UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





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


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      quarterly period ended June
      30,
      2008




OR





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from _________________to____________________





Commission
      file number 0-13507





RURBAN
      FINANCIAL CORP.


(Exact
      name of registrant as specified in its charter)





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





401
      Clinton Street, Defiance, Ohio 43512


(Address
      of principal executive offices)


(Zip
      Code)





(419)
      783-8950


(Registrant’s
      telephone number, including area code)





None


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes x No
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definition of “large accelerated filer, accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerate Filer
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**
            
            **4,913,933
                shares****(class)**
            
            **(Outstanding
                at August 13, 2008)**














**RURBAN
      FINANCIAL CORP.**





**FORM
      10-Q**





**TABLE
      OF CONTENTS**




**Page****PART
                I - FINANCIAL INFORMATION**Item
                1.
            
            Financial
                Statements
            
            3Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            25Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            33Item
                4T.
            
            Controls
                and Procedures
            
            35**PART
                II - OTHER INFORMATION**Item
                1.
            
            Legal
                Proceedings
            
            36Item
                1A.
            
            Risk
                Factors
            
            36Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            36Item
                3.
            
            Defaults
                Upon Senior Securities
            
            36Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            37Item
                5.
            
            Other
                Information
            
            37Item
                6.
            
            Exhibits
            
            37Signatures
            
            
            
            38





2


**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





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




3




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


**June
                30,**
            
            **December
                31,****2008**
            
            **2007****Assets**
            
            **(Unaudited)**Cash
                and due from banks
            
            $
            11,876,639
            
            $
            15,183,627Federal
                funds sold
            
            
            -
            
            
            2,000,000Cash
                and cash equivalents
            
            
            11,876,639
            
            
            17,183,627Available-for-sale
                securities
            
            
            96,706,231
            
            
            92,661,386Loans
                held for sale
            
            
            2,644,049
            
            
            1,649,758Loans,
                net of unearned income
            
            
            404,434,895
            
            
            389,268,744Allowance
                for loan losses
            
            
            (4,246,794
            )
            
            (3,990,455
            )Premises
                and equipment
            
            
            15,128,647
            
            
            15,128,754Purchased
                software
            
            
            4,656,742
            
            
            4,282,563Federal
                Reserve and Federal Home Loan Bank stock
            
            
            4,105,000
            
            
            4,021,200Foreclosed
                assets held for sale, net
            
            
            1,479,561
            
            
            124,131Interest
                receivable
            
            
            2,757,523
            
            
            3,008,968Goodwill
            
            
            13,940,618
            
            
            13,940,618Core
                deposits and other intangibles
            
            
            4,788,465
            
            
            5,135,228Cash
                value of life insurance
            
            
            12,393,478
            
            
            12,160,581Other
            
            
            5,847,772
            
            
            6,638,895Total
                assets
            
            $
            576,512,826
            
            $
            561,213,998




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





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




4


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


**June
                30,**
            
            **December
                31,****2008**
            
            **2007****Liabilities
                and Stockholders’ Equity**
            
            **(Unaudited)****Liabilities**DepositsDemand
            
            $
            41,419,072
            
            $
            41,541,297Savings,
                interest checking and money market
            
            
            154,140,138
            
            
            141,009,043Time
            
            
            206,998,707
            
            
            223,480,842Total
                deposits
            
            
            402,557,917
            
            
            406,031,182Notes
                payable
            
            
            -
            
            
            922,457Federal
                Home Loan Bank advances
            
            
            37,808,264
            
            
            24,000,000Federal
                Funds Purchased
            
            
            3,600,000
            
            
            -Retail
                repurchase agreements
            
            
            44,509,511
            
            
            43,006,438Trust
                preferred securities
            
            
            20,620,000
            
            
            20,620,000Interest
                payable
            
            
            2,158,948
            
            
            2,532,914Other
                liabilities
            
            
            5,896,457
            
            
            4,775,773Total
                liabilities
            
            
            517,151,097
            
            
            501,888,764**Commitments
                and Contingent Liabilities****Stockholders’
                Equity**Common
                stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433
                shares; outstanding June 2008 - 4,913,933 shares, December 2007 -
                4,978,933 shares
            
            
            12,568,583
            
            
            12,568,583Additional
                paid-in capital
            
            
            14,964,795
            
            
            14,923,571Retained
                earnings
            
            
            33,916,713
            
            
            32,361,106Accumulated
                other comprehensive income (loss)
            
            
            (761,502
            )
            
            82,235Treasury
                Stock, at costCommon;
                June 2008 - 113,500 shares, December 2007 - 48,500 shares
            
            
            (1,326,860
            )
            
            (610,260
            )Total
                stockholders’ equity
            
            
            59,361,729
            
            
            59,325,235Total
                liabilities and stockholders’ equity
            
            $
            576,512,826
            
            $
            561,213,998





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





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




5


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


**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Interest
                Income**LoansTaxable
            
            $
            7,023,308
            
            $
            6,976,506Tax-exempt
            
            
            20,469
            
            
            17,250SecuritiesTaxable
            
            
            1,090,570
            
            
            1,044,300Tax-exempt
            
            
            165,798
            
            
            160,845Other
            
            
            15,380
            
            
            35,138Total
                interest income
            
            
            8,315,525
            
            
            8,234,039**Interest
                Expense**Deposits
            
            
            2,623,590
            
            
            3,381,667Other
                borrowings
            
            
            9,483
            
            
            57,546Retail
                repurchase agreements
            
            
            450,763
            
            
            351,833Federal
                Home Loan Bank advances
            
            
            377,146
            
            
            242,658Trust
                preferred securities
            
            
            422,385
            
            
            450,197Total
                interest expense
            
            
            3,883,367
            
            
            4,483,901**Net
                Interest Income**
            
            
            4,432,158
            
            
            3,750,138**Provision
                for Loan Losses**
            
            
            212,997
            
            
            145,594**Net
                Interest Income After Provision for Loan Losses**
            
            
            4,219,161
            
            
            3,604,544**Non-interest
                Income**Data
                service fees
            
            
            4,948,783
            
            
            4,629,258Trust
                fees
            
            
            815,734
            
            
            865,880Customer
                service fees
            
            
            612,825
            
            
            533,209Net
                gains on loan sales
            
            
            183,145
            
            
            207,366Net
                realized gain on sales of securities
            
            
            -
            
            
            367Loan
                servicing fees
            
            
            55,220
            
            
            56,234Gain
                (loss) on sale of assets
            
            
            (390
            )
            
            14,010Other
            
            
            185,841
            
            
            201,376Total
                non-interest income
            
            
            6,801,158
            
            
            6,507,700




*See
        notes to condensed consolidated financial statements
        (unaudited)*
  6
 **Rurban
            Financial Corp.**
  **Condensed
            Consolidated Statements of Income (Unaudited)**
 **Three
            Months Ended**


**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Non-interest
                Expense**Salaries
                and employee benefits
            
            $
            4,435,657
            
            $
            4,185,324Net
                occupancy expense
            
            
            511,179
            
            
            505,925Equipment
                expense
            
            
            1,625,708
            
            
            1,676,676Data
                processing fees
            
            
            104,792
            
            
            114,243Professional
                fees
            
            
            284,536
            
            
            501,015Marketing
                expense
            
            
            156,090
            
            
            187,098Printing
                and office supplies
            
            
            119,686
            
            
            181,362Telephone
                and communications
            
            
            421,858
            
            
            437,690Postage
                and delivery expense
            
            
            535,813
            
            
            384,091State,
                local and other taxes
            
            
            186,418
            
            
            165,175Employee
                expense
            
            
            303,372
            
            
            280,078Other
            
            
            425,237
            
            
            446,693Total
                non-interest expense
            
            
            9,110,346
            
            
            9,065,370**Income
                Before Income Tax**
            
            
            1,909,973
            
            
            1,046,874**Provision
                for Income Taxes**
            
            
            554,149
            
            
            261,829**Net
                Income**
            
            $
            1,355,824
            
            $
            785,045**Basic
                Earnings Per Share**
            
            $
            0.28
            
            $
            0.16**Diluted
                Earnings Per Share**
            
            $
            0.28
            
            $
            0.16**Dividends
                Declared Per Share**
            
            $
            0.08
            
            $
            0.06




*See
      notes to consolidated financial statements (unaudited)*




7


**Rurban
      Financial Corp.**




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


**Six
      Months Ended**




**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Interest
                Income**LoansTaxable
            
            $
            13,831,504
            
            $
            13,653,319Tax-exempt
            
            
            41,819
            
            
            34,543SecuritiesTaxable
            
            
            2,130,464
            
            
            2,135,497Tax-exempt
            
            
            324,165
            
            
            313,902Other
            
            
            112,789
            
            
            113,606Total
                interest income
            
            
            16,440,741
            
            
            16,250,867**Interest
                Expense**Deposits
            
            
            5,715,492
            
            
            6,715,397Other
                borrowings
            
            
            26,989
            
            
            108,618Retail
                repurchase agreements
            
            
            911,315
            
            
            695,682Federal
                Home Loan Bank advances
            
            
            679,482
            
            
            492,245Trust
                preferred securities
            
            
            858,089
            
            
            895,511Total
                interest expense
            
            
            8,191,367
            
            
            8,907,453**Net
                Interest Income**
            
            
            8,249,374
            
            
            7,343,414**Provision
                for Loan Losses**
            
            
            405,215
            
            
            238,234**Net
                Interest Income After Provision for Loan Losses**
            
            
            7,844,159
            
            
            7,105,180**Non-interest
                Income**Data
                service fees
            
            
            10,213,348
            
            
            9,463,394Trust
                fees
            
            
            1,670,841
            
            
            1,692,262Customer
                service fees
            
            
            1,199,032
            
            
            1,061,633Net
                gains on loan sales
            
            
            457,748
            
            
            307,442Net
                realized gains on sales of securities
            
            
            -
            
            
            367Net
                proceeds from liquidation of equity securities
            
            
            132,106
            
            
            -Investment
                security recoveries
            
            
            197,487
            
            
            -Loan
                servicing fees
            
            
            118,160
            
            
            119,143Gain
                (loss) on sale of assets
            
            
            (61,325
            )
            
            49,977Other
            
            
            389,274
            
            
            552,224Total
                non-interest income
            
            
            14,316,671
            
            
            13,246,442


*S* *ee
        notes to condensed consolidated financial statements
        (unaudited)*


8


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





**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Non-interest
                Expense**Salaries
                and employee benefits
            
            $
            8,874,421
            
            $
            8,582,111Net
                occupancy expense
            
            
            1,077,195
            
            
            1,033,058Equipment
                expense
            
            
            3,193,345
            
            
            3,282,549Data
                processing fees
            
            
            201,359
            
            
            270,424Professional
                fees
            
            
            855,223
            
            
            1,178,406Marketing
                expense
            
            
            337,837
            
            
            342,783Printing
                and office supplies
            
            
            305,738
            
            
            379,454Telephone
                and communications
            
            
            843,787
            
            
            882,894Postage
                and delivery expense
            
            
            1,138,447
            
            
            776,352State,
                local and other taxes
            
            
            367,186
            
            
            364,916Employee
                expense
            
            
            533,983
            
            
            535,147Other
            
            
            983,185
            
            
            737,529Total
                non-interest expense
            
            
            18,711,706
            
            
            18,365,623**Income
                Before Income Tax**
            
            
            3,449,124
            
            
            1,985,999**Provision
                for Income Taxes**
            
            
            983,944
            
            
            498,501**Net
                Income**
            
            $
            2,465,180
            
            $
            1,487,498**Basic
                Earnings Per Share**
            
            $
            0.50
            
            $
            0.30**Diluted
                Earnings Per Share**
            
            $
            0.50
            
            $
            0.30**Dividends
                Declared Per Share**
            
            $
            0.16
            
            $
            0.12




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


9




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




Three
                Months Ended
            
            Six
                Months EndedJune
                30, 2008
            
            June
                30, 2007
            
            June
                30, 2008
            
            June
                30, 2007Balance
                at beginning of period
            
            $
            59,870,312
            
            $
            57,711,304
            
            $
            59,325,235
            
            $
            56,955,153Cumulative
                effect adjustment for split dollar BOLI
            
            
            -
            
            
            -
            
            
            (116,303
            )
            
            -Net
                Income
            
            
            1,355,824
            
            
            785,045
            
            
            2,465,180
            
            
            1,487,498Other
                comprehensive loss:Net
                change in unrealized gains (losses)****On
                securities available for sale, net
            
            
            (1,193,931
            )
            
            (705,666
            )
            
            (843,737
            )
            
            (363,582
            )Total
                comprehensive income
            
            
            161,893
            
            
            79,379
            
            
            1,621,443
            
            
            1,123,916Cash
                dividend
            
            
            (395,356
            )
            
            (301,647
            )
            
            (793,269
            )
            
            (603,292
            )Purchase
                of treasury shares
            
            
            (295,600
            )
            
            (149,200
            )
            
            (716,600
            )
            
            (149,200
            )Stock
                option expense
            
            
            20,480
            
            
            9,659
            
            
            41,223
            
            
            22,918Balance
                at end of period
            
            $
            59,361,729
            
            $
            57,349,495
            
            $
            59,361,729
            
            $
            57,349,495




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




10


**Rurban
      Financial Corp.**


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


**Six
      Months Ended**




**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Operating
                Activities**Net
                income
            
            $
            2,465,180
            
            $
            1,487,498Items
                not requiring (providing) cashDepreciation
                and amortization
            
            
            1,921,112
            
            
            1,962,303Provision
                for loan losses
            
            
            405,215
            
            
            238,234Expense
                of stock option plan
            
            
            41,224
            
            
            22,918Amortization
                of premiums and discounts on securities
            
            
            57,364
            
            
            18,329Amortization
                of intangible assets
            
            
            346,763
            
            
            355,860Deferred
                income taxes
            
            
            434,652
            
            
            1,105,680FHLB
                Stock Dividends
            
            
            (83,800
            )
            
            (47,250
            )Proceeds
                from sale of loans held for sale
            
            
            15,212,601
            
            
            8,184,841Originations
                of loans held for sale
            
            
            (15,749,144
            )
            
            (7,956,195
            )Gain
                from sale of loans
            
            
            (457,748
            )
            
            (228,447
            )Gain
                on sale of foreclosed assets
            
            
            (10,097
            )
            
            (7,666
            )(Gain)
                loss on sales of fixed assets
            
            
            71,422
            
            
            (42,311
            )Changes
                inInterest
                receivable
            
            
            251,445
            
            
            158,692Other
                assets
            
            
            619,093
            
            
            (504,930
            )Interest
                payable and other liabilities
            
            
            630,415
            
            
            (2,532,923
            )Net
                cash provided by operating activities
            
            
            6,155,697
            
            
            2,214,633**Investing
                Activities**Purchases
                of available-for-sale securities
            
            
            (46,231,265
            )
            
            (15,399,580
            )Proceeds
                from maturities of available-for-sale securities
            
            
            40,850,667
            
            
            23,507,087Proceeds
                from sales of available-for-sale securities
            
            
            __
            
            
            408,608Net
                change in interest bearing deposits
            
            
            __
            
            
            150,000Net
                change in loans
            
            
            (16,955,034
            )
            
            (11,828,901
            )Purchase
                of premises and equipment and software
            
            
            (2,582,000
            )
            
            (2,453,476
            )Proceeds
                from sales of premises and equipment
            
            
            286,816
            
            
            251,882Proceeds
                from sale of foreclosed assets
            
            
            162,385
            
            
            144,055Cash
                paid for Diverse Computer Marketers, Inc. acquisition
            
            
            —
            
            
            (16,034
            )Net
                cash used in investing activities
            
            
            (24,468,431
            )
            
            (5,236,359
            )




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




11




**Rurban
      Financial Corp.**


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


**Six
      Months Ended**




**June
                30,**
              **2008**
            
            **June
                30,**
              **2007****Financing
                Activities**Net
                increase in demand deposits, money market, interest checking and
                savings
                accounts
            
            $
            13,008,870
            
            $
            5,197,333Net
                decrease in certificates of deposit
            
            
            (16,482,135
            )
            
            (12,167,922
            )Net
                increase in securities sold under agreements to repurchase
            
            
            1,503,073
            
            
            846,093Net
                increase in federal funds purchased
            
            
            3,600,000
            
            
            1,000,000Proceeds
                from Federal Home Loan Bank advances
            
            
            21,000,000
            
            
            3,500,000Repayment
                of Federal Home Loan Bank advances
            
            
            (7,191,736
            )
            
            (3,500,000
            )Repayment
                of notes payable
            
            
            (922,457
            )
            
            (1,462,347
            )Purchase
                of treasury stock
            
            
            (716,600
            )
            
            (149,200
            )Dividends
                paid
            
            
            (793,269
            )
            
            (603,290
            )Net
                cash (used in) provided by financing activities
            
            
            13,005,746
            
            
            (7,339,333
            )**Increase
                (Decrease) in Cash and Cash Equivalents**
            
            
            (5,306,988
            )
            
            (10,361,059
            )**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            17,183,627
            
            
            22,481,791**Cash
                and Cash Equivalents, End of Period**
            
            $
            11,876,639
            
            $
            12,120,732**Supplemental
                Cash Flows Information**Interest
                paid
            
            $
            8,565,333
            
            $
            9,010,420Transfer
                of loans to foreclosed assets
            
            $
            1,640,007
            
            $
            137,883Federal
                Income Taxes Paid
            
            $
            414,000
            
            $
            1,000,000




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




12


**RURBAN
      FINANCIAL CORP.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**NOTE
      A—BASIS OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions for Form 10-Q. Accordingly,
      they
      do not include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements. The financial
      statements reflect all adjustments that are, in the opinion of management,
      necessary to fairly present the financial position, results of operations and
      cash flows of the Company. Those adjustments consist only of normal recurring
      adjustments. Results of operations for the three and six months ended June
      30,
      2008 are not necessarily indicative of results for the complete
      year.





The
      condensed consolidated balance sheet of the Company as of December 31, 2007
      has
      been derived from the audited consolidated balance sheet of the Company as
      of
      that date.





For
      further information, refer to the consolidated financial statements and
      footnotes included in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007.





**NOTE
      B—EARNINGS PER SHARE**





Earnings
      per share (EPS) have been computed based on the weighted average number of
      shares outstanding during the periods presented. For the periods ended June
      30,
      2008 and 2007, stock options totaling 316,263 and 247,852 common shares,
      respectively, were not considered in computing EPS as they were anti-dilutive.
      The number of shares used in the computation of basic and diluted earnings
      per
      share were:





Three
                Months Ended
            
            Six
                Months EndedJune
                30
            
            June
                302008
            
            2007
            
            2008
            
            2007Basic
                earnings per share
            
            
            4,934,241
            
            
            5,025,100
            
            
            4,948,334
            
            
            5,026,260Diluted
                earnings per share
            
            
            4,934,241
            
            
            5,030,441
            
            
            4,948,334
            
            
            5,026,893




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





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





June
                30,
            
            December
                31,2008
            
            2007Commercial
            
            $
            85,957,190
            
            $
            83,048,522Commercial
                real estate
            
            
            143,701,001
            
            
            126,784,483Agricultural
            
            
            45,230,778
            
            
            43,369,266Residential
                real estate
            
            
            80,613,743
            
            
            84,620,992Consumer
            
            
            48,824,993
            
            
            51,357,419Lease
                financing
            
            
            330,000
            
            
            330,000Total
                loans
            
            
            404,657,705
            
            
            389,510,682LessNet
                deferred loan fees, premiums and discounts
            
            
            (222,810
            )
            
            (241,938
            )Loans,
                net of unearned income
            
            $
            404,434,895
            
            $
            389,268,744Allowance
                for loan losses
            
            $
            (4,246,794
            )
            $
            (3,990,455
            )





13





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





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2008
            
            2007
            
            2008
            
            2007Balance,
                beginning of period
            
            $
            4,016,230
            
            $
            3,768,814
            
            $
            3,990,455
            
            $
            3,717,377Provision
                charged to expense
            
            
            212,997
            
            
            145,594
            
            
            405,215
            
            
            238,234Recoveries
            
            
            28,150
            
            
            46,448
            
            
            58,998
            
            
            100,491Loans
                charged off
            
            
            (10,583
            )
            
            (136,411
            )
            
            (207,874
            )
            
            (231,657
            )Balance,
                end of period
            
            $
            4,246,794
            
            $
            3,824,445
            
            $
            4,246,794
            
            $
            3,824,445





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





June
                30,
            
            December
                31,2008
            
            2007Non-accrual
                loans
            
            $
            5,141,442
            
            $
            5,990,483Accruing
                loans which are contractually past due 90 days or more as to interest
                orprincipal
                payments
            
            
            61,154
            
            
            -Total
                non-performing loans
            
            $
            5,202,596
            
            $
            5,990,483




Individual
      loans determined to be impaired were as follows:





June
                30,
            
            December
                31,2008
            
            2007Loans
                with no allowance for loan losses allocated
            
            $
            1,750,000
            
            $
            1,787,000Loans
                with allowance for loan losses allocated
            
            
            618,000
            
            
            1,898,000Total
                impaired loans
            
            $
            2,368,000
            
            $
            3,685,000Amount
                of allowance allocated
            
            $
            215,000
            
            $
            333,000




**NOTE
      D - REGULATORY MATTERS**




The
      Company and The State Bank and Trust Company (“State Bank”) are subject to
      various regulatory capital requirements administered by federal and state
      banking agencies. Failure to meet minimum capital requirements can initiate
      certain mandatory, and possibly additional discretionary, actions by regulators.
      If undertaken, these actions could have a direct material adverse effect on
      the
      Company’s financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Company and State Bank
      must meet specific capital guidelines that involve quantitative measures of
      assets, liabilities and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The capital amounts and classification are
      also
      subject to qualitative judgments by the regulators about components, risk
      weightings and other factors.




14




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




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




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




**Actual**
            
            **Minimum
                Required For**
              **Capital
                Adequacy Purposes**
            
            **To
                Be Well Capitalized**
              **Under****Prompt
                Corrective**
              **Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**As
                of June 30, 2008Total
                Capital(to
                Risk-Weighted Assets)Consolidated
            
            $
            65.6
            
            
            15.6
            %
            $
            33.6
            
            
            8.0
            %
            $
            —
            
            
            N/AState
                Bank
            
            
            51.6
            
            
            12.7
            
            
            32.6
            
            
            8.0
            
            
            38.4
            
            
            10.0Tier
                I Capital(to
                Risk-Weighted Assets)Consolidated
            
            
            61.5
            
            
            14.7
            
            
            16.8
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            47.4
            
            
            11.6
            
            
            16.3
            
            
            4.0
            
            
            23.0
            
            
            6.0Tier
                I Capital(to
                Average Assets)Consolidated
            
            
            61.5
            
            
            11.0
            
            
            22.4
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            47.4
            
            
            8.5
            
            
            22.4
            
            
            4.0
            
            
            26.4
            
            
            5.0As
                of December 31, 2007Total
                Capital(to
                Risk-Weighted Assets)Consolidated
            
            $
            64.2
            
            
            15.9
            %
            $
            32.2
            
            
            8.0
            %
            $
            —
            
            
            N/AState
                Bank
            
            
            49.5
            
            
            12.7
            
            
            31.3
            
            
            8.0
            
            
            39.1
            
            
            10.0Tier
                I Capital(to
                Risk-Weighted Assets)Consolidated
            
            
            59.9
            
            
            14.9
            
            
            16.1
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            45.5
            
            
            11.6
            
            
            15.6
            
            
            4.0
            
            
            23.5
            
            
            6.0Tier
                I Capital(to
                Average Assets)Consolidated
            
            
            59.9
            
            
            11.0
            
            
            21.9
            
            
            4.0
            
            
            —
            
            
            N/AState
                Bank
            
            
            45.5
            
            
            8.4
            
            
            21.8
            
            
            4.0
            
            
            27.3
            
            
            5.0




15




**NOTE
      E - CONTINGENT LIABILITIES**





There
      are
      various contingent liabilities that are not reflected in the consolidated
      financial statements, including claims and legal actions arising in the ordinary
      course of business. In the opinion of management, after consultation with legal
      counsel, the ultimate disposition of these matters is not expected to have
      a
      material effect on the Company’s consolidated financial condition or results of
      operations.





**NOTE
      F - NEW ACCOUNTING PRONOUNCEMENTS**





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





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





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





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




16





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




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




**NOTE
      G - COMMITMENTS AND CREDIT RISK**





As
      of
      June 30, 2008, loan commitments and unused lines of credit totaled $69,091,000,
      standby letters of credit totaled $737,000 and no commercial letters of credit
      were outstanding.





17




**NOTE
      H - SEGMENT INFORMATION**




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




18


NOTE
                H —
                SEGMENT INFORMATION (Continued)As
                of and for the three months ended June 30,
                2008




Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            4,880,961
            
            $
            (32,309
            )
            $
            (416,494
            )
            $
            4,432,158
            
            
            
            
            $
            4,432,158Non-interest
                  income - external customers
            
            
            1,831,915
            
            
            4,948,502
            
            
            20,741
            
            
            6,801,158
            
            
            
            
            
            6,801,158Non-interest
                income - other segments
            
            
            15,845
            
            
            369,549
            
            
            381,584
            
            
            766,978
            
            
            (766,978
            )
            
            -Total
                revenue
            
            
            6,728,721
            
            
            5,285,742
            
            
            (14,169
            )
            
            12,000,294
            
            
            (766,978
            )
            
            11,233,316Non-interest
                expense
            
            
            4,813,165
            
            
            4,316,685
            
            
            747,474
            
            
            9,877,324
            
            
            (766,978
            )
            
            9,110,346Significant
                non-cash items:Depreciation
                  and amortization
            
            
            226,187
            
            
            698,446
            
            
            19,453
            
            
            944,086
            
            
            -
            
            
            944,086Provision
                for loan losses
            
            
            212,997
            
            
            -
            
            
            -
            
            
            212,997
            
            
            -
            
            
            212,997Income
                tax expense (benefit)
            
            
            486,384
            
            
            329,479
            
            
            (261,714
            )
            
            554,149
            
            
            -
            
            
            554,149Segment
                profit (loss)
            
            $
            1,216,175
            
            $
            639,578
            
            $
            (499,929
            )
            $
            1,355,824
            
            $
            -
            
            $
            1,355,824Balance
                sheet information:Total
                assets
            
            $
            557,808,821
            
            $
            20,118,493
            
            $
            6,284,412
            
            $
            584,211,726
            
            $
            (7,698,900
            )
            $
            576,512,826Goodwill
                and intangibles
            
            
            11,468,086
            
            
            7,260,997
            
            
            -
            
            
            18,729,083
            
            
            -
            
            
            18,729,083Premises
                and equipment expenditures
            
            
            350,170
            
            
            1,279,652
            
            
            3,688
            
            
            1,207,340
            
            
            -
            
            
            1,207,340


19




NOTE
                H —
                SEGMENT INFORMATION (Continued)As
                of and for the three months ended June 30,
                2007




Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            4,272,915
            
            $
            (73,444
            )
            $
            (449,333
            )
            $
            3,750,138
            
            
            
            
            $
            3,750,138Non-interest
                  income - external customers
            
            
            1,856,794
            
            
            4,629,258
            
            
            21,648
            
            
            6,507,700
            
            
            
            
            
            6,507,700Non-interest
                income - other segments
            
            
            824
            
            
            392,015
            
            
            345,395
            
            
            738,234
            
            
            (738,234
            )
            
            -Total
                revenue
            
            
            6,130,533
            
            
            4,947,829
            
            
            (82,290
            )
            
            10,996,072
            
            
            (738,234
            )
            
            10,257,838Non-interest
                expense
            
            
            4,847,410
            
            
            4,228,103
            
            
            728,091
            
            
            9,803,604
            
            
            (738,234
            )
            
            9,065,370Significant
                non-cash items:Depreciation
                  and amortization
            
            
            255,990
            
            
            708,027
            
            
            29,555
            
            
            993,572
            
            
            -
            
            
            993,572Provision
                for loan losses
            
            
            145,594
            
            
            -
            
            
            -
            
            
            145,594
            
            
            -
            
            
            145,594Income
                tax expense (benefit)
            
            
            306,182
            
            
            244,692
            
            
            (289,045
            )
            
            261,829
            
            
            -
            
            
            261,829Segment
                profit (loss)
            
            $
            831,347
            
            $
            475,034
            
            $
            (521,336
            )
            $
            785,045
            
            $
            -
            
            $
            785,045Balance
                sheet information:Total
                assets
            
            $
            529,530,988
            
            $
            19,591,386
            
            $
            8,062,404
            
            $
            557,184,778
            
            $
            (8,984,568
            )
            $
            548,200,210Goodwill
                and intangibles
            
            
            11,926,264
            
            
            7,266,950
            
            
            -
            
            
            19,193,214
            
            
            -
            
            
            19,193,214Premises
                and equipment expenditures
            
            
            269,595
            
            
            620,218
            
            
            61,191
            
            
            951,004
            
            
            -
            
            
            951,004





20





As
                of and for the six months ended June 30,
                2008




Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            9,176,312
            
            $
            (75,549
            )
            $
            (851,389
            )
            $
            8,249,374
            
            
            
            
            $
            8,249,374Non-interest
                income - externalcustomers
            
            
            3,991,103
            
            
            10,208,068
            
            
            117,500
            
            
            14,316,671
            
            
            
            
            
            14,316,671Non-interest
                income - other segments
            
            
            25,211
            
            
            758,952
            
            
            691,582
            
            
            1,475,745
            
            
            (1,475,745
            )
            
            -Total
                revenue
            
            
            13,192,626
            
            
            10,891,471
            
            
            (42,307
            )
            
            24,041,790
            
            
            (1,475,745
            )
            
            22,566,045Non-interest
                expense
            
            
            9,831,052
            
            
            8,709,827
            
            
            1,646,572
            
            
            20,187,451
            
            
            (1,475,745
            )
            
            18,711,706Significant
                non-cash items:Depreciation
                  and amortization
            
            
            496,293
            
            
            1,365,608
            
            
            59,211
            
            
            1,921,112
            
            
            -
            
            
            1,921,112Provision
                for loan losses
            
            
            405,215
            
            
            -
            
            
            -
            
            
            405,215
            
            
            -
            
            
            405,215Income
                tax expense (benefit)
            
            
            822,731
            
            
            741,759
            
            
            (580,546
            )
            
            983,944
            
            
            -
            
            
            983,944Segment
                profit (loss)
            
            $
            2,133,628
            
            $
            1,439,885
            
            $
            (1,108,333
            )
            $
            2,465,180
            
            $
            -
            
            $
            2,465,180Balance
                sheet information:Total
                assets
            
            $
            557,808,821
            
            $
            20,118,493
            
            $
            6,284,412
            
            $
            584,211,726
            
            $
            (7,698,900
            )
            $
            576,512,826Goodwill
                and intangibles
            
            
            11,468,086
            
            
            7,260,997
            
            
            -
            
            
            18,729,083
            
            
            -
            
            
            18,729,083Premises
                and equipment expenditures
            
            
            904,965
            
            
            1,619,713
            
            
            57,322
            
            
            2,582,000
            
            
            -
            
            
            2,582,000





21


NOTE
                H —
                SEGMENT INFORMATION (Continued)As
                of and for the six months ended June 30, 2007Data
            
            
            
            Total
            
            Intersegment
            
            ConsolidatedIncome
                statement information:
            
            Banking
            
            Processing
            
            Other
            
            Segments
            
            Elimination
            
            TotalsNet
                interest income (expense)
            
            $
            8,404,344
            
            $
            (167,102
            )
            $
            (893,828
            )
            $
            7,343,414
            
            
            
            
            $
            7,343,414Non-interest
                  income - external customers
            
            
            3,746,531
            
            
            9,463,394
            
            
            36,517
            
            
            13,246,442
            
            
            
            
            
            13,246,442Non-interest
                income - other segments
            
            
            526,948
            
            
            807,240
            
            
            658,441
            
            
            1,992,629
            
            
            (1,992,629
            )
            
            -Total
                revenue
            
            
            12,677,823
            
            
            10,103,532
            
            
            (198,870
            )
            
            22,582,485
            
            
            (1,992,629
            )
            
            20,589,856Non-interest
                expense
            
            
            10,557,613
            
            
            8,336,869
            
            
            1,463,770
            
            
            20,358,252
            
            
            (1,992,629
            )
            
            18,365,623Significant
                non-cash items:Depreciation
                and amortization
            
            
            496,575
            
            
            1,407,664
            
            
            58,064
            
            
            1,962,303
            
            
            -
            
            
            1,962,303Provision
                for loan losses
            
            
            238,234
            
            
            -
            
            
            -
            
            
            238,234
            
            
            -
            
            
            238,234Income
                tax expense (benefit)
            
            
            480,126
            
            
            600,665
            
            
            (582,290
            )
            
            498,501
            
            
            -
            
            
            498,501Segment
                profit (loss)
            
            $
            1,401,850
            
            $
            1,165,998
            
            $
            (1,080,350
            )
            $
            1,487,498
            
            $
            -
            
            $
            1,487,498Balance
                sheet information:Total
                assets
            
            $
            529,530,988
            
            $
            19,591,386
            
            $
            8,062,404
            
            $
            557,184,778
            
            $
            (8,984,568
            )
            $
            548,200,210Goodwill
                and intangibles
            
            
            11,926,264
            
            
            7,266,950
            
            
            -
            
            
            19,193,214
            
            
            -
            
            
            19,193,214Premises
                and equipment expenditures
            
            
            1,000,030
            
            
            1,392,255
            
            
            61,191
            
            
            2,453,476
            
            
            -
            
            
            2,453,476




22





**NOTE
      I - FAIR VALUE OF ASSETS AND LIABILITIES**





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





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





**Level
              1**
            Quoted
                prices in active markets for identical assets or liabilities  **Level
              2**
            ****Observable
                inputs other than Level 1 prices, such as quoted prices for similar
                assets
                or liabilities; quoted prices in markets that are not active; or
                other
                inputs that are observable or can be corroborated by observable market
                data for substantially the full term of the assets or
                liabilities  **Level
              3**
            Unobservable
                inputs that are supported by little or no market activity and that
                are
                significant to the fair value of the assets or
                liabilities




Available-for-Sale
      Securities





The
      fair
      value of available-for-sale securities are determined by various valuation
      methodologies. Level 2 securities include U.S. government agencies,
      mortgage-backed securities, and obligations of political and state
      subdivisions.





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




Fair
                Value Measurements Using:Description
            
            Fair
                Values at 6/30/2008
            
            Quoted
                Prices in Active Markets for Identical Assets (Level 1)
            
            Significant
                Other Observable Inputs (Level 2)
            
            Significant
                Unobservable Inputs (Level 3)Available-for-Sale
                Securities
            
            $
            96,706,231
            
            
            -
            
            $
            96,706,231
            
            
            -





Impaired
      Loans





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




23





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




Fair
                Value Measurements Using:Description
            
            Fair
                Values at 6/30/2008
            
            Quoted
                Prices in Active Markets for Identical Assets (Level 1)
            
            Significant
                Other Observable Inputs (Level 2)
            
            Significant
                Unobservable Inputs (Level 3)Impaired
                loans
            
            $
            248,000
            
            
            -
            
            
            -
            
            $
            248,000




**Note
      J - Acquisitions**





On
      May
      22, 2008, the Company announced the execution of a definitive agreement to
      acquire NBM Bancorp, Incorporated and its wholly-owned subsidiary, National
      Bank
      of Montpelier, which is headquartered in Montpelier Ohio. As of June 30, 2008,
      NBM Bancorp had $108 million in assets, $45 million in loans and $90 million
      in
      deposits at its five banking offices. The transaction is expected to be
      completed in the third quarter of 2008, pending regulatory approvals, the
      approval of the shareholders of NBM Bancorp and the completion of customary
      closing conditions.




**Note
      K - Dividends on Common Stock**





On
      July
      16, 2008 the Company’s Board of Directors approved a quarterly cash dividend of
      $0.09 per share for the third quarter of 2008, payable on August 22, 2008 to
      all
      shareholders of record on August 8, 2008.





**Note
      L - Share Based Compensation Plan**





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




24


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





**Cautionary
      Statement Regarding Forward-Looking Information**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      contains forward-looking statements that are provided to assist in the
      understanding of anticipated future financial performance. Forward-looking
      statements provide current expectations or forecasts of future events and are
      not guarantees of future performance. Examples of forward-looking statements
      include: (a) projections of income or expense, earnings per share, the payments
      or non-payments of dividends, capital structure and other financial items;
      (b)
      statements of plans and objectives of the Company or our management or Board
      of
      Directors, including those relating to products or services; (c) statements
      of
      future economic performance; and (d) statements of assumptions underlying such
      statements. Words such as “believes,” “anticipates,” “expects,” “intends,”
“targets,” “plans,” “projects,” “estimates,” and similar expressions are
      intended to identify forward-looking statements, but are not the exclusive
      means
      of identifying those statements. Forward-looking statements are based on
      management’s expectations and are subject to a number of risks and
      uncertainties. Although management believes that the expectations reflected
      in
      such forward-looking statements are reasonable, actual results may differ
      materially from those expressed or implied in such statements. Risks and
      uncertainties that could cause actual results to differ materially include,
      without limitation, changes in interest rates, changes in the competitive
      environment, and changes in banking regulations or other regulatory or
      legislative requirements affecting bank holding companies. Additional detailed
      information concerning a number of important factors which could cause actual
      results to differ materially from the forward-looking statements contained
      in
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations is available in the Company’s filings with the Securities and
      Exchange Commission, under the Securities Exchange Act of 1934, including the
      disclosure under the heading “Item 1A. Risk Factors” of Part I of the
      Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
      2007. Undue reliance should not be placed on the forward-looking statements,
      which speak only as of the date hereof. Except as may be required by law, the
      Company undertakes no obligation to update any forward-looking statement to
      reflect unanticipated events or circumstances after the date on which the
      statement is made.




**Overview
      of Rurban**





Rurban
      is
      a bank holding company registered with the Federal Reserve Board. Rurban’s
      wholly-owned subsidiary, The State Bank and Trust Company (“State Bank” or the
      Bank), is engaged in commercial banking. Rurban’s subsidiary, Rurbanc Data
      Services, Inc. (“RDSI”), provides computerized data and item processing services
      to community banks and businesses. On March 24, 2007, The Exchange Bank and
      Reliance Financial Services, N.A. (“Reliance”) were merged with and into the
      lead bank, State Bank. Reliance’s trust and investment operations are now
      conducted through a division of State Bank, doing business under the name
      Reliance Financial Services. On December 31, 2007, Diverse Computer Marketers,
      Inc. (DCM) was merged with and into RDSI. DCM continues to operate as a division
      of RDSI, continuing to do business under the name Diverse Computer
      Marketers.





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




25





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





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





**Critical
      Accounting Policies**




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





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





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




26





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




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





**Impact
      of Accounting Changes**




None





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





***Net
      Income:*** Net
      income for the second quarter of 2008 was $1.4 million, or $0.28 per diluted
      share, compared to $785,000, or $0.16 per diluted share, for the second quarter
      of 2007. This quarterly increase in net income was driven by a $682,000 increase
      in net interest income and a $293,000 increase in non-interest income. These
      increases were offset by an increase of $67,000 in provision expense, along
      with
      a $45,000 increase in non-interest expense. The primary driver of the increase
      in net interest income was an increase of $28.5 million in average earning
      assets, coupled with a 36 basis point increase in the net interest margin.
      The
      increase in non-interest income was driven by the data and item processing
      fees
      generated by RDSI and DCM.





***Net
      Interest Income:*** Net
      interest income was $4.4 million, an increase of $682,000 or 18.2 percent,
      from
      the 2007 second quarter. As previously mentioned average earning assets
      increased $28.5 million or 5.9 percent over the 12-month period. The increase
      in
      earning assets is a result of loan growth over the past twelve months of $22.8
      million, or 6.0 percent, reaching $404.4 million at June 30, 2008. This growth
      was entirely organic. Nearly 68 percent of State Bank’s loan portfolio is
      commercial, and virtually all of the Bank’s growth was derived from this sector.
      Loan growth accelerated during the second quarter of 2008, increasing $12.5
      million, or 12.7 percent annualized, from the first quarter of 2008. As of
      June
      30, 2008, loans were $15.2 million higher than year-end, with commercial loan
      growth leading the way. Year-over-year, the net interest margin increased 36
      basis points from 3.19 percent for the second quarter 2007 to 3.55 percent
      for
      the second quarter 2008. The 3.55 percent represents a 29 basis point increase
      from the linked quarter of 3.26 percent. This increase is a result of being
      liability sensitive in a decreasing rate environment. Management’s focus will
      now turn to becoming asset sensitive as we feel rates have reached their low
      points and will now begin to increase.




27





***Provision
      for Loan Losses:*** The
      provision for loan losses was $213,000 in the second quarter of 2008 compared
      to
      a $146,000 provision for the second quarter of 2007. The Company experienced
      minimal losses in the 2008 second quarter, which is reflected in net recoveries
      of $18,000 compared to $90,000 of net charge-offs in the 2007 second quarter.
      For the second quarter ended June 30, 2008, net charge-offs as a percentage
      of
      average loans was (0.02) percent annualized. At quarter end, consolidated
      non-performing assets, including those of RFCBC (the loan workout subsidiary),
      were $6.7 million, or 1.16 percent of total assets compared with $6.0 million,
      or 1.09 percent of total assets for the prior-year second quarter.





*($
                in Thousands)*
            
            June
                30,
              2008
            
            March
                31, 2008
            
            June
                30,
              2007Net
                charge-offs
            
            $
            (18
            )
            $
            166
            
            $
            90Non-performing
                loans
            
            
            5,141
            
            
            5,305
            
            
            5,913OREO
                / OAO
            
            
            1,566
            
            
            1,662
            
            
            84Non-performing
                assets
            
            
            6,707
            
            
            6,967
            
            
            5,997Non-performing
                assets / Total assets
            
            
            1.16
            %
            
            1.22
            %
            
            1.09
            %Allowance
                for loan losses / Total loans
            
            
            1.04
            %
            
            1.02
            %
            
            1.00
            %Allowance
                for loan losses / Non-performing assets
            
            
            63.3
            %
            
            57.6
            %
            
            63.8
            %




***Non-interest
      Income:***  Non-interest
      income was $6.8 million for the second quarter of 2008 compared with $6.5
      million for the prior-year second quarter, an increase of $293,000, or 4.5
      percent. The increase was primarily driven by data processing fees, as they
      increased $320,000. Postage billing revenue, which was taken in-house in 2008
      by
      RDSI, accounted for $178,000 of the year over year increase. Customer service
      fees increased $80,000 or 14.9 percent. Non-interest income accounted for
      approximately 61 percent of Rurban’s total second quarter 2008
      revenue.





***Non-interest
      Expense:*** Non-interest expense was $9.1 million for the second quarter of 2008, unchanged
      from the second quarter of 2007. As mentioned, RDSI took billing for postage
      in-house at the beginning of 2008. The second quarter 2008 expense associated
      with these billings was $174,000, and is offset by non-interest income.
      Additionally, one-time legal fee recoveries of $200,000 were recorded in the
      quarter by RFCBC, Rurban’s loan workout subsidiary. The efficiencies completed
      throughout 2007 are contributing to the minor increase in year over year
      operating expenses.





28




**Six
      Months Ended June 30, 2008 compared to Six Months Ended June 30,
      2007**




***Net
      Income:*** Rurban
      had net income of $2.5 million or $0.50 per diluted share for the six months
      ended June 30, 2008 compared to $1.5 million or $0.30 per diluted share for
      the
      six months ended June 30, 2007. This represents a $977,000, or 65.7 percent,
      increase in comparison of the six-month periods. Significant changes from period
      to period include an increase in net interest income of $906,000, a $1.1 million
      increase in non-interest income and a $346,000 increase in non-interest expense.
      The increase in net-interest income is due to significant loan growth and a
      36
      basis point increase in the margin over the last twelve months. The increase
      in
      non-interest income and non-interest expense is primarily due to the postage
      revenue and expense taken in-house by RDSI at the start of 2008. Non-interest
      income is also bolstered by the addition of 11 client banks, signed by RDSI
      since the end of the 2007 second quarter.





***Net
      Interest Income:*** For the
      six months ended June 30, 2008, net interest income was $8.2 million, an
      increase of $906,000, or 12.3 percent, from the six-month period ended June
      30,
      2007. This increase is primarily the result of a 36 basis point increase in
      the
      year-to-date net interest margin. The strategic decision to restructure the
      balance sheet is benefiting the Company as the net interest margin has improved
      the past three quarters. As mentioned previously, the loan portfolio continues
      to grow, currently funded by low cost FHLB advances. The pending acquisition
      of
      the National Bank of Montpelier will provide an additional source of liquidity
      and offer Rurban the ability to fund loan growth with low cost
      deposits.





***Provision
      for Loan Losses:*** The
      provision for loan losses was $405,000 for the six months ended June 30, 2008
      compared to $238,000 for the six months ended June 30, 2007. The increase in
      the
      provision is principally due to loan growth.





***Non-interest
      Income:*** Non-interest income was $14.3 million for the six months ended June 30, 2008
      compared with $13.2 million for the six months ended June 30, 2007. Of the
      $1.1
      million increase, RDSI contributed nearly $750,000. Approximately $400,000
      of
      RDSI’s income is due to the in-house postage billings discussed previously. The
      first six months of 2008 were also positively impacted by the one-time recovery
      of $197,000 and $132,000, respectively, from the partial recovery of previously
      written off WorldCom securities and proceeds from the sale of equity securities
      derived from VISA Inc.’s Initial Public Offering.





***Non-interest
      Expense:*** For the
      six months ended June 30, 2008, total non-interest expense was $18.7 million
      compared with $18.4 million for the six months ended June 30, 2007. This
      represents a $346,000, or 1.9 percent, increase period over period. Of the
      overall increase, postage and delivery expenses increased $362,000, due
      primarily to the in-house billing expense at RDSI, and salaries and benefits
      increased $181,000. Offsetting these increases were decreases in professional
      fees of $323,000.





29




**Changes
      in Financial Condition**





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





At
      June
      30, 2008, total assets were $576.5 million, representing an increase of $15.3
      million or 2.7 percent, from December 31, 2007. The increase is primarily
      attributable to an increase of $15.2 million, or 3.9 percent in total loans.
      Available-for-sale securities increased $4.0 million, or 4.4 percent. Cash
      and
      cash equivalents decreased $5.3 million.





Year-
      over-year, average assets increased $29.6 million, or 5.4 percent. Loan growth
      over the past twelve months was approximately $22.8 million, or 6.0 percent,
      reaching $404.4 million at June 30, 2008; this growth was entirely organic.
      Virtually all of the growth in the Bank’s loan portfolio over this period was
      derived from the commercial sector. After a steady but slow first quarter which
      saw loan growth of $2.7 million, loan growth accelerated during the second
      quarter of 2008, growing $12.5 million, or an annualized rate of nearly 13
      percent.





At
      June
      30, 2008, liabilities totaled $517.2 million, an increase of $15.3 million
      since
      December 31, 2007. Of this increase, significant changes include Federal Home
      Loan Bank advances, which increased $13.8 million (57.5 percent); fed funds
      purchased increased to $3.6 million (there were no fed funds purchased at
      December 31, 2007); repurchase agreements increased $1.5 million (3.5 percent)
      and other liabilities increased $1.1 million (23.5 percent). Total deposits
      decreased $3.5 million (0.9 percent); and notes payable decreased $922,000
      (100
      percent). Of the $3.5 million decrease in total deposits, time deposits
      decreased $16.5 million while savings, interest checking and money market
      deposits increased $13.1 million. The decrease in time deposits was due to
      excess liquidity which allowed management to run off higher cost municipal
      deposits.





From
      December 31, 2007 to June 30, 2008, total shareholders’ equity increased
      $36,000, or 0.1 percent, to $59.4 million. Of this increase, retained earnings
      increased $1.6 million, which is the result of $2.5 million in net income less
      $793,000 in cash dividends to shareholders. Additional paid-in-capital increased
      $41,000 as the result of stock option expense incurred during the year.
      Accumulated other comprehensive income decreased $844,000 as the result of
      a
      decrease in market value of the available-for-sale securities portfolio. The
      stock repurchase plan also reduced capital by $717,000 during the first half
      of
      2008.





**Capital
      Resources**





At
      June
      30, 2008, actual capital levels (in millions) and minimum required levels were
      as follows:





Actual
            
            Minimum
                Required For
              Capital
                Adequacy Purposes
            
            Minimum
                Required
              To
                Be
              Well
                Capitalized Under
              Prompt
                Corrective
              Action
                RegulationsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                capital (to risk weighted assets)Consolidated
            
            $
            65.6
            
            
            15.6
            %
            $
            33.6
            
            
            8.0
            %
            $
            -
            
            
            N/AState
                Bank
            
            
            51.6
            
            
            12.7
            
            
            32.6
            
            
            8.0
            
            
            38.4
            
            
            10.0




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




30




**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 $111.2 million at June 30, 2008 compared
      to $111.5 million at December 31, 2007.





The
      Company’s commercial real estate and residential first mortgage portfolio of
      $224.3 million at June 30, 2008 and $211.4 million at December 31, 2007, which
      can and has been used to collateralize borrowings, is an additional source
      of
      liquidity. Management believes the Company’s current liquidity level, without
      these borrowings, is sufficient to meet its liquidity needs. At June 30, 2008,
      all eligible commercial real estate and first mortgage loans were pledged under
      an FHLB blanket lien.





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





The
      Company experienced positive cash flows from operating activities for the six
      months ended June 30, 2008 and 2007. Net cash provided from operating activities
      was $6.2 million and $2.2 million, respectively, for the six months ended June
      30, 2008 and 2007.





Net
      cash
      flow from investing activities was $(24.5) million and $(5.2) million for the
      six months ended June 30, 2008 and 2007, respectively. The changes in net cash
      from investing activities at June 30, 2008 included net change in loans of
      $17.0
      million, available-for-sale securities purchases totaling $46.2 million and
      purchases of premises equipment and software totaling $2.6 million. These cash
      payments were offset by $40.9 million in proceeds from maturities of
      available-for-sale securities. The changes in net cash from investing activities
      at June 30, 2007 included net change in loans of $11.8 million,
      available-for-sale security purchases totaling $15.4 million and purchase of
      premises equipment and software totaling $2.5 million. This was partially offset
      by proceeds from the sales and maturities of available-for-sale securities
      totaling $23.9 million.





Net
      cash
      flow from financing activities was $13.0 million and $(7.3) million for the
      six
      month periods ended June 30, 2008 and 2007, respectively. The 2008 financing
      activities included a $13.0 million increase in demand deposits, money market,
      interest checking and savings accounts, which was more than offset by a $16.5
      million decrease in certificates of deposits. Proceeds from advances from the
      Federal Home Loan Bank advances totaled $21.0 million, federal funds purchased
      totaled $3.6 million and repurchase agreements increased $1.5 million.
      Offsetting this increase were repayments of Federal Home Loan Bank advances
      of
      $7.2 million, the repayment of notes payable of $922,000, the purchase of
      treasury stock of $717,000 and cash dividends paid to shareholders of $793,000.
      The net cash used by financing activities at June 30, 2007 was primarily due
      to
      a decrease in certificates of deposits of $12.2 million partially offset by
      an
      increase in demand deposits, money markets, interest checking and savings
      accounts of $5.2 million, the repayment of notes payable totaling $1.5 million
      and cash dividends paid to shareholders of $603,000. These decreases were
      partially offset by an increase in federal funds purchased of $1.0 million
      and
      an increase in customer repurchase agreements of $846,000




31





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





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





Approximately
      $122.0 million of the Company’s $224.3 million commercial real estate and
      residential first mortgage loans qualify to collateralize FHLB borrowings and
      have been pledged to meet FHLB collateralization requirements as of June 30,
      2008. Based on the current collateralization requirements of the FHLB,
      approximately $19.8 million of additional borrowing capacity existed at June
      30,
      2008.





At
      June
      30, 2008, the Company had unused federal funds lines totaling $17.3 million.
      At
      December 31, 2007, the Company had $20.9 million in federal fund lines. Federal
      funds borrowed at June 30, 2008 and December 31, 2007 totaled $3.6 million
      and
      $0, respectively. The Company also had $9.9 million in unpledged securities
      of
      which $1.4 million may be used to pledge for additional borrowings.





The
      Company’s contractual obligations as of June 30, 2008 consisted of long-term
      debt obligations, other debt obligations, operating lease obligations and other
      long-term liabilities. Long-term debt obligations were comprised of FHLB
      advances of $37.8 million. Other debt obligations were comprised of Trust
      Preferred Securities of $20.6 million. The Company’s operating lease obligations
      consist of a lease on the State Bank operations building of $99,600 per year,
      a
      lease on the RDSI-North building of $162,000 per year, a lease on the new
      Northtowne branch of State Bank of $60,000 per year and a lease on the DCM
      Lansing facility of $108,000 per year. Other long-term liabilities were
      comprised of time deposits of $207.0 million.





**ASSET
      LIABILITY MANAGEMENT**





Asset
      liability management involves developing and monitoring strategies to maintain
      sufficient liquidity, maximize net interest income and minimize the impact
      that
      significant fluctuations in market interest rates would have on earnings. The
      business of the Company and the composition of its balance sheet consists 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.




32





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.





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





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





The
      following table provides information about the Company’s financial instruments
      used for purposes other than trading that are sensitive to changes in interest
      rates as of June 30, 2008. It does not present when these items may actually
      reprice. For loans receivable, securities, and liabilities with contractual
      maturities, the table presents principal cash flows and related weighted-average
      interest rates by contractual maturities as well as the historical impact of
      interest rate fluctuations on the prepayment of loans and mortgage backed
      securities. For core deposits (demand deposits, interest-bearing checking,
      savings, and money market deposits) that have no contractual maturity, the
      table
      presents principal cash flows and, as applicable, related weighted-average
      interest rates based upon the Company’s historical experience, management’s
      judgment and statistical analysis, as applicable, concerning their most likely
      withdrawal behaviors. The current historical interest rates for core deposits
      have been assumed to apply for future periods in this table as the actual
      interest rates that will need to be paid to maintain these deposits are not
      currently known. Weighted average variable rates are based upon contractual
      rates existing at the reporting date.




33




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


**(Dollars
      in Thousands)**





First
              Year
            
            Years
              2
                -
                5
            
            Thereafter
            
            TotalComparison
                of 2008 to 2007:
              Total
                rate-sensitive assets:At
                June 30, 2008
            
            $
            170,288
            
            $
            211,454
            
            $
            126,148
            
            $
            507,890At
                December 31, 2007
            
            
            176,907
            
            
            179,502
            
            
            133,191
            
            
            489,601Increase
                (decrease)
            
            $
            (6,619
            )
            $
            31,951
            
            $
            (7,043
            )
            $
            18,289Total
                rate-sensitive liabilities:At
                June 30, 2008
            
            $
            208,566
            
            $
            278,427
            
            $
            22,103
            
            $
            509,096At
                December 31, 2007
            
            
            231,589
            
            
            241,378
            
            
            21,612
            
            
            494,579Increase
                (decrease)
            
            $
            (23,023
            )
            $
            37,049
            
            $
            491
            
            $
            14,517




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





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




34




**Item
      4T. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures





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





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





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





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





Changes
      in Internal Control Over Financial Reporting





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




35


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




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





**Item
      1A. Risk Factors**




An
      investment in our common shares involves certain risks, including those
      identified and described in “Item 1A. Risk Factors” of Part I of the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as
      well
      as in the Cautionary Statements Regarding Forward-Looking Information contained
      on page 25 of this Form 10-Q. These risk factors could materially affect the
      Company’s business, financial condition or future results. There have been no
      material change in the risk factors previously disclosed in the Company’s Annual
      Report on Form 10-K for the fiscal year ended December 31, 2007.





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




a.
            Not
                applicable  b.
            Not applicable  c.
            The
                following table provides information regarding repurchases of the
                Company’s common shares during the three months ended June 30,
                2008:





Period
            
            Total
                Number of Shares Purchased (1)
            
            Average
                Price Paid per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            
            Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plans or Programs (2)April
                1 through April 30, 2008
            
            
            696
            
            $
            11.06
            
            
            —
            
            
            164,500May
                1 through May 31, 2008
            
            
            12
            
            $
            10.80
            
            
            —
            
            
            164,500June
                1 through June 30, 2008
            
            
            28,432
            
            $
            10.52
            
            
            28,000
            
            
            136,500





(1)
            Includes
                shares 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 and shares
                repurchased as part of the Company’s publicly announced repurchase
                program.


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





**Item
      3. Defaults Upon Senior Securities**





Not
      applicable




36





**Item
      4. Submission of Matters to a Vote of Security Holders**





Not
      applicable





**Item
      5. Other Information**





Not
      applicable





**Item
      6. Exhibits**





Exhibits





31.1
            —
            Rule
                13a-14(a)/15d-14(a) Certification (Principal Executive
                Officer)31.2
            —
            Rule
                13a-14(a)/15d-14(a) Certification (Principal Financial
                Officer)32.1
            —
            Section
                1350 Certification (Principal Executive Officer)32.2
            —
            Section
                1350 Certification (Principal Financial
                Officer)




37





**SIGNATURES**





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


RURBAN
              FINANCIAL
              CORP.Date:
              August
              13, 2008
            By
            /s/
              Kenneth A. JoyceKenneth
                A. Joyce
              President
                & Chief Executive Officer  By
            /s/
              Duane L. SinnDuane
                L. Sinn
              Executive
                Vice President &
              Chief
                Financial Officer





38