UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)




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





For the
quarterly period ended September 30, 2010




Or


o
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
 Commission
File Number: 000-30973





MBT
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





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




102
E. Front Street


Monroe,
Michigan  48161


(Address
of principal executive offices)


(Zip
Code)





(734)
241-3431


(Registrant’s
telephone number, including area code)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Date 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 o
              Accelerated
      Filer oNon-accelerated filer o
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈ No  x





As of
November 15, 2010, there were 17,202,422 shares of the Company’s Common Stock
outstanding.
  
 Part
I Financial Information




Item
1. Financial Statements




MBT
      FINANCIAL CORP.CONSOLIDATED
      BALANCE SHEETS




September
      30,
            
            
            December
      31,2010
            
            
            2009(Unaudited)Dollars
      in thousandsASSETSCash
      and Cash EquivalentsCash
      and due from banksNon-interest
      bearing
            
            $
            18,053
            
            
            $
            18,448Interest
      bearing
            
            
            33,361
            
            
            
            51,298Total
      cash and cash equivalents
            
            
            51,414
            
            
            
            69,746Securities
      - Held to Maturity
            
            
            25,044
            
            
            
            36,433Securities
      - Available for Sale
            
            
            286,280
            
            
            
            307,346Federal
      Home Loan Bank stock - at cost
            
            
            13,086
            
            
            
            13,086Loans
      held for sale
            
            
            1,181
            
            
            
            931Loans
      - Net
            
            
            764,127
            
            
            
            824,916Accrued
      interest receivable and other assets
            
            
            37,492
            
            
            
            50,580Bank
      Owned Life Insurance
            
            
            50,251
            
            
            
            47,953Premises
      and Equipment - Net
            
            
            31,001
            
            
            
            32,378Total
      assets
            
            $
            1,259,876
            
            
            $
            1,383,369LIABILITIESDeposits:Non-interest
      bearing
            
            $
            143,597
            
            
            $
            135,038Interest-bearing
            
            
            878,863
            
            
            
            896,753Total
      deposits
            
            
            1,022,460
            
            
            
            1,031,791Federal
      Home Loan Bank advances
            
            
            113,500
            
            
            
            228,500Repurchase
      agreements
            
            
            30,000
            
            
            
            30,000Notes
      Payable
            
            
            35
            
            
            
            -Interest
      payable and other liabilities
            
            
            9,802
            
            
            
            11,314Total
      liabilities
            
            
            1,175,797
            
            
            
            1,301,605STOCKHOLDERS'
      EQUITYCommon
      stock (no par value; 30,000,000 shares authorized,17,030,844
      and 16,210,110 shares issued and outstanding)
            
            
            1,807
            
            
            
            593Retained
      Earnings
            
            
            84,034
            
            
            
            88,396Accumulated
      other comprehensive loss
            
            
            (1,762
            )
            
            
            (7,225
            )Total
      stockholders' equity
            
            
            84,079
            
            
            
            81,764Total
      liabilities and stockholders' equity
            
            $
            1,259,876
            
            
            $
            1,383,369


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




2




MBT
      FINANCIAL CORP.CONSOLIDATED
      STATEMENTS OF INCOME - UNAUDITED
  Three
      Months EndedSeptember 30,
              
              
              Nine
      Months EndedSeptember 30,Dollars
      in thousands, except per share data
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009Interest
      IncomeInterest
      and fees on loans
              
              $
              11,587
              
              
              $
              13,229
              
              
              $
              35,178
              
              
              $
              39,994Interest
      on investment securities-Tax-exempt
              
              
              426
              
              
              
              837
              
              
              
              1,540
              
              
              
              2,579Taxable
              
              
              1,742
              
              
              
              3,544
              
              
              
              6,784
              
              
              
              11,872Interest
      on balances due from banks
              
              
              34
              
              
              
              30
              
              
              
              100
              
              
              
              57Total
      interest income
              
              
              13,789
              
              
              
              17,640
              
              
              
              43,602
              
              
              
              54,502Interest
      ExpenseInterest
      on deposits
              
              
              3,279
              
              
              
              4,174
              
              
              
              9,968
              
              
              
              14,280Interest
      on borrowed funds
              
              
              1,089
              
              
              
              2,950
              
              
              
              5,620
              
              
              
              9,308Total
      interest expense
              
              
              4,368
              
              
              
              7,124
              
              
              
              15,588
              
              
              
              23,588Net
      Interest Income
              
              
              9,421
              
              
              
              10,516
              
              
              
              28,014
              
              
              
              30,914Provision
      For Loan Losses
              
              
              7,464
              
              
              
              6,800
              
              
              
              13,414
              
              
              
              19,000Net
      Interest Income AfterProvision
      For Loan Losses
              
              
              1,957
              
              
              
              3,716
              
              
              
              14,600
              
              
              
              11,914Other
      IncomeIncome
      from wealth management services
              
              
              936
              
              
              
              936
              
              
              
              3,039
              
              
              
              2,756Service
      charges and other fees
              
              
              1,413
              
              
              
              1,516
              
              
              
              3,985
              
              
              
              4,304Net
      gain on sales of securities
              
              
              183
              
              
              
              4,365
              
              
              
              3,269
              
              
              
              5,021Other
      Than Temporary Impairments on securities
              
              
              -
              
              
              
              (2,693
              )
              
              
              -
              
              
              
              (9,093
              )Portion
      of OTTI loss recognized in othercomprehensive
      income (before taxes)
              
              
              -
              
              
              
              (1,859
              )
              
              
              -
              
              
              
              3,772Net
      impairment losses
              
              
              -
              
              
              
              (4,552
              )
              
              
              -
              
              
              
              (5,321
              )Origination
      fees on mortgage loans sold
              
              
              189
              
              
              
              119
              
              
              
              458
              
              
              
              350Bank
      owned life insurance income
              
              
              693
              
              
              
              369
              
              
              
              1,532
              
              
              
              1,034Other
              
              
              967
              
              
              
              806
              
              
              
              2,958
              
              
              
              2,376Total
      other income
              
              
              4,381
              
              
              
              3,559
              
              
              
              15,241
              
              
              
              10,520Other
      ExpensesSalaries
      and employee benefits
              
              
              4,717
              
              
              
              5,122
              
              
              
              14,438
              
              
              
              15,956Occupancy
      expense
              
              
              686
              
              
              
              804
              
              
              
              2,194
              
              
              
              2,445Equipment
      expense
              
              
              780
              
              
              
              729
              
              
              
              2,417
              
              
              
              2,348Marketing
      expense
              
              
              230
              
              
              
              277
              
              
              
              734
              
              
              
              798Professional
      fees
              
              
              549
              
              
              
              419
              
              
              
              1,537
              
              
              
              1,286Collection
      expenses
              
              
              67
              
              
              
              121
              
              
              
              263
              
              
              
              685Net
      loss on other real estate owned
              
              
              1,076
              
              
              
              1,927
              
              
              
              3,066
              
              
              
              7,957Other
      real estate owned expenses
              
              
              564
              
              
              
              399
              
              
              
              1,916
              
              
              
              1,165FDIC
      Deposit Insurance Assessment
              
              
              1,029
              
              
              
              628
              
              
              
              2,271
              
              
              
              2,314Debt
      prepayment penalties
              
              
              -
              
              
              
              -
              
              
              
              2,492
              
              
              
              -Other
              
              
              978
              
              
              
              964
              
              
              
              2,875
              
              
              
              3,022Total
      other expenses
              
              
              10,676
              
              
              
              11,390
              
              
              
              34,203
              
              
              
              37,976Loss
      Before Income Taxes
              
              
              (4,338
              )
              
              
              (4,115
              )
              
              
              (4,362
              )
              
              
              (15,542
              )Income
      Tax Benefit
              
              
              -
              
              
              
              (1,790
              )
              
              
              -
              
              
              
              (6,477
              )Net
      Loss
              
              $
              (4,338
              )
              
              $
              (2,325
              )
              
              $
              (4,362
              )
              
              $
              (9,065
              )Basic
      Loss Per Common Share
              
              $
              (0.27
              )
              
              $
              (0.14
              )
              
              $
              (0.27
              )
              
              $
              (0.56
              )Diluted
      Loss Per Common Share
              
              $
              (0.27
              )
              
              $
              (0.14
              )
              
              $
              (0.27
              )
              
              $
              (0.56
              )Common
      Stock Dividends Declared Per Share
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              0.02




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




3





MBT
      FINANCIAL CORP.CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -
  UNAUDITED
  AccumulatedOtherCommon
                
                
                Retained
                
                
                ComprehensiveDollars
      in thousands
                
                Stock
                
                
                Earnings
                
                
                Income
      (Loss)
                
                
                TotalBalance
      - January 1, 2010
                
                $
                593
                
                
                $
                88,396
                
                
                $
                (7,225
                )
                
                $
                81,764Issuance
      of Common Stock (820,734 shares)
                
                
                1,164
                
                
                
                -
                
                
                
                -
                
                
                
                1,164Equity
      Compensation
                
                
                50
                
                
                
                -
                
                
                
                -
                
                
                
                50Comprehensive
      income:Net
      loss
                
                
                -
                
                
                
                (4,362
                )
                
                
                -
                
                
                
                (4,362
                )Change
      in net unrealized gain on securitiesavailable
      for sale - Net of tax effect of $(3,889)
                
                
                -
                
                
                
                -
                
                
                
                7,435
                
                
                
                7,435Reclassification
      adjustment for gains includedin
      net income - Net of tax effect of $1,111
                
                
                -
                
                
                
                -
                
                
                
                (2,125
                )
                
                
                (2,125
                )Change
      in postretirement benefit obligationNet
      of tax effect of $(80)
                
                
                -
                
                
                
                -
                
                
                
                153
                
                
                
                153Total
      Comprehensive Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,101Balance
      - September 30, 2010
                
                $
                1,807
                
                
                $
                84,034
                
                
                $
                (1,762
                )
                
                $
                84,079


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




4





MBT
      FINANCIAL CORP.
                CONSOLIDATED
      STATEMENTS OF CASH FLOWS -
UNAUDITED
 
  Nine
      Months Ended
                September
      30,Dollars
      in thousands
              
              2010
              
              
              2009Cash
      Flows from Operating ActivitiesNet
      Loss
              
              $
              (4,362
              )
              
              $
              (9,065
              )Adjustments
      to reconcile net loss to net cash from operating
activitiesProvision
      for loan losses
              
              
              13,414
              
              
              
              19,000Depreciation
              
              
              1,604
              
              
              
              1,691Increase
      in net deferred Federal income tax asset
              
              
              -
              
              
              
              (4,099
              )Net
      amortization of investment premium and discount
              
              
              938
              
              
              
              209Writedowns
      of Other Real Estate Owned
              
              
              2,900
              
              
              
              6,116Net
      decrease in interest payable and other liabilities
              
              
              (1,276
              )
              
              
              (1,762
              )Net
      increase (decrease) in interest receivable and other
assets
              
              
              2,210
              
              
              
              (10,742
              )Equity
      based compensation expense
              
              
              62
              
              
              
              106Net
      gain on sale/settlement of securities
              
              
              (3,269
              )
              
              
              (5,021
              )Other
      Than Temporary Impairment of investment securities
              
              
              -
              
              
              
              5,321Increase
      in cash surrender value of life insurance
              
              
              (1,531
              )
              
              
              (1,034
              )Net
      cash provided by operating activities
              
              $
              10,690
              
              
              $
              720Cash
      Flows from Investing ActivitiesProceeds
      from maturities and redemptions of investment securities held to
      maturity
              
              $
              12,830
              
              
              $
              29,010Proceeds
      from maturities and redemptions of investment securities available for
      sale
              
              
              57,495
              
              
              
              114,718Proceeds
      from sales of investment securities held to maturity
              
              
              150
              
              
              
              -Proceeds
      from sales of investment securities available for sale
              
              
              143,093
              
              
              
              201,639Net
      decrease in loans
              
              
              47,125
              
              
              
              43,264Proceeds
      from sales of other real estate owned
              
              
              3,740
              
              
              
              5,103Proceeds
      from sales of other assets
              
              
              1,294
              
              
              
              217Purchase
      of investment securities held to maturity
              
              
              (1,582
              )
              
              
              (16,817
              )Purchase
      of Bank Owned Life Insurance
              
              
              (1,222
              )
              
              
              (1,439
              )Proceeds
      from surrender of Bank Owned Life Insurance
              
              
              455
              
              
              
              -Purchase
      of investment securities available for sale
              
              
              (169,041
              )
              
              
              (246,123
              )Purchase
      of bank premises and equipment
              
              
              (227
              )
              
              
              (1,768
              )Net
      cash provided by investing activities
              
              $
              94,110
              
              
              $
              127,804Cash
      Flows from Financing ActivitiesNet
      decrease in deposits
              
              $
              (9,331
              )
              
              $
              (88,429
              )Proceeds
      from issuance of long term debt
              
              
              35
              
              
              
              -Repayment
      of Federal Home Loan Bank borrowings
              
              
              (115,000
              )
              
              
              (18,000
              )Proceeds
      from issuance of common stock
              
              
              1,164
              
              
              
              127Dividends
      paid
              
              
              -
              
              
              
              (1,777
              )Net
      cash used for financing activities
              
              $
              (123,132
              )
              
              $
              (108,079
              )Net
      Increase (Decrease) In Cash and Cash Equivalents
              
              $
              (18,332
              )
              
              $
              20,445Cash
      and Cash Equivalents at Beginning Of Period
              
              
              69,746
              
              
              
              50,786Cash
      And Cash Equivalents At End Of Period
              
              $
              51,414
              
              
              $
              71,231
 The
accompanying notes to consolidated financial statements are 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 subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
eighteen branches in Monroe County, Michigan and seven branches in Wayne County,
Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe
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, the deferred tax asset valuation
allowance, and the fair value of investment securities.




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




The
significant accounting policies are as follows:




PRINCIPLES
OF CONSOLIDATION




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




COMPREHENSIVE
INCOME




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




BUSINESS
SEGMENTS




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




FAIR
VALUE




The
Corporation 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
Corporation uses various valuation techniques and assumptions when estimating
fair value.




6




The
Corporation 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 Corporation’s U.S. government agency securities,
government sponsored mortgage backed securities, and 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 Corporation’s borrowed funds and investments in 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.




When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at and/or marked to fair value, the Corporation
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 Corporation looks to active and
observable markets to price identical assets or liabilities. When identical
assets and liabilities are not traded in active markets, the Corporation looks
to market observable data for similar assets or liabilities. Nevertheless,
certain assets and liabilities are not actively traded in observable markets and
the Corporation must use alternative valuation techniques to derive a fair value
measurement.




ACCOUNTING
PRONOUNCEMENTS




In June
2009, the FASB issued “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles.” The FASB Accounting
Standards Codification (the Codification) is the single source of authoritative
nongovernmental GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission, have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification is effective for
interim or annual periods ending after September 15, 2009. There have been no
changes to the content of our financial statements or disclosures as a result of
implementing the Codification. However, as a result of implementation of the
Codification, previous references to new accounting standards and literature are
no longer applicable. All future references to authoritative accounting
literature in our consolidated financial statements will be referenced in
accordance with the Codification.




7




During
the first quarter of 2010, the FASB issued Accounting Standards Update No.
2010-06, Improving Disclosures about Fair Value Measurements. This update
requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and
out of Level 1 and Level 2 fair-value measurements and information about
purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of Level 3 fair-value measurements. This guidance was effective
for interim and annual reporting periods beginning after December 15,
2009.




In July
2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU requires new disclosures about an entity’s allowance for credit losses
and the credit quality of its financing receivables. The required disclosures as
of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010 and will be included in our annual
financial statements for the year ended December 31, 2010. The required
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15, 2010
and will be included in our financial statements for the interim period ending
March 31, 2011. The adoption of this ASU will result in increased financial
statement disclosures, but it is not expected to have a material effect on our
financial condition, results of operations, or cash flows.




2.
EARNINGS PER SHARE




The
calculations of loss per common share are as follows:




For
      the three monthsended Sept. 30,
              
              
              For
      the nine monthsended Sept. 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Basic
      and DilutedNet
      loss
              
              $
              (4,338,000
              )
              
              $
              (2,325,000
              )
              
              $
              (4,362,000
              )
              
              $
              (9,065,000
              )Net
      loss applicable to common stock
              
              $
              (4,338,000
              )
              
              $
              (2,325,000
              )
              
              $
              (4,362,000
              )
              
              $
              (9,065,000
              )Average
      common shares outstanding
              
              
              16,329,549
              
              
              
              16,192,914
              
              
              
              16,257,433
              
              
              
              16,180,527Loss
      per common share - basic
              
              $
              (0.27
              )
              
              $
              (0.14
              )
              
              $
              (0.27
              )
              
              $
              (0.56
              )


3. STOCK
BASED COMPENSATION




Stock Options -The following
table summarizes the options that have been granted to non-employee directors
and certain key executives 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
      AverageShares
              
              
              Exercise
      PriceOptions
      Outstanding, January 1, 2010
              
              
              489,075
              
              
              $
              17.35Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              44,500
              
              
              
              18.03Options
      Outstanding, September 30, 2010
              
              
              444,575
              
              
              $
              17.28Options
      Exercisable, September 30, 2010
              
              
              444,575
              
              
              $
              17.28




On
January 4, 2010, Stock Only Stock Appreciation Rights (SOSARs) were awarded to
certain directors in exchange for a portion of their retainer 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 on December 31, 2010. 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.




8





The fair
value of $0.45 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 35.7%, a risk free rate of 3.36%
and dividend yield of 3.00%. The following table summarizes the SOSARs that have
been granted:





WeightedAverageExerciseShares
              
              
              PriceSOSARs
      Outstanding, January 1, 2010
              
              
              221,500
              
              
              $
              5.23Granted
              
              
              16,000
              
              
              
              1.52Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              13,500
              
              
              
              2.58SOSARs
      Outstanding, September 30, 2010
              
              
              224,000
              
              
              $
              5.12SOSARs
      Exercisable, September 30, 2010
              
              
              116,182
              
              
              $
              5.82




The total
expense for equity based compensation was $17,000 in the third quarter of 2010
and $38,000 in the third quarter of 2009. The total expense for equity based
compensation was $62,000 in the first nine months of 2010 and $118,000 in the
first nine months of 2009.





4.
LOANS


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




Loans
consist of the following (000s omitted):




September
      30,
              
              
              December
      31,2010
              
              
              2009Residential
      real estate loans
              
              $
              341,947
              
              
              $
              374,970Non-farm,
      non-residential real estate loans
              
              
              334,030
              
              
              
              351,256Loans
      to finance agricultural production andother
      loans to farmers
              
              
              10,686
              
              
              
              7,113Commercial
      and industrial loans
              
              
              80,848
              
              
              
              93,786Loans
      to individuals for household, family,and
      other personal expenditures
              
              
              17,614
              
              
              
              22,071All
      other loans (including overdrafts)
              
              
              487
              
              
              
              574Total
      loans, gross
              
              
              785,612
              
              
              
              849,770Less:
      Deferred loan fees
              
              
              739
              
              
              
              791Total
      loans, net of deferred loan fees
              
              
              784,873
              
              
              
              848,979Less:
      Allowance for loan losses
              
              
              20,746
              
              
              
              24,063$
              764,127
              
              
              $
              824,916




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, and other real
estate owned. 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 (000’s omitted):




September
      30,
              
              
              December
      31,2010
              
              
              2009Nonaccrual
      loans
              
              $
              64,192
              
              
              $
              56,992Loans
      90 days past due
              
              
              117
              
              
              
              20Restructured
      loans
              
              
              15,290
              
              
              
              29,102Total
      nonperforming loans
              
              $
              79,599
              
              
              $
              86,114Other
      real estate owned
              
              
              18,878
              
              
              
              17,502Other
      assets
              
              
              164
              
              
              
              1,330Nonperforming
      investment securities
              
              
              4,740
              
              
              
              4,740Total
      nonperforming assets
              
              $
              103,381
              
              
              $
              109,686Nonperforming
      assets to total assets
              
              
              8.21
              %
              
              
              7.93
              %Allowance
      for loan losses tononperforming
      loans
              
              
              26.06
              %
              
              
              27.94
              %




5.
ALLOWANCE FOR LOAN LOSSES




Activity
in the allowance for loan losses during the quarter and nine months ended
September 30 was as follows (000’s omitted):





Quarter ended September
    30,
              
              
              Nine months ended September
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Balance
      beginning of period
              
              $
              24,026
              
              
              $
              23,875
              
              
              $
              24,063
              
              
              $
              18,528Provision
      for loan losses
              
              
              7,464
              
              
              
              6,800
              
              
              
              13,414
              
              
              
              19,000Loans
      charged off
              
              
              (11,010
              )
              
              
              (12,364
              )
              
              
              (17,339
              )
              
              
              (20,273
              )Recoveries
              
              
              266
              
              
              
              262
              
              
              
              608
              
              
              
              1,318Balance
      end of period
              
              $
              20,746
              
              
              $
              18,573
              
              
              $
              20,746
              
              
              $
              18,573




For each
period, the provision for loan losses in the income statement is based on
Management’s estimate of the amount required to maintain an adequate Allowance
for Loan Losses.




To serve
as a basis for making this provision, the Bank maintains an extensive credit
risk monitoring process that considers several factors including: current
economic conditions affecting the Bank’s customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank’s
recorded investment in the loan to the present value of expected cash flows
discounted at the loan’s effective interest rate, or the fair value of the
collateral, or the loan’s observable market price.




The
provision for loan losses increases the Allowance for Loan Losses, a valuation
account which is netted against loans on the consolidated statements of
condition. When it is determined that a customer will not repay a loan, the loan
is charged off to its net realizable value, 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.




10




6. INVESTMENT
SECURITIES




The
following is a summary of the Bank’s investment securities portfolio as of
September 30, 2010 and December 31, 2009 (000’s omitted):




Held
      to MaturitySeptember
      30, 2010Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              MarketCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S. GovernmentAgencies
              
              $
              6
              
              
              $
              -
              
              
              $
              -
              
              
              $
              6Obligations
      of States and PoliticalSubdivisions
              
              
              25,038
              
              
              
              510
              
              
              
              (19
              )
              
              
              25,529$
              25,044
              
              
              $
              510
              
              
              $
              (19
              )
              
              $
              25,535




Available
      for SaleSeptember
      30, 2010Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              MarketCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S. GovernmentAgencies
              
              $
              258,180
              
              
              $
              5,428
              
              
              $
              (58
              )
              
              $
              263,550Obligations
      of States and PoliticalSubdivisions
              
              
              16,487
              
              
              
              402
              
              
              
              (18
              )
              
              
              16,871Trust
      Preferred CDO Securities
              
              
              9,564
              
              
              
              -
              
              
              
              (6,188
              )
              
              
              3,376Other
      Securities
              
              
              2,553
              
              
              
              146
              
              
              
              (216
              )
              
              
              2,483$
              286,784
              
              
              $
              5,976
              
              
              $
              (6,480
              )
              
              $
              286,280




Held
      to MaturityDecember
      31, 2009Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              MarketCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S. GovernmentAgencies
              
              $
              6
              
              
              $
              -
              
              
              $
              -
              
              
              $
              6Obligations
      of States and PoliticalSubdivisions
              
              
              36,427
              
              
              
              336
              
              
              
              (352
              )
              
              
              36,411$
              36,433
              
              
              $
              336
              
              
              $
              (352
              )
              
              $
              36,417




Available
      for SaleDecember
      31, 2009Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              MarketCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S. GovernmentAgencies
              
              $
              256,483
              
              
              $
              602
              
              
              $
              (2,457
              )
              
              $
              254,628Obligations
      of States and PoliticalSubdivisions
              
              
              35,117
              
              
              
              667
              
              
              
              (147
              )
              
              
              35,637Trust
      Preferred CDO Securities
              
              
              13,485
              
              
              
              -
              
              
              
              (6,270
              )
              
              
              7,215Corporate
      Debt Securities
              
              
              8,383
              
              
              
              -
              
              
              
              (874
              )
              
              
              7,509Other
      Securities
              
              
              2,553
              
              
              
              74
              
              
              
              (270
              )
              
              
              2,357$
              316,021
              
              
              $
              1,343
              
              
              $
              (10,018
              )
              
              $
              307,346




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 that are not deemed to
be other than temporarily impaired (in thousands), aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position at September 30, 2010 and December 31,
2009.




11





September
      30, 2010Less
      than 12 months
                
                
                12
      months or longer
                
                
                TotalAggregate
      Fair Value
                
                
                Gross
      Unrealized Losses
                
                
                Aggregate
      Fair Value
                
                
                Gross
      Unrealized Losses
                
                
                Aggregate
      Fair Value
                
                
                Gross
      Unrealized LossesObligations
      of United StatesGovernment
      Agencies
                
                $
                34,863
                
                
                $
                58
                
                
                $
                -
                
                
                $
                -
                
                
                $
                34,863
                
                
                $
                58Obligations
      of States andPolitical
      Subdivisions
                
                
                1,188
                
                
                
                14
                
                
                
                1,319
                
                
                
                23
                
                
                
                2,507
                
                
                
                37Trust
      Preferred CDO Securities
                
                
                -
                
                
                
                -
                
                
                
                1,625
                
                
                
                3,115
                
                
                
                1,625
                
                
                
                3,115Equity
      Securities
                
                
                -
                
                
                
                -
                
                
                
                324
                
                
                
                216
                
                
                
                324
                
                
                
                216$
                36,051
                
                
                $
                72
                
                
                $
                3,268
                
                
                $
                3,354
                
                
                $
                39,319
                
                
                $
                3,426




December
      31, 2009Less
      than 12 months
                
                
                12
      months or longer
                
                
                TotalAggregate
      Fair Value
                
                
                Gross
      Unrealized Losses
                
                
                AggregateFair
      Value
                
                
                Gross
      Unrealized Losses
                
                
                Aggregate
      Fair Value
                
                
                Gross
      Unrealized LossesObligations
      of United StatesGovernment
      Agencies
                
                $
                170,584
                
                
                $
                2,457
                
                
                $
                -
                
                
                $
                -
                
                
                $
                170,584
                
                
                $
                2,457Obligations
      of States andPolitical
      Subdivisions
                
                
                14,616
                
                
                
                299
                
                
                
                5,058
                
                
                
                200
                
                
                
                19,674
                
                
                
                499Trust
      Preferred CDO Securities
                
                
                -
                
                
                
                -
                
                
                
                1,662
                
                
                
                3,078
                
                
                
                1,662
                
                
                
                3,078Corporate
      Debt Securities
                
                
                -
                
                
                
                -
                
                
                
                7,509
                
                
                
                874
                
                
                
                7,509
                
                
                
                874Equity
      Securities
                
                
                270
                
                
                
                270
                
                
                
                -
                
                
                
                -
                
                
                
                270
                
                
                
                270$
                185,470
                
                
                $
                3,026
                
                
                $
                14,229
                
                
                $
                4,152
                
                
                $
                199,699
                
                
                $
                7,178


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, 2010.





The Trust
Preferred CDO Securities are issued by companies in the financial services
industry, including banks, thrifts, and insurance companies. Each of the three
securities owned by the Company is in an unrealized loss position. The main
reasons for the impairment are the overall decline in market values for
financial industry securities and the lack of an active market for these types
of securities in particular. In determining whether the impairment is not
other-than-temporary, the Company analyzed each security’s expected cash flows.
The assumptions used in the cash flow analysis were developed following a review
of the financial condition of the individual obligors in the pools. The analysis
concluded that disruption of our cash flows due to defaults by issuers was
currently not expected to occur in one of the three securities owned. As a
result of uncertainties in the market place affecting companies in the financial
services industry, it is at least reasonably possible that a change in the
estimate will occur in the near term. Because the Company does not intend to
sell the investment and it is not more likely than not that the Company will be
required to sell the investment before recovery of its amortized cost basis,
which may be maturity, the Company does not consider this investment to be other
than temporarily impaired at  September 30, 2010.




12





The Other
Than Temporary Impairment (OTTI) analysis of two of the three Trust Preferred
CDO securities indicated that their impairment most likely is not temporary.
Accounting regulations require entities to split OTTI charges between credit
losses, which are charged to earnings, and other impairment, which is charged to
Other Comprehensive Income (OCI). The CDOs that have OTTI have an amortized cost
of $4.824 million and a fair value of $1.751 million. The impairment of $3.073
million includes $1.41 million of other impairment that was charged to OCI.
Credit losses of $1.663 million were charged to earnings in 2009.





7.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS




Certain
of the Bank’s assets and liabilities are financial instruments that have fair
values that differ from their carrying values in the accompanying consolidated
balance sheets.  These fair values, along with the methods and
assumptions used to estimate such fair values, are discussed
below.  The fair values of all financial instruments not discussed
below (Cash and cash equivalents, Federal funds sold, Federal Home Loan Bank
stock, Accrued interest receivable and other assets, Bank Owned Life Insurance,
Demand deposits, NOW deposits, Savings deposits, Money market deposits, Federal
funds purchased, and Interest payable and other liabilities) are estimated to be
equal to their carrying amounts as of September 30, 2010 and December 31,
2009.




INVESTMENT
SECURITIES




Fair
value for the Bank’s investment securities was determined using the market value
in active markets, where available. When not available, fair values are
estimated using the fair value hierarchy. In the fair value hierarchy, Level 2
fair values are determined using observable inputs other than Level 1 market
prices, such as quoted prices for similar assets. Level 3 values are determined
using unobservable inputs, such as discounted cash flow projections. These
Estimated Market Values are disclosed in Note 6. The fair value disclosures
required are in Note 8.




LOANS,
NET




The fair
value of all loans is estimated by discounting the future cash flows associated
with the loans, using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.




OTHER
TIME DEPOSITS




The fair
value of other time deposits, consisting of fixed maturity certificates of
deposit, is estimated by discounting the related cash flows using the rates
currently offered for deposits of similar remaining maturities.




FHLB
ADVANCES AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS




A portion
of the Federal Home Loan Bank advances in the accompanying consolidated balance
sheets were written with a put option that allows the Federal Home Loan Bank to
require repayment or conversion to a variable rate advance. The fair value of
these putable Federal Home Loan Bank advances is estimated using the binomial
lattice option pricing method.




The fair
value of fixed and variable rate Federal Home Loan Bank advances and Securities
Sold under Repurchase Agreements, is estimated by discounting the related cash
flows using the rates currently available for borrowings of similar remaining
maturities.




13




OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS




The fair
values of commitments to extend credit and standby letters of credit and
financial guarantees written are estimated using the fees currently charged to
engage into similar agreements.  The fair values of these instruments
are not significant.




The
carrying amounts and approximate fair values as of September 30, 2010 and
December 31, 2009 are as follows (000’s omitted):




September 30, 2010
              
              
              December 31, 2009Carrying
              
              
              Estimated
              
              
              Carrying
              
              
              EstimatedValue
              
              
              Fair
      Value
              
              
              Value
              
              
              Fair
      ValueFinancial
      Assets:Cash
      and due from banks
              
              $
              51,414
              
              
              $
              51,414
              
              
              $
              69,746
              
              
              $
              69,746Securities
      - Held to Maturity
              
              
              25,044
              
              
              
              25,535
              
              
              
              36,433
              
              
              
              36,417Securities
      - Available for Sale
              
              
              286,280
              
              
              
              286,280
              
              
              
              307,346
              
              
              
              307,346Federal
      Home Loan Bank Stock
              
              
              13,086
              
              
              
              13,086
              
              
              
              13,086
              
              
              
              13,086Loans,
      net
              
              
              765,308
              
              
              
              780,504
              
              
              
              825,847
              
              
              
              838,965Accrued
      Interest Receivable and Other Assets
              
              
              37,492
              
              
              
              37,492
              
              
              
              50,580
              
              
              
              50,580Financial
      Liabilities:Demand,
      NOW, savings and money marketsavings
      deposits
              
              
              621,199
              
              
              
              621,199
              
              
              
              630,065
              
              
              
              630,065Other
      time deposits
              
              
              401,261
              
              
              
              408,069
              
              
              
              401,726
              
              
              
              408,516Borrowed
      fundsVariable
      Rate FHLB Advances
              
              
              110,000
              
              
              
              115,577
              
              
              
              110,000
              
              
              
              116,938Fixed
      Rate FHLB Advances
              
              
              3,500
              
              
              
              3,605
              
              
              
              3,500
              
              
              
              3,688Putable
      FHLB Advances
              
              
              -
              
              
              
              -
              
              
              
              115,000
              
              
              
              119,700Repurchase
      Agreements
              
              
              30,000
              
              
              
              34,149
              
              
              
              30,000
              
              
              
              34,896Notes
      Payable
              
              
              35
              
              
              
              35
              
              
              
              -
              
              
              
              -




8. FAIR
VALUE MEASUREMENTS




The
following tables present information about the Company’s assets measured at fair
value on a recurring basis at September 30, 2010 and 2009, and the valuation
techniques used by the Company to determine those fair values.




In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets that the Company has the ability to
access.




Fair
values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices for similar
assets in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.




Level 3
inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related
asset.




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.




14




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




Quoted
      Prices in
                Active
      Markets for
                Identical
      Assets
                (Level
      1)
              
              
              Significant
      Other
                Observable
      Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
                Inputs
      (Level 3)
              
              
              Balance
      at
                Sept.
      30, 2010Investment
      Securities - Available for SaleObligations
      of U.S. Government Agencies
              
              $
              263,550
              
              
              $
              -
              
              
              $
              -
              
              
              $
              263,550Obligations
      of States and Political Subdivisions
              
              
              -
              
              
              
              16,871
              
              
              
              -
              
              
              
              16,871Trust
      Preferred CDO Securities
              
              
              -
              
              
              
              -
              
              
              
              3,376
              
              
              
              3,376Other
      Secruities
              
              
              -
              
              
              
              2,483
              
              
              
              -
              
              
              
              2,483$
              263,550
              
              
              $
              19,354
              
              
              $
              3,376
              
              
              $
              286,280






Quoted
      Prices in
                Active
      Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
      Inputs (Level 3)
              
              
              Balance
      at
                Sept.
      30, 2009Investment
      Securities - Available for SaleObligations
      of U.S. Government Agencies
              
              $
              263,904
              
              
              $
              -
              
              
              $
              -
              
              
              $
              263,904Obligations
      of States and Political Subdivisions
              
              
              -
              
              
              
              46,598
              
              
              
              -
              
              
              
              46,598Trust
      Preferred CDO Securities
              
              
              -
              
              
              
              -
              
              
              
              12,094
              
              
              
              12,094Corporate
      Debt Securities
              
              
              6,963
              
              
              
              -
              
              
              
              -
              
              
              
              6,963Other
      Secruities
              
              
              2,386
              
              
              
              -
              
              
              
              -
              
              
              
              2,386$
              273,253
              
              
              $
              46,598
              
              
              $
              12,094
              
              
              $
              331,945




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




Investment
      Securities -
                Available
      for Sale2010
              
              
              2009Balance
      at prior year end
              
              $
              7,215
              
              
              $
              19,746Total
      realized and unrealized gains (losses) included in income
              
              
              -
              
              
              
              (5,316
              )Total
      unrealized gains (losses) included in other comprehensive
      income
              
              
              81
              
              
              
              (2,336
              )Net
      purchases, sales, calls and maturities
              
              
              (3,920
              )
              
              
              -Net
      transfers in/out of Level 3
              
              
              -
              
              
              
              -Balance
      at September 30
              
              $
              3,376
              
              
              $
              12,094




Of the
Level 3 assets that were held by the Company at September 30, 2010, the
unrealized loss for the three months ended September 30, 2010 was $205,000,
which is recognized in other comprehensive income in the consolidated statements
of financial condition. The Company did not have any sales or purchases of Level
3 available for sale securities during the period.




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




The
Company owns pooled Trust Preferred Securities (“TRUPs”) with a fair value of
$3,376,000 as of September 30, 2010. Trading of these types of securities has
increased recently but is primarily conducted on a distress sale or forced
liquidation basis. As a result, the Company measures the fair values of these
assets using Level 3 inputs, specifically discounted cash flow
projections.




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.




15




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




Balance
      at
                September
      30,2010
              
              
              Quoted
      Prices inActiveMarkets forIdenticalAssets
                (Level
      1)
              
              
              SignificantOtherObservable
      Inputs (Level 2)
              
              
              SignificantUnobservableInputs
      (Level 3)
              
              
              Total
      Losses
                for
      the three
                months
      ended
                Sept.
      30, 2010
              
              
              Total
      Losses
                for
      the nine
                months
      ended
                Sept.
      30, 2010Impaired
      loans
              
              $
              89,102
              
              
              $
              -
              
              
              $
              -
              
              
              $
              89,102
              
              
              $
              10,744
              
              
              $
              16,731Other
      Real Estate Owned
              
              $
              18,878
              
              
              $
              -
              
              
              $
              -
              
              
              $
              18,878
              
              
              $
              1,076
              
              
              $
              3,066




Balance
      at
                September
      30,2009
              
              
              QuotedPrices
      in
                ActiveMarkets
      for
                IdenticalAssets
                (Level
      1)
              
              
              SignificantOther
                ObservableInputs(Level
      2)
              
              
              Significant
                Unobservable
      Inputs(Level 3)
              
              
              Total
      Losses
                for
      the three
                months
      ended
                Sept.
      30, 2009
              
              
              Total
      Losses
                for
      the nine
                months
      ended
                Sept.
      30, 2009Impaired
      loans
              
              $
              66,550
              
              
              $
              -
              
              
              $
              -
              
              
              $
              66,550
              
              
              $
              3,799
              
              
              $
              10,447Other
      Real Estate Owned
              
              $
              19,416
              
              
              $
              -
              
              
              $
              -
              
              
              $
              19,416
              
              
              $
              1,927
              
              
              $
              7,957




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.




9.
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
      AmountSeptember
      30,
              
              
              December
      31,2010
              
              
              2009Commitments
      to extend credit:Unused
      portion of commercial lines of credit
              
              $
              60,213
              
              
              $
              64,096Unused
      portion of credit card lines of credit
              
              
              3,036
              
              
              
              4,286Unused
      portion of home equity lines of credit
              
              
              15,904
              
              
              
              16,034Standby
      letters of credit and financial guarantees written
              
              
              4,753
              
              
              
              5,008All
      other off-balance sheet commitments
              
              
              -
              
              
              
              2,986




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.




16




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.




Other off
balance sheet commitments consisted of commitments to fund loans to
municipalities of $2,986,000 as of December 31, 2009.




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 subsidiary,
Monroe Bank & Trust (“the Bank”). The Bank is a commercial bank with two
wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial
Services. MBT Credit Company, Inc. conducts lending operations for the Bank and
MB&T Financial Services is an insurance agency which sells insurance
policies to the Bank. The Bank operates 18 branch offices in Monroe County,
Michigan and 7 offices in Wayne County, Michigan. The Bank’s primary source of
income is interest income on its loans and investments and its primary expense
is interest expense on its deposits and borrowings.





The
national economic recovery is continuing slowly, and conditions in southeast
Michigan have stabilized. Local unemployment rates remain higher than the
national average and commercial and residential development property values are
still declining slightly while residential property values have shown some
improvement. The stability in each of these indicators that began in the second
half of 2009 continued through the third quarter of 2010. Our total problem
assets, which include non performing loans, other real estate owned, non accrual
investments, and performing loans that are internally classified as potential
problems, decreased $2.1 million, or 1.4% during the third quarter of 2010, the
second consecutive quarterly decrease, allowing us to decrease our Allowance for
Loan and Lease Losses (ALLL) from $24.1 million to $20.7 million. The loan
portfolio decreased $21.7 million during the quarter, so the ALLL as a percent
of loans only decreased from 2.97% at June 30, 2010 to 2.64% at September 30,
2010. Although local property values and the unemployment rate have improved
slightly over the past five quarters, we do not anticipate a significant
recovery in our local markets in 2010. We will continue to focus our efforts on
improving asset quality, maintaining liquidity, strengthening capital, and
controlling expenses.





Net
Interest Income decreased $1,095,000 compared to the third quarter of 2009 even
though the net interest margin increased from 3.24% to 3.32% as the average
earning assets decreased $182.6 million, or 13.7%. The provision for loan losses
increased from $6.8 million in the third quarter of 2009 to $7.5 million in
2010. Recent stability in the local economic conditions and loan quality, and
the decrease in the size of the loan portfolio, decreased the amount of ALLL
required. As a result, we were able to record a provision that was less than the
net charge offs for the quarter. Non interest income increased $822,000 compared
to last year, primarily due to an increase in earnings on Bank Owned Life
Insurance (BOLI) policies. Origination fees on mortgage loans sold, ATM and
debit card fees, and rental income from Other Real Estate Owned (OREO) all
increased compared to 2009. Our ongoing efforts to control costs continue to
produce results, and our non interest expenses, excluding OREO costs and FDIC
deposit insurance assessments decreased $429,000, or 5.1% compared to the third
quarter of 2009. We expect credit related expenses, including the costs of
carrying a high level of Other Real Estate Owned (OREO), to remain high, but we
should continue to see meaningful expense improvement in most other
areas.




17




In May,
2009 the Bank agreed to an informal memorandum of understanding with its
regulators to establish, among other things, reporting regularly to the
regulators about our operations, financial condition, and efforts to mitigate
risks.  As a part of this informal program the Bank undertook certain
actions to improve the Bank's credit administration and developed a written plan
to attain a minimum Tier 1 Leverage Capital ratio of 8% that was approved by the
Company's Board and timely submitted to its regulatory agencies.  The
Bank has not achieved the capital target and on July 12, 2010 the Bank entered
into a formal regulatory agreement in the form of a Consent
Order.  While under the Consent Order, the Bank will be classified as
“adequately capitalized” even though its ratios remain above the “well
capitalized” minimums. The Bank’s Tier 1 Leverage Capital ratio decreased from
6.50% at June 30, 2010 to 6.42% at September 30, 2010. In addition to the net
loss, the decrease in this ratio in the third quarter was due to the increase in
the amount of the disallowance, solely for purposes of computation of the Bank’s
Tier 1 Leverage Capital ratio, of deferred tax assets from $1.8 million as of
June 30, 2010 to $3.2 million as of September 30, 2010. Bank capital regulations
limit the amount of deferred tax assets that banks may include in equity capital
when determining compliance with bank capital requirements. Although the
disallowance of $3.2 million in deferred tax assets adversely impacted our
regulatory capital ratios at September 30, 2010, we anticipate that we will be
able to utilize the deferred tax asset and did not increase the valuation
allowance for the deferred tax assets that we established in the fourth quarter
of 2009. The Bank does not expect to reach the Tier 1 Leverage Ratio and Total
Risk Based Capital ratio targets set forth in our Consent Order during 2010
without raising capital externally. This expectation could be impacted
positively or negatively due to current uncertainties, which include, but are
not limited to, recovery of, or increases in, the deferred tax asset valuation
allowance, changing economic conditions, asset quality, property values, and
potential increased impairment of investment securities.





Critical Accounting
Policies




The
Company’s Allowance for Loan Losses, Deferred Tax Asset Valuation Allowance,
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 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 Deferred Tax Asset Valuation Allowance, the Company prepares a
forecast of its earnings for the next four years. The projected earnings are
assigned a probability discount and multiplied by the Company’s marginal tax
rate to determine the amount of deferred tax assets that are expected to be
utilized. The valuation allowance is maintained at a level that makes the net
deferred tax asset equal to the amount expected to be utilized.




18





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


National
economic conditions began to recover in the second half of 2009. Local
unemployment and property values have stabilized; however, the economic
environment remains weak in southeast Michigan. Our nonperforming assets
decreased 8.8% during the quarter, from $113.4 million to $103.4 million, and
total problem assets decreased from $155.1 million to $153.0 million. Total
loans decreased due to low loan demand, payments received in the ordinary course
of business, and charge offs of existing loans. We continued to manage toward a
decreased use of high cost wholesale funding, which has helped improve our net
interest margin. While some lending opportunities exist, the economy is expected
to remain weak in our market area throughout the first half of 2011. The Company
expects low or slightly negative deposit growth and a significant reduction in
total assets in 2010, and intends to continue to focus efforts on improved
credit quality, capital management, and enterprise risk mitigation.





Since
December 31, 2009, total loans decreased $63.9 million (7.5%) due to the weak
loan demand. In the second quarter of 2010, the Bank used cash and the proceeds
from approximately $94 million in securities sales to fund the prepayment of
$115.0 million of Federal Home Loan Bank borrowings. These reductions in loans
and investments resulted in a decrease of $123.5 million (8.9%) in total assets
since the end of 2009. Total capital increased $2.3 million or 2.8%, resulting
from an increase of $1.2 million in common stock due to the sale of additional
stock, the decrease of $5.5 million in the accumulated other comprehensive loss
(AOCL) due to an increase in the value of our securities available for sale, and
the decrease of $4.4 million in retained earnings due to the year to date loss.
The increase in total capital and the decrease in total assets caused the
capital to assets ratio to increase from 5.91% at December 31, 2009 to 6.67% at
September 30, 2010.





The
amount of nonperforming assets (“NPAs”) decreased $6.3 million or 5.7% since
year end. NPAs include non performing loans, which decreased 7.6% from $86.1
million to $79.6 million, and Other Real Estate Owned and Other Assets (“OREO”),
which increased 1.1% from $18.8 million to $19.0 million. Total problem assets,
which includes all NPAs and performing loans that are internally classified as
substandard, decreased $3.0 million, or 1.9%. As of September 30, 2010, the
largest concentrations in the NPA category are commercial real estate investment
properties at approximately $19 million, residential mortgage loans at $16
million, and residential development loans at $14 million. The Company’s
Allowance for Loan and Lease Losses (“ALLL”) decreased $3.3 million since
December 31, 2009, resulting from an increase in our FAS 114 allocation from
$6.5 million to $9.5 million, and a decrease from $17.6 million to $11.2 million
in our FAS 5 general allocation due to the overall decrease in the size of the
loan portfolio and the amount of the portfolio that is subject to the FAS 5
allocation. The loss factors utilized in the general allocation include loss
averages for the most recent eight quarters and adjustments for various current
factors, such as recent delinquency trends and national and local economic
conditions. The ALLL is now 2.64% of loans, compared to 2.83% at December 31,
2009 and 2.11% at September 30, 2009. The ALLL is 26.06% of NPLs, compared to
27.94% at year end and 24.25% at September 30, 2009. In light of current
economic conditions, we believe that at this level the ALLL adequately estimates
the potential losses in the loan portfolio.




19





Deposit
funding remained stable throughout the first nine months of 2010. The total
deposit decrease of $9.3 million included a reduction of $15.5 million in the
amount of brokered certificates of deposit. The Company has been actively
reducing the amount of its total assets as part of its effort to strengthen its
capital position, and it has not been replacing its brokered CDs as they mature.
Due to its stable deposit funding, the Company has also been reducing its use of
non deposit funding sources, and its borrowings from the Federal Home Loan Bank
of Indianapolis decreased $115.0 million, or 50.3% during the first nine month
of 2010.





Results of Operations –
Third Quarter 2010 vs. Third Quarter 2009


Net
Interest Income - A comparison of the income statements for the three months
ended September 30, 2009 and 2010 shows a decrease of $1,095,000, or 10.4%, in
Net Interest Income. Interest income on loans decreased $1.6 million or 12.4% as
the average loans outstanding decreased $98.5 million and the average yield on
loans decreased from 5.83% to 5.74%. The interest income on investments, fed
funds sold, and interest bearing balances due from banks decreased $2.2 million
as the average amount of investments, fed funds sold, and interest bearing
balances due from banks decreased $84.0 million and the yield decreased from
4.05% to 2.51%. An improvement in the term structure of interest rates, a
decrease in the overall level of interest rates, and the maturity and prepayment
of some high cost borrowings and brokered certificates of deposit allowed
funding costs to decrease faster than asset yields. The interest expense on
deposits decreased $895,000 or 21.4% as the average deposits decreased $26.6
million and the average cost of those deposits decreased from 1.57% to 1.27%.
The cost of borrowed funds decreased $1.9 million as the average amount of
borrowed funds decreased $133.1 million and the average cost of the borrowings
decreased from 4.23% to 3.01%.





Provision
for Loan Losses - The Provision for Loan Losses increased from $6.8 million in
the third quarter of 2009 to $7.5 million in the third quarter of 2010. Net
charge offs were $10.7 million during the third quarter of 2010, compared to
$12.1 million in the third quarter of 2009. 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 the stabilization of economic conditions, especially local real estate
values, we were able to maintain an adequate ALLL while recording a provision
expense that was less the net charge offs in the third quarter of 2010. The ALLL
is 2.64% of loans as of September 30, 2010, 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 $822,000, or 23.1% compared to the third
quarter of 2009. Service charges and other fees decreased $103,000, or 6.8%,
primarily due to a decrease in overdraft fees on checking accounts. In the third
quarter of 2009, the Bank recognized an Other than Temporary Impairment charge
of $4.6 million on its holdings of pooled trust preferred collateralized debt
obligations. This loss was nearly offset by $4.4 million in gains on the sale of
federal agency debt and mortgage backed securities. These sales were conducted
in a portfolio restructuring that reduced the risk weighting of the Bank’s
assets by selling 20% risk weighted securities issued by FNMA and FHLMC and
reinvesting the proceeds in GNMA securities at a 0% risk weight. Mortgage loan
activity increased in the third quarter of 2010, and the origination fees on
mortgage loans sold increased $70,000, or 58.8%. Bank Owned Life Insurance
income increased $324,000 in the third quarter of 2010 compared to the third
quarter of 2009 due to higher yields on the life insurance policies and because
a change in the death benefit obligation calculation increased the amount of
cash surrender value increase that the Bank could recognize as
income.  Other non interest income increased $161,000 due to higher
rental income on foreclosed properties and increased fees from ATM and debit
card usage.




20





Other
Expenses – Total non interest expenses decreased $714,000 or 6.3% compared to
the third quarter of 2009. Most expense categories were flat or decreased due to
cost containment initiatives implemented throughout the last year. Salaries and
Employee Benefits decreased $405,000, or 7.9%, due to a decrease in staff,
elimination of the 401(k) matching contribution and the elimination of the
incentive pay accrual. Occupancy expense decreased $118,000 due to lower
maintenance costs mainly due to a reduction in the use of outside janitorial
services. Professional fees increased $130,000 primarily due to increases in
legal and other professional fees paid for collection activities. Losses on
Other Real Estate Owned (OREO) properties decreased $851,000 due to larger
writedowns of foreclosed property values in 2009. The OREO losses of $1.1
million in the third quarter of 2010 included writedowns of $299,000 on
properties sold at an auction on September 30. The closings of these sales will
result in a reduction of $1.2 million in OREO in the fourth quarter of 2010.
FDIC deposit insurance premium expense increased $401,000 due to an increase in
our assessment rate that was effective in the second quarter of 2010. This
expense is expected to go down to approximately $850,000 in the fourth quarter
of 2010.





As a
result of the above activity, the Loss Before Income Taxes increased $0.2
million from a loss of $4.1 million in the third quarter of 2009 to a loss of
$4.3 million in the third quarter of 2010. An income tax benefit of $1.8 million
was recorded in the third quarter of 2009, but the income tax benefit of $1.8
million for the third quarter of 2010 was not recorded due to the uncertainty of
our expected ability to utilize our existing deferred tax assets. Our third
quarter net loss of $4.3 million is an increase of $2.0 million from the loss of
$2.3 million in the third quarter of 2009.





Results of Operations – Nine
Months Ended September 30, 2010 vs. September 30, 2009


Net
Interest Income - A comparison of the income statements for the nine months
ended September 30, 2009 and 2010 shows a decrease of $2.9 million, or 9.4%, in
Net Interest Income. Interest income on loans decreased $4.8 million or 12.0% as
the average loans outstanding decreased $99.7 million and the average yield on
loans decreased from 5.83% to 5.75%. The interest income on investments, fed
funds sold, and interest bearing balances due from banks decreased $6.1 million
as the average amount of investments, fed funds sold, and interest bearing
balances due from banks decreased $58.8 million and the yield decreased from
4.38% to 2.93%. An improvement in the term structure of interest rates, a
decrease in the overall level of interest rates, and the maturity and prepayment
of some high cost borrowings and brokered certificates of deposit allowed
funding costs to decrease faster than asset yields. The interest expense on
deposits decreased $4.3 million or 30.2% as the average deposits decreased $46.4
million and the average cost of those deposits decreased from 1.79% to 1.30%.
The cost of borrowed funds decreased $3.7 million as the average amount of
borrowed funds decreased $80.0 million and the average cost of the borrowings
decreased from 4.37% to 3.67%.





Provision
for Loan Losses - The Provision for Loan Losses decreased from $19.0 million in
the first nine months of 2009 to $13.4 million in the first nine months of 2010
primarily due to stabilization of economic conditions, especially local real
estate values. Net charge offs were $16.7 million during the first nine months
of 2010, compared to $19.0 million in the first nine months of 2009. The
provision was less than the net charge offs for the first nine months of 2010 as
the Bank ALLL requirement decreased due to improving loan quality and decreasing
portfolio size. In the current environment we believe that we can maintain an
adequate ALLL with a provision expense slightly less than the net charge
offs.




21





Other
Income – Non interest income increased $4.7 million, or 44.9% compared to the
first nine months of 2009. Wealth Management Group income increased $283,000, or
10.3%. The increase in Wealth Management income was primarily due to increased
market values of investments and the collection of non recurring fees. Service
charges and other fees decreased $319,000, or 7.4%, primarily due to a decrease
in overdraft fees on checking accounts. Gains on sales of investment securities
decreased $1.8 million, or 34.9% due to gains taken during a portfolio
restructuring in 2009. Net impairment losses decreased $5.3 million due to OTTI
charges of that amount recorded in 2009. Bank Owned Life Insurance income
increased $498,000 in the first nine months of 2010 compared to the first nine
months of 2009 due to higher yields on the policies and a change in the death
benefit obligation calculation that increased the amount of cash surrender value
increase that could be recorded as income. Other non interest income increased
$582,000 due to higher rental income on foreclosed properties and increased fees
from ATM and debit card usage.





Other
Expenses – Total non interest expenses decreased $3.8 million or 9.9% compared
to the first nine months of 2009. Salaries and Employee Benefits decreased $1.5
million, or 9.5%, due to a decrease in staff, elimination of the 401(k) matching
contribution in the second quarter of 2010, and the elimination of the incentive
pay accrual. Occupancy expense decreased $251,000, or 10.3% due to lower
maintenance costs. Professional fees increased $251,000, or 19.5% due to higher
collection related legal fees. Collection expense decreased $422,000 primarily
due to a large expense in 2009 to secure our lien on a property that
collateralized a loan. Losses on Other Real Estate Owned (OREO) properties
decreased $4.9 million due to significant writedowns in 2009 due to the rapid
decline in property values and losses from a large auction of foreclosed
properties in the second quarter of 2009. Other real estate expenses increased
$751,000 due to increased property tax, maintenance, and insurance costs on
properties held in OREO. In 2010 the Bank incurred a prepayment penalty of $2.5
million to prepay $115.0 million in borrowings from the Federal Home Loan Bank
of Indianapolis.





As a
result of the above activity, the Loss Before Income Taxes decreased $11,180,000
from a loss of $15,542,000 in the first nine months of 2009 to a loss of
$4,362,000 in the first nine months of 2010. An income tax benefit of $6.5
million was recorded in the first nine months of 2009, but the income tax
benefit of $2.5 million for the first nine months of 2010 was not recorded due
to the uncertainty of our expected ability to utilize our existing deferred tax
assets. Our net loss of $4.4 million for the first nine months of 2010 is an
improvement of $4,703,000 from the loss of $9,065,000 in the first nine months
of 2009.





Cash
Flows




Cash
flows provided by operating activities increased from $0.7 million in the first
nine months of 2009 to $10.7 million in the first nine months of 2010 primarily
due to the smaller loss and the larger decrease in interest receivable and other
assets due to the lower interest rates and smaller loan portfolio, partially
offset by smaller non cash charges for the provision for loan losses and OTTI of
investment securities. Cash flows provided by investing activities decreased
from $127.8 million in the first nine months of 2009 to $94.1 million in the
first nine months of 2010 primarily due to a decrease in the sales, maturities,
and redemptions of investment securities. The decrease in the sales of
investment securities was due to the sales of federal agency debt and mortgage
backed securities in 2009 related to the restructuring of the portfolio in order
to reduce the risk weighted assets. The amount of cash used for financing
activities increased from $108.1 million in the first nine months of 2009 to
$123.1 million in the first nine months of 2010 primarily due to the repayment
of FHLB borrowings in 2010. Also, dividends paid decreased from $1.8 million in
the first nine months of 2009 to zero in the first nine months of 2010 as the
dividend was eliminated in the third quarter of 2009.




22





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, Repurchase Agreements with money center banks that allow us
to pledge securities as collateral for borrowings and secondary credit at the
Federal Reserve Discount Window, which allows us to pledge loans and investments
as collateral. As of September 30, 2010, the Bank utilized $113.5 million of its
authorized limit of $265 million with the Federal Home Loan Bank of
Indianapolis, none of its $10 million overdraft line of credit with the Federal
Home Loan Bank of Indianapolis, and none of its $25 million of federal funds
line with a correspondent bank.





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 2010 the Company was in compliance with its Funds
Management Policy regarding liquidity and capital.





Total
stockholders’ equity of the Company was $84.1 million at September 30, 2010 and
$81.8 million at December 31, 2009. The ratio of equity to assets was 6.67% at
September 30, 2010 and 5.91% at December 31, 2009. 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 6% of Risk Weighted Assets, and
the Leverage Capital Ratio is at least 5%.





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





Actual
              
              
              Minimum
      to Qualify as
                Well
      CapitalizedAmount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of September 30, 2010:Total
      Capital to Risk-Weighted AssetsConsolidated
              
              $
              93,858
              
              
              
              10.41
              %
              
              $
              90,202
              
              
              
              10
              %Monroe
      Bank & Trust
              
              
              92,511
              
              
              
              10.26
              %
              
              
              90,132
              
              
              
              10
              %Tier
      1 Capital to Risk-Weighted AssetsConsolidated
              
              
              82,462
              
              
              
              9.14
              %
              
              
              54,121
              
              
              
              6
              %Monroe
      Bank & Trust
              
              
              81,058
              
              
              
              8.99
              %
              
              
              54,079
              
              
              
              6
              %Tier
      1 Capital to Average AssetsConsolidated
              
              
              82,462
              
              
              
              6.52
              %
              
              
              63,190
              
              
              
              5
              %Monroe
      Bank & Trust
              
              
              81,058
              
              
              
              6.42
              %
              
              
              63,177
              
              
              
              5
              %




23




Actual
              
              
              Minimum
      to Qualify as
                Well
      CapitalizedAmount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2009:Total
      Capital to Risk-Weighted AssetsConsolidated
              
              $
              101,158
              
              
              
              10.21
              %
              
              $
              99,065
              
              
              
              10
              %Monroe
      Bank & Trust
              
              
              100,329
              
              
              
              10.14
              %
              
              
              98,984
              
              
              
              10
              %Tier
      1 Capital to Risk-Weighted AssetsConsolidated
              
              
              88,627
              
              
              
              8.95
              %
              
              
              59,439
              
              
              
              6
              %Monroe
      Bank & Trust
              
              
              87,775
              
              
              
              8.87
              %
              
              
              59,390
              
              
              
              6
              %Tier
      1 Capital to Average AssetsConsolidated
              
              
              88,627
              
              
              
              6.27
              %
              
              
              70,681
              
              
              
              5
              %Monroe
      Bank & Trust
              
              
              87,775
              
              
              
              6.21
              %
              
              
              70,643
              
              
              
              5
              %


At
December 31, 2009, the Bank was in compliance with the capital guidelines and
qualified as “well capitalized” under regulatory standards. On July 12, 2010,
the Bank entered into a Consent Order with its state and federal regulators.
While the Bank is under the Consent Order, it is classified as “adequately
capitalized” even though its ratios meet the “well capitalized”
guidelines.





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 monthly and it
has not changed significantly since year-end 2009.





Forward-Looking
Statements




Certain
statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A 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.




24





Each
month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank’s net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of gradual increases
or decreases of 100, 200, and 300 basis points in the prime rate. 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. At the end of 2009, the estimated variability of the net interest
income exceeded the Bank’s established policy limits for the minus 200 and minus
300 basis point rate scenarios. At the end of the first nine months of 2010, the
estimated variability of the net interest income exceeded the Bank’s established
policy limit for the minus 200 and minus 300 basis point rate scenario. However,
because current interest rates are at historically low levels, it is not
probable that rates would decrease 200 basis points, and the ALCO determined
that no corrective action is required.





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 month. 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 or minus 100, 200, and 300 basis points in
interest rates. The discount rates used to determine the present values of the
loans and deposits, as well as the prepayment rates for the loans, are based on
Management’s expectations of the effect of the rate changes on the market for
loans and deposits. In addition, each quarter, the Bank conducts additional
analyses that utilize other rate scenarios, such as larger shifts in rates and
changes in the shape of the yield curve, to assess the Bank’s exposure to
interest rate risk in stress scenarios.





The
Bank’s interest rate risk, as measured by the net interest income and economic
value of equity simulations, has not changed significantly from December 31,
2009.





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, 2010, 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, 2010, 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, 2010, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.




25





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




The
Company disclosed as a risk factor in its Report on Form 10-K for the fiscal
year ended December 31, 2009 that it was operating under a Memorandum of
Understanding with its governmental regulators and may be subject to further
enforcement actions. On July 13, 2010, the Company reported on From 8-K that it
entered into a stipulation and consent to the issuance of a Consent Order with
the Federal Deposit Insurance Corporation (FDIC) and the Office of Financial and
Insurance Regulation (OFIR) of the state of Michigan. The Consent Order, which
was filed as an exhibit to the Form 8-K filed by the Company, lowers the Bank’s
regulatory capital classification to “Adequately Capitalized” as defined by the
federal banking regulatory agencies. As an “Adequately Capitalized” institution,
the Bank may not issue or renew brokered certificates of deposit without a
waiver from the FDIC. This increases the risk that the Bank may not be able to
obtain needed liquidity.





Except as
otherwise described in this item, there have been no material changes from the
risk factors previously disclosed in Part I Item 1A of the Company’s annual
report on Form 10-K for its fiscal year ended December 31, 2009.





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




On
September 8, 2010 the Company commenced a private placement offering of up to
2,500,000 shares of its common stock, without par value. The shares of common
stock being offered pursuant to the private placement have not been, and shall
not be, registered under the Securities Act of 1933 (the “Act”) in reliance upon
the exemption from registration provided by Section 4(2) of the Act and Rule 506
of SEC Regulation D.





During
the quarterly period ended September 30, 2010, the Company had sold 673,918
shares of common stock pursuant to the private placement for the aggregate cash
consideration of $928,834.20. The Company plans to use the proceeds of the
private placement to increase the capital of the Bank.





Item
3. Defaults Upon Senior Securities




None.





Item
4. Other Information




No
matters to be reported.




26





Item
5. Exhibits




The
following exhibits are filed as a part of this report:




3.1
              
              Restated
      Articles of Incorporation of MBT Financial Corp. Previously filed as
      Exhibit 3.1 to MBT Financial Corp.’s Form 10-K for its fiscal year ended
      December 31, 2000.3.2
              
              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,
      2008.10.0
              
              Consent
      Order dated July 12, 2010 by and among Monroe Bank & Trust, the
      Federal Deposit Insurance Corporation, and the Michigan Office of
      Financial and Insurance Regulation (incorporated by reference to the
      Current Report on Form 8-K filed by the Company with the SEC on July 13,
      2010).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.




27




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
      15, 2010
            By:
            /s/ H.
      Douglas ChaffinDate
            
            H.
      Douglas ChaffinPresident
      &Chief
      Executive OfficerNovember
      15, 2010
            By:
            /s/
      John L. SkibskiDate
            
            John
      L. SkibskiExecutive
      Vice President and Chief
      Financial Officer




28




Exhibit
Index





Exhibit Number
            
            Description of Exhibits31.1
            
            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.




29