UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

Commission File Number: 000-30973

MBT FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Michigan

38-3516922

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

102 E. Front Street

Monroe, Michigan 48161

(Address of principal executive offices)

(Zip Code)

(734) 241-3431

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ☑ No ☐

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

Large accelerated filer ☐ Accelerated Filer ☑

Non-accelerated filer ☐ Smaller reporting company ☑ Emerging growth company ☐

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	MBTF	NASDAQ-Global

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 9, 2019, there were 23,036,758 shares of the Company’s Common Stock outstanding.

Part I Financial Information

Item 1. Financial Statements

MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS

	March 31, 2019
Dollars in thousands	(Unaudited)			December 31, 2018

ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	18,426		$	17,058
Interest bearing		414,381			34,784
Total cash and cash equivalents		432,807			51,842

Interest Bearing Time Deposits in Other Banks		600			10,796
Securities - Available for Sale		30,133			401,613
Equity Securities		7,450			7,415

Loans held for sale		-			488

Loans		766,877			768,660
Allowance for Loan Losses		(7,503	)		(7,771	)
Loans - Net		759,374			760,889

Accrued interest receivable and other assets		16,662			16,743
Other Real Estate Owned		58			692
Bank Owned Life Insurance		59,901			59,563
Premises and Equipment - Net		26,480			26,850
Total assets	$	1,333,465		$	1,336,891

LIABILITIES
Deposits
Non-interest bearing	$	290,929		$	297,704
Interest-bearing		892,220			885,206
Total deposits		1,183,149			1,182,910

Federal Home Loan Bank advances		10,000			10,000
Interest payable and other liabilities		10,028			16,314
Total liabilities		1,203,177			1,209,224

STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 23,036,758 and 23,033,715 shares issued and outstanding)		23,565			23,453
Retained earnings		106,477			113,921
Accumulated other comprehensive income (loss)		246			(9,707	)
Total stockholders' equity		130,288			127,667
Total liabilities and stockholders' equity	$	1,333,465		$	1,336,891

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

-2-

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

	Three Months Ended March 31,
Dollars in thousands, except per share data	2019			2018

Interest Income
Interest and fees on loans	$	9,571		$	8,217
Interest on investment securities-
Tax-exempt		296			404
Taxable		1,174			2,210
Interest on balances due from banks		1,209			125
Total interest income		12,250			10,956

Interest Expense
Interest on deposits		568			414
Interest on borrowed funds		64			6
Total interest expense		632			420

Net Interest Income		11,618			10,536
Recovery Of Loan Losses		-			(100	)

Net Interest Income After
Recovery Of Loan Losses		11,618			10,636

Other Income
Income from wealth management services		1,161			1,185
Service charges and other fees		822			946
Debit card income		701			720
Net loss on sales and redemptions of securities available for sale		(11,646	)		(101	)
Net gain on sales of Other Real Estate Owned		9			19
Origination fees on mortgage loans sold		69			62
Bank owned life insurance income		338			353
Other		659			600
Total other income (loss)		(7,887	)		3,784

Other Expenses
Salaries and employee benefits		6,064			5,962
Occupancy expense		729			721
Equipment expense		913			793
Marketing expense		292			377
Professional fees		843			594
EFT/ATM expense		291			259
Other Real Estate Owned expenses		22			15
FDIC Deposit Insurance Assessment		89			107
Bonding and other insurance expense		429			132
Telephone expense		80			75
Other		558			757
Total other expenses		10,310			9,792

Income (Loss) Before Income Taxes		(6,579	)		4,628
Income Tax Expense (Benefit)		(1,438	)		726
Net Income (Loss)	$	(5,141	)	$	3,902

Other Comprehensive Income - Net of Tax
Unrealized gains (losses) on securities		387			(4,204	)
Reclassification adjustment for (gains) losses included in net income		9,200			80
Postretirement benefit liability		366			32
Effect of accounting change on equity securities		-			(49	)
Total Other Comprehensive Income (Loss) - Net of Tax		9,953			(4,141	)

Comprehensive Income (Loss)	$	4,812		$	(239	)

Basic Earnings (Loss) Per Common Share	$	(0.22	)	$	0.17

Diluted Earnings (Loss) Per Common Share	$	(0.22	)	$	0.17

Dividends Declared Per Share of Common Stock	$	0.10		$	0.66

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

-3-

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

											Accumulated
											Other
	Common Stock					Retained			Unearned		Comprehensive
Dollars in thousands	Shares		Amount			Earnings			Compensation		Income (Loss)			Total
Balance - January 1, 2019		23,033,715	$	23,453		$	113,921		$	-	$	(9,707	)	$	127,667

Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes		186		(1	)		-			-		-			(1	)
Employee Stock Purchase Plan and other stock issued		2,857		30			-			-		-			30

Equity Compensation		-		93			-			-		-			93

Deferred Directors' Compensation		-		(10	)		-			-		-			(10	)

Dividends declared ($0.10 per share)		-		-			(2,303	)		-		-			(2,303	)

Net loss		-		-			(5,141	)		-		-			(5,141	)
Other comprehensive income - net of tax		-		-			-			-		9,953			9,953

Balance - March 31, 2019		23,036,758	$	23,565		$	106,477		$	-	$	246		$	130,288

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

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

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

Equity Compensation		-		216			-			19			-			235

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

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

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

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

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

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

-4-

MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Three Months Ended March 31,
Dollars in thousands	2019			2018

Cash Flows from Operating Activities
Net Income (Loss)	$	(5,141	)	$	3,902
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		-			(100	)
Depreciation		346			370
Net amortization of investment premium and discount		259			576
Adjustment for assets carried at fair market value		(35	)		36
Net decrease in interest payable and other liabilities		(5,835	)		(1,434	)
Net decrease (increase) in interest receivable and other assets		(2,550	)		2,555
Equity based compensation expense		93			235
Net loss on sale/settlement of securities		11,646			101
Increase in cash surrender value of life insurance		(338	)		(352	)
Net cash provided by (used for) operating activities	$	(1,555	)	$	5,889

Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks	$	750		$	1,000
Proceeds from maturities and redemptions of investment securities held to maturity		-			241
Proceeds from maturities and redemptions of investment securities available for sale		5,278			12,666
Proceeds from sales of investment securities available for sale		367,161			19,181
Proceeds from sales of interest bearing time deposits in other banks		9,446			-
Net (increase) decrease in loans		2,003			(27,140	)
Proceeds from sales of other real estate owned		643			347
Proceeds from sales of other assets		-			40
Purchase of investment securities available for sale		(728	)		(30,799	)
Purchase of bank premises and equipment		-			(32	)
Net cash provided by (used for) investing activities	$	384,553		$	(24,496	)

Cash Flows from Financing Activities
Net increase (decrease) in deposits	$	239		$	(4,801	)
Issuance of common stock		30			189
Stock redeemed for tax withholding - stock based compensation		1			(178	)
Dividends paid		(2,303	)		(15,145	)
Net cash used for financing activities	$	(2,033	)	$	(19,935	)

Net Increase (Decrease) in Cash and Cash Equivalents	$	380,965		$	(38,542	)

Cash and Cash Equivalents at Beginning of Period		51,842			53,010
Cash and Cash Equivalents at End of Period	$	432,807		$	14,468

Supplemental Cash Flow Information
Cash paid for interest	$	619		$	420
Cash paid for federal income taxes	$	-		$	-

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

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

-5-

MBT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

On October 9, 2018, the Company and First Merchants Corporation (“First Merchants”) signed an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which the Company will merge with and into First Merchants. Subject to the terms and conditions of the Merger Agreement, each share of the Company will be converted into 0.275 shares of First Merchants common stock. The merger was approved at a special meeting of the Company’s shareholders on February 14, 2019 and the transaction is expected to be completed in the second quarter of 2019.

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

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

The significant accounting policies are as follows:

PRINCIPLES OF CONSOLIDATION

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

COMPREHENSIVE INCOME

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

BUSINESS SEGMENTS

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

-6-

FAIR VALUE

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

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

ACCOUNTING PRONOUNCEMENTS

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

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

-7-

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

	For the three months ended March 31,
	2019			2018
Basic
Net income (loss)	$	(5,141,000	)	$	3,902,000
Average common shares outstanding		23,035,369			22,943,736
Earnings (Loss) per common share - basic	$	(0.22	)	$	0.17

Diluted
Net income (loss)	$	(5,141,000	)	$	3,902,000
Average common shares outstanding		23,035,369			22,943,736
Equity compensation		-			119,464
Average common shares outstanding - diluted		23,035,369			23,063,200
Earnings per common share - diluted	$	(0.22	)	$	0.17

3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) – SOSARs granted under the plan are structured as fixed grants with the base price equal to the market value of the underlying stock on the date of the grant.

The following table summarizes the SOSARs that have been granted:

				Weighted Average
	SOSARs			Base Price
SOSARs Outstanding, January 1, 2019		347,379		$	8.78
Granted		-			-
Exercised		(2,166	)		9.44
Forfeited		-			-
Expired		-			-
SOSARs Outstanding, March 31, 2019		345,213		$	8.78
SOSARs Exercisable, March 31, 2019		152,879		$	6.41

The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on March 31, 2019 was $10.02. The value of the exercisable SOSARs that are in-the-money as of March 31, 2019 was $552,000, and exercise of those SOSARs on that date would have resulted in the issuance of 55,079 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.

The total expense for equity based compensation was $93,000 in the first quarter of 2019 and $236,000 in the first quarter of 2018. The unrecognized compensation expense for all equity based compensation plans is $413,000 as of March 31, 2019. The expense is expected to be recognized over a weighted average period of 1.40 years.

-8-

4. LOANS

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

Loans consist of the following (000s omitted):

	March 31,		December 31,
	2019		2018
Residential real estate loans	$	231,074	$	230,008
Commercial and Construction real estate loans		306,593		306,694
Agriculture and agricultural real estate loans		22,087		22,486
Commercial and industrial loans		162,446		162,026
Loans to individuals for household, family, and other personal expenditures		44,677		47,446
Total loans, gross	$	766,877	$	768,660
Less: Allowance for loan losses		7,503		7,771
Net Loans	$	759,374	$	760,889

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

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

	March 31,			December 31,
	2019			2018
Nonaccrual loans	$	7,134		$	5,566
Loans 90 days past due and accruing		61			-
Restructured loans		3,418			4,495
Total nonperforming loans	$	10,613		$	10,061

Other real estate owned		58			692
Other assets		-			-
Total nonperforming assets	$	10,671		$	10,753

Nonperforming assets to total assets		0.80	%		0.80	%
Allowance for loan losses to nonperforming loans		70.70	%		77.24	%

-9-

5. ALLOWANCE FOR LOAN LOSSES

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

Activity in the allowance for loan losses during the three months ended March 31, 2019 was as follows (000s omitted):

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

Allowance for loan losses: For the three months ended March 31, 2019
Beginning Balance	$	205	$	1,266		$	3,012		$	184		$	1,218		$	1,886		$	7,771
Charge-offs		-		(252	)		(151	)		-			-			(8	)		(411	)
Recoveries		-		27			24			12			75			5			143
Provision		35		720			153			(158	)		(82	)		(668	)		-
Ending balance	$	240	$	1,761		$	3,038		$	38		$	1,211		$	1,215		$	7,503

Allowance for loan losses as of March 31, 2019
Ending balance individually evaluated for impairment	$	-	$	138		$	118		$	-		$	83		$	127		$	466
Ending balance collectively evaluated for impairment		240		1,623			2,920			38			1,128			1,088			7,037
Ending balance	$	240	$	1,761		$	3,038		$	38		$	1,211		$	1,215		$	7,503


Loans as of March 31, 2019
Ending balance individually evaluated for impairment	$	2,556	$	287		$	3,503		$	32		$	3,051		$	401		$	9,830
Ending balance collectively evaluated for impairment		19,531		162,159			275,149			27,909			228,023			44,276			757,047
Ending balance	$	22,087	$	162,446		$	278,652		$	27,941		$	231,074		$	44,677		$	766,877

-10-

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

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

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

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


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

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

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

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

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

•

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

-11-

•

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

•

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

•

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

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

•

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

•

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

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

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

-12-

The portfolio segments in each credit risk grade as of March 31, 2019 are as follows (000s omitted):

Credit Quality Indicators as of March 31, 2019
Credit Risk by Internally Assigned Grade

	Agriculture and Agricultural Real Estate		Commercial		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Consumer and Other		Total
Not Rated	$	-	$	1,731	$	44	$	11,948	$	147,437	$	39,747	$	200,907
10		-		3,998		-		-		-		-		3,998
20		64		116		185		-		-		-		365
30		267		46,455		24,609		-		1,363		3,424		76,118
40		13,977		103,187		219,492		13,051		73,934		1,495		425,136
45		1,589		1,909		19,787		1,360		2,719		-		27,364
50		3,755		4,582		6,866		245		2,590		-		18,038
55		72		255		2,363		-		693		-		3,383
60		2,363		213		5,306		1,337		2,338		11		11,568
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	22,087	$	162,446	$	278,652	$	27,941	$	231,074	$	44,677	$	766,877

Performing	$	19,490	$	162,181	$	275,374	$	27,909	$	227,091	$	44,219	$	756,264
Nonperforming		2,597		265		3,278		32		3,983		458		10,613
Total	$	22,087	$	162,446	$	278,652	$	27,941	$	231,074	$	44,677	$	766,877

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

Credit Quality Indicators as of December 31, 2018
Credit Risk by Internally Assigned Grade

	Agriculture and Agricultural Real Estate		Commercial		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Consumer and Other		Total
Not Rated	$	-	$	3,652	$	60	$	12,878	$	147,167	$	42,259	$	206,016
10		-		6,877		-		-		-		-		6,877
20		64		117		196		-		-		-		377
30		481		47,263		24,899		-		1,268		3,556		77,467
40		16,038		97,598		219,079		11,555		74,141		1,618		420,029
45		1,472		2,024		19,462		1,381		2,623		-		26,962
50		1,852		3,851		9,084		249		1,896		-		16,932
55		-		305		2,132		-		713		-		3,150
60		2,579		339		4,380		1,337		2,200		13		10,848
70		-		-		-		-		-		-		-
80		-		-		2		-		-		-		2
90		-		-		-		-		-		-		-
Total	$	22,486	$	162,026	$	279,294	$	27,400	$	230,008	$	47,446	$	768,660

Performing	$	20,305	$	161,749	$	276,021	$	27,368	$	226,119	$	47,037	$	758,599
Nonperforming		2,181		277		3,273		32		3,889		409		10,061
Total	$	22,486	$	162,026	$	279,294	$	27,400	$	230,008	$	47,446	$	768,660

-13-

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of March 31, 2019 and December 31, 2018 (000s omitted):

March 31, 2019	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment >90 Days Past Due and Accruing

Agriculture and Agricultural Real Estate	$	264	$	16	$	1,719	$	1,999	$	20,088	$	22,087	$	-
Commercial		149		21		46	$	216		162,230		162,446		15
Commercial Real Estate		914		936		636		2,486		276,166		278,652		-
Construction Real Estate		-		-		32		32		27,909		27,941		-
Residential Real Estate		1,810		81		387		2,278		228,796		231,074		-
Consumer and Other		153		50		47		250		44,427		44,677		46
Total	$	3,290	$	1,104	$	2,867	$	7,261	$	759,616	$	766,877	$	61

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

Agriculture and Agricultural Real Estate	$	632	$	1,235	$	-	$	1,867	$	20,619	$	22,486	$	-
Commercial		186		110		31		327		161,699		162,026		-
Commercial Real Estate		804		-		1,849		2,653		276,641		279,294		-
Construction Real Estate		-		-		-		-		27,400		27,400		-
Residential Real Estate		1,217		340		376		1,933		228,075		230,008		-
Consumer and Other		79		13		-		92		47,354		47,446		-
Total	$	2,918	$	1,698	$	2,256	$	6,872	$	761,788	$	768,660	$	-

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

The following is a summary of non-accrual loans as of March 31, 2019 and December 31, 2018 (000s omitted):

	March 31, 2019		December 31, 2018
Agriculture and Agricultural Real Estate	$	2,363	$	1,624
Commercial		85		106
Commercial Real Estate		3,277		2,907
Construction Real Estate		32		5
Residential Real Estate		1,366		912
Consumer and Other		11		12
Total	$	7,134	$	5,566

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.

-14-

The following is a summary of impaired loans as of March 31, 2019 and March 31, and December 31, 2018 (000s omitted):

March 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment for the Three Months Ended		Interest Income Recognized in the Three Months Ended

With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	2,556	$	2,555	$	-	$	2,595	$	(14	)
Commercial		67		67		-		91		1
Commercial Real Estate		1,899		2,116		-		2,076		61
Construction Real Estate		32		67		-		52		-
Residential Real Estate		2,660		2,822		-		2,842		39
Consumer and Other		134		135		-		137		2

With an allowance recorded:
Agriculture and Agricultural Real Estate		-		-		-		-		-
Commercial		220		229		138		231		2
Commercial Real Estate		1,604		1,697		118		1,698		5
Construction Real Estate		-		-		-		-		-
Residential Real Estate		391		403		83		405		5
Consumer and Other		267		267		127		270		3

Total:
Agriculture and Agricultural Real Estate	$	2,556	$	2,555	$	-	$	2,595	$	(14	)
Commercial		287		296		138		322		3
Commercial Real Estate		3,503		3,813		118		3,774		66
Construction Real Estate		32		67		-		52		-
Residential Real Estate		3,051		3,225		83		3,247		44
Consumer and Other		401		402		127		407		5

Total	$	9,830	$	10,358	$	466	$	10,397	$	104

	Recorded Investment as of December 31, 2018		Unpaid Principal Balance as of December 31, 2018		Related Allowance as of December 31, 2018		Average Recorded Investment for the Three Months Ended March 31, 2018		Interest Income Recognized in the Three Months Ended March 31, 2018

With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	2,388	$	2,384	$	-	$	820	$	11
Commercial		-		-		-		-		-
Commercial Real Estate		1,863		1,871		-		1,706		21
Construction Real Estate		-		-		-		-		-
Residential Real Estate		3,015		3,174		-		4,129		52
Consumer and Other		58		59		-		84		1

With an allowance recorded:
Agriculture and Agricultural Real Estate		234		234		-		240		3
Commercial		226		234		142		266		3
Commercial Real Estate		1,299		1,380		146		2,064		32
Construction Real Estate		32		67		4		1,597		19
Residential Real Estate		306		316		94		660		7
Consumer and Other		339		339		143		345		4

Total:
Agriculture and Agricultural Real Estate	$	2,622	$	2,618	$	-	$	1,060	$	14
Commercial		226		234		142		266		3
Commercial Real Estate		3,162		3,251		146		3,770		53
Construction Real Estate		32		67		4		1,597		19
Residential Real Estate		3,321		3,490		94		4,789		59
Consumer and Other		397		398		143		429		5

Total	$	9,760	$	10,058	$	529	$	11,911	$	153

-15-

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

Loans that have been classified as TDRs during the three month periods ended March 31, 2019 and March 31, 2018 are as follows (000s omitted from dollar amounts):

	Three months ended						Three months ended
	March 31, 2019						March 31, 2018
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance		Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		2	$	77	$	16		-	$	-	$	-
Commercial		-		-		-		-		-		-
Commercial Real Estate		1		39		36		1		283		283
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		-		-		-		1		150		150
Consumer and Other		1		15		14		-		-		-
Total		4	$	131	$	66		2	$	433	$	433

The Bank considers TDRs that become past due under the modified terms as defaulted. The following table shows the loans that became TDRs during the three month periods ended March 31, 2019 and March 31, 2018 that subsequently defaulted during the three month periods ended March 31, 2019 and March 31, 2018, respectively.

	Three months ended				Three months ended
	March 31, 2019				March 31, 2018
	Number of Contracts		Post- Modification Recorded Principal Balance		Number of Contracts		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-		-	$	-
Commercial		-		-		-		-
Commercial Real Estate		-		-		1		283
Construction Real Estate		-		-		-		-
Residential Real Estate		-		-		-		-
Consumer and Other		-		-		-		-
Total		-	$	-		1	$	283

The Company has allocated $417,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at March 31, 2019. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of March 31, 2019 and March 31, 2018.

-16-

6. INVESTMENT SECURITIES

The following is a summary of the Bank’s investment securities portfolio as of March 31, 2019 and December 31, 2018 (000s omitted):

	Available for Sale
	March 31, 2019
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political Subdivisions		29,127		626		(116	)		29,637
Corporate Debt Securities		500		-		(4	)		496
	$	29,627	$	626	$	(120	)	$	30,133

	Available for Sale
	December 31, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	134,160	$	1	$	(5,926	)	$	128,235
Mortgage Backed Securities issued by U.S. Government Agencies		196,224		32		(5,702	)		190,554
Obligations of States and Political Subdivisions		69,309		604		(804	)		69,109
Corporate Debt Securities		13,552		173		(10	)		13,715
	$	413,245	$	810	$	(12,442	)	$	401,613

The amortized cost and estimated market values of securities by contractual maturity as of March 31, 2019 are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
			Estimated
	Amortized		Market
	Cost		Value
Contractual maturity in
1 year or less	$	8,462	$	8,503
After 1 year through five years		15,112		15,310
After 5 years through 10 years		5,387		5,661
After 10 years		666		659
Total	$	29,627	$	30,133

-17-

The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates or the lack of an active market, and Management determines that the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before a recovery of their amortized costs bases, which may be maturity. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.

March 31, 2019

	Less than 12 months				12 months or longer				Total
	Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses
Obligations of States and Political Subdivisions		7,915		116		-		-		7,915		116
Corporate Debt Securities		496		4		-		-		496		4
	$	8,411	$	120	$	-	$	-	$	8,411	$	120

December 31, 2018

	Less than 12 months				12 months or longer				Total
	Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses
Obligations of United States Government Agencies	$	3,946	$	65	$	117,750	$	5,861	$	121,696	$	5,926
Mortgage Backed Securities issued by U.S. Government Agencies		19,945		131		165,604		5,571		185,549		5,702
Obligations of States and Political Subdivisions		32,260		573		5,955		231		38,215		804
Corporate Debt Securities		490		10		-		-		490		10
	$	56,641	$	779	$	289,309	$	11,663	$	345,950	$	12,442

The amount of investment securities issued by government agencies, states, and political subdivisions with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates and not the result of the credit quality of the issuers of the securities. The Company sold most of its Available for Sale Securities in the first quarter of 2019, retaining debt securities issued by local issuers that it does not intend to sell. Because the Company does not intend to sell the remaining investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at March 31, 2019. As of March 31, 2019 and December 31, 2018, there were 37 and 165 securities in an unrealized loss position, respectively.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

-18-

The Company applied the following fair value hierarchy:

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

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

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

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018, and the valuation techniques used by the Company to determine those fair values.

									Total
	Carrying								Estimated
March 31, 2019	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	432,807	$	432,807	$	-	$	-	$	432,807
Time Deposits in Other Banks		600		-		600		-		600
Securities - Available for Sale
Obligations of States and Political Subdivisions		29,637		-		29,637		-		29,637
Corporate Debt Securities		496		-		496		-		496
Equity Securities		7,450		2,077		5,373		-		7,450
Loans, net		759,374		-		-		747,951		747,951
Accrued Interest Receivable		3,135		-		-		3,135		3,135

Financial Liabilities:
Noninterest Bearing Deposits		290,929		290,929		-		-		290,929
Interest Bearing Deposits		892,220		-		892,881		-		892,881
Borrowed funds
FHLB Advances		10,000		-		10,212		-		10,212
Accrued Interest Payable		77		-		-		77		77

-19-

									Total
	Carrying								Estimated
December 31, 2018	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	51,842	$	51,842	$	-	$	-	$	51,842
Time Deposits in Other Banks		10,796		-		10,548		-		10,548
Securities - Available for Sale
Obligations of U.S. Government Agencies		128,235		-		128,235		-		128,235
MBS issued by U.S. Government Agencies		190,554		-		190,554		-		190,554
Obligations of States and Political Subdivisions		69,109		-		69,109		-		69,109
Corporate Debt Securities		13,715		-		13,715		-		13,715
Equity Securities		7,415		2,042		5,373		-		7,415
Loans Held for Sale		488		-		-		502		502
Loans, net		760,889		-		-		750,249		750,249
Accrued Interest Receivable		4,413		-		-		4,413		4,413

Financial Liabilities:
Noninterest Bearing Deposits		297,704		297,704		-		-		297,704
Interest Bearing Deposits		885,206		-		885,886		-		885,886
Federal Home Loan Bank Advances		10,000		-		-		10,042		10,042
Accrued Interest Payable		65		-		-		65		65

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

The Company’s assets with Level 3 fair values are carried at their amortized cost values as of March 31, 2019 or December 31, 2018. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

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

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

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

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2019
Impaired loans	$	-	$	-	$	9,364
Other Real Estate Owned	$	-	$	-	$	58

December 31, 2018

MBT FINANCIAL CORP 10-Q