MBT FINANCIAL CORP - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - MBT FINANCIAL CORP	ex_112480.htm
EX-32.1 - EXHIBIT 32.1 - MBT FINANCIAL CORP	ex_112479.htm
EX-31.2 - EXHIBIT 31.2 - MBT FINANCIAL CORP	ex_112478.htm
EX-31.1 - EXHIBIT 31.1 - MBT FINANCIAL CORP	ex_112477.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-30973

MBT FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Michigan

38-3516922

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

102 E. Front Street

Monroe, Michigan 48161

(Address of principal executive offices)

(Zip Code)

(734) 241-3431

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer ☐	Accelerated Filer ☑
Non-accelerated filer ☐	Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐

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

As of May 8, 2018, there were 22,977,864 shares of the Company’s Common Stock outstanding.

Part I Financial Information

Item 1. Financial Statements

MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS

	March 31, 2018
Dollars in thousands	(Unaudited)			December 31, 2017

ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	13,987		$	18,233
Interest bearing		481			34,777
Total cash and cash equivalents		14,468			53,010

Interest Bearing Time Deposits in Other Banks		14,196			15,196
Securities - Held to Maturity		36,907			37,163
Securities - Available for Sale		433,780			442,816
Equity Securities		6,205			4,148

Loans held for sale		-			346

Loans		722,640			694,979
Allowance for Loan Losses		(7,885	)		(7,666	)
Loans - Net		714,755			687,313

Accrued interest receivable and other assets		18,949			20,463
Other Real Estate Owned		1,229			1,412
Bank Owned Life Insurance		58,505			58,153
Premises and Equipment - Net		27,062			27,400
Total assets	$	1,326,056		$	1,347,420

LIABILITIES
Deposits
Non-interest bearing	$	293,243		$	299,838
Interest-bearing		900,120			898,326
Total deposits		1,193,363			1,198,164

Interest payable and other liabilities		15,191			16,598
Total liabilities		1,208,554			1,214,762

STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,973,261 and 22,907,844 shares issued and outstanding)		23,078			22,840
Retained earnings		106,330			117,524
Unearned compensation		(59	)		-
Accumulated other comprehensive loss		(11,847	)		(7,706	)
Total stockholders' equity		117,502			132,658
Total liabilities and stockholders' equity	$	1,326,056		$	1,347,420

The accompanying notes to consolidated financial statements are an integral part of these statements.

-2-

MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - UNAUDITED

	Three Months Ended March 31,
Dollars in thousands, except per share data	2018			2017

Interest Income
Interest and fees on loans	$	8,217		$	7,364
Interest on investment securities-
Tax-exempt		404			310
Taxable		2,210			2,268
Interest on balances due from banks		125			109
Total interest income		10,956			10,051

Interest Expense
Interest on deposits		414			456
Interest on borrowed funds		6			-
Total interest expense		420			456

Net Interest Income		10,536			9,595
Recovery Of Loan Losses		(100	)		(200	)

Net Interest Income After Recovery Of Loan Losses		10,636			9,795

Other Income
Income from wealth management services		1,185			1,128
Service charges and other fees		946			1,014
Debit card income		720			680
Net gain (loss) on sales and redemptions of securities available for sale		(101	)		10
Net gain (loss) on sales of Other Real Estate Owned		19			(34	)
Origination fees on mortgage loans sold		62			59
Bank owned life insurance income		353			341
Other		600			622
Total other income		3,784			3,820

Other Expenses
Salaries and employee benefits		5,962			5,434
Occupancy expense		721			748
Equipment expense		793			697
Marketing expense		377			284
Professional fees		594			589
EFT/ATM expense		259			248
Other Real Estate Owned expenses		15			32
FDIC Deposit Insurance Assessment		107			107
Bonding and other insurance expense		132			122
Telephone expense		75			116
Other		757			685
Total other expenses		9,792			9,062

Income Before Income Taxes		4,628			4,553
Income Tax Expense		726			1,373
Net Income	$	3,902		$	3,180

Other Comprehensive Income - Net of Tax
Unrealized gains (losses) on securities		(4,204	)		1,787
Reclassification adjustment for (gains) losses included in net income		80			(7	)
Postretirement benefit liability		32			27
Total Other Comprehensive Income (Loss) - Net of Tax		(4,092	)		1,807

Comprehensive Income (Loss)	$	(239	)	$	4,987

Basic Earnings Per Common Share	$	0.17		$	0.14

Diluted Earnings Per Common Share	$	0.17		$	0.14

Dividends Declared Per Share of Common Stock	$	0.66		$	0.75

The accompanying notes to consolidated financial statements are an integral part of these statements.

-3-

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

												Accumulated
												Other
	Common Stock					Retained			Unearned			Comprehensive
Dollars in thousands	Shares		Amount			Earnings			Compensation			Income (Loss)			Total
Balance - January 1, 2018		22,907,844	$	22,840		$	117,524		$	-		$	(7,706	)	$	132,658

Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes		39,825		(178	)		-			-			-			(178	)
Restricted stock awards, net of shares redeemed for taxes		7,500		78			-			(78	)		-			-
Employee Stock Purchase Plan and other stock issued		18,092		189			-			-			-			189
Tax benefit from exercise of options		-		-			-			-			-			-

Equity Compensation		-		216			-			19			-			235

Deferred Directors' Compensation		-		(67	)		-			-			-			(67	)

Cumulative Effect Adjustment (ASU 2016-01)		-		-			49			-			(49)			-

Dividends declared ($0.66 per share)		-		-			(15,145	)		-			-			(15,145	)

Net income		-		-			3,902			-			-			3,902
Other comprehensive income - net of tax		-		-			-			-			(4,092	)		(4,092	)

Balance - March 31, 2018		22,973,261	$	23,078		$	106,330		$	(59	)	$	(11,847	)	$	117,502

												Accumulated
												Other
	Common Stock					Retained			Unearned			Comprehensive
Dollars in thousands	Shares		Amount			Earnings			Compensation			Income (Loss)			Total
Balance - January 1, 2017		22,777,882	$	22,562		$	126,079		$	(4	)	$	(7,523	)	$	141,114

Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes		59,743		(230	)		-			-			-			(230	)
Restricted stock awards, net of shares redeemed for taxes		6,000		65			-			(65	)		-			-
Employee Stock Purchase Plan and other stock issued		17,169		190			-			-			-			190
Tax benefit from exercise of options		-		-			812			-			-			812

Equity Compensation		-		122			-			9			-			131

Deferred Directors' Compensation		-		(324	)					-			-			(324	)

Dividends declared ($0.75 per share)		-		-			(17,127	)		-			-			(17,127	)

Net income		-		-			3,180			-			-			3,180
Other comprehensive income - net of tax		-		-			-			-			1,807			1,807

Balance - March 31, 2017		22,860,794	$	22,385		$	112,944		$	(60	)	$	(5,716	)	$	129,553

The accompanying notes to consolidated financial statements are an integral part of these statements.

-4-

MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Three Months Ended March 31,
Dollars in thousands	2018			2017

Cash Flows from Operating Activities
Net Income	$	3,902		$	3,180
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		(100	)		(200	)
Depreciation		370			404
Net amortization of investment premium and discount		576			614
Adjustment for assets carried at fair market value		36			-
Writedowns of Other Real Estate Owned		-			6
Net decrease in interest payable and other liabilities		(1,434	)		(1,932	)
Net decrease in interest receivable and other assets		2,555			746
Writedowns of Other Assets		-			37
Equity based compensation expense		235			131
Net (gain) loss on sale/settlement of securities		101			(10	)
Increase in cash surrender value of life insurance		(352	)		(341	)
Net cash provided by operating activities	$	5,889		$	2,635

Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks	$	1,000		$	750
Proceeds from maturities and redemptions of investment securities held to maturity		241			1,835
Proceeds from maturities and redemptions of investment securities available for sale		12,666			7,030
Proceeds from sales of investment securities available for sale		19,181			10,013
Net increase in loans		(27,140	)		(10,465	)
Proceeds from sales of other real estate owned		347			240
Proceeds from sales of other assets		40			-
Purchase of time deposits in other banks		-			(500	)
Purchase of investment securities held to maturity		-			(2,565	)
Purchase of Bank Owned Life Insurance		-			(3	)
Purchase of investment securities available for sale		(30,799	)		(7,073	)
Purchase of bank premises and equipment		(32	)		(184	)
Net cash used for investing activities	$	(24,496	)	$	(922	)

Cash Flows from Financing Activities
Net increase (decrease) in deposits	$	(4,801	)	$	3,355
Issuance of common stock		189			190
Stock redeemed for tax withholding - stock based compensation		(178	)		(230	)
Dividends paid		(15,145	)		(17,127	)
Net cash used for financing activities	$	(19,935	)	$	(13,812	)

Net Decrease in Cash and Cash Equivalents	$	(38,542	)	$	(12,099	)

Cash and Cash Equivalents at Beginning of Period		53,010			52,772
Cash and Cash Equivalents at End of Period	$	14,468		$	40,673

Supplemental Cash Flow Information
Cash paid for interest	$	420		$	458
Cash paid for federal income taxes	$	-		$	-

Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned	$	144		$	-
Transfer of loans to other assets	$	-		$	40

The accompanying notes to consolidated financial statements are an integral part of these statements.

-5-

MBT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The unaudited consolidated financial statements include the accounts of MBT Financial Corp. (the “Company”) and its subsidiary, Monroe Bank & Trust (the “Bank”). The Bank includes the accounts of its wholly owned subsidiary, MB&T Financial Services, Inc. The Bank operates fourteen branches in Monroe County, Michigan, six branches in Wayne County, Michigan, and one loan and wealth management office in Wayne County. The Bank’s primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Company’s sole business segment is community banking.

The accounting and reporting policies of the Bank conform to practice within the banking industry and are in accordance with accounting principles generally accepted in the United States. Preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses and the fair value of investment securities.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

The significant accounting policies are as follows:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany transactions and balances have been eliminated.

COMPREHENSIVE INCOME

Accounting principles generally require that revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale and amounts recognized related to postretirement benefit plans (gains and losses, prior service costs, and transition assets or obligations), are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

BUSINESS SEGMENTS

While the Company's chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable segment.

FAIR VALUE

The Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities that are elected to be accounted for under The Fair Value Option as well as for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments and available for sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Fair value is defined 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. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

-6-

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets or liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement.

ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2017 (therefore, for the year ending December 31, 2018 for the Company). The ASU does not apply to financial instruments, which constitute a significant portion of our revenue. The Company adopted ASU 2014-09 on January 1, 2018 and determined that adoption of the standard did not have a significant impact on its financial statements.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Company’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Company's year ending December 31, 2020. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard will likely have an effect on the Company's consolidated financial statements from a onetime adjustment to increase the ALLL upon adoption of the standard and due to increased provision expense at the time loans are originated. Management has begun the process of segmenting the portfolio and developing an implementation timeline.

-7-

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities. This premium will now be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument. This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, and must be adopted on a modified retrospective basis. The Company has reviewed the investment portfolio and determined that the standard will not have a material effect on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU was issued to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, and require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The Company adopted ASU 2016-01 on January 1, 2018 and it did not have a material effect on the consolidated financial statements. For exit pricing on loans, the Corporation made a fair value adjustment based on the yield metrics of the portfolio and applied a credit mark provided by its merger and acquisition advisors.

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

	For the three months ended March 31,
	2018		2017
Basic
Net income	$	3,902,000	$	3,180,000
Average common shares outstanding		22,943,736		22,821,273
Earnings per common share - basic	$	0.17	$	0.14

Diluted
Net income	$	3,902,000	$	3,180,000
Average common shares outstanding		22,943,736		22,821,273
Equity compensation		119,464		140,152
Average common shares outstanding - diluted		23,063,200		22,961,425
Earnings per common share - diluted	$	0.17	$	0.14

-8-

3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) - On February 22, 2018, 105,000 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2018. The fair value of $2.36 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 23.64%, a risk free interest rate of 2.86% and dividend yield of 2.18%. The fair value of the Company’s common stock was $10.45 on the grant date.

SOSARs granted under the plan are structured as fixed grants with the base price equal to the market value of the underlying stock on the date of the grant.

The following table summarizes the SOSARs that have been granted:

				Weighted Average
	SOSARs			Base Price
SOSARs Outstanding, January 1, 2018		372,585		$	6.82
Granted		105,000			10.45
Exercised		(89,536	)		4.15
Forfeited		(3,003	)		10.02
Expired		-			-
SOSARs Outstanding, March 31, 2018		385,046		$	8.41
SOSARs Exercisable, March 31, 2018		161,029		$	5.72

The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on March 31, 2018 was $10.75. The value of the exercisable SOSARs that are in-the-money as of March 31, 2018 was $810,000, and exercise of those SOSARs on that date would have resulted in the issuance of 75,347 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.

Restricted Stock Unit Awards – On February 22, 2018, 21,500 performance restricted stock units were awarded to certain key executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. Each Restricted Stock Unit (RSU) is equivalent to one share of MBT Financial Corp. common stock. Stock will be issued to the participants following a two year performance period that ends on December 31, 2019 if the defined performance targets are achieved. The grant date fair value of the stock was $10.45 per share. Earned RSUs vest on December 15, 2020 and as of March 31, 2018 none of the RSUs were vested.

Restricted Stock Awards – On February 22, 2018, 7,500 restricted shares were awarded to certain non-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2018. The expense for the restricted stock is based on the grant date value of $10.45 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $59,000 as of March 31, 2018.

The total expense for equity based compensation was $236,000 in the first quarter of 2018 and $131,000 in the first quarter of 2017. The unrecognized compensation expense for all equity based compensation plans is $950,000 as of March 31, 2018. The expense is expected to be recognized over a weighted average period of 1.98 years.

-9-

4. LOANS

The Bank makes commercial, consumer, and mortgage loans primarily to customers in Monroe County, Michigan, southern and western Wayne County, Michigan, and surrounding areas. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the automotive, manufacturing, and real estate development economic sectors.

Loans consist of the following (000s omitted):

	March 31,		December 31,
	2018		2017
Residential real estate loans	$	223,318	$	222,014
Commercial and Construction real estate loans		290,256		293,202
Agriculture and agricultural real estate loans		22,319		21,231
Commercial and industrial loans		131,902		122,219
Loans to individuals for household, family, and other personal expenditures		54,845		36,313
Total loans, gross	$	722,640	$	694,979
Less: Allowance for loan losses		7,885		7,666
Net Loans	$	714,755	$	687,313

Loans are placed in a nonaccrual status when, in the opinion of Management, the collection of additional interest is doubtful. All loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are reviewed for impairment each quarter. Allowances for loans determined to be impaired are included in the allowance for loan losses. All cash received on nonaccrual loans is applied to the principal balance. Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, nonaccrual investment securities, other real estate owned, and other repossessed assets. Other real estate owned includes real estate that has been acquired in full or partial satisfaction of loan obligations or upon foreclosure.

The following table summarizes nonperforming assets (000s omitted):

	March 31,			December 31,
	2018			2017
Nonaccrual loans	$	3,453		$	3,658
Loans 90 days past due and accruing		-			3
Restructured loans		8,290			9,625
Total nonperforming loans	$	11,743		$	13,286

Other real estate owned		1,229			1,412
Other assets		-			40
Total nonperforming assets	$	12,972		$	14,738

Nonperforming assets to total assets		0.98	%		1.09	%
Allowance for loan losses to nonperforming loans		67.15	%		57.70	%

-10-

5. ALLOWANCE FOR LOAN LOSSES

The Company separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The six segments analyzed are Agriculture and Agricultural Real Estate, Commercial, Commercial Real Estate, Construction Real Estate, Residential Real Estate, and Consumer and Other. The Agriculture and Agricultural Real Estate segment includes all loans to finance agricultural production and all loans secured by agricultural real estate. This segment does not include loans to finance agriculture that are secured by residential real estate, which are included in the Residential Real Estate segment. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes loans secured by non-farm, non-residential real estate. The Construction Real Estate segment includes loans to finance construction and land development. This includes residential and commercial construction and land development. The Residential Real Estate segment includes all loans, other than construction loans, that are secured by single family and multi-family residential real estate properties. The Consumer and Other segment includes all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures. The majority of this segment is student loans, and it also includes loans for autos, boats, and recreational vehicles.

Activity in the allowance for loan losses during the three months ended March 31, 2018 was as follows (000s omitted):

	Agriculture and Agricultural Real Estate		Commercial			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Consumer and Other			Total

Allowance for loan losses: For the three months ended March 31, 2018
Beginning Balance	$	195	$	1,443		$	3,297		$	491		$	1,279		$	961		$	7,666
Charge-offs		-		-			(3	)		-			(7	)		(2	)		(12	)
Recoveries		2		15			240			20			42			12			331
Provision		13		(61	)		(446	)		(50	)		(225	)		669			(100	)
Ending balance	$	210	$	1,397		$	3,088		$	461		$	1,089		$	1,640		$	7,885

Allowance for loan losses as of March 31, 2018
Ending balance individually evaluated for impairment	$	1	$	146		$	315		$	354		$	131		$	199		$	1,146
Ending balance collectively evaluated for impairment		209		1,251			2,773			107			958			1,441			6,739
Ending balance	$	210	$	1,397		$	3,088		$	461		$	1,089		$	1,640		$	7,885


Loans as of March 31, 2018
Ending balance individually evaluated for impairment	$	1,139	$	260		$	3,720		$	1,574		$	4,566		$	424		$	11,683
Ending balance collectively evaluated for impairment		21,180		131,642			266,608			18,354			218,752			54,421			710,957
Ending balance	$	22,319	$	131,902		$	270,328		$	19,928		$	223,318		$	54,845		$	722,640

-11-

Activity in the allowance for loan losses during the three months ended March 31, 2017 was as follows (000s omitted):

	Agriculture and Agricultural Real Estate			Commercial			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Consumer and Other			Total

Allowance for loan losses: For the three months ended March 31, 2017
Beginning Balance	$	201		$	1,632		$	3,336		$	525		$	1,599		$	1,165		$	8,458
Charge-offs		-			-			(25	)		-			(50	)		(37	)		(112	)
Recoveries		3			56			37			13			54			25			188
Provision		(4	)		(109	)		90			(4	)		(33	)		(140	)		(200	)
Ending balance	$	200		$	1,579		$	3,438		$	534		$	1,570		$	1,013		$	8,334

Allowance for loan losses as of March 31, 2017
Ending balance individually evaluated for impairment	$	5		$	181		$	234		$	381		$	230		$	182		$	1,213
Ending balance collectively evaluated for impairment		195			1,398			3,204			153			1,340			831			7,121
Ending balance	$	200		$	1,579		$	3,438		$	534		$	1,570		$	1,013		$	8,334


Loans as of March 31, 2017
Ending balance individually evaluated for impairment	$	1,213		$	327		$	3,458		$	1,705		$	6,502		$	459		$	13,664
Ending balance collectively evaluated for impairment		19,810			107,504			247,335			19,824			212,473			42,314			649,260
Ending balance	$	21,023		$	107,831		$	250,793		$	21,529		$	218,975		$	42,773		$	662,924

Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods.

The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated balance sheets. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded.

To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships.

The Company utilizes an internal loan grading system to assign a risk grade to all commercial loans, all renegotiated loans, and each commercial credit relationship. Grades 10 through 45 are considered “pass” credits, grades 50 through 55 are considered “watch” credits, and grade 60 is considered “substandard” credits. Grades 50 through 60 are subject to greater scrutiny. Loans with grades 70 through 90 and considered “doubtful” or “loss” and have generally been charged off. A description of the general characteristics of each grade is as follows:

•

Grade 10– Excellent – Loans secured by marketable collateral, with adequate margin, or supported by strong financial statements, including substantial levels of tangible net worth. Probability of serious financial deterioration is unlikely. Possess a sound repayment source and a secondary source. This classification will also include individual loans backed by liquid personal assets, established history and unquestionable character. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans.

-12-

•

Grade 20– Above Average – Loans that exhibit less than average risk and clearly demonstrate debt service coverage that is consistently above average as well as a strong capital base. These loans may have some deficiency or vulnerability, but with offsetting features and are considered to be fully collectable.

•

Grade 30– Satisfactory – Loans that have an acceptable amount of risk but may exhibit vulnerability to deterioration if adverse circumstances are encountered. These loans should demonstrate adequate debt service coverage and adequate levels of capital support but warrant periodic monitoring to ensure that weaknesses do not materialize or advance.

•

Grades 40 and 45 – Pass – Loans that are considered “pass credits” and typically demonstrate adequate debt service coverage. The level of risk is considered acceptable but these loans warrant ongoing monitoring to ensure that adverse trends or other credit deficiencies have not materialized or advanced. The level of risk is considered acceptable so long as the loan is given adequate and ongoing management supervision.

•	Grades 50 and 55 – Watch – Loans that possess some credit deficiency or potential weakness that deserves close attention. The primary source of loan repayment is sufficient but may be considered inadequate by the Bank’s standards.

•

Grade 60– Substandard – Loans that exhibit one or more of the following characteristics: (1) a defined credit weakness, financial deterioration is underway, and uncertainty about the likelihood that the loan will be paid from the primary source of repayment; (2) inadequately protected by the current net worth and paying capacity of the obligor; (3) reliance on secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility the Bank will sustain loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) insufficient cash flow to repay principal but continuing to pay interest; (7) the Bank is subordinated or unsecured due to flaws in documentation; (8) loans are restructured or are on nonaccrual status due to concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

•

Grade 70– Doubtful – Loans that exhibit one or more of the following characteristics: (1) loans with all the weaknesses of Substandard loans and collection or liquidation is not probable to result in payment in full; (2) the primary source of repayment is gone and there is considerable doubt as to the quality of the secondary source of repayment; or (3) the possibility of loss is high, but certain important pending factors may strengthen the loan and loss classification is deferred.

•	Grades 80 and 90 - Loss – Loans are considered uncollectible and of such little value that continuing to carry them on the Bank’s financial statements is not feasible.

The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.

-13-

The portfolio segments in each credit risk grade as of March 31, 2018 are as follows (000s omitted):

Credit Quality Indicators as of March 31, 2018

Credit Risk by Internally Assigned Grade

	Agriculture and Agricultural Real Estate		Commercial		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Consumer and Other		Total
Not Rated	$	-	$	2,424	$	143	$	10,355	$	138,517	$	49,109	$	200,548
10		-		6,779		-		-		-		-		6,779
20		281		292		331		-		-		-		904
30		504		32,711		10,358		-		935		3,869		48,377
40		15,421		81,565		220,063		4,845		72,875		1,839		396,608
45		1,406		3,113		16,746		1,506		4,788		-		27,559
50		2,180		3,485		15,982		1,648		2,508		4		25,807
55		1,505		1,084		2,260		1,528		814		-		7,191
60		1,022		449		4,445		46		2,881		24		8,867
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	22,319	$	131,902	$	270,328	$	19,928	$	223,318	$	54,845	$	722,640

Performing	$	21,710	$	131,614	$	267,374	$	18,353	$	217,442	$	54,404	$	710,897
Nonperforming		609		288		2,954		1,575		5,876		441		11,743
Total	$	22,319	$	131,902	$	270,328	$	19,928	$	223,318	$	54,845	$	722,640

The portfolio segments in each credit risk grade as of December 31, 2017 are as follows (000s omitted):

Credit Quality Indicators as of December 31, 2017

Credit Risk by Internally Assigned Grade

	Agriculture and Agricultural Real Estate		Commercial		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Consumer and Other		Total
Not Rated	$	-	$	1,341	$	160	$	13,903	$	135,311	$	30,359	$	181,074
10		-		6,870		-		-		-		-		6,870
20		281		293		353		-		-		-		927
30		503		29,655		6,300		-		941		3,972		41,371
40		14,819		76,792		223,468		4,857		72,634		1,947		394,517
45		1,414		2,391		12,244		1,528		5,363		-		22,940
50		1,864		3,778		21,802		1,667		3,590		6		32,707
55		1,441		594		1,857		1,537		867		2		6,298
60		909		505		3,460		66		3,308		27		8,275
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	21,231	$	122,219	$	269,644	$	23,558	$	222,014	$	36,313	$	694,979

Performing	$	20,665	$	121,768	$	265,801	$	21,955	$	215,643	$	35,861	$	681,693
Nonperforming		566		451		3,843		1,603		6,371		452		13,286
Total	$	21,231	$	122,219	$	269,644	$	23,558	$	222,014	$	36,313	$	694,979

-14-

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of March 31, 2018 and December 31, 2017 (000s omitted):

March 31, 2018	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment >90 Days Past Due and Accruing

Agriculture and Agricultural Real Estate	$	26	$	30	$	-	$	56	$	22,263	$	22,319	$	-
Commercial		88		-		-	$	88		131,814		131,902		-
Commercial Real Estate		807		283		-		1,090		269,238		270,328		-
Construction Real Estate		-		-		-		-		19,928		19,928		-
Residential Real Estate		1,310		14		978		2,302		221,016		223,318		-
Consumer and Other		40		-		-		40		54,805		54,845		-
Total	$	2,271	$	327	$	978	$	3,576	$	719,064	$	722,640	$	-

December 31, 2017	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment >90 Days Past Due and Accruing

Agriculture and Agricultural Real Estate	$	-	$	-	$	-	$	-	$	21,231	$	21,231	$	-
Commercial		111		8		5		124		122,095		122,219		3
Commercial Real Estate		834		783		56		1,673		267,971		269,644		-
Construction Real Estate		17		-		-		17		23,541		23,558		-
Residential Real Estate		1,361		58		871		2,290		219,724		222,014		-
Consumer and Other		55		2		-		57		36,256		36,313		-
Total	$	2,378	$	851	$	932	$	4,161	$	690,818	$	694,979	$	3

Loans are placed on non-accrual status when, in the opinion of Management, the collection of additional interest is doubtful. Loans are automatically placed on non-accrual status upon becoming ninety days past due, however, loans may be placed on non-accrual status regardless of whether or not they are past due. All cash received on non-accrual loans is applied to the principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following is a summary of non-accrual loans as of March 31, 2018 and December 31, 2017 (000s omitted):

	March 31, 2018		December 31, 2017
Agriculture and Agricultural Real Estate	$	43	$	-
Commercial		87		243
Commercial Real Estate		1,528		1,580
Construction Real Estate		14		33
Residential Real Estate		1,764		1,783
Consumer and Other		17		19
Total	$	3,453	$	3,658

For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank’s recorded investment in the loan to the present value of expected cash flows discounted at the loan’s effective interest rate, the fair value of the collateral, or the loan’s observable market price.

-15-

The following is a summary of impaired loans as of March 31, 2018 and March 31, and December 31, 2017 (000s omitted):

March 31, 2018

Recorded

Investment

Unpaid

Principal

Balance

Allowance

Average

Recorded

Investment for the

Three Months

Ended

Interest Income

Recognized in the

Three Months

Ended

With no related allowance recorded:

Agriculture and Agricultural Real Estate

899

895

820

Commercial

Commercial Real Estate

1,692

1,754

1,706

Construction Real Estate

Residential Real Estate

3,918

4,104

4,129

Consumer and Other

With an allowance recorded:

Agriculture and Agricultural Real Estate

240

239

240

Commercial

260

264

146

266

Commercial Real Estate

2,028

2,059

315

2,064

Construction Real Estate

1,574

1,607

354

1,597

Residential Real Estate

648

658

131

660

Consumer and Other

342

199

345

Total:

Agriculture and Agricultural Real Estate

1,139

1,134

1,060

Commercial

260

264

146

266

Commercial Real Estate

3,720

3,813

315

3,770

Construction Real Estate

1,574

1,607

354

1,597

Residential Real Estate

4,566

4,762

131

4,789

Consumer and Other

424

199

429

Total

11,683

12,004

1,146

11,911

153

-16-

Recorded

Investment as of

December 31,

2017

Unpaid

Principal

Balance as of

December 31,

2017

Allowance as

of December 31, 2017

Average

Recorded

Investment for the

Three Months

Ended March 31,

2017

Interest Income

Recognized in the

Three Months

Ended March 31,

2017

With no related allowance recorded:

Agriculture and Agricultural Real Estate

829

826

973

Commercial

Commercial Real Estate

1,977

2,034

661

Construction Real Estate

Residential Real Estate

3,757

3,935

4,479

Consumer and Other

With an allowance recorded:

Agriculture and Agricultural Real Estate

241

240

245

Commercial

265

268

148

293

Commercial Real Estate

1,776

1,783

219

2,914

Construction Real Estate

1,586

1,619

360

1,647

Residential Real Estate

1,464

1,515

177

2,277

Consumer and Other

402

403

205

434

Total:

Agriculture and Agricultural Real Estate

1,070

1,066

1,218

Commercial

265

268

148

358

Commercial Real Estate

3,753

3,817

219

3,575

Construction Real Estate

1,603

1,640

360

1,728

Residential Real Estate

5,221

5,450

177

6,756

Consumer and Other

432

433

205

465

Total

12,344

12,674

1,110

14,100

165

The Bank may agree to modify the terms of a loan in order to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. Modifications that are performed due to the debtor’s financial difficulties are considered Troubled Debt Restructurings (“TDRs”).

Loans that have been classified as TDRs during the three month periods ended March 31, 2018 and March 31, 2017 are as follows (000s omitted from dollar amounts):

	Three months ended
	March 31, 2018
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-	$	-
Commercial		-		-		-
Commercial Real Estate		1		283		283
Construction Real Estate		-		-		-
Residential Real Estate		1		150		150
Consumer and Other		-		-		-
Total		2	$	433	$	433

-17-

	Three months ended
	March 31, 2017
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-	$	-
Commercial		2		29		29
Commercial Real Estate		2		74		54
Construction Real Estate		-		-		-
Residential Real Estate		3		212		180
Consumer and Other		1		1		1
Total		8	$	316	$	264

The Bank considers TDRs that become past due under the modified terms as defaulted. The following table shows the loans that became TDRs during the three month periods ended March 31, 2018 and March 31, 2017 that subsequently defaulted during the three month periods ended March 31, 2018 and March 31, 2017, respectively.

	Three months ended				Three months ended
	March 31, 2018				March 31, 2017
	Number of Contracts		Recorded Principal Balance		Number of Contracts		Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-		-	$	-
Commercial		-		-		-		-
Commercial Real Estate		1		283		-		-
Construction Real Estate		-		-		-		-
Residential Real Estate		-		-		-		-
Consumer and Other		-		-		-		-
Total		1	$	283		-	$	-

The Company has allocated $975,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at March 31, 2018. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of March 31, 2018 and March 31, 2017.

-18-

6. INVESTMENT SECURITIES

The following is a summary of the Bank’s investment securities portfolio as of March 31, 2018 and December 31, 2017 (000s omitted):

Held to Maturity

March 31, 2018

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

Obligations of States and Political Subdivisions

36,407

534

(384

)

36,557

Corporate Debt Securities

500

(20

)

480

36,907

534

(404

)

37,037

Available for Sale

March 31, 2018

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

Obligations of U.S. Government Agencies

139,952

(6,709

)

133,243

Mortgage Backed Securities issued by U.S. Government Agencies

245,122

(5,993

)

239,129

Obligations of States and Political Subdivisions

48,860

(779

)

48,123

Corporate Debt Securities

13,065

241

(21

)

13,285

446,999

283

(13,502

)

433,780

Held to Maturity

December 31, 2017

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

Obligations of States and Political Subdivisions

36,663

666

(322

)

37,007

Corporate Debt Securities

500

(21

)

479

37,163

666

(343

)

37,486

-19-

Available for Sale

December 31, 2017

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

Obligations of U.S. Government Agencies

140,090

(4,242

)

135,880

Mortgage Backed Securities issued by U.S. Government Agencies

248,649

(3,875

)

244,777

Obligations of States and Political Subdivisions

37,308

(373

)

36,983

Corporate Debt Securities

22,662

462

(41

)

23,083

Equity Securities

2,044

2,093

450,753

594

(8,531

)

442,816

The amortized cost and estimated market values of securities by contractual maturity as of March 31, 2018 are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Held to Maturity

Available for Sale

Estimated

Amortized

Market

Amortized

Market

Cost

Value

Cost

Value

Contractual maturity in

1 year or less

8,940

8,950

3,079

3,077

After 1 year through five years

19,372

19,422

53,621

51,832

After 5 years through 10 years

7,476

7,609

107,932

102,872

After 10 years

1,119

1,056

37,245

36,870

Total

36,907

37,037

201,877

194,651

Mortgage Backed Securities

245,122

239,129

Securities with no stated maturity

2,044

2,057

Total

36,907

37,037

449,043

435,837

The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates or the lack of an active market, and Management determines that the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before a recovery of their amortized costs bases, which may be maturity. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017.

-20-

March 31, 2018

Less than 12 months

12 months or longer

Total

Aggregate

Fair Value

Gross

Unrealized

Losses

Aggregate

Fair Value

Gross

Unrealized

Losses

Aggregate

Fair Value

Gross

Unrealized

Losses

Obligations of United States Government Agencies

29,943

867

103,299

5,842

133,242

6,709

Mortgage Backed Securities issued by U.S. Government Agencies

162,899

3,135

76,230

2,858

239,129

5,993

Obligations of States and Political Subdivisions

42,466

688

13,715

475

56,181

1,163

Corporate Debt Securities

2,524

237,832

4,731

193,244

9,175

431,076

13,906

December 31, 2017

Less than 12 months

12 months or longer

Total

Aggregate

Fair Value

Gross

Unrealized

Losses

Aggregate

Fair Value

Gross

Unrealized

Losses

Aggregate

Fair Value

Gross

Unrealized

Losses

Obligations of United States Government Agencies

25,257

286

105,329

3,956

130,586

4,242

Mortgage Backed Securities issued by U.S. Government Agencies

161,792

1,725

81,157

2,150

242,949

3,875

Obligations of States and Political Subdivisions

23,898

357

16,741

338

40,639

695

Corporate Debt Securities

4,560

2,009

6,569

215,507

2,407

205,236

6,467

420,743

8,874

The amount of investment securities issued by government agencies, states, and political subdivisions with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates and not the result of the credit quality of the issuers of the securities. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at March 31, 2018. As of March 31, 2018 and December 31, 2017, there were 219 and 205 securities in an unrealized loss position, respectively.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined in ASC Topic 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is used on a recurring basis for Available for Sale Securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

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The Company applied the following fair value hierarchy:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company’s equity mutual fund investments where quoted prices are available in an active market generally are classified within Level 1 of the fair value hierarchy.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Company’s borrowed funds and investments in U.S. government agency securities, government sponsored mortgage backed securities, corporate debt securities, bank certificates of deposit, and obligations of states and political subdivisions are generally classified in Level 2 of the fair value hierarchy. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Certain municipal debt obligations and certificates of deposit are classified within Level 3 of the fair value hierarchy. Fair values are initially valued based on transaction price and are adjusted to reflect exit values.

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017, and the valuation techniques used by the Company to determine those fair values.

Total

Carrying

Estimated

March 31, 2018

Value

Level 1

Level 2

Level 3

Fair Value

Financial Assets:

Cash and due from banks

14,468

Time Deposits in Other Banks

14,196

13,234

750

13,984

Securities - Held to Maturity

Obligations of States and Political Subdivisions

36,407

2,394

34,163

36,557

Corporate Debt Securities

500

480

Securities - Available for Sale

Obligations of U.S. Government Agencies

133,243

MBS issued by U.S. Government Agencies

239,129

Obligations of States and Political Subdivisions

48,123

Corporate Debt Securities

13,285

Equity Securities

6,205

2,057

4,148

6,205

Loans Held for Sale

Loans, net

714,755

664,062

Accrued Interest Receivable

4,394

Financial Liabilities:

Noninterest Bearing Deposits

293,243

Interest Bearing Deposits

900,120

901,213

Accrued Interest Payable

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Total

Carrying

Estimated

December 31, 2017

Value

Level 1

Level 2

Level 3

Fair Value

Financial Assets:

Cash and due from banks

53,010

Time Deposits in Other Banks

15,196

15,082

Securities - Held to Maturity

Obligations of States and Political Subdivisions

36,663

2,407

34,600

37,007

Corporate Debt Securities

500

479

Securities - Available for Sale

Obligations of U.S. Government Agencies

135,880

MBS issued by U.S. Government Agencies

244,777

Obligations of States and Political Subdivisions

36,983

Corporate Debt Securities

23,083

Equity Securities

2,093

Federal Home Loan Bank Stock

4,148

Loans Held for Sale

346

356

Loans, net

687,313

657,684

Accrued Interest Receivable

4,169

Financial Liabilities:

Noninterest Bearing Deposits

299,838

Interest Bearing Deposits

898,326

899,481

Accrued Interest Payable

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

The Company’s assets with Level 3 fair values are carried at their amortized cost values as of March 31, 2018 or December 31, 2017. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include loans and Other Real Estate Owned. The Company estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

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Assets measured at fair value on a nonrecurring basis are as follows (000s omitted):

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant Other

Observable

Inputs (Level 2)

Significant

Unobservable

Inputs (Level 3)

March 31, 2018

Impaired loans

10,537

Other Real Estate Owned

1,229

December 31, 2017

Impaired loans

11,234

Other Real Estate Owned

1,412

Impaired loans categorized as Level 3 assets consist of non-homogenous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned (OREO) consists of property received in full or partial satisfaction of a receivable. The Company utilizes independent appraisals to estimate the fair value of OREO properties.

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its other lending activities.

Financial instruments whose contractual amounts represent off-balance sheet credit risk were as follows (000s omitted):

	Contractual Amount
	March 31,		December 31,
	2018		2017
Commitments to extend credit:
Unused portion of commercial lines of credit	$	102,843	$	103,080
Unused portion of credit card lines of credit		6,130		5,934
Unused portion of home equity lines of credit		30,970		30,368
Standby letters of credit and financial guarantees written		1,674		1,364
All other off-balance sheet commitments		-		-

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Most commercial lines of credit are secured by real estate mortgages or other collateral, and generally have fixed expiration dates or other termination clauses. Since the lines of credit may expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. Credit card lines of credit have various established expiration dates, but are fundable on demand. Home equity lines of credit are secured by real estate mortgages, a majority of which have ten year expiration dates, but are fundable on demand. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management’s credit evaluation of the counterparty.

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and other business transactions.

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

Introduction

MBT Financial Corp. (the “Company”) is a bank holding company with one commercial bank subsidiary, Monroe Bank & Trust (the “Bank”). The Bank operates 14 branch offices in Monroe County, Michigan and 6 branch offices in Wayne County, Michigan, and 1 loan and wealth management office in Wayne County, Michigan.

The Bank’s primary source of income is Net Interest Income (interest income on loans and investments less interest expense on deposits and borrowings), and its primary expense is the compensation of its employees. The discussion and analysis should be read in conjunction with the accompanying consolidated statements and footnotes.

Executive Overview

The Bank is operated as a community bank, primarily providing loan, deposit, and wealth management products and services to the people, businesses, and communities in its market area. In addition to our commitment to our mission of serving the needs of our local communities, we are focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

The net profit of $3,902,000 for the first quarter of 2018 was an increase of $722,000 or 22.7% compared to the first quarter of 2017. The increase was mainly the result of an increase of $941,000 in the net interest income and a decrease of $647,000 in the federal income tax expense. The effect of these items was mitigated by an increase of $100,000 in the provision for loan losses, a decrease of $36,000 in non-interest income and an increase of $730,000 in non-interest expenses.

The national economic condition is good, and the economy in southeast Michigan is continuing to recover. State and local unemployment rates are holding steady near their lowest post-recession levels, and are now comparable to the national average. Commercial and residential development property values continue to improve, with most values reaching or exceeding their pre-recession levels. Our total classified assets, which include internal watch list loans, other real estate owned, and nonperforming and watch list investment securities, have been improving steadily since 2014. Classified assets decreased $5.3 million, or 34.6% compared to a year ago. Net recoveries were $319,000, or 0.18% of loans, annualized, in the first quarter of 2018, compared to $76,000, or 0.05% in the first quarters of 2017. Due to improving loan quality metrics and net recoveries, another reduction in our Allowance for Loan and Lease Losses (ALLL) was appropriate, and we recorded a $100,000 credit to the provision expense in the first quarter of 2018. This reflected an increase of $100,000 when compared to the negative provision of $200,000 recorded in the first quarter of 2017. The ALLL increased $219,000 during the quarter, but decreased as a percent of loans from 1.10% at the end of 2017 to 1.09% due to the growth in the loan portfolio. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $1.1 million of specific allocations on $11.7 million of loans evaluated for impairment and $6.8 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge off experience of the previous 20 quarters. The improvement in the historical loss rates is slowing and loan growth is continuing, so we do not expect negative provisions to continue.

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The $941,000 increase in Net Interest Income in the first quarter of 2018 compared to the first quarter of 2017 was entirely due to the increase in the net interest margin, as the amount of average earning assets decreased $5.6 million, or 0.5%. The net interest margin increased from 3.21% to 3.52% because the yield on earnings assets increased and the cost of interest bearing liabilities decreased. Non-interest income for the quarter decreased $36,000, as the improvements in Wealth Management fees and debit card income were exceeded by reductions in deposit account fees and gains on securities transactions. Non-interest expenses increased $730,000 as salaries, benefits, equipment, and marketing expenses all increased.

Critical Accounting Policies

The Company’s Allowance for Loan Losses and Fair Value of Investment Securities are “critical accounting estimates” because they are estimates that are based on assumptions that are highly uncertain, and if different assumptions were used or if any of the assumptions used were to change, there could be a material impact on the presentation of the Company’s financial condition. These assumptions include, but are not limited to, collateral values, the effect of economic conditions on the financial condition of the borrowers, the Company, and the issuers of investment securities, market interest rates, and projected earnings for the Company.

To determine the Allowance for Loan Losses, the Company estimates losses on all loans that are not classified as non-accrual or renegotiated by applying historical loss rates, adjusted for current conditions, to those loans. In addition, all non-accrual loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses.

To determine the fair value of investment securities, the Company utilizes quoted prices in active markets for identical assets, quoted prices for similar assets in active markets, or discounted cash flow calculations for investments where there is little, if any, market activity for the asset.

Financial Condition

The regional economic conditions remained strong this quarter, with steady local unemployment rates and increasing property values. Management efforts remain focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 11.6% during the quarter, from $14.7 million to $13.0 million, while total classified assets increased slightly from $9.7 million to $10.1 million. Loan delinquencies decreased from $4.2 million 30 days or more past due as of December 31, 2017 to $3.6 million as of March 31, 2018 and the delinquency percentage decreased from 0.60% to 0.49% of the total loans. Over the last twelve months, NPAs decreased $3.8 million, or 22.5%, with nonperforming loans decreasing 23.5% from $15.3 million to $11.7 million, and Other Real Estate Owned (“OREO”) decreased 14.3% from $1.4 million to $1.2 million. Total classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, decreased $5.3 million, or 34.6%. The amount required in the Allowance for Loan and Lease Losses (“ALLL”) decreased $0.4 million over the last four quarters because of the improvement in the quality of the assets in the loan portfolio and a decrease in the historical loss rates. The ALLL is now 1.09% of loans, down from 1.26% at March 31, 2017. The ALLL is 67.15% of nonperforming loans (“NPLs”), compared to 57.70% at year end and 54.37% at March 31, 2017. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

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Since December 31, 2017, total loans held for investment increased $27.3 million as new loan activity exceeded payments received and other reductions in the period. Even with the increase in loans, our pipeline of loans in process remained steady, and we expect new loan production to continue to exceed run off, resulting in an increase in loans outstanding throughout 2018.

Since December 31, 2017, deposits decreased $4.8 million, other liabilities decreased $1.4 million, and capital decreased $15.2 million, and as a result our total assets decreased $21.4 million, or 1.6%. Deposits decreased during the first quarter of 2018 as some of our local competitors increased their deposit interest rates faster than we have. We monitor the competition closely, and have adjusted some of our pricing in order to preserve our strong deposit base while still controlling our interest expense. We expect this to result in a small amount of deposit funding growth in the second quarter of 2018, but we have adequate on and off balance sheet liquidity to fund our continued loan growth without needing to actively grow deposits. The total capital decreased $15.2 million since December 31, 2017, mainly because dividends paid exceeded earnings by $11.2 million due to the special dividend of $13.8 million paid in the first quarter of 2018. Capital also decreased due to an increase of $4.1 million in the Accumulated Other Comprehensive Loss, which was due to the decrease in the market value of securities available for sale. Capital decreased at a higher rate than assets, causing the capital to assets ratio to decrease from 9.85% at December 31, 2017 to 8.86% at March 31, 2018.

Results of Operations – First Quarter 2018 vs. First Quarter 2017

Net Interest Income - A comparison of the income statements for the three months ended March 31, 2018 and 2017 shows an increase of $941,000, or 9.8%, in Net Interest Income. Interest income on loans increased $853,000, or 11.6% as the average loans outstanding increased $49.3 million and the average yield on loans increased from 4.55% to 4.72%. The average loans outstanding increased due to the purchase of a pool of consumer loans related to the refinance of student debt, the purchase of 2 syndicated loans, and organic growth in our local markets. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $52,000 even though the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $54.9 million because the investment portfolio yield increased from 1.90% to 2.14%. The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from low yielding short term investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits decreased $42,000, or 9.2% as the average deposits decreased $1.7 million and the average cost of deposits decreased from 0.15% to 0.14%. The average cost of deposits decreased because maturing time deposits are either resetting at lower rates or customers are moving the funds to non interest bearing demand deposit accounts or low cost non maturity deposits due to the low interest rate environment.

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Provision for Loan Losses - The Provision for Loan Losses increased $100,000 compared to the first quarter of 2017 as a $100,000 credit to provision expense was recorded in the first quarter of 2018, compared to a negative provision expense of $200,000 that was recorded in the first quarter of 2017. We only charged off $12,000 of principal while recovering $331,000 of previously charged off loans in the first quarter of 2018, for a net recovery total of $319,000, or 0.18% of loans, annualized. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Even though the portfolio risk indicators improved, growth in the portfolio resulted in the need for an increase of $219,000 in the amount of ALLL required. The net recoveries of $319,000 enabled us to achieve the required ALLL by recording the negative provision expense of $100,000. The allowance includes $1.1 million of specific allocations and $6.8 million of general allocations. The general allocation is based on the historical charge off experience of the previous 20 quarters. The historical charge off rate is not expected to continue to improve significantly, and if loan growth continues as expected, small provision expenses may be required.

Other Income – Non interest income decreased $36,000, or 0.9% compared to the first quarter of 2017. Service charges on deposit accounts decreased $68,000 due to lower overdraft activity. Gains on securities transactions decreased $111,000 due to losses in the first quarter of 2018 related to some portfolio restructuring transactions. Wealth management fees increased $57,000 due to an increase in the market value of assets under management, and debit card income increased due to increased customer debit card usage.

Other Expenses – Total non-interest expenses increased $730,000, or 8.1% compared to the first quarter of 2017. Salaries and Employee Benefits increased $528,000, or 9.7% due to higher salaries, a larger incentive compensation accrual, separation expenses, and an adjustment to the stock based compensation accrual related to the special dividend. Also, the 401k matching contribution increased due to higher employee deferrals, health insurance benefits expense increased, and payroll tax expense was higher. Equipment expense increased $96,000 due to higher computer expense, which included earlier completion of our annual PC network hardware replacement and initial expenses related to a wealth management system conversion that is planned for later in 2018. Marketing expenses increased $93,000, or 32.7% due to increased advertising and other expenses related to our branding initiative.

As a result of the above activity, the Profit Before Income Taxes in the first quarter of 2018 was $4,628,000, an increase of $75,000 compared to the pre-tax profit of $4,553,000 in the first quarter of 2017. The Company recorded a federal income tax expense of $726,000 in the first quarter of 2018, reflecting an effective tax rate of 15.7%, compared to the tax expense of $1,373,000 in the first quarter of 2017, which reflected an effective rate of 30.2%. The tax expense in the first quarter of 2018 reflected the decrease in our statutory rate from 34% to 21% resulting from the Tax Cuts and Jobs Act, and also included a tax benefit related to our stock based compensation program. The Net profit for the first quarter of 2018 was $3,902,000, an increase of 22.7% compared to the net profit of $3,180,000 in the first quarter of 2017.

Cash Flows

Cash flows provided by operating activities increased $3,254,000 compared to the first three months of 2017 mainly because the net income was $722,000 higher in 2018 and the cash provided by decreasing our other assets increased $1,809,000. The cash flow used for investing activities increased $23.6 million from $0.9 million used in the first three months of 2017 to $24.5 million used in the first three months of 2018. This was the result of an increase in the amount of investment in loans. The bank is actively growing its loan portfolio, and funding that growth with maturities, calls, and sales of investment securities. The amount of cash used for financing activities was $6.1 million higher in the first three months of 2018 than it was in the first three months of 2017 because deposits decreased by $4.8 million in the first quarter of 2018 and increased by $3.4 million in the first quarter of 2017, a difference of $8.2 million. This was partially offset by a $2.0 million reduction in the cash used to pay dividends. In the first quarter of 2018, the cash used for investing and financing activities exceeded the cash provided by operating activities, and the amount of cash and cash equivalents decreased by $38.5 million during the period. In the first quarter of 2017, the cash used for investing and financing activities exceeded the cash provided by operating activities, resulting in a decrease of $12.1 million in cash and cash equivalents during the first quarter. We expect cash flows from redemptions of callable investment securities to remain low in the second quarter of 2018, and we plan to utilize short term borrowings to fund loan growth until cash flow occurs from the maturities of investment securities. We anticipate that we will maintain our current level of cash and cash equivalents through the end of the year.

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Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. Internal sources of liquidity include the maturities of loans and securities in the ordinary course of business as well as our available for sale securities portfolio. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of March 31, 2018, the Bank was not utilizing any of its authorized limit of $255 million with the Federal Home Loan Bank of Indianapolis, or its $20 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis, or its $25 million federal funds line with a correspondent bank. The Company periodically draws on its overdraft and fed funds lines to ensure that funding will be available if needed.

The Company’s Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first three months of 2018 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

Total stockholders’ equity of the Company was $117.5 million at March 31, 2018 and $132.7 million at December 31, 2017. Retained earnings decreased $11.2 million as the year to date profit was exceeded by the payment of cash dividends on the common stock, and the Accumulated Other Comprehensive Loss (AOCL) increased due to a decrease in the value of our securities that are classified as Available For Sale. Total equity decreased $15.2 million while total assets decreased $21.4 million, so the ratio of equity to assets decreased from 9.85% at December 31, 2017 to 8.86% at March 31, 2018.

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 8% of Risk Weighted Assets, and the Leverage Capital Ratio is at least 5%. The Basel III capital requirements that began to be phased in the first quarter of 2015 increased the well capitalized requirement for the Tier 1 Capital as a percent of Risk Weighted Assets from 6% to 8%. Basel III also implemented the new Common Equity Tier 1 Capital to Risk Weighted Assets ratio, with a minimum of 6.5% required to be considered well capitalized.

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The following table summarizes the capital ratios of the Company and the Bank:

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of March 31, 2018:
Total Capital to Risk-Weighted Assets
Consolidated	$	137,569		15.77	%	$	87,227		10.0	%
Monroe Bank & Trust		136,003		15.59	%		87,218		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		129,349		14.83	%		69,782		8.0	%
Monroe Bank & Trust		127,783		14.65	%		69,774		8.0	%
Common Equity Tier 1 Capital to
Risk-Weighted Assets
Consolidated		129,349		14.83	%		56,698		6.5	%
Monroe Bank & Trust		127,783		14.65	%		56,692		6.5	%
Tier 1 Capital to Average Assets
Consolidated		129,349		9.62	%		67,202		5.0	%
Monroe Bank & Trust		127,783		9.51	%		67,185		5.0	%

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of December 31, 2017:
Total Capital to Risk-Weighted Assets
Consolidated	$	148,387		17.39	%	$	85,350		10.0	%
Monroe Bank & Trust		146,842		17.21	%		85,343		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		140,364		16.45	%		68,280		8.0	%
Monroe Bank & Trust		138,819		16.27	%		68,274		8.0	%
Common Equity Tier 1 Capital to
Risk-Weighted Assets
Consolidated		140,364		16.45	%		55,477		6.5	%
Monroe Bank & Trust		138,819		16.27	%		55,473		6.5	%
Tier 1 Capital to Average Assets
Consolidated		140,364		10.44	%		67,229		5.0	%
Monroe Bank & Trust		138,819		10.33	%		67,216		5.0	%

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank’s earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank’s market risk is monitored quarterly and it has not changed significantly since year-end 2017.

Forward-Looking Statements

Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, changes in the financial and securities markets, including changes with respect to the market value of our financial assets, the availability of and costs associated with sources of liquidity, and the ability of the Company to resolve or dispose of problem loans.

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The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Bank faces market risk to the extent that the fair values of its financial instruments are affected by changes in interest rates. The Bank does not face market risk due to changes in foreign currency exchange rates, commodity prices, or equity prices. The asset and liability management process of the Bank seeks to monitor and manage the amount of interest rate risk. This is accomplished by analyzing the differences in repricing opportunities for assets and liabilities, by simulating operating results under varying interest rate scenarios, and by estimating the change in the net present value of the Bank’s assets and liabilities due to interest rate changes.

Each quarter, the Asset and Liability Committee (ALCO), which includes the senior management of the Bank and a non executive member of the board of directors, estimates the effect of interest rate changes on the projected net interest income of the Bank. The sensitivity of the Bank’s net interest income to changes in interest rates is measured by using a computer based simulation model to estimate the impact on earnings of increases of 100, 200, 300, 400, and 500 basis points and decreases of 100 and 200 basis points in the interest rates. The net interest income projections are compared to a base case projection, which assumes no changes in interest rates.

The Bank’s ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank’s projected net interest income, in its policy. Throughout the first quarter of 2018, the Bank’s interest rate risk has remained within its policy limits.

The ALCO also monitors interest rate risk by estimating the effect of changes in interest rates on the economic value of the Bank’s equity each quarter. The economic value of the Bank’s equity is first determined by subtracting the fair value of the Bank’s liabilities from the fair value of the Bank’s assets. The Bank estimates the interest rate risk by calculating the effect of market interest rate changes on that economic value of its equity. For this analysis, the Bank assumes immediate parallel shifts of plus 100, 200, 300, 400, and 500 basis points and minus 100 and 200 basis points in interest rates. The discount rates used to determine the present values of the loans and deposits, as well as the prepayment rates for the loans, are based on Management’s expectations of the effect of the rate changes on the market for loans and deposits. In addition, each quarter, the Bank conducts additional analyses that utilize other rate scenarios, such as larger shifts in rates and changes in the shape of the yield curve, to assess the Bank’s exposure to interest rate risk in stress scenarios.

The Bank’s interest rate risk, as measured by the net interest income and economic value of equity simulations, has not changed significantly from December 31, 2017.

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Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2018, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2018, in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2018, that has materially affected, or is 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

MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their property the subject of any material legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2017.

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

The Company has a stock repurchase program which it publicly announced on January 25, 2018. On that date, the Board of Directors authorized the repurchase of 2 million of the Company’s common shares, which authorization commenced on February 1, 2018 and will expire on January 31, 2020. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2018, and 2,000,000 shares remain available under the repurchase authorization.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

3.1

Amended and Restated Articles of Incorporation of MBT Financial Corp. Previously filed as Exhibit 3.1 to MBT Financial Corp.’s Form 10-Q for its quarter ended June 30, 2016.

3.2

Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2 to MBT Financial Corp.’s Form 10-Q for its quarter ended March 31, 2008.

31.1

Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.

31.2

Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14.

32.1

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

-34-

Signatures

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

May 9, 2018	By	/s/ H. Douglas Chaffin
Date			H. Douglas Chaffin
			President &
			Chief Executive Officer

May 9, 2018	By	/s/ John L. Skibski
Date			John L. Skibski
			Executive Vice President and
			Chief Financial Officer

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Exhibit Index

Exhibit Number	Description of Exhibits
31.1	Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.

31.2	Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14.

32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

MBT Financial Corp.

(Registrant)