MBT FINANCIAL CORP - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - MBT FINANCIAL CORP	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - MBT FINANCIAL CORP	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - MBT FINANCIAL CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MBT FINANCIAL CORP	ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

☐ 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 August 9, 2017, there were 22,870,566 shares of the Company’s Common Stock outstanding.

Part I Financial Information

Item 1. Financial Statements

MBT FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

	June 30, 2017
Dollars in thousands	(Unaudited)			December 31, 2016
ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	22,425		$	18,183
Interest bearing		18,182			34,589
Total cash and cash equivalents		40,607			52,772

Interest Bearing Time Deposits in Other Banks		17,696			18,946
Securities - Held to Maturity		38,617			40,741
Securities - Available for Sale		439,612			488,067
Federal Home Loan Bank stock - at cost		4,148			4,148

Loans held for sale		899			611

Loans		682,749			652,337
Allowance for Loan Losses		(8,137	)		(8,458	)
Loans - Net		674,612			643,879

Accrued interest receivable and other assets		22,694			24,901
Other Real Estate Owned		1,502			1,634
Bank Owned Life Insurance		59,217			54,415
Premises and Equipment - Net		26,788			27,169
Total assets	$	1,326,392		$	1,357,283

LIABILITIES
Deposits:
Non-interest bearing	$	290,595		$	279,001
Interest-bearing		886,474			920,716
Total deposits		1,177,069			1,199,717

Interest payable and other liabilities		15,101			16,452
Total liabilities		1,192,170			1,216,169

STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,870,082 and 22,777,882 shares issued and outstanding)		22,559			22,562
Retained earnings		115,453			126,079
Unearned compensation		(39	)		(4	)
Accumulated other comprehensive income (loss)		(3,751	)		(7,523	)
Total stockholders' equity		134,222			141,114
Total liabilities and stockholders' equity	$	1,326,392		$	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 June 30,

Six Months Ended June 30,

Dollars in thousands, except per share data

2017

2016

2017

2016

Interest Income

Interest and fees on loans

7,709

7,179

15,073

14,214

Interest on investment securities-

Tax-exempt

306

303

616

608

Taxable

2,185

2,218

4,453

4,744

Interest on balances due from banks

101

162

210

279

Total interest income

10,301

9,862

20,352

19,845

Interest Expense

Interest on deposits

434

486

890

1,003

Interest on borrowed funds

132

308

Total interest expense

437

618

893

1,311

Net Interest Income

9,864

9,244

19,459

18,534

Provision For (Recovery Of) Loan Losses

(200

)

(200

)

(500

)

Net Interest Income After

Provision For Loan Losses

9,864

9,444

19,659

19,034

Other Income

Income from wealth management services

1,547

1,105

2,675

2,202

Service charges and other fees

1,046

1,016

2,060

2,024

Debit card income

748

735

1,428

1,409

Net gain on sales and redemptionsof securities available for sale

1,752

2,072

Net loss on sales of Other Real Estate Owned

(62

)

(96

)

(57

)

Origination fees on mortgage loans sold

115

136

174

266

Bank owned life insurance income

412

362

753

717

Other

497

450

1,119

1,036

Total other income

4,370

5,555

8,190

9,669

Other Expenses

Salaries and employee benefits

5,273

5,399

10,707

11,017

Occupancy expense

682

633

1,430

1,334

Equipment expense

791

726

1,488

1,410

Marketing expense

302

286

586

545

Professional fees

620

556

1,209

1,208

EFT/ATM Expense

259

237

507

546

Other Real Estate Owned expenses

FDIC Deposit Insurance Assessment

107

191

214

360

Bonding and other insurance expense

125

214

247

336

Telephone expense

103

219

217

Other

716

509

1,401

1,288

Total other expenses

9,008

8,872

18,070

18,355

Income Before Income Taxes

5,226

6,127

9,779

10,348

Income Tax Expense

1,586

1,888

2,959

3,112

Net Income

3,640

4,239

6,820

7,236

Other Comprehensive Income - Net of Tax

Unrealized gains on securities

1,983

2,049

3,770

6,376

Reclassification adjustment for gains included in net income

(44

)

(1,156

)

(51

)

(1,367

)

Postretirement benefit liability

Total Other Comprehensive Income - Net of Tax

1,965

919

3,772

5,062

Comprehensive Income

5,605

5,158

10,592

12,298

Basic Earnings Per Common Share

0.16

0.19

0.30

0.32

Diluted Earnings Per Common Share

0.16

0.18

0.30

0.31

Dividends Declared Per Share of Common Stock

0.05

0.03

0.80

0.56

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		63,677		(250	)		-			-			-			(250	)
Restricted stock awards, net of shares redeemed for taxes		6,000		65			-			(65	)		-			-
Employee Stock Purchase Plan and other stock issued		22,523		243			-			-			-			243

Tax benefit from exercise of options		-		-			824			-			-			824

Equity Compensation		-		263			-			30			-			293

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

Dividends declared ($0.80 per share)		-		-			(18,270	)		-			.			(18,270	)

Net income		-		-			6,820			-			-			6,820
Other comprehensive income - net of tax		-		-			-			-			3,772			3,772

Balance - June 30, 2017		22,870,082	$	22,559		$	115,453		$	(39	)	$	(3,751	)	$	134,222

													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		105,303			(212	)		-			-			-			(212	)
Restricted stock awards, net of shares redeemed for taxes		5,000			41			-			(41	)		-			-
Employee Stock Purchase Plan and other stock issued		19,628			156			-			-			-			156

Equity Compensation		-			252			-			19			-			271

Dividends declared ($0.56 per share)		-			-			(12,817	)		-			-			(12,817	)

Net income		-			-			7,236			-			-			7,236
Other comprehensive income - net of tax		-			-			-			-			5,062			5,062

Balance - June 30, 2016		22,728,558		$	22,315		$	120,633		$	(35	)	$	2,710		$	145,623

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

-4-

MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Six Months Ended June 30,
Dollars in thousands	2017			2016
Cash Flows from Operating Activities
Net Income	$	6,820		$	7,236
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		(200	)		(500	)
Depreciation		806			797
Deferred tax expense		-			1,891
Net amortization of investment premium and discount		1,165			707
Writedowns of Other Real Estate Owned		56			69
Net decrease in interest payable and other liabilities		(720	)		(125	)
Net (increase) decrease in interest receivable and other assets		96			(763	)
Writedowns of Other Assets		37			-
Equity based compensation expense		293			271
Net gain on sale/settlement of securities		(77	)		(2,072	)
Increase in cash surrender value of life insurance		(754	)		(614	)
Net cash provided by operating activities	$	7,522		$	6,897

Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks	$	1,750		$	250
Proceeds from maturities and redemptions of investment securities held to maturity		6,542			6,182
Proceeds from maturities and redemptions of investment securities available for sale		18,964			240,900
Proceeds from sales of investment securities available for sale		73,918			-
Net increase in loans		(31,193	)		(21,338	)
Proceeds from sales of other real estate owned		367			918
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	)		(4,259	)
Purchase of Bank Owned Life Insurance		(4,357	)		-
Proceeds from surrender of Bank Owned Life Insurance		309			-
Purchase of investment securities available for sale		(39,842	)		(164,098	)
Purchase of bank premises and equipment		(494	)		(793	)
Net cash provided by investing activities	$	21,239		$	43,987

Cash Flows from Financing Activities
Net decrease in deposits	$	(22,648	)	$	(1,975	)
Repayment of repurchase agreements		-			(15,000	)
Issuance of common stock		243			156
Stock redeemed for tax withholding - stock based compensation		(251	)		(212	)
Repurchase of common stock		-			(1,414	)
Dividends paid		(18,270	)		(12,817	)
Net cash used for financing activities	$	(40,926	)	$	(31,262	)

Net Increase (Decrease) in Cash and Cash Equivalents	$	(12,165	)	$	19,622

Cash and Cash Equivalents at Beginning of Period		52,772			79,550
Cash and Cash Equivalents at End of Period	$	40,607		$	99,172

Supplemental Cash Flow Information
Cash paid for interest	$	899		$	1,359
Cash paid for federal income taxes	$	2,106		$	1,220

Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned	$	332		$	397
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.

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosures related to certain financial instruments, including requiring equity investments to be accounted for at fair value with changes recorded through earnings, the use of the exit price when measuring fair value, and disaggregation of financial assets and liabilities by category for disclosure purposes. The new guidance will be effective for the Company's year ending December 31, 2018. Early adoption is permitted as early as periods ending after December 31, 2017 with some additional options for early application. The Company does not believe adopting the provisions of ASU No. 2016-01 in the future will have a material impact on the consolidated financial statements. The Company has not yet quantified the impact of the change.

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.

-7-

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

	For the three months ended June 30,				For the six months ended June 30,
	2017		2016		2017		2016
Basic
Net income	$	3,640,000	$	4,239,000	$	6,820,000	$	7,236,000
Average common shares outstanding		22,865,529		22,884,350		22,843,523		22,869,453
Earnings per common share - basic	$	0.16	$	0.19	$	0.30	$	0.32

Diluted
Net income	$	3,640,000	$	4,239,000	$	6,820,000	$	7,236,000
Average common shares outstanding		22,865,529		22,884,350		22,843,523		22,869,453
Equity compensation		141,237		165,368		144,280		160,385
Average common shares outstanding - diluted		23,006,766		23,049,718		22,987,803		23,029,838
Earnings per common share - diluted	$	0.16	$	0.18	$	0.30	$	0.31

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		(156,094	)		5.21
Forfeited		(9,773	)		6.96
Expired		-			-
SOSARs Outstanding, June 30, 2017		395,751		$	6.72
SOSARs Exercisable, June 30, 2017		202,148		$	4.53

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 June 30, 2017 was $9.70. The value of the exercisable SOSARs that are in-the-money as of June 30, 2017 was $1,000,000, and exercise of those SOSARs on that date would have resulted in the issuance of 107,743 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.

-8-

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 June 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 $39,000 as of June 30, 2017.

The total expense for equity based compensation was $162,000 in the second quarter of 2017 and $157,000 in the second quarter of 2016. The total expense for equity based compensation was $293,000 in the first six months of 2017 and $271,000 in the first six months of 2016. The unrecognized compensation expense for all equity based compensation plans is $873,000 as of June 30, 2017. The expense is expected to be recognized over a weighted average period of 1.72 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):

	June 30,		December 31,
	2017		2016
Residential real estate loans	$	213,648	$	216,436
Commercial and Construction real estate loans		286,901		271,623
Agriculture and agricultural real estate loans		22,689		21,518
Commercial and industrial loans		120,050		96,761
Loans to individuals for household, family, and other personal expenditures		39,461		45,999
Total loans, gross	$	682,749	$	652,337
Less: Allowance for loan losses		8,137		8,458
Net Loans	$	674,612	$	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):

	June 30,			December 31,
	2017			2016
Nonaccrual loans	$	4,143		$	4,656
Loans 90 days past due and accruing		3			10
Restructured loans		10,103			14,161
Total nonperforming loans	$	14,249		$	18,827

Other real estate owned		1,502			1,634
Other assets		40			-
Total nonperforming assets	$	15,791		$	20,461

Nonperforming assets to total assets		1.19	%		1.51	%
Allowance for loan losses to nonperforming loans		57.11	%		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 six months ended June 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 June 30, 2017
Beginning Balance	$	200	$	1,579		$	3,438		$	534		$	1,570		$	1,013		$	8,334
Charge-offs		-		-			(384	)		-			-			(12	)		(396	)
Recoveries		-		42			37			13			92			15			199
Provision		120		(125	)		268			(6	)		(264	)		7			-
Ending balance	$	320	$	1,496		$	3,359		$	541		$	1,398		$	1,023		$	8,137

Allowance for loan losses: For the six months ended June 30, 2017
Beginning Balance	$	201	$	1,632		$	3,336		$	525		$	1,599		$	1,165		$	8,458
Charge-offs		-		-			(409	)		-			(50	)		(49	)		(508	)
Recoveries		3		98			74			26			146			40			387
Provision		116		(234	)		358			(10	)		(297	)		(133	)		(200	)
Ending balance	$	320	$	1,496		$	3,359		$	541		$	1,398		$	1,023		$	8,137

Allowance for loan losses as of June 30, 2017
Ending balance individually evaluated for impairment	$	-	$	143		$	44		$	374		$	221		$	181		$	963
Ending balance collectively evaluated for impairment		320		1,353			3,315			167			1,177			842			7,174
Ending balance	$	320	$	1,496		$	3,359		$	541		$	1,398		$	1,023		$	8,137


Loans as of June 30, 2017
Ending balance individually evaluated for impairment	$	1,209	$	286		$	3,025		$	1,689		$	6,101		$	442		$	12,752
Ending balance collectively evaluated for impairment		21,480		119,764			260,365			21,822			207,547			39,019			669,997
Ending balance	$	22,689	$	120,050		$	263,390		$	23,511		$	213,648		$	39,461		$	682,749

-11-

Activity in the allowance for loan losses during the three and six months ended June 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 June 30, 2016
Beginning Balance	$	487		$	1,597		$	5,018		$	475		$	1,920		$	1,040		$	10,537
Charge-offs		(221	)		(12	)		(296	)		-			(65	)		(24	)		(618	)
Recoveries		-			44			46			14			45			35			184
Provision		(66	)		(103	)		(298	)		(29	)		(109	)		405			(200	)
Ending balance	$	200		$	1,526		$	4,470		$	460		$	1,791		$	1,456		$	9,903

Allowance for loan losses: For the six months ended June 30, 2016
Beginning Balance	$	389		$	2,279		$	4,350		$	420		$	2,235		$	1,223		$	10,896
Charge-offs		(221	)		(12	)		(352	)		-			(156	)		(86	)		(827	)
Recoveries		-			77			69			27			103			58			334
Provision		32			(818	)		403			13			(391	)		261			(500	)
Ending balance	$	200		$	1,526		$	4,470		$	460		$	1,791		$	1,456		$	9,903

Allowance for loan losses as of June 30, 2016
Ending balance individually evaluated for impairment	$	1		$	468		$	447		$	262		$	309		$	188		$	1,675
Ending balance collectively evaluated for impairment		199			1,058			4,023			198			1,482			1,268			8,228
Ending balance	$	200		$	1,526		$	4,470		$	460		$	1,791		$	1,456		$	9,903


Loans as of June 30, 2016
Ending balance individually evaluated for impairment	$	1,366		$	823		$	10,805		$	1,779		$	7,212		$	496		$	22,481
Ending balance collectively evaluated for impairment		19,798			85,903			236,551			14,991			208,024			50,532			615,799
Ending balance	$	21,164		$	86,726		$	247,356		$	16,770		$	215,236		$	51,028		$	638,280

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

Credit Quality Indicators as of June 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	$	1	$	1,757	$	188	$	13,663	$	131,120	$	33,011	$	179,740
10		-		5,742		-		-		-		-		5,742
20		424		304		400		-		-		-		1,128
30		600		32,915		7,528		-		826		4,174		46,043
40		15,181		71,915		213,775		4,578		68,307		2,171		375,927
45		1,552		2,564		12,076		3,032		5,497		-		24,721
50		2,072		2,946		21,792		369		2,521		9		29,709
55		1,807		1,406		3,184		1,555		1,189		-		9,141
60		1,052		501		4,126		314		4,188		96		10,277
7		-		-		-		-		-		-		-
80		-		-		321		-		-		-		321
90		-		-		-		-		-		-		-
Total	$	22,689	$	120,050	$	263,390	$	23,511	$	213,648	$	39,461	$	682,749

Performing	$	21,922	$	119,609	$	259,704	$	21,663	$	206,641	$	38,961	$	668,500
Nonperforming		767		441		3,686		1,848		7,007		500		14,249
Total	$	22,689	$	120,050	$	263,390	$	23,511	$	213,648	$	39,461	$	682,749

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

June 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	$	-	$	-	$	113	$	113	$	22,576	$	22,689	$	-
Commercial		204		5		48	$	257		119,793		120,050		3
Commercial Real Estate		681		719		824		2,224		261,166		263,390		-
Construction Real Estate		567		-		159		726		22,785		23,511		-
Residential Real Estate		1,103		117		1,377		2,597		211,051		213,648		-
Consumer and Other		35		88		3		126		39,335		39,461		-
Total	$	2,590	$	929	$	2,524	$	6,043	$	676,706	$	682,749	$	3

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

	June 30, 2017		December 31, 2016
Agriculture and Agricultural Real Estate	$	199	$	113
Commercial		152		169
Commercial Real Estate		1,337		1,625
Construction Real Estate		181		31
Residential Real Estate		2,216		2,623
Consumer and Other		58		95
Total	$	4,143	$	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 June 30, 2017 and June 30, and December 31, 2016 (000s omitted):

June 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 Six Months Ended		Interest Income Recognized in the Six Months Ended

With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	1,209	$	1,404	$	-	$	1,215	$	14	$	1,217	$	28
Commercial		61		61		-		62		1		64		1
Commercial Real Estate		1,270		1,530		-		1,278		-		1,288		19
Construction Real Estate		134		167		-		154		2		156		4
Residential Real Estate		4,336		4,524		-		4,540		47		4,570		107
Consumer and Other		1		1		-		1		-		1		-

With an allowance recorded:
Agriculture and Agricultural Real Estate		-		-		-		-		-		-		-
Commercial		225		225		143		253		2		272		5
Commercial Real Estate		1,755		1,774		44		1,776		18		1,787		37
Construction Real Estate		1,555		1,555		374		1,560		18		1,564		36
Residential Real Estate		1,765		1,828		221		1,802		18		1,809		35
Consumer and Other		441		441		181		445		5		449		10

Total:
Agriculture and Agricultural Real Estate	$	1,209	$	1,404	$	-	$	1,215	$	14	$	1,217	$	28
Commercial		286		286		143		315		3		336		6
Commercial Real Estate		3,025		3,304		44		3,054		18		3,075		56
Construction Real Estate		1,689		1,722		374		1,714		20		1,720		40
Residential Real Estate		6,101		6,352		221		6,342		65		6,379		142
Consumer and Other		442		442		181		446		5		450		10

Total	$	12,752	$	13,510	$	963	$	13,086	$	125	$	13,177	$	282

-16-

	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 June 30, 2016		Interest Income Recognized in the Three Months Ended June 30, 2016		Average Recorded Investment for the Six Months Ended June 30, 2016		Interest Income Recognized in the Six Months Ended June 30, 2016

With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	966	$	1,164	$	-	$	1,026	$	10	$	1,028	$	25
Commercial		88		140		-		146		3		148		5
Commercial Real Estate		4,295		4,502		-		7,217		70		7,255		133
Construction Real Estate		144		177		-		127		2		130		4
Residential Real Estate		4,916		5,157		-		4,292		47		4,335		98
Consumer and Other		11		11		-		34		1		35		1

With an allowance recorded:
Agriculture and Agricultural Real Estate		246		246		5		352		3		417		3
Commercial		267		274		199		726		8		754		17
Commercial Real Estate		2,558		2,610		129		4,140		44		4,272		98
Construction Real Estate		1,573		1,573		388		1,676		19		1,681		38
Residential Real Estate		2,182		2,224		236		3,269		26		3,292		63
Consumer and Other		465		465		184		467		6		471		11

Total:
Agriculture and Agricultural Real Estate	$	1,212	$	1,410	$	5	$	1,378	$	13	$	1,445	$	28
Commercial		355		414		199		872		11		902		22
Commercial Real Estate		6,853		7,112		129		11,357		114		11,527		231
Construction Real Estate		1,717		1,750		388		1,803		21		1,811		42
Residential Real Estate		7,098		7,381		236		7,561		73		7,627		161
Consumer and Other		476		476		184		501		7		506		12

Total	$	17,711	$	18,543	$	1,141	$	23,472	$	239	$	23,818	$	496

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”).

-17-

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

	Three months ended						Six months ended
	June 30, 2017						June 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		280		279		3		353		332
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		-		-		-		3		212		180
Consumer and Other		-		-		-		1		1		-
Total		1	$	280	$	279		9	$	595	$	541

	Three months ended						Six months ended
	June 30, 2016						June 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	$	362		1	$	362	$	362
Commercial		-		-		-		-		-		-
Commercial Real Estate		-		-		-		-		-		-
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		6		251		250		7		451		447
Consumer and Other		1		57		57		1		57		57
Total		8	$	670	$	669		9	$	870	$	866

The Bank considers TDRs that become past due under the modified terms as defaulted. There were no loans that became TDRs during the six month periods ended June 30, 2017 and June 30, 2016 that subsequently defaulted during the six month periods ended June 30, 2017 and June 30, 2016, respectively.

The Company has allocated $963,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at June 30, 2017. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of June 30, 2017 and June 30, 2016.

6. INVESTMENT SECURITIES

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

	Held to Maturity
	June 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political
Subdivisions	$	38,117	$	1,044	$	(150	)	$	39,011
Corporate Debt Securities		500		1		-			501
	$	38,617	$	1,045	$	(150	)	$	39,512

-18-

	Available for Sale
	June 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	236,531	$	716	$	(3,859	)	$	233,388
Mortgage Backed Securities issued by U.S. Government Agencies		156,783		48		(1,773	)		155,058
Obligations of States and Political Subdivisions		28,153		96		(168	)		28,081
Corporate Debt Securities		20,608		382		(14	)		20,976
Equity Securities		2,044		65		-			2,109
	$	444,119	$	1,307	$	(5,814	)	$	439,612

	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

-19-

The amortized cost and estimated market values of securities by contractual maturity as of June 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	$	9,134	$	9,171	$	3,586	$	3,588
After 1 year through five years		20,838		21,250		125,298		125,044
After 5 years through 10 years		7,466		7,923		146,841		144,290
After 10 years		1,179		1,168		9,567		9,523
Total		38,617		39,512		285,292		282,445
Mortgage Backed Securities		-		-		156,783		155,058
Securities with no stated maturity		-		-		2,044		2,109
Total	$	38,617	$	39,512	$	444,119	$	439,612

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 June 30, 2017 and December 31, 2016.

June 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	$	167,460	$	3,859	$	-	$	-	$	167,460	$	3,859
Mortgage Backed Securities issued by U.S. Government Agencies		102,272		1,354		29,259		419		131,531		1,773
Obligations of States and Political Subdivisions		25,954		313		1,184		5		27,138		318
Corporate Debt Securities		2,022		14		-		-		2,022		14
	$	297,708	$	5,540	$	30,443	$	424	$	328,151	$	5,964

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

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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 June 30, 2017. As of June 30, 2017 and December 31, 2016, there were 163 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.

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

									Total
	Carrying								Estimated
June 30, 2017	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	40,607	$	40,607	$	-	$	-	$	40,607
Time Deposits in Other Banks		17,696		-		16,906		750		17,656
Securities - Held to Maturity
Obligations of States and Political Subdivisions		38,117		-		2,747		36,264		39,011
Corporate Debt Securities		500		-		501		-		501

Securities - Available for Sale
Obligations of U.S. Government Agencies		233,388		-		233,388		-		233,388
MBS issued by U.S. Government Agencies		155,058		-		155,058		-		155,058
Obligations of States and Political Subdivisions		28,081		-		28,081		-		28,081
Corporate Debt Securities		20,976		-		20,976		-		20,976
Equity Securities		2,109		2,109		-		-		2,109

Federal Home Loan Bank Stock		4,148		-		4,148		-		4,148
Loans Held for Sale		899		-		-		919		919
Loans, net		674,612		-		-		666,394		666,394
Accrued Interest Receivable		3,923		-		-		3,923		3,923

Financial Liabilities:
Noninterest Bearing Deposits		290,595		290,595		-		-		290,595
Interest Bearing Deposits		886,474		-		887,768		-		887,768
Accrued Interest Payable		52		-		-		52		52

									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

-22-

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 June 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.

-23-

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)
June 30, 2017
Impaired loans	$	-	$	-	$	11,789
Other Real Estate Owned	$	-	$	-	$	1,502

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
	June 30,		December 31,
	2017		2016
Commitments to extend credit:
Unused portion of commercial lines of credit	$	74,609	$	75,454
Unused portion of credit card lines of credit		5,486		4,983
Unused portion of home equity lines of credit		28,134		25,057
Standby letters of credit and financial guarantees written		1,281		1,582

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.

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

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

Introduction

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

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

Executive Overview

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

The net profit of $6,820,000 for the first six months of 2017 was a decrease of $416,000 or 5.7% compared to the first six months of 2016. The decrease was the result of an increase of $300,000 in the provision for loan losses and a decrease of $1,995,000 in gains on securities transactions. The effect of these items was mitigated by an increase of $925,000 in net interest income and a decrease of $285,000 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 six months ended June 30, 2017 would have been $6,638,000, an increase of $1,099,000, or 19.8% compared to the six months ended June 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 $4.5 million, or 26.9% during the first two quarters of 2017, and decreased $14.0 million or 53.6% compared to a year ago. Net charge offs were $121,000, or 0.04% of loans, annualized, in the first two quarters of 2017, compared to $493,000, or 0.16% in the first two quarters of 2016. Due to improving loan quality metrics and net recoveries, another reduction in our Allowance for Loan and Lease Losses (ALLL) was appropriate, and we recorded a $200,000 credit to the provision expense in the first two quarters of 2017. This reflected an increase of $300,000 when compared to the negative provision of $500,000 recorded in the first two quarters of 2016. The ALLL as a percent of loans decreased from 1.30% at the end of 2016 to 1.19%. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $1.0 million of specific allocations on $12.8 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.

-25-

Net Interest Income increased $925,000, or 5.0% compared to the first two quarters of 2016, even though the period was one day shorter and average earning assets decreased $0.5 million, as the net interest margin increased from 3.09% to 3.26%. 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 two quarters decreased $1,479,000, mainly due to large securities gains from callable bonds that were owned at discounts being redeemed at par in the first two quarters of 2016. Non-interest expenses decreased $285,000, as salaries, benefits, EFT and ATM expenses, Other Real Estate expenses, FDIC deposit insurance assessments, and other insurance expenses decreased. These decreases were partially offset by increases in occupancy expense, equipment expense, and marketing expense.

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.

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 5.4% during the quarter, from $16.7 million to $15.8 million, and total classified assets decreased 21.4% from $15.4 million to $12.1 million. Loan delinquencies increased slightly from $5,719,000 30 days or more past due as of December 31, 2016 to $6,043,000 as of June 30, 2017 and the delinquency percentage increased from 0.86% to 0.88% of the total loans. Over the last twelve months, NPAs decreased $10.3 million, or 39.5%, with nonperforming loans decreasing 41.6% from $24.3 million to $14.2 million, and Other Real Estate Owned (“OREO”) decreasing 16.7% from $1.8 million to $1.5 million. Total classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, decreased $14.0 million, or 53.6%. The amount required in the Allowance for Loan and Lease Losses (“ALLL”) decreased $1.8 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 1.19% of loans, down from 1.55% at June 30, 2016. The ALLL is 57.11% of nonperforming loans (“NPLs”), compared to 44.92% at year end and 40.81% at June 30, 2016. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

-26-

Since December 31, 2016, total loans held for investment increased $30.4 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 second half of 2017.

Since December 31, 2016, deposits decreased $22.6 million, other liabilities decreased $1.4 million, and capital decreased $6.9 million, and as a result our total assets decreased $30.9 million, or 2.3%. Deposits decreased during the second quarter of 2017 due to seasonal fluctuations. The Company expects a small amount of deposit funding growth in the third quarter of 2017, as 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 June 30, 2017, deposits consisted of $142.1 million in certificates of deposit and IRAs with an average cost of 0.63%, $229.1 million in savings deposits with an average cost of 0.02%, $238.9 million in Money Market Deposit Accounts with an average cost of 0.15%, $276.3 million in interest bearing demand deposits with an average cost of 0.17%, and $290.6 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 $6.9 million since December 31, 2016, mainly because dividends paid exceeded earnings by $11.5 million. This reduction was mitigated by an increase of $3.8 million in the Accumulated Other Comprehensive Income, which increased 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 10.12% at June 30, 2017.

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

Net Interest Income - A comparison of the income statements for the three months ended June 30, 2017 and 2016 shows an increase of $620,000, or 6.7%, in Net Interest Income. Interest income on loans increased $530,000 or 7.4% as the average loans outstanding increased $47.4 million while the average yield on loans decreased from 4.62% to 4.60%. 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 $91,000 even though the investment portfolio yield increased from 1.82% to 1.92% because the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $50.6 million. 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 $52,000 or 10.7% even though the average deposits increased $9.6 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 $129,000 as the final remaining long term borrowed funds were repaid in the second quarter of 2016.

-27-

Provision for Loan Losses - The Provision for Loan Losses increased $200,000 compared to the second quarter of 2016 as a $200,000 credit to provision expense was recorded in the second quarter of 2016, while no provision expense was recorded in the second quarter of 2017. We charged off $396,000 of principal while recovering $199,000 of previously charged off loans in the second quarter of 2017, for a net charge off total of $197,000, or 0.12% 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 $8,334,000 at March 31, 2017 to $8,137,000 as of June 30, 2017. This allowed us to use $197,000 of the ALLL to cover the net charge offs without recording a provision expense. The allowance includes $1.0 million 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 $1,185,000, or 21.3% compared to the second quarter of 2016. Gains on securities transactions decreased $1,685,000 due to large gains in the second quarter of 2016 that were the result of bonds owned at discounts being called at par. Fees for Wealth Management services are billed in arrears, and we previously recorded the income when it was collected. In order to properly reflect the receivable for earned but unbilled fees on our balance sheet, we accrued a receivable of $389,000 in June for the June fees that were billed and collected in July. Excluding this receivable adjustment, Wealth Management income increased $53,000, or 4.8%. Origination fees on mortgage loans sold decreased $21,000 or 15.4% due to a decrease in mortgage loans sold. Income from Bank Owned life Insurance (BOLI) increased $50,000 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 increased $136,000, or 1.5% compared to the second quarter of 2016. Salaries and Employee Benefits decreased $126,000, or 2.3%. 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 accrual for the incentive compensation plan. Occupancy expense increased $49,000, or 7.7% as maintenance and repairs increased. Equipment expense increased $65,000, or 9.0% due to higher maintenance expense. Professional fees expense increased $64,000 due to increases in legal, accounting, and consulting fees. FDIC insurance assessments decreased $84,000 due to reductions in the FDIC assessment rate. Other insurance decreased $89,000, primarily due to a reclassification of life insurance expense for directors from salaries and employee benefits in the second quarter of 2016. The increase of $207,000 in Other expense occurred because the second quarter of 2016 expense included the reversal of $185,000 of over accrued interest on the settlement of an IRS audit, which is now closed.

As a result of the above activity, the Profit Before Income Taxes in the second quarter of 2017 was $5,226,000, a decrease of $901,000 compared to the pre-tax profit of $6,127,000 in the second quarter of 2016. The Company recorded a federal income tax expense of $1,586,000 in the second quarter of 2017, reflecting an effective tax rate of 30.3%, compared to the tax expense of $1,888,000 in the second quarter of 2016, which reflected an effective rate of 30.8%. The Net profit for the second quarter of 2017 was $3,640,000, a decrease of 14.1% compared to the net profit of $4,239,000 in the second quarter of 2016.

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

Net Interest Income - A comparison of the income statements for the six months ended June 30, 2017 and 2016 shows an increase of $925,000, or 5.0%, in Net Interest Income. Interest income on loans increased $859,000 or 6.0% as the average loans outstanding increased $42.0 million and the average yield on loans decreased from 4.59% to 4.57%. 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 $352,000 even though the yield increased from 1.89% to 1.91% because the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $42.5 million. 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 $113,000 or 11.3% even though the average deposits increased $19.8 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 the second quarter of 2016.

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Provision for Loan Losses - The Provision for Loan Losses increased $300,000 compared to the first two quarters of 2016 as a $200,000 credit to provision expense was recorded in the first six months of 2017, compared to a $500,000 credit to provision expense recorded in the first six months of 2016. We charged off $508,000 of principal while recovering $387,000 of previously charged off loans in the first two quarters of 2017, for a net charge off total of $121,000, or 0.04% of loans, annualized. This is an improvement compared to the net charge offs of $493,000, or 0.16% of loans, annualized, in the first two 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 $1,479,000, or 15.3% compared to the first two quarters of 2016. Gains on securities transactions decreased $1,995,000 due to large gains in the first two quarters of 2016 that were the result of bonds owned at substantial discounts being redeemed early at par. Wealth Management fees increased $473,000 primarily due to the establishment of a receivable for earned but uncollected fees in 2017. Origination fees on mortgage loans sold decreased $92,000 or 34.6% due to lower sales activity.

Other Expenses – Total non-interest expenses decreased $285,000, or 1.6% compared to the first two quarters of 2016. Salaries and Employee Benefits decreased $310,000, or 2.8%. Salaries decreased due to a decrease in the number of full time equivalent employees, 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 $96,000, or 7.2% as maintenance and repairs increased. FDIC insurance assessments decreased $146,000 due to reductions in the FDIC assessment rate. Other insurance decreased $89,000, primarily due to a reclassification adjustment to the life insurance expense for directors in the second quarter of 2016. Other expense increased $113,000, partly due to the reversal of $185,000 of over accrued interest on the settlement of our IRS audit in 2016.

As a result of the above activity, the Profit Before Income Taxes in the first two quarters of 2017 was $9,779,000, a decrease of $569,000 compared to the pre-tax profit of $10,348,000 in the first two quarters of 2016. The Company recorded a federal income tax expense of $2,959,000 in the first two quarters of 2017, reflecting an effective tax rate of 30.3%, compared to the tax expense of $3,112,000 in the first two quarters of 2016, which reflected an effective rate of 30.1%. The Net profit for the first two quarters of 2017 was $6,820,000, a decrease of 5.7% compared to the net profit of $7,236,000 in the first two quarters of 2016.

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Cash Flows

Cash flows provided by operating activities increased $625,000 compared to the first six months of 2016 even though net income was $416,000 lower because the net income included more non-cash or non-operating items in 2017. The cash flow from investing activities decreased $22.7 million from $44.0 million provided in the first half of 2016 to $21.2 million provided in the first half 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 first quarter of 2017 to fund the increase in loans. The amount of cash used for financing activities was $9.7 million higher in the first six months of 2017 than it was in the first six months of 2016 because the amount of cash used to fund deposit withdrawals increased $20.7 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 $5.5 million higher as the per share dividend was increased from $0.56 in the first six months of 2016 to $0.80 in the first six months of 2017. In the first two quarters of 2017, the cash used for financing activities exceeded the cash provided by operating and investing activities, and the amount of cash and cash equivalents decreased by $12.2 million during the period. In the first two quarters of 2016, the cash provided by operations and investing activities exceeded the cash used for financing activities, resulting in an increase of $19.6 million in cash and cash equivalents during the six months. We expect cash flows from redemptions of callable investment securities to remain low through the remainder 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 June 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.

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

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Total stockholders’ equity of the Company was $134.2 million at June 30, 2017 and $141.1 million at December 31, 2016. Retained earnings decreased $10.6 million as the year to date profit was exceeded by the payment of cash dividends on the common stock, and the Accumulated Other Comprehensive Income (AOCI) increased due to an increase in the value of our securities that are classified as Available For Sale. Total equity decreased $6.9 million while total assets decreased $30.9 million, so the ratio of equity to assets decreased from 10.4% at December 31, 2016 to 10.12% at June 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 June 30, 2017:
Total Capital to Risk-Weighted Assets
Consolidated	$	142,950		16.85	%	$	84,835		10.0	%
Monroe Bank & Trust		141,066		16.63	%		84,835		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		134,449		15.85	%		67,868		8.0	%
Monroe Bank & Trust		132,565		15.63	%		67,868		8.0	%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		134,449		15.85	%		55,142		6.5	%
Monroe Bank & Trust		132,565		15.63	%		55,142		6.5	%
Tier 1 Capital to Average Assets
Consolidated		134,449		10.09	%		66,626		5.0	%
Monroe Bank & Trust		132,565		9.95	%		66,614		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.

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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.

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, and 400 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, and 400 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 June 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 June 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 June 30, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-34-

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 June 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
April 1, 2017 - April 30, 2017		-	$	-		-		1,807,920
May 1, 2017 - May 31, 2017		-	$	-		-		1,807,920
June 1, 2017 - June 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

-36-

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)


August 9, 2017		By /s/ H. Douglas Chaffin
Date		H. Douglas Chaffin
		President &
		Chief Executive Officer

August 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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