MBT Financial (MBTF) 10-Q 2017 Q3 Quarterly report

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 September 30, 2017

Or

☐ 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 November 8, 2017, there were 22,878,685 shares of the Company’s Common Stock outstanding.

Part I Financial Information

Item 1. Financial Statements

MBT FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

	September 30, 2017
Dollars in thousands	(Unaudited)			December 31, 2016
ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	21,959		$	18,183
Interest bearing		6,532			34,589
Total cash and cash equivalents		28,491			52,772
Interest Bearing Time Deposits in Other Banks		16,946			18,946
Securities - Held to Maturity		34,029			40,741
Securities - Available for Sale		465,323			488,067
Federal Home Loan Bank stock - at cost		4,148			4,148
Loans held for sale		-			611
Loans		693,866			652,337
Allowance for Loan Losses		(8,010	)		(8,458	)
Loans - Net		685,856			643,879
Accrued interest receivable and other assets		24,416			24,901
Other Real Estate Owned		1,646			1,634
Bank Owned Life Insurance		59,594			54,415
Premises and Equipment - Net		26,903			27,169
Total assets	$	1,347,352		$	1,357,283
LIABILITIES
Deposits
Non-interest bearing	$	297,927		$	279,001
Interest-bearing		897,408			920,716
Total deposits		1,195,335			1,199,717
Interest payable and other liabilities		16,048			16,452
Total liabilities		1,211,383			1,216,169
STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,875,505 and 22,777,882 shares issued and outstanding)		22,718			22,562
Retained earnings		117,773			126,079
Unearned compensation		(20	)		(4	)
Accumulated other comprehensive loss		(4,502	)		(7,523	)
Total stockholders' equity		135,969			141,114
Total liabilities and stockholders' equity	$	1,347,352		$	1,357,283

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 September 30,						Nine Months Ended September 30,
Dollars in thousands, except per share data	2017			2016			2017			2016
Interest Income
Interest and fees on loans	$	8,095		$	7,538		$	23,168		$	21,752
Interest on investment securities-
Tax-exempt		327			316			943			924
Taxable		2,054			1,970			6,507			6,714
Interest on balances due from banks		182			171			392			450
Total interest income		10,658			9,995			31,010			29,840
Interest Expense
Interest on deposits		427			480			1,317			1,483
Interest on borrowed funds		-			-			3			308
Total interest expense		427			480			1,320			1,791
Net Interest Income		10,231			9,515			29,690			28,049
Provision For (Recovery Of) Loan Losses		-			(700	)		(200	)		(1,200	)
Net Interest Income After
Provision For (Recovery Of) Loan Losses		10,231			10,215			29,890			29,249
Other Income
Income from wealth management services		1,155			1,145			3,830			3,347
Service charges and other fees		1,076			1,118			3,136			3,142
Debit card income		719			721			2,147			2,130
Net gain on sales and redemptions of securities available for sale		150			87			227			2,159
Net gain (loss) on sales of Other Real Estate Owned		7			(4	)		(89	)		(61	)
Origination fees on mortgage loans sold		87			149			261			415
Bank owned life insurance income		377			352			1,130			1,069
Other		464			471			1,583			1,507
Total other income		4,035			4,039			12,225			13,708
Other Expenses
Salaries and employee benefits		5,313			5,514			16,020			16,531
Occupancy expense		694			668			2,124			2,002
Equipment expense		783			731			2,271			2,141
Marketing expense		375			280			961			825
Professional fees		570			459			1,779			1,667
EFT/ATM expense		256			235			763			781
Other Real Estate Owned expenses		33			35			95			129
FDIC Deposit Insurance Assessment		107			179			321			539
Bonding and other insurance expense		120			118			367			454
Telephone expense		83			95			302			312
Other		616			660			2,017			1,948
Total other expenses		8,950			8,974			27,020			27,329
Income Before Income Taxes		5,316			5,280			15,095			15,628
Income Tax Expense		1,383			1,593			4,342			4,705
Net Income	$	3,933		$	3,687		$	10,753		$	10,923
Other Comprehensive Income - Net of Tax
Unrealized gains (losses) on securities		(679	)		(883	)		3,091			5,493
Reclassification adjustment for gains included in net income		(99	)		(58	)		(150	)		(1,425	)
Postretirement benefit liability		27			27			80			80
Total Other Comprehensive Income (Loss) - Net of Tax		(751	)		(914	)		3,021			4,148
Comprehensive Income	$	3,182		$	2,773		$	13,774		$	15,071
Basic Earnings Per Common Share	$	0.17		$	0.16		$	0.47		$	0.48
Diluted Earnings Per Common Share	$	0.17		$	0.16		$	0.47		$	0.48
Dividends Declared Per Share of Common Stock	$	0.06		$	0.04		$	0.86		$	0.60

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, 2017		22,777,882	$	22,562		$	126,079		$	(4	)	$	(7,523	)	$	141,114
Repurchase of Common Stock		-		-			-			-			-			-
Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes		64,211		(253	)		-			-			-			(253	)
Restricted stock awards, net of shares redeemed for taxes		6,000		65			-			(65	)		-			-
Employee Stock Purchase Plan and other stock issued		27,412		294			-			-			-			294
Tax benefit from exercise of options		-		-			583			-			-			583
Equity Compensation		-		404			-			49			-			453
Deferred Directors' Compensation		-		(354	)		-			-			-			(354	)
Dividends declared ($0.86 per share)		-		-			(19,642	)		-			.			(19,642	)
Net income		-		-			10,753			-			-			10,753
Other comprehensive income - net of tax		-		-			-			-			3,021			3,021
Balance - September 30, 2017		22,875,505	$	22,718		$	117,773		$	(20	)	$	(4,502	)	$	135,969

													Accumulated
													Other
	Common Stock						Retained			Unearned			Comprehensive
Dollars in thousands	Shares			Amount			Earnings			Compensation			Income (Loss)			Total
Balance - January 1, 2016		22,790,707		$	23,492		$	126,214		$	(13	)	$	(2,352	)	$	147,341
Repurchase of Common Stock		(192,080	)		(1,414	)		-			-			-			(1,414	)
Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes		109,727			(221	)		-			-			-			(221	)
Restricted stock awards, net of shares redeemed for taxes		5,000			41			-			(41	)		-			-
Employee Stock Purchase Plan and other stock issued		22,762			184			-			-			-			184
Equity Compensation		-			392			-			35			-			427
Dividends declared ($0.60 per share)		-			-			(13,726	)		-			-			(13,726	)
Net income		-			-			10,923			-			-			10,923
Other comprehensive income - net of tax		-			-			-			-			4,148			4,148
Balance - September 30, 2016		22,736,116		$	22,474		$	123,411		$	(19	)	$	1,796		$	147,662

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

-4-

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Nine Months Ended September 30,
Dollars in thousands	2017			2016
Cash Flows from Operating Activities
Net Income	$	10,753		$	10,923
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		(200	)		(1,200	)
Depreciation		1,174			1,202
Deferred tax expense (benefit)		(241	)		2,210
Net amortization of investment premium and discount		1,710			1,294
Writedowns of Other Real Estate Owned		76			78
Net increase in interest payable and other liabilities		237			824
Net increase in interest receivable and other assets		(1,266	)		(1,128	)
Writedowns of Other Assets		37			-
Equity based compensation expense		453			427
Net gain on sale/settlement of securities		(227	)		(2,159	)
Increase in cash surrender value of life insurance		(1,131	)		(966	)
Net cash provided by operating activities	$	11,375		$	11,505
Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks	$	2,500		$	250
Proceeds from maturities and redemptions of investment securities held to maturity		11,113			6,789
Proceeds from maturities and redemptions of investment securities available for sale		28,385			297,099
Proceeds from sales of investment securities available for sale		135,327			33,144
Net increase in loans		(42,033	)		(38,721	)
Proceeds from sales of other real estate owned		726			1,376
Proceeds from sales of other assets		230			171
Purchase of time deposits in other banks		(500	)		(13,946	)
Purchase of investment securities held to maturity		(4,455	)		(8,259	)
Purchase of Bank Owned Life Insurance		(4,357	)		-
Proceeds from surrender of Bank Owned Life Insurance		309			-
Purchase of investment securities available for sale		(137,941	)		(291,898	)
Purchase of bank premises and equipment		(977	)		(1,050	)
Net cash used for investing activities	$	(11,673	)	$	(15,045	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits	$	(4,382	)	$	15,068
Repayment of repurchase agreements		-			(15,000	)
Issuance of common stock		294			184
Stock redeemed for tax withholding - stock based compensation		(253	)		(221	)
Repurchase of common stock		-			(1,414	)
Dividends paid		(19,642	)		(13,726	)
Net cash used for financing activities	$	(23,983	)	$	(15,109	)
Net Decrease in Cash and Cash Equivalents	$	(24,281	)	$	(18,649	)
Cash and Cash Equivalents at Beginning of Period		52,772			79,550
Cash and Cash Equivalents at End of Period	$	28,491		$	60,901
Supplemental Cash Flow Information
Cash paid for interest	$	1,321		$	1,845
Cash paid for federal income taxes	$	3,076		$	2,069
Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned	$	827		$	736
Transfer of loans to other assets	$	40		$	34

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 does not apply to financial instruments. 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 Corporation). Early implementation is not allowed for public companies. Management does not expect the standard will have a significant effect on the Corporation’s consolidated financial statements, however the exact effect is still being determined. Management is in the process of developing its implementation plan and timeline.

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.

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, with earlier adoption permitted.  The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures, as this pronouncement will reduce net interest income over the period until the security’s call date, as compared to a net interest income reduction for all remaining premium as of the date of call if earlier than the date of maturity.

-7-

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2017		2016		2017		2016
Basic
Net income	$	3,933,000	$	3,687,000	$	10,753,000	$	10,923,000
Average common shares outstanding		22,871,451		22,733,134		22,852,935		22,823,682
Earnings per common share - basic	$	0.17	$	0.16	$	0.47	$	0.48
Diluted
Net income	$	3,933,000	$	3,687,000	$	10,753,000	$	10,923,000
Average common shares outstanding		22,871,451		22,733,134		22,852,935		22,823,682
Equity compensation		169,509		182,144		181,598		164,682
Average common shares outstanding - diluted		23,040,960		22,915,278		23,034,533		22,988,364
Earnings per common share - diluted	$	0.17	$	0.16	$	0.47	$	0.48

3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) - On February 23, 2017, 94,500 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, 2017. The fair value of $3.37 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 33.54%, a risk free interest rate of 2.20% and dividend yield of 1.83%. The fair value of the Company’s common stock was $10.90 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, 2017		467,118		$	5.38
Granted		94,500			10.90
Exercised		(157,760	)		5.21
Forfeited		(10,440	)		7.05
Expired		-			-
SOSARs Outstanding, September 30, 2017		393,418		$	6.73
SOSARs Exercisable, September 30, 2017		200,482		$	4.53

-8-

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 September 30, 2017 was $10.95. The value of the exercisable SOSARs that are in-the-money as of September 30, 2017 was $1,300,000, and exercise of those SOSARs on that date would have resulted in the issuance of 117,543 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 23, 2017, 24,000 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, 2018 if the defined performance targets are achieved. The grant date fair value of the stock was $10.90 per share. Earned RSUs vest on December 15, 2019 and as of September 30, 2017 none of the RSUs were vested.

Restricted Stock Awards – On February 23, 2017, 6,000 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, 2017. The expense for the restricted stock is based on the grant date value of $10.90 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $20,000 as of September 30, 2017.

The total expense for equity based compensation was $161,000 in the third quarter of 2017 and $156,000 in the third quarter of 2016. The total expense for equity based compensation was $454,000 in the first nine months of 2017 and $427,000 in the first nine months of 2016. The unrecognized compensation expense for all equity based compensation plans is $713,000 as of September 30, 2017. The expense is expected to be recognized over a weighted average period of 1.55 years.

4. LOANS

The Bank makes commercial, consumer, and mortgage loans primarily to customers in Monroe County, Michigan, southern and western Wayne County, Michigan, Lenawee 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):

	September 30,		December 31,
	2017		2016
Residential real estate loans	$	216,414	$	216,436
Commercial and Construction real estate loans		293,657		271,623
Agriculture and agricultural real estate loans		23,441		21,518
Commercial and industrial loans		122,993		96,761
Loans to individuals for household, family, and other personal expenditures		37,361		45,999
Total loans, gross	$	693,866	$	652,337
Less: Allowance for loan losses		8,010		8,458
Net Loans	$	685,856	$	643,879

-9-

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):

	September 30,			December 31,
	2017			2016
Nonaccrual loans	$	3,050		$	4,656
Loans 90 days past due and accruing		5			10
Restructured loans		9,859			14,161
Total nonperforming loans	$	12,914		$	18,827
Other real estate owned		1,646			1,634
Other assets		40			-
Total nonperforming assets	$	14,600		$	20,461
Nonperforming assets to total assets		1.08	%		1.51	%
Allowance for loan losses to nonperforming loans		62.03	%		44.92	%

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.

-10-

Activity in the allowance for loan losses during the three and nine months ended September 30, 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 September 30, 2017
Beginning Balance	$	320		$	1,496		$	3,359		$	541		$	1,398		$	1,023		$	8,137
Charge-offs		-			(6	)		(163	)		-			(49	)		(88	)		(306	)
Recoveries		77			18			23			13			31			17			179
Provision		(67	)		(199	)		56			(56	)		(134	)		400			-
Ending balance	$	330		$	1,309		$	3,275		$	498		$	1,246		$	1,352		$	8,010
Allowance for loan losses: For the nine months ended September 30, 2017
Beginning Balance	$	201		$	1,632		$	3,336		$	525		$	1,599		$	1,165		$	8,458
Charge-offs		-			(6	)		(572	)		-			(99	)		(137	)		(814	)
Recoveries		80			116			97			39			177			57			566
Provision		49			(433	)		414			(66	)		(431	)		267			(200	)
Ending balance	$	330		$	1,309		$	3,275		$	498		$	1,246		$	1,352		$	8,010
Allowance for loan losses as of September 30, 2017
Ending balance individually evaluated for impairment	$	1		$	139		$	16		$	367		$	174		$	206		$	903
Ending balance collectively evaluated for impairment		329			1,170			3,259			131			1,072			1,146			7,107
Ending balance	$	330		$	1,309		$	3,275		$	498		$	1,246		$	1,352		$	8,010
Loans as of September 30, 2017
Ending balance individually evaluated for impairment	$	1,095		$	220		$	2,622		$	1,598		$	5,368		$	433		$	11,336
Ending balance collectively evaluated for impairment		22,346			122,773			268,893			20,544			211,046			36,928			682,530
Ending balance	$	23,441		$	122,993		$	271,515		$	22,142		$	216,414		$	37,361		$	693,866

-11-

Activity in the allowance for loan losses during the three and nine months ended September 30, 2016 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 September 30, 2016
Beginning Balance	$	200		$	1,526		$	4,470		$	460		$	1,791		$	1,456		$	9,903
Charge-offs		-			(14	)		(61	)		-			(39	)		-			(114	)
Recoveries		3			24			114			13			132			30			316
Provision		18			(84	)		(140	)		(104	)		(68	)		(322	)		(700	)
Ending balance	$	221		$	1,452		$	4,383		$	369		$	1,816		$	1,164		$	9,405
Allowance for loan losses: For the nine months ended September 30, 2016
Beginning Balance	$	389		$	2,279		$	4,350		$	420		$	2,235		$	1,223		$	10,896
Charge-offs		(221	)		(26	)		(413	)		-			(195	)		(86	)		(941	)
Recoveries		3			102			182			40			235			88			650
Provision		50			(903	)		264			(91	)		(459	)		(61	)		(1,200	)
Ending balance	$	221		$	1,452		$	4,383		$	369		$	1,816		$	1,164		$	9,405
Allowance for loan losses as of September 30, 2016
Ending balance individually evaluated for impairment	$	5		$	340		$	629		$	255		$	347		$	187		$	1,763
Ending balance collectively evaluated for impairment		216			1,112			3,754			114			1,469			977			7,642
Ending balance	$	221		$	1,452		$	4,383		$	369		$	1,816		$	1,164		$	9,405
Loans as of September 30, 2016
Ending balance individually evaluated for impairment	$	1,251		$	717		$	9,431		$	1,761		$	7,729		$	487		$	21,376
Ending balance collectively evaluated for impairment		20,710			94,109			245,209			16,011			209,523			48,871			634,433
Ending balance	$	21,961		$	94,826		$	254,640		$	17,772		$	217,252		$	49,358		$	655,809

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 September 30, 2017 are as follows (000s omitted):

Credit Quality Indicators as of September 30, 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	$	-	$	2,856	$	250	$	12,431	$	134,662	$	31,128	$	181,327
10		-		7,023		-		-		-		-		7,023
20		423		294		375		-		-		-		1,092
30		522		31,523		7,555		-		821		4,074		44,495
40		16,017		75,510		222,669		4,746		68,319		2,057		389,318
45		1,517		2,592		13,389		2,968		5,334		-		25,800
50		2,077		1,882		21,508		358		2,962		8		28,795
55		1,950		894		1,677		1,546		738		4		6,809
60		935		419		4,092		93		3,577		90		9,206
70		-		-		-		-		-		-		-
80		-		-		-		-		1		-		1
90		-		-		-		-		-		-		-
Total	$	23,441	$	122,993	$	271,515	$	22,142	$	216,414	$	37,361	$	693,866
Performing	$	22,790	$	122,671	$	268,182	$	20,502	$	209,900	$	36,907	$	680,952
Nonperforming		651		322		3,333		1,640		6,514		454		12,914
Total	$	23,441	$	122,993	$	271,515	$	22,142	$	216,414	$	37,361	$	693,866

The portfolio segments in each credit risk grade as of December 31, 2016 are as follows (000s omitted):

Credit Quality Indicators as of December 31, 2016
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	$	1,768	$	214	$	9,960	$	132,144	$	39,114	$	183,202
10		-		5,787		-		-		-		-		5,787
20		293		348		447		-		-		145		1,233
30		645		17,373		8,128		-		218		-		26,364
40		15,827		63,687		198,416		4,211		70,275		6,626		359,042
45		1,507		2,142		16,227		2,974		4,513		-		27,363
50		1,769		4,090		16,828		448		3,393		12		26,540
55		263		927		4,081		1,574		989		-		7,834
60		1,212		639		7,828		287		4,904		102		14,972
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	21,518	$	96,761	$	252,169	$	19,454	$	216,436	$	45,999	$	652,337
Performing	$	20,834	$	96,240	$	244,816	$	17,734	$	208,458	$	45,428	$	633,510
Nonperforming		684		521		7,353		1,720		7,978		571		18,827
Total	$	21,518	$	96,761	$	252,169	$	19,454	$	216,436	$	45,999	$	652,337

-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 September 30, 2017 and December 31, 2016 (000s omitted):

September 30, 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	$	83	$	-	$	-	$	83	$	23,358	$	23,441	$	-
Commercial		23		153		101	$	277		122,716		122,993		5
Commercial Real Estate		2,192		-		402		2,594		268,921		271,515		-
Construction Real Estate		-		-		-		-		22,142		22,142		-
Residential Real Estate		1,307		270		1,204		2,781		213,633		216,414		-
Consumer and Other		23		-		-		23		37,338		37,361		-
Total	$	3,628	$	423	$	1,707	$	5,758	$	688,108	$	693,866	$	5

December 31, 2016	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	$	93	$	-	$	113	$	206	$	21,312	$	21,518	$	-
Commercial		77		46		23		146		96,615		96,761		10
Commercial Real Estate		708		363		828		1,899		250,270		252,169		-
Construction Real Estate		-		-		-		-		19,454		19,454		-
Residential Real Estate		1,523		192		1,558		3,273		213,163		216,436		-
Consumer and Other		149		46		-		195		45,804		45,999		-
Total	$	2,550	$	647	$	2,522	$	5,719	$	646,618	$	652,337	$	10

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 September 30, 2017 and December 31, 2016 (000s omitted):

	September 30, 2017		December 31, 2016
Agriculture and Agricultural Real Estate	$	83	$	113
Commercial		97		169
Commercial Real Estate		1,033		1,625
Construction Real Estate		60		31
Residential Real Estate		1,756		2,623
Consumer and Other		21		95
Total	$	3,050	$	4,656

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 September 30, 2017 and September 30, and December 31, 2016 (000s omitted):

September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment for the Three Months Ended		Interest Income Recognized in the Three Months Ended		Average Recorded Investment for the Nine Months Ended		Interest Income Recognized in the Nine Months Ended
With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	852	$	848	$	-	$	849	$	11	$	850	$	32
Commercial		-		-		-		-		-		-		-
Commercial Real Estate		2,010		2,061		-		2,177		23		2,238		59
Construction Real Estate		-		-		-		-		-		-		-
Residential Real Estate		3,860		4,030		-		4,054		51		4,110		150
Consumer and Other		-		-		-		-		-		1		-
With an allowance recorded:
Agriculture and Agricultural Real Estate		243		242		1		242		3		244		10
Commercial		220		219		139		220		2		224		7
Commercial Real Estate		612		612		16		614		6		621		17
Construction Real Estate		1,598		1,631		367		1,622		19		1,635		57
Residential Real Estate		1,508		1,547		174		1,537		16		1,552		45
Consumer and Other		433		433		206		437		5		444		15
Total:
Agriculture and Agricultural Real Estate	$	1,095	$	1,090	$	1	$	1,091	$	14	$	1,094	$	42
Commercial		220		219		139		220		2		224		7
Commercial Real Estate		2,622		2,673		16		2,791		29		2,859		76
Construction Real Estate		1,598		1,631		367		1,622		19		1,635		57
Residential Real Estate		5,368		5,577		174		5,591		67		5,662		195
Consumer and Other		433		433		206		437		5		445		15
Total	$	11,336	$	11,623	$	903	$	11,752	$	136	$	11,919	$	392

	Recorded Investment as of December 31, 2016		Unpaid Principal Balance as of December 31, 2016		Related Allowance as of December 31, 2016		Average Recorded Investment for the Three Months Ended September 30, 2016		Interest Income Recognized in the Three Months Ended September 30, 2016		Average Recorded Investment for the Nine Months Ended September 30, 2016		Interest Income Recognized in the Nine Months Ended September 30, 2016
With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	966	$	1,164	$	-	$	1,017	$	11	$	1,024	$	36
Commercial		88		140		-		152		2		157		8
Commercial Real Estate		4,295		4,502		-		5,390		49		5,456		152
Construction Real Estate		144		177		-		120		2		126		6
Residential Real Estate		4,916		5,157		-		5,433		69		5,553		198
Consumer and Other		11		11		-		34		1		36		2
With an allowance recorded:
Agriculture and Agricultural Real Estate		246		246		5		248		3		249		10
Commercial		267		274		199		651		7		729		24
Commercial Real Estate		2,558		2,610		129		4,431		45		4,590		153
Construction Real Estate		1,573		1,573		388		1,668		19		1,677		57
Residential Real Estate		2,182		2,224		236		2,659		33		2,726		84
Consumer and Other		465		465		184		457		5		465		17
Total:
Agriculture and Agricultural Real Estate	$	1,212	$	1,410	$	5	$	1,265	$	14	$	1,273	$	46
Commercial		355		414		199		803		9		886		32
Commercial Real Estate		6,853		7,112		129		9,821		94		10,046		305
Construction Real Estate		1,717		1,750		388		1,788		21		1,803		63
Residential Real Estate		7,098		7,381		236		8,092		102		8,279		282
Consumer and Other		476		476		184		491		6		501		19
Total	$	17,711	$	18,543	$	1,141	$	22,260	$	246	$	22,788	$	747

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”).

-16-

Loans that have been classified as TDRs during the three and nine month periods ended September 30, 2017 and September 30, 2016 are as follows (000s omitted from dollar amounts):

	Three months ended						Nine months ended
	September 30, 2017						September 30, 2017
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance		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		1		225		202		4		578		492
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		1		99		99		5		371		229
Consumer and Other		-		-		-		1		1		-
Total		2	$	324	$	301		12	$	979	$	750

	Three months ended						Nine months ended
	September 30, 2016						September 30, 2016
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance		Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-	$	-		1	$	362	$	361
Commercial		1		250		250		1		250		250
Commercial Real Estate		1		215		215		1		215		215
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		2		242		241		9		693		653
Consumer and Other		-		-		-		1		57		55
Total		4	$	707	$	706		13	$	1,577	$	1,534

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 nine month periods ended September 30, 2017 and September 30, 2016 that subsequently defaulted during the nine month periods ended September 30, 2017 and September 30, 2016, respectively.

	Nine months ended				Nine months ended
	September 30, 2017				September 30, 2016
	Number of Contracts		Recorded Principal Balance		Number of Contracts		Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-		-	$	-
Commercial		-		-		-		-
Commercial Real Estate		-		-		-		-
Construction Real Estate		-		-		-		-
Residential Real Estate		1		99		-		-
Consumer and Other		-		-		-		-
Total		1	$	99		-	$	-

The Company has allocated $903,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at September 30, 2017. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of September 30, 2017 and September 30, 2016.

-17-

6. INVESTMENT SECURITIES

The following is a summary of the Bank’s investment securities portfolio as of September 30, 2017 and December 31, 2016 (000s omitted):

	Held to Maturity
	September 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political Subdivisions	$	33,529	$	1,005	$	(134	)	$	34,400
Corporate Debt Securities		500		-		-			500
	$	34,029	$	1,005	$	(134	)	$	34,900

	Available for Sale
	September 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	185,294	$	218	$	(3,779	)	$	181,733
Mortgage Backed Securities issued by U.S. Government Agencies		224,236		32		(2,386	)		221,882
Obligations of States and Political Subdivisions		38,834		86		(313	)		38,607
Corporate Debt Securities		20,600		404		(14	)		20,990
Equity Securities		2,044		67		-			2,111
	$	471,008	$	807	$	(6,492	)	$	465,323

	Held to Maturity
	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political Subdivisions	$	40,241	$	701	$	(288	)	$	40,654
Corporate Debt Securities		500		2		-			502
	$	40,741	$	703	$	(288	)	$	41,156

	Available for Sale
	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	282,130	$	389	$	(7,519	)	$	275,000
Mortgage Backed Securities issued by U.S. Government Agencies		148,764		118		(2,673	)		146,209
Obligations of States and Political Subdivisions		30,909		109		(409	)		30,609
Corporate Debt Securities		34,363		135		(338	)		34,160
Equity Securities		2,044		45		-			2,089
	$	498,210	$	796	$	(10,939	)	$	488,067

-18-

The amortized cost and estimated market values of securities by contractual maturity as of September 30, 2017 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				Estimated
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
Contractual maturity in
1 year or less	$	5,442	$	5,473	$	3,575	$	3,576
After 1 year through five years		19,992		20,412		90,631		90,061
After 5 years through 10 years		7,476		7,913		134,502		131,857
After 10 years		1,119		1,102		16,020		15,836
Total		34,029		34,900		244,728		241,330
Mortgage Backed Securities		-		-		224,236		221,882
Securities with no stated maturity		-		-		2,044		2,111
Total	$	34,029	$	34,900	$	471,008	$	465,323

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 September 30, 2017 and December 31, 2016.

September 30, 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	$	105,204	$	2,203	$	51,900	$	1,576	$	157,104	$	3,779
Mortgage Backed Securities issued by U.S. Government Agencies		140,734		1,106		69,135		1,280		209,869		2,386
Obligations of States and Political Subdivisions		27,149		390		7,376		57		34,525		447
Corporate Debt Securities		2,020		14		-		-		2,020		14
	$	275,107	$	3,713	$	128,411	$	2,913	$	403,518	$	6,626

December 31, 2016
	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	$	242,212	$	7,519	$	-	$	-	$	242,212	$	7,519
Mortgage Backed Securities issued by U.S. Government Agencies		112,995		2,144		22,857		529		135,852		2,673
Obligations of States and Political Subdivisions		40,524		682		2,976		15		43,500		697
Corporate Debt Securities		24,025		338		-		-		24,025		338
	$	419,756	$	10,683	$	25,833	$	544	$	445,589	$	11,227

-19-

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 September 30, 2017. As of September 30, 2017 and December 31, 2016, there were 169 and 230 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.

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.

-20-

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016, and the valuation techniques used by the Company to determine those fair values.

									Total
	Carrying								Estimated
September 30, 2017	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	28,491	$	28,491	$	-	$	-	$	28,491
Time Deposits in Other Banks		16,946		-		16,156		750		16,906
Securities - Held to Maturity
Obligations of States and Political Subdivisions		33,529		-		2,732		31,668		34,400
Corporate Debt Securities		500		-		500		-		500
Securities - Available for Sale
Obligations of U.S. Government Agencies		181,733		-		181,733		-		181,733
MBS issued by U.S. Government Agencies		221,882		-		221,882		-		221,882
Obligations of States and Political Subdivisions		38,607		-		38,607		-		38,607
Corporate Debt Securities		20,990		-		20,990		-		20,990
Equity Securities		2,111		2,111		-		-		2,111
Federal Home Loan Bank Stock		4,148		-		4,148		-		4,148
Loans Held for Sale		-		-		-		-		-
Loans, net		685,856		-		-		673,225		673,225
Accrued Interest Receivable		4,508		-		-		4,508		4,508
Financial Liabilities:
Noninterest Bearing Deposits		297,927		297,927		-		-		297,927
Interest Bearing Deposits		897,408		-		898,667		-		898,667
Accrued Interest Payable		56		-		-		56		56

-21-

									Total
	Carrying								Estimated
December 31, 2016	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	52,772	$	52,772	$	-	$	-	$	52,772
Time Deposits in Other Banks		18,946		-		18,940		-		18,940
Securities - Held to Maturity
Obligations of States and Political Subdivisions		40,241		-		3,153		37,501		40,654
Corporate Debt Securities		500		-		502		-		502
Securities - Available for Sale
Obligations of U.S. Government Agencies		275,000		-		275,000		-		275,000
MBS issued by U.S. Government Agencies		146,209		-		146,209		-		146,209
Obligations of States and Political Subdivisions		30,609		-		30,609		-		30,609
Corporate Debt Securities		34,160		-		34,160		-		34,160
Equity Securities		2,089		2,089		-		-		2,089
Federal Home Loan Bank Stock		4,148		-		4,148		-		4,148
Loans Held for Sale		611		-		-		623		623
Loans, net		643,879		-		-		642,908		642,908
Accrued Interest Receivable		4,335		-		-		4,335		4,335
Financial Liabilities:
Noninterest Bearing Deposits		279,001		279,001		-		-		279,001
Interest Bearing Deposits		920,716		-		922,187		-		922,187
Repurchase Agreements		-		-		-		-		-
Accrued Interest Payable		57		-		-		57		57

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 September 30, 2017 or December 31, 2016. 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.

-22-

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)
September 30, 2017
Impaired loans	$	-	$	-	$	10,433
Other Real Estate Owned	$	-	$	-	$	1,646
December 31, 2016
Impaired loans	$	-	$	-	$	16,570
Other Real Estate Owned	$	-	$	-	$	1,634

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
	September 30,		December 31,
	2017		2016
Commitments to extend credit:
Unused portion of commercial lines of credit	$	88,762	$	75,454
Unused portion of credit card lines of credit		5,536		4,983
Unused portion of home equity lines of credit		29,397		25,057
Standby letters of credit and financial guarantees written		1,364		1,582
All other off-balance sheet commitments		-		-

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.

-23-

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 $10,753,000 for the first three quarters of 2017 was a decrease of $170,000 or 1.6% compared to the first three quarters of 2016. The decrease was the result of an increase of $1,000,000 in the provision for loan losses and a decrease of $1,932,000 in gains on securities transactions. The effect of these items was mitigated by an increase of $1,641,000 in net interest income and a decrease of $309,000 in non-interest expenses. The negative provision expense and gains on securities transactions are not ordinary occurrences. Excluding these items in both periods, and net of the tax effects thereon, the net profit for the three quarters ended September 30, 2017 would have been $10,471,000, an increase of $1,765,000, or 20.3% compared to the three quarters ended September 30, 2016.

The national economic recovery is continuing, and the recovery in southeast Michigan is getting stronger. State and local unemployment rates are now below the national average. Commercial and residential development property values continue to improve, with some 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 went down $5.7 million, or 34.4% during the first three quarters of 2017, and decreased $11.0 million or 50.1% compared to a year ago. Net charge offs were $248,000, or 0.05% of loans, annualized, in the first three quarters of 2017, compared to $291,000, or 0.06% in the first three quarters of 2016. Due to improving loan quality metrics and low net charge offs, another reduction in our Allowance for Loan and Lease Losses (ALLL) was appropriate, and we recorded a $200,000 credit to the provision expense in the first three quarters of 2017. This reflected an increase of $1,000,000 when compared to the negative provision of $1,200,000 recorded in the first three quarters of 2016. The ALLL as a percent of loans decreased from 1.30% at the end of 2016 to 1.15%. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $0.9 million of specific allocations on $11.3 million of loans evaluated for impairment and $7.1 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge off experience of the previous 16 quarters. The improvement in the historical loss rates is slowing and loan growth is continuing, so we do not expect negative provisions to continue.

-24-

Net Interest Income increased $1,641,000, or 5.9% compared to the first three quarters of 2016, even though the period was one day shorter and average earning assets decreased $4.9 million, as the net interest margin increased from 3.11% to 3.30%. The net interest margin improved because the yield on earnings assets increased and the cost of interest bearing liabilities decreased. Non-interest income for the three quarters decreased $1,483,000, mainly due to large securities gains from callable bonds that were owned at discounts being redeemed at par in 2016. Non-interest expenses decreased $309,000, as salaries, benefits, EFT and ATM expenses, Other Real Estate expenses, FDIC deposit insurance assessments, other insurance, and telephone expenses decreased. These decreases were partially offset by increases in occupancy expense, equipment expense, marketing expense, and professional fees.

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 recovery continued this quarter, with improving local unemployment and property values steadily increasing since 2014. Management efforts remain focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

-25-

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 7.6% during the quarter, from $15.8 million to $14.6 million, and total classified assets decreased 9.9% from $12.1 million to $10.9 million. Loan delinquencies increased slightly from $5,719,000 30 days or more past due as of December 31, 2016 to $5,758,000 as of September 30, 2017 but the delinquency percentage decreased from 0.88% to 0.83% of the total loans. Over the last twelve months, NPAs decreased $9.6 million, or 39.7%, with nonperforming loans decreasing 42.7% from $22.5 million to $12.9 million, and Other Real Estate Owned (“OREO”) unchanged at $1.6 million. Total classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, decreased $10.9 million, or 50.0%. The amount required in the Allowance for Loan and Lease Losses (“ALLL”) decreased $1.4 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 1.15% of loans, down from 1.43% at September 30, 2016. The ALLL is 62.03% of nonperforming loans (“NPLs”), compared to 44.92% at year end and 41.80% at September 30, 2016. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

Since December 31, 2016, total loans held for investment increased $41.5 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 in the fourth quarter of 2017.

Since December 31, 2016, deposits decreased $4.4 million, other liabilities decreased $0.4 million, and capital decreased $5.1 million, and as a result our total assets decreased $9.9 million, or 0.7%. Deposits increased during the third quarter of 2017 rebounding from the seasonal decline in the second quarter. The Company expects a small amount of deposit funding growth in the fourth quarter of 2017, but we have adequate liquidity to fund our anticipated loan growth without needing to actively grow deposits. The composition of deposits continues to change as customers move funds from maturing interest bearing time deposit accounts to low or no cost non maturity deposit accounts due to the low interest rate environment. As of September 30, 2017, deposits consisted of $137.9 million in certificates of deposit and IRAs with an average cost of 0.63%, $229.9 million in savings deposits with an average cost of 0.02%, $263.4 million in Money Market Deposit Accounts with an average cost of 0.16%, $266.2 million in interest bearing demand deposits with an average cost of 0.14%, and $297.9 million in non-interest bearing demand deposits. We do not expect significant changes in our deposit funding, and our expected loan growth will continue to be funded by reductions in our cash and investments. The total capital decreased $5.1 million since December 31, 2016, mainly because dividends paid exceeded earnings by $8.9 million. This reduction was mitigated by an decrease of $3.0 million in the Accumulated Other Comprehensive Loss, which decreased mainly due to the increase 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 10.40% at December 31, 2016 to 10.09% at September 30, 2017.

Results of Operations – Third Quarter 2017 vs. Third Quarter 2016

Net Interest Income - A comparison of the income statements for the three months ended September 30, 2017 and 2016 shows an increase of $716,000, or 7.5%, in Net Interest Income. Interest income on loans increased $557,000 or 7.4% as the average loans outstanding increased $34.1 million and the average yield on loans increased from 4.60% to 4.68%. The average loans outstanding increased as demand increased due to improving economic conditions. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $106,000 even though the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $47.7 million because the investment portfolio yield increased from 1.68% to 1.90%. 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 $53,000 or 11.0% even though the average deposits increased $8.8 million because the average cost of deposits decreased from 0.16% 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.

-26-

Provision for Loan Losses - The Provision for Loan Losses increased $700,000 compared to the third quarter of 2016 as a $700,000 credit to provision expense was recorded in the third quarter of 2016, while no provision expense was recorded in the third quarter of 2017. We charged off $306,000 of principal while recovering $179,000 of previously charged off loans in the third quarter of 2017, for a net charge off total of $127,000, or 0.07% 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. Due to an improvement in portfolio risk indicators and a decrease in the historical charge off percentages, the amount of ALLL required decreased from $8,137,000 at June 30, 2017 to $8,010,000 as of September 30, 2017. This allowed us to use $127,000 of the ALLL to cover the net charge offs without recording a provision expense. The allowance includes $903,000 of specific allocations and $7.1 million of general allocations. The general allocation is based on the historical charge off experience of the previous 16 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 $4,000, or 0.1% compared to the third quarter of 2016. Service charges on deposit accounts decreased $42,000 due to lower overdraft activity. Gains on securities transactions increased $63,000 because activity was higher in 2017 as we sold bonds to fund loan growth. Origination fees on mortgage loans sold decreased $62,000 or 41.6% as we retained more of the loans originated in 2017 in our portfolio. Income from Bank Owned life Insurance (BOLI) increased $25,000 due to an increase in the BOLI investment and a restructuring of the BOLI portfolio to improve its yield.

Other Expenses – Total non-interest expenses decreased $24,000, or 0.3% compared to the third quarter of 2016. Salaries and Employee Benefits decreased $201,000, or 3.6% due to lower salaries and a lower incentive compensation accrual. Occupancy expense increased $26,000, or 3.9% as maintenance and repairs increased $67,000 while depreciation, utilities, and other occupancy expenses decreased $30,000, $10,000, and $1,000, respectively. Equipment expense increased $52,000, or 7.1% due to higher maintenance expense and small equipment purchases. Marketing expense increased $95,000, or 33.9% due to increased advertising and sales promotion activity. Professional fees expense increased $111,000 due to increases in legal, accounting, and consulting fees. FDIC insurance assessments decreased $72,000 due to reductions in the FDIC assessment rate.

As a result of the above activity, the Profit Before Income Taxes in the third quarter of 2017 was $5,316,000, an increase of $36,000 compared to the pre-tax profit of $5,280,000 in the third quarter of 2016. The Company recorded a federal income tax expense of $1,383,000 in the third quarter of 2017, reflecting an effective tax rate of 26.0%, compared to the tax expense of $1,593,000 in the third quarter of 2016, which reflected an effective rate of 30.2%. The tax expense in the third quarter of 2017 included a tax benefit of $241,000 related to our stock based compensation program. Excluding this benefit, the effective tax rate would have been 30.5%. The Net profit for the third quarter of 2017 was $3,933,000, an increase of 6.7% compared to the net profit of $3,687,000 in the third quarter of 2016.

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Results of Operations – First Three Quarters of 2017 vs. First Three Quarters of 2016

Net Interest Income - A comparison of the income statements for the nine months ended September 30, 2017 and 2016 shows an increase of $1,641,000, or 5.9%, in Net Interest Income. Interest income on loans increased $1,416,000 or 6.5% as the average loans outstanding increased $39.4 million and the average yield on loans increased from 4.59% to 4.61%. The average loans outstanding increased as demand increased due to improving economic conditions. The interest income on investments, fed funds sold, and interest bearing balances due from banks decreased $246,000 even though the yield increased from 1.82% to 1.91% because the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $44.3 million. The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from lower yielding investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits decreased $166,000 or 11.2% even though the average deposits increased $16.1 million because the average cost of deposits decreased from 0.17% to 0.15%. 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. The interest expense on borrowed funds decreased $305,000 as the final remaining long term borrowed funds were repaid in 2016.

Provision for Loan Losses - The Provision for Loan Losses increased $1,000,000 compared to the first three quarters of 2016 as a $200,000 credit to provision expense was recorded in the first nine months of 2017, compared to a $1,200,000 credit to provision expense recorded in the first nine months of 2016. We charged off $814,000 of principal while recovering $566,000 of previously charged off loans in the first three quarters of 2017, for a net charge off total of $248,000, or 0.05% of loans, annualized. This is an improvement compared to the net charge offs of $291,000, or 0.06% of loans, annualized, in the first three quarters of 2016. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy, and necessary adjustments to the ALLL are made through the provision for loan losses expense. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to the growth in the loan portfolio, and limited potential for future recoveries and improvements in the historical charge off percentages, further negative provisions are not likely to occur.

Other Income – Non interest income decreased $1,483,000, or 10.8% compared to the first three quarters of 2016. Gains on securities transactions decreased $1,932,000 due to large gains in 2016 that were the result of bonds owned at substantial discounts being redeemed early at par. Wealth Management fees increased $483,000 primarily due to the establishment of a receivable for earned but uncollected fees in 2017. Origination fees on mortgage loans sold decreased $154,000 or 37.1% due to lower sales activity as more of the mortgage loans originated in 2017 were retained in the bank’s portfolio.

Other Expenses – Total non-interest expenses decreased $309,000, or 1.1% compared to the first three quarters of 2016. Salaries and Employee Benefits decreased $511,000, or 3.1%. Salaries decreased due to an increase in loan originations, which caused an increase in the amount of salary expense deferred, and a decrease in the incentive compensation accrual. Benefits expense decreased due to lower life and health insurance expenses. Occupancy expense increased $122,000, or 6.1% as maintenance and repairs increased. FDIC insurance assessments decreased $218,000 due to reductions in the FDIC assessment rate. Other insurance decreased $87,000, primarily due to a reclassification adjustment to the life insurance expense for directors in 2016.

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As a result of the above activity, the Profit Before Income Taxes in the first three quarters of 2017 was $15,095,000, a decrease of $533,000 compared to the pre-tax profit of $15,628,000 in the first three quarters of 2016. The Company recorded a federal income tax expense of $4,342,000 in the first three quarters of 2017, reflecting an effective tax rate of 28.8%, compared to the tax expense of $4,705,000 in the first three quarters of 2016, which reflected an effective rate of 30.1%. The tax expense in 2017 includes a $241,000 benefit related to our stock based compensation plan. Excluding this benefit, the effective tax rate was 30.4%. The net profit for the first three quarters of 2017 was $10,753,000, a decrease of 1.6% compared to the net profit of $10,923,000 in the first three quarters of 2016. Excluding the effect of the negative loan loss provisions and the securities gains in both periods, the net profit would have increased $1,765,000, or 20.3%.

Cash Flows

Cash flows provided by operating activities decreased $130,000 compared to the first nine months of 2016 primarily because the net income was $170,000 lower in 2017. The cash flow used for investing activities decreased $3.3 million from $15.0 million used in the first three quarters of 2016 to $11.7 million used in the first three quarters of 2017. This was the result of a decrease in the amount of investment securities called prior to maturity and an increase in the investment in loans, mitigated by an increase in investment securities sold and a decrease in the investment securities purchased. The bank is purchasing less callable securities, and the increase in market rates has also decreased the amount of call activity. The decrease in early redemptions of investment securities also caused a decrease in the amount of investments purchased, and the bank also sold securities in the 2017 to fund the increase in loans. The amount of cash used for financing activities was $8.9 million higher in the first nine months of 2017 than it was in the first nine months of 2016 because the amount of cash used to fund deposit withdrawals increased $19.5 million. The amount of cash used to fund repayment of debt decreased $15.0 million as the last of our repurchase agreement debt was paid off in 2016. Also, the amount used to pay dividends was $5.9 million higher as the per share dividend increased from $0.60 in the first three quarters of 2016 to $0.86 in the first three quarters of 2017. In the first three quarters of 2017, 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 $24.3 million during the period. In the first three quarters of 2016, the cash used for investing and financing activities exceeded the cash provided by operating activities, resulting in a decrease of $18.6 million in cash and cash equivalents during the three quarters. We expect cash flows from redemptions of callable investment securities to remain low in the fourth quarter of 2017, and we plan to use the proceeds from maturities and sales of investment securities to fund our expected loan growth. We anticipate that we will maintain our current level of cash and cash equivalents through the end of the year.

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 September 30, 2017, 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.

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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 nine months of 2017 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

Total stockholders’ equity of the Company was $136.0 million at September 30, 2017 and $141.1 million at December 31, 2016. Retained earnings decreased $8.3 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) decreased due to an increase in the value of our securities that are classified as Available For Sale. Total equity decreased $5.1 million while total assets decreased $9.9 million, so the ratio of equity to assets decreased from 10.4% at December 31, 2016 to 10.09% at September 30, 2017.

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 September 30, 2017:
Total Capital to Risk-Weighted Assets
Consolidated	$	145,340		16.98	%	$	85,620		10.0	%
Monroe Bank & Trust		143,846		16.80	%		85,615		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		136,965		16.00	%		68,496		8.0	%
Monroe Bank & Trust		135,471		15.82	%		68,492		8.0	%
Common Equity Tier 1 Capital to
Risk-Weighted Assets
Consolidated		136,965		16.00	%		55,653		6.5	%
Monroe Bank & Trust		135,471		15.82	%		55,650		6.5	%
Tier 1 Capital to Average Assets
Consolidated		136,965		10.22	%		66,978		5.0	%
Monroe Bank & Trust		135,471		10.12	%		66,965		5.0	%

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of December 31, 2016:
Total Capital to Risk-Weighted Assets
Consolidated	$	153,957		18.35	%	$	83,923		10.0	%
Monroe Bank & Trust		151,936		18.12	%		83,831		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		145,144		17.30	%		67,138		8.0	%
Monroe Bank & Trust		143,123		17.07	%		67,064		8.0	%
Common Equity Tier 1 Capital to
Risk-Weighted Assets
Consolidated		145,144		17.30	%		54,550		6.5	%
Monroe Bank & Trust		143,123		17.07	%		54,490		6.5	%
Tier 1 Capital to Average Assets
Consolidated		145,144		10.89	%		66,645		5.0	%
Monroe Bank & Trust		143,123		10.75	%		66,579		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 2016.

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 two quarters of 2017, 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, 2016.

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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 September 30, 2017, 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 September 30, 2017, 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 September 30, 2017, 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, 2016.

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

The Company has a stock repurchase program which it publicly announced on January 28, 2016. 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, 2016 and will expire on January 31, 2018. The following table summarizes the open-market and privately negotiated stock repurchase activity of the Company during the three months ended September 30, 2017:

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2017 - July 31, 2017		-	$	-		-		1,807,920
August 1, 2017 - August 31, 2017		-	$	-		-		1,807,920
September 1, 2017 - September 30, 2017		-	$	-		-		1,807,920
Total		-	$	-		-

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

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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.

	MBT Financial Corp. (Registrant)
November 9, 2017	By /s/ H. Douglas Chaffin
Date	H. Douglas Chaffin
	President &  Chief Executive Officer
November 9, 2017	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

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