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 June 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.  Yes   ̈No   x




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 October 25, 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
                    39Item
      4.
                    Controls
      and Procedures
                    39PART II – OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    41Item
      1A.
                    Risk
      Factors
                    41Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    42Item
      3.
                    Defaults
      Upon Senior Securities
                    43Item
      4.
                    [Reserved]
                    43Item
      5.
                    Other
      Information
                    43Item
      6.
                    Exhibits
                    43Signatures
                    44




2





PART I – FINANCIAL
INFORMATION




Item 1. Financial
Statements





The
interim condensed consolidated financial statements of Rurban Financial Corp.
(“Rurban” or the “Company”) are unaudited; however, the information contained
herein reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial condition, results of operations
and cash flows for the interim periods presented. Results for the three and six
months ended June 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 six months ended June 30, 2010 are not necessarily
indicative of results for the complete year.


3




Rurban
Financial Corp.


Condensed
Consolidated Balance Sheets


June
30, 2010 and December 31, 2009




June 30
                    
                    
                    December 312010
                    
                    
                    2009(Unaudited)ASSETSCash
      and cash equivalents
                    
                    $
                    20,278,740
                    
                    
                    $
                    24,824,785Available-for-sale
      securities
                    
                    
                    111,140,374
                    
                    
                    
                    105,083,112Loans
      held for sale
                    
                    
                    11,649,780
                    
                    
                    
                    16,857,648Loans,
      net of unearned income
                    
                    
                    437,275,407
                    
                    
                    
                    452,557,581Allowance
      for loan losses
                    
                    
                    (7,000,513
                    )
                    
                    
                    (7,030,178
                    )Premises
      and equipment, net
                    
                    
                    15,135,862
                    
                    
                    
                    16,993,640Purchased
      software
                    
                    
                    600,827
                    
                    
                    
                    5,338,319Federal
      Reserve and Federal Home Loan Bank Stock
                    
                    
                    3,748,250
                    
                    
                    
                    3,748,250Foreclosed
      assets held for sale, net
                    
                    
                    1,648,026
                    
                    
                    
                    1,767,953Accrued
      interest receivable
                    
                    
                    2,339,958
                    
                    
                    
                    2,324,868Goodwill
                    
                    
                    21,414,790
                    
                    
                    
                    21,414,790Core
      deposits and other intangibles
                    
                    
                    4,577,245
                    
                    
                    
                    4,977,513Cash
      value of life insurance
                    
                    
                    13,001,493
                    
                    
                    
                    12,792,045Other
      assets
                    
                    
                    10,536,672
                    
                    
                    
                    11,398,776Total
      assets
                    
                    $
                    646,346,911
                    
                    
                    $
                    673,049,102




See
notes to condensed consolidated financial statements (unaudited)





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




4




Rurban
Financial Corp.


Condensed
Consolidated Balance Sheets


June
30, 2010 and December 31, 2009




June 30
                      
                      
                      December 312010
                      
                      
                      2009(Unaudited)LIABILITIES AND SHAREHOLDERS' EQUITYDepositsNon
      interest bearing demand
                      
                      $
                      57,301,649
                      
                      
                      $
                      57,229,795Interest
      bearing NOW
                      
                      
                      90,283,830
                      
                      
                      
                      87,511,973Savings
                      
                      
                      45,069,665
                      
                      
                      
                      43,321,364Money
      Market
                      
                      
                      79,045,113
                      
                      
                      
                      86,621,953Time
      Deposits
                      
                      
                      210,062,500
                      
                      
                      
                      216,557,067Total
      deposits
                      
                      
                      481,762,757
                      
                      
                      
                      491,242,152Notes
      payable
                      
                      
                      3,415,856
                      
                      
                      
                      2,146,776Advances
      from Federal Home Loan Bank
                      
                      
                      26,046,944
                      
                      
                      
                      35,266,510Fed
      Funds Purchased
                      
                      
                      10,500,000
                      
                      
                      
                      5,000,000Repurchase
      Agreements
                      
                      
                      45,602,027
                      
                      
                      
                      47,042,820Trust
      preferred securities
                      
                      
                      20,620,000
                      
                      
                      
                      20,620,000Accrued
      interest payable
                      
                      
                      1,378,388
                      
                      
                      
                      1,507,521Other
      liabilities
                      
                      
                      3,819,772
                      
                      
                      
                      8,515,668Total
      liabilities
                      
                      
                      593,145,744
                      
                      
                      
                      611,341,447Shareholders'
      EquityCommon
      stock
                      
                      
                      12,568,583
                      
                      
                      
                      12,568,583Additional
      paid-in capital
                      
                      
                      15,179,118
                      
                      
                      
                      15,186,042Retained
      earnings
                      
                      
                      25,360,487
                      
                      
                      
                      34,415,316Accumulated
      other comprehensive income
                      
                      
                      1,862,290
                      
                      
                      
                      1,307,025Treasury
      stock
                      
                      
                      (1,769,311
                      )
                      
                      
                      (1,769,311
                      )Total
      shareholders' equity
                      
                      
                      53,201,167
                      
                      
                      
                      61,707,655Total
      liabilities and shareholders' equity
                      
                      $
                      646,346,911
                      
                      
                      $
                      673,049,102




See
notes to condensed consolidated financial statements (unaudited)





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




5




Rurban
Financial Corp.


Condensed
Consolidated Statements of Operations (Unaudited)


Three
Months Ended





Three Months EndedJune 302010
                      
                      
                      2009Interest
      incomeLoansTaxable
                      
                      $
                      6,749,644
                      
                      
                      $
                      6,855,627Tax-exempt
                      
                      
                      17,381
                      
                      
                      
                      25,390SecuritiesTaxable
                      
                      
                      380,586
                      
                      
                      
                      1,134,573Tax-exempt
                      
                      
                      382,889
                      
                      
                      
                      244,331Other
                      
                      
                      (31,261
                      )
                      
                      
                      29,745Total
      interest income
                      
                      
                      7,499,239
                      
                      
                      
                      8,289,666Interest
      expenseDeposits
                      
                      
                      1,285,833
                      
                      
                      
                      1,657,345Other
      borrowings
                      
                      
                      30,695
                      
                      
                      
                      33,411Retail
      Repurchase Agreements
                      
                      
                      432,658
                      
                      
                      
                      431,336Federal
      Home Loan Bank advances
                      
                      
                      289,008
                      
                      
                      
                      411,556Trust
      preferred securities
                      
                      
                      403,024
                      
                      
                      
                      394,629Total
      interest expense
                      
                      
                      2,441,218
                      
                      
                      
                      2,928,277Net
      interest income
                      
                      
                      5,058,021
                      
                      
                      
                      5,361,389Provision
      for loan losses - Bank Only
                      
                      
                      3,498,710
                      
                      
                      
                      798,850Provision
      for loan losses - RDSI
                      
                      
                      3,000,000
                      
                      
                      
                      -Net
      interest income / (expense) after provision for loan
losses
                      
                      
                      (1,440,689
                      )
                      
                      
                      4,562,539Non-interest
      incomeData
      service fees
                      
                      
                      2,608,769
                      
                      
                      
                      4,956,034Trust
      fees
                      
                      
                      590,697
                      
                      
                      
                      641,033Customer
      service fees
                      
                      
                      614,944
                      
                      
                      
                      649,003Net
      gain on sales of loans
                      
                      
                      609,047
                      
                      
                      
                      938,345Net
      realized gain on sales of securities
                      
                      
                      -
                      
                      
                      
                      423,784Loan
      servicing fees
                      
                      
                      130,248
                      
                      
                      
                      103,863Gain
      (loss) on sale or disposal of assets
                      
                      
                      (1,429
                      )
                      
                      
                      16,241Other
      income
                      
                      
                      158,552
                      
                      
                      
                      169,488Total
      non-interest income
                      
                      
                      4,710,828
                      
                      
                      
                      7,897,791




See
notes to condensed consolidated financial statements (unaudited)




6




Rurban
Financial Corp.


Condensed
Consolidated Statements of Operations (Unaudited)


Three
Months Ended




Three Months EndedJune 302010
                    
                    
                    2009Non-interest
      expenseSalaries
      and employee benefits
                    
                    
                    4,902,735
                    
                    
                    
                    5,298,604Net
      occupancy expense
                    
                    
                    566,468
                    
                    
                    
                    865,599FDIC
      Insurance expense
                    
                    
                    197,913
                    
                    
                    
                    46,120Equipment
      expense
                    
                    
                    2,385,561
                    
                    
                    
                    1,698,905Software
      and fixed asset impairment
                    
                    
                    4,323,696
                    
                    
                    
                    -Data
      processing fees
                    
                    
                    229,478
                    
                    
                    
                    208,726Professional
      fees
                    
                    
                    561,209
                    
                    
                    
                    642,988Marketing
      expense
                    
                    
                    112,625
                    
                    
                    
                    234,557Printing
      and office supplies
                    
                    
                    97,326
                    
                    
                    
                    117,335Telephone
      and communication
                    
                    
                    339,341
                    
                    
                    
                    399,835Postage
      and delivery expense
                    
                    
                    456,430
                    
                    
                    
                    514,490State,
      local and other taxes
                    
                    
                    (156,595
                    )
                    
                    
                    233,157Employee
      expense
                    
                    
                    227,304
                    
                    
                    
                    257,204OREO
      Impairment
                    
                    
                    215,000
                    
                    
                    
                    -Other
      expenses
                    
                    
                    1,631,111
                    
                    
                    
                    590,537Total
      non-interest expense
                    
                    
                    16,089,602
                    
                    
                    
                    11,108,057Income
      / (loss) before income tax expense / (benefit)
                    
                    
                    (12,819,463
                    )
                    
                    
                    1,352,273Income
      tax expense/(benefit)
                    
                    
                    (4,612,572
                    )
                    
                    
                    348,687Net
      income (loss)
                    
                    $
                    (8,206,891
                    )
                    
                    $
                    1,003,586Earnings
      (loss) per common share:Basic
                    
                    $
                    (1.69
                    )
                    
                    $
                    0.20Diluted
                    
                    $
                    (1.69
                    )
                    
                    $
                    0.20





See
notes to condensed consolidated financial statements
(unaudited)


7




Rurban
Financial Corp.


Condensed
Consolidated Statements of Operations (Unaudited)


Six
Months Ended




Six Months EndedJune 302010
                      
                      
                      2009Interest
      incomeLoansTaxable
                      
                      $
                      13,161,226
                      
                      
                      $
                      13,670,260Tax-exempt
                      
                      
                      36,296
                      
                      
                      
                      50,847SecuritiesTaxable
                      
                      
                      1,082,841
                      
                      
                      
                      2,214,070Tax-exempt
                      
                      
                      701,952
                      
                      
                      
                      472,215Other
                      
                      
                      187
                      
                      
                      
                      29,877Total
      interest income
                      
                      
                      14,982,502
                      
                      
                      
                      16,437,269Interest
      expenseDeposits
                      
                      
                      2,660,124
                      
                      
                      
                      3,555,649Other
      borrowings
                      
                      
                      68,778
                      
                      
                      
                      47,803Retail
      Repurchase Agreements
                      
                      
                      859,625
                      
                      
                      
                      858,823Federal
      Home Loan Bank advances
                      
                      
                      641,825
                      
                      
                      
                      804,128Trust
      preferred securities
                      
                      
                      789,648
                      
                      
                      
                      793,614Total
      interest expense
                      
                      
                      5,020,000
                      
                      
                      
                      6,060,017Net
      interest income
                      
                      
                      9,962,502
                      
                      
                      
                      10,377,252Provision
      for loan losses - Bank Only
                      
                      
                      4,890,143
                      
                      
                      
                      1,293,992Provision
      for loan losses - RDSI
                      
                      
                      3,000,000
                      
                      
                      
                      -Net
      interest income after provision for loan losses
                      
                      
                      2,072,359
                      
                      
                      
                      9,083,260Non-interest
      incomeData
      service fees
                      
                      
                      6,638,175
                      
                      
                      
                      9,928,583Trust
      fees
                      
                      
                      1,233,483
                      
                      
                      
                      1,224,656Customer
      service fees
                      
                      
                      1,202,345
                      
                      
                      
                      1,223,702Net
      gain on sales of loans
                      
                      
                      1,326,061
                      
                      
                      
                      2,016,392Net
      realized gain on sales of securities
                      
                      
                      451,474
                      
                      
                      
                      477,591Investment
      securities recoveries
                      
                      
                      73,774
                      
                      
                      
                      -Loan
      servicing fees
                      
                      
                      284,090
                      
                      
                      
                      171,736(Loss)
      on sale or disposal of assets
                      
                      
                      (30,081
                      )
                      
                      
                      (42,414
                      )Other
      income
                      
                      
                      314,533
                      
                      
                      
                      345,050Total
      non-interest income
                      
                      
                      11,493,854
                      
                      
                      
                      15,345,296




See
notes to condensed consolidated financial statements (unaudited)




8




Rurban Financial
Corp.


Condensed
Consolidated Statements of Operations (Unaudited)


Six
Months Ended




Six Months EndedJune 302010
                            
                            
                            2009Non-interest
      expenseSalaries
      and employee benefits
                            
                            
                            10,006,275
                            
                            
                            
                            10,222,726Net
      occupancy expense
                            
                            
                            1,152,691
                            
                            
                            
                            1,195,457FDIC
      Insurance expense
                            
                            
                            416,816
                            
                            
                            
                            388,663Equipment
      expense
                            
                            
                            4,550,662
                            
                            
                            
                            3,312,298Software
      and fixed asset impairment
                            
                            
                            4,892,231
                            
                            
                            
                            -Data
      processing fees
                            
                            
                            424,264
                            
                            
                            
                            344,462Professional
      fees
                            
                            
                            1,204,019
                            
                            
                            
                            1,141,043Marketing
      expense
                            
                            
                            190,226
                            
                            
                            
                            423,303Printing
      and office supplies
                            
                            
                            258,428
                            
                            
                            
                            331,877Telephone
      and communication
                            
                            
                            725,547
                            
                            
                            
                            806,228Postage
      and delivery expense
                            
                            
                            1,026,863
                            
                            
                            
                            1,123,512State,
      local and other taxes
                            
                            
                            (35,556
                            )
                            
                            
                            466,053Employee
      expense
                            
                            
                            507,229
                            
                            
                            
                            517,142OREO
      Impairment
                            
                            
                            215,000
                            
                            
                            
                            -Other
      expenses
                            
                            
                            2,346,605
                            
                            
                            
                            1,310,317Total
      non-interest expense
                            
                            
                            27,881,300
                            
                            
                            
                            21,583,081Income
      (loss) before income tax expense / (benefit)
                            
                            
                            (14,315,087
                            )
                            
                            
                            2,845,475Income
      tax expense/(benefit)
                            
                            
                            (5,260,258
                            )
                            
                            
                            738,336Net
      income (loss)
                            
                            $
                            (9,054,829
                            )
                            
                            $
                            2,107,139Earnings
      (loss) per common share:Basic
                            
                            $
                            (1.86
                            )
                            
                            $
                            0.43Diluted
                            
                            $
                            (1.86
                            )
                            
                            $
                            0.43




See
notes to condensed consolidated financial statements (unaudited)




9





RURBAN FINANCIAL
CORP.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’


EQUITY
(UNAUDITED)




Three Months Ended
                
                
                Six Months EndedJune 30, 2010
                
                
                June 30, 2009
                
                
                June 30, 2010
                
                
                June 30, 2009Balance
      at beginning of period
                
                $
                60,854,543
                
                
                $
                63,620,510
                
                
                $
                61,707,655
                
                
                $
                61,662,004Net
      Income / (Loss)
                
                
                (8,206,891
                )
                
                
                1,003,586
                
                
                
                (9,054,829
                )
                
                
                2,107,139Unrealized
      gains (losses) on securitiesUnrealized
      holding gains (losses) arising during the year, net of tax
                
                
                604,066
                
                
                
                (464,173
                )
                
                
                853,239
                
                
                
                915,432Less:
      reclassification adjustment for gains realized in net income, net of
      tax
                
                
                -
                
                
                
                279,697
                
                
                
                297,974
                
                
                
                315,210Total
      comprehensive income / (loss)
                
                
                (7,602,825
                )
                
                
                259,716
                
                
                
                (8,499,564
                )
                
                
                2,707,361Cash
      dividend
                
                
                -
                
                
                
                (438,333
                )
                
                
                -
                
                
                
                (877,291
                )Purchase
      of treasury shares
                
                
                -
                
                
                
                (59,246
                )
                
                
                -
                
                
                
                (139,494
                )Share-based
      compensation
                
                
                (50,551
                )
                
                
                30,066
                
                
                
                (6,924
                )
                
                
                60,133Balance
      at end of period
                
                $
                53,201,167
                
                
                $
                63,412,713
                
                
                $
                53,201,167
                
                
                $
                63,412,713Dividends
      declared per share
                
                $
                -
                
                
                $
                0.09
                
                
                $
                -
                
                
                $
                0.18




See
notes to condensed consolidated financial statements
(unaudited)


10





Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


Six
Months Ended




June 30, 2010
                
                
                June 30, 2009Operating
      ActivitiesNet
      income/(loss)
                
                $
                (9,054,829
                )
                
                $
                2,107,139Items
      not requiring (providing) cashDepreciation
      and amortization
                
                
                2,492,871
                
                
                
                1,830,970Provision
      for loan losses
                
                
                7,890,143
                
                
                
                1,293,922Expense
      of share-based compensation plan
                
                
                (6,924
                )
                
                
                60,133Amortization
      of premiums and discounts on securities
                
                
                653,169
                
                
                
                324,964Amortization
      of intangible assets
                
                
                400,268
                
                
                
                443,822Deferred
      income taxes
                
                
                (3,001,762
                )
                
                
                (984,182
                )Proceeds
      from sale of loans held for sale
                
                
                117,528,701
                
                
                
                204,379,921Originations
      of loans held for sale
                
                
                (110,994,772
                )
                
                
                (211,849,075
                )Gain
      from sale of loans
                
                
                (1,326,061
                )
                
                
                (2,016,392
                )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
                
                
                17,887
                
                
                
                15,414Loss
      on sales of fixed assets
                
                
                12,194
                
                
                
                27,000Changes
      inInterest
      receivable
                
                
                (15,090
                )
                
                
                451,877Other
      assets
                
                
                519,381
                
                
                
                (1,903,768
                )Interest
      payable and other liabilities
                
                
                (2,109,313
                )
                
                
                (583,503
                )Net
      cash from / (used in) operating activities
                
                
                7,661,620
                
                
                
                (6,879,349
                )Investing
      ActivitiesPurchases
      of available-for-sale securities
                
                
                (41,525,452
                )
                
                
                (44,042,933
                )Proceeds
      from maturities of available-for-sale securities
                
                
                26,112,083
                
                
                
                21,932,628Proceeds
      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
                
                
                4,371,388
                
                
                
                8,095,458Purchase
      of premises and equipment and software
                
                
                (1,294,300
                )
                
                
                (613,597
                )Proceeds
      from sales of premises and equipment
                
                
                504,468
                
                
                
                40,877Proceeds
      from sale of foreclosed assets
                
                
                2,999,099
                
                
                
                321,231Net
      cash from / (used in ) investing activities
                
                $
                1,163,010
                
                
                $
                2,020,301





See
notes to condensed consolidated financial statements
(unaudited)


11





Rurban
Financial Corp.


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


Six
Months Ended




June 30, 2010
                
                
                June 30, 2009Financing
      ActivitiesNet
      increase/(decrease) in demand deposits, money market, interest checking
      and savings accounts
                
                $
                (2,984,828
                )
                
                $
                11,731,106Net
      decrease in certificates of deposit
                
                
                (6,494,567
                )
                
                
                (22,958,151
                )Net
      decrease in securities sold under agreements to repurchase
                
                
                (1,440,793
                )
                
                
                (722,346
                )Net
      increase in federal funds purchased
                
                
                5,500,000
                
                
                
                10,000,000Proceeds
      from Federal Home Loan Bank advances
                
                
                2,000,000
                
                
                
                7,500,000Repayment
      of Federal Home Loan Bank advances
                
                
                (11,219,566
                )
                
                
                (3,680,481
                )Proceeds
      from notes payable
                
                
                2,250,000
                
                
                
                4,200,000Repayment
      of notes payable
                
                
                (980,920
                )
                
                
                (2,636,313
                )Purchase
      of treasury stock
                
                
                -
                
                
                
                (139,494
                )Dividends
      paid
                
                
                -
                
                
                
                (877,291
                )Net
      cash from / (used in) financing activities
                
                
                (13,370,674
                )
                
                
                2,417,030Decrease
      in Cash and Cash Equivalents
                
                
                (4,546,045
                )
                
                
                (2,442,018
                )Cash
      and Cash Equivalents, Beginning of Year
                
                
                24,824,785
                
                
                
                28,059,532Cash
      and Cash Equivalents, End of Period
                
                $
                20,278,740
                
                
                $
                25,617,514Supplemental
      Cash Flows InformationInterest
      paid
                
                $
                5,149,133
                
                
                $
                6,275,766Transfer
      of loans to foreclosed assets
                
                $
                2,897,059
                
                
                $
                297,042





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 three and
six months ended June 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 six months ended June 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 June 30, 2010
and 2009, share based awards totaling 404,213 and 327,263 common shares,
respectively, were not considered in computing EPS as they were anti-dilutive.
The number of shares used in the computation of basic and diluted earnings per
share were:


Three Months Ended
                  
                  
                  Six Months EndedJune 30
                  
                  
                  June 302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Basic
      earnings per share
                  
                  
                  4,861,779
                  
                  
                  
                  4,868,063
                  
                  
                  
                  4,861,779
                  
                  
                  
                  4,871,978Diluted
      earnings per share
                  
                  
                  4,861,779
                  
                  
                  
                  4,868,063
                  
                  
                  
                  4,861,779
                  
                  
                  
                  4,871,978





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





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





June 30,
                    2010
                  
                  
                  December 31,
                    2009Commercial
                  
                  $
                  79,129,809
                  
                  
                  $
                  84,462,860Commercial
      real estate
                  
                  
                  175,054,896
                  
                  
                  
                  179,909,135Agricultural
                  
                  
                  39,582,159
                  
                  
                  
                  41,485,301Residential
      real estate
                  
                  
                  90,675,563
                  
                  
                  
                  92,971,599Consumer
                  
                  
                  52,863,188
                  
                  
                  
                  53,655,238Lease
      financing
                  
                  
                  249,273
                  
                  
                  
                  221,190Total
      loans
                  
                  
                  437,554,888
                  
                  
                  
                  452,885,323LessNet
      deferred loan fees, premiums and discounts
                  
                  
                  (279,481
                  )
                  
                  
                  (327,742
                  )Loans,
      net of unearned income
                  
                  $
                  437,275,407
                  
                  
                  $
                  452,557,581Allowance
      for loan losses
                  
                  $
                  (7,000,513
                  )
                  
                  $
                  (7,030,178
                  )




13




The
following is a summary of the activity in the allowance for loan losses account
for the three and six months ended June 30, 2010 and 2009:





Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Balance,
      beginning of period
                
                $
                6,075,126
                
                
                $
                5,348,952
                
                
                $
                7,030,178
                
                
                $
                5,020,197Provision
      charged to expense
                
                
                6,498,710
                
                
                
                798,850
                
                
                
                7,890,143
                
                
                
                1,293,992Recoveries
                
                
                106,770
                
                
                
                60,921
                
                
                
                240,503
                
                
                
                81,915Loans
      charged off
                
                
                (5,680,093
                )
                
                
                (335,577
                )
                
                
                (8,160,311
                )
                
                
                (522,958
                )Balance,
      end of period
                
                $
                7,000,513
                
                
                $
                5,873,146
                
                
                $
                7,000,513
                
                
                $
                5,873,146





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





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Non-accrual
      loans
                  
                  $
                  12,401,498
                  
                  
                  $
                  18,543,368Accruing
      loans which are contractually past due 90 days or more as to interest or
      principal payments
                  
                  
                  0
                  
                  
                  
                  0Total
      non-performing loans
                  
                  $
                  12,401,498
                  
                  
                  $
                  18,543,368





Individual
loans determined to be impaired were as follows:





June 30,
                        2010
                      
                      
                      December 31,
                        2009Loans
      with no allowance for loan losses allocated
                      
                      $
                      1,726,714
                      
                      
                      $
                      1,099,912Loans
      with allowance for loan losses allocated
                      
                      
                      9,182,108
                      
                      
                      
                      14,912,035Total
      impaired loans
                      
                      $
                      10,908,822
                      
                      
                      $
                      16,011,947Amount
      of allowance for loan losses allocated
                      
                      $
                      2,281,302
                      
                      
                      $
                      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. (“Rurban”),
which provides management and operational services to its subsidiaries. Segment
results for the three and six months ended June 30, 2010 and 2009 were as
follows:




15





NOTE E —
SEGMENT INFORMATION (Continued)





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





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  5,639,927
                  
                  
                  $
                  (210,558
                  )
                  
                  $
                  (371,348
                  )
                  
                  $
                  5,058,021
                  
                  
                  
                  
                  
                  $
                  5,058,021Non-interest
      income – external customers
                  
                  
                  2,081,469
                  
                  
                  
                  2,608,768
                  
                  
                  
                  20,591
                  
                  
                  
                  4,710,828
                  
                  
                  
                  
                  
                  
                  4,710,828Non-interest
      income - other segments
                  
                  
                  24,738
                  
                  
                  
                  226,343
                  
                  
                  
                  155,319
                  
                  
                  
                  406,400
                  
                  
                  
                  (406,400
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  7,746,134
                  
                  
                  
                  2,624,553
                  
                  
                  
                  (195,438
                  )
                  
                  
                  10,175,249
                  
                  
                  
                  (406,400
                  )
                  
                  
                  9,768,849Non-interest
      expense
                  
                  
                  6,641,773
                  
                  
                  
                  9,576,293
                  
                  
                  
                  277,936
                  
                  
                  
                  16,496,002
                  
                  
                  
                  (406,400
                  )
                  
                  
                  16,089,602Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  247,925
                  
                  
                  
                  848,212
                  
                  
                  
                  15,648
                  
                  
                  
                  1,111,785
                  
                  
                  
                  -
                  
                  
                  
                  1,111,785Fixed
      asset & software impairment
                  
                  
                  -
                  
                  
                  
                  4,323,696
                  
                  
                  
                  -
                  
                  
                  
                  4,323,696
                  
                  
                  
                  -
                  
                  
                  
                  4,323,696Provision
      for loan losses
                  
                  
                  3,498,710
                  
                  
                  
                  3,000,000
                  
                  
                  
                  -
                  
                  
                  
                  6,498,710
                  
                  
                  
                  -
                  
                  
                  
                  6,498,710Income
      tax expense (benefit)
                  
                  
                  (914,787
                  )
                  
                  
                  (3,505,992
                  )
                  
                  
                  (191,793
                  )
                  
                  
                  (4,612,572
                  )
                  
                  
                  -
                  
                  
                  
                  (4,612,572
                  )Segment
      profit (loss)
                  
                  $
                  (1,479,562
                  )
                  
                  $
                  (6,445,748
                  )
                  
                  $
                  (281,581
                  )
                  
                  $
                  (8,206,891
                  )
                  
                  $
                  -
                  
                  
                  $
                  (8,206,891
                  )Balance
      sheet information:Total
      assets
                  
                  $
                  634,047,112
                  
                  
                  $
                  13,063,769
                  
                  
                  $
                  5,456,742
                  
                  
                  $
                  652,567,623
                  
                  
                  $
                  (6,220,712
                  )
                  
                  $
                  646,346,911Goodwill
      and intangibles
                  
                  $
                  19,151,849
                  
                  
                  $
                  6,840,186
                  
                  
                  $
                  -
                  
                  
                  $
                  25,992,035
                  
                  
                  $
                  -
                  
                  
                  $
                  25,992,035Premises
      and equipment expenditures
                  
                  $
                  25,688
                  
                  
                  $
                  515,342
                  
                  
                  $
                  -
                  
                  
                  $
                  541,030
                  
                  
                  $
                  -
                  
                  
                  $
                  541,030


16





NOTE E —
SEGMENT INFORMATION (Continued)





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





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


17





NOTE E —
SEGMENT INFORMATION (Continued)





As of and
for the six months ended June 30, 2010





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  10,980,625
                  
                  
                  $
                  (271,961
                  )
                  
                  $
                  (746,162
                  )
                  
                  $
                  9,962,502
                  
                  
                  
                  
                  
                  $
                  9,962,502Non-interest
      income - external customers
                  
                  
                  4,777,802
                  
                  
                  
                  6,638,175
                  
                  
                  
                  77,877
                  
                  
                  
                  11,493,854
                  
                  
                  
                  
                  
                  
                  11,493,854Non-interest
      income - other segments
                  
                  
                  49,810
                  
                  
                  
                  596,153
                  
                  
                  
                  428,773
                  
                  
                  
                  1,074,736
                  
                  
                  
                  (1,074,736
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  15,808,237
                  
                  
                  
                  6,962,367
                  
                  
                  
                  (239,512
                  )
                  
                  
                  22,531,092
                  
                  
                  
                  (1,074,736
                  )
                  
                  
                  21,456,356Non-interest
      expense
                  
                  
                  12,702,246
                  
                  
                  
                  15,245,545
                  
                  
                  
                  1,008,245
                  
                  
                  
                  28,956,036
                  
                  
                  
                  (1,074,736
                  )
                  
                  
                  27,881,300Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  506,447
                  
                  
                  
                  2,564,909
                  
                  
                  
                  31,512
                  
                  
                  
                  3,102,868
                  
                  
                  
                  -
                  
                  
                  
                  3,102,868Fixed
      asset & software impairment
                  
                  
                  -
                  
                  
                  
                  4,892,231
                  
                  
                  
                  -
                  
                  
                  
                  4,892,231
                  
                  
                  
                  -
                  
                  
                  
                  4,892,231Provision
      for loan losses
                  
                  
                  4,890,143
                  
                  
                  
                  3,000,000
                  
                  
                  
                  -
                  
                  
                  
                  7,890,143
                  
                  
                  
                  -
                  
                  
                  
                  7,890,143Income
      tax expense (benefit)
                  
                  
                  (842,958
                  )
                  
                  
                  (3,958,681
                  )
                  
                  
                  (458,619
                  )
                  
                  
                  (5,260,258
                  )
                  
                  
                  -
                  
                  
                  
                  (5,260,258
                  )Segment
      profit (loss)
                  
                  $
                  (941,194
                  )
                  
                  $
                  (7,324,497
                  )
                  
                  $
                  (789,138
                  )
                  
                  $
                  (9,054,829
                  )
                  
                  $
                  -
                  
                  
                  $
                  (9,054,829
                  )Balance
      sheet information:Total
      assets
                  
                  $
                  634,047,112
                  
                  
                  $
                  13,063,769
                  
                  
                  $
                  5,456,742
                  
                  
                  $
                  652,567,623
                  
                  
                  $
                  (6,220,712
                  )
                  
                  $
                  646,346,911Goodwill
      and intangibles
                  
                  $
                  19,151,849
                  
                  
                  $
                  6,840,186
                  
                  
                  $
                  -
                  
                  
                  $
                  25,992,035
                  
                  
                  $
                  -
                  
                  
                  $
                  25,992,035


18





NOTE E —
SEGMENT INFORMATION (Continued)





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





Data
                  
                  
                  
                  
                  
                  Total
                  
                  
                  Intersegment
                  
                  
                  ConsolidatedIncome
      statement information:
                  
                  Banking
                  
                  
                  Processing
                  
                  
                  Other
                  
                  
                  Segments
                  
                  
                  Elimination
                  
                  
                  TotalsNet
      interest income (expense)
                  
                  $
                  11,229,516
                  
                  
                  $
                  (59,078
                  )
                  
                  $
                  (793,186
                  )
                  
                  $
                  10,377,252
                  
                  
                  
                  
                  
                  $
                  10,377,252Non-interest
      income - external customers
                  
                  
                  5,399,246
                  
                  
                  
                  9,903,705
                  
                  
                  
                  42,345
                  
                  
                  
                  15,345,296
                  
                  
                  
                  
                  
                  
                  15,345,296Non-interest
      income - other segments
                  
                  
                  44,036
                  
                  
                  
                  819,455
                  
                  
                  
                  733,595
                  
                  
                  
                  1,597,086
                  
                  
                  
                  (1,597,086
                  )
                  
                  
                  -Total
      revenue
                  
                  
                  16,672,798
                  
                  
                  
                  10,664,082
                  
                  
                  
                  (17,246
                  )
                  
                  
                  27,319,634
                  
                  
                  
                  (1,597,086
                  )
                  
                  
                  25,722,548Non-interest
      expense
                  
                  
                  12,814,443
                  
                  
                  
                  8,579,138
                  
                  
                  
                  1,786,586
                  
                  
                  
                  23,180,167
                  
                  
                  
                  (1,597,086
                  )
                  
                  
                  21,583,081Significant
      non-cash items:Depreciation
      and amortization
                  
                  
                  531,084
                  
                  
                  
                  1,250,373
                  
                  
                  
                  49,513
                  
                  
                  
                  1,830,970
                  
                  
                  
                  -
                  
                  
                  
                  1,830,970Provision
      for loan losses
                  
                  
                  1,293,992
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,293,992
                  
                  
                  
                  -
                  
                  
                  
                  1,293,992Income
      tax expense (benefit)
                  
                  
                  654,308
                  
                  
                  
                  708,881
                  
                  
                  
                  (624,853
                  )
                  
                  
                  738,336
                  
                  
                  
                  -
                  
                  
                  
                  738,336Segment
      profit (loss)
                  
                  $
                  1,910,055
                  
                  
                  $
                  1,376,063
                  
                  
                  $
                  (1,178,979
                  )
                  
                  $
                  2,107,139
                  
                  
                  $
                  -
                  
                  
                  $
                  2,107,139Balance
      sheet information:Total
      assets
                  
                  $
                  639,781,723
                  
                  
                  $
                  22,837,374
                  
                  
                  $
                  3,753,803
                  
                  
                  $
                  666,372,900
                  
                  
                  $
                  (4,827,945
                  )
                  
                  $
                  661,544,955Goodwill
      and intangibles
                  
                  $
                  19,792,840
                  
                  
                  $
                  7,014,064
                  
                  
                  $
                  -
                  
                  
                  $
                  26,806,904
                  
                  
                  $
                  -
                  
                  
                  $
                  26,806,904Premises
      and equipment expenditures
                  
                  $
                  323,136
                  
                  
                  $
                  251,289
                  
                  
                  $
                  39,172
                  
                  
                  $
                  613,597
                  
                  
                  $
                  -
                  
                  
                  $
                  613,597


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 June 30, 2010 and
December 31, 2009:





Fair Value Measurements
    Using:Description
                
                Fair Values at
                  6/30/2010
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Available-for-Sale
      SecuritiesU.S.
      Treasury and Government Agencies
                
                $
                33,309,532
                
                
                
                -
                
                
                $
                33,309,532
                
                
                
                -Mortgage-backed
      securities
                
                
                41,621,064
                
                
                
                -
                
                
                
                41,621,064
                
                
                
                -State
      and political subdivisions
                
                
                35,799,246
                
                
                
                -
                
                
                
                35,799,246
                
                
                
                -Money
      Market Mutual Funds
                
                
                387,538
                
                
                
                387,538
                
                
                
                -
                
                
                
                -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
      SecuritiesU.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 June 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 June 30, 2010 and December 31,
2009:





Fair Value Measurements
    Using:Description
                
                Fair Values at
                  6/30/2010
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Impaired
      loans
                
                $
                6,255,000
                
                
                
                -
                
                
                
                -
                
                
                $
                6,255,000Mortgage
      Servicing Rights
                
                $
                2,140,000
                
                
                
                -
                
                
                
                -
                
                
                $
                2,140,000Foreclosed
      Assets (HFS)
                
                $
                690,000
                
                
                
                -
                
                
                
                -
                
                
                $
                690,000





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
                
                $
                1,955,153
                
                
                
                -
                
                
                
                -
                
                
                $
                1,955,153Foreclosed
      Assets (HFS)
                
                $
                356,455
                
                
                
                -
                
                
                
                -
                
                
                $
                356,455





There
were no changes in the inputs or methodologies used to determine fair value
during the quarter ended June 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
and Federal Reserve and Federal Home Loan Bank Stock and Accrued Interest
Payable and Receivable




The
carrying amount approximates the fair value.





Loans




The
estimated fair value for loans receivable, including loans held for sale, net,
is based on estimates of the interest rate that Rurban’s wholly-owned
subsidiary, The State Bank and Trust Company (“State Bank”) would charge for
similar loans at June 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 June 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 June 30, 2010 or December 31, 2009.


23





June
      30, 2010Carrying
                
                
                FairAmount
                
                
                ValueFinancial
      assetsCash
      and cash equivalents
                
                $
                20,278,740
                
                
                $
                20,279,000Available-for-sale
      securities
                
                
                111,140,374
                
                
                
                111,140,000Loans
      held for sale
                
                
                11,649,780
                
                
                
                11,928,000Loans,
      net of allowance for loan losses
                
                
                430,274,894
                
                
                
                433,513,000Federal
      Reserve and FHLB Bank stock
                
                
                3,748,250
                
                
                
                3,748,000Accrued
      interest receivable
                
                
                2,339,958
                
                
                
                2,340,000Financial
      liabilitiesDeposits
                
                $
                481,762,757
                
                
                $
                481,323,000Short-term
      borrowings
                
                
                56,102,027
                
                
                
                57,022,000Notes
      payable
                
                
                3,415,856
                
                
                
                3,442,000FHLB
      advances
                
                
                26,046,944
                
                
                
                26,959,000Trust
      preferred securities
                
                
                20,620,000
                
                
                
                21,049,000Accrued
      interest payable
                
                
                1,378,388
                
                
                
                1,378,000





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 June 30, 2010 and December 31, 2009 were as follows:





Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Approximate
                  Fair
      ValueAvailable-for-Sale
      Securities:June
      30, 2010U.S.
      Treasury and Government agencies
                
                $
                33,111,639
                
                
                $
                226,574
                
                
                $
                (28,681
                )
                
                $
                33,309,532Mortgage-backed
      securities
                
                
                40,373,263
                
                
                
                1,517,511
                
                
                
                (269,710
                )
                
                
                41,621,064State
      and political subdivisions
                
                
                34,423,283
                
                
                
                1,466,844
                
                
                
                (90,887
                )
                
                
                35,799,240Equity
      securities
                
                
                23,000
                
                
                
                -
                
                
                
                -
                
                
                
                23,000Money
      market mutual funds
                
                
                387,538
                
                
                
                -
                
                
                
                -
                
                
                
                387,538$
                108,318,723
                
                
                $
                3,210,929
                
                
                $
                (389,278
                )
                
                $
                111,140,374




Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Approximate
                  Fair ValueAvailable-for-Sale
      Securities:December
      31, 2009U.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
                )
                
                
                31,537,006Equity
      securities
                
                
                23,000
                
                
                
                -
                
                
                
                -
                
                
                
                23,000Money
      market mutual funds
                
                
                8,333,179
                
                
                
                -
                
                
                
                -
                
                
                
                8,333,179$
                103,102,772
                
                
                $
                2,783,086
                
                
                $
                (802,746
                )
                
                $
                105,083,112


25





The
amortized cost and fair value of securities available for sale at June 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
                
                $
                884,741
                
                
                $
                893,912Due
      after one year through five years
                
                
                12,165,108
                
                
                
                12,365,465Due
      after five years through ten years
                
                
                18,996,077
                
                
                
                19,462,481Due
      after ten years
                
                
                35,488,996
                
                
                
                36,386,91467,534,922
                
                
                
                69,108,772Mortgage-backed
      securities, equity securities and money market mutual
funds
                
                
                40,783,801
                
                
                
                42,031,602Totals
                
                $
                108,318,723
                
                
                $
                111,140,374





The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $30,009,592 at June 30, 2010. The carrying value of
securities delivered for repurchase agreements was $53,921,595 at June 30,
2010.





Gross
gains of $451,474 resulting from sales of available-for-sale securities were
realized as of June 30, 2010. The tax expense for net security gains for June
30, 2010 was $153,501. For the first six 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 June 30, 2010 and December 31, 2009,
the total fair value of these investments was $17,962,390 and $20,140,212,
respectively, which was approximately 16 percent 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 June 30, 2010 and December 31, 2009 are as
follows:





June 30, 2010
                        
                        Less than 12 Months
                        
                        
                        12 Months or Longer
                        
                        
                        TotalUnrealized
                        
                        
                        
                        
                        
                        Unrealized
                        
                        
                        
                        
                        
                        UnrealizedFair Value
                        
                        
                        Losses
                        
                        
                        Fair Value
                        
                        
                        Losses
                        
                        
                        Fair Value
                        
                        
                        LossesAvailable-for-Sale
      Securities:U.S.
      Treasury and Government agencies
                        
                        $
                        9,907,459
                        
                        
                        $
                        (28,681
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        9,907,459
                        
                        
                        $
                        (28,681
                        )Mortgage-backed
      securities
                        
                        
                        3,039,898
                        
                        
                        
                        (97,454
                        )
                        
                        
                        2,186,148
                        
                        
                        
                        (172,256
                        )
                        
                        
                        5,226,046
                        
                        
                        
                        (269,710
                        )State
      and political subdivisions
                        
                        
                        1,818,870
                        
                        
                        
                        (64,526
                        )
                        
                        
                        1,010,015
                        
                        
                        
                        (26,361
                        )
                        
                        
                        2,828,885
                        
                        
                        
                        (90,887
                        )$
                        14,766,227
                        
                        
                        $
                        (190,661
                        )
                        
                        $
                        3,196,163
                        
                        
                        $
                        (198,617
                        )
                        
                        $
                        17,962,390
                        
                        
                        $
                        (389,278
                        )




December
      31, 2009
                        
                        Less than 12 Months
                        
                        
                        12 Months or Longer
                        
                        
                        TotalUnrealized
                        
                        
                        
                        
                        
                        Unrealized
                        
                        
                        
                        
                        
                        UnrealizedFair Value
                        
                        
                        Losses
                        
                        
                        Fair Value
                        
                        
                        Losses
                        
                        
                        Fair Value
                        
                        
                        LossesAvailable-for-SaleU.S.
      Treasury and Government 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 June 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, and RDSI is working with New
Core to address a wind-down of their relationships to enable both companies to
pursue their strategic directions.





NOTE
I:  OTHER INTANGIBLES




On July
28, 2010, the Company announced that it had determined that the planned spin-off
of RDSI and merger of RDSI with New Core cannot be successfully completed. 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 software,
hardware and development costs related to the data processing business of
RDSI.





NOTE
J: 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 June 30, 2010, the total amount of the loan
commitment was $5 million, with $1.7 million drawn.





As of
June 30, 2010, the Company was in violation of two debt covenants related to
this agreement, as State Bank’s year-to-date ROA was (0.26) percent and
non-performing asset ratio was 3.02 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
K: 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.


28





For The
State Bank and Trust Company, 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.





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.


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 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”) 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
 
 FDIC Insurance
Assessments.  On May 22, 2009, the FDIC adopted a final rule
that imposed a special assessment for the second quarter of 2009 of 5 basis
points on each insured depositary institution’s assets minus its Tier 1 capital
as of June 30, 2009, which was collected on September 30, 2009. The special
assessment for the Company was $296,619.
 
 On
November 12, 2009, the FDIC adopted a final rule requiring insured depository
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid
assessments for these periods were collected on December 30, 2009, along with
the regular quarterly risk-based deposit insurance assessment for the third
quarter of 2009. For the fourth quarter of 2009 and for all of 2010, the prepaid
assessment rate was based on each institution’s total base assessment rate in
effect on September 30, 2009, modified to assume that the assessment rate in
effect for the institution on September 30, 2009 was in effect for the entire
third quarter of 2009. On September 29, 2009, the FDIC increased annual
assessment rates uniformly by 3 basis points beginning in 2011. As a result, an
institution’s total base assessment rate for purposes of estimating an
institution’s assessment for 2011 and 2012 was increased by 3 basis points. Each
institution’s prepaid assessment base was calculated using its third quarter
2009 assessment base, adjusted quarterly for an estimated five percent annual
growth rate in the assessment base through the end of 2012. The Company paid
$2,678,000 for the three-year prepayment in December 2009, which will be
expensed over three years.




31




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.




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.


32





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





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


33


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 September 30,
2010, RDSI/DCM had relationships with 49 item processing and 19 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.





Six Months Ended June 30,
2010 compared to Six Months Ended June 30, 2009





Net
Income: For the six months ended June 30, 2010, net loss for the Company
was $(9.1) million, or $(1.86) per diluted share, compared to $2.11 million in
net income, or $0.43 per diluted share, for the first six months of 2009. This
reflects an increase in non-interest expense of $6.3 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 six months of 2010 of $7.3
million.





Net
Interest Income: Net interest income was $10.0 million, a decrease of
$0.40 million, or 3.9 percent, from 2009. Earning assets decreased $14.9
million, or 2.6 percent, over the prior year second quarter. The decrease in
earning assets was a result of loan paydowns over the past twelve months and
selective exit from undesirable loan relationships. Total loan balances at June
30, 2010 totaled $437.3 million.





Provision
for Loan Losses: The provision for loan losses was $7.89 million for 2010
compared to a $1.3 million provision for 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 $7.93 million compared to $0.44 million of net charge-offs
in 2009. At June 30, 2010, consolidated non-performing assets were $14 million,
or 2.17 percent of total assets compared with $11.5 million, or 1.74 percent of
total assets at June 30, 2009.





Non-interest
Income: Non-interest income was $11.49 million for the six months of 2010
compared with $15.35 million in 2009, a decrease of $3.86 million, or 25.2
percent. Data processing fees were down $3.3 million from the prior year,
reflecting the loss of clients at RDSI. Gains on loan sales (SBA, Residential
Mortgage and USDA) were down $0.69 million, reflecting lower loan
volume.


34


Non-interest
Expense: Non-interest expense was $27.9 million for the six months of
2010, compared with $21.6 million for the first six months of 2009. Software and
fixed asset impairment increased $4.9 million due to the write-downs at RDSI in
addition to the higher depreciation expense at RDSI of $1.2
million.





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





Net
Income:For the three months ended June 30, 2010, net loss for the
Company was $(8.2) million, or $(1.69) per diluted share, compared to $1.0
million in net income, or $0.20 per diluted share, for the second quarter of
2009. This reflects an increase in non-interest expense of $5.0 million and an
increase in the provision for loan losses of $5.7 million. RDSI had a net loss
for the quarter of $6.4 million.





Net
Interest Income: Net interest income was $5.1 million, a decrease of
$0.30 million, or 5.6 percent, from 2009. Net interest margin was 3.72% at June
30, 2010, compared to 3.82% at June 30, 2009.





Provision
for Loan Losses: The provision for loan losses was $6.5 million for the
second quarter of 2010 compared to a $0.79 million provision for the prior year
second quarter. 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 for the
quarter of $5.58 million compared to $0.28 million of net charge-offs in the
second quarter of 2009. For the second quarter of 2010, net charge-offs as a
percentage of average loans was 2.28 percent annualized, compared to .24 percent
annualized for the second quarter of 2009 (State Bank only).





($
      in Thousands) (State Bank Results Only)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009
                  
                  
                  June 30,
                    2009Net
      charge-offs
                  
                  $
                  2,579
                  
                  
                  $
                  2,547
                  
                  
                  $
                  275Non-performing
      loans
                  
                  $
                  12,401
                  
                  
                  $
                  18,543
                  
                  
                  $
                  10,173OREO
      / OAO
                  
                  $
                  1,651
                  
                  
                  $
                  1,775
                  
                  
                  $
                  1,346Non-performing
      assets
                  
                  $
                  14,052
                  
                  
                  $
                  20,319
                  
                  
                  $
                  11,519Non-performing
      assets / Total assets
                  
                  
                  2.17
                  %
                  
                  
                  3.02
                  %
                  
                  
                  1.74
                  %Allowance
      for loan losses / Total loans
                  
                  
                  1.59
                  %
                  
                  
                  1.55
                  %
                  
                  
                  1.33
                  %Allowance
      for loan losses / Non-performing assets
                  
                  
                  49.8
                  %
                  
                  
                  34.6
                  %
                  
                  
                  51.0
                  %





Non-interest
Income: Non-interest income was $4.71 million for the second quarter of
2010 compared with $7.9 million for the second quarter of 2009, a decrease of
$3.2 million, or 40.5 percent. Data processing fees were down $2.3 million from
the prior year, reflecting the loss of clients at RDSI.





Non-interest
Expense: Non-interest expense was $16.1 million for the second quarter of
2010, compared with $11.1 million in 2009. Software and fixed asset impairment
increased $4.3 million due to the write-downs at RDSI in addition to the higher
depreciation expense at RDSI of $0.69 million. The company also took a $0.22
million impairment on an OREO property.


35


Changes in Financial
Condition





June
30, 2010 vs. December 31, 2009





At June
30, 2010, total assets were $646.3 million, representing a decrease of $26.7
million, or 3.97 percent, from December 31, 2009. The decrease is primarily
attributable to a decrease of $15.2 million, or 3.38 percent, in
loans.





At June
30, 2010, liabilities totaled $593.1 million, a decrease of $18.2 million since
December 31, 2009. Of this decrease, significant changes include deposits, which
decreased $9.4 million, advances from the Federal Home Loan Bank, which
decreased $9.3 million and other liabilities, which decreased $4.7 million.
Offsetting the decreases was an increase of $5.5 million in Fed Funds
purchased.





From
December 31, 2009 to June 30, 2010, total shareholders’ equity decreased $8.5
million, or 13.78 percent, to $53.2 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 June 30, 2010 and December 31, 2009, goodwill comprised
$21.4 million of Rurban’s consolidated balance sheet. This includes $16.4
million at State Bank and $5.0 million at RDSI.





Capital
Resources





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





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
                        
                        
                        
                        11.3
                        %
                        
                        $
                        36.0
                        
                        
                        
                        8.0
                        %
                        
                        $
                        -
                        
                        
                        
                        N/AState
      Bank
                        
                        
                        49.8
                        
                        
                        
                        11.2
                        
                        
                        
                        35.6
                        
                        
                        
                        8.0
                        
                        
                        
                        44.5
                        
                        
                        
                        10.0





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


36


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 $142.6 million at June 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 six months ended June 30, 2010 follows.





The
Company experienced positive cash flows from operating activities for the six
months ended June 30, 2010 of $7.7 million. For the six months ended June 30,
2009, the Company experienced negative cash flows from operations of $6.9
million.





Net cash
flow from investing activities was a positive $1.2 million and a positive $2.0
million for the six months ended June 30, 2010 and 2009, respectively. The
changes in net cash from investing activities at June 30, 2010 included
available-for-sale securities purchases totaling $41.5 million. These cash
payments were offset by $26.1 million in proceeds from maturities of securities
and $10.0 million in proceeds from the sales of securities. Changes in net loans
were $4.4 million. The changes in net cash from investing activities at June 30,
2009 included the purchase of securities of $44.0 million and changes in loans
of $8.1 million. This was partially offset by the proceeds from maturities or
calls of securities of $37.7 million.





Net cash
flow from financing activities was a negative $13.4 million and a positive $2.4
million for the six months ended June 30, 2010 and 2009, respectively. The 2010
financing activities included a $3.0 million decrease in demand deposits, money
market, interest checking and savings accounts, and a $6.5 million decrease in
certificates of deposit. Proceeds from advances from the Federal Home Loan Bank
totaled $2.0 million, federal funds purchased totaled $5.5 million and proceeds
from notes payable totaled $2.3 million. Offsetting this increase were
repayments of Federal Home Loan Bank advances of $11.2 million and repayment of
notes payable of $1.0 million. The net cash provided by financing activities at
June 30, 2009 was primarily due to proceeds from advances from the FHLB which
totaled $7.5 million, federal funds purchased totaling $10.0 million and a $4.2
million increase in notes payable. This was partially offset by a net decrease
in deposits of $11.2 million and repayment of FHLB advances of $3.7
million.





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 June
30, 2010, the Company had unused federal funds lines and lines of credit
totaling $4.3 million.


37


The
Company’s contractual obligations as of June 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.





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.


38


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.





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 Company’s President and Chief Executive Officer (the
principal executive officer) and Executive Vice President and Chief Financial
Officer (the principal financial officer), 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 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 Executive
Vice President and Chief Financial Officer have concluded that, as a result of a
material weakness in internal control over financial reporting discussed below,
the Company’s disclosure controls and procedures were not effective as of June
30, 2010.


39


Material
Weakness





Management’s
evaluation of the Company’s disclosure controls and procedures as of the end of
the period covered by this Quarterly Report on Form 10-Q identified a material
weakness in the Company’s internal control over financial reporting. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected on a timely basis.





In
connection with the preparation of the Company’s condensed consolidated
financial statements for the quarterly period ended June 30, 2010, the Company
and its registered public accounting firm were required to perform significant
additional reconciliations and reviews as a result of the Company’s conversion
to a new data processing system during the second quarter of 2010, and the
Company’s subsequent conversion back to its previous data processing system.
Because of these additional reconciliations and reviews, the Company was unable
to complete the preparation of its June 30, 2010 financial statements in a
timely and accurate manner and, therefore, was unable to complete and file its
Form 10-Q within the time period prescribed by Securities and Exchange
Commission rules. Notwithstanding the identified material weakness, management
has concluded that the financial statements and other financial information
included in this Quarterly Report on Form 10-Q presents fairly in all material
respects the financial condition, results of operations and cash flows for the
periods presented.





Management
has taken remedial steps to address the material weakness discussed
above.


·
            Reviewed
      all customer transactions during the quarter to ensure proper posting to
      customer accounts.


·
            Worked
      with our registered public accounting firm to test samples of our customer
      transactions for appropriateness.


·
            Engaged
      an independent consulting firm to complete additional customer,
      transaction and general ledger testing for
  appropriateness.





Changes to Internal Control
Over Financial Reporting





Other
than the remedial steps taken to address the material weakness discussed above,
there were no changes in the Company’s internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
Company’s fiscal quarter ended June 30, 2010, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.


40


PART II – OTHER
INFORMATION





Item 1. Legal
Proceedings





There are
no material pending legal proceedings against the Company or any of its
subsidiaries other than ordinary, routine litigation incidental to their
respective businesses. In the opinion of management, this litigation should not,
individually or in the aggregate, have a material adverse effect on the
Company’s results of operations, 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. 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 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 September 30,
2010, RDSI/DCM had relationships with 49 item processing and 19 network services
clients.





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.


41





The
enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may
significantly affect the business activities of State Bank and the
Company.





On July
21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection 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.





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


a.
            Not
      applicable


b.
            Not
      applicable


c.
            The
      following table provides information regarding repurchases of the
      Company’s common shares during the three months ended June 30,
      2010:





Period
                        
                        Total Number of
                          Shares Purchased
                        
                        
                        Average Price
                          Paid per Share
                        
                        
                        Total Number of
                          Shares Purchased
                          as Part of Publicly
                          Announced Plans
                          or Programs
                        
                        
                        Maximum
                          Number of Shares
                          that May Yet Be
                          Purchased Under
                          the Plans or
                          Programs
                          (1)April
      1 through April 30, 2010
                        
                        
                        0
                        
                        
                        
                        N/A
                        
                        
                        
                        0
                        
                        
                        
                        84,346May
      1 through May 31, 2010
                        
                        
                        0
                        
                        
                        
                        N/A
                        
                        
                        
                        0
                        
                        
                        
                        84,346June
      1 through June 30, 2010
                        
                        
                        0
                        
                        
                        
                        N/A
                        
                        
                        
                        0
                        
                        
                        
                        84,346





(1)
            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. Through
      June 30, 2010, the Company had repurchased a total of 165,654 common
      shares under the stock repurchase program, which expired on October 12,
      2010.




42




Item 3. Defaults Upon Senior
Securities





Not
applicable





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)


43


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:
      October 25,
      2010
                              By
                              /s/ Mark A. KleinMark
      A. KleinPresident
      and Chief Executive
Officer




By
              /s/ Anthony V. CosentinoAnthony
      V. CosentinoExecutive
      Vice President andChief
      Financial Officer


44