UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September~~March 3031, ~~2018~~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 ☑

AsAPPLICABLE ofONLY ~~November~~TO 8,ISSUERS ~~2018,~~INVOLVED ~~there~~IN ~~were 22,991,496 shares of the Company’s Common Stock outstanding.~~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

	September 30, 2018
	March 31, 2019
Dollars in thousands	(Unaudited)			December 31, ~~2017~~2018
ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	1718,~~436~~426		$	1817,~~233~~058
Interest bearing		20414,~~548~~381			34,~~777~~784
Total cash and cash equivalents		37432,~~984~~807			5351,~~010~~842
Interest Bearing Time Deposits in Other Banks		~~11,946~~600			1510,~~196~~796
Securities - Held to Maturity		-			37,163
Securities - Available for Sale		30,133			401,613
Securities - Available for Sale		430,831			442,816
Equity Securities		7,450			7,415
Equity Securities		7,403			4,148
Loans held for sale		-			488
Loans held for sale		183			346
Loans		766,877			768,660
Loans		752,712			694,979
Allowance for Loan Losses		(7,503	)		(7,771	)
Allowance for Loan Losses		(7,986	)		(7,666	)
Loans - Net		759,374			760,889
Loans - Net		744,726			687,313
Accrued interest receivable and other assets		16,662			16,743
Accrued interest receivable and other assets		19,187			20,463
Other Real Estate Owned		58			692
Other Real Estate Owned		997			1,412
Bank Owned Life Insurance		59,901			59,563
Bank Owned Life Insurance		59,205			58,153
Premises and Equipment - Net		26,480			26,850
Premises and Equipment - Net		26,660			27,400
Total assets	$	1,333,465		$	1,336,891
Total assets	$	1,339,122		$	1,347,420
LIABILITIES
Deposits
Non-interest bearing	$	~~291~~290,~~731~~929		$	~~299~~297,~~838~~704
Interest-bearing		~~874~~892,~~545~~220			~~898~~885,~~326~~206
Total deposits		1,~~166~~183,~~276~~149			1,~~198~~182,~~164~~910
Federal Home Loan Bank advances		3510,000			-10,000
Interest payable and other liabilities		1610,~~495~~028			16,~~598~~314
Total liabilities		1,~~217~~203,~~771~~177			1,~~214~~209,~~762~~224
STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,990,208 and 22,907,844 shares issued and outstanding)		23,403			22,840
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		~~112~~106,~~343~~477			~~117~~113,~~524~~921
Unearned compensation		(19	)		-
Accumulated other comprehensive income (loss)		246			(9,707	)
Accumulated other comprehensive loss		(14,376	)		(7,706	)
Total stockholders' equity		130,288			127,667
Total stockholders' equity		121,351			132,658
Total liabilities and stockholders' equity	$	1,333,465		$	1,336,891
Total liabilities and stockholders' equity	$	1,339,122		$	1,347,420

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

-2-

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
Dollars in thousands, except per share data	~~2018~~2019			~~2017~~2018			~~2018~~			~~2017~~
Interest Income
Interest and fees on loans	$	9,~~164~~571		$	8,~~095~~217		$	~~26,117~~		$	~~23,168~~
Interest on investment securities-
Tax-exempt		~~415~~296			~~327~~404			~~1,262~~			~~943~~
Taxable		21,~~120~~174			2,~~054~~210			~~6,417~~			~~6,507~~
Interest on balances due from banks		~~193~~1,209			~~182~~125			~~376~~			~~392~~
Total interest income		1112,~~892~~250			10,~~658~~956			~~34,172~~			~~31,010~~
Interest Expense
Interest on deposits		~~456~~568			~~427~~414			~~1,270~~			~~1,317~~
Interest on borrowed funds		~~219~~64			-6			~~316~~			3
Total interest expense		~~675~~632			~~427~~420			~~1,586~~			~~1,320~~
Net Interest Income		11,~~217~~618			10,~~231~~536			~~32,586~~			~~29,690~~
Recovery Of Loan Losses		-			-(100	)		~~(100~~	)		~~(200~~	)
Net Interest Income After
Recovery Of Loan Losses		11,~~217~~618			10,~~231~~636			~~32,686~~			~~29,890~~
Other Income
Income from wealth management services		1,~~193~~161			1,~~155~~185			~~3,556~~			~~3,830~~
Service charges and other fees		~~993~~822			~~1,076~~946			~~2,894~~			~~3,136~~
Debit card income		~~763~~701			~~719~~720			~~2,269~~			~~2,147~~
Net gain (loss) on sales and redemptions of securities available for sale		(91	)		150			(193	)		227
Net loss on sales and redemptions of securities available for sale		(11,646	)		(101	)
Net gain (loss) on sales of Other Real Estate Owned		-			7			536			(89	)
Net gain on sales of Other Real Estate Owned		9			19
Origination fees on mortgage loans sold		~~152~~69			8762			~~306~~			~~261~~
Bank owned life insurance income		~~350~~338			~~377~~353			~~1,052~~			~~1,130~~
Other		~~680~~659			~~464~~600			~~1,807~~			~~1,583~~
Total other income		4,040			4,035			12,227			12,225
Total other income (loss)		(7,887	)		3,784
Other Expenses
Salaries and employee benefits		56,~~381~~064			5,~~313~~962			~~16,714~~			~~16,020~~
Occupancy expense		~~660~~729			~~694~~721			~~2,001~~			~~2,124~~
Equipment expense		~~881~~913			~~783~~793			~~2,548~~			~~2,271~~
Marketing expense		~~389~~292			~~375~~377			~~1,233~~			~~961~~
Professional fees		~~550~~843			~~570~~594			~~1,736~~			~~1,779~~
EFT/ATM expense		~~297~~291			~~256~~259			~~844~~			~~763~~
Other Real Estate Owned expenses		2522			3315			61			95
FDIC Deposit Insurance Assessment		9789			107			~~296~~			~~321~~
Bonding and other insurance expense		~~129~~429			~~120~~132			~~398~~			~~367~~
Telephone expense		8480			8375			~~233~~			~~302~~
Other		~~663~~558			~~616~~757			~~2,070~~			~~2,017~~
Total other expenses		910,~~156~~310			89,~~950~~792			~~28,134~~			~~27,020~~
Income Before Income Taxes		6,101			5,316			16,779			15,095
Income (Loss) Before Income Taxes		(6,579	)		4,628
Income Tax Expense		1,127			1,383			2,958			4,342
Income Tax Expense (Benefit)		(1,438	)		726
Net Income	$	4,974		$	3,933		$	13,821		$	10,753
Net Income (Loss)	$	(5,141	)	$	3,902
Other Comprehensive Income - Net of Tax
Unrealized gains (losses) on securities		~~(1,972~~387	)		(~~679~~4,204	)		~~(6,868~~	)		~~3,091~~
Reclassification adjustment for (gains) losses included in net income		719,200			~~(99~~80	)		~~152~~			~~(150~~	)
Postretirement benefit liability		31366			2732			95			80
Total Other Comprehensive Income (Loss) - Net of Tax		(1,870	)		(751	)		(6,621	)		3,021
Effect of accounting change on equity securities		-			(49	)
Comprehensive Income	$	3,104		$	3,182		$	7,200		$	13,774
Total Other Comprehensive Income (Loss) - Net of Tax		9,953			(4,141	)
Basic Earnings Per Common Share	$	0.21		$	0.17		$	0.60		$	0.47
Comprehensive Income (Loss)	$	4,812		$	(239	)
Diluted Earnings Per Common Share	$	0.21		$	0.17		$	0.60		$	0.47
Basic Earnings (Loss) Per Common Share	$	(0.22	)	$	0.17
Dividends Declared Per Share of Common Stock	$	0.10		$	0.06		$	0.83		$	0.86
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, 2018		22,907,844	$	22,840		$	117,524		$	-		$	(7,706	)	$	132,658
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		~~45,749~~186		(~~209~~1	)		-			-			-			(~~209~~1	)
Restricted stock awards, net of shares redeemed for taxes		7,500		78			-			(78	)		-			-
Employee Stock Purchase Plan and other stock issued		2,857		30			-			-			-			30
Employee Stock Purchase Plan and other stock issued		29,115		309			-			-			-			309
Equity Compensation		-		93			-			-			-			93
Tax benefit from exercise of options		-		-			-			-			-			-
Deferred Directors' Compensation		-		(10	)		-			-			-			(10	)
Equity Compensation		-		489			-			59			-			548
Dividends declared ($0.10 per share)		-		-			(2,303	)		-			-			(2,303	)
Deferred Directors' Compensation		-		(104	)		-			-			-			(104	)
Net loss		-		-			(5,141	)		-			-			(5,141	)
Cumulative Effect Adjustment (ASU 2016-01)		-		-			49			-			(49	)		-
Other comprehensive income - net of tax		-		-			-			-			9,953			9,953
Dividends declared ($0.83 per share)		-		-			(19,051	)		-			-			(19,051	)
Balance - March 31, 2019		23,036,758	$	23,565		$	106,477		$	-		$	246		$	130,288
Net income		-		-			13,821			-			-			13,821
Other comprehensive income - net of tax		-		-			-			-			(6,621	)		(6,621	)
Balance - September 30, 2018		22,990,208	$	23,403		$	112,343		$	(19	)	$	(14,376	)	$	121,351

												Accumulated
												Other
	Common Stock					Retained			Unearned			Comprehensive
Dollars in thousands	Shares		Amount			Earnings			Compensation			Income (Loss)			Total
Balance - January 1, 2017		22,777,882	$	22,562		$	126,079		$	(4	)	$	(7,523	)	$	141,114
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		6439,~~211~~825		(~~253~~178	)		-			-			-			(~~253~~178	)
Restricted stock awards, net of shares redeemed for taxes		67,~~000~~500		6578			-			(6578	)		-			-
Employee Stock Purchase Plan and other stock issued		2718,~~412~~092		~~294~~189			-			-			-			~~294~~189
Tax benefit from exercise of options		-		-			~~583~~-			-			-			~~583~~-
Equity Compensation		-		404			-			49			-			453
Tax benefit from exercise of options		-		-			-			-			-			-
Deferred Directors' Compensation		-		(354	)		-			-			-			(354	)
Equity Compensation		-		216			-			19			-			235
Dividends declared ($0.86 per share)		-		-			(19,642	)		-			-			(19,642	)
Deferred Directors' Compensation		-		(67	)		-			-			-			(67	)
Net income		-		-			10,753			-			-			10,753
Cumulative Effect Adjustment (ASU 2016-01)		-		-			49			-			(49	)		-
Other comprehensive income - net of tax		-		-			-			-			3,021			3,021
Dividends declared ($0.66 per share)		-		-			(15,145	)		-			-			(15,145	)
Balance - September 30, 2017		22,875,505	$	22,718		$	117,773		$	(20	)	$	(4,502	)	$	135,969
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

	Nine Months Ended September 30,
	Three Months Ended March 31,
Dollars in thousands	~~2018~~2019			~~2017~~2018
Cash Flows from Operating Activities
Net Income	$	13,821		$	10,753
Net Income (Loss)	$	(5,141	)	$	3,902
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		~~(100~~-	)		(~~200~~100	)
Depreciation		~~1,102~~346			~~1,174~~370
Deferred tax expense		-			(241	)
Net amortization of investment premium and discount		259			576
Net amortization of investment premium and discount		1,673			1,710
Adjustment for assets carried at fair market value		(35	)		36
Adjustment for assets carried at fair market value		63			-
Net decrease in interest payable and other liabilities		(5,835	)		(1,434	)
Writedowns of Other Real Estate Owned		42			76
Net decrease (increase) in interest receivable and other assets		(2,550	)		2,555
Net (decrease) increase in interest payable and other liabilities		(86	)		237
Equity based compensation expense		93			235
Net decrease (increase) in interest receivable and other assets		2,033			(1,266	)
Net loss on sale/settlement of securities		11,646			101
Writedowns of Other Assets		-			37
Increase in cash surrender value of life insurance		(338	)		(352	)
Equity based compensation expense		548			453
Net cash provided by (used for) operating activities	$	(1,555	)	$	5,889
Net (gain) loss on sale/settlement of securities		193			(227	)
Increase in cash surrender value of life insurance		(1,052	)		(1,131	)
Net cash provided by operating activities	$	18,237		$	11,375
Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks	$	~~3,250~~750		$	21,~~500~~000
Proceeds from maturities and redemptions of investment securities held to maturity		~~4,567~~-			~~11,113~~241
Proceeds from maturities and redemptions of investment securities available for sale		455,~~400~~278			2812,~~385~~666
Proceeds from sales of investment securities held to maturity		1,612			-
Proceeds from sales of investment securities available for sale		367,161			19,181
Proceeds from sales of investment securities available for sale		23,569			135,327
Proceeds from sales of interest bearing time deposits in other banks		9,446			-
Net increase in loans		(57,898	)		(42,033	)
Net (increase) decrease in loans		2,003			(27,140	)
Proceeds from sales of other real estate owned		~~1,698~~643			~~726~~347
Proceeds from sales of other assets		~~438~~-			~~230~~40
Purchase of time deposits in other banks		-			(500	)
Purchase of investment securities available for sale		(728	)		(30,799	)
Purchase of investment securities held to maturity		(133	)		(4,455	)
Purchase of bank premises and equipment		-			(32	)
Purchase of Bank Owned Life Insurance		-			(4,357	)
Net cash provided by (used for) investing activities	$	384,553		$	(24,496	)
Proceeds from surrender of Bank Owned Life Insurance		-			309
Purchase of investment securities available for sale		(39,565	)		(137,941	)
Purchase of bank premises and equipment		(362	)		(977	)
Net cash used for investing activities	$	(17,424	)	$	(11,673	)
Cash Flows from Financing Activities
Net decrease in deposits	$	(31,888	)	$	(4,382	)
Net increase (decrease) in deposits	$	239		$	(4,801	)
Proceeds from Federal Home Loan Bank borrowings		40,000			-
Issuance of common stock		30			189
Repayment of Federal Home Loan Bank borrowings		(5,000	)		-
Stock redeemed for tax withholding - stock based compensation		1			(178	)
Issuance of common stock		309			294
Dividends paid		(2,303	)		(15,145	)
Stock redeemed for tax withholding - stock based compensation		(209	)		(253	)
Net cash used for financing activities	$	(2,033	)	$	(19,935	)
Dividends paid		(19,051	)		(19,642	)
Net Increase (Decrease) in Cash and Cash Equivalents	$	380,965		$	(38,542	)
Net cash used for financing activities	$	(15,839	)	$	(23,983	)
Cash and Cash Equivalents at Beginning of Period		51,842			53,010
Net Decrease in Cash and Cash Equivalents	$	(15,026	)	$	(24,281	)
Cash and Cash Equivalents at End of Period	$	432,807		$	14,468
Cash and Cash Equivalents at Beginning of Period		53,010			52,772
Cash and Cash Equivalents at End of Period	$	37,984		$	28,491
Supplemental Cash Flow Information
Cash paid for interest	$	~~1,556~~619		$	~~1,321~~420
Cash paid for federal income taxes	$	~~1,419~~-		$	~~3,076~~-
Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned	$	~~748~~-		$	~~827~~144
Transfer of loans to other assets	$	-		$	40

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

-5-

MBT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

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. ~~Consummation~~The ~~of the~~ merger iswas ~~subject~~approved toat ~~various~~a ~~conditions,~~special ~~including,~~meeting ~~among others, requisite regulatory approval and approval~~ of the Company’s shareholders. ~~The~~on ~~Merger~~February ~~Agreement~~14, ~~was~~2019 ~~entered~~and ~~into subsequent to~~ the ~~end~~transaction ofis ~~the~~expected ~~third~~to ~~quarter~~be ~~and~~completed ~~the~~in ~~financial statements for~~ the ~~third~~second quarter doof ~~not reflect any activity pertaining to the Merger Agreement~~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.

-6-

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

~~The~~In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ~~2014-09~~ (ASU) ~~2014~~No. 2016-~~09)~~13, ~~“Revenue~~Financial ~~from~~Instruments ~~Contracts~~- ~~with~~Credit ~~Customers~~Losses: ~~(Topic~~Measurement ~~606)”~~of Credit Losses on Financial Instruments. The ASU ~~2014-09~~includes ~~adopts~~increased adisclosures ~~standardized~~and ~~approach~~various ~~for~~changes ~~revenue~~to ~~recognition~~the accounting and ~~was~~measurement aof ~~joint~~financial ~~effort~~assets ~~with~~including the ~~International~~Company’s ~~Accounting~~loans ~~Standards~~and ~~Board~~available-for-sale ~~(IASB).~~and ~~The~~held-to-maturity ~~new~~debt ~~revenue~~securities. ~~recognition~~Each ~~standard~~financial isasset ~~based~~presented on the balance sheet would have a ~~core~~unique ~~principle~~allowance offor ~~recognizing~~credit ~~revenue~~losses valuation account that is deducted from the amortized cost basis to ~~depict~~present the ~~transfer~~net ofcarrying ~~promised~~value ~~goods~~at orthe ~~services~~amount expected to ~~customers~~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 ~~amount~~entity’s ~~that~~current ~~reflects~~estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the ~~consideration~~Company's toyear ~~which~~ending December 31, 2020. Upon adoption, the ~~entity~~ASU ~~expects~~will be applied using a modified retrospective transition method to bethe ~~entitled~~beginning of the first reporting period in ~~exchange~~which the guidance is effective. A prospective transition approach is required for ~~those~~debt ~~goods~~securities orfor ~~services.~~which ~~ASU~~an ~~2014~~other-09than-temporary isimpairment had been recognized before the effective date. Early adoption for ~~public~~all ~~entities~~institutions is permitted for ~~reporting~~fiscal ~~periods~~years beginning after December 15, ~~2017 (therefore~~2018, ~~for~~including ~~the~~interim ~~year~~periods ~~ending~~within ~~December~~those ~~31,~~fiscal ~~2018~~years. ~~for~~The standard will likely have an effect on the Company).'s ~~The~~consolidated ~~ASU~~financial ~~does~~statements ~~not~~from ~~apply~~a toonetime ~~financial~~adjustment ~~instruments,~~to ~~which~~increase ~~constitute~~the aALLL ~~significant~~upon ~~portion~~adoption of ~~our~~the ~~revenue.~~standard ~~The~~and ~~Company~~due ~~adopted~~to ~~ASU~~increased ~~2014-09~~provision onexpense ~~January~~at 1,the ~~2018~~time ~~and~~loans ~~determined~~are ~~that~~originated. ~~adoption~~Management has begun the process of segmenting the ~~standard~~portfolio. ~~did~~Our ~~not~~bank's ~~have~~merger awith ~~significant~~First ~~impact~~Merchants onBank ~~its~~will ~~financial~~be ~~statements~~completed prior to the effective date, and First Merchants will complete the implementation.

In ~~June~~March ~~2016~~2017, the ~~Financial Accounting Standards Board (~~FASB) issued ~~Accounting Standards Update (~~ASU) No. ~~2016~~2017-1308, ~~Financial Instruments~~ Receivables-Nonrefundable ~~Credit~~Fees ~~Losses:~~and ~~Measurement~~Other ofCosts ~~Credit~~– ~~Losses~~Premium Amortization on ~~Financial~~Purchased ~~Instruments.~~Callable ~~The~~Debt ~~ASU~~Securities ~~includes~~(Subtopic ~~increased~~310-20). This ~~disclosures~~ASU ~~and~~was ~~various~~issued ~~changes~~ to shorten the ~~accounting~~amortization ~~and~~period ~~measurement~~for ofthe ~~financial~~premium ~~assets~~to ~~including~~ the ~~Company’s~~earliest ~~loans~~call ~~and~~date ~~available-for-sale~~on ~~and held-to-maturity~~ debt securities. This ~~Each~~premium ~~financial~~will ~~asset~~now ~~presented~~be onrecorded ~~the~~as ~~balance sheet would have~~ a ~~unique~~reduction ~~allowance for credit losses valuation account that is deducted from the amortized cost basis~~ to ~~present the~~ net ~~carrying~~interest ~~value~~margin atduring the ~~amount~~shorter ~~expected~~yield to becall ~~collected~~period, onas ~~the~~compared ~~financial~~to ~~asset.~~prior ~~The~~practice ~~amendments~~of inamortizing ~~this ASU also eliminate~~ the ~~probable~~premium ~~initial~~as ~~recognition~~a ~~threshold~~reduction into ~~current~~net ~~GAAP~~interest ~~and~~margin ~~instead,~~over ~~reflect~~the ancontractual ~~entity’s~~life ~~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~~instrument. This ~~Upon adoption, the~~ ASU ~~will~~does benot ~~applied~~change ~~using~~the acurrent ~~modified retrospective transition~~ method ~~to the beginning~~ of ~~the~~amortizing ~~first~~any ~~reporting~~discount ~~period~~over ~~in which~~ the ~~guidance~~contractual islife ~~effective.~~of Athe ~~prospective transition approach is required for~~ debt ~~securities~~security, ~~for~~and ~~which~~this anpronouncement ~~other-than-temporary~~is ~~impairment had been recognized before the~~ effective ~~date. Early adoption~~ for ~~all institutions is permitted for~~ fiscal years beginning after December 15, 2018, ~~including~~and ~~interim~~must ~~periods~~be ~~within~~adopted ~~those fiscal years. The standard will likely have an effect~~ on ~~the Company's consolidated financial statements from~~ a ~~onetime~~modified ~~adjustment~~retrospective tobasis. Adoption ~~increase the ALLL upon adoption~~ of the standard ~~and~~did ~~due~~not tohave ~~increased~~a ~~provision~~material ~~expense~~effect aton the ~~time~~Company’s ~~loans~~financial ~~are originated~~statements. ~~Management has developed an implementation timeline and begun the process of segmenting the portfolio.~~

-7-

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

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

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

	For the three months ended September 30,					For the nine months ended September 30,
	For the three months ended March 31,
	2018			2017		2018		2017
	2019			2018
Basic
Net income	$	4,974,000		$	3,933,000	$	13,821,000	$	10,753,000
Net income (loss)	$	(5,141,000	)	$	3,902,000
Average common shares outstanding		2223,~~985~~035,~~176~~369			22,~~871~~943,~~451~~736		~~22,969,182~~		~~22,852,935~~
Earnings per common share - basic	$	0.21		$	0.17	$	0.60	$	0.47
Earnings (Loss) per common share - basic	$	(0.22	)	$	0.17
Diluted
Net income	$	4,974,000		$	3,933,000	$	13,821,000	$	10,753,000
Net income (loss)	$	(5,141,000	)	$	3,902,000
Average common shares outstanding		2223,~~985~~035,~~176~~369			22,~~871~~943,~~451~~736		~~22,969,182~~		~~22,852,935~~
Equity compensation		~~136,675~~-			~~169~~119,~~509~~464		~~131,329~~		~~181,598~~
Average common shares outstanding - diluted		23,~~121~~035,~~851~~369			23,~~040~~063,~~960~~200		~~23,100,511~~		~~23,034,533~~
Earnings per common share - diluted	$	(0.2122	)	$	0.17	$	~~0.60~~	$	~~0.47~~

-8-

3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) -– OnSOSARs ~~February~~granted ~~22,~~under ~~2018,~~the ~~105,000~~plan ~~Stock~~are ~~Only~~structured ~~Stock~~as ~~Appreciation~~fixed ~~Rights~~grants ~~(SOSARs) were awarded to certain officers in accordance~~ with the ~~MBT~~base ~~2008~~price ~~Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three~~ equal ~~annual~~to ~~installments~~the ~~beginning~~market ~~on December 31, 2018. The fair~~ value of ~~$2.36 for~~ the ~~SOSARs~~underlying ~~was~~stock ~~estimated~~on at the date of the grant~~, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 23~~.~~64%, a risk free interest rate of 2.86% and dividend yield of 2.18%. The fair value of the Company’s common stock was $10.45 on the grant date.~~

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

The following table summarizes the SOSARs that have been granted:

				Weighted Average
	SOSARs			Base Price
SOSARs Outstanding, January 1, 2018		372,585		$	6.82
SOSARs Outstanding, January 1, 2019		347,379		$	8.78
Granted		~~105,000~~-			~~10.45~~-
Exercised		(~~106~~2,~~870~~166	)		49.3344
Forfeited		~~(4,336~~-	)		~~10.09~~-
Expired		-			-
SOSARs Outstanding, September 30, 2018		366,379		$	8.55
SOSARs Outstanding, March 31, 2019		345,213		$	8.78
SOSARs Exercisable, September 30, 2018		174,181		$	6.66
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 ~~September~~March 3031, ~~2018~~2019 was $1110.3002. The value of the exercisable SOSARs that are in-the-money as of ~~September~~March 3031, ~~2018~~2019 was $~~808~~552,000, and exercise of those SOSARs on that date would have resulted in the issuance of 7155,~~522~~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.

~~Restricted~~The ~~Stock~~total ~~Unit~~expense ~~Awards~~for –equity Onbased ~~February~~compensation ~~22,~~was ~~2018~~$93,000 ~~21,500 performance restricted stock units were awarded to certain key executive officers~~ in ~~accordance with~~ the ~~MBT~~first ~~2008~~quarter ~~Stock~~of ~~Incentive~~2019 ~~Plan that was approved by shareholders on May 1, 2008~~ and ~~amended by shareholders on May 7~~$236,000 ~~2015.~~in ~~Each~~the ~~Restricted~~first ~~Stock~~quarter ~~Unit (RSU) is equivalent to one share~~ of ~~MBT Financial Corp~~2018. ~~common~~The ~~stock.~~unrecognized ~~Stock~~compensation ~~will~~expense befor ~~issued~~all toequity ~~the~~based ~~participants~~compensation ~~following~~plans ais ~~two~~$413,000 ~~year~~as ~~performance~~of ~~period~~March ~~that ends on December~~ 31, 2019 ~~if the defined performance targets are achieved~~. The ~~grant~~expense ~~date~~is ~~fair~~expected ~~value~~to ofbe ~~the~~recognized ~~stock~~over ~~was~~a ~~$10.45~~weighted ~~per~~average ~~share.~~period ~~Earned RSUs vest on December 15, 2020 and as~~ of 1.40 ~~September 30, 2018 none of the RSUs were vested~~years.

~~Restricted Stock Awards – On February 22, 2018, 7,500 restricted shares were awarded to certain non~~-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2018. The expense for the restricted stock is based on the grant date value of $10.45 and is recognized over the vesting period. The unrecognized cost related to the non8-~~vested restricted stock awards was $19,000 as of September 30, 2018.~~

The total expense for equity based compensation was $156,000 in the third quarter of 2018 and $161,000 in the third quarter of 2017. The total expense for equity based compensation was $548,000 in the first nine months of 2018 and $454,000 in the first nine months of 2017. The unrecognized compensation expense for all equity based compensation plans is $648,000 as of September 30, 2018. The expense is expected to be recognized over a weighted average period of 1.60 years.

-9-

4. LOANS

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

Loans consist of the following (000s omitted):

	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Residential real estate loans	$	~~229~~231,~~485~~074	$	~~222~~230,~~014~~008
Commercial and Construction real estate loans		~~295~~306,~~673~~593		~~293~~306,~~202~~694
Agriculture and agricultural real estate loans		22,~~624~~087		2122,~~231~~486
Commercial and industrial loans		~~154~~162,~~188~~446		~~122~~162,~~219~~026
Loans to individuals for household, family, and other personal expenditures		5044,~~742~~677		3647,~~313~~446
Total loans, gross	$	~~752~~766,~~712~~877	$	~~694~~768,~~979~~660
Less: Allowance for loan losses		7,~~986~~503		7,~~666~~771
Net Loans	$	~~744~~759,~~726~~374	$	~~687~~760,~~313~~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):

		September 30,				December 31,
	March 31,				December 31,
		2018				2017
	2019				2018
Nonaccrual loans	$	$7,134	~~4,494~~		$	$5,566	~~3,658~~
Loans 90 days past due and accruing		61	5			-	3
Restructured loans		3,418	~~6,854~~			4,495	~~9,625~~
Total nonperforming loans	$	$10,613	~~11,353~~		$	$10,061	~~13,286~~
Other real estate owned		58	~~997~~			692	~~1,412~~
Other assets		-	~~448~~			-	40
Total nonperforming assets	$	$10,671	~~12,798~~		$	$10,753	~~14,738~~
Nonperforming assets to total assets		0.80	~~0.96~~%	%		0.80	~~1.09~~%	%
Allowance for loan losses to nonperforming loans		70.70	~~70.34~~%	%		77.24	~~57.70~~%	%

-109-

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 ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~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 September 30, 2018
Allowance for loan losses: For the three months ended March 31, 2019
Beginning Balance	$	~~262~~205	$	1,~~449~~266		$	23,~~949~~012		$	~~474~~184		$	1,~~142~~218		$	1,~~682~~886		$	7,~~958~~771
Charge-offs		-		-(252	)		(80151	)		-			(6-	)		(118	)		(97411	)
Recoveries		3-		3427			1524			12			3475			275			~~125~~143
Provision		6135		~~(77~~720	)		~~(419~~153	)		(14158	)		(~~134~~82	)		~~583~~(668	)		-
Ending balance	$	~~326~~240	$	1,~~406~~761		$	23,~~465~~038		$	~~472~~38		$	1,~~036~~211		$	21,~~281~~215		$	7,~~986~~503
Allowance for loan losses: For the nine months ended September 30, 2018
Allowance for loan losses as of March 31, 2019
Beginning Balance	$	195	$	1,443		$	3,297		$	491		$	1,279		$	961		$	7,666
Ending balance individually evaluated for impairment	$	-	$	138		$	118		$	-		$	83		$	127		$	466
Charge-offs		-		-			(83	)		-			(64	)		(13	)		(160	)
Ending balance collectively evaluated for impairment		240		1,623			2,920			38			1,128			1,088			7,037
Recoveries		5		65			304			46			107			53			580
Ending balance	$	240	$	1,761		$	3,038		$	38		$	1,211		$	1,215		$	7,503
Provision		126		(102	)		(1,053	)		(65	)		(286	)		1,280			(100	)
Loans as of March 31, 2019
Ending balance	$	326	$	1,406		$	2,465		$	472		$	1,036		$	2,281		$	7,986
Ending balance individually evaluated for impairment	$	2,556	$	287		$	3,503		$	32		$	3,051		$	401		$	9,830
Allowance for loan losses as of September 30, 2018
Ending balance collectively evaluated for impairment		19,531		162,159			275,149			27,909			228,023			44,276			757,047
Ending balance individually evaluated for impairment	$	-	$	162		$	173		$	340		$	107		$	149		$	931
Ending balance	$	22,087	$	162,446		$	278,652		$	27,941		$	231,074		$	44,677		$	766,877
Ending balance collectively evaluated for impairment		326		1,244			2,292			132			929			2,132			7,055
Ending balance	$	326	$	1,406		$	2,465		$	472		$	1,036		$	2,281		$	7,986
Loans as of September 30, 2018
Ending balance individually evaluated for impairment	$	1,127	$	246		$	4,617		$	1,546		$	4,153		$	406		$	12,095
Ending balance collectively evaluated for impairment		21,497		153,942			265,927			23,583			225,332			50,336			740,617
Ending balance	$	22,624	$	154,188		$	270,544		$	25,129		$	229,485		$	50,742		$	752,712

-1110-

Activity in the allowance for loan losses during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~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 September 30, 2017
Allowance for loan losses: For the three months ended March 31, 2018
Beginning Balance	$	~~320~~195		$	1,~~496~~443		$	3,~~359~~297		$	~~541~~491		$	1,~~398~~279		$	~~1,023~~961		$	87,~~137~~666
Charge-offs		-			(6-	)		(~~163~~3	)		-			(497	)		(882	)		(~~306~~12	)
Recoveries		772			1815			23240			1320			3142			1712			~~179~~331
Provision		~~(67~~13	)		(~~199~~61	)		56(446	)		(5650	)		(~~134~~225	)		~~400~~669			-(100	)
Ending balance	$	~~330~~210		$	1,~~309~~397		$	3,~~275~~088		$	~~498~~461		$	1,~~246~~089		$	1,~~352~~640		$	87,~~010~~885
Allowance for loan losses: For the nine months ended September 30, 2017
Allowance for loan losses as of March 31, 2018
Beginning Balance	$	201		$	1,632		$	3,336		$	525		$	1,599		$	1,165		$	8,458
Ending balance individually evaluated for impairment	$	1		$	146		$	315		$	354		$	131		$	199		$	1,146
Charge-offs		-			(6	)		(572	)		-			(99	)		(137	)		(814	)
Ending balance collectively evaluated for impairment		209			1,251			2,773			107			958			1,441			6,739
Recoveries		80			116			97			39			177			57			566
Ending balance	$	210		$	1,397		$	3,088		$	461		$	1,089		$	1,640		$	7,885
Provision		49			(433	)		414			(66	)		(431	)		267			(200	)
Loans as of March 31, 2018
Ending balance	$	330		$	1,309		$	3,275		$	498		$	1,246		$	1,352		$	8,010
Ending balance individually evaluated for impairment	$	1,139		$	260		$	3,720		$	1,574		$	4,566		$	424		$	11,683
Allowance for loan losses as of September 30, 2017
Ending balance collectively evaluated for impairment		21,180			131,642			266,608			18,354			218,752			54,421			710,957
Ending balance individually evaluated for impairment	$	1		$	139		$	16		$	367		$	174		$	206		$	903
Ending balance	$	22,319		$	131,902		$	270,328		$	19,928		$	223,318		$	54,845		$	722,640
Ending balance collectively evaluated for impairment		329			1,170			3,259			131			1,072			1,146			7,107
Ending balance	$	330		$	1,309		$	3,275		$	498		$	1,246		$	1,352		$	8,010
Loans as of September 30, 2017
Ending balance individually evaluated for impairment	$	1,095		$	220		$	2,622		$	1,598		$	5,368		$	433		$	11,336
Ending balance collectively evaluated for impairment		22,346			122,773			268,893			20,544			211,046			36,928			682,530
Ending balance	$	23,441		$	122,993		$	271,515		$	22,142		$	216,414		$	37,361		$	693,866

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.

-12-

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-

~~The~~Loans ~~portfolio~~are ~~segments~~considered inpast ~~each~~due ~~credit~~when ~~risk~~contractually ~~grade~~required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of ~~September~~the 30loan, ~~2018~~not just the amount of payments that are past due. The following is a summary of past due loans as ~~follows~~of March 31, 2019 and December 31, 2018 (000s omitted):

Credit Quality Indicators as of September 30, 2018 Credit Risk by Internally Assigned Grade

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

		Agriculture and Agricultural Real Estate			Commercial			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Consumer and Other			Total
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
Not Rated		$	-		$	2,573		$	114		$	11,612		$	146,009		$	45,226		$	205,534
Agriculture and Agricultural Real Estate	$	632		$	1,235		$	-		$	1,867		$	20,619		$	22,486		$	-
10			-			6,805			-			-			-			-			6,805
Commercial		186			110			31			327			161,699			162,026			-
20			281			115			206			-			-			-			602
Commercial Real Estate		804			-			1,849			2,653			276,641			279,294			-
30			490			44,661			23,963			-			1,273			3,662			74,049
Construction Real Estate		-			-			-			-			27,400			27,400			-
40			16,046			93,097			213,410			8,979			73,940			1,840			407,312
Residential Real Estate		1,217			340			376			1,933			228,075			230,008			-
45			1,336			2,082			15,442			1,402			2,730			-			22,992
Consumer and Other		79			13			-			92			47,354			47,446			-
50			1,879			4,355			10,799			1,590			2,185			-			20,808
Total	$	2,918		$	1,698		$	2,256		$	6,872		$	761,788		$	768,660		$	-
55			-			251			2,108			1,510			731			-			4,600
60			2,592			249			4,502			36			2,617			14			10,010
70			-			-			-			-			-			-			-
80			-			-			-			-			-			-			-
90			-			-			-			-			-			-			-
Total		$	22,624		$	154,188		$	270,544		$	25,129		$	229,485		$	50,742		$	752,712
Performing		$	21,946		$	153,889		$	266,992		$	23,583		$	224,627		$	50,322		$	741,359
Nonperforming			678			299			3,552			1,546			4,858			420			11,353
Total		$	22,624		$	154,188		$	270,544		$	25,129		$	229,485		$	50,742		$	752,712

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

Credit Quality Indicators as of December 31, 2017 Credit Risk by Internally Assigned Grade

	Agriculture and Agricultural Real Estate		Commercial		Commercial Real Estate		Construction Real Estate		Residential Real Estate		Consumer and Other		Total
Not Rated	$	-	$	1,341	$	160	$	13,903	$	135,311	$	30,359	$	181,074
10		-		6,870		-		-		-		-		6,870
20		281		293		353		-		-		-		927
30		503		29,655		6,300		-		941		3,972		41,371
40		14,819		76,792		223,468		4,857		72,634		1,947		394,517
45		1,414		2,391		12,244		1,528		5,363		-		22,940
50		1,864		3,778		21,802		1,667		3,590		6		32,707
55		1,441		594		1,857		1,537		867		2		6,298
60		909		505		3,460		66		3,308		27		8,275
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	21,231	$	122,219	$	269,644	$	23,558	$	222,014	$	36,313	$	694,979
Performing	$	20,665	$	121,768	$	265,801	$	21,955	$	215,643	$	35,861	$	681,693
Nonperforming		566		451		3,843		1,603		6,371		452		13,286
Total	$	21,231	$	122,219	$	269,644	$	23,558	$	222,014	$	36,313	$	694,979

-14-

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of September 30, 2018 and December 31, 2017 (000s omitted):

September 30, 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	$	56	$	-	$	75	$	131	$	22,493	$	22,624	$	-
Commercial		388		109		30	$	527		153,661		154,188		5
Commercial Real Estate		402		-		1,852		2,254		268,290		270,544		-
Construction Real Estate		-		-		-		-		25,129		25,129		-
Residential Real Estate		1,098		74		492		1,664		227,821		229,485		-
Consumer and Other		53		-		-		53		50,689		50,742		-
Total	$	1,997	$	183	$	2,449	$	4,629	$	748,083	$	752,712	$	5

December 31, 2017	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment >90 Days Past Due and Accruing
Agriculture and Agricultural Real Estate	$	-	$	-	$	-	$	-	$	21,231	$	21,231	$	-
Commercial		111		8		5		124		122,095		122,219		3
Commercial Real Estate		834		783		56		1,673		267,971		269,644		-
Construction Real Estate		17		-		-		17		23,541		23,558		-
Residential Real Estate		1,361		58		871		2,290		219,724		222,014		-
Consumer and Other		55		2		-		57		36,256		36,313		-
Total	$	2,378	$	851	$	932	$	4,161	$	690,818	$	694,979	$	3

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

The following is a summary of non-accrual loans as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018 (000s omitted):

		September 30, 2018			December 31, 2017
	March 31, 2019			December 31, 2018
Agriculture and Agricultural Real Estate	$	$2,363	~~119~~	$	$1,624	-
Commercial		85	~~104~~		106	~~243~~
Commercial Real Estate		3,277	~~2,939~~		2,907	~~1,580~~
Construction Real Estate		32	7		5	33
Residential Real Estate		1,366	~~1,311~~		912	~~1,783~~
Consumer and Other		11	14		12	19
Total	$	$7,134	~~4,494~~	$	$5,566	~~3,658~~

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

-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 following is a summary of impaired loans as of September 30, 2018 and September 30, and December 31, 2017 (000s omitted):

September 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment for the Three Months Ended		Interest Income Recognized in the Three Months Ended		Average Recorded Investment for the Nine Months Ended		Interest Income Recognized in the Nine Months Ended
With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	891	$	888	$	-	$	889	$	12	$	903	$	35
Commercial		-		-		-		-		-		-		-
Commercial Real Estate		2,873		2,875		-		2,896		7		2,902		72
Construction Real Estate		-		-		-		-		-		-		-
Residential Real Estate		3,809		3,983		-		4,006		41		4,058		149
Consumer and Other		32		32		-		33		1		34		2
With an allowance recorded:
Agriculture and Agricultural Real Estate		236		236		-		236		3		238		9
Commercial		246		253		162		256		3		261		9
Commercial Real Estate		1,744		1,807		173		1,878		27		1,895		84
Construction Real Estate		1,546		1,580		340		1,572		19		1,585		56
Residential Real Estate		344		352		107		355		4		359		12
Consumer and Other		374		375		149		377		3		382		8
Total:
Agriculture and Agricultural Real Estate	$	1,127	$	1,124	$	-	$	1,125	$	15	$	1,141	$	44
Commercial		246		253		162		256		3		261		9
Commercial Real Estate		4,617		4,682		173		4,774		34		4,797		156
Construction Real Estate		1,546		1,580		340		1,572		19		1,585		56
Residential Real Estate		4,153		4,335		107		4,361		45		4,417		161
Consumer and Other		406		407		149		410		4		416		10
Total	$	12,095	$	12,381	$	931	$	12,498	$	120	$	12,617	$	436

	Recorded Investment as of December 31, 2017		Unpaid Principal Balance as of December 31, 2017		Related Allowance as of December 31, 2017		Average Recorded Investment for the Three Months Ended September 30, 2017		Interest Income Recognized in the Three Months Ended September 30, 2017		Average Recorded Investment for the Nine Months Ended September 30, 2017		Interest Income Recognized in the Nine Months Ended September 30, 2017
With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	829	$	826	$	-	$	849	$	11	$	850	$	32
Commercial		-		-		-		-		-		-		-
Commercial Real Estate		1,977		2,034		-		2,177		23		2,238		59
Construction Real Estate		17		21		-		-		-		-		-
Residential Real Estate		3,757		3,935		-		4,054		51		4,110		150
Consumer and Other		30		30		-		-		-		1		-
With an allowance recorded:
Agriculture and Agricultural Real Estate		241		240		1		242		3		244		10
Commercial		265		268		148		220		2		224		7
Commercial Real Estate		1,776		1,783		219		614		6		621		17
Construction Real Estate		1,586		1,619		360		1,622		19		1,635		57
Residential Real Estate		1,464		1,515		177		1,537		16		1,552		45
Consumer and Other		402		403		205		437		5		444		15
Total:
Agriculture and Agricultural Real Estate	$	1,070	$	1,066	$	1	$	1,091	$	14	$	1,094	$	42
Commercial		265		268		148		220		2		224		7
Commercial Real Estate		3,753		3,817		219		2,791		29		2,859		76
Construction Real Estate		1,603		1,640		360		1,622		19		1,635		57
Residential Real Estate		5,221		5,450		177		5,591		67		5,662		195
Consumer and Other		432		433		205		437		5		445		15
Total	$	12,344	$	12,674	$	1,110	$	11,752	$	136	$	11,919	$	392

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-

Loans that have been classified as TDRs during the three and nine month periods ended September 30, 2018 and September 30, 2017 are as follows (000s omitted from dollar amounts):

	Three months ended						Nine months ended
	September 30, 2018						September 30, 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		-	$	-	$	-		-	$	-	$	-
Commercial		-		-		-		-		-		-
Commercial Real Estate		1		58		53		2		341		333
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		1		78		78		3		250		228
Consumer and Other		-		-		-		-		-		-
Total		2	$	136	$	131		5	$	591	$	561

	Three months ended						Nine months ended
	September 30, 2017						September 30, 2017
	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance		Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-	$	-		-	$	-	$	-
Commercial		-		-		-		2		29		29
Commercial Real Estate		1		225		202		4		578		492
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		1		99		99		5		371		229
Consumer and Other		-		-		-		1		1		-
Total		2	$	324	$	301		12	$	979	$	750

-17-

The Bank considers TDRs that become past due under the modified terms as defaulted. The following table shows the loans that became TDRs during the nine month periods ended September 30, 2018 and September 30, 2017 that subsequently defaulted during the nine month periods ended September 30, 2018 and September 30, 2017, respectively.

	Nine months ended				Nine months ended
	September 30, 2018				September 30, 2017
	Number of Contracts		Recorded Principal Balance		Number of Contracts		Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-		-	$	-
Commercial		-		-		-		-
Commercial Real Estate		-		-		-		-
Construction Real Estate		-		-		-		-
Residential Real Estate		-		-		1		99
Consumer and Other		-		-		-		-
Total		-	$	-		1	$	99

The Company has allocated $871,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at September 30, 2018. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of September 30, 2018 and September 30, 2017.

-18-

6. INVESTMENT SECURITIES

The following is a summary of the Bank’s investment securities portfolio as of ~~September~~March 3031, ~~2018~~2019 and December 31, ~~2017~~2018 (000s omitted):

	Held to Maturity
	Available for Sale
	September 30, 2018
	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

September 30, 2018

December 31, 2018

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

Obligations of U.S. Government Agencies

~~139~~134,~~690~~160

-1

(75,~~768~~926

)

~~131~~128,~~922~~235

Mortgage Backed Securities issued by U.S. Government Agencies

~~221~~196,~~515~~224

-32

(75,~~556~~702

)

~~213~~190,~~959~~554

Obligations of States and Political Subdivisions

7269,~~570~~309

4604

(~~1,258~~804

)

7169,~~316~~109

Corporate Debt Securities

13,~~556~~552

~~108~~173

(3010

)

13,~~634~~715

~~447~~413,~~331~~245

~~112~~810

(1612,~~612~~442

)

~~430~~401,~~831~~613

	Held to Maturity
	December 31, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political Subdivisions	$	36,663	$	666	$	(322	)	$	37,007
Corporate Debt Securities		500		-		(21	)		479
	$	37,163	$	666	$	(343	)	$	37,486

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
	December 31, 2017
			Estimated
			Gross		Gross			Estimated
	Amortized		Market
	Amortized		Unrealized		Unrealized			Market
	Cost		Value
	Cost		Gains		Losses			Value
Contractual maturity in
Obligations of U.S. Government Agencies	$	140,090	$	32	$	(4,242	)	$	135,880
1 year or less	$	8,462	$	8,503
Mortgage Backed Securities issued by U.S. Government Agencies		248,649		3		(3,875	)		244,777
After 1 year through five years		15,112		15,310
Obligations of States and Political Subdivisions		37,308		48		(373	)		36,983
After 5 years through 10 years		5,387		5,661
Corporate Debt Securities		22,662		462		(41	)		23,083
After 10 years		666		659
Equity Securities		2,044		49		-			2,093
Total	$	29,627	$	30,133
	$	450,753	$	594	$	(8,531	)	$	442,816

-1917-

The ~~amortized~~investment ~~cost~~securities ~~and~~portfolio ~~estimated~~is ~~market~~evaluated ~~values~~for ofimpairment throughout the year. Impairment is recorded against individual securities, byunless ~~contractual~~the ~~maturity~~decrease asin fair value is attributable to interest rates or the lack of ~~September~~an 30active market, ~~2018~~and ~~are~~Management ~~shown~~determines ~~below.~~that ~~Expected~~the ~~maturities~~Company does not intend to sell the investments and it is not more likely than not that the Company will ~~differ~~be ~~from~~required ~~contractual~~to ~~maturities~~sell ~~because~~the ~~issuers~~investments before a recovery of their amortized costs bases, which may ~~have~~be maturity. The following table shows the ~~right~~gross tounrealized ~~call~~losses orand ~~prepay~~fair ~~obligations~~value of the Company’s investments with orunrealized ~~without~~losses ~~call~~(in orthousands), ~~prepayment~~aggregated ~~penalties~~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.

	Held to Maturity				Available for Sale
March 31, 2019
			Estimated				Estimated
	Less than 12 months				12 months or longer				Total
	Amortized		Market		Amortized		Market
	Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses
	Cost		Value		Cost		Value
Obligations of States and Political Subdivisions		7,915		116		-		-		7,915		116
Contractual maturity in
Corporate Debt Securities		496		4		-		-		496		4
1 year or less	$	-	$	-	$	9,239	$	9,239
	$	8,411	$	120	$	-	$	-	$	8,411	$	120
After 1 year through five years		-		-		69,750		67,387
After 5 years through 10 years		-		-		107,097		101,421
After 10 years		-		-		39,730		38,825
Total		-		-		225,816		216,872
Mortgage Backed Securities		-		-		221,515		213,959
Total	$	-	$	-	$	447,331	$	430,831

The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates or the lack of an active market, and Management determines that the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before a recovery of their amortized costs bases, which may be maturity. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017.

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

	September 30, 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	$	17,086	$	536	$	109,557	$	7,231	$	126,643	$	7,767
Mortgage Backed Securities issued by U.S. Government Agencies		76,652		2,410		137,306		5,146		213,958		7,556
Obligations of States and Political Subdivisions		37,508		968		13,134		655		50,642		1,623
Corporate Debt Securities		4,511		45		-		-		4,511		45
	$	135,757	$	3,959	$	259,997	$	13,032	$	395,754	$	16,991

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.

	December 31, 2017
	Less than 12 months				12 months or longer				Total
	Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses		Aggregate Fair Value		Gross Unrealized Losses
Obligations of United States Government Agencies	$	25,257	$	286	$	105,329	$	3,956	$	130,586	$	4,242
Mortgage Backed Securities issued by U.S. Government Agencies		161,792		1,725		81,157		2,150		242,949		3,875
Obligations of States and Political Subdivisions		23,898		357		16,741		338		40,639		695
Corporate Debt Securities		4,560		39		2,009		23		6,569		62
	$	215,507	$	2,407	$	205,236	$	6,467	$	420,743	$	8,874

-20-

The amount of investment securities issued by government agencies, states, and political subdivisions with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates and not the result of the credit quality of the issuers of the securities. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at September 30, 2018. As of September 30, 2018 and December 31, 2017, there were 199 and 205 securities in an unrealized loss position, respectively.

During the third quarter of 2018, the Company sold Obligations of States and Political Subdivisions that were classified as Held to Maturity. According to ASC 320-10-25, the sale of these securities was inconsistent with the Held to Maturity classification, and as a result, the Company reclassified all of its remaining Held to Maturity investments as Available for Sale as of September 30, 2018.

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.

~~-21-~~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.

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017, 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

									Total
	Carrying								Estimated
September 30, 2018	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	37,984	$	37,984	$	-	$	-	$	37,984
Time Deposits in Other Banks		11,946		-		10,954		750		11,704
Securities - Held to Maturity
Obligations of States and Political Subdivisions		-		-		-		-		-
Corporate Debt Securities		-		-		-		-		-
Securities - Available for Sale
Obligations of U.S. Government Agencies		131,922		-		131,922		-		131,922
MBS issued by U.S. Government Agencies		213,959		-		213,959		-		213,959
Obligations of States and Political Subdivisions		71,316		-		71,316		-		71,316
Corporate Debt Securities		13,634		-		13,634		-		13,634
Equity Securities		7,403		3,255		4,148		-		7,403
Loans Held for Sale		183		-		-		186		186
Loans, net		744,726		-		-		684,324		684,324
Accrued Interest Receivable		4,772		-		-		4,772		4,772
Financial Liabilities:
Noninterest Bearing Deposits		291,731		291,731		-		-		291,731
Interest Bearing Deposits		874,545		-		875,157		-		875,157
Borrowed funds
FHLB Advances		35,000		-		34,775		-		34,775
Accrued Interest Payable		92		-		-		92		92

-19-

									Total
	Carrying								Estimated
December 31, 2017	Value		Level 1		Level 2		Level 3		Fair Value
December 31, 2018	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	5351,~~010~~842	$	5351,~~010~~842	$	-	$	-	$	5351,~~010~~842
Time Deposits in Other Banks		1510,~~196~~796		-		1510,~~082~~548		-		1510,~~082~~548
Securities - Held to Maturity
Obligations of States and Political Subdivisions		36,663		-		2,407		34,600		37,007
Corporate Debt Securities		500		-		479		-		479
Securities - Available for Sale
Obligations of U.S. Government Agencies		~~135~~128,~~880~~235		-		~~135~~128,~~880~~235		-		~~135~~128,~~880~~235
MBS issued by U.S. Government Agencies		~~244~~190,~~777~~554		-		~~244~~190,~~777~~554		-		~~244~~190,~~777~~554
Obligations of States and Political Subdivisions		3669,~~983~~109		-		3669,~~983~~109		-		3669,~~983~~109
Corporate Debt Securities		2313,~~083~~715		-		2313,~~083~~715		-		2313,~~083~~715
Equity Securities		27,~~093~~415		2,~~093~~042		-5,373		-		27,~~093~~415
Federal Home Loan Bank Stock		4,148		-		4,148		-		4,148
Loans Held for Sale		488		-		-		502		502
Loans Held for Sale		346		-		-		356		356
Loans, net		760,889		-		-		750,249		750,249
Loans, net		687,313		-		-		657,684		657,684
Accrued Interest Receivable		4,413		-		-		4,413		4,413
Accrued Interest Receivable		4,169		-		-		4,169		4,169
Financial Liabilities:
Noninterest Bearing Deposits		~~299~~297,~~838~~704		~~299~~297,~~838~~704		-		-		~~299~~297,~~838~~704
Interest Bearing Deposits		~~898~~885,~~326~~206		-		~~899~~885,~~481~~886		-		~~899~~885,~~481~~886
Accrued Interest Payable		61		-		-		61		61
Federal Home Loan Bank Advances		10,000		-		-		10,042		10,042
Accrued Interest Payable		65		-		-		65		65

-22-

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

The Company’s assets with Level 3 fair values are carried at their amortized cost values as of ~~September~~March 3031, ~~2018~~2019 or December 31, ~~2017~~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)

September 30, 2018

March 31, 2019

Impaired loans

119,~~164~~364

Other Real Estate Owned

~~997~~58

December 31, 2017

December 31, 2018

Impaired loans

119,~~234~~231

Other Real Estate Owned

~~1,412~~692

-20-

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

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

-23-

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

	Contractual Amount
	September 30,		December 31,
	March 31,		December 31,
	2018		2017
	2019		2018
Commitments to extend credit:
Unused portion of commercial lines of credit	$	~~117~~119,~~670~~668	$	~~103~~116,~~080~~119
Unused portion of credit card lines of credit		67,~~271~~018		56,~~934~~680
Unused portion of home equity lines of credit		3536,~~272~~823		3034,~~368~~621
Standby letters of credit and financial guarantees written		1,~~837~~223		1,~~364~~763
All other off-balance sheet commitments		-		-

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

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

-21-

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

Introduction

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

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

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. Consummation of the merger is ~~subject~~expected to ~~various~~occur ~~conditions,~~in ~~including,~~the ~~among~~second ~~others,~~quarter ~~requisite regulatory approval and approval~~ of ~~the Company’s shareholders~~2019. For additional information regarding the Merger Agreement and the related proposed merger transaction, please see the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2018.

Executive Overview

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

The net loss of $5,141,000 for the first quarter of 2019 was caused by losses totaling $11,646,000 on the sale of investment securities as the Company liquidated a substantial portion of its investment portfolio in anticipation of its merger with First Merchants. Excluding the securities losses, net profit would have been $4,059,000, an increase of $157,000 or 4.0% compared to the first quarter of 2018. The Net Interest Income increased $1,082,000, or 10.3% due to an improvement in the Net Interest Margin from 3.49% in the first quarter of 2018 to 3.83% in the first quarter of 2019. The effect of the improved margin was mitigated by an increase of $518,000 in non-~~24-~~interest expenses.

The ~~net~~national ~~profit~~economic ofcondition $4is good,~~974,000~~ ~~for~~and the ~~third~~economy ~~quarter~~in ofsoutheast ~~2018~~Michigan ~~was~~is ancontinuing ~~increase~~to ofrecover. $1State and local unemployment rates are holding steady near their lowest post-recession levels,~~041,000~~ orand ~~26.5%~~are ~~compared~~now comparable to the ~~third~~national ~~quarter~~average. ofCommercial ~~2017~~and residential development property values continue to improve, with most values reaching or exceeding their pre-recession levels. ~~The~~Our ~~increase~~total ~~was~~classified ~~mainly~~assets, ~~the~~which ~~result~~include ofinternal anwatch ~~increase~~list ofloans, other real estate owned, and nonperforming and watch list investment securities, had been improving steadily since 2014, and stabilized recently. Net charge offs were $~~986~~268,000, or 0.14% of loans, annualized, in the ~~net~~first ~~interest~~quarter ~~income~~of ~~and~~2019, acompared ~~decrease~~to net recoveries of $~~256~~319,000, or 0.18% of loans in the ~~federal~~first ~~income~~quarter ~~tax~~of ~~expense~~2018. ~~For~~Due ~~the~~to ~~first~~improving ~~nine~~loan ~~months~~quality metrics, we were able to reduce our Allowance for Loan and Lease Losses (ALLL) as a percent of ~~2018,~~loans ~~net~~from ~~income~~1.01% isat upDecember $331,~~068,000,~~ or2018 28to 0.598% ~~compared~~as toof ~~2017~~March 31, 2019. The ~~year~~ALLL todecreased ~~date~~$268,000 ~~improvement~~during isthe first quarter of 2019 due to the ~~increase~~net charge offs of $2268,~~896,~~000, inas ~~net~~we ~~interest~~did ~~income~~not ~~and~~record a provision during the ~~decrease~~quarter. We assess the adequacy of $1our ALLL each quarter,~~384,000~~ inand ~~federal~~adjust ~~income~~it ~~tax~~as necessary by debiting or crediting the provision expense. The ~~effect~~allowance ofincludes ~~these~~$466,000 ~~items~~of ~~was~~specific ~~mitigated~~allocations byon an$9.8 ~~increase~~million of loans evaluated for impairment and $~~1,114,000~~7.0 inmillion ~~non-interest~~of ~~expenses,~~general ~~which~~allocations ~~was~~on ~~primarily~~the ~~due~~remainder toof ~~higher~~the ~~salaries~~portfolio. The general allocation is based on the historical charge off experience of the previous 20 quarters. The improvement in the historical loss rates is slowing and ~~employee~~loan ~~benefits~~growth is continuing, so future provisions may be necessary.

~~The national economic condition is good, and the economy in southeast Michigan is continuing to recover. State and local unemployment rates are holding steady near their lowest post~~-~~recession levels, and are now comparable to the national average. Commercial and residential development property values continue to improve, with most values reaching or exceeding their pre~~22-recession levels. Our total classified assets, which include internal watch list loans, other real estate owned, and nonperforming and watch list investment securities, have been improving steadily since 2014, but increased slightly in the third quarter of 2018. Classified assets increased $1.0 million, or 9.3% compared to a year ago. Net recoveries were $420,000, or 0.08% of loans, annualized, in the first three quarters of 2018, compared to net charge offs of $248,000, or 0.05% in the first three quarters of 2017. Due to improving loan quality metrics and net recoveries, we were able to reduce our Allowance for Loan and Lease Losses (ALLL) as a percent of loans from 1.15% at September 30, 2017 to 1.06% as of September 30, 2018. Even though the ALLL decreased as a percent of loans outstanding, the growth in the loan portfolio necessitated an increase in the size of the ALLL. The ALLL increased $320,000 during the first nine months of 2018 due to the net recoveries of $420,000, offset by the year to date negative provision of $100,000. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $931,000 of specific allocations on $12.1 million of loans evaluated for impairment and $7.1 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge off experience of the previous 20 quarters. The improvement in the historical loss rates is slowing and loan growth is continuing, so we do not expect negative provisions to continue.

The $~~986~~1,082,000 increase in Net Interest Income in the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017~~2018 was due to the increase in the net interest margin from 3.3849% to 3.6283%, and the increase of $175.60 million in the amount of average earning assets. The net interest margin increased because the yield on earnings assets increased 3541 basis points while the cost of interest bearing liabilities only increased 109 basis points. Non-interest income for the quarter ~~increased~~(excluding securities losses) decreased $5126,000 and non-interest expenses increased $~~206~~518,000.

Critical Accounting Policies

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

-25-

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

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

Financial Condition

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

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 120.97% during the ~~nine months~~quarter, from $1410.775 million to $1210.867 million~~, while total classified assets increased from $9~~.7 ~~million to $11.9 million.~~ Loan delinquencies increased from $46.29 million 30 days or more past due as of December 31, ~~2017~~2018 to $47.63 million as of ~~September~~March 3031, ~~2018~~2019 and the delinquency percentage increased from 0.6089% to 0.6194% of the total loans. Over the last twelve months, NPAs decreased $12.83 million, or 1217.37%, with nonperforming loans decreasing 149.36% from $1311.37 million to $1110.46 million, and Other Real Estate Owned ~~and Other Assets~~(“OREO”) ~~unchanged~~decreasing atfrom $1.452 million. ~~Total~~to ~~classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, increased~~ $~~2.2 million~~58, ~~or 22~~000.~~4%.~~ The amount required in the Allowance for Loan and Lease Losses (“ALLL”) was ~~unchanged~~decreased atfrom $87.09 million ~~compared to~~ a year ago ~~because~~to ~~the~~$7.5 ~~improvement~~million inbecause the ~~quality~~decreases ofrequired by the ~~assets~~improvement in the ~~loan~~quality ~~portfolio~~of ~~and~~ the ~~decrease~~assets inand the historical loss rates ~~were~~exceeded ~~offset~~the amount required by the increase in the size of the loan portfolio. The ALLL is now 10.0698% of loans, down from 1.1509% at ~~September~~March 3031, ~~2017~~2018. The ALLL is 70.3470% of nonperforming loans (“NPLs”), compared to 5767.7015% at ~~year~~March ~~end and 62.03% at September 30~~31, ~~2017~~2018. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

Since December 31, ~~2017~~2018, total loans held for investment ~~increased~~decreased $571.78 million as new loan activity was exceeded by payments received and other reductions in the period. ~~Even~~Our ~~with the increase in loans, our~~ pipeline of loans in process remained steady, and weour ~~expect~~unfunded ~~new~~ loan ~~production~~commitments ~~to continue to exceed run off~~increased, ~~resulting~~so inwe anexpect ~~increase in~~ loans outstanding into ~~the~~increase ~~fourth~~in ~~quarter of 2018~~2019.

Since December 31, 2017, deposits decreased $31.9 million, borrowed funds increased $35.0 million, other liabilities decreased $0.1 million, and capital decreased $11.3 million, and as a result our total assets decreased $8.3 million, or 0.6%. Deposits decreased during the first half of 2018 as some of our local competitors increased their deposit interest rates faster than we did. We monitor the competition closely, and adjusted some of our pricing in order to preserve our strong deposit base while still controlling our interest expense. This resulted in a small amount of deposit funding growth in the third quarter of 2018. We will continue to price our deposit products competitively, but we have adequate on and off balance sheet liquidity to fund our continued loan growth without needing to actively grow deposits. The total capital decreased $11.3 million since December 31, 2017, mainly because dividends paid exceeded earnings by $5.2 million due to the special dividend of $13.8 million paid in the first quarter of 2018. Capital also decreased due to an increase of $6.7 million in the Accumulated Other Comprehensive Loss, which was due to the decrease in the market value of securities available for sale. Capital decreased at a higher rate than assets, causing the capital to assets ratio to decrease from 9.85% at December 31, 2017 to 9.06% at September 30, 2018.-23-

~~-26-~~Since December 31, 2018, deposits were unchanged at $1.183 billion, and borrowed funds were unchanged at $10.0 million, while other liabilities decreased $6.3 million and capital increased $2.6 million. As a result, our total assets decreased $3.4 million, or 0.3%. We will continue to price our deposit products competitively, but we have adequate liquidity on our balance sheet to fund our continued loan growth due to the investment sales. Capital increased and assets decreased, causing the capital to assets ratio to increase from 9.55% at December 31, 2018 to 9.77% at March 31, 2019.

Results of Operations – ~~Third~~First Quarter ~~2018~~2019 vs. ~~Third~~First Quarter ~~2017~~2018

Net Interest Income - A comparison of the income statements for the three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 shows an increase of $~~986~~1,082,000, or 910.63%, in Net Interest Income. Interest income on loans increased $1,~~069~~354,000, or 1316.25% as the average loans outstanding increased $6463.78 million and the average yield on loans increased from 4.6872% to 45.8404%. The average loans outstanding increased due to the purchases of consumer loans and syndicated commercial loans, and organic growth in our local markets. The interest income on investments, fed funds sold, and interest bearing balances due from banks ~~increased~~decreased $~~165~~60,000 even though the yield increased from 2.14% to 2.36% as the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $4758.08 million ~~as the yield increased from 1~~.~~90%~~ ~~to 2.22%.~~ The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from low yielding short term investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits increased $29154,000, or 637.82% even though the average deposits decreased $114.50 million as the average cost of deposits increased from 0.14% to 0.1519%. Due to the growth in loans and the decrease in deposit funding, average borrowed funds increased $~~36.~~8.5 million, and the cost of borrowed funds increased $~~219~~58,000 compared to the ~~third~~first quarter of ~~2017~~2018. Average total interest bearing liabilities increased $~~12.~~7.9 million, and the cost of interest bearing liabilities increased from 0.19% in the ~~third~~first quarter of ~~2017~~2018 to 0.2928% in the ~~third~~first quarter of ~~2018~~2019. As a result, interest expense increased $~~248~~212,000, or 5850.15%.

Provision for Loan Losses - The Company did not record a Provision for Loan Losses expense in the ~~third~~first quarter of ~~2017~~2019, orwhich was an increase of $100,000 compared to the ~~third~~negative provision expense of $100,000 in the first quarter of 2018. We charged off $97411,000 of principal while recovering $~~125~~143,000 of previously charged off loans in the ~~third~~first quarter of ~~2018~~2019, for a net ~~recovery~~charge off total of $28268,000, or 0.0114% of average loans, annualized. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. ~~Even~~In ~~though~~the first quarter of 2019, the portfolio risk indicators improved, ~~growth~~and in the ~~portfolio~~amount ~~resulted~~of loans outstanding decreased slightly, resulting in the need for ana ~~increase~~decrease in the amount of ALLL required. The net ~~recoveries~~charge offs of $28268,000 enabled us to achieve the required ALLL without recording a negative provision expense. The allowance includes $~~931~~466,000 of specific allocations and $7.10 million of general allocations. The general allocation is based on the historical charge off experience of the previous 20 quarters. The historical charge off rate is not expected to continue to improve significantly, and if loan growth continues as expected, provision expenses may be required in the future.

Other Income – Non interest income ~~increased~~decreased $511,671,000, or 0308.14% compared to the ~~third~~first quarter of ~~2017~~2018. ~~Increases~~Excluding insecurities ~~Wealth~~losses ~~Management~~in ~~income,~~both ~~Debit Card income~~periods, ~~and Other~~ non-interest income ~~were~~decreased ~~offset~~$126,000, byor ~~the~~3.2%. ~~decrease~~Wealth inManagement ~~gains~~income, onService ~~securities~~Charges ~~transactions.~~on ~~Origination~~Deposit ~~fees~~Accounts, onDebit ~~mortgage~~Card ~~loans~~income, ~~sold~~and ~~increased~~Bank ~~$65,000~~Owned ~~because~~Life weInsurance ~~retained~~income ~~more~~all ofdecreased. ~~our~~Origination ~~fixed~~fees ~~rate~~on mortgage ~~loan~~loans ~~originations~~sold inand ~~the~~Other ~~third~~non-interest ~~quarter~~income ofincreased ~~2018~~slightly.

~~Other Expenses – Total non~~-interest expenses increased $206,000, or 2.3% compared to the third quarter of 2017. Salaries and Employee Benefits increased $68,000, or 1.2% mainly due to higher retirement and healthcare benefit expenses. Occupancy expense decreased $34,000 due to lower depreciation and maintenance costs. Equipment expense increased $98,000 due to higher computer expense, which includes expenses related to a wealth management system conversion that was completed in the third quarter of 2018.24-

Other Expenses – Total non-~~27-~~interest expenses increased $518,000, or 5.3% compared to the first quarter of 2018. Salaries and Employee Benefits increased $102,000, or 1.7% mainly because workers’ compensation insurance increased due to a refund received in the first quarter of 2018. Professional fees increased $249,000, or 41.9% due to higher legal and accounting fees. Other insurance increased $297,000 primarily due to costs related to settling post retirement death benefits with former directors and officers.

As a result of the above activity, the ~~Profit~~Loss Before Income Taxes in the ~~third~~first quarter of ~~2018~~2019 was $6,~~101~~579,000, ana ~~increase~~decrease of $~~785~~11,207,000 compared to the pre-tax profit of $54,~~316~~628,000 in the ~~third~~first quarter of ~~2017~~2018. The Company recorded a federal income tax ~~expense~~benefit of $1,~~127~~438,000 in the ~~third~~first quarter of ~~2018~~2019, reflecting an effective tax rate of 1821.59%, compared to the tax expense of $1726,~~383,~~000 in the ~~third~~first quarter of ~~2017~~2018, which reflected an effective rate of 2615.07%. The ~~tax expense in the third quarter of 2018 reflects the decrease in our statutory rate from 34% to 21% resulting from the Tax Cuts and Jobs Act. The~~ Net ~~profit~~Loss for the ~~third~~first quarter of ~~2018~~2019 was $45,~~974~~141,000, ana ~~increase~~decrease of 26231.58% compared to the net profit of $3,~~933~~902,000 in the ~~third~~first quarter of ~~2017~~2018.

Results of Operations – First Three Quarters 2018 vs. First Three Quarters 2017

Net Interest Income - A comparison of the income statements for the nine months ended September 30, 2018 and 2017 shows an increase of $2,896,000, or 9.8%, in Net Interest Income. Interest income on loans increased $2,949,000, or 12.7% as the average loans outstanding increased $56.0 million and the average yield on loans increased from 4.61% to 4.80%. The average loans outstanding increased due to the purchase of a pool of consumer loans related to the refinance of student debt, purchases of syndicated loans, and organic growth in our local markets. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $213,000 even though the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $54.7 million because the investment portfolio yield increased from 1.91% to 2.17%. The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from low yielding short term investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits decreased $47,000, or 3.6% as the average deposits decreased $10.3 million and the average cost of deposits decreased from 0.15% to 0.14%. The average cost of deposits decreased because maturing time deposits are either resetting at lower rates or customers are moving the funds to non-interest bearing demand deposit accounts or low cost non maturity deposits due to the flat yield curve interest rate environment. Due to the increase in loans and the decrease in deposit funding, the Bank increased its average use of borrowed funds by $18.3 million. The cost of the borrowed funds increased from 0.96% in the first nine months of 2017 to 2.25% in the first nine months of 2018, resulting in an increase of $313,000 in interest expense on borrowed funds. The cost of all interest bearing liabilities increased from 0.19% for the first nine months of 2017 to 0.24% for the first nine months of 2018.

Provision for Loan Losses - The Provision for Loan Losses increased $100,000 compared to the first nine months of 2017 as a $100,000 credit to provision expense was recorded in the first quarter of 2018, compared to a negative provision expense of $200,000 that was recorded in the first quarter of 2017. We charged off $160,000 of principal while recovering $580,000 of previously charged off loans in the first three quarters of 2018, for a net recovery total of $420,000, or 0.08% of loans, annualized. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Even though the portfolio grew, the risk indicators improved, resulting in the need for an increase of $320,000 in the amount of ALLL required. The net recoveries of $420,000 enabled us to achieve the required ALLL by recording the negative provision expense of $100,000. The historical charge off rate is not expected to continue to improve significantly, and if loan growth continues as expected, provision expenses may be required.

Other Income – Non interest income was $12.2 million in the first three quarters of 2018 and 2017. Wealth management fees decreased $274,000 due to an accrual adjustment of $389,000 in 2017. Service charges on deposit accounts decreased $242,000 due to lower overdraft activity and higher earnings credits on certain business checking accounts. Gains on securities transactions decreased $420,000 due to losses in 2018 related to some portfolio restructuring transactions, and gains in 2017. Gains on other real estate transactions increased $625,000 due to gains on sales in 2018 compared to losses on sales in 2017. Debit card income increased $122,000, or 5.7% due to increased customer debit card usage.

-28-

Other Expenses – Total non-interest expenses increased $1,114,000, or 4.1% compared to the first three quarters of 2017. Salaries and Employee Benefits increased $694,000, or 4.3% due to higher salaries, a larger incentive compensation accrual, and an adjustment to the stock based compensation accrual related to the special dividend in the first half of 2018. Also, the 401k matching contribution increased due to higher employee deferrals, health insurance benefits expense increased, and payroll tax expense was higher. Equipment expense increased $277,000 due to higher computer expense, which included PC network hardware replacement and expenses related to a wealth management system conversion in 2018. Marketing expenses increased $272,000, or 28.3% due to increased advertising and other expenses related to our branding initiative.

As a result of the above activity, the Profit Before Income Taxes in the first three quarters of 2018 was $16,779,000, an increase of $1,684,000 compared to the pre-tax profit of $15,095,000 in the first three quarters of 2017. The Company recorded a federal income tax expense of $2,958,000 in the first three quarters of 2018, reflecting an effective tax rate of 17.6%, compared to the tax expense of $4,342,000 in the first three quarters of 2017, which reflected an effective rate of 28.8%. The tax expense in 2018 reflects the decrease in our statutory rate from 34% to 21% resulting from the Tax Cuts and Jobs Act, and also includes a tax benefit related to our stock based compensation program. The Net profit for the first three quarters of 2018 was $13,821,000, an increase of 28.5% compared to the net profit of $10,753,000 in the first three quarters of 2017.

Cash Flows

Cash flows provided by operating activities ~~increased~~decreased $67,~~862~~444,000 compared to the first ~~nine~~three months of ~~2017~~2018 mainly ~~because~~due to the ~~net~~large ~~income~~loss ~~was~~on ~~$3,068,000~~the ~~higher~~sale inof ~~2018~~investment ~~and~~securities ~~$3,299,000~~in ~~more cash was provided by reducing interest receivable and other assets~~2019. The cash flow ~~used~~from ~~for~~ investing activities inincreased ~~the~~$409,049 ~~first~~compared ~~nine~~to ~~months of~~ 2018 ~~was~~due ~~$17.4~~to ~~million because~~ the ~~cash~~sale ~~provided by sales, maturities, and redemption~~ of ~~securities,~~a ~~net~~substantial ofportion ~~purchases~~ of the investment ~~securities~~portfolio ~~was~~in ~~$38.8 million while~~ the ~~cash used to increase loans was $57.9 million. The cash flow used for investing activities~~ in the first ~~nine~~three months of ~~2017 was $11~~2019.7 ~~million~~The ~~because~~securities ~~the~~were ~~cash~~sold ~~provided~~as bythe ~~sales,~~first ~~maturities,~~part ~~and redemption~~ of ~~securities,~~a ~~net~~portfolio ofrestructuring ~~purchases~~that ofis ~~investment~~being ~~securities~~completed ~~was~~in ~~$39.4~~conjunction ~~million~~with ~~while~~our ~~the~~merger ~~cash~~with ~~used~~First toMerchants ~~increase~~Bank, ~~loans~~ and ~~bank~~the ~~owned~~proceeds ~~life~~were ~~insurance~~still ~~was~~being ~~$42.0~~held ~~million~~in ~~and~~cash ~~$4.4~~as ~~million, respectively. The amount~~ of ~~cash provided by~~ the ~~investment~~end ~~portfolio~~of ~~decreased because~~ the ~~higher~~first ~~rate~~quarter ~~environment has slowed the prepayments~~ of ~~mortgage backed securities and callable debt securities~~2019. The ~~bank is actively growing its loan portfolio, and primarily funding that growth with cash flow from the investment portfolio. The~~ amount of cash used for financing activities was $817.19 million lower in the first ~~nine~~three months of ~~2018~~2019 than it was in the first ~~nine~~three months of ~~2017 even though deposits decreased by $27.5 million more in the first nine months of~~ 2018 ~~because~~due ~~cash provided by borrowing, net of repayments of borrowings, was $35.0 million higher. The amount of cash used~~ to ~~pay~~the ~~dividends~~large ~~decreased~~decrease byin ~~$0.6~~deposits ~~million~~and as the special dividend ~~payout~~paid ~~ratio decreased from 182.7%~~ in ~~2017~~the tofirst ~~137.8%~~three inmonths of 2018. In the first ~~nine~~three months of ~~2018~~2019, the cash ~~used~~provided ~~for~~by investing ~~and financing~~ activities greatly exceeded the cash ~~provided~~used byfor operating and financing activities, and the amount of cash and cash equivalents ~~decreased~~increased by $15381.0 million during the period. In the first ~~nine~~three months of ~~2017~~2018, the cash used for investing and financing activities exceeded the cash provided by operating activities, resulting in a decrease of $2438.35 million in cash and cash equivalents during the first ~~nine~~three months of ~~2017~~2018. WeAs ~~expect~~we ~~cash~~redeploy ~~flows~~the proceeds from ~~redemptions~~the of investment securities ~~and~~sales ~~deposit growth to exceed our uses for loan growth~~ in ~~the~~2019 ~~fourth~~we ~~quarter~~expect ofcash ~~2018,~~flows ~~and~~from asinvesting aactivities ~~result we plan~~ to ~~utilize~~exceed ~~that~~the cash ~~flow~~provided toby ~~reduce~~operating ~~borrowings.~~activities, Weresulting ~~anticipate~~in ~~that~~a wedecrease ~~will~~from ~~maintain~~ our current level of cash and cash equivalents ~~through the end of the year~~.

-29-

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. ~~Internal~~The ~~sources~~high oflevel ~~liquidity include the maturities~~ of ~~loans~~cash and ~~securities~~cash inequivalents ensures that the ~~ordinary~~Company ~~course~~can ofmeet ~~business~~its asliquidity ~~well~~without asutilizing ~~our~~any ~~available~~of ~~for~~its ~~sale~~external ~~securities~~sources ~~portfolio~~of liquidity. External sources of liquidity include a ~~line of credit with the~~ Federal ~~Home Loan Bank of Indianapolis, the Federal~~ funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of ~~September~~March 3031, ~~2018~~2019, the Bank was utilizing $3510 million of its authorized limit of $~~255~~275 million with the Federal Home Loan Bank of Indianapolis, ~~$0 of its $20 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis,~~ and $0none of its $25 million federal funds line with a correspondent bank. The Company periodically draws on its ~~overdraft and~~ fed funds lines to ensure that funding will be available if needed.

The Company’s Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first ~~nine~~three months of ~~2018~~2019 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

Total stockholders’ equity of the Company was $121.4 million at September 30, 2018 and $132.7 million at December 31, 2017. Retained earnings decreased $5.2 million as the year to date profit was exceeded by the payment of cash dividends on the common stock, and the Accumulated Other Comprehensive Loss (AOCL) increased due to a decrease in the value of our securities that are classified as Available For Sale. Total equity decreased $11.3 million while total assets decreased $8.3 million, so the ratio of equity to assets decreased from 9.85% at December 31, 2017 to 9.06% at September 30, 2018.-25-

Total stockholders’ equity of the Company was $130.3 million at March 31, 2019 and $127.7 million at December 31, 2018. Retained earnings decreased $7.4 million due to the year to date loss of $5.1 million and the dividends paid of $2.3 million. The Accumulated Other Comprehensive Income (Loss) (“AOCI” or “AOCL”) increased because the unrealized losses on Available for Sale securities made up the largest portion of the AOCL as of December 31, 2018, and most of those losses were realized when the investment portfolio was sold. Total equity increased $2.6 million while total assets decreased $3.4 million, so the ratio of equity to assets increased from 9.55% at December 31, 2018 to 9.77% at March 31, 2019.

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain a Total Risk Based Capital ratio of at least 8%, a Tier 1 Risk Based Capital ratio of at least 6%, and a Tier 1 Leverage Ratio of at least 4% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Risk Based Capital is at least 8% of Risk Weighted Assets, and the Tier 1 Leverage Capital ratio is at least 5%. Basel III implemented the new Common Equity Tier 1 Capital to Risk Weighted Assets ratio, with a minimum of 4.5% to be considered adequately capitalized and a minimum of 6.5% required to be considered well capitalized.

-30-

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

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of September 30, 2018:
As of March 31, 2019:
Total Capital to Risk-Weighted Assets
Consolidated	$	~~144~~137,~~047~~880		15.7680	%	$	9187,~~419~~258		10.0	%
Monroe Bank & Trust		~~142~~136,~~676~~149		15.63	%		9187,~~288~~120		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		~~135~~130,~~726~~042		14.8590	%		7369,~~135~~806		8.0	%
Monroe Bank & Trust		~~134~~128,~~355~~311		14.7273	%		7369,~~030~~696		8.0	%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		~~135~~130,~~726~~042		14.8590	%		5956,~~422~~718		6.5	%
Monroe Bank & Trust		~~134~~128,~~355~~311		14.7273	%		5956,~~337~~628		6.5	%
Tier 1 Capital to Average Assets
Consolidated		~~135~~130,~~726~~042		9.9666	%		6867,~~160~~292		5.0	%
Monroe Bank & Trust		~~134~~128,~~355~~311		9.8655	%		6867,~~109~~211		5.0	%

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

-26-

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of December 31, 2018:
Total Capital to Risk-Weighted Assets
Consolidated	$	145,480		15.79	%	$	92,111		10.0	%
Monroe Bank & Trust		143,583		15.61	%		91,976		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		137,374		14.91	%		73,689		8.0	%
Monroe Bank & Trust		135,477		14.73	%		73,580		8.0	%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		137,374		14.91	%		59,872		6.5	%
Monroe Bank & Trust		135,477		14.73	%		59,784		6.5	%
Tier 1 Capital to Average Assets
Consolidated		137,374		10.28	%		66,824		5.0	%
Monroe Bank & Trust		135,477		10.15	%		66,741		5.0	%

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank’s earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank’s market risk is monitored quarterly by estimating the effect of changes in interest rates on its projected net interest income and the economic value of its equity. The sale of a large portion of its investment portfolio in the first quarter of 2019 significantly changed the Bank’s interest rate risk position.

Forward-Looking Statements

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

-31-

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

-27-

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

The Bank’s ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank’s projected net interest income, in its policy. ~~Throughout~~In the first ~~three~~quarter ~~quarters~~ of ~~2018~~2019, the Bank’s interest rate risk ~~has~~exceeded ~~remained within~~ its policy limits.

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

The ~~Bank’s~~tables ~~interest~~below ~~rate~~summarize ~~risk, as measured by~~ the net interest income ~~and~~sensitivity ~~economic~~as ~~value~~ of ~~equity~~March ~~simulations~~31, ~~has~~2019 ~~not~~and ~~changed significantly from~~ December 31, ~~2017.~~2018:

-32-

	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%
March 31, 2019 12 Month Projection
Interest Income	$	50,880	$	56,898		$	62,893		$	68,858		$	74,715		$	44,687		$	38,300		$	35,904
Interest Expense		2,788		4,510			6,232			7,954			9,676			1,464			1,111			1,107
Net Interest Income	$	48,092	$	52,388		$	56,661		$	60,904		$	65,039		$	43,223		$	37,189		$	34,797

Percent Change From Base Projection				8.9	%		17.8	%		26.6	%		35.2	%		-10.1	%		-22.7	%		-27.6	%
ALCO Policy Limit (+/-)				10.0	%		15.0	%		20.0	%		25.0	%		10.0	%		15.0	%		20.0	%

	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%
December 31, 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			6,133			7,822			9,511			1,488			1,134			1,121
Net Interest Income	$	49,376	$	50,228		$	51,058		$	51,863		$	52,535		$	48,131		$	45,390		$	44,144

Percent Change From Base Projection				1.7	%		3.4	%		5.0	%		6.4	%		-2.5	%		-8.1	%		-10.6	%
ALCO Policy Limit (+/-)				10.0	%		15.0	%		20.0	%		30.0	%		10.0	%		15.0	%		20.0	%

-28-

Due to the large amount of cash held in variable rate deposits at the Federal Reserve Bank, the increase in Net Interest Income in the 2%, 3%, and 4% rising rate scenarios exceeded the Bank’s policy limits, and the decrease in Net Interest Income in the 1%, 2%, and 3% decreasing rate scenarios also exceeded the Bank’s policy limits. Management is in the process of reinvesting the cash in investment securities that will reduce the risk to acceptable levels.

The tables below summarize the amount of interest rate risk to the economic value of the Bank’s equity as of March 31, 2019 and December 31, 2018:

	Economic Value at March 31, 2019
	Rates
(Dollars in Millions)	Base		Up 1%			Up 2%			Up 3%			Up 4%			Down 1%			Down 2%			Down 3%
Assets	$	1,322,924	$	1,309,444		$	1,296,248		$	1,283,195		$	1,270,260		$	1,335,213		$	1,346,016		$	1,354,916
Liabilities		1,132,425		1,106,344			1,081,280			1,057,184			1,034,011			1,160,539			1,192,309			1,196,923
Stockholders' Equity	$	190,499	$	203,100		$	214,968		$	226,011		$	236,249		$	174,674		$	153,707		$	157,993

Change in Equity				6.6	%		12.8	%		18.6	%		24.0	%		-8.3	%		-19.3	%		-17.1	%
ALCO Policy Limit (+/-)				10.0	%		20.0	%		30.0	%		40.0	%		10.0	%		20.0	%		30.0	%

	Economic Value at December 31, 2018
	Rates
(Dollars in Millions)	Base		Up 1%			Up 2%			Up 3%			Up 4%			Down 1%			Down 2%			Down 3%
Assets	$	1,329,149	$	1,298,132		$	1,268,967		$	1,241,032		$	1,214,084		$	1,357,942		$	1,385,228		$	1,399,592
Liabilities		1,129,827		1,103,978			1,079,135			1,055,251			1,032,280			1,157,675			1,189,053			1,197,122
Stockholders' Equity	$	199,322	$	194,154		$	189,832		$	185,781		$	181,804		$	200,267		$	196,175		$	202,470

Change in Equity				-2.6	%		-4.8	%		-6.8	%		-8.8	%		0.5	%		-1.6	%		1.6	%
ALCO Policy Limit (+/-)				10.0	%		20.0	%		30.0	%		40.0	%		10.0	%		20.0	%		30.0	%

The Economic Value of Equity analysis measures market risk by estimating the changes in the economic values of the Bank’s equity caused by changes in interest rates. This analysis indicates that moving assets from long term fixed investment securities to variable rate overnight deposits changed the market risk of our balance sheet, however, the estimated variability of the economic value of equity was within the Bank’s established policy limits.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of ~~September~~March 3031, ~~2018~~2019, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of ~~September~~March 3031, ~~2018~~2019, in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended ~~September~~March 3031, ~~2018~~2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-3329-

Part II Other Information

Item 1. Legal Proceedings

~~MBT~~Except ~~Financial~~as ~~Corp.~~set ~~and~~forth in the Company's Annual Report on Form 10-K originally filed with the SEC on March 18, 2019 (the "2018 10-K"), neither the Company nor its subsidiaries 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. There have been no material developments with respect to any of the matters referenced in the 2018 10-K since the filing thereof.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018.

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

The Company has a stock repurchase program which it publicly announced on January 25, 2018. On that date, the Board of Directors authorized the repurchase of 2 million of the Company’s common shares, which authorization commenced on February 1, 2018 and will expire on January 31, 2020. The Company did not repurchase any shares of its common stock during the three months ended ~~September~~March 3031, ~~2018~~2019, and 2,000,000 shares remain available under the repurchase authorization.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

-3430-

Item 6. Exhibits

	2.1	Agreement and Plan of Reorganization and Merger between First Merchants Corporation and MBT Financial Corp. dated October 9, 2018. Previously filed as Exhibit 2.1 to MBT Financial Corp.'s Form 8-K filed with the Securities and Exchange Commission on October 10, 2018.

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

3.2

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

	10.1	Amended and Restated Change in Control Agreement with H. Douglas Chaffin. Previously field as Exhibit 10.1 to MBT Financial Corp.’s Form 8-K filed with the Securities and Exchange Commission on August 8, 2018.
	10.2	Form of Severance Agreement with Mr. Scott E. McKelvey, Thomas G. Myers, Audrey Mistor and John L. Skibski. Previously field as Exhibit 10.2 to MBT Financial Corp.’s Form 8-K filed with the Securities and Exchange Commission on August 8, 2018.
	10.3	The Monroe Bank & Trust Supplemental Executive Retirement Agreement with H. Douglas Chaffin, as amended. Previously field as Exhibit 10.3 to MBT Financial Corp.’s Form 8-K filed with the Securities and Exchange Commission on August 8, 2018.
	10.4	Voting Agreement dated October 9, 2018 among First Merchants Corporation, each member of the Board of Directors of MBT Financial Corp., Patriot Financial Partners and Castle Creek Capital Partners. Previously field as Exhibit 10.1 to MBT Financial Corp.’s Form 8-K filed with the Securities and Exchange Commission on October 10, 2018.
	31.1	Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

-3531-

Signatures

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

	MBT Financial Corp. (Registrant)
				MBT Financial Corp.
November 9, 2018	By /s/ H. Douglas Chaffin
				(Registrant)
Date	H. Douglas Chaffin President & Chief Executive Officer
May 10, 2019		By	/s/ H. Douglas Chaffin
November 9, 2018	By /s/ John L. Skibski
Date				H. Douglas Chaffin
Date	John L. Skibski Executive Vice President and Chief Financial Officer
				President &
				Chief Executive Officer
May 10, 2019		By	/s/ John L. Skibski
Date				John L. Skibski
				Executive Vice President and
				Chief Financial Officer

-3632-

-37-

Filing Compare · MBT FINANCIAL CORP