UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

Commission File Number: 000-30973

MBT FINANCIAL CORP.

(Exact Name of Registrant as Specified in its Charter)

MICHIGAN		38-3516922
(State of Incorporation)		(I.R.S. Employer Identification No.)

102 E. Front St.
Monroe, Michigan		48161
(Address of Principal Executive Offices)		(Zip Code)

(734) 241-3431

(Registrant’s Telephone Number, Including Area Code)

None

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

Securities registered pursuant to section 12(b) of the Act: Common Stock, No Par Value, Registered on NASDAQ Global Select Market

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ☐ NO ☑

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 every Interactive Data File required to be submitted 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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any of the amendments of this Form 10-K. ☐

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 of revised financial accounting standards provided pursuant to Section 13(a) 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 June 30, 2018, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $188.6 million based on the closing sale price as reported on the NASDAQ Global Select system.

As of March 18, 2019, there were 23,036,758 shares of the registrant’s common stock, no par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders of MBT Financial Corp. are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14.

Special Note regarding Forward Looking Information

This document, including the documents that are incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act (the “Exchange Act”). You can identify forward-looking statements by words or phrases such as “will likely result,” “may,” “are expected to,” “predict,” “is anticipated,” “estimate,” “forecast,” “projected,” “future,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “may,” “hope,” “can,” “predict,” “potential,” “continue,” or similar verbs, or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. We believe that it is important to communicate our future expectations to our investors. Such forward-looking statements may relate to our financial condition, results of operations, plans, objectives, future performance, or business and are based upon the beliefs and assumptions of our management and the information available to our management at the time these disclosures are prepared. These forward-looking statements involve risks and uncertainties that we may not be able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Shareholders should be aware that the occurrence of certain events could have an adverse effect on our business, results of operations, and financial condition. These events, many of which are beyond our control, include the following:

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general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in Michigan;

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potential limitations on our ability to access and rely on wholesale funding sources;

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changes in accounting principles, policies, and guidelines applicable to bank holding companies and the financial services industry;

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fluctuation of our stock price;

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ability to attract and retain key personnel;

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ability to receive dividends from our subsidiaries;

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operating, legal, and regulatory risks, including risks relating to further deteriorations in credit quality, our allowance for loan losses, and potential losses on dispositions of non-performing assets;

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the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

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legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules;

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the results of examinations of us by the Federal Reserve and our bank subsidiary by the Federal Deposit Insurance Corporation, or other regulatory authorities, who could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

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compliance with regulatory enforcement actions, including legislative or regulatory changes that adversely affect our business, including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

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the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets;

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economic, political, and competitive forces affecting our banking, securities, asset management, insurance, and credit services businesses;

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the impact on net interest income from changes in monetary policy and general economic conditions; and

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the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows, financial position, and prospects. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report and the information incorporated herein by reference are reasonable, you should not place undue reliance on any forward-looking statement. The forward-looking statements contained or incorporated by reference in this document relate only to circumstances as of the date on which the statements are made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Part I

Item 1. Business

General

MBT Financial Corp. (the “Corporation” or the “Company”) is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “BHCA”) headquartered in Monroe, Michigan. It was incorporated under the laws of the State of Michigan in January 2000, at the direction of the management of Monroe Bank & Trust (the “Bank”), for the purpose of becoming a bank holding company by acquiring all the outstanding shares of Monroe Bank & Trust.

Monroe Bank & Trust was incorporated and chartered as Monroe State Savings Bank under the laws of the State of Michigan in 1905. In 1940, Monroe Bank & Trust consolidated with Dansard Bank and moved to the present address of its main office. Monroe Bank & Trust operated as a unit bank until 1950 when it opened its first branch office in Ida, Michigan. It then continued its expansion to its present total of 20 branch offices, including its main office. Monroe Bank & Trust changed its name from "Monroe State Savings Bank" to "Monroe Bank & Trust" in 1968.

Monroe Bank & Trust provides customary retail and commercial banking and trust services to its customers, including checking and savings accounts, time deposits, safe deposit facilities, commercial loans, personal loans, real estate mortgage loans, installment loans, IRAs, ATM and night depository facilities, treasury management services, telephone and internet banking, personal trust, employee benefit and investment management services. Monroe Bank & Trust’s service areas are comprised of Monroe, Wayne, and Lenawee counties in Southern Michigan.

Monroe Bank & Trust's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to applicable legal limits and Monroe Bank & Trust is supervised and regulated by the FDIC and Michigan Office of Financial and Insurance Regulation.

Competition

MBT Financial Corp., through its subsidiary, Monroe Bank & Trust, operates in a highly competitive industry. Monroe Bank & Trust's main competition comes from other commercial banks, national or state savings and loan institutions, credit unions, securities brokers, mortgage bankers, finance companies and insurance companies. Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and personal manner in which these services are offered. Monroe Bank & Trust encounters strong competition from most of the financial institutions in Monroe Bank & Trust's extended market area.

The Bank’s primary market area is Monroe County, Michigan. According to the most recent market data, there are eight deposit taking/lending institutions competing in the Bank’s market. According to the most recent FDIC Deposit Market Share Report, the Bank ranks first in deposit market share out of eight institutions operating in Monroe County with 50.12% of the market. Huntington National Bank is second in the market with a deposit market share of approximately 17.04%, and Fifth Third Bank is third in the market with a deposit market share of approximately 11.86%. No other institution operating in the Monroe County market has a deposit market share in excess of 10%. JP Morgan Chase Bank, NA and Comerica Bank are first and second in the Wayne County market, respectively, with a combined market share of approximately 76.37%. In 2001, the Bank began expanding into Wayne County, Michigan, and currently ranks fourteenth out of twenty- institutions operating in Wayne County with a market share of 0.28%. For the combined Monroe and Wayne County market, the Bank ranks eighth of twenty-three institutions with a market share of 2.02%.

Supervision and Regulation

General

As a bank holding company, we are required by federal law to file reports with, and otherwise comply with, the rules and regulations of the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Federal Reserve Board.”) The Bank is a Michigan state chartered commercial bank and is not a member of the Federal Reserve, and therefore, is regulated and supervised by the Commissioner of the Michigan Department of Insurance and Financial Services (“Michigan DIFS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Michigan DIFS and the FDIC conduct periodic examinations of the Bank. The Bank is also a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and subject to its regulations. The deposits of the Bank are insured under the provisions of the Federal Deposit Insurance Act by the FDIC to the fullest extent provided by law. The Corporation is also subject to regulation by the Securities and Exchange Commission (the “SEC”) by virtue of its status as a public company.

The system of supervision and regulation applicable to the Corporation establishes a comprehensive framework for its operations and is intended primarily for the protection of the FDIC's Deposit Insurance Fund (“DIF”), the Bank's depositors and the public, rather than the Corporation’s shareholders and creditors. Changes in the regulatory framework, including changes in statutes, regulations and the agencies that administer those laws, could have a material adverse impact on the Corporation and its operations.

The federal and state laws and regulations that are applicable to banks and to some extent bank holding companies regulate, among other matters, the scope of their business, their activities, their investments, their reserves against deposits, the timing of the availability of deposited funds, the amount of loans to individual and related borrowers and the nature, amount of and collateral for certain loans, and the amount of interest that may be charged on loans. Various federal and state consumer laws and regulations also affect the services provided to consumers.

The Corporation and/or its subsidiary are required to file various reports with, and is subject to examination by regulators, including the Federal Reserve, the FDIC and Michigan DIFS. The Federal Reserve, FDIC and Michigan DIFS have the authority to issue orders to bank holding companies and/or banks to cease and desist from certain banking practices and violations of conditions imposed by, or violations of agreements with, the FRB, FDIC and Michigan DIFS. Certain of the Corporation's and/or its banking subsidiary regulators are also empowered to assess civil money penalties against companies or individuals in certain situations, such as when there is a violation of a law or regulation. Applicable state and federal law also grant certain regulators the authority to impose additional requirements and restrictions on the activities of the Corporation and or its banking subsidiary and, in some situations, the imposition of such additional requirements and restrictions will not be publicly available information.

Regulatory Reform

Congress, U.S. Department of the Treasury (“Treasury”), and the federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the U.S. banking system and financial markets. Beginning in late 2008, the U.S. and global financial markets experienced deterioration of the worldwide credit markets, which created significant challenges for financial institutions both in the United States and around the world. Dramatic declines in the housing market in 2009 and 2010, marked by falling home prices and increasing levels of mortgage foreclosures, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.

In response to the financial market crisis and continuing economic uncertainty, the United States government, specifically the Treasury, the Federal Reserve Board and the FDIC working in cooperation with foreign governments and other central banks, took a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including measures available under the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”), which included the Troubled Asset Relief Program (“TARP”).The stated purpose of TARP was to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.

EESA also temporarily increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This increase became permanent at the end of 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and deposit insurance is now limited to $250,000 on all deposit accounts.

The Dodd-Frank Act is aimed, in part, at accountability and transparency in the financial system and includes numerous provisions that apply to and/or could impact the Corporation and its banking subsidiary. The Dodd-Frank Act implements changes that, among other things, affect the oversight and supervision of financial institutions, provide for a new resolution procedure for large financial companies, create a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduce more stringent regulatory capital requirements, effect significant changes in the regulation of over the counter derivatives, reform the regulation of credit rating agencies, implement changes to corporate governance and executive compensation practices, incorporate requirements on proprietary trading and investing in certain funds by financial institutions (known as the "Volcker Rule"), require registration of advisers to certain private funds, and effect significant changes in the securitization market. In order to fully implement many provisions of the Dodd-Frank Act, various government agencies, in particular banking and other financial services agencies are required to promulgate regulations. Set forth below is a discussion of some of the major sections the Dodd-Frank Act and implementing regulations that have or could have a substantial impact on the Corporation and its banking subsidiary. Due to the volume of regulations required by the Dodd-Frank Act, not all proposed or final regulations that may have an impact on the Corporation or its banking subsidiary are necessarily discussed.

Debit Card Interchange Fees

The Dodd-Frank Act provides for a set of new rules requiring that interchange transaction fees for electronic debit transactions be "reasonable" and proportional to certain costs associated with processing the transactions. The Federal Reserve was given authority to, among other things, establish standards for assessing whether interchange fees are reasonable and proportional. In June 2011, the Federal Reserve issued a final rule establishing certain standards and prohibitions pursuant to the Dodd-Frank Act, including establishing standards for debit card interchange fees and allowing for an upward adjustment if the issuer develops and implements policies and procedures reasonably designed to prevent fraud. The provisions regarding debit card interchange fees and the fraud adjustment became effective October 1, 2011. The rules impose requirements on the Corporation and its banking subsidiary and may negatively impact our revenues and results of operations.

Consumer Issues

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), which has the authority to implement regulations pursuant to numerous consumer protection laws and has supervisory authority, including the power to conduct examinations and take enforcement actions, with respect to depository institutions with more than $10 billion in consolidated assets. The CFPB also has authority, with respect to consumer financial services to, among other things, restrict unfair, deceptive or abusive acts or practices, enforce laws that prohibit discrimination and unfair treatment and to require certain consumer disclosures.

Corporate Governance

The Dodd-Frank Act clarifies that the SEC may, but is not required to promulgate rules that would require that a company's proxy materials include a nominee for the board of directors submitted by a shareholder. Although the SEC promulgated rules to accomplish this, these rules were invalidated by a federal appeals court decision. The SEC has said that it will not challenge the ruling, but has not ruled out the possibility that new rules could be proposed. The Dodd-Frank Act requires stock exchanges to have rules prohibiting their members from voting securities that they do not beneficially own (unless they have received voting instructions from the beneficial owner) with respect to the election of a member of the board of directors (other than an uncontested election of directors of an investment company registered under the Investment Company Act of 1940), executive compensation or any other significant matter, as determined by the SEC by rule.

Executive Compensation

The Dodd-Frank Act provides for a say on pay for shareholders of all public companies. Under the Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives at least once every three years. The Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions.

The Dodd-Frank Act requires the SEC to issue rules directing the stock exchanges to prohibit listing classes of equity securities if a company's compensation committee members are not independent. The Dodd-Frank Act also provides that a company's compensation committee may only select a compensation consultant, legal counsel or other advisor after taking into consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual meetings of shareholders information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a company's stock and dividends or distributions.

The Dodd-Frank Act provides that the SEC must issue rules directing the stock exchanges to prohibit listing any security of a company unless the company develops and implements a policy providing for disclosure of the policy of the company on incentive-based compensation that is based on financial information required to be reported under the securities laws and that, in the event the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, the company will recover from any current or former executive officer of the company who received incentive-based compensation during the three-year period preceding the date on which the company is required to prepare the restatement based on the erroneous data, any exceptional compensation above what would have been paid under the restatement.

The Dodd-Frank Act requires the SEC, by rule, to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member.

Basel III

Internationally, both the Basel Committee on Banking Supervision and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, which was fully implemented January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with full implementation by January 2019. In July 2013, the Federal Reserve Board released final rules regarding implementation of the Basel III regulatory capital rules for U.S. banking organizations. The final rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the rules include the total phase-out from Tier 1 capital of trust preferred securities with grandfathering for bank holding companies with less than $15 billion in assets, a capital conservation buffer of 2.5% above minimum capital ratios, inclusion of accumulated other comprehensive income in Tier 1 common equity, inclusion in Tier 1 capital of perpetual preferred stock, and an effective minimum Tier 1 common equity ratio of 7.0%.

Bank Regulation

As a Michigan chartered commercial bank that has not elected membership in the Federal Reserve System, the Bank is regulated and supervised by both the Commissioner of the Michigan DIFS and the FDIC. Summarized below are some of the more important regulatory and supervisory laws and regulations applicable to the Bank.

Business Activities. The activities of state banks are governed by state as well as federal law and regulations. These laws and regulations delineate the nature and extent of the investments and activities in which state institutions may engage.

Loans to One Borrower. Michigan law provides that a Michigan commercial bank may not provide loans or extensions of credit to a person in excess of 15% of the capital and surplus of the bank. The limit, however, may be increased to 25% of capital and surplus if approval of two-thirds of the Bank’s board of directors is granted. At December 31, 2018, the Bank’s regulatory limit on loans to one borrower was $15.089 million or $25.149 million for loans approved by two-thirds of the Board of Directors. If the Michigan DIFS determines that the interests of a group of more than one person, co-partnership, association or corporation are so interrelated that they should be considered as a unit for the purpose of extending credit, the total loans and extensions of credit to that group are combined. At December 31, 2018, the Bank did not have any loans with one borrower that exceeded its regulatory limits.

At December 31, 2018, loans that had high loan to value ratios at origination were quantified by management and represented less than 10% of total outstanding loans as of the balance sheet date. Additionally, management quantified all loans (mortgage, consumer and commercial) that required interest only payments as of the balance sheet date and determined that these types of loans were less than 10% of total loans outstanding at December 31, 2018. Based on these facts, management concluded no concentrations of credit risk existed at December 31, 2018.

Dividends. The Corporation’s ability to pay dividends on its common stock depends on its receipt of dividends from the Bank. The Bank is subject to restrictions and limitations in the amount and timing of the dividends it may pay to the Corporation. Dividends may be paid out of a Michigan commercial bank’s net income after deducting all bad debts. A Michigan commercial bank may only pay dividends on its common stock if the bank has a surplus amounting to not less than 20% of its capital after the payment of the dividend. If a bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net income for the preceding one-half year (in the case of quarterly or semi-annual dividends) or at least 10% of net income of the preceding two consecutive half-year periods (in the case of annual dividends) has been transferred to surplus.

Federal law also affects the ability of a Michigan commercial bank to pay dividends. The FDIC’s prompt corrective action regulations prohibit an insured depository institution from making capital distributions, including dividends, if the institution has a regulatory capital classification of “undercapitalized,” or if it would be undercapitalized after making the distribution. The FDIC may also prohibit the payment of dividends if it deems any such payment to constitute an unsafe and unsound banking practice. In addition, the Basel III capital rules include a capital conservation buffer that prohibits or limits the dividends a bank can pay if its risk-based capital ratios fall below certain thresholds.

Michigan DIFS Assessments. Michigan commercial banks are required to pay supervisory fees to the Michigan DIFS to fund the operations of the Michigan DIFS. The amount of supervisory fees paid by a bank is based upon a formula involving the bank’s total assets, as reported to the Michigan DIFS.

State Enforcement. Under Michigan law, the Michigan DIFS has broad enforcement authority over state chartered banks and, under certain circumstances, affiliated parties, insiders, and agents. If a Michigan commercial bank does not operate in accordance with the regulations, policies and directives of the Michigan DIFS or is engaging, has engaged or is about to engage in an unsafe or unsound practice in conducting the business of the bank, the Michigan DIFS may issue and serve upon the bank a notice of charges with respect to the practice or violation. The Michigan DIFS enforcement authority includes: cease and desist orders, receivership, conservatorship, removal and suspension of officers and directors, assessment of monetary penalties, emergency closures, liquidation and the power to issue orders and declaratory rulings.

Federal Enforcement. The FDIC has primary federal enforcement responsibility over state non-member banks and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive, cease and desist, consent order to removal of officers and/or directors of the institution as well as receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.

Capital Requirements. Under FDIC regulations, federally-insured state-chartered banks that are not members of the Federal Reserve (“state non-member banks”), such as the Bank, are required to comply with minimum leverage capital requirements. The minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 4%.Tier 1 capital is principally composed of the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships). As of December 31, 2018, the Tier 1 capital to average total assets ratio for the Bank was 10.15%.

The Bank must also comply with the FDIC risk-based capital guidelines. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to risk-weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans fully secured by one-to-four family residential properties generally have a 50% risk weight and commercial loans have a risk weight of 100%.

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, the principal elements of which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net unrealized gain on equity securities and other capital instruments such as subordinated debt.

The FDIC has adopted a regulation providing that it will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. For more information about interest rate risk, see “Management’s Discussion and Analysis - Quantitative and Qualitative Disclosures about Market Risk.”

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized"), and all institutions are assigned one such category. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. At December 31, 2018, the Bank’s regulatory capital classification was “well capitalized.”

For further discussion regarding the Corporation’s regulatory capital requirements, see Note 13 to the 2017 Consolidated Financial Statements. In addition, for a discussion of changes in the regulatory capital requirements which went into effect on January 1, 2015, see the section of this item captioned “Supervision and Regulation – Regulatory Reform – Basel III,” above.

Deposit Insurance Assessments. All of the Bank’s deposits are insured under the Federal Deposit Insurance Act by the FDIC to the fullest extent permitted by law. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.

The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act changes the deposit insurance assessment framework, primarily by basing assessments on an institution’s average total consolidated assets less average tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than domestic deposits, which is expected to shift a greater portion of the aggregate assessments to large banks, as described in detail below. The Dodd-Frank Act also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. On December 20, 2010, the FDIC raised the minimum designated reserve ratio of DIF to 2%. The ratio is higher than the minimum reserve ratio of 1.35% as set by the Dodd-Frank Act. Under the Dodd-Frank Act, the FDIC is required to offset the effect of the higher reserve ratio on small insured depository institutions, defined as those with consolidated assets of less than $10 billion.

On February 7, 2011, the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The final rule, mandated by the Dodd-Frank Act, changed the deposit insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity. Because the assessment base under the Dodd-Frank Act is larger than the previous assessment base, the final rule’s assessment rates are lower than the previous rates, which achieved the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. In addition, the final rule adopted a “scorecard” assessment scheme for larger banks and suspends dividend payments if the DIF reserve ratio exceeds 1.5% but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. The final rule also determines how the effect of the higher reserve ratio will be offset for institutions with less than $10 billion of consolidated assets.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency.

Transactions with Related Parties. The Bank’s authority to engage in transactions with an “affiliate” (generally, any company that controls or is under common control with a depository institution) is limited by federal law. Federal law places quantitative and qualitative restrictions on these transactions and imposes specified collateral requirements for certain transactions. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.

The Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is also governed by federal law. Among other restrictions, these loans are generally required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of failure to make required repayment. The Sarbanes-Oxley Act of 2002 generally prohibits the Corporation from extending or maintaining credit, arranging for the extension of credit, or renewing an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof), except for extensions of credit made, maintained, arranged or renewed by the Corporation that are subject to the federal law restrictions discussed above.

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions. The guidelines address internal controls and information systems, the internal audit system, credit underwriting, loan documentation, interest rate risk exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit an acceptable plan to achieve compliance with the standard.

Investments and Activities. Since the enactment of the FDIC Improvement Act, all state-chartered FDIC insured banks have generally been limited to activities of the type and in the amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the FDIC permit exceptions to these limitations. For example, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than direct equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the DIF.

Mergers and Acquisitions. The Bank may engage in mergers or consolidations with other depository institutions or their holding companies, subject to review and approval by applicable state and federal banking agencies. When reviewing a proposed merger, the federal banking regulators consider numerous factors, including the effect on competition, the financial and managerial resources and future prospects of existing and proposed institutions, the effectiveness of FDIC-insured institutions involved in the merger in addressing money laundering activities and the convenience and needs of the community to be served, including performance under the Community Reinvestment Act.

Interstate Branching. Beginning June 1, 1997, federal law permitted the responsible federal banking agencies to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under the law of the two states. The law also permitted a state to “opt in” to the provisions of the Interstate Banking Act before June 1, 1997, and permitted a state to “opt out” of the provisions of the Interstate Banking Act by adopting appropriate legislation before that date. Michigan did not “opt out” of the provisions of the Interstate Banking Act. Accordingly, beginning June 1, 1997, a Michigan commercial bank could acquire an institution by merger in a state other than Michigan unless the other state had opted out. The Interstate Banking Act also authorizes de novo branching into another state, but only if the host state enacts a law expressly permitting out of state banks to establish such branches within its borders. Effective with the enactment of The Dodd-Frank Act, the FDI Act and the National Bank Act have been amended to remove the expressly required “opt-in” concept applicable to de novo interstate branching and now permits national and insured state banks to engage in de novo in interstate branching if, under the laws of the state where the new branch is to be established, as a state bank chartered in that state would be permitted to establish a branch.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, or the OCC, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. The Bank received a “satisfactory” rating in its most recent Community Reinvestment Act evaluation by the FDIC. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Privacy. The Federal Reserve, FDIC and other bank regulatory agencies have adopted final guidelines (the "Guidelines) for safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Corporation has adopted a customer information security program that has been approved by the Corporation's Board of Directors (the "Board”). The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the banking subsidiary's policies and procedures. The Corporation's banking subsidiary has implemented a privacy policy.

Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of federal governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States’ anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Department of the Treasury has issued a number of implementing regulations which apply to various requirements of the USA Patriot Act to financial institutions such as us. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputation consequences for the institution, including the imposition of enforcement actions and civil monetary penalties.

Federal Home Loan Bank. The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”), one of the 11 regional Federal Home Loan Banks. The FHLBI provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLBI, is required to acquire and hold shares of capital stock in the FHLBI in an amount equal to at least 0.75% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or between 2% and 4.5% of its advances (borrowings) from the FHLBI, whichever is greater. The Bank was in compliance with this requirement and its investment in FHLBI stock at December 31, 2018 was $4.1 million. The FHLB Banks function as a central reserve bank by providing credit for financial institutions throughout the United States. Advances are generally secured by eligible assets of a member, which include principally mortgage loans and obligations of, or guaranteed by, the U.S. government or its agencies. Advances can be made to the Bank under several different credit programs of the FHLBI. Each credit program has its own interest rate, range of maturities and limitations on the amount of advances permitted based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.

Federal Reserve Board. The Federal Reserve Board regulations require banks to maintain non-interest-earning reserves against their net transaction accounts, nonpersonal time deposits and Eurocurrency liabilities (collectively referred to as reservable liabilities).

Overdraft Regulation. The Federal Reserve Board amended Regulation E (Electronic Fund Transfers) effective July 1, 2010 to require consumers to opt in, or affirmatively consent, to the institution’s overdraft service for ATM and one-time debit card transactions before overdraft fees may be assessed on the account. Consumers also must be provided a clear disclosure of the fees and terms associated with the institution’s overdraft service.

Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank's loan operations are also subject to federal laws applicable to credit transactions, such as:

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the federal "Truth-In-Lending Act," governing disclosures of credit terms to consumer borrowers;

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the "Home Mortgage Disclosure Act of 1975," requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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the "Equal Credit Opportunity Act," prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

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the "Fair Credit Reporting Act of 1978," governing the use and provision of information to credit reporting agencies;

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the "Fair Debt Collection Act," governing the manner in which consumer debts may be collected by collection agencies; and

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the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

The deposit operations of the Bank are subject to:

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the "Right to Financial Privacy Act," which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

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the "Electronic Funds Transfer Act" and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Holding Company Regulation

General. The Corporation, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System. The Corporation is also required to file annually a report of its operations with the Federal Reserve Board. This regulation and oversight is generally intended to ensure that the Corporation limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank. Under the Bank Holding Company Act, the Corporation must obtain the prior approval of the Federal Reserve Board before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the Corporation would directly or indirectly own or control more than 5% of such shares.

Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board policy that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations, or both.

Non-Banking Activities. The business activities of the Corporation, as a bank holding company, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve Board’s bank holding company regulations, the Corporation may only engage in, acquire, or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act and (2) any non-banking activity the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities as well as a lengthy list of activities that the Federal Reserve Board has determined to be so closely related to the business of banking as to be a proper incident thereto.

Financial Modernization. The Gramm-Leach-Bliley Act, which became effective in March 2000, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” CRA rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. The Corporation has not submitted notice to the Federal Reserve Board of our intent to be deemed a financial holding company.

Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board’s capital adequacy guidelines are similar to those imposed on the Bank by the FDIC.

Restrictions on Dividends. The Corporation relies on dividends from the Bank to pay dividends to shareholders. The Michigan Banking Code of 1999 provides that dividends may be paid out of a Michigan commercial bank’s net income after deducting all bad debts. A Michigan commercial bank may only pay dividends on its common stock if the bank has a surplus amounting to not less than 20% of its capital after the payment of the dividend. If a bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of the net income of the preceding six months (in the case of quarterly or semi-annual dividends) or at least 10% of net income of the preceding two consecutive six month periods (in the case of annual dividends) has been transferred to surplus. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation.

The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

Employees

MBT Financial Corp. has no employees other than its three officers, each of whom is also an employee and officer of Monroe Bank & Trust and who serve in their capacity as officers of MBT Financial Corp. without compensation. As of December 31, 2018, Monroe Bank & Trust had 267 full-time employees and 9 part-time employees. Monroe Bank & Trust provides a number of benefits for its full-time employees, including health and life insurance, workers' compensation, social security, paid vacations, numerous bank services, and a 401(k) plan.

Executive Officers of the Registrant

NAME	AGE	POSITION
H. Douglas Chaffin	63	President & Chief Executive Officer
Scott E. McKelvey	59	Executive Vice President, Wayne County President & Strategic Support Director, Monroe Bank & Trust Secretary, MBT Financial Corp.
Audrey Mistor	61	Executive Vice President, Wealth Management Group & MBTeam Mentorship Director, Monroe Bank and Trust
Thomas G. Myers	62	Executive Vice President, Chief Lending Manager & MBTeam/CARE Sales Director, Monroe Bank & Trust
John L. Skibski	54	Executive Vice President - Chief Financial Officer & Risk Management Director, Monroe Bank & Trust; Treasurer, MBT Financial Corp.

There is no family relationship between any of the Directors or Executive Officers of the registrant and there is no arrangement or understandings between any of the Directors or Executive Officers and any other person pursuant to which he was selected a Director or Executive Officer nor with any respect to the term which each will serve in the capacities stated previously.

The Executive Officers of the Bank are elected to serve for a term of one year at the Board of Directors Annual Organizational Meeting, held in May.

H. Douglas Chaffin was President & Chief Executive Officer of the Bank and the Company in each of the last five years. Scott E. McKelvey was Executive Vice President, Regional President Wayne County in 2014-2015, and was Executive Vice President, Wayne County President & Strategic Support Director in 2016-2018. McKelvey was Secretary of the Company in each of the last five years. Audrey Mistor was Executive Vice President, Wealth Management Group Manager in 2014-2015, and was Executive Vice President, Wealth Management Group and MBTeam Mentorship Director in 2016-2018. Thomas G. Myers was Executive Vice President & Chief Lending Manager in 2014-2015 and was Executive Vice President, Chief Lending Manager & MBTeam/CARE Sales Director in 2016-2018. John L. Skibski was Executive Vice President & Chief Financial Officer in 2014-2015 and was Executive Vice President – Chief Financial Officer and Risk Management Director in 2016-2018. Skibski was Treasurer of the Company in each of the last five years.

Available Information

MBT Financial Corp. makes its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to those reports available on its website as soon as reasonably practicable after they are filed with or furnished to the SEC, free of charge. The website address is www.mbandt.com.

Item 1A. Risk Factors

Our business may be adversely affected by conditions in the financial markets and economic conditions generally.

Our success depends significantly on the general economic conditions of the State of Michigan. Unlike larger regional or national banks that are more geographically diversified, the Bank provides banking and financial services to customers primarily in Southeast Michigan and Northwest Ohio.

Southeast Michigan and the United States as a whole went through a prolonged downward economic cycle that began in 2007. Significant weakness in market conditions adversely impacted all aspects of the economy including our business. In particular, dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, negatively impacted the credit performance of construction loans, which resulted in significant write-downs of assets by many financial institutions. Business activity across a wide range of industries and regions was greatly reduced, and local governments and many businesses experienced serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. In addition, unemployment had been high throughout this period. The business environment was adverse for many households and businesses in the Southeast Michigan market, United States, and worldwide.

Overall, during the lengthy recession, the general business environment had an adverse effect on our business. There have been recent improvements in general economic conditions in our market, with evidence of stabilizing home prices and a reduction in unemployment levels, however, there can be no assurance that the environment will continue to improve in the near term. Unemployment levels have improved significantly, but housing values remain low in some areas. Consequently, particularly in Michigan, which was one of the most adversely impacted states in the United States by the recent recession, there can be no assurance that the economic conditions will continue to improve. Furthermore, a worsening of economic conditions would likely have adverse effects on us and others in the financial institutions industry. Continued market stress could have a materially adverse effect on the credit quality of the Bank’s loans and, therefore, our financial condition and results of operations.

The Bank previously operated under agreements with its governmental regulators and may be subject to further regulatory enforcement actions.

On July 12, 2010, the Bank agreed to the issuance of a consent order (the “Consent Order”) with the FDIC and the Michigan DIFS Bank & Trust Division requiring, among other things, the achievement of certain minimum regulatory capital levels, the imposition of certain lending restrictions, the enhancement of the credit quality of the Bank’s loan portfolio, the increased monitoring by the Board of Directors of the adequacy of the Bank’s allowance for loan and lease losses, and a prohibition on the declaration and payment of any dividends without prior regulatory approval. The Consent Order was terminated by the regulatory agencies effective June 30, 2014. However, certain informal regulatory requirements and restrictions remained in effect, including requirements to continue to improve credit quality, a restriction prohibiting dividend payments without prior approval from the FDIC and the DIFS, and the maintenance of a specified Tier 1 capital ratio. The informal regulatory requirements were rescinded effective June 23, 2015. However, any failure to maintain acceptable asset quality, reserves, and capital levels may result in resumption of adverse regulatory actions.

Our business is subject to credit risk and the impact of nonperforming loans.

We face the risk that loan losses, including unanticipated loan losses due to changes in loan portfolios, fraud and economic factors, could require additional increases in the allowance for loan losses. Additions to the allowance for loan losses would cause our net income to decline and could have a material adverse impact on our financial condition and results of operations.

Making loans is an essential element of our business, and there is a risk that customer loans will not be repaid. The risk of nonpayment is affected by a number of factors, including:

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the duration of the loan;

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credit risks of each particular borrower;

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changes in unemployment, economic and industry conditions; and

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in the case of a collateralized loan, the potential inadequacy of the value of the collateral in the event of default, such as has resulted from the deterioration in commercial and residential real estate values.

The Bank’s allowance for loan losses may not be adequate.

We attempt to maintain an appropriate allowance for loan losses to provide for potential inherent losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors including, among others, the ongoing review and grading of the loan portfolio, consideration of our past loan loss experience as well as that of the banking industry, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, the size and diversity of individual credits, and other qualitative and quantitative factors which could affect probable credit losses. We determine the amount of the allowance for loan losses by considering these factors and by using estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on our historical loss experience with additional qualitative factors for various issues, and allocation of specific reserves for special situations that are unique to the measurement period with consideration of current economic trends and conditions, all of which are susceptible to significant change. As an integral part of their examination process, various federal and state regulatory agencies also review the allowance for loan losses. These agencies may require that certain loan balances be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. Although we believe the level of the allowance for loan losses is appropriate as recorded in the consolidated financial statements, because current economic conditions are uncertain and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. Management is of the opinion that the Allowance for Loan Losses of $7,771,000 as of December 31, 2018 was adequate.

Our loan portfolio is collateralized predominantly by real estate.

A substantial portion of the Bank’s loan portfolio is sensitive to real estate values. The declines in the market value of real estate that occurred during the most recent national and regional decline during the 2008 – 2010 timeframe resulted in significant increases in delinquencies and losses on certain segments of our portfolio. While the real estate market has stabilized and is no longer experiencing the rapid decreases in value and increases in inventory of foreclosed properties that occurred during 2008 – 2010 timeframe, there remain substantial risks associated with real estate collateral values, particularly in the Bank’s primary market in Southeast Michigan. As of December 31, 2018, more than 75% of the Bank’s loan portfolio was secured by real estate.

We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon the Bank’s net interest income. Net interest income is the difference between interest earned on interest earning assets such as loans and securities and interest paid on interest bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond our control, including general economic and market conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect the Bank’s ability to originate loans and obtain deposits and the fair values of the Bank’s financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate or decrease at a slower rate than the interest rates received on loans and investments, the Bank’s net interest income, and therefore its and our earnings, could be adversely affected.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Bank’s results of operations, any substantial, unexpected, or prolonged change in market interest rates or in the term structure of interest rates could have a material adverse effect on the Bank’s, and our, financial condition and results of operations. See “Quantitative and Qualitative Disclosures about Market Risk” in this document for further discussion related to the Bank’s management of interest rate risk.

Real estate market volatility and future changes in disposition strategies could result in net proceeds that differ significantly from other real estate owned (“OREO”) fair value appraisals.

The Bank’s OREO portfolio consists of properties that it obtained through foreclosure or other collection actions in satisfaction of loans. OREO properties are recorded at the lower of the recorded investment in the loans for which the properties served as collateral or estimated fair value, less estimated selling costs. Generally, in determining fair value, an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. While the real estate market has stabilized and is no longer experiencing the rapid decreases in value and increases in inventory of foreclosed properties that occurred during 2008 through 2010, there remain substantial risks associated with real estate collateral values, particularly in Southeast Michigan.

In response to market conditions and other economic factors, the Bank may utilize alternative sale strategies other than orderly dispositions as part of its OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from estimates used to determine the fair value of the Bank’s OREO properties. As of December 31, 2018, the Bank’s OREO portfolio was valued at $692,000.

We face the risk of cyber-attack to our computer systems.

Our computer systems, software and networks have been and will continue to be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events. These threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential client information, damage to our reputation with our clients and the market, additional costs to us (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and financial losses, to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations (such as the lack of availability of our online banking system), as well as the operations of our clients, customers or other third parties. Although we maintain safeguards to protect against these risks, there can be no assurance that we will not suffer losses in the future that may be material in amount.

The Bank operates in a highly competitive industry.

The Bank faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include regional and national banks within the Bank’s market. The Bank also faces competition from many other types of financial institutions, including savings and loan institutions, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, and insurance. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Bank’s competitors have fewer regulatory constraints, and may have lower cost structures. Additionally, many competitors may be able to achieve economies of scale, and as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Bank can. Increased competition could adversely affect the Bank’s growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We and the Bank are subject to extensive government regulation and supervision.

Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect the Bank’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we and the Bank may offer and/or increase the ability of non-banks to offer competing financial products and services, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Recent economic conditions, particularly in the financial markets, resulted in government regulatory agencies placing increased focus on and scrutiny of the financial services industry. The U.S. government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis, by introducing various actions and passing legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Such programs and legislation subject us and other financial institutions to restrictions, oversight and/or costs that may have an impact on our business, financial condition, results of operations, or the price of our common stock.

New proposals for legislation, regulations, and regulatory reform continue to be introduced that could further substantially change the regulation of the financial services industry. We cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation. Additional regulation could affect us in a substantial way and could have an adverse effect on the Bank’s and our business, financial condition, and results of operations.

The new Basel III Capital Standards may have an adverse effect on us.

In July 2013, the Federal Reserve Board released its final rules which will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements increased for both the quality and quantity of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also, among other things, raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. The new capital rules require us to maintain higher levels of capital, and we were required to begin transitioning to the new rules on January 1, 2015.

If the concentration level of the Bank’s commercial real estate loan portfolio increases, we may be subject to additional regulatory scrutiny.

The FDIC, the Federal Reserve Board, and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm non-residential properties, loans for construction, land development, and other land loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital and increased by 50% or more during the prior 36 months. The joint guidance requires heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment, and monitoring through market analysis and stress testing. As of December 31, 2018, the Bank did not meet the level of concentration in commercial real estate lending activity that would indicate a need under the regulatory guidance for increased risk assessment.

The Bank is dependent upon outside third parties for processing and handling of its records and data.

The Bank relies on software developed by third party vendors to process various Bank transactions. In some cases, the Bank has contracted with third parties to run its proprietary software on behalf of the Bank. These systems include, but are not limited to, general ledger, payroll, employee benefits, trust record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While the Bank performs a review of controls instituted by the vendors over these programs in accordance with industry standards and performs its own testing of user controls, the Bank must rely on the continued maintenance of these controls by the outside parties, including safeguards over the security of customer data. In addition, the Bank maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, the Bank may incur a temporary disruption in its ability to conduct its business or process its transactions, or incur damage to its reputation if the third party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on our financial condition and results of operations.

The Bank continually encounters technological change.

The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Bank’s future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in the Bank’s operations. Many of the Bank’s competitors have greater resources to invest in technological improvements, and the Bank may not effectively implement new technology-driven products and services or do so as quickly, which could reduce its ability to effectively compete. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Bank’s business and, in turn, our financial condition and results of operations.

The Bank is subject to claims and litigation pertaining to fiduciary responsibility and other legal risks.

From time to time, customers and others make claims and take legal action pertaining to the Bank’s performance of fiduciary responsibilities. If such claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect the market perception of the Bank and its products and services as well as customer demand for those products and services. Any financial liability or reputational damage could have a material adverse effect on the Bank’s business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Consumers and businesses may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. This could result in the loss of fee income as well as the loss of customer deposits and income generated from those deposits and could have a material adverse effect on our financial condition and results of operations.

Our controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Bank’s business, and in turn, our results of operations and financial condition.

Financial services companies depend upon the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, the Bank may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Bank may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse effect on the Bank’s business and, in turn, our financial condition and results of operations.

We are subject to risks arising from potential increases in FDIC insurance premiums.

The FDIC maintains a deposit insurance fund to resolve the cost of bank failures. The FDIC’s deposit insurance fund is funded by fees assessed on insured depository institutions including us. Future deposit premiums paid by us depend on the level of the deposit insurance fund and the magnitude and cost of future bank failures. As a consequence, we may be required to pay significantly higher FDIC premiums in the event market developments significantly deplete the deposit insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

We are subject to changes in federal and state tax laws and changes in interpretation of existing laws.

Our financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and ongoing state budgetary pressures, the enactment of new federal or state tax legislation may occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have a material adverse effect on our financial condition and results of operations.

We are subject to changes in accounting principles, policies, or guidelines.

Our financial performance is impacted by accounting principles, policies, and guidelines. Changes in these are continuously occurring and, given the current economic environment, more drastic changes may occur. The implementation of such changes could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people.

Our successful operation will be greatly influenced by our ability to retain the services of our existing senior management and to attract and retain qualified additional senior and middle management. The unexpected loss of the services of any of our key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

We are a bank holding company and our sources of funds are limited.

We are a bank holding company, and our operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to our shareholders is derived primarily from dividends received from the Bank. Our ability to receive dividends or loans from the Bank is restricted. Dividend payments by the Bank to us in the future will require generation of future earnings by the Bank and could require regulatory approval if the proposed dividend is in excess of prescribed guidelines. Further, our right to participate in the assets of the Bank upon its liquidation, reorganization, or otherwise will be subject to the claims of the Bank’s creditors, including depositors, which will take priority.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Bank’s business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Bank’s ability to conduct business. Such events could affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay outstanding loans, reduce the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Bank to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Bank’s business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Managing reputational risk is important to attracting and maintaining customers, investors, and employees.

Threats to the Bank’s reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. The Bank has policies and procedures in place that seek to protect our reputation and promote ethical conduct. Nonetheless, negative publicity may arise regarding the Bank’s business, employees, or customers, with or without merit, and could result in the loss of customers, investors, and employees; costly litigation; a decline in revenues; and increased governmental regulation.

We may not be able to complete our merger with First Merchants Bank.

On October 10, 2018 we announced that we signed an agreement to merge with First Merchants Corporation and to merge Monroe Bank and Trust with First Merchants Bank. The merger has received the necessary approval of two-thirds of our shareholders and we expect the transaction to be completed in the first half of 2019. If the merger is not completed, there will be a risk of an adverse effect on the Company’s earnings due to the liquidation of its investment portfolio.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

MBT Financial Corp. does not conduct any business other than its ownership of Monroe Bank & Trust’s stock. MBT Financial Corp. operates its business from Monroe Bank & Trust’s headquarters facility. Monroe Bank & Trust operates its business from its main office complex located at 102 E. Front Street, Monroe, Michigan, its 20 full service branches in the counties of Monroe and Wayne, Michigan. The Bank owns its main office complex and 19 of its branches, and one of the Bank’s branches is leased. The Bank is in the process of constructing a branch office to replace the office that is leased.

Item 3. Legal Proceedings

Except as set forth below, MBT Financial Corp. and its subsidiaries (“MBT”) are not a party to, nor is any of their property the subject of any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

MBT Financial Corp. has not been required to pay a penalty to the IRS for failing to make disclosures required with respect to certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.

MBT is currently a party to an Agreement and Plan of Reorganization and Merger dated October 9, 2018 (the “Merger Agreement”) with First Merchants Corporation (“First Merchants”) pursuant to which MBT, upon the consummation of the transaction, will be merged with and into First Merchants (the “Merger”). After public announcement of the Merger and filing by MBT of its proxy statement, as a part of the Proxy/Prospectus contained in First Merchant’s registration statement on SEC Form S-4, MBT was sued in two separate federal and four separate state court actions related to the Merger.

The Federal Court Cases

On January 9, 2019, MBT was sued by David Pill (“Pill”), a purported MBT stockholder, on behalf of and a putative class of all MBT stockholders other than the named defendants and their affiliates. On January 18, 2019, MBT was sued by Christopher Pauli, a purported MBT stockholder, on behalf of himself and a putative class of all MBT stockholders other than the named defendants and their affiliates. Both the Pill case and the Pauli case were filed as putative class actions in the United States District Court for the Eastern District of Michigan and are titled as follows: (i) David Pill v. MBT Financial Corp, et al., and (ii) Christopher Pauli v. MBT Financial Corp, et al. Both cases name each MBT director and MBT as defendants.

Both complaints allege violation of the Securities and Exchange Act of 1934 (the “Exchange Act”). The allegations are that MBT and its directors violated the Exchange Act by omitting certain material information from First Merchants’ Registration Statement on Form S-4 filed with the Securities and Exchange Commission (the “SEC”), which includes First Merchants’ prospectus with respect to the shares of First Merchants’ common stock to be issued to MBT stockholders in the proposed merger and the MBT proxy statement for the MBT special stockholders’ meeting that was held on February 14, 2019. The relief sought by the complaint includes preliminary and permanent injunction from proceeding with, consummating, or closing the proposed merger, directing MBT to amend its proxy statement, and damages, including attorneys’ and experts’ fees.

The Plaintiff in the Pauli case filed a motion for a preliminary injunction seeking to delay the MBT special stockholder meeting. The court ruled against the plaintiff, and the special meeting of shareholders took place on February 14, 2019, at which meeting MBT shareholders approved the Merger. Following the special shareholder meeting, the plaintiff in the Pill case voluntarily dismissed the case with prejudice as to plaintiff Pill and without prejudice as to the purported class, thereby ending the case. MBT has filed a motion to dismiss the Pauli case.

MBT will vigorously defend the remaining federal court case and believes it is wholly without merit.

The State Court Cases

MBT has been sued, on the dates indicated, in the following state court cases, all filed as putative class actions in the Circuit Court for the County of Monroe, Michigan, naming each MBT director and MBT as defendants.

December 20, 2018, Gaylord Viky v. Michael J. Miller, et. al.

January 11, 2019, Paul Parshall v. MBT Financial Corp., et. al.

January 15, 2019, Gary Nowitzke v. MBT Financial Corp, et al.

January 15, 2019, Gary Zimmer v. MBT Financial Corp, et al.

The complaints are substantially similar and allege, among other claims, that MBT directors have breached their fiduciary duties by omitting certain material information from First Merchants’ Registration Statement on Form S-4 filed with the SEC, which includes First Merchants’ prospectus with respect to the shares of First Merchants’ common stock to be issued to MBT stockholders in the Merger and the MBT proxy statement for the MBT special stockholders’ meeting that was held on February 14, 2019. The Gary Zimmer case is also styled as a derivative claim brought on behalf of MBT and includes allegations of self-dealing relating to the First Merchants transaction. The relief sought by the complaints includes preliminary and permanent injunction from proceeding with, consummating, or closing the proposed merger, rescission and rescissory damages if the proposed merger is completed, and damages, including attorneys’ and experts’ fees. MBT has filed a motion to dismiss the Gaylord Viky case. No filings of note have occurred in the other three state court cases.

MBT will vigorously defend all of the above state court cases and believes they are wholly without merit.

Item 4. Mine Safety Disclosures

Not Applicable.

Part II

Item 5. Market for the Registrant’s Common Equity, Related Security Holder Matters, and Issuer Purchases of Equity Securities

Common stock consists of 23,033,715 shares with a book value of $5.54. The common stock is traded on the NASDAQ Stock Market under the symbol MBTF. Below is a schedule of the high and low trading price for the past two years by quarter, as reported in the consolidated transaction reporting system. These prices represent those known to Management, but do not necessarily represent all transactions that occurred.

	2018				2017
	High		Low		High		Low
1^st quarter	$	11.55	$	9.56	$	12.00	$	10.35
2^nd quarter	$	11.00	$	9.85	$	12.10	$	9.60
3^rd quarter	$	11.60	$	10.68	$	11.30	$	9.25
4^th quarter	$	12.49	$	8.75	$	11.10	$	9.43

The closing price for the Corporation’s common stock on March 8, 2019, as reported in the consolidated transaction reporting system was $10.70.

Dividends declared during the past two years on a quarterly basis were as follows:

	2018		2017
1^st quarter	$	0.66	$	0.75
2^nd quarter	$	0.07	$	0.05
3^rd quarter	$	0.10	$	0.06
4^th quarter	$	0.10	$	0.06

As of March 8, 201, the number of holders of record of the Corporation’s common shares was 978.

The payment of future cash dividends is at the discretion of the Board of Directors and is subject to a number of factors, including applicable regulatory restrictions, results of operations, general business conditions, growth, financial condition, and other factors deemed relevant. On January 24, 2019 the Corporation’s Board of Directors approved payment of a $0.10 per share quarterly dividend. The Corporation intends to continue to pay quarterly dividends until the completion of its merger with First Merchants Corporation. For more information on applicable regulatory restrictions on the payment of dividends, see the section of Item 1 of this 10-K captioned “Supervision and Regulation.”

There were no repurchases of common stock during the three months ended December 31, 2018.

			*Period Ending*
*Index*	12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		12/31/18
MBT Financial Corp.		100.00		117.14		160.33		288.57		292.16		280.01
NASDAQ Composite Index		100.00		114.75		122.74		133.62		173.22		168.30
SNL U.S. Bank NASDAQ Index		100.00		103.57		111.80		155.02		163.20		137.56
Peer Group		100.00		92.58		117.66		170.99		187.35		137.33

Item 6. Selected Financial Data

The selected financial data for the five years ended December 31, 2018 are derived from the audited Consolidated Financial Statements of the Corporation. The financial data set forth below contains only a portion of our financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K.

Selected Consolidated Financial Data

Dollar amounts are in thousands, except per share data	2018			2017			2016			2015			2014
Consolidated Statements of Income
Interest Income	$	46,294		$	41,800		$	39,859		$	40,041		$	38,539
Interest Expense		2,255			1,737			2,236			3,066			3,838
Net Interest Income		44,039			40,063			37,623			36,975			34,701
Provision for Loan Losses		(100	)		(700	)		(2,200	)		(3,000	)		(500	)
Net Interest Income after Provision for Loan Losses		44,139			40,763			39,823			39,975			35,201
Other Income		15,540			15,882			17,513			15,327			13,353
Other Expenses		38,035			36,135			36,598			38,200			38,667
Income before provision for (benefit from) Income Taxes		21,644			20,510			20,738			17,102			9,887
Provision for (benefit from) Income Taxes		3,945			9,901			6,237			5,020			2,572
Net Income	$	17,699		$	10,609		$	14,501		$	12,082		$	7,315

Per Common Share
Basic Net Income	$	0.77		$	0.46		$	0.64		$	0.53		$	0.33
Diluted Net Income		0.77			0.46			0.63			0.53			0.33
Cash Dividends Declared		0.93			0.92			0.64			-			-
Book Value at Year End		5.54			5.79			6.20			6.46			5.92

Average Common Shares Outstanding		22,976,393			22,860,767			22,802,325			22,742,476			22,109,911

Consolidated Balance Sheets (Year End)
Total Assets	$	1,336,891		$	1,347,420		$	1,357,283		$	1,342,313		$	1,278,657
Total Investments		419,824			499,323			551,902			547,789			513,326
Total Loans		768,660			694,979			652,337			617,308			610,332
Allowance for Loan Losses		7,771			7,666			8,458			10,896			13,208
Deposits		1,182,910			1,198,164			1,199,717			1,165,393			1,111,811
Borrowings		-			-			-			15,000			15,000
Total Shareholders' Equity		127,667			132,658			141,114			147,341			134,536

Selected Financial Ratios
Return on Average Assets		1.33	%		0.79	%		1.08	%		0.93	%		0.59	%
Return on Average Equity		14.72	%		8.04	%		10.13	%		8.67	%		6.00	%
Net Interest Margin		3.61	%		3.28	%		3.07	%		3.11	%		3.11	%
Dividend Payout Ratio		120.78	%		200.00	%		100.00	%		0.00	%		0.00	%
Allowance for Loan Losses to Period End Loans		1.01	%		1.10	%		1.30	%		1.77	%		2.16	%
Allowance for Loan Losses to Non Performing Loans		77.24	%		57.70	%		44.92	%		39.55	%		36.74	%
Non Performing Loans to Period End Loans		1.31	%		1.91	%		2.88	%		4.46	%		5.89	%
Net Charge Offs to Average Loans		-0.03	%		0.01	%		0.04	%		-0.11	%		0.42	%

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction – The Company is a bank holding company with one subsidiary, Monroe Bank & Trust (“Bank”). The Bank is a commercial bank that operates 14 branch offices in Monroe County, Michigan and 6 branches in Wayne County, Michigan. The Bank’s primary source of income is interest income on its loans and investments and its primary expense is compensation of its employees. This 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 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 maintaining our asset quality, and improving our profitability and shareholder value. On October 9, 2018, the Company entered an agreement to merge with First Merchants Corporation of Muncie, Indiana. Upon completion of the merger, Monroe Bank and Trust will merge with First Merchants Bank. The merger is expected to close in the first half of 2019.

The economic conditions remained strong in 2018, and due to improvement in the domestic auto industry and increased economic diversity in the region, the economic conditions in southeast Michigan continued their improvement. Local and state unemployment rates were low, and real estate values and new construction and real estate development activity continued to increase. Significant objectives this year included maintaining our strong asset quality and actively managing our capital. The stronger economic environment benefited our loan customers, and also provided us with opportunities to generate new loan assets. Our total classified assets, which include non-accrual and internally classified problem loans, other real estate owned, and classified investment securities, increased $1.9 million, or 19.1% during 2018, primarily due to a downgrade in our Agricultural portfolio. The overall improvement in our asset quality over the past year, the decrease in our loan charge offs, and strong loan recoveries allowed us to record a negative Provision for Loan Loss expense while increasing our Allowance for Loan and Lease Losses (ALLL) from $7.7 million to $7.8 million in 2018. The portfolio of loans held for investment increased $73.7 million during the year, and the ALLL as a percent of loans decreased from 1.10% to 1.01%. Local property values and the unemployment rate have improved over the past four years and the pace of the recovery in our local markets remained strong in 2018. We will continue our efforts on maintaining asset quality in 2019, and we also plan to increase our focus on growing our loan portfolio and maintaining our low cost deposit funding base.

Net Interest Income increased $4.0 million in 2018 compared to 2017 even though the average earning assets decreased $1.9 million, or 0.2% as the net interest margin increased from 3.28% to 3.61%. The provision for loan losses increased from a reversal of $700,000 in 2017 to a reversal of $100,000 in 2018. Growth in the loan portfolio required us to increase the amount of ALLL, but the net recoveries during 2018 enabled us to record a negative provision expense. We increased the ALLL by $105,000 by recording a provision reversal of $100,000 and net recoveries of $205,000. Non-interest income decreased $342,000 or 2.2%, due to an increase in losses on securities transactions and decreases in Bank Owned Life Insurance income and wealth management and deposit account fees. Non-interest expenses increased $1.9 million, or 5.3%, mainly due to higher salaries and employee benefits, equipment expenses, and professional fees. Federal Income Tax expense decreased $6.0 million in 2018 even though the income before the provision for income taxes increased $1.1 million, due to the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) on December 22, 2017. The TCJA reduced the Corporation’s federal tax rate from 34% to 21%, effective January 1, 2018.

Critical Accounting Policies - The Bank’s Allowance for Loan Losses is a “critical accounting estimate” because it is an estimate that is 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 Corporation’s financial condition. These assumptions include, but are not limited to, collateral values and the effect of economic conditions on the financial condition of the Bank’s borrowers. To determine the Allowance for Loan Losses, the Bank estimates losses on all loans that are not classified as non-accrual or renegotiated by applying historical loss rates, adjusted for environmental factors, to those loans. This portion of the analysis utilizes the loss history for the most recent twenty quarters, adjusted for qualitative factors including recent delinquency rates, real estate values, and economic conditions. In addition, all loans over $250,000 that are nonaccrual and all loans that are renegotiated are individually tested for impairment. Impairment exists when the carrying value of a loan is greater than the realizable value of the collateral pledged to secure the loan or the present value of the cash flow of the loan. Any amount of monetary impairment is included in the Allowance for Loan Losses. Management is of the opinion that the Allowance for Loan Losses of $7,771,000 as of December 31, 2018 was adequate.

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of fair value less costs to sell or the loan carrying amount at the date of foreclosure. Subsequent to foreclosure, appraisals or other independent valuations are periodically obtained by Management and the assets are carried at the lower of carrying amount or fair value less costs to sell.

Recent Accounting Pronouncements – Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)” was issued in May 2014. 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. The Company adopted ASU 2014-09 on January 1, 2018. The Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and adoption did not significantly affect the timing or amount of non-interest revenue recognized in the Company’s financial statements.

Accounting Standards Update 2016-01 (ASU 2016-01), “Recognition and Measurement of Financial Assets and Financial Liabilities” was issued in January, 2016. This ASU requires an entity to (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses on available for sale debt securities in combination with other deferred tax assets. This ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The Company adopted the ASU effective January 1, 2018, and the adoption did not have a material effect on our financial position or results of operations. The adoption of this guidance resulted in a reclassification of equity securities from available for sale securities to other assets and an insignificant cumulative-effect adjustment that decreased retained earnings, with offsetting related adjustments to deferred taxes and Accumulated Other Comprehensive Loss (AOCL). The fair value of loans has been estimated using an exit price notion as disclosed in Note 11.

Accounting Standards Update 2016-13 (ASU 2016-13), “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” was issued in June, 2016. 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.

Accounting Standards Update 2017-08 (ASU 2017-08), “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued in March, 2017. The ASU shortens the amortization period for certain purchased callable debt securities held at a premium to the earliest call date rather than maturity. The standard is effective for fiscal years beginning after December 31, 2018 and early adoption is permitted. Adoption of the standard will not have an effect on the Company’s consolidated financial statements.

Results of Operations

Comparison of 2018 to 2017 – The Company reported a Net Profit of $17.7 million in 2018, compared to the Net Profit of $10.6 million in 2017. The increase of $7.1 million was the result of the increase in the net interest margin and the decrease in the federal income tax expense, mitigated by the increase in the provision for loan losses expense, decrease in non-interest income, and increase in non-interest expense. Pretax income increased $1.1 million and federal income tax expense decreased $6.0 million. The increase in the provision for loan losses reflected a smaller reversal than in 2017, non-interest income decreased due to lower fee income and larger losses on securities transactions in 2018, and non-interest expense increased due to higher salaries and benefits expenses. The primary source of earnings for the Bank is its net interest income, which increased $4.0 million, or 9.9% compared to 2017. Net interest income increased even though the average earning assets decreased $1.9 million, or 0.2% as the net interest margin increased 33 basis points, from 3.28% to 3.61%. Short term interest rates continued to increase in 2018. This increase in rates and the shift of earning assets from investments to loans caused the yield on earning assets to increase 38 basis points in 2018. There was an increase in competitive pressure on deposit rates and we increased our use of non-deposit borrowed funds, resulting in a 6 basis point decrease in the cost of interest bearing liabilities. Interest income increased $4,494,000 in 2018 as the yield on earning assets increased from 3.42% to 3.80%, while the amount of average earning assets decreased from $1.222 billion to $1.220 billion. Interest expense increased $518,000 compared to 2017 as the average amount of interest bearing liabilities decreased $4.9 million but the cost of the interest bearing liabilities increased from 0.19% in 2017 to 0.25% in 2018.

The Provision for Loan Losses expense increased from a reversal of $0.7 million in 2017 to a reversal of $0.1 million in 2018. Asset quality and historical loan loss ratios continued to improve in 2018, but the growth in the loan portfolio required and increase in the amount of the Allowance for Loan Losses. The Allowance as a percent of loans decreased from 1.10% as of December 31, 2017 to 1.01% as of December 31, 2018 as the Allowance increased by only 1.4% while the loan portfolio increased by 10.6%.

Other Income decreased 2.5% from $15.9 million in 2017 to $15.5 million in 2018. Wealth Management income decreased $289,000, or 5.8%. The decrease occurred primarily due to an adjustment of $389,000 in 2017 to change from cash to accrual basis recognition of fees. Deposit account service charges and fees decreased $352,000, or 8.4% mainly due to lower overdraft fees. Losses on securities transactions increased $269,000 as rising interest rates resulted in lower market values. The sales activity resulted in losses in 2018, but it resulted in an increase in asset yield as the proceeds we invested in higher yielding loans. Income from Bank Owned Life Insurance policies decreased $567,000 mainly because a claim on an insured former director resulted in a gain of $481,000 in 2017.

Other expenses increased $1.9 million, or 5.3% in 2018 compared to 2017. Salaries and benefits expense increased $944,000, or 4.4%. Salaries and incentive compensation increased $688,000, or 4.0% and benefits expense increased $256,000, or 6.3%. Marketing expense increased $267,000, or 20.2% due to the efforts to grow loan and wealth management business and the continued branding initiative that began in 2017. Professional fees increased $546,000, or 23.3% mainly due to increased consulting and legal fees related to our agreement to merge with First Merchants Corporation.

The Company’s net income for 2018, before provision for income taxes, was $21.6 million, an increase of $1.1 million compared to the pretax income of $20.5 million in 2017. In 2018 we recorded a federal income tax expense of $3.9 million, reflecting an effective tax rate of 18.2%. In 2017 we recorded a tax expense of $9.9 million, reflecting an effective tax rate of 48.3%. The tax expense in 2017 included $4.3 million due to the remeasurement of our deferred tax asset due to the reduction in the statutory rate from 34% to 21%. Excluding this $4.3 million expense, our effective tax rate was 27.4%. The net income in 2018 was $17.7 million, an increase of $7.1 million compared to the net income of $10.6 million in 2017.

Comparison of 2017 to 2016 – The Company reported a Net Profit of $10.6 million in 2017, compared to the Net Profit of $14.5 million in 2016. The decrease of $3.9 million was almost entirely the result of the increase in the federal income tax expense due to the revaluation of the deferred tax asset following the enactment of the Tax Cuts and Jobs Act of 2017. Pretax income decreased $228,000 as the improvements in net interest income and non-interest expense were exceeded by an increase in the provision for loan losses and a decrease in non-interest income. The increase in the provision for loan losses reflected a smaller reversal than in 2016, and non-interest income decreased due to large gains on securities transactions in 2016. The primary source of earnings for the Bank is its net interest income, which increased $2.4 million, or 6.5% compared to 2016. Net interest income increased even though the average earning assets decreased $5.8 million, or 0.5% as the net interest margin increased 21 basis points, from 3.07% to 3.28%. Short term interest rates began to increase near the end of 2016 and continued to increase through 2017. This increase in rates and the shift of earning assets from investments to loans caused the yield on earning assets to increase 17 basis points in 2017. The repayment of some high cost borrowed funds in 2016 and little upward pressure on deposit rates allowed us to decrease the cost of funds, resulting in a 6 basis point decrease in the cost of interest bearing liabilities. Interest income increased $1,941,000 in 2017 as the yield on earning assets increased from 3.25% to 3.42%, while the amount of average earning assets decreased from $1.227 billion to $1.222 billion. Interest expense decreased $499,000 compared to 2016 as the average amount of interest bearing liabilities decreased $10.4 million and the cost of the interest bearing liabilities decreased from 0.25% in 2016 to 0.19% in 2017. The decrease in the interest expense was due to the reductions in the amount of funds borrowed under repurchase agreements and the amount of customer Certificates of Deposit and the cost of those certificates. As deposit rates remain near historically low levels, customers are continuing to move their maturing higher cost CD funds to more liquid, lower cost transaction accounts.

The Provision for Loan Losses expense increased from a reversal of $2.2 million in 2016 to a reversal of $0.7 million in 2017. Asset quality and historical loan loss ratios continued to improve in 2017, but the growth in the loan portfolio limited the amount of the Allowance for Loan Losses that could be recovered through the provision expense. The Allowance as a percent of loans decreased from 1.30% as of December 31, 2016 to 1.10% as of December 31, 2017 as the Allowance decreased by 9.4% and the loan portfolio increased by 6.5%.

Other Income decreased 9.1% from $17.5 million in 2016 to $15.9 million in 2017. Wealth Management income increased $564,000, or 12.7%. The increase consisted of $389,000 due to changing from cash to accrual basis recognition of fees, and $175,000 due to an increase in the amount of assets under management. Assets under management increased due to new business and market gains. Gains and losses on securities transactions decreased $2.7 million, from a gain of $2.2 million in 2016 to a loss of $0.5 million in 2017. The gains in 2016 were primarily due to bonds owned at discounts being called at par, while the losses in 2017 were mainly due to some portfolio restructuring activity near the end of the year. This restructuring activity resulted in losses in 2017, but Management expects it will result in an increase in portfolio yield in the future, while improving our interest rate risk management. Origination fees on mortgage loans sold decreased $211,000, or 39.1% as the Bank retained more of the fixed rate mortgage loans it originated in 2017. Income from Bank Owned Life Insurance policies increased $553,000 due to an increase in the investment in BOLI polices, and because a claim on an insured former director resulted in a gain of $481,000.

Other expenses decreased $463,000, or 1.3% in 2017 compared to 2016. Salaries and benefits expense decreased $1,043,000, or 4.6%. The Bank’s incentive compensation plan is based on operating income performance compared to budget. The operating income exceeded the budget by a smaller amount in 2017, and the total incentive compensation accrual decreased $522,000. Loan origination activity increased in 2017, and the amount of salary expense that was deferred and will be recognized over the life of the loans originated increased, causing a decrease of $101,000 in the expense compared to 2016. Also, health insurance expense decreased $141,000 in 2017 due to changes in the insurance options offered to employees. Marketing expense increased $178,000, or 15.6% due to increased efforts to grow loan and wealth management business and the commencement of a branding initiative. Professional fees increased $201,000, or 9.4% mainly due to increased consulting and legal fees related to strategic growth opportunities. FDIC insurance assessments decreased $139,000, or 24.5% as our assessment rate decreased near the end of 2016.

The Company’s net income for 2017, before provision for income taxes, was $20.5 million, a decrease of $0.2 million compared to the pretax income of $20.7 million in 2016. In 2017 we recorded a federal income tax expense of $9.9 million, reflecting an effective tax rate of 48.3%. The tax expense in 2017 included $4.3 million due to the remeasurement of our deferred tax asset due to the reduction in the statutory rate from 34% to 21%. Excluding this $4.3 million expense, our effective tax rate was 27.4%. In 2016 we recorded a tax expense of $6.2 million, reflecting an effective tax rate of 30.1%. The lower effective tax rate (exclusive of the deferred tax adjustment) in 2017 was due to the increase in the portion of pretax income that was from nontaxable sources, primarily consisting of municipal investments and Bank Owned Life Insurance. The net income in 2017 was $10.6 million, a decrease of $3.9 million compared to the net income of $14.5 million in 2016.

Interest Rates and Selected Ratios - Earnings for the Bank are usually highly reflective of the Net Interest Income. The Federal Open Market Committee (FOMC) of the Federal Reserve increased the fed funds rate target three times in 2017, from a range of 0.50%-0.75% to 1.25%-1.50%. During 2018, the FOMC increased the target four more times, to its current level of 2.25%-2.50%. From the end of 2008 through October 2014, the Federal Reserve greatly expanded its holdings of long term securities through open market purchases with the goal of putting downward pressure on longer term interest rates, thus supporting economic activity and job creation. Although the Fed concluded its Quantitative Easing purchases in 2014, global economic uncertainty increased demand for US Treasury securities, and longer term rates began to drop, flattening the yield curve throughout 2015 and into 2016. Increased optimism about the economy and corporate earnings resulted in higher longer term rates and a steepening of the yield curve late in 2016. Employment continued to improve, but persistently low inflation allowed longer term interest rates to remain low, and the increases in short term rates caused additional curve flattening in 2017 and 2018. Most loan and investment yields follow long term market yields, and the yield on our loans increased from 4.59% in 2016 to 4.62% in 2017 and 4.83% in 2018. The yields on our investment securities increased from 1.80% in 2016 to 1.93% in 2017 and 2.21% in 2018 due to an increase in the portfolio duration and the increase in the yield on the short term. As a result of the low interest rate environment and increasing loan demand, we had been maintaining our investment portfolio in shorter duration securities and cash reserves. This liquidity helped us fund loan growth, and it contributed to our improved investment portfolio yield in 2017 and 2018 as the short end of the yield curve increased faster than the long end. Funding costs are tied to the short term rates, but are generally less sensitive to changes in the rates, and the average cost of our deposits decreased from 0.16% in 2016 to 0.15% in 2017 and 2018 as customers moved maturing certificate of deposit balances to low cost transaction accounts. The cost of borrowed funds was 4.73% in 2016, 1.29% in 2017, and 2.31% in 2018. As a result of the changing interest rate environment, the change in the mix of earning assets, and the minimal changes in the cost of funds, our net interest margin increased from 3.07% in 2016 to 3.28% in 2017 and to 3.61% in 2018. The average cost of interest bearing deposits was 0.21%, 0.19%, and 0.21%, for 2018, 2017, and 2016, respectively. The following table shows selected financial ratios for the same three years.

	2018			2017			2016
Return on Average Assets		1.33	%		0.79	%		1.08	%
Return on Average Equity		14.72	%		8.04	%		10.13	%
Dividend Payout Ratio		120.78	%		200.00	%		100.00	%
Average Equity to Average Assets		9.03	%		9.85	%		10.69	%

Balance Sheet Activity – Compared to 2017, the total assets of the Company decreased $10.5 million, or 0.8%. Deposit funding decreased by $15.3 million, and capital decreased $5.0 million, so the use of borrowed funds increased $10.0 million. Loan demand remained high in 2018, and total loans held for investment increased $73.7 million, or 10.6%. Our loan pipeline is still strong and we expect the loan portfolio to continue to increase during 2019. Loans grew and deposits and capital decreased in 2018, so the loan growth was funded by increased use of borrowed funds and decreases in cash and investment securities. The investment portfolio primarily consists of mortgage backed securities issued by GNMA, and debt securities issued by U.S. government agencies and states and political subdivisions. Capital decreased $5.0 million, as the dividends paid exceeded earnings and the increase in interest rates caused the unrealized loss on available for sale securities component of our Accumulated Other Comprehensive Loss to increase.

Asset Quality - The Company uses an internal loan classification system as a means of tracking and reporting problem and potential problem credit assets. Loans that are rated 10 to 45 are considered “pass” or high quality credits, loans rated 50 to 55 are “watch” credits, and loans rated 60 and higher are “problem assets”, which includes nonperforming loans. Classified assets include all problem loans, Other Real Estate Owned (OREO), and sub investment grade securities. Asset quality began to deteriorate along with economic conditions in 2007, and asset quality has been the focus of our efforts since then. The amount of classified assets decreased $6.9 million, or 41.6%, from $16.6 million to $9.7 million during 2017, but increased slightly, to $11.5 million in 2018. The increase in classified assets was caused by loan rating downgrades, partially offset by a reduction of $720,000 in OREO. The increase in classified assets and decrease in capital increased the classified assets to capital ratio from 6.6% as of December 31, 2017 to 8.1% as of December 31, 2018.

The Company monitors the Allowance for Loan and Lease Losses (ALLL) and the values of the OREO each quarter, making adjustments when necessary. We believe that the ALLL adequately provides for the losses in the portfolio and that the reported OREO value is accurate as of December 31, 2018. Loans that were past due increased from $4.2 million, or 0.60% of loans, as of December 31, 2017 to $6.9 million, or 0.89% of loans as of December 31, 2018. Delinquency is one of the indications of potential problems with a loan, and this increase in delinquencies may be an indication that the classified asset level will continue to increase in 2019. We expect the national and local economic environment to remain steady in 2019. This may result in continued improvement in asset quality, but we expect a small provision for loan losses will be required to maintain an adequate ALLL due to expected loan growth in 2019.

Cash Flow – Cash flows provided by operating activities increased $6.6 million compared to 2017, as net income increased $7.1 million. The amount of cash provided by investing activities decreased $3.9 million in 2018. The amount of cash received from maturities, redemptions, and sales of investment securities and time deposits in other banks decreased $132.3 million as investment sales activity decreased following some portfolio restructuring activities in 2017. The amount of cash used to purchase investment securities decreased $152.9 million, from $196.6 million in 2017 to $43.7 million in 2018 as we moved cash from investment securities into loans. The amount of cash used to increase loans increased $30.9 million, from $43.5 million in 2017 to $74.4 million in 2018. Cash flows used for financing activity increased $4.1 million in 2018 as deposits decreased $15.3 million in 2018 after decreasing only $1.6 million in 2017, net debt activity increased $10.0 million, and dividends paid increased $0.3 million. As a result of the above activity, total cash and cash equivalents decreased $1,168,000 in 2018. Management believes that the Bank has adequate cash to fund its anticipated loan growth in 2019.

Liquidity and Capital - The Corporation has maintained sufficient liquidity to allow for fluctuations in deposit levels. Internal sources of liquidity are provided by the maturities of loans and securities as well as holdings of securities Available for Sale. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, a Federal funds line that has been established with a correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of December 31, 2018, the Bank utilized $10.0 million of its authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis and none of its $25 million federal funds line with its correspondent bank.

Total stockholders’ equity of the Corporation was $127.7 million at December 31, 2018 and $132.7 million at December 31, 2017. The stockholders’ equity decreased $5.0 million during the year and the ratio of equity to assets decreased from 9.85% as of December 31, 2017 to 9.55% as of December 31, 2018. Federal bank regulatory agencies issued new capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, Common Equity Tier One Capital, and Leverage Capital. These regulatory standards became effective January 1, 2015 and require banks to maintain a Tier 1 Leverage ratio of at least 4%, a Common Equity Tier One ratio of at least 4.5%, a Tier One Risk Based Capital ratio of at least 6%, and a Total Risk Based Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be “well capitalized” if its Tier 1 Leverage ratio is at least 5%, its Common Equity Tier One ratio is at least 6.5%, its Tier One Risk Based Capital ratio is at least 8%, and its Total Risk Based Capital ratio is at least 10%, and the Bank is not subject to any written agreements or order issued by the FDIC pursuant to Section 8 of the Federal Deposit Insurance Act.

The following table summarizes the capital ratios of the Corporation:

	December 31, 2018		December 31, 2017		Minimum to be Well Capitalized
Tier 1 Leverage Ratio		10.28%		10.44%		5%
Common Equity Tier 1 Capital		14.91%		16.45%		6.5%
Tier 1 Risk based Capital		14.91%		16.45%		8%
Total Risk Based Capital		15.79%		17.39%		10%

At December 31, 2017 and 2018, the Bank exceeded the capital ratio requirements and was considered “Well Capitalized”. The new capital rule includes a transition schedule to phase in a capital conservation buffer that adds 2.50% to each of the above minimum ratios for 2019. We expect the Bank to continue to meet the requirements to be considered “Well Capitalized” in 2019.

The Bank’s Tier 1 Leverage Capital ratio decreased from 10.33% at December 31, 2017 to 10.15% at December 31, 2018. The Bank’s Total Risk Based Capital ratio decreased from 17.21% at December 31, 2017 to 15.61% at December 31, 2018.

The following table shows the investment portfolio for the last three years (000s omitted).

	Held to Maturity
	December 31, 2018				December 31, 2017				December 31, 2016
			Estimated				Estimated				Estimated
	Amortized		Market		Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value		Cost		Value
Securities issued by states and political subdivisions in the U.S.	$	-	$	-	$	36,663	$	37,007	$	40,241	$	40,654

Corporate Debt Securities		-		-		500		479		500		502

Total	$	-	$	-	$	37,163	$	37,486	$	40,741	$	41,156

Pledged securities	$	-	$	-	$	-	$	-	$	-	$	-

	Available for Sale
	December 31, 2018				December 31, 2017				December 31, 2016
			Estimated				Estimated				Estimated
	Amortized		Market		Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value		Cost		Value
U.S. Government agency and corporation obligations (excluding mortgage-backed securities)	$	134,160	$	128,235	$	140,090	$	135,880	$	282,130	$	275,000

Mortgage Backed Securities issued by U.S. Government Agencies		196,224		190,554		248,649		244,777		148,764		146,209

Securities issued by states and political subdivisions in the U.S.		69,309		69,109		37,308		36,983		30,909		30,609

Corporate Debt Securities		13,552		13,715		22,662		23,083		34,363		34,160

Other domestic securities (debt and equity)		-		-		2,044		2,093		2,044		2,089

Total	$	413,245	$	401,613	$	450,753	$	442,816	$	498,210	$	488,067

Pledged securities	$	110,084	$	105,873	$	106,478	$	103,850	$	97,106	$	96,032

The following table shows average daily balances, interest income or expense amounts, and the resulting average rates for interest earning assets and interest bearing liabilities for the last three years. Also shown are the net interest income, total interest rate spread, and the net interest margin for the same periods.

	Years Ended December 31,
	2018							2017							2016
	Average		Interest					Average		Interest					Average		Interest
	Daily		Earned		Average			Daily		Earned		Average			Daily		Earned		Average
(Dollars in Thousands)	Balance		or Paid		Yield			Balance		or Paid		Yield			Balance		or Paid		Yield
Investments
Interest Bearing Balances Due From Banks	$	29,070	$	514		1.77	%	$	39,432	$	494		1.25	%	$	82,813	$	562		0.68	%
Obligations of US Government Agencies		357,268		7,281		2.04	%		401,066		7,191		1.79	%		406,739		7,368		1.81	%
Obligations of States & Political Subdivisions¹		75,562		1,912		2.53	%		70,601		1,544		2.19	%		62,978		1,491		2.37	%
Other Securities		21,289		979		4.60	%		33,024		1,271		3.85	%		36,795		1,173		3.19	%
Total Investments		483,189		10,686		2.21	%		544,123		10,500		1.93	%		589,325		10,594		1.80	%

Loans
Commercial		535,968		25,589		4.77	%		495,025		22,689		4.58	%		451,930		20,762		4.59	%
Mortgage		154,804		7,697		4.97	%		147,003		6,844		4.66	%		146,689		6,585		4.49	%
Consumer		45,720		2,322		5.08	%		35,409		1,767		4.99	%		39,385		1,918		4.87	%
Total Loans²		736,492		35,608		4.83	%		677,437		31,300		4.62	%		638,004		29,265		4.59	%

Total Interest Earning Assets		1,219,681		46,294		3.80	%		1,221,560		41,800		3.42	%		1,227,329		39,859		3.25	%

Cash & Non Interest Bearing Due From Banks		15,030							15,447							18,515
Interest Receivable and Other Assets		97,341							101,188							92,611
Total Assets	$	1,332,052						$	1,338,195						$	1,338,455

Savings Accounts	$	237,695	$	51		0.02	%	$	230,928	$	49		0.02	%	$	215,864	$	47		0.02	%
Interest Bearing DDA & NOW Accounts		262,305		445		0.17	%		271,908		389		0.14	%		270,469		326		0.12	%
Money Market Deposits		249,059		475		0.19	%		254,884		395		0.15	%		253,192		324		0.13	%
Certificates of Deposit		126,965		833		0.66	%		142,230		898		0.63	%		164,774		1,231		0.75	%
Fed Funds Purch & Other Borrowings		3,047		60		1.97	%		464		6		1.29	%		3		-		0.00	%
Repurchase Agreements		0		0		n/a			0		0		n/a			6,516		308		4.73	%
FHLB Advances		16,456		391		2.38	%		0		0		n/a			0		0		n/a
Total Interest Bearing Liabilities		895,527		2,255		0.25	%		900,414		1,737		0.19	%		910,818		2,236		0.25	%

Non-interest Bearing Deposits		300,266							290,386							270,810
Other Liabilities		15,986							15,523							13,719
Total Liabilities		1,211,779							1,206,323							1,195,347

Stockholders' Equity		120,273							131,872							143,108

Total Liabilities & Stockholders' Equity	$	1,332,052						$	1,338,195						$	1,338,455

Net Interest Income			$	44,039						$	40,063						$	37,623

Interest Rate Spread						3.55	%						3.23	%						3.00	%

Net Interest Income as a percent of average earning assets						3.61	%						3.28	%						3.07	%

¹Interest income on Obligations of States and Political Subdivisions is not on a taxable equivalent basis.

²Total Loans excludes Overdraft Loans, which are non-interest earning. These loans are included in Other Assets. Total Loans includes nonaccrual loans. When a loan is placed in nonaccrual status, all accrued and unpaid interest is charged against interest income. Loans on nonaccrual status do not earn any interest.

The following table summarizes the changes in interest income and interest expense attributable to changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities for the period indicated:

	Years Ended December 31,
	2018 versus 2017								2017 versus 2016									2016 versus 2015
	Changes due to								Changes due to									Changes due to
	increased (decreased)								increased (decreased)									increased (decreased)
(Dollars in Thousands)	Rate		Volume			Net			Rate			Volume			Net			Rate			Volume			Net
Interest Income
Investments
Interest Bearing Balances Due From Banks	$	150	$	(130	)	$	20		$	226		$	(294	)	$	(68	)	$	328		$	129		$	457
Obligations of US Government Agencies		875		(785	)		90			(74	)		(103	)		(177	)		(531	)		(1,147	)		(1,678	)
Obligations of States & Political Subdivisions		259		108			367			(127	)		180			53			(111	)		232			121
Other Securities		160		(452	)		(292	)		218			(120	)		98			(325	)		990			665
Total Investments		1,444		(1,259	)		185			243			(337	)		(94	)		(639	)		204			(435	)

Loans
Commercial		1,026		1,874			2,900			(55	)		1,982			1,927			(805	)		1,074			269
Mortgage		491		363			854			245			14			259			159			(232	)		(73	)
Consumer		40		515			555			43			(194	)		(151	)		57			0			57
Total Loans		1,557		2,752			4,309			233			1,802			2,035			(589	)		842			253

Total Interest Income		3,001		1,493			4,494			476			1,465			1,941			(1,228	)		1,046			(182	)

Interest Expense
Savings Accounts		0		1			1			(1	)		3			2			(50	)		11			(39	)
Interest Bearing DDA and NOW Accounts		70		(14	)		56			61			2			63			(6	)		14			8
Money Market Deposits		89		(9	)		80			69			2			71			(26	)		3			(23	)
Certificates of Deposit		31		(95	)		(64	)		(164	)		(169	)		(333	)		(159	)		(218	)		(377	)
Fed Funds Purch & Other Borrrowings		24		30			54			3			3			6			0			0			-
Repurchase agreements		0		-			-			0			(308	)		(308	)		0			(399	)		(399	)
FHLB Advances		391		0			391			0			0			0			0			0			0
Total Interest Expense		605		(87	)		518			(32	)		(467	)		(499	)		(241	)		(589	)		(830	)


Net Interest Income	$	2,396	$	1,580		$	3,976		$	508		$	1,932		$	2,440		$	(987	)	$	1,635		$	648

For a variety of reasons, including volatile economic conditions, fluctuating interest rates, and large amounts of local municipal deposits, we have attempted, for the last several years, to maintain a liquid investment position. The percentage of securities held as Available for Sale was 100% as of December 31, 2018 and 92.3% as of December 31, 2017. The percentage of securities that mature within five years was 18.9% as of December 31, 2018 and 21.0% as of December 31, 2017. The following table presents the scheduled maturities for each of the investment categories, and the average yield on the amounts maturing. The yields presented for the Obligations of States and Political Subdivisions are not tax equivalent yields. The interest income on a portion of these securities is exempt from federal income tax. The Corporation’s statutory federal income tax rate was twenty-one percent in 2018.

	Maturing
						After 1					After 5
	Within 1 year					through 5 years					through 10 years					After 10 Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
(Dollars in Thousands)
Obligations of US Government Agencies	$	-		0.00	%	$	47,851		1.77	%	$	75,104		1.95	%	$	5,280		3.65	%	$	128,235		1.95	%
Mortgage Backed Securities issued by US Gov't Agencies		-		0.00	%		2,883		2.99	%		21,076		2.47	%		166,595		2.32	%		190,554		2.35	%
Obligations of States & Political Subdivisions		8,476		2.10	%		16,384		2.55	%		10,237		2.69	%		34,012		2.72	%		69,109		2.60	%
Corporate Debt Securities		-		0.00	%		489		2.00	%		13,226		5.10	%		-		0.00	%		13,715		4.99	%
Other Securities		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Total	$	8,476		2.10	%	$	67,607		2.01	%	$	119,643		2.45	%	$	205,887		2.42	%	$	401,613		2.35	%

Our loan policies also reflect our awareness of the need for liquidity. We have short average terms for most of our loan portfolios, in particular real estate mortgages, the majority of which are normally written for five years or less. The following table shows the maturities or repricing opportunities (whichever is earlier) for the Bank’s interest earning assets and interest bearing liabilities at December 31, 2018. The repricing assumptions shown are consistent with those established by the Bank’s Asset and Liability Management Committee (ALCO). Savings accounts and interest bearing demand deposit accounts are non-maturing, variable rate deposits, which may reprice as often as daily, but are not included in the zero to six month category because in actual practice, these deposits are only repriced if there is a large change in market interest rates. The effect of including these accounts in the zero to six-month category is depicted in a subsequent table. Money Market deposits are also non-maturing, variable rate deposits; however, these accounts are included in the zero to six-month category because they may get repriced following smaller changes in market rates.

	Assets/Liabilities at December 31, 2018, Maturing or Repricing in:
	0 - 6			6 - 12			1 - 2			2 - 5		Over 5		Total
(Dollars in Thousands)	Months			Months			Years			Years		Years		Amount
Interest Earning Assets
US Treas Secs & Obligations of US Gov't Agencies	$	48,659		$	27,904		$	39,923		$	80,779	$	121,524	$	318,789
Obligations of States & Political Subdivisions		11,754			5,232			5,126			9,837		37,160		69,109
Other Securities		7,415			-			5,000			8,715		-		21,130
Commercial Loans		113,054			35,565			75,821			264,944		74,560		563,944
Mortgage Loans		36,493			17,500			10,781			23,795		72,225		160,794
Consumer Loans		23,914			2,263			3,575			7,742		6,916		44,410
Interest Bearing DFB		37,134			3,000			5,446			-		-		45,580
Total Interest Earning Assets	$	278,423		$	91,464		$	145,672		$	395,812	$	312,385	$	1,223,756

Interest Bearing Liabilities
Savings Deposits	$	489,579		$	-		$	-		$	-	$	-	$	489,579
Other Time Deposits		36,269			29,754			28,804			26,623		-		121,450
FHLB Advances		-			-			-			-		10,000		10,000
Total Interest Bearing Liabilities	$	525,848		$	29,754		$	28,804		$	26,623	$	10,000	$	621,029


Gap	$	(247,425	)	$	61,710		$	116,868		$	369,189	$	302,385	$	602,727
Cumulative Gap	$	(247,425	)	$	(185,715	)	$	(68,847	)	$	300,342	$	602,727	$	602,727

Sensitivity Ratio		0.53			3.07			5.06			14.87		31.24		1.97
Cumulative Sensitivity Ratio		0.53			0.67			0.88			1.49		1.97		1.97

If interest bearing demand deposit accounts were included in the zero to six months category, the Bank’s gap would be as shown in the following table:

	Assets/Liabilities at December 31, 2018, Maturing or Repricing in:
	0 - 6			6 - 12			1 - 2			2 - 5			Over 5
	Months			Months			Years			Years			Years		Total
Total Interest Earning Assets	$	278,423		$	91,464		$	145,672		$	395,812		$	312,385	$	1,223,756
Total Interest Bearing Liabilities	$	885,149		$	29,754		$	28,804		$	26,623		$	10,000	$	980,330


Gap	$	(606,726	)	$	61,710		$	116,868		$	369,189		$	302,385	$	243,426
Cumulative Gap	$	(606,726	)	$	(545,016	)	$	(428,148	)	$	(58,959	)	$	243,426	$	243,426

Sensitivity Ratio		0.31			3.07			5.06			14.87			31.24		1.25
Cumulative Sensitivity Ratio		0.31			0.40			0.55			0.94			1.25		1.25

The amount of loans due after one year with floating interest rates is $129,733,000. The amount of loans due after one year with fixed interest rates is $491,101,000.

The following table shows the remaining maturity for Certificates of Deposit with balances of $100,000 or more as of December 31 (000s omitted):

	Years Ended December 31,
(Dollars in Thousands)	2018		2017		2016
Maturing Within
3 Months	$	7,182	$	8,387	$	9,264
3 - 6 Months		4,548		6,061		6,374
6 - 12 Months		14,199		10,574		9,092
Over 12 Months		17,901		23,920		28,663
Total	$	43,830	$	48,942	$	53,393

For 2019, we expect few increases in the fed funds rate from the FOMC. We plan to close our merger with First Merchants Corporation in the first half of the year. Prior to the merger, we will liquidate most of our investment portfolio, which will make our balance sheet significantly more asset sensitive. In the near term, our focus will be on controlling our asset quality, pursuing new lending opportunities, maintaining our low cost funding, and preparing to integrate our Bank into First Merchants Bank.

The following table shows the loan portfolio for the last five years (000s omitted).

	Book Value at December 31,
	2018		2017		2016		2015		2014
Domestic Loans:
Agriculture and Agricultural Real Estate	$	22,486	$	21,231	$	21,518	$	19,243	$	16,700
Commercial		162,026		122,219		96,761		84,438		62,761
Commercial Real Estate		279,294		269,644		252,169		243,220		249,469
Construction Real Estate		27,400		23,558		19,454		15,919		12,926
Residential Real Estate		230,008		222,014		216,436		213,989		223,701
Consumer and Other		47,446		36,313		45,999		40,499		44,775

Total loans and leases, net of unearned income	$	768,660	$	694,979	$	652,337	$	617,308	$	610,332

Nonaccrual loans	$	5,566	$	3,658	$	4,656	$	8,633	$	13,040
Loans 90 days or more past due and accruing	$	-	$	3	$	10	$	4	$	10
Troubled debt restructurings	$	4,495	$	9,625	$	14,161	$	18,910	$	22,896

The Troubled Debt Restructurings reported in the table above are performing in accordance with the terms of the restructuring. Troubled Debt Restructurings that are not performing are included in the Nonaccrual amounts reported above. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if principal or interest is considered doubtful. Interest paid on nonaccrual loans is applied to the principal balance outstanding, so no interest income was recognized on nonaccrual loans in 2018. If the nonaccrual loans outstanding as of December 31, 2018 had been current in accordance with their original terms, the Bank would have recorded $262,000 in gross interest income on those loans during 2018.

The following is an analysis of the transactions in the allowance for loan losses:

	Years Ended December 31,
(Dollars in Thousands)	2018			2017			2016			2015			2014
Balance Beginning of Period	$	7,666		$	8,458		$	10,896		$	13,208		$	16,209

Loans Charged Off (Domestic)
Agriculture and Agricultural Real Estate		-			-			221			188			3
Commercial		-			6			26			352			688
Commercial Real Estate		320			572			742			559			3,543
Construction Real Estate		-			-			-			2			254
Residential Real Estate		108			113			319			893			1,562
Consumer and Other		54			137			155			118			94
Recoveries (Domestic)
Agriculture and Agricultural Real Estate		5			81			6			325			10
Commercial		95			139			150			311			341
Commercial Real Estate		329			190			194			502			1,449
Construction Real Estate		59			54			151			648			1,077
Residential Real Estate		138			198			588			863			608
Consumer and Other		61			74			136			151			158
Net Loans Charged Off		(205	)		92			238			(688	)		2,501
(Recovery) Provision Charged to Operations		(100	)		(700	)		(2,200	)		(3,000	)		(500	)
Balance End of Period	$	7,771		$	7,666		$	8,458		$	10,896		$	13,208

Ratio of Net Loans Charged Off (Recovered) to Average Total Loans Outstanding		-0.03	%		0.01	%		0.04	%		-0.11	%		0.42	%

The following analysis shows the allocation of the allowance for loan losses:

	Years Ended December 31,
	2018					2017					2016					2015					2014
(Dollars in Thousands)	$ Amount		% of loans to total loans			$ Amount		% of loans to total loans			$ Amount		% of loans to total loans			$ Amount		% of loans to total loans			$ Amount		% of loans to total loans
Balance at end of period applicable to:
Domestic
Agriculture and Agricultural Real Estate	$	205		2.9	%	$	195		3.1	%	$	201		3.3	%	$	389		3.1	%	$	216		2.7	%
Commercial		1,266		21.1	%		1,443		17.6	%		1,632		14.8	%		2,279		13.7	%		1,361		10.3	%
Commercial Real Estate		3,012		36.3	%		3,297		38.8	%		3,336		38.6	%		4,350		39.3	%		6,179		40.9	%
Construction Real Estate		184		3.6	%		491		3.4	%		525		3.0	%		420		2.6	%		803		2.1	%
Residential Real Estate		1,218		29.9	%		1,279		31.9	%		1,599		33.2	%		2,235		34.7	%		3,226		36.7	%
Consumer and Other		1,886		6.2	%		961		5.2	%		1,165		7.1	%		1,223		6.6	%		1,423		7.3	%
Foreign		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
Total	$	7,771		100.0	%	$	7,666		100.0	%	$	8,458		100.0	%	$	10,896		100.0	%	$	13,208		100.0	%

Each period the provision for loan losses in the statement of operations 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.

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. 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. Year-end nonperforming assets, which include nonaccrual loans, loans ninety days or more past due, renegotiated debt, nonaccrual securities, and other real estate owned, decreased $3.2 million, or 24.3%, from 2017 to 2018. Nonperforming assets as a percent of total assets at year-end decreased from 1.1% in 2017 to 0.8% in 2018. The Allowance for Loan Losses as a percent of nonperforming loans at year-end increased from 57.7% in 2017 to 77.2% in 2018.

The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated statements of condition. 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.

Contractual Obligations – The following table shows the Corporation’s contractual obligations.

	Payment Due by Period
			Less than		1 - 3		3 - 5		Over 5
(Dollars in Thousands)	Total		1 year		Years		Years		Years
Long Term Debt Obligations	$	10,000	$	-	$	-	$	-	$	10,000
Operating Lease Obligations		255		123		86		42		4
Salary Continuation Obligations		2,278		-		228		456		1,594
Post Retirement Health Care Obligations		1,899		150		342		370		1,037
Death Benefit Only Obligations		3,929		356		752		800		2,021
Time Deposits		120,275		65,448		48,767		6,060		-
Savings and Demand Deposits		1,062,635		1,062,635		-		-		-
Unfunded Loan Commitments		157,420		83,126		13,228		17,085		43,981
Commercial Letters of Credit		1,763		1,763		-		-		-
Total Contractual Obligations	$	1,360,454	$	1,213,601	$	63,403	$	24,813	$	58,637

Off-Balance Sheet Arrangements – Please see Note 17 to the audited financial statements provided under Item 8 to this Annual Report for information regarding the Corporation’s off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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, which committee monitors such risk on a monthly basis.

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 (gap analysis, as shown in Item 7), 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, ALCO, which includes the senior management of the Bank, 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 immediate and parallel shifts in interest rates. In the current low interest rate environment, increases of 100, 200, 300, and 400 basis points and decreases of 100, 200 and 300 basis points are analyzed. The net interest income projections are compared to a base case projection, which assumes no changes in interest rates. The table below summarizes the net interest income sensitivity as of December 31, 2018 and 2017.

	Base		Rates		Rates		Rates		Rates		Rates		Rates		Rates
(Dollars in Thousands)	Projection		Up 1%		Up 2%		Up 3%		Up 4%		Down 1%		Down 2%		Down 3%
Year-End 2018 12 Month Projection
Interest Income	$	52,131	$	54,672	$	57,191	$	59,685	$	62,046	$	49,619	$	46,524	$	45,265
Interest Expense		2,755		4,444

Peer Group consists of Chemical Financial Corporation (CHFC), Fentura Financial, Inc. (FETM), Flagstar Bancorp, Inc. (FBC),

Macatawa Bank Corporation (MCBC) ,Mercantile Bank Corporation (MBWM)

Source: S&P Global Market Intelligence

© 2019

MBT FINANCIAL CORP 10-K