New Core cannot be successfully completed. RDSI is
working with New Core to address a wind-down of their relationships to enable
both companies to pursue their separate strategic directions. As a result of
this determination, together with the loss of RDSI’s data processing client base
and associated revenue, the Company recorded a $5.6 million pre-tax charge in
the second quarter of 2010 for impairment and write-downs of hardware, software
and developmental costs related to the data processing business of RDSI. The
Company also recorded a $3.0 million loan provision and associated charge-off at
RDSI during the second quarter of 2010 relating to a loan to New Core Holdings
Inc. for software development costs.





The
Company expects that RDSI will lose all of its existing data processing clients
with the exception of State Bank, which intends to continue its data processing
and item processing services with RDSI using RDSI’s previous data processing
system. However, RDSI continues to offer item processing and network services,
and expects to maintain those primary businesses going forward. These services
have not been and are not expected to be materially impacted by recent
developments relating to RDSI’s data processing services. As of October 31,
2010, RDSI/DCM had relationships with 44 item processing and 10 network services
clients.




40




In view
of the expected loss of data processing clients and associated revenue by RDSI
in connection with the wind-down of its relationship with New Core, it is
anticipated that RDSI will experience a net operating loss through the remainder
of 2010.





Changes
in economic conditions could adversely affect our earnings, as our borrowers’
ability to repay loans and the value of the collateral securing our loans
decline.





Our
success depends to a large extent upon local and national economic conditions,
as well as governmental fiscal and monetary policies.  Conditions such
as inflation, recession, unemployment, changes in interest rates, money supply
and other factors beyond our control can adversely affect our asset quality,
deposit levels and loan demand and, therefore, our earnings and our
capital.  Because we have a significant amount of real estate loans,
additional decreases in real estate values could adversely affect the value of
property used as collateral and our ability to sell the collateral upon
foreclosure. Adverse changes in the economy may also have a negative effect on
the ability of our borrowers to make timely repayments of their loans, which
would have an adverse impact on our earnings and cash flows.





We
continue to experience difficult economic conditions and high unemployment in
our market areas, which has impaired the ability of our customers to make
payments on their loans, and a significant continued decline in the economy in
our market areas could have a materially adverse effect on our financial
condition and results of operations.  As a result of these economic
conditions, the Company’s future earnings continue to be susceptible to further
declining credit conditions in the markets in which we operate.





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


a.
            Not
      applicable


b.
            Not
      applicable


c.
            The
      Company did not have any repurchases of common shares during the three
      months ended September 30, 2010. On April 12, 2007, the Company announced
      that its Board of Directors had authorized a stock repurchase program
      pursuant to which the Company could repurchase up to 250,000 of its common
      shares from time to time over a period of fifteen months. On July 22,
      2008, the Board of Directors extended the stock repurchase program for an
      additional twelve months, with no change in the number of authorized
      shares. On July 15, 2009, the Board of Directors extended the stock
      repurchase program for an additional fifteen months, with no change in the
      number of authorized shares. The Company repurchased a total of 165,654
      common shares under the stock repurchase program, which expired on October
      12, 2010.





Item 3. Defaults Upon Senior
Securities





Not
applicable




41




Item 4.
[Reserved]








Item 5. Other
Information





Not
applicable





Item 6.
Exhibits





Exhibits





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


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


32.1    – Section 1350 Certification (Principal Executive
Officer)


32.2    – Section 1350 Certification (Principal Financial
Officer)
  42


SIGNATURES





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





RURBAN
      FINANCIAL CORP.Date:  November 15,
      2010
                    
                    By
                    /s/ Mark A. KleinMark
      A. KleinPresident
      and Chief Executive OfficerBy
                    /s/ Anthony V. CosentinoAnthony
      V. CosentinoExecutive
      Vice President andChief
      Financial
Officer




43