UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2015

Or

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

Commission File Number: 000-30973

MBT FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Michigan	38-3516922
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

102 E. Front Street

Monroe, Michigan 48161

(Address of principal executive offices)

(Zip Code)

(734) 241-3431

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

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

Large accelerated filer ☐	Accelerated Filer ☑
Non-accelerated filer ☐	Smaller reporting company ☐

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

As of November 9, 2015, there were 22,764,926 shares of the Company’s Common Stock outstanding.

Part I Financial Information

Item 1. Financial Statements

MBT FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

	September 30, 2015
Dollars in thousands	(Unaudited)			December 31, 2014
ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing	$	8,205		$	15,957
Interest bearing		58,220			36,165
Total cash and cash equivalents		66,425			52,122
Securities - Held to Maturity		37,492			32,613
Securities - Available for Sale		487,626			473,176
Federal Home Loan Bank stock - at cost		4,148			7,537
Loans held for sale		1,597			548
Loans		623,809			610,332
Allowance for Loan Losses		(12,996	)		(13,208	)
Loans - Net		610,813			597,124
Accrued interest receivable and other assets		25,275			29,465
Other Real Estate Owned		2,154			5,615
Bank Owned Life Insurance		52,730			51,825
Premises and Equipment - Net		28,459			28,632
Total assets	$	1,316,719		$	1,278,657
LIABILITIES
Deposits:
Non-interest bearing	$	247,512		$	218,221
Interest-bearing		889,297			893,590
Total deposits		1,136,809			1,111,811
Repurchase agreements		15,000			15,000
Interest payable and other liabilities		18,756			17,310
Total liabilities		1,170,565			1,144,121
STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,761,327 and 22,718,077 shares issued and outstanding)		23,345			23,037
Retained earnings		122,200			114,132
Unearned compensation		(15	)		-
Accumulated other comprehensive income (loss)		624			(2,633	)
Total stockholders' equity		146,154			134,536
Total liabilities and stockholders' equity	$	1,316,719		$	1,278,657

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 Sept. 30,						Nine Months Ended Sept. 30,
Dollars in thousands, except per share data	2015			2014			2015			2014
Interest Income
Interest and fees on loans	$	7,225		$	7,255		$	21,811		$	21,355
Interest on investment securities-
Tax-exempt		278			288			826			892
Taxable		2,437			2,222			7,301			6,540
Interest on balances due from banks		24			32			64			86
Total interest income		9,964			9,797			30,002			28,873
Interest Expense
Interest on deposits		562			767			1,826			2,423
Interest on borrowed funds		178			178			529			551
Total interest expense		740			945			2,355			2,974
Net Interest Income		9,224			8,852			27,647			25,899
Provision For (Recovery Of) Loan Losses		(200	)		(700	)		(1,000	)		(500	)
Net Interest Income After
Provision For Loan Losses		9,424			9,552			28,647			26,399
Other Income
Income from wealth management services		1,163			1,194			3,576			3,496
Service charges and other fees		1,134			1,054			3,058			2,954
Debit card income		594			557			1,749			1,588
Net gain (loss) on sales of securities available for sale		16			(1,020	)		274			(744	)
Net gain (loss) on sales of Other Real Estate Owned		36			(634	)		(248	)		(964	)
Origination fees on mortgage loans sold		184			80			450			230
Bank owned life insurance income		358			357			991			1,062
Rent income on Other Real Estate Owned		68			99			205			364
Other		425			438			1,353			1,387
Total other income		3,978			2,125			11,408			9,373
Other Expenses
Salaries and employee benefits		5,694			5,631			17,318			17,163
Occupancy expense		648			626			2,074			2,040
Equipment expense		708			723			2,232			2,002
Marketing expense		267			225			821			640
Professional fees		481			681			1,607			1,620
Other Real Estate Owned expenses		59			187			364			887
FDIC Deposit Insurance Assessment		212			275			1,055			1,535
Bonding and other insurance expense		203			258			660			777
Telephone expense		113			108			317			355
Other		781			648			2,267			1,833
Total other expenses		9,166			9,362			28,715			28,852
Income Before Income Taxes		4,236			2,315			11,340			6,920
Income Tax Expense		1,230			603			3,272			1,754
Net Income	$	3,006		$	1,712		$	8,068		$	5,166
Other Comprehensive Income (Loss) - Net of Tax
Unrealized gains (losses) on securities		4,177			(649	)		3,358			6,353
Reclassification adjustment for (gains) losses included in net income		(10	)		673			(181	)		491
Postretirement benefit liability		27			26			80			(240	)
Total Other Comprehensive Income - Net of Tax		4,194			50			3,257			6,604
Comprehensive Income	$	7,200		$	1,762		$	11,325		$	11,770
Basic Earnings Per Common Share	$	0.13		$	0.08		$	0.35		$	0.24
Diluted Earnings Per Common Share	$	0.13		$	0.07		$	0.35		$	0.23
Common Stock Dividends Declared Per Share	$	-		$	-		$	-		$	-

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		Retained		Unearned			Comprehensive
Dollars in thousands	Stock		Earnings		Compensation			Income (Loss)			Total
Balance - January 1, 2015	$	23,037	$	114,132	$	-		$	(2,633	)	$	134,536
Issuance of Common Stock
SOSARs exercised (23,855 shares)		-		-		-			-			-
Restricted stock awards (6,000 shares)		35		-		(35	)		-			-
Other stock issued (13,395 shares)		76		-		-			-			76
Equity Compensation		197		-		20			-			217
Net income		-		8,068		-			-			8,068
Other comprehensive loss - net of tax		-		-		-			3,257			3,257
Balance - September 30, 2015	$	23,345	$	122,200	$	(15	)	$	624		$	146,154

									Accumulated
									Other
	Common			Retained		Unearned			Comprehensive
Dollars in thousands	Stock			Earnings		Compensation			Income (Loss)			Total
Balance - January 1, 2014	$	14,671		$	106,817	$	(7	)	$	(10,873	)	$	110,608
Issuance of Common Stock
SOSARs exercised (7,287 shares)		1			-		-			-			1
Restricted stock awards (6,000 shares)		29			-		(29	)		-			-
Other stock issued (2,076,126 shares)		8,838			-		-			-			8,838
Stock Offering Expense		(754	)		-		-			-			(754	)
Equity Compensation		161			-		28			-			189
Net income		-			5,166		-			-			5,166
Other comprehensive income - net of tax		-			-		-			6,604			6,604
Balance - September 30, 2014	$	22,946		$	111,983	$	(8	)	$	(4,269	)	$	130,652

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

-4-

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Nine Months Ended September 30,
Dollars in thousands	2015			2014
Cash Flows from Operating Activities
Net Income	$	8,068		$	5,166
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses		(1,000	)		(500	)
Depreciation		1,177			1,210
Decrease in net deferred taxes		2,927			1,684
Net amortization of investment premium and discount		1,054			677
Writedowns of Other Real Estate Owned		509			959
Net increase in interest payable and other liabilities		538			957
Net increase in interest receivable and other assets		(693	)		(772	)
Equity based compensation expense		217			190
Net (gain) loss on sale/settlement of securities		(274	)		744
Increase in cash surrender value of life insurance		(905	)		(978	)
Net cash provided by operating activities	$	11,618		$	9,337
Cash Flows from Investing Activities
Proceeds from maturities and redemptions of investment securities held to maturity	$	8,245		$	7,692
Proceeds from maturities and redemptions of investment securities available for sale		126,388			19,453
Proceeds from sales of investment securities available for sale		29,327			93,321
Net (increase) decrease in loans		(14,308	)		7,003
Proceeds from sales of other real estate owned		3,728			5,113
Proceeds from sales of other assets		82			40
Purchase of investment securities held to maturity		(13,187	)		(4,590	)
Purchase of investment securities available for sale		(162,680	)		(176,334	)
Purchase of bank premises and equipment		(1,013	)		(1,742	)
Net cash used for investing activities	$	(23,418	)	$	(50,044	)
Cash Flows from Financing Activities
Net increase in deposits	$	24,998		$	19,766
Net increase in short term borrowings		1,029			-
Repayment of Federal Home Loan Bank borrowings		-			(12,000	)
Proceeds from issuance of common stock		76			8,084
Net cash provided by financing activities	$	26,103		$	15,850
Net Increase (Decrease) in Cash and Cash Equivalents	$	14,303		$	(24,857	)
Cash and Cash Equivalents at Beginning of Period		52,122			77,798
Cash and Cash Equivalents at End of Period	$	66,425		$	52,941
Supplemental Cash Flow Information
Cash paid for interest	$	2,379		$	2,993
Cash paid for federal income taxes	$	345		$	69
Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned	$	516		$	2,482
Transfer of loans to other assets	$	54		$	42

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 seventeen branches in Monroe County, Michigan, seven branches in Wayne County, Michigan, and a loan and wealth management office in Lenawee County. The Bank’s primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Company’s sole business segment is community banking.

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

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

The significant accounting policies are as follows:

PRINCIPLES OF CONSOLIDATION

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

COMPREHENSIVE INCOME

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

BUSINESS SEGMENTS

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

-6-

FAIR VALUE

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

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

ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2016 (therefore, for the year ending December 31, 2017 for the Corporation). Early implementation is not allowed for public companies. Management is currently assessing the impact to the Corporation’s consolidated financial statements.

2. EARNINGS PER SHARE

The calculations of earnings per common share are as follows:

		For the three months ended Sept. 30,				For the nine months ended Sept. 30,
		2015		2014		2015		2014
Basic
	Net income	$	3,006,000	$	1,712,000	$	8,068,000	$	5,166,000
	Average common shares outstanding		22,748,974		22,691,593		22,734,952		21,911,996
	Earnings per common share - basic	$	0.13	$	0.08	$	0.35	$	0.24
Diluted
	Net income	$	3,006,000	$	1,712,000	$	8,068,000	$	5,166,000
	Average common shares outstanding		22,748,974		22,691,593		22,734,952		21,911,996
	Equity compensation		200,089		194,090		181,492		192,573
	Average common shares outstanding - diluted		22,949,063		22,885,683		22,916,444		22,104,569
	Earnings per common share - diluted	$	0.13	$	0.07	$	0.35	$	0.23

-7-

3. STOCK BASED COMPENSATION

Stock Options - The following table summarizes the options that had been granted to certain key officers in accordance with the Long-Term Incentive Compensation Plan that was approved by shareholders at the Annual Meeting of Shareholders on April 6, 2000.

			Weighted Average
	Shares		Exercise Price
Options Outstanding, January 1, 2015		205,400	$	19.08
Granted		-		-
Exercised		-		-
Forfeited		5,500		15.83
Expired		89,500		23.40
Options Outstanding, September 30, 2015		110,400	$	15.74
Options Exercisable, September 30, 2015		110,400	$	15.74

Stock Only Stock Appreciation Rights (SOSARs) - On January 21, 2015, 72,500 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2015. The fair value of $2.85 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 57.07%, a risk free interest rate of 1.70% and dividend yield of 0.00%. The fair value of the Company’s common stock was $4.94 on the grant date.

On May 28, 2015, 55,500 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2015. The fair value of $2.44 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 55.57%, a risk free interest rate of 1.90% and dividend yield of 3.00%. The fair value of the Company’s common stock was $5.79 on the grant date.

SOSARs granted under the plan are structured as fixed grants with the exercise 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, 2015		557,439	$	3.58
Granted		128,000		5.31
Exercised		60,660		2.34
Forfeited		15,504		5.21
Expired		-		-
SOSARs Outstanding, September 30, 2015		609,275	$	4.02
SOSARs Exercisable, September 30, 2015		384,230	$	3.57

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 exercise price of the SOSAR. The market value of the Company’s common stock on September 30, 2015 was $6.24. The value of the exercisable SOSARs that are in-the-money as of September 30, 2015 was $1,175,000, and exercise of those SOSARs on that date would have resulted in the issuance of 188,361 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.

-8-

Restricted Stock Unit Awards – On January 21, 2015, 25,000 performance restricted stock units were awarded to certain key executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008. Each Restricted Stock Unit (RSU) is equivalent to one share of MBT Financial Corp. common stock. Stock will be issued to the participants following a two year performance period that ends on December 31, 2016. Earned RSUs vest on December 15, 2017 and as of September 30, 2015 none of the RSUs were vested.

Restricted Stock Awards – On May 28, 2015, 6,000 restricted shares were awarded to certain non-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2015. The expense for the restricted stock is based on the grant date value of $5.79 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $15,000 as of September 30, 2015.

The total expense for equity based compensation was $116,000 in the third quarter of 2015 and $72,000 in the third quarter of 2014. The total expense for equity based compensation was $293,000 in the first nine months of 2015 and $218,000 in the first nine months of 2014.

4. LOANS

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

Loans consist of the following (000s omitted):

	September 30,		December 31,
	2015		2014
Residential real estate loans	$	215,771	$	223,701
Commercial and Construction real estate loans		263,654		262,395
Agriculture and agricultural real estate loans		20,140		16,700
Commercial and industrial loans		85,974		62,761
Loans to individuals for household, family, and other personal expenditures		38,270		44,775
Total loans, gross	$	623,809	$	610,332
Less: Allowance for loan losses		12,996		13,208
Net Loans	$	610,813	$	597,124

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 and real estate that the bank has purchased but no longer intends to use for bank premises.

-9-

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

	September 30,			December 31,
	2015			2014
Nonaccrual loans	$	10,623		$	13,040
Loans 90 days past due and accruing		6			10
Restructured loans		20,972			22,896
Total nonperforming loans	$	31,601		$	35,946
Other real estate owned		2,154			5,615
Other assets		-			18
Total nonperforming assets	$	33,755		$	41,579
Nonperforming assets to total assets		2.56	%		3.25	%
Allowance for loan losses to nonperforming loans		41.13	%		36.74	%

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, such as autos, boats, and recreational vehicles.

-10-

Activity in the allowance for loan losses during the three and nine months ended September 30, 2015 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, 2015
Beginning Balance	$	425		$	1,481		$	5,437		$	623		$	3,070		$	2,043		$	13,079
Charge-offs		-			-			(91	)		-			(101	)		-			(192	)
Recoveries		2			45			155			14			57			36			309
Provision		202			372			(1,232	)		(15	)		602			(129	)		(200	)
Ending balance	$	629		$	1,898		$	4,269		$	622		$	3,628		$	1,950		$	12,996
Allowance for loan losses: For the nine months ended September 30, 2015
Beginning Balance	$	216		$	1,361		$	6,179		$	803		$	3,226		$	1,423		$	13,208
Charge-offs		(75	)		(164	)		(212	)		-			(353	)		(117	)		(921	)
Recoveries		12			215			337			635			414			96			1,709
Provision		476			486			(2,035	)		(816	)		341			548			(1,000	)
Ending balance	$	629		$	1,898		$	4,269		$	622		$	3,628		$	1,950		$	12,996
Allowance for loan losses as of September 30, 2015
Ending balance individually evaluated for impairment	$	395		$	878		$	948		$	471		$	1,288		$	228		$	4,208
Ending balance collectively evaluated for impairment		234			1,020			3,321			151			2,340			1,722			8,788
Ending balance	$	629		$	1,898		$	4,269		$	622		$	3,628		$	1,950		$	12,996
Loans as of September 30, 2015
Ending balance individually evaluated for impairment	$	1,214		$	1,259		$	16,803		$	1,843		$	10,423		$	522		$	32,064
Ending balance collectively evaluated for impairment		18,926			84,715			232,177			12,831			205,348			37,748			591,745
Ending balance	$	20,140		$	85,974		$	248,980		$	14,674		$	215,771		$	38,270		$	623,809

-11-

Activity in the allowance for loan losses during the three and nine months ended September 30, 2014 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, 2014
Beginning Balance	$	214		$	1,288		$	7,535		$	1,147		$	4,280		$	537		$	15,001
Charge-offs		(3	)		(62	)		(2,267	)		(44	)		(976	)		(1	)		(3,353	)
Recoveries		-			115			939			794			271			63			2,182
Provision		14			(22	)		390			(1,290	)		(259	)		467			(700	)
Ending balance	$	225		$	1,319		$	6,597		$	607		$	3,316		$	1,066		$	13,130
Allowance for loan losses: For the nine months ended September 30, 2014
Beginning Balance	$	171		$	1,989		$	7,030		$	1,397		$	4,606		$	1,016		$	16,209
Charge-offs		(3	)		(688	)		(3,478	)		(254	)		(1,187	)		(79	)		(5,689	)
Recoveries		5			204			1,215			1,047			509			130			3,110
Provision		52			(186	)		1,830			(1,583	)		(612	)		(1	)		(500	)
Ending balance	$	225		$	1,319		$	6,597		$	607		$	3,316		$	1,066		$	13,130
Allowance for loan losses as of September 30, 2014
Ending balance individually evaluated for impairment	$	36		$	528		$	1,290		$	480		$	649		$	257		$	3,240
Ending balance collectively evaluated for impairment		189			791			5,307			127			2,667			809			9,890
Ending balance	$	225		$	1,319		$	6,597		$	607		$	3,316		$	1,066		$	13,130
Loans as of September 30, 2014
Ending balance individually evaluated for impairment	$	946		$	1,445		$	20,257		$	2,138		$	11,901		$	573		$	37,260
Ending balance collectively evaluated for impairment		17,167			60,873			233,268			10,288			212,229			14,685			548,510
Ending balance	$	18,113		$	62,318		$	253,525		$	12,426		$	224,130		$	15,258		$	585,770

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. The number of categories was increased in the third quarter of 2015 to allow differentiation between credits within the categories. Ratings for previous periods were not revised to utilize these new categories. Grades 10 through 45 are considered “pass” credits and grades 50 through 65 are considered “watch” credits and are subject to greater scrutiny. Loans with grades 70 through 95 and considered “doubtful” or “loss” and have generally been charged off. A description of the general characteristics of each grade is as follows:

• Grades 10 and 15 – 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.

• Grades 20 and 25 – 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.

• Grades 30 and 35 – 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.

• Grades 60 and 65 – 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.

• Grades 70 and 75 – 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 80-95 - Loss – Loans are considered uncollectible and of such little value that continuing to carry them on the Bank’s financial statements is not feasible.

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

-13-

The portfolio segments in each credit risk grade as of September 30, 2015 are as follows (000s omitted):

Credit Quality Indicators as of September 30, 2015

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	$	109	$	1,346	$	324	$	6,384	$	138,117	$	34,765	$	181,045
10		-		2,752		-		-		61		-		2,813
20		477		361		554		-		-		366		1,758
30		487		18,706		8,446		-		378		-		28,017
40		14,992		55,201		185,643		4,013		59,709		2,946		322,504
45		670		184		5,951		1,618		3,040		-		11,463
50		1,281		4,787		25,474		2,216		4,578		19		38,355
55		910		-		1,996		-		-		-		2,906
60		1,214		2,637		20,592		443		9,888		174		34,948
70		-		-		-		-		-		-		-
80		-		-		-		-		-		-		-
90		-		-		-		-		-		-		-
Total	$	20,140	$	85,974	$	248,980	$	14,674	$	215,771	$	38,270	$	623,809
Performing	$	18,926	$	84,679	$	232,251	$	12,826	$	205,863	$	37,663	$	592,208
Nonperforming		1,214		1,295		16,729		1,848		9,908		607		31,601
Total	$	20,140	$	85,974	$	248,980	$	14,674	$	215,771	$	38,270	$	623,809

The portfolio segments in each credit risk grade as of December 31, 2014 are as follows (000s omitted):

Credit Quality Indicators as of December 31, 2014

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	$	122	$	2,700	$	-	$	5,402	$	138,355	$	40,371	$	186,950
1		-		3,060		-		-		-		369		3,429
2		330		287		830		-		132		-		1,579
3		491		7,084		9,923		-		464		-		17,962
4		13,458		41,441		176,685		4,357		58,902		3,260		298,103
5		1,261		4,903		34,385		2,471		10,112		199		53,331
6		1,038		3,286		27,646		696		15,736		576		48,978
7		-		-		-		-		-		-		-
8		-		-		-		-		-		-		-
9		-		-		-		-		-		-		-
Total	$	16,700	$	62,761	$	249,469	$	12,926	$	223,701	$	44,775	$	610,332
Performing	$	15,702	$	61,287	$	231,461	$	10,740	$	211,143	$	44,053	$	574,386
Nonperforming		998		1,474		18,008		2,186		12,558		722		35,946
Total	$	16,700	$	62,761	$	249,469	$	12,926	$	223,701	$	44,775	$	610,332

-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, 2015 and December 31, 2014 (000s omitted):

September 30, 2015	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	$	45	$	-	$	-	$	45	$	20,095	$	20,140	$	-
Commercial		205		28		54		287		85,687		85,974		6
Commercial Real Estate		3,638		833		2,041		6,512		242,468		248,980		-
Construction Real Estate		69		-		-		69		14,605		14,674		-
Residential Real Estate		1,873		892		824		3,589		212,182		215,771		-
Consumer and Other		92		-		5		97		38,173		38,270		-
Total	$	5,922	$	1,753	$	2,924	$	10,599	$	613,210	$	623,809	$	6

December 31, 2014	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	$	449	$	-	$	80	$	529	$	16,171	$	16,700	$	-
Commercial		142		44		60		246		62,515		62,761		10
Commercial Real Estate		2,127		1,118		2,287		5,532		243,937		249,469		-
Construction Real Estate		334		-		-		334		12,592		12,926		-
Residential Real Estate		2,946		741		777		4,464		219,237		223,701		-
Consumer and Other		124		15		61		200		44,575		44,775		-
Total	$	6,122	$	1,918	$	3,265	$	11,305	$	599,027	$	610,332	$	10

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

The following is a summary of non-accrual loans as of September 30, 2015 and December 31, 2014 (000s omitted):

	September 30, 2015		December 31, 2014
Agriculture and Agricultural Real Estate	$	214	$	80
Commercial		240		315
Commercial Real Estate		6,034		6,287
Construction Real Estate		69		409
Residential Real Estate		3,962		5,760
Consumer and Other		104		189
Total	$	10,623	$	13,040

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

-15-

The following is a summary of impaired loans as of September 30, 2015 and 2014 (000s omitted):

September 30, 2015	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	$	-	$	480	$	-	$	-	$	2	$	1	$	6
Commercial		53		119		-		56		1		64		3
Commercial Real Estate		8,429		8,590		-		8,919		85		9,031		275
Construction Real Estate		124		288		-		276		3		312		8
Residential Real Estate		4,582		5,760		-		4,943		63		5,087		191
Consumer and Other		27		75		-		34		1		37		4
With an allowance recorded:
Agriculture and Agricultural Real Estate		1,214		1,213		395		1,214		13		1,230		35
Commercial		1,206		1,257		878		1,279		14		1,338		47
Commercial Real Estate		8,374		10,037		948		9,686		96		9,755		302
Construction Real Estate		1,719		1,725		471		1,731		20		1,740		60
Residential Real Estate		5,841		6,350		1,288		6,204		76		6,243		209
Consumer and Other		495		495		228		500		6		509		17
Total:
Agriculture and Agricultural Real Estate	$	1,214	$	1,693	$	395	$	1,214	$	15	$	1,231	$	41
Commercial		1,259		1,376		878		1,335		15		1,402		50
Commercial Real Estate		16,803		18,627		948		18,605		181		18,786		577
Construction Real Estate		1,843		2,013		471		2,007		23		2,052		68
Residential Real Estate		10,423		12,110		1,288		11,147		139		11,330		400
Consumer and Other		522		570		228		534		7		546		21

	Recorded Investment as of December 31, 2014		Unpaid Principal Balance as of December 31, 2014		Related Allowance as of December 31, 2014		Average Recorded Investment for the Three Months Ended September 30, 2014		Interest Income Recognized in the Three Months Ended September 30, 2014		Average Recorded Investment for the Nine Months Ended September 30, 2014		Interest Income Recognized in the Nine Months Ended September 30, 2014
With no related allowance recorded:
Agriculture and Agricultural Real Estate	$	256	$	256	$	-	$	258	$	4	$	259	$	7
Commercial		363		412		-		500		7		580		25
Commercial Real Estate		8,084		8,882		-		10,461		111		10,565		352
Construction Real Estate		297		954		-		610		2		668		17
Residential Real Estate		6,424		7,200		-		6,674		84		6,763		234
Consumer and Other		3		3		-		30		1		31		2
With an allowance recorded:
Agriculture and Agricultural Real Estate		661		661		34		687		9		700		28
Commercial		1,051		1,062		554		1,071		13		1,098		40
Commercial Real Estate		10,929		12,758		1,502		11,845		115		11,941		352
Construction Real Estate		1,820		1,851		671		1,855		22		1,869		66
Residential Real Estate		5,251		5,658		672		5,807		63		5,868		191
Consumer and Other		531		529		222		548		6		586		20
Total:
Agriculture and Agricultural Real Estate	$	917	$	917	$	34	$	945	$	13	$	959	$	35
Commercial		1,414		1,474		554		1,571		20		1,678		65
Commercial Real Estate		19,013		21,640		1,502		22,306		226		22,506		704
Construction Real Estate		2,117		2,805		671		2,465		24		2,537		83
Residential Real Estate		11,675		12,858		672		12,481		147		12,631		425
Consumer and Other		534		532		222		578		7		617		22

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

-16-

Loans that have been classified as TDRs during the three and nine month periods ended September 30, 2015 and September 30, 2014 are as follows (000s omitted from dollar amounts):

	Three months ended						Nine months ended
	September 30, 2015						September 30, 2015
	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		3	$	325	$	324		3	$	325	$	324
Commercial		-		-		-		1		66		64
Commercial Real Estate		-		-		-		3		684		636
Construction Real Estate		-		-		-		-		-		-
Residential Real Estate		-		-		-		7		581		523
Consumer and Other		-		-		-		-		-		-
Total		3	$	325	$	324		14	$	1,656	$	1,547

	Three months ended						Nine months ended
	September 30, 2014						September 30, 2014
	Number of Contracts		Pre-Modification Recorded Principal Balance		Post-Modification Recorded Principal Balance		Number of Contracts		Pre-Modification Recorded Principal Balance		Post-Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate		-	$	-	$	-		1	$	314	$	314
Commercial		-		-		-		4		295		54
Commercial Real Estate		2		743		649		6		1,990		1,508
Construction Real Estate		3		43		22		3		43		22
Residential Real Estate		4		203		57		14		1,047		730
Consumer and Other		-		-		-		-		-		-
Total		9	$	989	$	728		28	$	3,689	$	2,628

The Bank considers TDRs that become past due under the modified terms as defaulted. There were no loans that became TDRs during the three and nine month periods ended September 30, 2015 and September 30, 2014 that subsequently defaulted during the three month periods ended September 30, 2015 and September 30, 2014, respectively.

The Company has allocated $3,065,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at September 30, 2015. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of September 30, 2015 and September 30, 2014.

-17-

6. INVESTMENT SECURITIES

The following is a summary of the Bank’s investment securities portfolio as of September 30, 2015 and December 31, 2014 (000s omitted):

	Held to Maturity
	September 30, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political
Subdivisions	$	36,992	$	1,225	$	(246	)	$	37,971
Corporate Debt Securities		500		-		-			500
	$	37,492	$	1,225	$	(246	)	$	38,471

	Available for Sale
	September 30, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	349,388	$	3,185	$	(399	)	$	352,174
Mortgage Backed Securities issued by U.S. Government Agencies		108,280		490		(600	)		108,170
Obligations of States and Political Subdivisions		17,825		337		(35	)		18,127
Corporate Debt Securities		6,998		2		-			7,000
Equity Securities		2,044		111		-			2,155
	$	484,535	$	4,125	$	(1,034	)	$	487,626

	Held to Maturity
	December 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of States and Political Subdivisions	$	32,113	$	1,287	$	(69	)	$	33,331
Corporate Debt Securities		500		-		-			500
	$	32,613	$	1,287	$	(69	)	$	33,831

	Available for Sale
	December 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Obligations of U.S. Government Agencies	$	343,703	$	1,372	$	(3,027	)	$	342,048
Mortgage Backed Securities issued by U.S. Government Agencies		105,890		406		(890	)		105,406
Obligations of States and Political Subdivisions		19,286		377		(82	)		19,581
Corporate Debt Securities		3,975		27		-			4,002
Equity Securities		2,044		95		-			2,139
	$	474,898	$	2,277	$	(3,999	)	$	473,176

-18-

The amortized cost and estimated market values of securities by contractual maturity as of September 30, 2015 are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to Maturity				Available for Sale
			Estimated				Estimated
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value
Contractual maturity in
1 year or less	$	4,425	$	4,455	$	4,756	$	4,762
After 1 year through five years		18,602		18,880		137,902		138,823
After 5 years through 10 years		11,630		12,112		219,131		221,185
After 10 years		2,835		3,024		12,422		12,531
Total		37,492		38,471		374,211		377,301
Mortgage Backed Securities		-		-		108,280		108,170
Securities with no stated maturity		-		-		2,044		2,155
Total	$	37,492	$	38,471	$	484,535	$	487,626

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, 2015 and December 31, 2014.

		September 30, 2015
	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	$	10,011	$	18	$	79,018	$	381	$	89,029	$	399
Mortgage Backed Securities issued by U.S. Government Agencies		34,500		187		29,698		413		64,198		600
Obligations of States and Political Subdivisions		8,905		216		5,580		65		14,485		281
	$	53,416	$	421	$	114,296	$	859	$	167,712	$	1,280

		December 31, 2014
	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	$	47,695	$	144	$	159,650	$	2,883	$	207,345	$	3,027
Mortgage Backed Securities issued by U.S. Government Agencies		32,756		175		40,556		715		73,312		890
Obligations of States and Political Subdivisions		9,341		52		4,276		99		13,617		151
	$	89,792	$	371	$	204,482	$	3,697	$	294,274	$	4,068

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, 2015. As of September 30, 2015 and December 31, 2014, there were 108 and 116 securities in an unrealized loss position, respectively.

-19-

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

The Company applied the following fair value hierarchy:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company’s mutual fund investments where quoted prices are available in an active market generally are classified within Level 1 of the fair value hierarchy.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Company’s borrowed funds and investments in U.S. government agency securities, government sponsored mortgage backed securities, corporate debt securities, 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. Private equity investments and trust preferred collateralized debt obligations are classified within Level 3 of the fair value hierarchy. Fair values are initially valued based on transaction price and are adjusted to reflect exit values.

-20-

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014, and the valuation techniques used by the Company to determine those fair values.

									Total
	Carrying								Estimated
September 30, 2015	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	66,425	$	66,425	$	-	$	-	$	66,425
Securities - Held to Maturity
Obligations of States and Political Subdivisions		36,992		-		37,971		-		37,971
Corporate Debt Securities		500		-		500		-		500
Securities - Available for Sale
Obligations of U.S. Government Agencies		352,174		-		352,174		-		352,174
MBS issued by U.S. Government Agencies		108,170		-		108,170		-		108,170
Obligations of States and Political Subdivisions		18,127		-		18,127		-		18,127
Corporate Debt Securities		7,000		-		7,000		-		7,000
Other Securities		2,155		2,155		-		-		2,155
Federal Home Loan Bank Stock		4,148		-		4,148		-		4,148
Loans Held for Sale		1,597		-		-		1,634		1,634
Loans, net		610,813		-		-		619,517		619,517
Accrued Interest Receivable		4,835		-		-		4,835		4,835
Financial Liabilities:
Noninterest Bearing Deposits		247,512		247,512		-		-		247,512
Interest Bearings Deposits		889,297		-		891,149		-		891,149
Repurchase Agreements		15,000		-		15,415		-		15,415
Accrued Interest Payable		114		-		-		114		114

									Total
	Carrying								Estimated
December 31, 2014	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	52,122	$	52,122	$	-	$	-	$	52,122
Securities - Held to Maturity
Obligations of States and Political Subdivisions		32,113		-		33,331		-		33,331
Corporate Debt Securities		500		-		500		-		500
Securities - Available for Sale
Obligations of U.S. Government Agencies		342,048		-		342,048		-		342,048
MBS issued by U.S. Government Agencies		105,406		-		105,406		-		105,406
Obligations of States and Political Subdivisions		19,581		-		19,581		-		19,581
Corporate Debt Securities		4,002		-		4,002		-		4,002
Other Securities		2,139		2,139		-		-		2,139
Federal Home Loan Bank Stock		7,537		-		7,537		-		7,537
Loans Held for Sale		548		-		-		560		560
Loans, net		597,124		-		-		608,109		608,109
Accrued Interest Receivable		3,943		-		-		3,943		3,943
Financial Liabilities:
Noninterest Bearing Deposits		218,221		218,221		-		-		218,221
Interest Bearings Deposits		893,590		-		895,522		-		895,522
Repurchase Agreements		15,000		-		15,828		-		15,828
Accrued Interest Payable		137		-		-		137		137

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.

-21-

The changes in Level 3 assets measured at fair value on a recurring basis were (000s omitted):

Investment Securities - Available for Sale		2015		2014
Balance at January 1		$	-	$	5,751
	Total realized and unrealized losses included in income		-		(2,599	)
	Total unrealized gains included in other comprehensive income		-		3,758
	Net purchases, sales, calls and maturities		-		(6,910	)
	Net transfers in/out of Level 3		-		-
Balance at September 30		$	-	$	-

The Company did not have any sales or purchases of Level 3 available for sale securities during the period. The Company sold all of its Level 3 Available for Sale securities in the second and third quarters of 2014.

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):

	Balance at September 30, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	32,064	$	-	$	-	$	27,856
Other Real Estate Owned	$	2,154	$	-	$	-	$	2,154

	Balance at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	35,670	$	-	$	-	$	32,015
Other Real Estate Owned	$	5,615	$	-	$	-	$	5,615

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.

-22-

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

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

	Contractual Amount
	September 30,		December 31,
	2015		2014
Commitments to extend credit:
Unused portion of commercial lines of credit	$	64,388	$	66,319
Unused portion of credit card lines of credit		4,092		3,630
Unused portion of home equity lines of credit		22,212		19,544
Standby letters of credit and financial guarantees written		3,136		3,178
All other off-balance sheet commitments		-		-

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

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

-23-

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

Introduction

MBT Financial Corp. (the “Company”) is a bank holding company with one commercial bank subsidiary, Monroe Bank & Trust (“the Bank”). The Bank operates 17 branch offices in Monroe County, Michigan and 7 branch offices in Wayne County, Michigan, and a loan and wealth management office in Lenawee County, Michigan. The Bank has announced that it intends to close 3 branch offices in Monroe County and 1 branch office in Wayne County in the first quarter of 2016. The Wayne County location where the retail branch will be closed will continue to serve as a loan and wealth management office.

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

Executive Overview

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

The net profit of $3,006,000 for the quarter ended September 30, 2015 was an increase of $1,294,000 or 75.6% compared to the third quarter of 2014. The increase was the result of improvement in net interest income, non interest income, and non interest expense. These improvements resulted in increases in income before taxes and in federal income tax expense. This quarter marked the seventeenth consecutive quarterly profit following significant losses caused by the severe economic downturn that impacted the regional and national economies beginning in 2006.

The national economic recovery is slowly continuing, and the recovery in southeast Michigan is steady. Local unemployment rates continued to improve, and total employment is also growing. Commercial and residential development property values continue to improve, with some values reaching or exceeding their pre-recession levels. Our total classified assets, which include internal watch list loans, other real estate owned, and nonperforming and watch list investment securities, improved significantly during 2014 and this trend of improvement is continuing through 2015. Classified assets went down $9.1 million, or 19.7% during the third quarter of 2015, and decreased $17.6 million or 32.2% compared to a year ago. Loan recoveries increased in the third quarter of 2015, and exceeded charge offs for the second time this year. The net recoveries for the quarter were 0.07% of loans, annualized, compared to net charge offs totaling 0.78% of loans in the third quarter of 2014. Due to the net recoveries and improving loan quality metrics, we recorded a $200,000 credit to the provision expense to maintain an appropriate Allowance for Loan and Lease Losses (ALLL). The loan portfolio held for investment increased slightly during the quarter, and the ALLL as a percent of loans decreased from 2.09% to 2.08%. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense.

-24-

Net Interest Income increased $372,000, or 4.2% compared to the third quarter of 2014 even though the net interest margin decreased from 3.17% to 3.11% as the average earning assets increased $65.6 million. The net interest margin decreased because the yield on earnings assets decreased more than the cost of interest bearing liabilities as interest rates remain at historically low levels. The provision for loan losses increased $500,000 compared to the third quarter of 2014 as we recorded a $200,000 credit to the provision expense this year, compared to the $700,000 credit to the provision in the third quarter of 2014. Non-interest income for the quarter increased $1,853,000, due to large securities losses from the sale of our nonperforming pooled Trust Preferred CDOs and losses on the sales of Other Real Estate in the third quarter of 2014. Non-interest expenses decreased $196,000, as professional fees, OREO expense, FDIC deposit insurance assessments, and insurance expenses decreased. These decreases were partially offset by increases in salaries and benefits and marketing and other expenses that were related to some product changes and enhancements. We announced a branch efficiency initiative in the fourth quarter of 2015 that we expect will reduce non-interest expenses beginning in 2016.

Critical Accounting Policies

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

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

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

To determine the fair value of Other Real Estate Owned, the Company utilizes independent appraisals to estimate the fair value of the property.

Financial Condition

The pace of the regional economic recovery has increased over the last year, with local unemployment and property values steadily improving throughout 2014 and 2015. Management efforts are focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

-25-

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 11.6% during the quarter, from $38.2 million to $33.8 million, and total classified assets decreased 19.7% from $46.2 million to $37.1 million. Loan delinquencies increased from 1.4% to 1.7% during the quarter, but remain below the 1.9% total at the end of 2014 and the 1.9% total reported one year ago. The increase in delinquencies this quarter is mainly attributed to two large commercial accounts. One of these accounts returned to current status in October, and the other is expected to be liquidated without loss in the fourth quarter. Over the last twelve months, NPAs decreased $9.7 million, or 22.4%, with nonperforming loans decreasing 15.6% from $37.5 million to $31.6 million, and Other Real Estate Owned (“OREO”) decreasing 64.3% from $6.0 million to $2.2 million. Total classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, decreased $17.6 million, or 32.2%. The Company’s Allowance for Loan and Lease Losses (“ALLL”) decreased $134,000 over the last four quarters in spite of growth in the loan portfolio because of the improvement in the quality of the assets in the loan portfolio and a decrease in the historical loss rates. The ALLL is now 2.08% of loans, down from 2.24% at September 30, 2014. The ALLL is 41.13% of nonperforming loans (“NPLs”), compared to 36.74% at year end and 35.06% at September 30, 2014. 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, 2014, total loans held for investment increased 2.2% as new loan activity exceeded payments received and other reductions in the period. Our pipeline of loans in process remains steady, and we expect new loan production to continue to exceed run off, resulting in an increase in loans outstanding, in the next few quarters.

Since December 31, 2014, deposits increased $25.0 million, other liabilities increased $1.4 million and capital increased $11.6 million, and as a result our total assets increased $38.1 million, or 3.0%. The Company expects minimal deposit funding growth in the fourth quarter of 2015, increasing in the first quarter of 2016, as local municipalities deposit their property tax collections with us. The composition of deposits continues to change as customers move funds from maturing interest accounts to non interest bearing demand deposit accounts due to the low interest rate environment. The expected loan growth will be funded by reductions in our cash and investments. The increase in total capital during the first nine months of 2015 was mainly due to the profit of $8.1 million and the $3.3 million increase in the accumulated other comprehensive income (AOCI). AOCI increased mainly due to an increase in the value of our securities available for sale. Capital increased at a higher rate than assets, causing the capital to assets ratio to increase from 10.52% at December 31, 2014 to 11.10% at September 30, 2015.

Results of Operations – Third Quarter 2015 vs. Third Quarter 2014

Net Interest Income - A comparison of the income statements for the three months ended September 30, 2015 and 2014 shows an increase of $372,000, or 4.2%, in Net Interest Income. Interest income on loans decreased $30,000 or 0.4% even though the average loans outstanding increased $27.2 million as the average yield on loans decreased from 4.82% to 4.59%. The loan yield decreased this quarter due to the continued low interest rates while loans outstanding increased due to improving economic conditions and increased purchases of loan participations. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $197,000 because the yield increased from 1.91% to 1.92% and the average amount of investments, fed funds sold, and interest bearing balances due from banks increased $38.4 million. The Company continues to maintain a very high liquidity position by keeping a large amount of funds in low yielding short term investments and deposits in the Federal Reserve Bank. The interest expense on deposits decreased $205,000 or 26.7% even though the average deposits increased $51.4 million because the average cost of deposits decreased from 0.28% to 0.20%. 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 due to the low interest rate environment. The interest expense on borrowed funds was unchanged at $178,000 as the average amount of borrowed funds was unchanged at $15.0 million and the cost of borrowed funds was unchanged at 4.65%.

-26-

Provision for Loan Losses - The Provision for Loan Losses increased $500,000 compared to the third quarter of 2014 as a $200,000 credit to provision expense was recorded in the third quarter of 2015, compared to the $700,000 credit to provision expense recorded in the third quarter of 2014. We charged off $192,000 of principal while recovering $309,000 of previously charged off loans in the third quarter of 2015, for a net recovery total of $117,000. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to an improvement in portfolio risk indicators and a decrease in the historical loss percentages, the amount of ALLL required at the end of the third quarter of 2015 decreased from $13.2 million at December 31, 2014 to approximately $13.0 million. Along with the net recovery, this required us to record a credit to the provision expense. The ALLL is 2.08% of loans as of September 30, 2015, and, in light of current economic conditions, we believe that at this level the ALLL adequately estimates the potential losses in our loan portfolio.

Other Income – Non interest income increased $1,853,000, or 87.2% compared to the third quarter of 2014. Excluding gains and losses on securities and other real estate owned activity, non-interest income increased $147,000, or 3.9%. Wealth management income decreased $31,000 or 2.6% as the market value of assets managed decreased. Service charges and other fees on deposit accounts increased $80,000, or 7.6% as we added new features and benefits to our primary checking account product and instituted a monthly service fee. Debit card income increased $37,000, or 6.6% and origination fees on mortgage loans sold increased $104,000, or 130%, both due to increased activity. Gains on securities transactions increased $1,036,000 due to large losses in the third quarter of 2014 that were the result of the sales of nonperforming investment securities. Income from other real estate activity improved $670,000 due to losses and write downs of the carrying values properties in the third quarter of 2014.

Other Expenses – Total non-interest expenses decreased $196,000, or 2.1% compared to the third quarter of 2014. Salaries and Employee Benefits increased $63,000, or 1.1%, even though the number of full time equivalent employees decreased from 370 to 346 as equity based compensation expense increased $38,000 and the officer incentive compensation accrual increased $28,000. Improving operational efficiency has been one of Management’s key objectives this year, and the branch efficiency initiative announced in the fourth quarter of 2015 is expected to reduce salaries and benefits expense by over $400,000 per quarter beginning in 2016. Occupancy expense increased $22,000, or 3.5% due to higher maintenance and repairs costs. Marketing expense increased $42,000 or 18.7% due to higher advertising expense and expenses related to the new benefits added to our primary checking account product. Other real estate owned expense went down $128,000, or 68.4% due to a decrease in the number of properties owned. FDIC insurance assessments decreased $63,000 as the termination of our informal agreement with the FDIC and Michigan Department of Insurance and Financial Services in the second quarter of 2015 resulted in a decrease in the assessment rate. Other expense increased $133,000, or 20.5% due to higher ATM expenses and directors’ fees.

As a result of the above activity, the Profit Before Income Taxes in the third quarter of 2015 was $4,236,000, an increase of $1,921,000 compared to the pre-tax profit of $2,315,000 in the third quarter of 2014. The Company recorded a federal income tax expense of $1,230,000 in the third quarter of 2015, reflecting an effective tax rate of 29.0%, compared to the tax expense of $603,000 in the third quarter of 2014, which reflected an effective rate of 26.0%. The increase in the effective tax rate was the result of the decrease in the percentage of operating income that was from municipal investments and bank owned life insurance. The Net profit for the third quarter of 2015 was $3,006,000, an increase of 75.6% compared to the net profit of $1,712,000 in the third quarter of 2014.

-27-

Results of Operations – Nine Months Ended September 30, 2015 vs. Nine Months Ended September 30, 2014

Net Interest Income - A comparison of the income statements for the nine months ended September 30, 2015 and 2014 shows an increase of $1,748,000, or 6.7%, in Net Interest Income. Interest income on loans increased $456,000 or 2.1% as the average yield on loans decreased from 4.78% to 4.70% while the average loans outstanding increased $23.0 million. The loan yield decreased this year due to the lower rates on new and refinanced loans. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $673,000 even though the yield decreased from 1.96% to 1.95% because the average amount of investments, fed funds sold, and interest bearing balances due from banks increased $49.6 million. The Company continues to maintain a very high liquidity position by keeping a large amount of funds in low yielding short term investments and deposits in the Federal Reserve system. The interest expense on deposits decreased $597,000 or 24.6% even though the average deposits increased $57.6 million because the average cost of deposits decreased from 0.30% to 0.22%. The cost of borrowed funds decreased $22,000 as the average amount of borrowed funds decreased $7.3 million.

Provision for Loan Losses - The Provision for Loan Losses decreased $500,000 compared to the first nine months of 2014 as a negative provision of $500,000 was recorded in 2014 and a negative provision expense of $1,000,000 was recorded in 2015. The negative provision was larger in 2015 due to the recovery of a previously charged off loan that occurred in the first quarter of 2015. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to an improvement in portfolio risk indicators and a decrease in the historical loss percentages, the amount of ALLL required at September 30, 2015 decreased to $13.0 million from the $13.1 million required at September 30, 2014. The ALLL is 2.08% of loans as of September 30, 2015, compared to 2.24% at September 30, 2014, and in light of current economic conditions, we believe that the ALLL adequately estimates the potential losses in our loan portfolio.

Other Income – Non interest income increased $2,035,000, or 21.7% compared to the first nine months of 2014. Excluding gains and losses on securities and other real estate owned activity, non-interest income increased $301,000, or 2.7%. Wealth management income increased $80,000 or 2.3% as the market value of assets managed increased in the first half of 2015 due to new assets brought in and market value appreciation. Deposit account fees increased $104,000 or 3.5% due to a new fee charged for benefits added to our main checking account product in 2015. Debit card income increased $161,000, or 10.1% and origination fees on mortgage loans sold increased $220,000, or 95.7%, both due to increased activity.

Other Expenses – Total non-interest expenses decreased $137,000, or 0.5% compared to the first nine months of 2014. Salaries and Employee Benefits increased $155,000, or 0.9%, as the officer incentive compensation accrual increased $187,000. This increase was mitigated by decreases in salaries and benefits expenses that were the result of the decrease in the number of full time equivalent employees from 366 in 2014 to 350 in 2015. Improving operational efficiency has been one of Management’s key objectives this year, and reductions in staffing implemented in the fourth quarter of 2015 are expected to provide salary and benefits expense reductions of $1.7 million in 2016. Equipment expense went up $230,000, or 11.5% due to higher computer expenses and one-time costs related to the conversion of the system used for our bill payment service in 2015. Marketing expense increased $181,000, or 28.3% due to increased advertising and expenses related to enhancing our main checking account product. Other real estate owned expense went down $523,000, or 59.0% due to the continuing sales of OREO properties. FDIC insurance assessments decreased $480,000 as the termination of our consent order in the second quarter of 2014 and the termination of our informal agreement in the second quarter of 2015 resulted in decreases in the assessment rate. Other expense increased $434,000, or 23.7% due to higher ATM expenses, directors’ fees, and training and education expenses.

-28-

As a result of the above activity, the Profit Before Income Taxes in the first nine months of 2015 was $11,340,000, an increase of $4,420,000 compared to the pre-tax profit of $6,920,000 in the first nine months of 2014. The Company recorded a federal income tax expense of $3,272,000 in the first nine months of 2015, reflecting an effective tax rate of 28.9%, compared to the tax expense of $1,754,000 in the first nine months of 2014, which reflected an effective rate of 25.3%. The increase in the effective tax rate was the result of the decrease in the percentage of operating income that was from municipal investments and bank owned life insurance. The Net profit for the first nine months of 2015 was $8,068,000, an increase of 56.2% compared to the net profit of $5,166,000 in the first nine months of 2014.

Cash Flows

Cash flows provided by operating activities increased $2,281,000 compared to the first nine months of 2014 due to the increase of $2,902,000 in net income. Cash flows used for investing activities decreased by $26.6 million from $50.0 million in the first nine months of 2014 to $23.4 million in the first nine months of 2015 as less cash was invested in securities in the first nine months of 2015 than in the first nine months of 2014. This was mitigated by the loan growth, which used $21.3 million more cash in the first nine months of 2015 than it did in the first nine months of 2014 as loan portfolio growth accelerated this year due to improving economic conditions and increased use of loan participations. The amount of cash provided by financing activities in the first nine months of 2015 was $26.1 million, mainly because deposit funding increased by $25.0 million. In the first nine months of 2014, $12.0 million of cash was used for financing activities to repay advances from the Federal Home Loan Bank of Indianapolis, while $19.8 million was provided by deposit growth and $8.1 million was provided by the issuance of nearly 2.1 million shares of common stock. In the first nine months of 2015, the cash provided by operations and financing activities exceeded the use of cash for investing activities, resulting in an increase of $14.3 million in cash and cash equivalents during the nine months. In the first nine months of 2014, the use of cash for investing activities exceeded the cash provided by operations and financing activities, and the amount of cash and cash equivalents decreased by $24.9 million during the period.

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. Internal sources of liquidity include the maturities of loans and securities in the ordinary course of business as well as our available for sale securities portfolio. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of September 30, 2015, the Bank was not utilizing any of its authorized limit of $255 million with the Federal Home Loan Bank of Indianapolis, or its $20 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis, or its $25 million federal funds line with a correspondent bank. The Company periodically draws on its overdraft and fed funds lines to ensure that funding will be available if needed.

The Company’s Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first nine months of 2015 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

-29-

Total stockholders’ equity of the Company was $146.2 million at September 30, 2015 and $134.5 million at December 31, 2014. Common stock increased $308,000 due to the issuance of stock under compensation programs and for our Employee Stock Purchase Plan, retained earnings increased $8.1 million due to the year to date profit, and the Accumulated Other Comprehensive Income (AOCI) increased $3.3 million due to an increase in the value of our securities that are classified as Available For Sale. Total equity increased $11.6 million and total assets increased $38.1 million, so the ratio of equity to assets increased from 10.52% at December 31, 2014 to 11.10% at September 30, 2015.

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 8% of Risk Weighted Assets, and the Leverage Capital Ratio is at least 5%. The Basel III capital requirements that are being phased in beginning in the first quarter of 2015 increased the well capitalized requirement for the Tier 1 Capital as a percent of Risk Weighted Assets from 6% to 8%. Basel III also implemented the new Common Equity Tier 1 Capital to Risk Weighted Assets ratio, with a minimum of 6.5% required to be considered well capitalized.

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, 2015:
Total Capital to Risk-Weighted Assets
Consolidated	$	149,686		19.18	%	$	78,061		10.0	%
Monroe Bank & Trust		148,048		18.98	%		78,013		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		139,792		17.91	%		62,449		8.0	%
Monroe Bank & Trust		138,164		17.71	%		62,411		8.0	%
Common Equity Tier 1 Capital to
Risk-Weighted Assets
Consolidated		139,792		17.91	%		50,740		6.5	%
Monroe Bank & Trust		138,164		17.71	%		50,709		6.5	%
Tier 1 Capital to Average Assets
Consolidated		139,792		10.75	%		65,006		5.0	%
Monroe Bank & Trust		138,164		10.63	%		64,983		5.0	%

-30-

	Actual					Minimum to Qualify as Well Capitalized
	Amount		Ratio			Amount		Ratio
As of December 31, 2014:
Total Capital to Risk-Weighted Assets
Consolidated	$	129,032		17.22	%	$	74,917		10.0	%
Monroe Bank & Trust		127,400		17.01	%		74,895		10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated		119,573		15.96	%		44,950		6.0	%
Monroe Bank & Trust		117,944		15.75	%		44,937		6.0	%
Tier 1 Capital to Average Assets
Consolidated		119,573		9.68	%		61,731		5.0	%
Monroe Bank & Trust		117,944		9.55	%		61,721		5.0	%

The Bank had entered into a Consent Order with its state and federal regulators on July 12, 2010. Following the termination of the Consent Order on June 30, 2014, the Bank became subject to certain informal regulatory requirements and restrictions, including, among other things, requirements to maintain a Tier 1 leverage ratio of at least 9%, continue to reduce classified and delinquent assets, continually monitor its progress, and submit quarterly progress reports to the regulators. The informal agreement also required the Bank to request prior approval from its state and federal regulators before paying dividends to the Company. This informal agreement was terminated in the second quarter of 2015. Since November 18, 2010 the Company operated under a Board Resolution as required by the Federal Reserve system, which is the regulator for the Company. This resolution required the Company to request approval from the Federal Reserve Bank of Chicago prior to any payment of dividends or redemption of stock. On October 14, 2015, the Federal Reserve Bank of Chicago notified the Company that is had no objection if the directorate rescinded the Board Resolution. On October 23, 2015, the Board of Directors of the Company rescinded the Board Resolution and the Company is no longer restricted from paying dividends or redeeming stock.

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank’s earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank’s market risk is monitored quarterly and it has not changed significantly since year-end 2014.

Internal Revenue Service Audit

Since the fourth quarter of 2010, the Internal Revenue Service (IRS) has been conducting an audit of our tax returns for the 2004, 2005, 2007, 2008, 2009, and 2010 tax years. The Company recorded a tax liability in the second quarter of 2012 to reflect the amount of a settlement offer that the Company proposed to the IRS in an attempt to resolve the audit. The Company has also been accruing interest expense on the settlement amount. Based on current knowledge, the Company believes that the accrued tax liability is adequate to absorb the effect relating to the ultimate resolution of the uncertain tax positions challenged by the IRS.

The Company and the IRS have recently made progress toward resolution and the Company believes it is reasonably possible that the IRS will conclude this audit within the current year. If resolution is reached at a liability amount that is less than the 2012 settlement amount, the Company may reduce the amount of interest expense that has been accrued. Management will re-evaluate the estimated potential federal income tax payable noted above each quarter based on current, relevant facts.

-31-

Forward-Looking Statements

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

The Bank’s ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank’s projected net interest income, in its policy. Throughout the first three quarters of 2015, the Bank’s interest rate risk has remained within its policy limits.

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

-32-

The Bank’s interest rate risk, as measured by the net interest income and economic value of equity simulations, has not changed significantly from December 31, 2014.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2015, in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-33-

Part II Other Information

Item 1. Legal Proceedings

MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their property the subject of any material legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

Item 1A. Risk Factors

Due to an increase in cyber security events affecting the financial services industry globally, the Company has identified an additional risk factor to those risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2014.

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

No matters to be reported.

-34-

Item 6. Exhibits

3.1	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, 2011.
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	MBT Financial Corp. 2008 Stock Incentive Plan, as amended effective May 28, 2015. Previously filed as Exhibit 10 to MBT Financial Corp.’s Form 8-K filed with the Commission on June 1, 2015.
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

-35-

Signatures

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

	MBT Financial Corp.
	(Registrant)
November 9, 2015	By:	/s/ H. Douglas Chaffin
Date	H. Douglas Chaffin
	President Chief Executive Officer

November 9, 2015	By:	/s/ John L. Skibski
Date	John L. Skibski
	Executive Vice President and Chief Financial Officer

-36-

Exhibit Index

Exhibit Number	Description of Exhibits
31.1	Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.
31.2	Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14.
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document