SB Financial (SBFG) 10-Q 2006 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedMarch 31, 2006

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 number0-13507

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 proceeding 12 months (or for such shorter period the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerate Filero Accelerated Filero Non-Accelerated Filerþ

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

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

Common Stock, par value $2.50 per share	5,027,433 shares
(class)	(Outstanding at April 28, 2006)

RURBAN FINANCIAL CORP.

FORM 10-Q

TABLE OF CONTENTS

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

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

Exhibit 32.1 – Section 1350 Certification (Principal Executive Officer)

Exhibit 32.2 – Section 1350 Certification (Principal Executive Officer)

 EX-31.1

 EX-31.2

 EX-32.1

 EX-32.2

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

The interim condensed consolidated financial statements of Rurban Financial Corp. (“Rurban” or the “Company”) are unaudited; however, the information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods presented. All adjustments reflected in these financial statements are of a normal recurring nature in accordance with Rule 10-01 of Regulation S-X. Results of operations for the three months ended March 31, 2006 are not necessarily indicative of results for the complete year.

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Rurban Financial Corp.
Condensed Consolidated Balance Sheets
March 31, 2006, December 31, 2005 and March 31, 2005

	(Unaudited)						(Unaudited)
	March 31,			December 31,			March 31,
	2006			2005			2005
Assets
Cash and due from banks	$	12,289,142		$	12,650,839		$	8,773,625
Federal funds sold		4,228,000			—			4,300,000
Cash and cash equivalents		16,517,142			12,650,839			13,073,625
Interest-bearing deposits		150,000			150,000			150,000
Available-for-sale securities		130,124,716			139,353,329			102,673,228
Loans held for sale		40,000			224,000			260,000
Loans, net of unearned income		337,729,277			327,048,229			266,046,311
Allowance for loan losses		(4,348,541	)		(4,699,827	)		(4,800,293	)
Premises and equipment		14,017,625			13,346,632			7,837,007
Purchased software		4,498,803			3,916,913			4,622,428
Federal Reserve and Federal Home Loan Bank stock		3,649,400			3,607,500			2,818,400
Foreclosed assets held for sale, net		2,383,852			2,309,900			757,476
Interest receivable		2,766,999			3,010,355			1,937,445
Goodwill		8,805,347			8,917,373			2,144,304
Core deposits and other intangibles		3,625,573			3,742,333			520,740
Cash value of life insurance		10,528,528			10,443,487			9,242,417
Other		7,712,506			6,521,213			7,197,400
Total assets	$	538,201,227		$	530,542,276		$	414,480,488

See notes to condensed consolidated financial statements (unaudited)

Note: The balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date.

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	(Unaudited)						(Unaudited)
	March 31,			December 31,			March 31,
	2006			2005			2005
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	45,380,636		$	52,073,751		$	36,498,890
Savings, interest checking and money market		129,111,866			124,206,115			96,376,323
Time		224,033,626			208,558,046			152,042,228
Total deposits		398,526,128			384,837,912			284,917,441
Notes payable		—			938,572			2,757,609
Federal Home Loan Bank advances		43,500,000			45,500,000			53,500,000
Federal funds purchased		—			4,600,000			5,000,000
Retail repurchase agreements		15,403,500			6,080,420			4,352,712
Trust preferred securities		20,620,000			20,620,000			10,310,000
Interest payable		1,486,845			1,373,044			934,065
Deferred income taxes		244,928			1,140,001			622,618
Other liabilities		4,367,894			11,001,679			2,309,282
Total liabilities		484,149,295			476,091,628			364,703,727
Commitments and Contingent Liabilities
Stockholders’ Equity
Common stock, $2.50 stated value; authorized 10,000,000 shares; issued 5,027,433; outstanding March 31, 2006 – 5,027,433, December 31, 2005 – 5,027,433 and March 31, 2005 – 4,568,488 shares		12,568,583			12,568,583			11,439,255
Additional paid-in capital		14,841,050			14,835,110			11,003,574
Retained earnings		28,973,991			28,702,817			29,353,780
Accumulated other comprehensive loss		(2,331,692	)		(1,655,862	)		(1,743,600	)
Treasury stock, at cost Common; March 31, 2006 – 0, December 31, 2005 – 0 and March 31, 2005 – 7,214 shares		—			—			(276,248	)
Total stockholders’ equity		54,051,932			54,450,648			49,776,761
Total liabilities and stockholders’ equity	$	538,201,227		$	530,542,276		$	414,480,488

See notes to condensed consolidated financial statements (unaudited)

Note: The balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date.

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

	March 31,			March 31,
	2006			2005
Interest Income
Loans
Taxable	$	5,554,154		$	3,913,966
Tax-exempt		12,235			15,506
Securities
Taxable		1,312,600			1,054,459
Tax-exempt		131,833			42,024
Other		36,267			18,258	��
Total interest income		7,047,089			5,044,213
Interest Expense
Deposits		2,121,214			1,103,421
Other borrowings		26,299			70,274
Retail repurchase agreements		124,277			17,648
Federal Home Loan Bank advances		482,821			586,552
Trust preferred securities		428,422			269,408
Total interest expense		3,183,033			2,047,303
Net Interest Income		3,864,056			2,996,910
Provision for Loan Losses		246,000			—
Net Interest Income After Provision for Loan Losses		3,618,056			2,996,910
Non-interest Income
Data service fees		3,241,134			3,157,519
Trust fees		815,451			804,493
Customer service fees		550,067			436,716
Net gains on loan sales		61,046			8,070
Net realized losses on sales of available-for-sale securities		—			(8,750	)
Loan servicing fees		86,694			66,843
Loss on sale of assets		(19,126	)		(38,958	)
Other		273,034			186,406
Total non-interest income		5,008,300			4,612,339

See notes to condensed consolidated financial statements (unaudited)

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Condensed Consolidated Statements of Operations (continued)

	March 31,		March 31,
	2006		2005
Non-interest Expense
Salaries and employee benefits	$	3,857,734	$	3,231,323
Net occupancy expense		439,948		290,155
Equipment expense		1,375,828		1,253,099
Data processing fees		136,590		91,197
Professional fees		519,365		518,530
Marketing expense		126,448		80,716
Printing and office supplies		152,984		151,242
Telephone and communications		402,367		351,617
Postage and delivery expense		131,994		74,051
State, local and other taxes		133,858		144,527
Employee expense		249,388		236,071
Other		423,527		299,186
Total non-interest expense		7,950,031		6,721,714
Income Before Income Tax		676,325		887,535
Provision for Income Taxes		153,780		249,070
Net Income	$	522,545	$	638,465
Basic Earnings Per Share	$	0.10	$	0.14
Diluted Earnings Per Share	$	0.10	$	0.14
Dividends Declared Per Share	$	0.05	$	0.05

See notes to condensed consolidated financial statements (unaudited)

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

	Three Months			Three Months
	Ended			Ended
	March 31, 2006			March 31, 2005
	Total			Total
	Stockholders’			Stockholders’
	Equity			Equity
Balance at beginning of period	$	54,450,648		$	50,305,795
Net Income		522,545			638,465
Other comprehensive loss:
Net change in unrealized gains (losses) on securities available for sale, net of taxes		(675,829	)		(940,408	)
Total comprehensive loss		(153,284	)		(301,943	)
Cash dividend		(251,372	)		(228,424	)
Stock options exercised		—			1,333
Stock option expense		5,940			—
Balance at end of period	$	54,051,932		$	49,776,761

See notes to condensed consolidated financial statements (unaudited)

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Rurban Financial Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended

	March 31,			March 31,
	2006			2005
Operating Activities
Net income	$	522,545		$	638,465
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		847,743			736,990
Provision for loan losses		246,000			—
Expense of stock option plan		5,940			—
Amortization of premiums and discounts on securities		74,956			13,587
Amortization of intangible assets		116,760			22,238
Deferred income taxes		(868,939	)		583,961
Gain from sale of loans		(61,046	)		(8,070	)
Loss on sales of foreclosed assets		6,452			48,278
FHLB Stock Dividends		(41,900	)		(25,400	)
(Gain) loss on sales of premises and equipment		12,674			(9,320	)
Net realized losses on available-for-sale securities		—			8,750
Changes in Proceeds from sale of loans held for sale		3,489,321			660,670
Originations of loans held for sale		(3,244,275	)		(799,700	)
Interest receivable		243,356			47,007
Other assets		(1,156,765	)		(661,081	)
Interest payable and other liabilities		(66,900	)		(703,370	)
Net cash provided by operating activities		125,922			553,005
Investing Activities
Purchases of available-for-sale securities		(9,659,256	)		(4,004,375	)
Proceeds from maturities of available-for-sale securities		2,577,430			4,476,852
Proceeds from the sales of available-for-sale securities		15,562,738			4,127,585
Net change in loans		(11,439,615	)		(1,977,925	)
Purchase of premises and equipment		(2,137,041	)		(891,509	)
Cash paid to shareholders of Exchange Bank Acquisition		(6,453,084	)		—
Proceeds from sales of premises and equipment		23,741			9,320
Proceeds from the sale of foreclosed assets		44,115			125,356
Net cash provided by (used in) investing activities		(11,480,972	)		1,865,304

See notes to condensed consolidated financial statements (unaudited)

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Condensed Consolidated Statements of Cash Flows (continued)

	March 31,			March 31,
	2006			2005
Financing Activities
Net increase (decrease) in demand deposits, money market, interest checking and savings accounts	$	(1,787,363	)	$	7,247,773
Net increase (decrease) in certificates of deposit		15,475,580			(1,954,646	)
Net increase in securities sold under agreements to repurchase		9,323,080			293,561
Net decrease in federal funds purchased		(4,600,000	)		(2,500,000	)
Proceeds from Federal Home Loan Bank advances		10,400,000			12,500,000
Repayment of Federal Home Loan Bank advances		(12,400,000	)		(15,000,000	)
Repayment of notes payable		(938,572	)		(322,047	)
Dividends paid		(251,372	)		(228,424	)
Proceeds from stock options exercised		—			1,333
Net cash provided by financing activities		15,221,353			37,550
Increase in Cash and Cash Equivalents		3,866,303			2,455,859
Cash and Cash Equivalents, Beginning of Year		12,650,839			10,617,766
Cash and Cash Equivalents, End of Period	$	16,517,142		$	13,073,625
Supplemental Cash Flows Information
Interest paid	$	3,069,232		$	2,107,352
Transfer of loans to foreclosed assets	$	244,088		$	313,633

See notes to condensed consolidated financial statements (unaudited)

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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 months ended March 31, 2006 are not necessarily indicative of results for the complete year.

The condensed consolidated balance sheet of the Company as of December 31, 2005 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, 2005.

Stock Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Standards (“SFAS”) No. 123(R) using the “modified prospective” method, and accordingly, will not restate prior period results. SFAS 123(R) requires compensation expense to be recognized for all stock options granted after the date of adoption and for all previously granted stock options that vest after the date of adoption. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation methodology previously utilized for options in the footnote disclosures required under SFAS No. 123. The impact of this adoption on financial statements for the period ended March 31, 2006 is not considered material.

Prior to January 1, 2006, the Company accounted for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. Under APB Opinion No. 25, no stock-based employee compensation cost was reflected in net income, as all options granted under the Company’s stock option plan had an exercise price equal to the market value of the underlying common stock on the grant date.

As of March 31, 2006, the Company had 19,000 nonvested options outstanding and there was $89,100 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized monthly on a straight-line basis as each option is vested through December 21, 2010.

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The following table illustrates the effect on net income and earnings per share if expense had been measured using the fair value recognition provisions of SFAS No. 123(R).

	Three Months Ended March 31, 2006
	Using Previous		SFAS 123(R)			As
	Accounting		Adjustment			Reported
Income before tax expense	$	682,265	$	(5,940	)	$	676,325
Income taxes		153,780		—			153,780
Net income	$	528,485	$	(5,940	)	$	522,545
Earnings per share:
Basic	$	0.10				$	0.10
Diluted	$	0.10				$	0.10

	Three Months Ended March 31, 2005
			SFAS 123(R)
	As Reported		Adjustment			Proforma
Income before tax expense	$	887,535	$	(11,880	)	$	875,655
Income taxes		249,070		—			249,070
Net income	$	638,465	$	(11,880	)	$	626,585
Earnings per share:
Basic	$	0.14				$	0.14
Diluted	$	0.14				$	0.14

NOTE B—EARNINGS PER SHARE

Earnings per share have been computed based on the weighted average number of shares outstanding during the periods presented. For the periods ended March 31, 2006 and 2005, stock options totaling 281,407 and 66,308 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 was:

	Three Months Ended
	March 31,
	2006		2005
Basic earnings per share		5,027,433		4,568,399
Diluted earnings per share		5,028,183		4,572,788

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

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

	March 31,			December 31,			March 31,
	2006			2005			2005
Commercial	$	85,599,534		$	79,359,126		$	60,130,766
Commercial real estate		71,609,379			68,071,738			65,039,558
Agricultural		42,881,753			40,236,664			42,077,524
Residential real estate		88,529,167			89,086,024			62,903,667
Consumer		48,150,518			48,876,788			32,072,744
Lease financing		1,226,816			1,661,126			4,074,254
Total loans		337,997,167			327,291,466			266,298,513
Less
Net deferred loan fees, premiums and discounts		(267,890	)		(243,237	)		(252,202	)
Loans, net of unearned income	$	337,729,277		$	327,048,229		$	266,046,311
Allowance for loan losses	$	(4,348,541	)	$	(4,699,827	)	$	(4,800,293	)

The following is a summary of the activity in the allowance for loan losses account for the three months ended March 31, 2006 and 2005 and the year ended December 31, 2005.

	March 31,			December 31,			March 31,
	2006			2005			2005
Balance, beginning of year	$	4,699,827		$	4,899,063		$	4,899,063
Balance, Exchange Bank		—			910,004			—
Provision charged to expense		246,000			583,402			—
Recoveries		143,301			1,716,815			183,580
Loans charged off		(740,587	)		(3,409,457	)		(282,350	)
Balance, end of period	$	4,348,541		$	4,699,827		$	4,800,293

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

	March 31,		December 31,		March 31,
	2006		2005		2005
Non-accrual loans	$	6,029,000	$	6,270,000	$	14,817,000
Accruing loans which are contractually past due 90 days or more as to interest or principal payments		1,900		5,200		50,100
Total non-performing loans	$	6,030,900	$	6,275,200	$	14,867,100

Individual loans determined to be impaired, including non-accrual loans, were as follows:

	March 31,		December 31,		March 31,
	2006		2005		2005
Loans with no allowance for loan losses allocated	$	897,000	$	1,676,000	$	923,000
Loans with allowance for loan losses allocated		5,756,000		4,460,000		13,303,000
Total impaired loans	$	6,653,000	$	6,136,000	$	14,226,000
Amount of allowance allocated	$	1,660,000	$	1,993,000	$	1,660,000

NOTE D – REGULATORY MATTERS

The Company, State Bank and Exchange 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, State Bank and Exchange 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.

Quantitative measures established by regulation to ensure capital adequacy require the Company, State Bank and Exchange 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), and of Tier I capital (as defined) to average assets (as defined). As of March 31, 2006 and 2005, the Company, State Bank and Exchange Bank exceeded all “well-capitalized” requirements to which they are subject.

As of December 31, 2005, the most recent notification to the regulators categorized the State Bank and Exchange Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Bank and Exchange Bank must maintain capital ratios as set

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forth in the following table. There are no conditions or events since that notification that management believes have changed State Bank’s or Exchange Bank’s categorization as well capitalized.

The Company’s consolidated, State Bank’s and Exchange Bank’s actual capital amounts (in millions) and ratios are also presented in the following table.

											To Be Well Capitalized Under
						Minimum Required For					Prompt Corrective Action
	Actual					Capital Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2006 Total Capital            (to Risk-Weighted Assets)      Consolidated	$	68.3		18.9	%	$	28.9		8.0	%	$	—		N/A
State Bank		37.1		12.7			23.3		8.0			29.2		10.0
Exchange Bank		7.6		13.4			4.5		8.0			5.7		10.0
Tier I Capital      (to Risk-Weighted Assets) Consolidated		62.7		17.3			14.5		4.0			—		N/A
State Bank		33.9		11.6			11.7		4.0			17.5		6.0
Exchange Bank		6.9		12.2			2.3		4.0			3.4		6.0
Tier I Capital      (to Average Assets) Consolidated		62.7		12.0			20.9		4.0			—		N/A
State Bank		33.9		8.0			17.2		4.0			21.4		5.0
Exchange Bank		6.9		9.1			3.0		4.0			3.8		5.0
As of December 31, 2005 Total Capital            (to Risk-Weighted Assets)      Consolidated	$	67.8		19.3	%	$	28.1		8.0	%	$	—		N/A
State Bank		36.6		13.0			22.6		8.0			28.2		10.0
Exchange Bank		7.5		13.8			4.4		8.0			5.5		10.0
Tier I Capital      (to Risk-Weighted Assets) Consolidated		62.1		17.7			14.0		4.0			—		N/A
State Bank		33.5		11.9			11.3		4.0			16.9		6.0
Exchange Bank		6.9		12.6			2.2		4.0			3.3		6.0
Tier I Capital      (to Average Assets) Consolidated		62.1		14.4			17.2		4.0			—		N/A
State Bank		33.5		8.0			16.7		4.0			20.8		5.0
Exchange Bank		6.9		8.5			3.2		4.0			4.1		5.0

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.

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NOTE F — NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, SFAS No. 156, “Accounting for Servicing of Financial Assets,” was issued. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” as it relates to the accounting for separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured by fair value, if practicable. SFAS No. 156 also permits the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company is currently measuring the effects of SFAS No. 156 and looks to adopt it in the fourth quarter of 2006. At this time, the Company deems this adoption to be immaterial to the financial position or results of operations.

NOTE G – COMMITMENTS AND CREDIT RISK

As of March 31, 2006, loan commitments and unused lines of credit totaled $128,612,000, standby letters of credit totaled $667,000 and no commercial letters of credit were outstanding.

NOTE H – SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between banking and data processing operations. Other segments include the accounts of the holding company, Rurban, which combined provides management and operational services to its subsidiaries; Rurban Operations Corp., which provides operational services for the company’s subsidiaries as described in Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations; and Reliance Financial Services, N.A., which provides trust and financial services to customers nationwide. Information reported internally for performance assessment follows.

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As of and for the three months ended March 31, 2006

			Data						Total		Intersegment			Consolidated
	Banking		Processing			Other			Segments		Elimination			Totals
Income statement information:
Net interest income (expense)	$	4,328,142	$	(45,927	)	$	(418,159	)	$	3,864,056				$	3,864,056
Non-interest income — external customers		931,585		3,241,134			835,581			5,008,300					5,008,300
Non-interest income — other segments		—		442,168			1,192,086			1,634,254		(1,634,254	)		—
Total revenue		5,259,727		3,637,375			1,609,508			10,506,610		(1,634,254	)		8,872,356
Non-interest expense		5,589,767		2,807,194			1,187,324			9,584,285		(1,634,254	)		7,950,031
Significant non-cash items:
Depreciation and amortization		201,818		594,519			51,406			847,743		—			847,743
Provision for loan losses		246,000		—			—			246,000		—			246,000
Income tax expense (benefit)		40,265		282,262			(168,747	)		153,780		—			153,780
Segment profit (loss)	$	292,287	$	547,919		$	(317,661	)	$	522,545	$	—		$	522,545
Balance sheet information:
Total assets	$	528,169,239	$	12,954,276		$	11,720,563		$	552,844,078	$	(14,642,851	)	$	538,201,227
Goodwill and intangibles		12,430,920		—			—			12,430,920		—			12,430,920
Premises and equipment expenditures, Three months ended March 31, 2006		294,177		1,811,257			31,607			2,137,041		—			2,137,041

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

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,” “targeted,” 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, 2005. 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 events or circumstances after the date on which the statement is made to reflect unanticipated events.

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

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

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.

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Rurban Operations Corp. (“ROC”) was formed in December 2005 and its first day of operation commenced January 3, 2006. ROC serves as a central location for the performance of the following functions that will provide services for all of the Company’s subsidiaries: human resources, marketing, facilities maintenance, loan operations, loan accounting, collections, file room, internet banking, credit analysis, VISA processing, mortgage operations, technology, training and development, deposit operations, operations administration, accounting, and a call center.

Reliance Financial Services, N.A. (“Reliance”), a wholly owned subsidiary of State Bank, provides trust and financial services to customers nationwide.

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, 2005 describes the significant accounting policies used in the development and presentation of the Company’s financial statements. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

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

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

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger

19

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 effect 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

In March 2006, SFAS No. 156, “Accounting for Servicing of Financial Assets,” was issued. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” as it relates to the accounting for separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured by fair value, if practicable. SFAS No. 156 also permits the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company is currently measuring the effects of SFAS No. 156 and looks to adopt it in the fourth quarter of 2006. At this time, the Company deems that this adoption to be immaterial to the financial position or results of operations.

Quarterly Earnings Summary

Net income for the first quarter of 2006 was $523,000, or $0.10 per diluted share, versus $638,000, or $0.14 per diluted share, for the first quarter of 2005. The quarterly decrease in net income is mainly driven by the provision for loan losses being $246,000 in the first quarter of 2006. Several recoveries were recorded in first quarter of 2005 resulting in no loan loss provision. The company believes the first quarter of 2006 is more indicative of where the provision will be on a quarterly basis. The acquisition of the Exchange Bank in the greater Toledo market is included in the Company’s condensed consolidated statements of operations for the first time in the first quarter of 2006.

Net interest income increased $867,000 to $3.9 million for the three months ended March 31, 2006 compared to $3.0 million for the first quarter 2005. The increase in net interest income is attributed to the 9 basis point improvement in the net interest margin to 3.37% compared to 3.28% in the first quarter of 2005. This improvement in net interest income is primarily due to the impact of the Exchange Bank acquisition. The improvement in the asset quality ratio also positively impacted the company’s net interest income.

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The provision for loan losses was $246,000 for the first quarter of 2006 compared to $0 for the first quarter of 2005. Loan loss reserves were 1.29% of total loans in the first quarter of 2006 compared to 1.81% in the first quarter of 2005. This reduction in the loan loss reserve to loans ration is a result of the greatly improved asset quality ratios. The non-performing loans to assets ratio improved to 1.56% at the end if the first quarter of 2006 compared to 4.10% for the first quarter 2005.

Non-interest income increased $396,000 to $5.0 million in the first quarter of 2006 compared to $4.6 million for the first quarter of 2005. The increase in non-interest income was mainly the result of the increase in data processing fees of $84,000 associated with the expansion of RDSI’s customer base in 2005. Total customer service fees were up $113,000 and mortgage banking activities were up $53,000 and are a direct result of the Exchange Bank acquisition.

Non-interest expense increased $1.3 million to $8.0 million for the first quarter of 2006 compared to $6.7 million for the first quarter of 2005. Exchange Bank’s non-interest expense totaled $1.3 million for the first quarter of 2006. On-going operating expenses at State Bank were well-controlled, and declining on a quarterly basis since the acquisition of the Lima branches in the second quarter of 2005. The operating expenses within the loan workout company, RFCBC, also decreased significantly in the first quarter of 2006 compared to the first quarter of 2005. Management continues to monitor expenses daily and looks to gain additional efficiencies as additional backroom operations are fully integrated with the recent acquisitions.

Changes in Financial Condition

March 31, 2006 vs. December 31, 2005

At March 31, 2006, total assets were $538.2 million, an increase of $7.7 million from December 31, 2005. The increase was primarily attributable to an increase in loans and federal funds sold of $10.7 million and $4.2 million, respectively. The increase was partially offset by decreases in available for sale securities of $9.2 million. The entire securities portfolio of Exchange Bank was liquidated in the first quarter of 2006 and only a portion was reinvested in securities.

At March 31, 2006, the increase in total liabilities and shareholders’ equity of $7.7 million from December 31, 2005 was mainly attributable to increases in total deposits and repurchase agreements of $13.7 million and $9.3 million, respectively. These increases were somewhat offset by decreases in notes payable, federal funds purchased and other liabilities of $0.9, $4.6 and $6.6 million, respectively. The reduction to notes payable was attributable to RDSI paying down debt. The $6.6 million reduction in other liabilities was due to the payout to shareholders of Exchange Bank during the first quarter of 2006.

March 31, 2006 vs. March 31, 2005

As of March 31, 2006, total assets increased $123.7 million from March 31, 2005. The majority of the increase was due to the acquisitions of the Lima branches and Exchange Bank. The increase was offset by the reduction of problem loan balances within the loan workout company RFCBC.

Linked Quarter Comparison

The Company reported a net profit for the first quarter of 2006 of $523,000, or $0.10 per diluted share, versus a net loss of $344,000, or $0.08 per diluted share, for the fourth quarter of 2005. The

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first quarter profit was mainly due to an improvement in the net interest margin coupled with a reduction in the provision for loan losses as a result of continued improvements in credit quality. Also impacting the variance for the linked quarter was the sale of approximately $8.4 million in troubled loans at RFCBC resulting in a loss on sale of loans of $499,000 in the fourth quarter of 2005. The acquisition of the Exchange Bank in the first quarter of 2006 also impacted the company’s overall performance as this was the first quarter that Exchange Bank was included in the condensed consolidated statements of operations.

Net interest income increased $717,000 or 23% to $3.9 million for the first quarter of 2006 when compared to the fourth quarter of 2005. This increase was driven by the inclusion of earning assets from Exchange Bank during the first quarter of 2006.

A comparison of financial results for the quarter ended March 31, 2006 to the previous quarter ended December 31, 2005 is as follows:

						Linked
	Three Months Ended					Quarter
	03/31/06		12/31/05			% Change
	(dollars in millions, except per share data)
Total Assets	$	538	$	531			+1	%
Loans Held for Sale		0.0		0.2			—
Loans (net of unearned income)		338		327			+3	%
Allowance for Loan Losses		4.3		4.7			-9	%
Total Deposits		399		385			+4	%
Net interest Income		3.9		3.1			+26	%
Loan Loss Provision		0.2		0.6			—
Non-interest Income		5.0		4.5			+11	%
Non-interest Expense		8.0		7.6			+5	%
Net Income		0.5		(0.3	)		—
Basic Earnings Per Share	$	0.10	$	(0.08	)		—
Diluted Earnings Per Share	$	0.10	$	(0.08	)		—

On a linked quarter basis, total loans increased $11 million and total assets increased $7 million. The majority of the loan growth in the first quarter was from commercial lending efforts.

Total Revenue

	Three Months Ended
	03/31/06		12/31/05		$Change		%Change
			(dollars in thousands)
Total Revenue	$	8,872	$	7,623	$	+1,249		+16	%

Total revenue (net interest income plus noninterest income) was $8.9 million for the first quarter of 2006 compared to $7.6 million for the fourth quarter of 2005, up $1.2 million or 16%. This increase is mainly due to the acquisition of Exchange Bank as of December 31, 2005. The linked quarter favorable variance was also due to the loss on the sale of troubled loans in the fourth quarter of 2005.

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Net Interest Income

	Three Months Ended
	03/31/06		12/31/05		$Change		%Change
			(dollars in thousands)
Net Interest Income	$	3,864	$	3,147	$	+717		+23	%

Net interest income increased $717,000 in the first quarter of 2006 when compared to the fourth quarter of 2005. The increase was attributed primarily to the increased volume in loans and the increase in the prime rate. The tax equivalent net interest margin for the first quarter of 2006 was 3.37% compared to 3.18% for the previous quarter. The increase in net interest margin was principally a result of higher margin from Exchange Bank.

Loan Loss Provision

The provision for loan losses was $246,000 for the first quarter of 2006 compared to $613,000 in the fourth quarter of 2005. The decrease in the provision in the first quarter was the result of the continued review and determination of the level of reserves necessary to absorb probable losses in the loan portfolio. The results of the first quarter are discussed in the “Allowance for Loan Losses” section.

Non-interest Income

	Three Months Ended
	03/31/06			12/31/05			$Change		%Change
	(dollars in thousands)
Total Non-interest Income	$	5,008		$	4,477		$	+531		+12	%
- Data Service Fees		3,241			3,399			-158		-5	%
- Trust Fees		815			782			+33		+4	%
- Deposit Service Fees		550			450			+100		+22	%
- Gains on Sale of Loans		61			(483	)		+544		—
- Gain (Loss) on Assets		(19	)		(65	)		+46		+71	%
- Other		360			394			-34		-9	%

Non-interest income increased by $531,000 to $5.0 million in the first quarter of 2006 compared to $4.5 million in the fourth quarter of 2005. This increase is mainly due to the Exchange acquisition and the loss on sale of the troubled loans recorded in the fourth quarter 2005.

Non-interest Expense

	Three Months Ended
	03/31/06		12/31/05		$Change		%Change
	(dollars in thousands)
Total Non-interest Expense	$	7,950	$	7,632	$	+318		+4	%
- Salaries & Employee Benefits		3,858		3,179		+679		+21	%
- Equipment Expense		1,376		1,317		+59		+4	%
- Professional Fees		519		1,033		-514		-50	%
- All Other		2,197		2,103		+94		+4	%

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Non-interest expense for the first quarter of 2006 was $8.0 million compared to $7.6 million for the fourth quarter of 2005, an increase of $318,000 or 4%. Of the quarterly increase, $1.3 million was contributed from the Exchange Bank acquisition. This increase was mostly offset by the on-going expenses at the other affiliates being well-controlled and monitored.

Loans

	As of
			% of					% of			Inc
	03/31/06		Total			12/31/05		Total			(Dec)
	(dollars in millions)
Commercial	$	86		26	%	$	79		24	%	$	7
Commercial real estate		72		21	%		68		21	%		4
Agricultural		43		13	%		40		12	%		3
Residential		88		26	%		89		27	%		(1	)
Consumer		48		14	%		49		15	%		(1	)
Leasing loans		1		—			2		1	%		(1	)
Total	$	338				$	327				$	11
Loans held for sale		0.0					0.2					—
Total	$	338				$	327				$	11

Loans increased $11 million from December 31, 2005 to March 31, 2006. During the first quarter of 2006, the Company realized the majority if its loan growth in Commercial loans. The Company is continuing its focus on sales in all its markets and management is encouraged by the progress made in the first quarter of 2006.

Asset Quality

As of and For the Quarter Ended
(dollars in millions)

	03/31/06			12/31/05			Change
Non-performing loans	$	6.0		$	6.3		$	-0.3
Non-performing assets		8.4			8.9			-0.5
Non-performing assets/ loan plus OREO		2.48	%		2.70	%		-0.22	%
Non-performing assets/ total assets		1.56	%		1.67	%		-0.11	%
Net chargeoffs		0.6			1.6			-1.0
Net chargeoffs (annualized)/ total loans		0.72	%		1.96	%		-1.24	%
Loan loss provision		0.2			0.6			-0.4
Allowance for loan loss — $		4.3			4.7			-0.4
Allowance for loan loss — %		1.29	%		1.44	%		-0.15	%
Allowance/non-performing loans		72	%		75	%		—
Allowance/non-performing assets		51	%		53	%		—

Non-performing assets at March 31, 2006 decreased to $8.4 million or 1.56% of total assets, versus $8.9 million, or 1.67% at December 31, 2005, a decrease of $0.5 million. This decrease is attributed to our continued improvement in asset quality. Of the $8.4 million of non-performing assets, a commercial building valued at $2.1 million is currently being marketed for sale. The $0.6 million in net charge-offs for the first quarter was primarily related to the write-down of previously identified problem loans.

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Allowance for Loan Losses

The Company grades its loans using an eight grade system. Loans with concerns are classified as either:

• Grade 5 — Special Mention: Potential weaknesses that deserve management’s close attention;

• Grade 6 — Substandard: Inadequately protected, with well-defined weakness that jeopardize pay off of debt;

• Grade 7 — Doubtful: Inherent weaknesses which are well-defined and a high probability of loss (impaired) (these loans are typically reserved down to collateralized values); or

• Grade 8 — Loss: Considered uncollectible. May have recovery or salvage value with future collection efforts (these loans are either fully reserved or charged off).

The Company’s allowance for loan losses has four components. Those components are shown in the following table. Commercial, commercial real estate and agricultural loans of over $100,000 ($25,000 at Exchange Bank) are individually reviewed and assessed regarding the need for an individual allocation.

	03/31/06							12/31/05
	Loan		Allocation					Loan		Allocation
	Balance		$		%			Balance		$		%
Allocations for individual commercial loans graded Doubtful (impaired)	$	5.6	$	1.1		19.64	%	$	6.1	$	2.0		32.79	%
Allocations for individual commercial loans graded Substandard		5.6		0.4		7.14			7.7		0.5		6.49
Allocation based on Special Mention loan balance		14.1		0.4		2.84			12.2		0.4		3.28
“General” allowance based on chargeoff history of nine categories of loans		312.7		2.4		0.77			301.5		1.8		0.60
TOTAL	$	338.0	$	4.3		1.29	%	$	327.5	$	4.7		1.44	%

The amount of loans classified as doubtful decreased $0.5 million to $5.6 million for the quarter ended March 31, 2006 and substandard loans decreased $2.1 million to $5.6 million. Allowance allocations on doubtful loans decreased $0.9 million and the allowance allocations on substandard loans decreased $0.1 million from December 31, 2005. The allowance for loan losses at March 31, 2006 was $4.3 million or 1.29% of loans compared to $4.7 million or 1.44% at December 31, 2005.

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Capital Resources

At March 31, 2006, actual capital levels (in millions) and minimum required levels were:

											Minimum Required
						Minimum Required					To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk weighted assets) Consolidated	$	68.3		18.9	%	$	28.9		8.0	%	$	—		N/A
State Bank		37.1		12.7			23.3		8.0			29.2		10.0
Exchange Bank		7.6		13.4			4.5		8.0			5.7		10.0

The Company, State Bank and Exchange Bank were categorized as well capitalized at March 31, 2006.

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 $146.8 million at March 31, 2006 compared to $152.4 million at December 31, 2005.

The Company’s residential first mortgage portfolio of $88.5 million at March 31, 2006 and $89.1 million at December 31, 2005, which can and has been used to collateralize borrowings, is an additional source of liquidity. Management believes its current liquidity level is sufficient to meet its liquidity needs. At March 31, 2006, all eligible mortgage loans were pledged under a Federal Home Loan Bank (“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 at March 31, 2006 and 2005 follows.

The Company experienced positive cash flows from operating activities at March 31, 2006 and 2005. Net cash from operating activities was $125,922 and $553,005, respectively, at March 31, 2006 and 2005.

Net cash flow from investing activities was $(11.5) million and $1.9 million at March 31, 2006 and 2005 respectively. The changes in net cash from investing activities at March 31, 2006 include loan growth of $11.4 million and the payment to the Exchange shareholders of $6.5 million partially offset by an decrease in securities of $8.5 million. The changes in net cash from investing activities at March 31, 2005 include an decrease in securities of $4.6 million partially offset by loan growth of $2.0 million.

Net cash flow from financing activities was $15.2 million and $37,550 at March 31, 2006 and 2005, respectively. The net cash variance was primarily due to an increase in total deposits of $13.7 million at March 31, 2006 compared to an increase of total deposits of $5.3 million at March 31, 2005.

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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.

Approximately $77.5 million of the Company’s $88.5 million residential first mortgage loan portfolio qualifies to collateralize FHLB borrowings and was pledged to meet FHLB collateralization requirements as of March 31, 2006. In addition to residential first mortgage loans, $14.2 million in investment securities are pledged to meet FHLB collateralization requirements. Based on the current collateralization requirements of the FHLB, approximately $21.1 million of additional borrowing capacity existed at March 31, 2006.

As of March 31, 2006, the Company had unused federal funds lines totaling $20.9 million from four correspondent banks. At December 31, 2005, the Company had $20.9 million in federal fund lines. Federal funds borrowed were $0 at March 31, 2006 and $4.6 million at December 31, 2005.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
March 31, 2006

	Payment Due by Period
			Less						More
			than 1		1 – 3		3 – 5		than 5
Contractual Obligations	Total		year		years		years		years
Long-Term Debt Obligations	$	43,500,000	$	10,500,000	$	10,000,000	$	20,000,000	$	3,000,000
Other Debt Obligations		20,620,000		0		0		0		20,620,000
Capital Lease Obligations		0		0		0		0		0
Operating Lease Obligations		1,978,320		261,600		523,200		523,200		670,320
Purchase Obligations		0		0		0		0		0
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP		224,033,626		166,698,880		52,322,690		4,147,690		864,366
Total	$	290,131,946	$	177,460,480	$	62,845,890	$	24,670,890	$	25,154,686

The Company’s contractual obligations as of March 31, 2006 were evident in long-term debt obligations, other debt obligations, operating lease obligations and other long-term liabilities. Long-term debt obligations are comprised of FHLB advances of $43.5 million. Other debt obligations are comprised of Trust Preferred Securities of $20.6 million. The operating lease obligation is a lease on the ROC operations building of $99,600 a year and the RDSI-North building of $162,000 a year. Other long-term liabilities are comprised of time deposits of $224,033,626.

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 loans which are originated and held for sale, all of the financial

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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 profitability and stockholder value; however, excessive levels of interest rate risk could pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the Company’s safety and soundness.

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

The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Company, adopted a Joint Agency Policy Statement on interest rate risk effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk, and serves as 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

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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.

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 March 31, 2006. 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 Company’s historical experience of the 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.

Principal/Notional Amount Maturing or Assumed to Withdraw In:
(Dollars in Thousands)

	First			Years
Comparison of 2006 to 2005:	Year			2 – 5			Thereafter		Total
Total rate-sensitive assets:
At March 31, 2006	$	203,171		$	160,949		$	112,069	$	476,189
At December 31, 2005		215,721			162,891			92,014		470,626
Increase (decrease)	$	(12,550	)	$	(1,942	)	$	20,055	$	5,563
Total rate-sensitive liabilities:
At March 31, 2006	$	214,895		$	216,592		$	46,563	$	478,050
At December 31, 2005		200,846			221,267			40,464		462,577
Increase (decrease)	$	14,049		$	(4,675	)	$	6,099	$	15,473

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. While increasingly aggressive local market competition in lending rates has pushed loan rates lower, the Company’s increased reliance on non-core funding sources has restricted the Company’s ability to reduce funding rates in concert with declines in lending rates.

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 and 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 90 days, and 6) Federal Home Loan Bank borrowings with terms of one day to ten years.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      With the participation of the President and Chief Executive Officer (the principal executive officer) and the Executive Vice President and Chief Financial Officer (the principal financial officer) of the Company, the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and 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 are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared.

Changes in Internal Control Over Financial Reporting

      There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2006, that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no material 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 Part I, Item 1A. Risk Factors of the Company’s Annual Report of Form 10-K for the fiscal year ended December 31, 2005, as well as cautionary statements contained in 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 Form 10-K.

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

a.	Not applicable
b.	Not applicable
c.	The following table provides information regarding repurchases of the Company’s common shares during the three months ended March 31, 2006:

							Maximum Number
							(or Approximate
					Total Number of		Dollar Value) of
					Shares Purchased as		Shares that May Yet
					Part of Publicly		Be Purchased Under
	Total Number of		Average Price		Announced Plans or		the Plans or
Period	Shares Purchased (1)		Paid per Share		Programs		Programs
January 1 thru January 31, 2006		5,951	$	11.68		—		—
February 1 thru February 28, 2006		1,982	$	12.54		—		—
March 1 thru March 31, 2006		2,100	$	12.58		—		—

(1) All of the repurchased shares were purchased by Reliance Financial Services, N.A., an indirect subsidiary of the Company, in its capacity as the administrator of the Company’s Employee Stock Ownership and Savings Plan.

Item 3. Defaults Upon Senior Securities

Not applicable

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

I. Annual Meeting of Shareholders – April 20, 2006

a. On April 20, 2006, Rurban Financial Corp. held its Annual Meeting of Shareholders. At the close of business on the February 23, 2006 record date, 5,027,433 Rurban Financial Corp. common shares were outstanding and entitled to vote. At the Annual Meeting,

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	3,612,251 or 71.9% of the outstanding common shares entitle to vote were represented by proxy or in person.
b.	Directors elected at the Annual Meeting for a three year term:
	Thomas A. Buis Kenneth A. Joyce Thomas L. Sauer J. Michael Walz
	Directors whose term of office continued after the Annual Meeting:
	Thomas M. Callan John R. Compo John Fahl Robert A. Fawcett, Jr. Richard L. Hardgrove Rita A. Kissner Steven D. VanDemark
c.	Results of Matters voted upon at the Annual Meeting: Election of Directors:

Nominee	Votes For		Votes Withheld
Thomas A. Buis		3,381,971		223,562
Kenneth A. Joyce		3,418,461		187,072
Thomas L. Sauer		3,419,802		185,731
J. Michael Walz		3,395,350		210,183

d. Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

a. 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)

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SIGNATURES

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

	RURBAN FINANCIAL CORP.
Date: May 12, 2006	By	/s/ Kenneth A. Joyce
		Kenneth A. Joyce
		President & Chief Executive Officer
	By	/s/ Duane L. Sinn
		Duane L. Sinn
		Executive Vice President & Chief Financial Officer

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