UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934




For the
quarterly period ended March 31,
2010


OR





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


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from _________________to_______________________





Commission
file 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 xNo o




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


Yes oNo o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
Accelerate Filer oAccelerated Filer oNon-Accelerated
Filer oSmaller Reporting Company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x




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




Common
      Shares, without par value
              4,861,779
      shares(class)
              (Outstanding
      at May 17, 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
            
            
            24Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            
            34Item
      4.
            Controls
      and Procedures
            
            
            34PART
      II – OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            
            
            35Item
      1A.
            Risk
      Factors
            
            
            35Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            
            38Item
      3.
            Defaults
      Upon Senior Securities
            
            
            38Item
      4.
            [Reserved]
            
            
            38Item
      5.
            Other
      Information
            
            
            38Item
      6.
            Exhibits
            
            
            39Signatures
            
            
            
            40




2




PART I – FINANCIAL
INFORMATION





Item 1. Financial
Statements





The
interim condensed consolidated financial statements of Rurban Financial Corp.
(“Rurban” or the “Company”) are unaudited; however, the information contained
herein reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial condition and results of
operations for the interim periods presented.  All adjustments
reflected in these financial statements are of a normal recurring nature in
accordance with Rule 10-01 of Regulation S-X.  Results of operations
for the three months ended March 31, 2010 are not necessarily indicative of
results for the complete year.




3





Rurban
      Financial Corp.
                Condensed
      Consolidated Balance Sheets
                March
      31, 2010 and December 31, 2009
 
  March
              
              
              December2010
              
              
              2009(Unaudited)ASSETSCash
      and due from banks
              
              $
              37,404,242
              
              
              $
              24,824,785Cash
      and cash equivalents
              
              
              37,404,242
              
              
              
              24,824,785Available-for-sale
      securities
              
              
              106,855,099
              
              
              
              105,083,112Loans
      held for sale
              
              
              12,469,633
              
              
              
              16,857,648Loans,
      net of unearned income
              
              
              444,082,134
              
              
              
              452,557,581Allowance
      for loan losses
              
              
              (6,075,126
              )
              
              
              (7,030,178
              )Premises
      and equipment, net
              
              
              16,308,680
              
              
              
              16,993,640Purchased
      software
              
              
              4,307,523
              
              
              
              5,338,319Federal
      Reserve and Federal Home Loan Bank Stock
              
              
              3,748,250
              
              
              
              3,748,250Foreclosed
      assets held for sale, net
              
              
              1,613,937
              
              
              
              1,767,953Accrued
      interest receivable
              
              
              2,963,119
              
              
              
              2,324,868Goodwill
              
              
              21,414,790
              
              
              
              21,414,790Core
      deposits and other intangibles
              
              
              4,777,379
              
              
              
              4,977,513Cash
      value of life insurance
              
              
              12,896,092
              
              
              
              12,792,045Other
      assets
              
              
              11,037,845
              
              
              
              11,398,776Total
      assets
              
              $
              673,803,597
              
              
              $
              673,049,102
 See
notes to condensed consolidated financial statements
(unaudited)





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




4




Rurban
      Financial Corp.
                Condensed
      Consolidated Balance Sheets
                March
      31, 2010 and December 31, 2009
  March
              
              
              December2010
              
              
              2009(Unaudited)LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNon
      interest bearing demand
              
              $
              61,699,862
              
              
              $
              57,229,795Interest
      bearing NOW
              
              
              88,805,006
              
              
              
              87,511,973Savings
              
              
              43,772,462
              
              
              
              43,321,364Money
      Market
              
              
              93,022,350
              
              
              
              86,621,953Time
      Deposits
              
              
              211,645,981
              
              
              
              216,557,067Total
      deposits
              
              
              498,945,661
              
              
              
              491,242,152Notes
      payable
              
              
              3,380,935
              
              
              
              2,146,776Advances
      from Federal Home Loan Bank
              
              
              32,659,210
              
              
              
              35,266,510Fed
      Funds Purchased
              
              
              -
              
              
              
              5,000,000Repurchase
      Agreements
              
              
              49,111,099
              
              
              
              47,042,820Trust
      preferred securities
              
              
              20,620,000
              
              
              
              20,620,000Accrued
      interest payable
              
              
              1,200,836
              
              
              
              1,507,521Other
      liabilities
              
              
              7,031,313
              
              
              
              8,515,668Total
      liabilities
              
              
              612,949,054
              
              
              
              611,341,447Shareholders'
      EquityCommon
      stock
              
              
              12,568,583
              
              
              
              12,568,583Additional
      paid-in capital
              
              
              15,229,669
              
              
              
              15,186,042Retained
      earnings
              
              
              33,567,379
              
              
              
              34,415,316Accumulated
      other comprehensive income (loss)
              
              
              1,258,223
              
              
              
              1,307,025Treasury
      stock
              
              
              (1,769,311
              )
              
              
              (1,769,311
              )Total
      shareholders' equity
              
              
              60,854,543
              
              
              
              61,707,655Total
      liabilities and shareholders' equity
              
              $
              673,803,597
              
              
              $
              673,049,102
 
 See
notes to condensed consolidated financial statements
(unaudited)





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




5




Rurban
      Financial Corp.
                Condensed
      Consolidated Statements of Operations (Unaudited)
                Three
      Months Ended
  Three
      Months Ended
                March
      312010
              
              
              2009Interest
      incomeLoansTaxable
              
              $
              6,411,582
              
              
              $
              6,814,633Tax-exempt
              
              
              18,915
              
              
              
              25,457SecuritiesTaxable
              
              
              702,255
              
              
              
              1,079,497Tax-exempt
              
              
              319,063
              
              
              
              227,884Other
              
              
              31,448
              
              
              
              132Total
      interest income
              
              
              7,483,263
              
              
              
              8,147,603Interest
      expenseDeposits
              
              
              1,374,291
              
              
              
              1,898,304Other
      borrowings
              
              
              38,083
              
              
              
              14,392Retail
      Repurchase Agreements
              
              
              426,967
              
              
              
              427,487Federal
      Home Loan Bank advances
              
              
              352,817
              
              
              
              392,572Trust
      preferred securities
              
              
              386,624
              
              
              
              398,985Total
      interest expense
              
              
              2,578,782
              
              
              
              3,131,740Net
      interest income
              
              
              4,904,481
              
              
              
              5,015,863Provision
      for loan losses
              
              
              1,391,433
              
              
              
              495,142Net
      interest income after provision for loan losses
              
              
              3,513,048
              
              
              
              4,520,721Non-interest
      incomeData
      service fees
              
              
              4,029,406
              
              
              
              4,972,549Trust
      fees
              
              
              642,786
              
              
              
              583,623Customer
      service fees
              
              
              587,401
              
              
              
              574,699Net
      gain on sales of loans
              
              
              717,014
              
              
              
              1,078,047Net
      realized gain on sales of securities
              
              
              451,474
              
              
              
              53,807Investment
      securities recoveries
              
              
              73,774
              
              
              
              -Loan
      servicing fees
              
              
              153,842
              
              
              
              67,873Loss
      on sale of assets
              
              
              (28,652
              )
              
              
              (58,655
              )Other
      income
              
              
              155,981
              
              
              
              175,562Total
      non-interest income
              
              
              6,783,026
              
              
              
              7,447,505
 
 See
notes to condensed consolidated financial statements (unaudited)
  6




Three
      Months Ended
                March
      312010
              
              
              2009Non-interest
      expenseSalaries
      and employee benefits
              
              
              5,103,540
              
              
              
              4,924,122Net
      occupancy expense
              
              
              586,223
              
              
              
              626,281FDIC
      Insurance expense
              
              
              218,903
              
              
              
              46,120Equipment
      expense
              
              
              2,165,101
              
              
              
              1,613,393Software
      impairment expense
              
              
              568,535
              
              
              
              -Data
      processing fees
              
              
              194,786
              
              
              
              135,736Professional
      fees
              
              
              642,810
              
              
              
              498,055Marketing
      expense
              
              
              77,601
              
              
              
              188,746Printing
      and office supplies
              
              
              161,102
              
              
              
              214,542Telephone
      and communication
              
              
              386,206
              
              
              
              406,393Postage
      and delivery expense
              
              
              570,433
              
              
              
              609,022State,
      local and other taxes
              
              
              121,039
              
              
              
              232,896Employee
      expense
              
              
              279,925
              
              
              
              259,938Other
      expenses
              
              
              715,494
              
              
              
              719,780Total
      non-interest expense
              
              
              11,791,698
              
              
              
              10,475,024Income
      (loss) before income tax expense
              
              
              (1,495,624
              )
              
              
              1,493,202Income
      tax expense (benefit)
              
              
              (647,686
              )
              
              
              389,649Net
      income (loss)
              
              $
              (847,938
              )
              
              $
              1,103,553Earnings
      (loss) per common share:Basic
              
              $
              (0.17
              )
              
              $
              0.23Diluted
              
              $
              (0.17
              )
              
              $
              0.23





See
notes to condensed consolidated financial statements (unaudited)




7




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




Three
      Months EndedMar.
      31,2010
            
            
            Mar.
      31,2009Balance
      at beginning of period
            
            $
            61,707,655
            
            
            $
            61,662,004Net
      Income
            
            
            (847,938
            )
            
            
            1,103,553Unrealized
      gains (losses) on securitiesUnrealized
      holding gains (losses) arising during the year, net of
      tax
            
            
            249,171
            
            
            
            1,379,605Less:
      reclassification adjustment for gains realized in net income, net of
      tax
            
            
            297,972
            
            
            
            35,513Total
      comprehensive income
            
            
            (896,739
            )
            
            
            2,447,645Cash
      dividend
            
            
            -
            
            
            
            (438,958
            )Purchase
      of treasury shares
            
            
            -
            
            
            
            (80,247
            )Share-based
      compensation
            
            
            43,627
            
            
            
            30,066Balance
      at end of period
            
            $
            60,854,543
            
            
            $
            63,620,510





See
notes to condensed consolidated financial statements (unaudited)




8


Rurban
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


Three
Months Ended




March 31,2010
            
            
            March 31,2009Operating
      ActivitiesNet
      income (Loss)
            
            $
            (847,938
            )
            
            $
            1,103,553Items
      not requiring (providing) cashDepreciation
      and amortization
            
            
            1,991,083
            
            
            
            906,560Provision
      for loan losses
            
            
            1,391,433
            
            
            
            495,142Expense
      of share-based compensation plan
            
            
            43,627
            
            
            
            30,066Amortization
      of premiums and discounts on securities
            
            
            201,935
            
            
            
            126,959Amortization
      of intangible assets
            
            
            200,134
            
            
            
            221,911Deferred
      income taxes
            
            
            (20,568
            )
            
            
            (1,367,386
            )Proceeds
      from sale of loans held for sale
            
            
            69,929,801
            
            
            
            75,954,853Originations
      of loans held for sale
            
            
            (64,824,772
            )
            
            
            (80,148,083
            )Gain
      from sale of loans
            
            
            (717,014
            )
            
            
            (1,087,047
            )Gain
      on available for sale securities
            
            
            (451,474
            )
            
            
            (53,807
            )Loss
      on sale of foreclosed assets
            
            
            22,841
            
            
            
            58,655Loss
      on sales of fixed assets
            
            
            5,811
            
            
            
            27,878Changes
      inInterest
      receivable
            
            
            (638,251
            )
            
            
            100,473Other
      assets
            
            
            305,640
            
            
            
            (662,788
            )Interest
      payable and other liabilities
            
            
            (1,745,332
            )
            
            
            (1,884,229
            )Net
      cash provided by (used in) operating activities
            
            
            4,846,956
            
            
            
            (6,168,290
            )Investing
      ActivitiesPurchases
      of available-for-sale securities
            
            
            (23,365,873
            )
            
            
            (37,662,358
            )Proceeds
      from maturities of available-for-sale securities
            
            
            11,773,761
            
            
            
            10,851,012Proceeds
      from sales of available-for-sale securities
            
            
            9,995,724
            
            
            
            3,501,640Proceeds
      from sales of Fed Stock
            
            
            -
            
            
            
            700,000Net
      change in loans
            
            
            3,478,042
            
            
            
            15,677,493Purchase
      of premises and equipment and software
            
            
            (753,269
            )
            
            
            (347,271
            )Proceeds
      from sales of premises and equipment
            
            
            477,941
            
            
            
            645Proceeds
      from sale of foreclosed assets
            
            
            2,727,528
            
            
            
            127,090Net
      cash used in investing activities
            
            
            4,333,854
            
            
            
            (7,151,749
            )





See
notes to condensed consolidated financial statements (unaudited)




9


Rurban
Financial Corp.


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


Three
Months Ended




March 31,2010
            
            
            March 31,2009Financing
      ActivitiesNet
      increase in demand deposits, money market, interest checking and savings
      accounts
            
            $
            12,614,595
            
            
            $
            12,791,810Net
      decrease in certificates of deposit
            
            
            (4,911,086
            )
            
            
            (9,378,442
            )Net
      increase in securities sold under agreements to repurchase
            
            
            2,068,279
            
            
            
            4,468,865Repayment
      of Fed Funds Purchased
            
            
            (5,000,000
            )Proceeds
      from Federal Home Loan Bank advances
            
            
            -
            
            
            
            2,000,000Repayment
      of Federal Home Loan Bank advances
            
            
            (2,607,300
            )
            
            
            (2,587,836
            )Proceeds
      from notes payable
            
            
            2,000,000
            
            
            
            1,500,000Repayment
      of notes payable
            
            
            (765,841
            )
            
            
            -Purchase
      of treasury stock
            
            
            -
            
            
            
            (80,247
            )Dividends
      paid
            
            
            -
            
            
            
            (438,958
            )Net
      cash provided by financing activities
            
            
            3,398,647
            
            
            
            8,275,192Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            12,579,457
            
            
            
            (5,044,847
            )Cash
      and Cash Equivalents, Beginning of Year
            
            
            24,824,785
            
            
            
            28,059,532Cash
      and Cash Equivalents, End of Period
            
            $
            37,404,242
            
            
            $
            23,014,685Supplemental
      Cash Flows InformationInterest
      paid
            
            $
            2,885,467
            
            
            $
            3,373,057Transfer
      of loans to foreclosed assets
            
            $
            2,589,970
            
            
            $
            190,158Sale
      and financing of foreclosed assets
            
            $
            2,249,532
            
            
            $
            -





See
notes to condensed consolidated financial statements (unaudited)




10


RURBAN
FINANCIAL CORP.




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
A—BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form
10-Q.  Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  The financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly present
the financial position, results of operations and cash flows of the
Company.  Those adjustments consist only of normal recurring
adjustments.  Results of operations for the three months ended March
31, 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) have been computed based on the weighted average number of
shares outstanding during the periods presented. For the periods ended March 31,
2010 and 2009, share based awards totaling 481,213 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 EndedMarch 312010
            
            
            2009Basic
      earnings per share
            
            
            4,861,799
            
            
            
            4,875,936Diluted
      earnings per share
            
            
            4,861,799
            
            
            
            4,875,936





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





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





March
      31,
              
              
              December
      31,2010
              
              
              2009Commercial
              
              $
              81,595,768
              
              
              $
              84,642,860Commercial
      real estate
              
              
              179,752,511
              
              
              
              179,909,135Agricultural
              
              
              38,235,611
              
              
              
              41,485,301Residential
      real estate
              
              
              92,293,481
              
              
              
              92,971,599Consumer
              
              
              52,300,732
              
              
              
              53,655,238Lease
      financing
              
              
              207,861
              
              
              
              221,190Total
      loans
              
              
              444,385,964
              
              
              
              452,885,323LessNet
      deferred loan fees, premiums and discounts
              
              
              (303,830
              )
              
              
              (327,742
              )Loans,
      net of unearned income
              
              $
              444,082,134
              
              
              $
              452,557,581Allowance
      for loan losses
              
              $
              (6,075,126
              )
              
              $
              (7,030,178
              )





11




The
following is a summary of the activity in the allowance for loan losses account
for the three months ended March 31, 2010 and 2009.





Three
      Months EndedMarch 31,2010
            
            
            2009Balance,
      beginning of period
            
            $
            7,030,178
            
            
            $
            5,020,197Provision
      charged to expense
            
            
            1,391,433
            
            
            
            495,142Recoveries
            
            
            133,735
            
            
            
            20,994Loans
      charged off
            
            
            (2,480,220
            )
            
            
            (187,381
            )Balance,
      end of period
            
            $
            6,075,126
            
            
            $
            5,348,952




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




March
      31,
              
              
              December
      31,2010
              
              
              2009Non-accrual
      loans
              
              $
              14,399,482
              
              
              $
              18,543,368Accruing
      loans which are contractually past due 90 days or more as to interest or
      principal payments
              
              
              137,083
              
              
              
              -Total
      non-performing loans
              
              $
              14,536,565
              
              
              $
              18,543,368


In
addition to the above mentioned non-performers, management was very proactive in
reaching out to customers to restructure loans.  On March 31, 2010,
approximately $1.36 million in loans were restructured and are currently paying
under the new terms.  At December 31, 2009, $1.36 million in loans
were restructured and paying under the new terms.





Individual
loans determined to be impaired were as follows:





March
      31,
              
              
              December
      31,2010
              
              
              2009Loans
      with no allowance for loan losses allocated
              
              $
              984,480
              
              
              $
              1,099,912Loans
      with allowance for loan losses allocated
              
              
              9,066,435
              
              
              
              14,912,035Total
      impaired loans
              
              $
              10,050,915
              
              
              $
              16,011,947Amount
      of allowance allocated
              
              $
              3,607,180
              
              
              $
              3,041,967
  12


NOTE
D - NEW ACCOUNTING PRONOUNCEMENTS





In
June 2009, the FASB issued new guidance relating to the accounting for
transfers of financial assets. The new guidance was adopted into Codification in
December 2009 through the issuance of Accounting Standards Updated (“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 on its 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.





NOTE
E – SEGMENT INFORMATION




The
reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing
operations.  “Other” segment information includes the accounts of the
holding company, Rurban, which combined, provides management and operational
services to its subsidiaries.  Information reported internally for
performance assessment follows.




13




NOTE
      E -- SEGMENT INFORMATION (Continued)As
      of and for the three months ended March 31, 2010Data
              
              
              
              
              
              Total
              
              
              Intersegment
              
              
              ConsolidatedIncome
      statement information:
              
              Banking
              
              
              Processing
              
              
              Other
              
              
              Segments
              
              
              Elimination
              
              
              TotalsNet
      interest income (expense)
              
              $
              5,340,699
              
              
              $
              (61,403
              )
              
              $
              (374,815
              )
              
              $
              4,904,481
              
              
              
              
              
              $
              4,904,481Non-interest
      income - externalcustomers
              
              
              2,696,332
              
              
              
              4,029,407
              
              
              
              57,287
              
              
              
              6,783,026
              
              
              
              
              
              
              6,783,026Non-interest
      income - other segments
              
              
              25,072
              
              
              
              369,810
              
              
              
              273,454
              
              
              
              668,336
              
              
              
              (668,336
              )
              
              
              -Total
      revenue
              
              
              8,062,103
              
              
              
              4,337,814
              
              
              
              (44,074
              )
              
              
              12,355,843
              
              
              
              (668,336
              )
              
              
              11,687,507Non-interest
      expense
              
              
              6,060,473
              
              
              
              5,669,252
              
              
              
              730,309
              
              
              
              12,460,034
              
              
              
              (668,336
              )
              
              
              11,791,698Significant
      non-cash items:Depreciation
      andamortization
              
              
              258,522
              
              
              
              1,716,697
              
              
              
              15,864
              
              
              
              1,991,083
              
              
              
              -
              
              
              
              1,991,083Provision
      for loan losses
              
              
              1,391,433
              
              
              
              -
              
              
              
              -
              
              
              
              1,391,433
              
              
              
              -
              
              
              
              1,391,433Income
      tax expense (benefit)
              
              
              71,829
              
              
              
              (452,689
              )
              
              
              (266,826
              )
              
              
              (647,686
              )
              
              
              -
              
              
              
              (647,686
              )Segment
      profit (loss)
              
              $
              538,368
              
              
              $
              (878,749
              )
              
              $
              (507,557
              )
              
              $
              (847,938
              )
              
              $
              -
              
              
              $
              (847,938
              )Balance
      sheet information:Total
      assets
              
              $
              653,521,849
              
              
              $
              22,796,993
              
              
              $
              4,259,352
              
              
              $
              680,578,194
              
              
              $
              (6,774,597
              )
              
              $
              673,803,597Goodwill
      and intangibles
              
              $
              19,312,167
              
              
              $
              6,880,002
              
              
              $
              -
              
              
              $
              26,192,169
              
              
              $
              -
              
              
              $
              26,192,169Premises
      and equipment expenditures
              
              $
              132,861
              
              
              $
              620,408
              
              
              $
              -
              
              
              $
              753,269
              
              
              $
              -
              
              
              $
              753,269




14




NOTE
      E -- SEGMENT INFORMATION (Continued)As
      of and for the three months ended March 31, 2009Data
              
              
              
              
              
              Total
              
              
              Intersegment
              
              
              ConsolidatedIncome
      statement information:
              
              Banking
              
              
              Processing
              
              
              Other
              
              
              Segments
              
              
              Elimination
              
              
              TotalsNet
      interest income (expense)
              
              $
              5,439,653
              
              
              $
              (25,075
              )
              
              $
              (398,715
              )
              
              $
              5,015,863
              
              
              
              
              
              $
              5,015,863Non-interest
      income - externalcustomers
              
              
              2,481,920
              
              
              
              4,944,671
              
              
              
              20,914
              
              
              
              7,447,505
              
              
              
              
              
              
              7,447,505Non-interest
      income - other segments
              
              
              19,872
              
              
              
              428,016
              
              
              
              378,593
              
              
              
              826,481
              
              
              
              (826,481
              )
              
              
              -Total
      revenue
              
              
              7,941,445
              
              
              
              5,347,612
              
              
              
              792
              
              
              
              13,289,849
              
              
              
              (826,481
              )
              
              
              12,463,368Non-interest
      expense
              
              
              6,307,784
              
              
              
              4,184,780
              
              
              
              808,941
              
              
              
              11,301,505
              
              
              
              (826,481
              )
              
              
              10,475,024Significant
      non-cash items:Depreciation
      andamortization
              
              
              270,118
              
              
              
              611,956
              
              
              
              24,486
              
              
              
              906,560
              
              
              
              -
              
              
              
              906,560Provision
      for loan losses
              
              
              495,142
              
              
              
              -
              
              
              
              -
              
              
              
              495,142
              
              
              
              -
              
              
              
              495,142Income
      tax expense (benefit)
              
              
              275,062
              
              
              
              395,363
              
              
              
              (280,776
              )
              
              
              389,649
              
              
              
              -
              
              
              
              389,649Segment
      profit (loss)
              
              $
              863,457
              
              
              $
              767,469
              
              
              $
              (527,373
              )
              
              $
              1,103,553
              
              
              $
              -
              
              
              $
              1,103,553Balance
      sheet information:Total
      assets
              
              $
              644,158,701
              
              
              $
              20,244,226
              
              
              $
              3,203,320
              
              
              $
              667,606,247
              
              
              $
              (1,793,641
              )
              
              $
              665,812,606Goodwill
      and intangibles
              
              $
              19,953,018
              
              
              $
              7,075,797
              
              
              $
              -
              
              
              $
              27,028,815
              
              
              $
              -
              
              
              $
              27,028,815Premises
      and equipment expenditures
              
              $
              96,645
              
              
              $
              225,435
              
              
              $
              25,191
              
              
              $
              347,271
              
              
              $
              -
              
              
              $
              347,271




15




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 has been applied prospectively as of
the beginning of the period.





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







Level
      1Quoted prices in active markets for identical assets
      or liabilitiesLevel
      2Observable inputs other than Level 1 prices, such as
      quoted prices for similar assets or liabilities; quoted prices in markets
      that are not active; or other inputs that are observable or can be
      corroborated by observable market data for substantially the full term of
      the assets or liabilities





Level
      3Unobservable inputs that are supported by little or no
      market activity and that are significant to the fair value of the assets
      or liabilities





Available-for-Sale
Securities





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





The
following table presents the fair value measurements of assets measured at fair
value on a recurring basis and the level within ASC 820 fair value hierarchy in
which the fair value measurements fall at March 31, 2010 and December 31,
2009:





16




Fair
      Value Measurements Using:Description
            
            Fair
      Values at 3/31/2010
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Available-for-Sale
      SecuritiesU.S.
      Treasury and Government Agencies
            
            $
            21,896,539
            
            
            
            -
            
            
            $
            21,896,539
            
            
            
            -Mortgage-backed
      securities
            
            
            47,974,740
            
            
            
            -
            
            
            
            47,974,740
            
            
            
            -State
      and political subdivisions
            
            
            35,630,782
            
            
            
            -
            
            
            
            35,630,782
            
            
            
            -Money
      Market Mutual Fund
            
            
            1,330,038
            
            
            
            1,330,038
            
            
            
            -
            
            
            
            -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 Fund
            
            
            8,333,179
            
            
            
            8,333,179
            
            
            
            -
            
            
            
            -Equity
      securities
            
            
            23,000
            
            
            
            -
            
            
            
            23,000
            
            
            
            -





Level 1 –
Quoted Prices in Active Markets for Identical Assets


Level 2 –
Significant Other Observable Inputs


Level 3 –
Significant Unobservable Inputs





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 March 31, 2010 and December 31,
2009.





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.




17





Foreclosed Assets Held For
Sale





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





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





Fair
      Value Measurements Using:Description
            
            Fair
      Values at 3/31/2010
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Impaired
      loans
            
            $
            6,137,000
            
            
            
            -
            
            
            
            -
            
            
            $
            6,137,000Mortgage
      Servicing Rights
            
            $
            2,136,535
            
            
            
            -
            
            
            
            -
            
            
            $
            2,136,535Foreclosed
      Assets
            
            $
            28,000
            
            
            
            -
            
            
            
            -
            
            
            $
            28,000





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
            
            $
            356,455
            
            
            
            -
            
            
            
            -
            
            
            $
            356,455





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





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.




18





Loans




The
estimated fair value for loans receivable, including loans held for sale, net,
is based on estimates of the rate State Bank would charge for similar loans at
March 31, 2010 and December 31, 2009, applied for the time period until the
loans are assumed to re-price or be paid.




Deposits & Other
Borrowings




Deposits
include demand deposits, savings accounts, NOW accounts and certain money market
deposits. The carrying amount approximates the fair value. The estimated fair
value for fixed-maturity time deposits, as well as borrowings, is based on
estimates of the rate State Bank could pay on similar instruments with similar
terms and maturities at March 31, 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 approximate cost at March 31, 2010 and are not considered
significant to this presentation.




March
      31, 2010Carrying
              
              
              FairAmount
              
              
              ValueFinancial
      assetsCash
      and cash equivalents
              
              $
              37,404,242
              
              
              $
              37,404,000Available-for-sale
      securities
              
              
              106,855,099
              
              
              
              106,855,000Loans
      held for sale
              
              
              12,469,633
              
              
              
              12,698,000Loans,
      net of allowance for loan losses
              
              
              438,007,008
              
              
              
              437,312,000Federal
      Reserve and FHLB Bank stock
              
              
              3,748,250
              
              
              
              3,748,000Accrued
      interest receivable
              
              
              2,963,119
              
              
              
              2,963,000Financial
      liabilitiesDeposits
              
              $
              498,945,661
              
              
              $
              501,498,000Short-term
      borrowings
              
              $
              49,111,099
              
              
              $
              49,934,000Notes
      payable
              
              
              3,380,935
              
              
              
              3,386,000FHLB
      advances
              
              
              32,659,210
              
              
              
              33,748,000Trust
      preferred securities
              
              
              20,620,000
              
              
              
              20,151,000Accrued
      interest payable
              
              
              1,200,836
              
              
              
              1,201,000


19




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
              
              
              
              20,571,000




Note
G - Securities





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




Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              ApproximateCost
              
              
              Gains
              
              
              Losses
              
              
              Fair
      ValueAvailable-for-Sale
      Securities:March
      31, 2010U.S.
      Treasury andGovernment
      agencies
              
              $
              21,911,652
              
              
              $
              18,475
              
              
              $
              (33,588
              )
              
              $
              21,896,539Mortgage-backed
      securities
              
              
              46,986,548
              
              
              
              1,215,080
              
              
              
              (226,888
              )
              
              
              47,974,740State
      and political subdivisions
              
              
              34,697,461
              
              
              
              1,100,185
              
              
              
              (166,864
              )
              
              
              35,630,782Money
      Market Mutual Funds
              
              
              1,330,038
              
              
              
              -
              
              
              
              -
              
              
              
              1,330,038Equity
      securities
              
              
              23,000
              
              
              
              -
              
              
              
              -
              
              
              
              23,000$
              104,948,699
              
              
              $
              2,333,740
              
              
              $
              (427,340
              )
              
              $
              106,855,099




20





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




The
amortized cost and fair value of securities available for sale at March 31,
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.




March 31,
2010


Available
      for SaleAmortized
              
              
              FairCost
              
              
              ValueWithin
      one year
              
              $
              2,527,085
              
              
              $
              2,541,085Due
      after one year through five years
              
              
              7,873,199
              
              
              
              8,029,798Due
      after five years through ten years
              
              
              15,752,850
              
              
              
              15,992,020Due
      after ten years
              
              
              30,455,979
              
              
              
              30,964,41856,609,113
              
              
              
              57,527,321Mortgage-backed
      securities & equity and other securities
              
              
              48,339,586
              
              
              
              49,327,778Totals
              
              $
              104,948,699
              
              
              $
              106,855,099




The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $24,525,565 at March 31, 2010 and $24,104,265 at
December 31, 2009.  The securities delivered for repurchase agreements
were $55,820,723 at March 31, 2010 and 55,504,340 at December 31,
2009.





Gross
gains of $451,474 resulting from sales of available-for-sale securities were
realized as of March 31, 2010.  The tax expense for net security gains
for March 31, 2010 was $153,501.





Certain
investments in debt securities are reported in the financial statements at an
amount less than their historical cost.  Total fair value of these
investments was $27,613,024 at March 31, 2010 and $20,140,212 at December 31,
2009 which was approximately 26 and 19 percent, respectively, of the Company’s
available-for-sale investment portfolio at such dates.  Based on
evaluation of available evidence, including recent changes in market interest
rates, credit rating information and information obtained from regulatory
filings, management believes the declines in fair value for these securities are
temporary.  Should the impairment of any of these securities become
other than temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the other-than-temporary
impairment is identified.




21





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





March
      31, 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
              
              $
              9,362,510
              
              
              $
              (33,588
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              9,362,510
              
              
              $
              (33,588
              )Mortgage-backed
      securities
              
              
              9,720,188
              
              
              
              (13,254
              )
              
              
              2,288,963
              
              
              
              (213,634
              )
              
              
              12,009,151
              
              
              
              (226,888
              )State
      and political subdivisions
              
              
              5,246,865
              
              
              
              (124,852
              )
              
              
              994,498
              
              
              
              (42,012
              )
              
              
              6,241,363
              
              
              
              (166,864
              )$
              24,329,563
              
              
              $
              (171,694
              )
              
              $
              3,283,461
              
              
              $
              (255,646
              )
              
              $
              27,613,024
              
              
              $
              (427,340
              )




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
                
                
                
                (44,737
                )
                
                
                3,784,792
                
                
                
                (101,431
                )$
                16,893,212
                
                
                $
                (349,028
                )
                
                $
                3,247,000
                
                
                $
                (453,717
                )
                
                $
                20,140,212
                
                
                $
                (802,746
                )





The total
unrealized losses on the mortgage-backed securities portfolio, all of which are
residential mortgage backs, is derived mainly from three private label senior
tranche CMO securities.  Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concern warrants such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent of the
Company to not sell the investment and whether it is more likely than not that
the Company will be required to sell the security before recovery of its
amortized cost.  Management has determined there is no
other-than-temporary-impairment on these CMO securities.





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




22





Note
H – Strategic Partnership





On April
27, 2009, the Company announced a strategic partnership 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
partnership, 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.  It is anticipated that New Core
shareholders would receive between 15.5% and 26.8% of the shares of the
separately reorganized RDSI.





NOTE
I:  OTHER INTANGIBLES




On March
31, 2010, the Company’s subsidiary, RDSI, recorded a $568,000 impairment charge
on its ITI related software.  At March 31, 2010, it was determined that the
amortized cost of the software exceeded the discounted future cash flows related
to the software.





NOTE
J: DEBT COVENANT





Pursuant
to a loan covenant agreement between the Company and First Tennessee Bank,
National Association (“FTB”), the Company’s subsidiary bank, The State Bank and
Trust Company, certain performance ratios must be maintained.  They
include a minimum Tier 1 Capital ratio of 6 percent, a year-to-date ROA of 50
basis points and non-performing loan ratio of less than 2.25
percent.





As of
March 31, 2010, the Company was in violation of a debt covenant related to its
line of credit as the year-to-date ROA was (0.51) percent and non-performing
loans was 3.49 percent.  The covenant violations could result in the
note being called by FTB.




23






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 and those relating
to the planned spin-off of RDSI and merger of RDSI with New Core; (c) statements
of future economic performance; and (d) statements of future customer attraction
or retention; and (e) statements of assumptions underlying such
statements.  Words or phrases such as “anticipates,” “believes,”
“plans,” “intends,” “expects,” “projects,” “estimates,” “should,” “may,” “would
be,” “will allow,” “will likely result,” “ will continue,” “will remain,” or
other similar expressions are intended to identify forward-looking statements,
but are not the exclusive means of identifying those
statements.  Forward-looking statements are based on management’s
expectations and are subject to a number of risks and
uncertainties.  Although management believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from those expressed or implied in such
statements.  Risks and uncertainties that could cause actual results
to differ materially include, without limitation, changes in interest rates,
changes in the competitive environment, and changes in banking regulations or
other regulatory or legislative requirements affecting bank holding
companies.  Additional detailed information concerning a number of
important factors which could cause actual results to differ materially from the
forward-looking statements contained in Management’s Discussion and Analysis of
Financial Condition and Results of Operations is available in the Company’s
filings with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk
Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 and under the heading “Item 1A. Risk Factors” of
Part II of this Quarterly Report on Form 10-Q”.  Undue reliance should
not be placed on the forward-looking statements, which speak only as of the date
hereof.  Except as may be required by law, the Company undertakes no
obligation to update any forward-looking statement to reflect unanticipated
events or circumstances after the date on which the statement is
made.




Overview of
Rurban





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





Rurban
Statutory Trust I (“RST”) was established in August 2000.  In
September 2000, RST completed a pooled private offering of 10,000 Capital
Securities with a liquidation amount of $1,000 per security.  The
proceeds of the offering were loaned to the Company in exchange for junior
subordinated debentures of the Company with terms substantially similar to the
Capital Securities.  The sole assets of RST are the junior
subordinated debentures, and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Company of the obligations
of RST under the Capital Securities.




24





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





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





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





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.





Recent Developments Related
to RDSI





On April
27, 2009, RDSI announced a strategic partnership with New Core Holdings, Inc.
d/b/a New Core Banking Systems, headquartered in Birmingham, AL (“New
Core”).  As part of this partnership, RDSI and New Core 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.




25





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.  The spin-off of RDSI and the merger of
RDSI and New Core remain subject to the satisfaction of a number of conditions,
including the completion and effectiveness of required filings with the
Securities Exchange Commission and the final approval of Rurban’s Board of
Directors of the spin-off and its terms based on consideration of, among other
conditions, applicable market conditions, the fairness opinion provided by its
financial advisor, and the impact of the spin-off on the capital structures and
the current and anticipated capital needs of each of Rurban and State Bank, on
the one hand, and RDSI, on the other hand.





Following
RDSI’s April 2009 announcement of its proposed merger and strategic partnership
with New Core, RDSI received notice from Information Technology, Inc. and Fiserv
Solutions, Inc. (“Fiserv”) stating Fiserv’s intention to terminate a series of
license agreements between RDSI and Fiserv (the “License
Agreements”).  Pursuant to the License Agreements, RDSI licensed
Fiserv’s Premier and other software products which it used to provide data
processing services to many of its financial institution customers.





On May
22, 2009, RDSI received a complaint in a lawsuit filed against it by Fiserv in
the U.S. District Court for the District of Nebraska.  In the lawsuit,
Fiserv sought declaratory and injunctive relief relating to the License
Agreements and asserted claims for breach of contract.





On July
28, 2009, RDSI reached an agreement with Fiserv to wind down their licensing
relationship.  Pursuant to this agreement, after December 31, 2010,
Fiserv will no longer license its Premier suite of products to RDSI and RDSI
will exclusively market New Core’s Single SourceTM software
system.  RDSI customers which presently rely on the Premier platform
were provided the option to continue their processing with RDSI and convert to
Single SourceTM, or to move their processing to Fiserv and continue to use
Premier.  As of the date of the agreement with Fiserv (July 28, 2009),
RDSI had 74 data processing customers using Fiserv’s Premier
software.





RDSI also
provides item processing services to 43 customers through its DCM division,
which generated approximately 18 percent of RDSI’s total revenues in
2009.  The item processing services are provided by RDSI/DCM utilizing
software licensed from Bankware and, as a result, has not been and is not
expected to be impacted by the agreement with Fiserv or the transition of data
processing customers to Single SourceTM.





Since
entering into the agreement with Fiserv, RDSI has transitioned its marketing and
sales efforts to offering New Core’s Single SourceTM software to its current data
processing customers.  However, RDSI has encountered a number of
significant issues and challenges in connection with this
transition.  These issues and challenges include:





·
            RDSI
      has lost or will lose a significant number of its existing data processing
      customers in connection with the transition to Single
      SourceTM.  As of May 14, 2010, 53 of RDSI’s 74 customers had
      notified RDSI of their intentions to move their processing away from RDSI,
      with 29 of these customers having already de-converted from
      RDSI.  While RDSI currently has 10 contracts from existing RDSI
      customers (excluding State Bank) to convert to the Single SourceTM software
      and remain with RDSI, and New Core has six contracts with non-RDSI
      customers to convert to Single SourceTM, it is currently uncertain as to if
      and when these customers will be converted to Single SourceTM and/or begin
      to generate revenue for RDSI.




26




·
            RDSI
      and New Core have encountered significant challenges in converting RDSI’s
      first customer, State Bank, to Single SourceTM due to the fact that the
      Single SourceTM core system is untested in a bank environment of the size
      and complexity of State Bank.  RDSI has been running Single
      SourceTM as the primary data source for State Bank since the conversion of
      State Bank to this new core system on March 19, 2010, with State Bank’s
      previous data processing system also running essentially parallel to the
      Single SourceTM system since the conversion.  Since the
      conversion of State Bank, RDSI and State Bank have determined that the
      Single SourceTM system needs further enhancements to operate in a number of
      complex areas.  As the alternatives and necessary enhancements
      to the Single SourceTM software system are considered and addressed by RDSI
      and New Core, the Boards of Directors of State Bank and RDSI have agreed
      that State Bank will go back to its previous data processing system
      operated at RDSI.  It is expected that this transition of State
      Bank back to its previous data processing system will take approximately
      60 days.  No assurances can be given as to if or when State Bank
      will convert back over to the Single SourceTM system.  RDSI is
      communicating this development to the client banks that have contracted
      for the installation of Single SourceTM software, and this development may
      delay their conversion dates or result in some or all of these banks
      electing to seek other processing
alternatives.




·
            In
      view of the expected loss of customers and associated revenue by RDSI in
      connection with its transition to providing Single SourceTM software,
      together with the increased expenses associated with this transition and
      the contemplated spin-off of RDSI from Rurban and merger of RDSI with New
      Core, it is anticipated that RDSI will experience a significant net
      operating loss in 2010, and possibly beyond.  As a result, RDSI
      has agreed with regulators to seek additional equity and/or debt financing
      from outside sources unaffiliated with Rurban and State Bank to provide
      funding to support ongoing operations and business development of RDSI
      over the short-term and long-term through the end of 2011.  RDSI
      has further agreed that it will not convert any additional financial
      institution customers to the Single SourceTM until it has secured this
      additional financing.  No assurances can be given as to if or
      when RDSI will be able to secure this additional financing on terms
      acceptable to RDSI.  As a result, it is currently uncertain as
      to if and when additional customers will be converted to Single SourceTM
      and/or begin to generate revenue for
RDSI.




In view
of these recent developments relating to RDSI, the Boards of Directors of Rurban
and RDSI are in the process of evaluating various strategic alternatives for
RDSI to address these issues and uncertainties and to decide upon a strategic
direction for RDSI which will best further the interests of shareholders,
customers and other relevant constituencies.




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.




27





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





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





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





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




28





Impact of Accounting
Changes




None





Three Months Ended March 31,
2010 compared to Three Months Ended March 31, 2009





Net
Loss: Net loss for the first quarter of 2010 was $848 thousand or $(0.17)
per diluted share, compared to a net income of $1.10 million, or $0.23 per
diluted share, for the first quarter of 2009.  The quarter reflects an
increase in non-interest expense of $1.32 million and an increase in the
provision for loan losses of $896 thousand.  Net interest income was
flat versus the prior year at $4.90 million and non-interest income was down
$664 thousand.  Non-interest income was negatively impacted by the
loss of clients within the RDSI subsidiary.  Non-interest expense was
driven by $1.3 million in expenses related to the pending spin-off of
RDSI.





Net
Interest Income: Net interest income for the first quarter of 2010 was
$4.90 million, a decrease of $111 thousand, or 2.22 percent, from the 2009 first
quarter.  Average earning assets increased $6.1 million, or 1.1
percent, over the prior-year first quarter.  The increase in earning
assets is a result of loan growth over the past twelve months of $10.1 million,
or 2.3 percent, reaching $444.1 million at March 31,
2010.  Year-over-year, the net interest margin decreased 9 basis
points from 3.67 percent for the first quarter 2009 to 3.58 percent for the
first quarter 2010.  The 3.56 percent represents a 19 basis point
decline from the linked quarter of 3.77 percent.





Provision
for Loan Losses: The provision for loan losses was $1,391,000 for the
first quarter of 2010 compared to a $495,000 provision for the first quarter of
2009.  The Company experienced an increase in losses year-over-year,
which is reflected in net charge-offs of $2,346,000 compared to $169,000 of net
charge-offs in the 2009 first quarter.  For the first quarter ended
March 31, 2010, net charge-offs as a percentage of average loans was 2.05
percent annualized.  At quarter-end, consolidated non-performing
assets were $16.0 million, or 2.38 percent of total assets, compared with $10.6
million, or 1.59 percent of total assets for the prior-year first
quarter.




29




($
      in Thousands)
            
            March 31,
              2010
            
            
            December 31,
              2009
            
            
            March 31,
              2009Net
      charge-offs
            
            $
            2,346
            
            
            $
            2,547
            
            
            $
            167Non-performing
      loans
            
            $
            16,016
            
            
            $
            20,319
            
            
            $
            10,589OREO
      / OAO
            
            $
            1,616
            
            
            $
            1,775
            
            
            $
            1,426Non-performing
      assets
            
            $
            11,394
            
            
            $
            6,587
            
            
            $
            6,270Non-performing
      assets / Total assets
            
            
            2.38
            %
            
            
            3.02
            %
            
            
            1.59
            %Allowance
      for loan losses / Total loans
            
            
            1.37
            %
            
            
            1.55
            %
            
            
            1.23
            %Allowance
      for loan losses / Non-performing assets
            
            
            37.9
            %
            
            
            34.6
            %
            
            
            50.5
            %





Non-interest
Income: Non-interest income was $6.78 million for the first quarter of
2010 compared with $7.45 million for the prior-year first quarter, a decrease of
$664,500, or 8.92 percent.  The first quarter results were primarily
driven by the decrease in data servicing fees relating to the loss of customers
by RDSI and lower gains on loan sales.  Those decreases were partially
offset by gains on security sales.





Non-interest
Expense: Non-interest expense was $11.8 million for the first quarter of
2010, compared with $10.48 million for the first quarter of 2009.  As
previously discussed, the quarterly expense was inflated due to the non-cash
charges for RDSI related to amortization and impairment for
software.





Income
Taxes: Income taxes amounted to a benefit of $848,000 for the first
quarter of 2010.  The effective tax rate for the first quarter was
impacted by the pretax loss and the benefit of tax exempt assets including
Municipal securities and Bank Owned Life Insurance.  The effective tax
rate for the first quarter of 2009 was 26 percent.





Changes in Financial
Condition





March
31, 2010 vs. December 31, 2009





At March
31, 2010, total assets were $673.8 million, which were flat in comparison to the
$673.0 million of total assets at December 31, 2009.  Loans held for
sale decreased $4.4 million, while loans, net of unearned income, decreased $8.5
million.  The decrease was driven mainly by pay downs on commercial
and agricultural loans.





At March
31, 2010, liabilities totaled $612.9 million, an increase of $1.6 million since
December 31, 2009.  Of this increase, significant changes include an
increase of $7.7 million in total deposits, as savings, interest checking and
money market deposits increased $12.7 million, while time deposits decreased
$5.0 million.  Advances from the Federal Home Loan Bank and Fed Fund
purchases were down $7.6 million from December 31, 2009.




30





From
December 31, 2009 to March 31, 2010, total shareholders’ equity decreased $0.8
million to $60.9 million.  There were no cash dividends paid to
shareholders during the March 2010 or December 2009 quarters.





Capital
Resources





At March
31, 2010, actual capital levels (in millions) and minimum required levels were
as follows:




Actual
                
                
                Minimum
      Required
                  For
      Capital
                  Adequacy
      Purposes
                
                
                Minimum
      Required
                  To
      Be Well Capitalized
                  Under
      Prompt Corrective
                  Action
      RegulationsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioTotal
      capital (to risk weighted assets)Consolidated
                
                $
                59.0
                
                
                
                12.9
                %
                
                $
                36.5
                
                
                
                8.0
                %
                
                $
                -
                
                
                
                N/AState
      Bank
                
                
                50.9
                
                
                
                11.5
                
                
                
                35.4
                
                
                
                8.0
                
                
                
                44.2
                
                
                
                10.0


Both the
Company and State Bank were categorized as well capitalized at March 31,
2010.





LIQUIDITY





Liquidity
relates primarily to the Company’s ability to fund loan demand, meet deposit
customers’ withdrawal requirements and provide for operating
expenses.  Assets used to satisfy these needs consist of cash and due
from banks, federal funds sold, interest-earning deposits in other financial
institutions, securities available-for-sale and loans held for
sale.  These assets are commonly referred to as liquid
assets.  Liquid assets were $156.7 million at March 31, 2010 compared
to $146.8 million at December 31, 2009.





The
Company’s commercial real estate, multi-family and residential first mortgage
portfolio of $272.0 million at March 31, 2010 and $269.5 million at December 31,
2009, which can and has been used to collateralize borrowings, is an additional
source of liquidity.  Management believes the Company’s current
liquidity level, without these borrowings, is sufficient to meet its liquidity
needs.  At March 31, 2010, all eligible commercial real estate and
first mortgage loans were pledged under an FHLB blanket lien.





The cash
flow statements for the periods presented provide an indication of the Company’s
sources and uses of cash, as well as an indication of the ability of the Company
to maintain an adequate level of liquidity.  A discussion of the cash
flow statements for the three months ended March 31, 2010 and 2009
follows.





The
Company experienced positive cash flows from operating activities for the three
months ended March 31, 2010 and negative cash flows for the three months ended
March 31, 2009.  Net cash provided in operating activities was $4.85
million for the three months ended March 31, 2010.  Net cash used in
operating activities was $6.17 million for the three months ended March 31,
2009.





Net cash
flow from investing activities was a provider of cash of $4.33 million and a use
of $7.15 million for the three months ended March 31, 2010 and 2009,
respectively.  The changes in net cash from investing activities at
March 31, 2010 included available-for-sale securities purchases totaling $23.4
million.  These cash payments were offset by $11.8 million in proceeds
from maturities of securities and $10.0 million in proceeds from the sales of
securities.  The changes in net cash from investing activities at
March 31, 2009 included the purchase of securities of $37.7 million, net changes
in loans of 15.7 million and the purchases of equipment and software of $640
thousand.  This was partially offset by the proceeds from maturities
or calls of securities of $10.9 million and proceeds from the sale of Fed stock
of $700 thousand.




31





Net cash
flow from financing activities was $3.4 million and $8.3 million for the three
month periods ended March 31, 2010 and 2009, respectively.  The 2010
financing activities included a $12.6 million increase in demand deposits, money
market, interest checking and savings accounts, which were offset by a $4.9
million decrease in certificates of deposit.  Offsetting this increase
were repayments of Federal Home Loan Bank advances of $2.61 million, and
repayment of Fed Fund advances of $5.0 million.  The net cash provided
by financing activities at March 31, 2009 was primarily due to proceeds from
advances from the FHLB which totaled $2.0 million; and a $4.47 million increase
in repurchase agreements.  Deposits increased $3.4 million, with
demand deposits, money market, interest checking and savings accounts increasing
$12.8 million and certificate of deposit balances decreasing $9.4
million.  Partially offsetting these increases were repayment of FHLB
advances of $2.59 million and cash dividends paid to shareholders of $440
thousand.





Off-Balance-Sheet
Borrowing Arrangements:





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





Approximately
$139.4 million of the Company’s $272.0 million commercial real estate,
multi-family and residential first mortgage loans qualify to collateralize FHLB
borrowings and have been pledged to meet FHLB collateralization requirements as
of March 31, 2010.  Based on the current collateralization
requirements of the FHLB, no additional borrowing capacity existed at March 31,
2010. The Company also had $22.3 million in unpledged securities that may be
used to pledge for additional borrowings.





At March
31, 2010, the Company had unused federal funds lines totaling $13.5
million.  At December 31, 2009, the Company had $20.5 million in
federal funds lines.  Federal funds borrowed at March 31, 2010 and
December 31, 2009 totaled $0 and $0, respectively.  The Company also
has a $5.0 million line of credit with a regional bank.  Advances on
this line totaled $1.5 million and $0 at March 31, 2010 and December 31, 2009
respectively.





The
Company’s contractual obligations as of March 31, 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 $32.7 million.  Other debt obligations were comprised
of Trust Preferred Securities of $20.6 million.  The Company’s
operating lease obligations consist of a lease on the State Bank operations
building of $99,600 per year, a lease on the RDSI-North building of $162,000 per
year, a lease on the Northtowne branch of State Bank of $60,000 per year and a
lease on the RDSI/DCM Lansing facility of $61,000 per year.  Other
long-term liabilities were comprised of time deposits of $211.6
million.





32





ASSET LIABILITY
MANAGEMENT





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





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





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





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





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




33





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




ITEM 3 Quantitative and Qualitative
Disclosures About Market Risk





Management
believes there has been no material change in the Company’s market risk since
the Company’s Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2009.





Item 4. Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures





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





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





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





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





Changes in Internal Control
Over Financial Reporting





There
were no changes in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
Company’s fiscal quarter ended March 31, 2010, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.




34


PART II – OTHER
INFORMATION





Item 1. Legal
Proceedings




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





Item 1A. Risk
Factors





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.  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.





RDSI will lose a significant number
of existing customers and associated revenue in connection with its transition
from licensing Fiserv’s Premier software to exclusively marketing and licensing
Single SourceTM software, and this loss of customers and revenues is expected to
result in a net loss by RDSI in 2010 and possibly beyond.





It is
anticipated that RDSI will lose a significant number of its existing customers
and associated revenue in connection with its transition to providing the Single
SourceTM software.  Since entering into the agreement with Fiserv on
July 28, 2009, RDSI has transitioned its marketing and sales efforts to offering
New Core’s Single SourceTM software to its current data processing
customers.  However, RDSI has lost or will lose a significant number
of its existing data processing customers in connection with the transition to
Single SourceTM.  As of May 14, 2010, 53 of RDSI’s 74 customers had
notified RDSI of their intentions to move their processing away from RDSI, with
29 of these customers having already de-converted from
RDSI.  While  RDSI currently has 10 contracts from existing
RDSI customers (excluding State Bank) to convert to the Single SourceTM software
and remain with RDSI, and New Core has six contracts with non-RDSI customers to
convert to Single SourceTM, it is currently uncertain as to if and when these
customers will be converted to Single SourceTM and/or begin to generate revenue
for RDSI.  In view of the expected loss of customers and associated
revenue by RDSI in connection with its transition to providing Single SourceTM
software, together with the increased expenses associated with this transition
and the contemplated spin-off of RDSI from Rurban and merger of RDSI with New
Core, it is anticipated that RDSI will experience a significant net operating
loss in 2010, and possibly beyond.




35





RDSI
has and may continue to encounter significant challenges in converting client
banks to the Single SourceTM software.





Single
SourceTM is a new and relatively unproven software technology, and RDSI has and
may continue to encounter significant challenges in the conversion of client
banks to Single SourceTM.  Currently, only two banks are using the
Single SourceTM software.  One of these banks, which has approximately
$350 million in total assets and 16 banking location, has been running Single
SourceTM since February, 2008.  The second of these banks is Rurban’s
subsidiary, State Bank, which was converted to the Single SourceTM system on
March 19, 2010.  RDSI and New Core have encountered significant
challenges in converting RDSI’s first customer, State Bank, to Single SourceTM
due to the fact that the Single SourceTM core system is untested in a bank
environment of the size and complexity of State Bank.  RDSI has been
running Single SourceTM as the primary data source for State Bank since the
conversion of State Bank to this new core system on March 19, 2010, with State
Bank’s previous data processing system also running essentially parallel to the
Single SourceTM system since the conversion.  Since the conversion of
State Bank, RDSI and State Bank have determined that the Single SourceTM system
needs further enhancements to operate in a number of complex
areas.  As the alternatives and necessary enhancements to the Single
SourceTM software system are considered and addressed by RDSI and New Core, the
Boards of Directors of State Bank and RDSI have agreed that State Bank will go
back to its previous data processing system operated at RDSI.  It is
expected that this transition of State Bank back to its previous data processing
system will take approximately 60 days.  No assurances can be given as
to if or when State Bank will convert back over to the Single SourceTM
system.  RDSI is communicating this development to the client banks
that have contracted for the installation of Single SourceTM software, and this
development may delay their conversion dates or result in some or all of these
banks electing to seek other processing alternatives.  In the event
that the RDSI and New Core are unable to successfully and timely complete the
necessary enhancements to the Single SourceTM system identified in connection
with the State Bank conversion, or any further enhancements and/or modifications
which may become necessary in connection with future conversions of client
banks, it is likely to have a material adverse effect on RDSI’s results of
operations and financial condition.




RDSI
may be unable to secure additional financing on acceptable terms when and to the
extent needed to support ongoing operations and planned business development and
growth activities.





In view
of the expected loss of customers and associated revenue by RDSI in connection
with its transition to providing Single SourceTM software, together with the
increased expenses associated with this transition and the contemplated spin-off
of RDSI from Rurban and merger of RDSI with New Core, it is anticipated that
RDSI will experience a significant net operating loss in 2010, and possibly
beyond.  As a result, RDSI has agreed with regulators to seek
additional equity and/or debt financing from outside sources unaffiliated with
Rurban and State Bank to provide funding to support ongoing operations and
business development of RDSI over the short-term and long-term through the end
of 2011.  RDSI has further agreed that it will not convert any
additional financial institution customers to the Single SourceTM until it has
secured this additional financing.  No assurances can be given as to
if or when RDSI will be able to secure this additional financing on terms
acceptable to RDSI.  In addition, no assurances can be given that RDSI
will not be required to obtain additional financing in the future to support
ongoing operations and planned business development and growth
activities.  RDSI’s ability to secure additional financing will depend
upon conditions in the financial and capital markets, economic conditions and a
number of other factors, many of which are outside RDSI’s control, and on RDSI’s
financial performance and condition.  If RDSI cannot secure additional
financing when needed, it is likely to have a material adverse effect on RDSI’s
financial condition and results of operations.




The
loss of a significant number of bank clients by RDSI may cause the goodwill
reflected on RDSI’s balance sheet to become impaired.





The loss
of a significant number of bank clients by RDSI may cause the current portion of
goodwill reflected on RDSI’s balance sheet to become impaired, which may require
RDSI to record a loss through its income statement. The RDSI goodwill was tested
for impairment during the first quarter of 2010, and it was determined that
there was no impairment at that time.  RDSI will continue to test
goodwill for impairment on a quarterly basis going forward.




36





Failure
to complete the planned spin-off of RDSI and the merger of RDSI with New Core
could adversely impact the market price of our common shares as well as the
business and operating results of the Company and RDSI.





The
spin-off of RDSI and the merger of RDSI and New Core remain subject to the
satisfaction of a number of conditions, including the completion and
effectiveness of required filings with the Securities Exchange Commission and
the final approval of Rurban’s Board of Directors of the spin-off and its terms
based on consideration of, among other conditions, applicable market conditions,
the fairness opinion provided by its financial advisor, and the impact of the
spin-off on the capital structures and the current and anticipated capital needs
of each of Rurban and State Bank, on the one hand, and RDSI, on the other
hand.  If the planned spin-off of RDSI and the merger of RDSI with New
Core are not completed for any reason, the price of Rurban common shares may
decline to the extent that the market price of the Company’s common shares
reflects positive market assumptions that the spin-off and the merger will be
completed and the related benefits will be realized.  The Company and
RDSI may also be subject to additional risks if the spin-off and the merger are
not completed, including the risk that RDSI will not be able to recover the
substantial costs incurred in connection with the contemplated spin-off and
merger, such as fees for financial advisors, attorneys and auditors, or to
obtain repayment in full of the loans and advances made by RDSI to New Core in
connection with the planned merger; the risks associated with the potential
disruption to the respective businesses of the Company and RDSI and the
distraction of their respective workforce and management teams in connection
with the planned spin-off and merger; the possible payment of a break-up fee by
RDSI to New Core under the terms of the Agreement and Plan of Merger; and the
risk of possible legal disputes with New Core that could arise in connection
with the failure to complete the merger.





37




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 March 31,
      2010:





Period
            
            Total
      Number of Shares Purchased (1)
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            
            
            Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
      Under the Plans or Programs (2)Jan.
      1 through Jan. 31, 2010
            
            
            722
            
            
            $
            6.92
            
            
            
            -
            
            
            
            84,346February
      1 through  February 28, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            84,346March
      1 through March 31, 2010
            
            
            3,730
            
            
            $
            6.00
            
            
            
            -
            
            
            
            84,346





(1)
            All
      of the repurchased shares, other than the shares repurchased as part of
      the publicly announced plan, were purchased in the open market by Reliance
      Financial Services, an indirect subsidiary of the Company, in its capacity
      as the administrator of the Company’s Employee Stock Ownership and Savings
      Plan.(2)
            On
      July 15, 2009, the Company announced that its Board of Directors had
      authorized an extension to the stock repurchase program for an additional
      fifteen months.  The original stock repurchase program was
      announced in April, 2007 for fifteen months authorizing the purchase of
      250,000 common shares.  The Company has suspended stock
      repurchases pursuant to this program pending the planned spin-off of
      RDSI.







Item 3. Defaults Upon Senior
Securities





Not
applicable





Item 4.
[Reserved]








Item 5. Other
Information





Not
applicable




38





Item 6.
Exhibits





Exhibits




2.1
            -
            Agreement
      and Plan of Merger, dated as of April 25, 2009, by and among
      Rurbanc  Data Services, Inc., NC Merger Corp. and New Core
      Holdings, Inc. (Incorporated herein by reference to Exhibit 2.1 to Rurban
      Financial Corp.’s Current Report on Form 8-K filed April 29, 2009 (File
      No. 0-13507))2.2
            -
            First
      Amendment to Agreement and Plan of Merger, dated as of December 29, 2009,
      by and among Rurbanc Data Services, Inc., NC Merger Corp. and New Core
      Holdings, Inc. (Incorporated hereby by reference to Exhibit 2.3 to Rurban
      Financial Corp.’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2009 (File No. 0-13507))3.1
            -
            Amended
      Articles of Rurban Financial Corp., as amended (Incorporated herein by
      reference to Exhibit 3(a)(i) to Rurban Financial Corp.’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 1989 (File No.
      0-13507))3.2
            -
            Certificate
      of Amendment to the Amended Articles of Rurban Financial Corp.(Incorporated herein by
      reference to Exhibit 3(b) to Rurban Financial Corp.’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 1993 (File No.
      0-13507))3.3
            -
            Certificate
      of Amendment to the Amended Articles of Rurban Financial Corp.
      (Incorporated herein by reference to Exhibit 3(c) to Rurban Financial
      Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31,
      1997 (File No. 0-13507))3.4
            -
            Amended
      and Restated Articles of Rurban Financial Corp. [Note: filed for purposes of
      SEC reporting compliance only – this document has not been filed with the
      Ohio Secretary of State.]3.5
            -
            Amended
      and Restated Regulations of Rurban Financial Corp. (Incorporated herein by
      reference to Exhibit 3.5 to Rurban Financial Corp.’s Annual Report on Form
      10-K for the fiscal year ended December 31, 2005 (File No.
      0-13507))3.6
            -
            Certificate
      Regarding Adoption of Amendment to Section 2.01 of the Amended and
      Restated Regulations of Rurban Financial Corp. by the Shareholders on
      April 16, 2009 (Incorporated herein by reference to Exhibit 3.1 to Rurban
      Financial Corp.’s Current Report on Form 8-K filed April 22, 2009 (File
      No. 0-13507))31.1
            -
            Rule
      13a-14(a)/15d-14(a) Certification (Principal Executive
  Officer)31.2
            -
            Rule
      13a-14(a)/15d-14(a) Certification (Principal Financial
  Officer)32.1
            -
            Section
      1350 Certification (Principal Executive Officer)32.2
            -
            Section
      1350 Certification (Principal Financial
Officer)




39





SIGNATURES





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




RURBAN
      FINANCIAL CORP.Date:  May 17,
      2010
              By
              /s/
      Mark A. KleinMark
      A. KleinPresident
      & Chief Executive OfficerBy
              /s/
      Anthony V. CosentinoAnthony
      V. CosentinoExecutive
      Vice President &Chief
      Financial Officer
  40