UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 þ
                Quarterly report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934
                  For
      the quarterly period ended June 30,
2010
 
 Or
 
  ̈
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
 Commission
File Number: 000-30973
 
 MBT
FINANCIAL CORP.
 (Exact
name of registrant as specified in its charter)
 
 Michigan
                
                38-3516922(State
      or other jurisdiction of
                  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 þ  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  ̈
                Accelerated
      Filer  ̈Non-accelerated
      filer  ̈
                Smaller
      reporting company þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈
No  þ
 
 As of
August 5, 2010, there were 16,231,357 shares of the Company’s Common Stock
outstanding.
 
  
  Part
I Financial Information
 Item
1. Financial Statements
 MBT
FINANCIAL CORP.
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30, 2010Dollars in thousands
                  
                  (Unaudited)
                  
                  
                  December 31, 2009ASSETSCash
      and Cash EquivalentsCash
      and due from banksNon-interest
      bearing
                  
                  $
                  17,341
                  
                  
                  $
                  18,448Interest
      bearing
                  
                  
                  61,267
                  
                  
                  
                  51,298Total
      cash and cash equivalents
                  
                  
                  78,608
                  
                  
                  
                  69,746Securities
      - Held to Maturity
                  
                  
                  27,229
                  
                  
                  
                  36,433Securities
      - Available for Sale
                  
                  
                  234,750
                  
                  
                  
                  307,346Federal
      Home Loan Bank stock - at cost
                  
                  
                  13,086
                  
                  
                  
                  13,086Loans
      held for sale
                  
                  
                  699
                  
                  
                  
                  931Loans
      - Net
                  
                  
                  783,063
                  
                  
                  
                  824,916Accrued
      interest receivable and other assets
                  
                  
                  45,261
                  
                  
                  
                  50,580Bank
      Owned Life Insurance
                  
                  
                  49,558
                  
                  
                  
                  47,953Premises
      and Equipment - Net
                  
                  
                  31,424
                  
                  
                  
                  32,378Total
      assets
                  
                  $
                  1,263,678
                  
                  
                  $
                  1,383,369LIABILITIESDeposits:Non-interest
      bearing
                  
                  $
                  144,864
                  
                  
                  $
                  135,038Interest-bearing
                  
                  
                  878,793
                  
                  
                  
                  896,753Total
      deposits
                  
                  
                  1,023,657
                  
                  
                  
                  1,031,791Federal
      Home Loan Bank advances
                  
                  
                  113,500
                  
                  
                  
                  228,500Repurchase
      agreements
                  
                  
                  30,000
                  
                  
                  
                  30,000Interest
      payable and other liabilities
                  
                  
                  10,320
                  
                  
                  
                  11,314Total
      liabilities
                  
                  
                  1,177,477
                  
                  
                  
                  1,301,605STOCKHOLDERS'
      EQUITYCommon
      stock (no par value; 30,000,000 shares authorized, 16,228,029 and
      16,210,110 shares issued and outstanding)
                  
                  
                  664
                  
                  
                  
                  593Retained
      Earnings
                  
                  
                  88,372
                  
                  
                  
                  88,396Accumulated
      other comprehensive loss
                  
                  
                  (2,835
                  )
                  
                  
                  (7,225
                  )Total
      stockholders' equity
                  
                  
                  86,201
                  
                  
                  
                  81,764Total
      liabilities and stockholders' equity
                  
                  $
                  1,263,678
                  
                  
                  $
                  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 Ended June 30,
                      
                      
                      Six
      Months Ended June 30,Dollars in thousands, except per share
      data
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Interest
      IncomeInterest
      and fees on loans
                      
                      $
                      11,642
                      
                      
                      $
                      13,165
                      
                      
                      $
                      23,591
                      
                      
                      $
                      26,765Interest
      on investment securities-Tax-exempt
                      
                      
                      476
                      
                      
                      
                      865
                      
                      
                      
                      1,114
                      
                      
                      
                      1,742Taxable
                      
                      
                      2,353
                      
                      
                      
                      3,828
                      
                      
                      
                      5,042
                      
                      
                      
                      8,328Interest
      on balances due from banks
                      
                      
                      28
                      
                      
                      
                      12
                      
                      
                      
                      66
                      
                      
                      
                      27Total
      interest income
                      
                      
                      14,499
                      
                      
                      
                      17,870
                      
                      
                      
                      29,813
                      
                      
                      
                      36,862Interest
      ExpenseInterest
      on deposits
                      
                      
                      3,336
                      
                      
                      
                      4,582
                      
                      
                      
                      6,689
                      
                      
                      
                      10,106Interest
      on borrowed funds
                      
                      
                      1,975
                      
                      
                      
                      3,103
                      
                      
                      
                      4,531
                      
                      
                      
                      6,358Total
      interest expense
                      
                      
                      5,311
                      
                      
                      
                      7,685
                      
                      
                      
                      11,220
                      
                      
                      
                      16,464Net
      Interest Income
                      
                      
                      9,188
                      
                      
                      
                      10,185
                      
                      
                      
                      18,593
                      
                      
                      
                      20,398Provision
      For Loan Losses
                      
                      
                      3,750
                      
                      
                      
                      8,000
                      
                      
                      
                      5,950
                      
                      
                      
                      12,200Net
      Interest Income AfterProvision
      For Loan Losses
                      
                      
                      5,438
                      
                      
                      
                      2,185
                      
                      
                      
                      12,643
                      
                      
                      
                      8,198Other
      IncomeIncome
      from wealth management services
                      
                      
                      1,141
                      
                      
                      
                      906
                      
                      
                      
                      2,103
                      
                      
                      
                      1,820Service
      charges and other fees
                      
                      
                      1,301
                      
                      
                      
                      1,432
                      
                      
                      
                      2,572
                      
                      
                      
                      2,788Net
      gain on sales of securities
                      
                      
                      2,791
                      
                      
                      
                      50
                      
                      
                      
                      3,086
                      
                      
                      
                      656Other
      Than Temporary Impairments on securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (6,400
                      )Portion
      of OTTI loss recognized in othercomprehensive
      income (before taxes)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,631Net
      impairment losses
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (769
                      )Origination
      fees on mortgage loans sold
                      
                      
                      137
                      
                      
                      
                      122
                      
                      
                      
                      269
                      
                      
                      
                      231Bank
      owned life insurance income
                      
                      
                      450
                      
                      
                      
                      296
                      
                      
                      
                      839
                      
                      
                      
                      665Other
                      
                      
                      999
                      
                      
                      
                      824
                      
                      
                      
                      1,991
                      
                      
                      
                      1,570Total
      other income
                      
                      
                      6,819
                      
                      
                      
                      3,630
                      
                      
                      
                      10,860
                      
                      
                      
                      6,961Other
      ExpensesSalaries
      and employee benefits
                      
                      
                      4,652
                      
                      
                      
                      5,400
                      
                      
                      
                      9,721
                      
                      
                      
                      10,834Occupancy
      expense
                      
                      
                      703
                      
                      
                      
                      727
                      
                      
                      
                      1,508
                      
                      
                      
                      1,641Equipment
      expense
                      
                      
                      797
                      
                      
                      
                      771
                      
                      
                      
                      1,637
                      
                      
                      
                      1,619Marketing
      expense
                      
                      
                      256
                      
                      
                      
                      279
                      
                      
                      
                      504
                      
                      
                      
                      521Professional
      fees
                      
                      
                      508
                      
                      
                      
                      409
                      
                      
                      
                      988
                      
                      
                      
                      867Collection
      expenses
                      
                      
                      102
                      
                      
                      
                      101
                      
                      
                      
                      196
                      
                      
                      
                      564Net
      loss on other real estate owned
                      
                      
                      954
                      
                      
                      
                      4,174
                      
                      
                      
                      1,990
                      
                      
                      
                      6,030Other
      real estate owned expenses
                      
                      
                      601
                      
                      
                      
                      467
                      
                      
                      
                      1,352
                      
                      
                      
                      766FDIC
      Deposit Insurance Assessment
                      
                      
                      611
                      
                      
                      
                      1,250
                      
                      
                      
                      1,242
                      
                      
                      
                      1,686Debt
      prepayment penalties
                      
                      
                      2,492
                      
                      
                      
                      -
                      
                      
                      
                      2,492
                      
                      
                      
                      -Other
                      
                      
                      953
                      
                      
                      
                      1,011
                      
                      
                      
                      1,897
                      
                      
                      
                      2,058Total
      other expenses
                      
                      
                      12,629
                      
                      
                      
                      14,589
                      
                      
                      
                      23,527
                      
                      
                      
                      26,586Loss
      Before Income Taxes
                      
                      
                      (372
                      )
                      
                      
                      (8,774
                      )
                      
                      
                      (24
                      )
                      
                      
                      (11,427
                      )Income
      Tax Benefit
                      
                      
                      -
                      
                      
                      
                      (3,401
                      )
                      
                      
                      -
                      
                      
                      
                      (4,687
                      )Net
      Loss
                      
                      $
                      (372
                      )
                      
                      $
                      (5,373
                      )
                      
                      $
                      (24
                      )
                      
                      $
                      (6,740
                      )Basic
      Loss Per Common Share
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.33
                      )
                      
                      $
                      -
                      
                      
                      $
                      (0.42
                      )Diluted
      Loss Per Common Share
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.33
                      )
                      
                      $
                      -
                      
                      
                      $
                      (0.42
                      )Common
      Stock Dividends Declared Per Share
                      
                      $
                      -
                      
                      
                      $
                      0.01
                      
                      
                      $
                      -
                      
                      
                      $
                      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 (17,919 shares)
                    
                    
                    34
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34Equity
      Compensation
                    
                    
                    37
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37Comprehensive
      income:Net
      loss
                    
                    
                    -
                    
                    
                    
                    (24
                    )
                    
                    
                    -
                    
                    
                    
                    (24
                    )Change
      in net unrealized gain on securities available for sale - Net of tax
      effect of $(3,389)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,294
                    
                    
                    
                    6,294Reclassification
      adjustment for gains included in net income - Net of tax effect of
      $1,080
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,006
                    )
                    
                    
                    (2,006
                    )Change
      in postretirement benefit obligationNet
      of tax effect of $(55)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    102
                    
                    
                    
                    102Total
      Comprehensive Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,366Balance
      - June 30, 2010
                    
                    $
                    664
                    
                    
                    $
                    88,372
                    
                    
                    $
                    (2,835
                    )
                    
                    $
                    86,201
 
 The
accompanying notes to consolidated financial statements are integral part of
these statements.
  -4-
  MBT
FINANCIAL CORP.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS - UNAUDITED
 
 Six
      Months Ended June 30,Dollars in thousands
                  
                  2010
                  
                  
                  2009Cash
      Flows from Operating ActivitiesNet
      Loss
                  
                  $
                  (24
                  )
                  
                  $
                  (6,740
                  )Adjustments
      to reconcile net loss to net cash from operating
activitiesProvision
      for loan losses
                  
                  
                  5,950
                  
                  
                  
                  12,200Depreciation
                  
                  
                  1,087
                  
                  
                  
                  1,135Increase
      in net deferred Federal income tax asset
                  
                  
                  -
                  
                  
                  
                  (4,302
                  )Net
      amortization of investment premium and discount
                  
                  
                  645
                  
                  
                  
                  107Writedowns
      of Other Real Estate Owned
                  
                  
                  1,814
                  
                  
                  
                  5,201Net
      decrease in interest payable and other liabilities
                  
                  
                  (837
                  )
                  
                  
                  (589
                  )Net
      increase in interest receivable and other assets
                  
                  
                  (2,828
                  )
                  
                  
                  (3,241
                  )Equity
      based compensation expense
                  
                  
                  45
                  
                  
                  
                  72Net
      gain on sale/settlement of securities
                  
                  
                  (3,086
                  )
                  
                  
                  (656
                  )Other
      Than Temporary Impairment of investment securities
                  
                  
                  -
                  
                  
                  
                  769Increase
      in cash surrender value of life insurance
                  
                  
                  (839
                  )
                  
                  
                  (665
                  )Net
      cash provided by operating activities
                  
                  $
                  1,927
                  
                  
                  $
                  3,291Cash
      Flows from Investing ActivitiesProceeds
      from maturities and redemptions of investment securities held to
      maturity
                  
                  $
                  10,646
                  
                  
                  $
                  8,105Proceeds
      from maturities and redemptions of investment securities available for
      sale
                  
                  
                  50,361
                  
                  
                  
                  100,201Proceeds
      from sales of investment securities held to maturity
                  
                  
                  150
                  
                  
                  
                  -Proceeds
      from sales of investment securities available for sale
                  
                  
                  128,449
                  
                  
                  
                  52,589Net
      decrease in loans
                  
                  
                  36,135
                  
                  
                  
                  24,523Proceeds
      from sales of other real estate owned
                  
                  
                  2,686
                  
                  
                  
                  3,226Proceeds
      from sales of other assets
                  
                  
                  1,286
                  
                  
                  
                  112Purchase
      of investment securities held to maturity
                  
                  
                  (1,582
                  )
                  
                  
                  (1,837
                  )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
                  
                  
                  (97,196
                  )
                  
                  
                  (104,310
                  )Purchase
      of bank premises and equipment
                  
                  
                  (133
                  )
                  
                  
                  (576
                  )Net
      cash provided by investing activities
                  
                  $
                  130,035
                  
                  
                  $
                  80,594Cash
      Flows from Financing ActivitiesNet
      decrease in deposits
                  
                  $
                  (8,134
                  )
                  
                  $
                  (96,599
                  )Repayment
      of Federal Home Loan Bank borrowings
                  
                  
                  (115,000
                  )
                  
                  
                  (13,000
                  )Proceeds
      from issuance of common stock
                  
                  
                  34
                  
                  
                  
                  103Dividends
      paid
                  
                  
                  -
                  
                  
                  
                  (1,615
                  )Net
      cash used for financing activities
                  
                  $
                  (123,100
                  )
                  
                  $
                  (111,111
                  )Net
      Decrease In Cash and Cash Equivalents
                  
                  $
                  8,862
                  
                  
                  $
                  (27,226
                  )Cash
      and Cash Equivalents at Beginning Of Period
                  
                  
                  69,746
                  
                  
                  
                  50,786Cash
      And Cash Equivalents At End Of Period
                  
                  $
                  78,608
                  
                  
                  $
                  23,560
 
 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.
  -6-
  FAIR
VALUE
 In
February 2007, the Financial Accounting Standards Board “FASB” issued “The Fair
Value Option for Financial Assets and Financial Liabilities” This permits
companies to elect on an instrument by instrument basis to fair value certain
financial assets and financial liabilities with changes in fair value recognized
in earnings as they occur. The election to fair value is generally irrevocable.
In April 2007, the Corporation elected early adoption as of January 1, 2007. The
Corporation did not select any financial assets or financial liabilities for
fair value measurement, but elected early adoption in order to be able to apply
the fair value option to financial assets and financial liabilities that may be
acquired prior to the effective date of the statements.
  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.
  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.
  -7-
  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.
  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.
  2.
EARNINGS PER SHARE
  The
calculations of net income (loss) per common share are as follows:
 
 For the three months ended June
      30,
                      
                      
                      For the six months ended June
      30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009BasicNet
      loss
                      
                      $
                      (372,000
                      )
                      
                      $
                      (5,373,000
                      )
                      
                      $
                      (24,000
                      )
                      
                      $
                      (6,740,000
                      )Net
      loss applicable to common stock
                      
                      $
                      (372,000
                      )
                      
                      $
                      (5,373,000
                      )
                      
                      $
                      (24,000
                      )
                      
                      $
                      (6,740,000
                      )Average
      common shares outstanding
                      
                      
                      16,225,327
                      
                      
                      
                      16,182,528
                      
                      
                      
                      16,220,777
                      
                      
                      
                      16,174,231Loss
      per common share - basic
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.33
                      )
                      
                      $
                      -
                      
                      
                      $
                      (0.42
                      )2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009DilutedNet
      loss
                      
                      $
                      (372,000
                      )
                      
                      $
                      (5,373,000
                      )
                      
                      $
                      (24,000
                      )
                      
                      $
                      (6,740,000
                      )Net
      loss applicable to common stock
                      
                      $
                      (372,000
                      )
                      
                      $
                      (5,373,000
                      )
                      
                      $
                      (24,000
                      )
                      
                      $
                      (6,740,000
                      )Average
      common shares outstanding
                      
                      
                      16,225,327
                      
                      
                      
                      16,182,528
                      
                      
                      
                      16,220,777
                      
                      
                      
                      16,174,231Stock
      option adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Average
      common shares outstanding - diluted
                      
                      
                      16,225,327
                      
                      
                      
                      16,182,528
                      
                      
                      
                      16,220,777
                      
                      
                      
                      16,174,231Loss
      per common share - diluted
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.33
                      )
                      
                      $
                      -
                      
                      
                      $
                      (0.42
                      )
 
 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
                    
                    
                    9,500
                    
                    
                    
                    17.69Options
      Outstanding, June 30, 2010
                    
                    
                    479,575
                    
                    
                    $
                    17.34Options
      Exercisable, June 30, 2010
                    
                    
                    479,575
                    
                    
                    $
                    17.34
 
 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:
 
 Weighted
      AverageShares
                      
                      
                      Exercise PriceSOSARs
      Outstanding, January 1, 2010
                      
                      
                      221,500
                      
                      
                      $
                      5.23Granted
                      
                      
                      16,000
                      
                      
                      
                      1.52Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      1,500
                      
                      
                      
                      3.03SOSARs
      Outstanding, June 30, 2010
                      
                      
                      236,000
                      
                      
                      $
                      4.99SOSARs
      Exercisable, June 30, 2010
                      
                      
                      124,182
                      
                      
                      $
                      5.64
 
 The total
expense for equity based compensation was $15,000 in the second quarter of 2010
and $40,000 in the second quarter of 2009. The total expense for equity based
compensation was $45,000 in the first six months of 2010 and $80,000 in the
first six 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):
  June
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009Residential
      real estate loans
                    
                    $
                    354,095
                    
                    
                    $
                    374,970Non-farm,
      non-residential real estate loans
                    
                    
                    338,272
                    
                    
                    
                    351,256Loans
      to finance agricultural production and other loans to
    farmers
                    
                    
                    9,508
                    
                    
                    
                    7,113Commercial
      and industrial loans
                    
                    
                    86,867
                    
                    
                    
                    93,786Loans
      to individuals for household, family, and other personal
      expenditures
                    
                    
                    18,702
                    
                    
                    
                    22,071All
      other loans (including overdrafts)
                    
                    
                    405
                    
                    
                    
                    574Total
      loans, gross
                    
                    
                    807,849
                    
                    
                    
                    849,770Less:
      Deferred loan fees
                    
                    
                    760
                    
                    
                    
                    791Total
      loans, net of deferred loan fees
                    
                    
                    807,089
                    
                    
                    
                    848,979Less:
      Allowance for loan losses
                    
                    
                    24,026
                    
                    
                    
                    24,063$
                    783,063
                    
                    
                    $
                    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):
  June
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009Nonaccrual
      loans
                        
                        $
                        65,066
                        
                        
                        $
                        56,992Loans
      90 days past due and still accruing
                        
                        
                        166
                        
                        
                        
                        20Restructured
      loans
                        
                        
                        25,058
                        
                        
                        
                        29,102Total
      nonperforming loans
                        
                        $
                        90,290
                        
                        
                        $
                        86,114Other
      real estate owned
                        
                        
                        18,242
                        
                        
                        
                        17,502Other
      assets
                        
                        
                        145
                        
                        
                        
                        1,330Nonperforming
      investment securities
                        
                        
                        4,740
                        
                        
                        
                        4,740Total
      nonperforming assets
                        
                        $
                        113,417
                        
                        
                        $
                        109,686Nonperforming
      assets to total assets
                        
                        
                        8.98
                        %
                        
                        
                        7.93
                        %Allowance
      for loan losses tononperforming loans
                        
                        
                        26.61
                        %
                        
                        
                        27.94
                        %
  5.
ALLOWANCE FOR LOAN LOSSES
 Activity
in the allowance for loan losses during the quarter and six months ended June 30
was as follows (000’s omitted):
 
 Quarter ended June 30,
                      
                      
                      Six months ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Balance
      beginning of period
                      
                      $
                      24,112
                      
                      
                      $
                      21,753
                      
                      
                      $
                      24,063
                      
                      
                      $
                      18,528Provision
      for loan losses
                      
                      
                      3,750
                      
                      
                      
                      8,000
                      
                      
                      
                      5,950
                      
                      
                      
                      12,200Loans
      charged off
                      
                      
                      (3,967
                      )
                      
                      
                      (6,334
                      )
                      
                      
                      (6,329
                      )
                      
                      
                      (7,909
                      )Recoveries
                      
                      
                      131
                      
                      
                      
                      456
                      
                      
                      
                      342
                      
                      
                      
                      1,056Balance
      end of period
                      
                      $
                      24,026
                      
                      
                      $
                      23,875
                      
                      
                      $
                      24,026
                      
                      
                      $
                      23,875
  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 June
30, 2010 and December 31, 2009 (000’s omitted):
  Held
      to MaturityJune
      30, 2010Gross
                  
                  
                  Gross
                  
                  
                  EstimatedAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  MarketCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueObligations
      of U.S. Government Agencies
                  
                  $
                  6
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6Obligations
      of States and Political Subdivisions
                  
                  
                  27,223
                  
                  
                  
                  296
                  
                  
                  
                  (292
                  )
                  
                  
                  27,227$
                  27,229
                  
                  
                  $
                  296
                  
                  
                  $
                  (292
                  )
                  
                  $
                  27,233
  Available
      for SaleJune
      30, 2010Gross
                        
                        
                        Gross
                        
                        
                        EstimatedAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        MarketCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueObligations
      of U.S. Government Agencies
                        
                        $
                        205,488
                        
                        
                        $
                        4,160
                        
                        
                        $
                        (89
                        )
                        
                        $
                        209,559Obligations
      of States and PoliticalSubdivisions
                        
                        
                        16,335
                        
                        
                        
                        117
                        
                        
                        
                        (55
                        )
                        
                        
                        16,397Trust
      Preferred CDO Securities
                        
                        
                        9,565
                        
                        
                        
                        -
                        
                        
                        
                        (5,983
                        )
                        
                        
                        3,582Corporate
      Debt Securities
                        
                        
                        2,885
                        
                        
                        
                        -
                        
                        
                        
                        (144
                        )
                        
                        
                        2,741Other
      Securities
                        
                        
                        2,553
                        
                        
                        
                        134
                        
                        
                        
                        (216
                        )
                        
                        
                        2,471$
                        236,826
                        
                        
                        $
                        4,411
                        
                        
                        $
                        (6,487
                        )
                        
                        $
                        234,750
 
 Held
      to MaturityDecember
      31, 2009Gross
                          
                          
                          Gross
                          
                          
                          EstimatedAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          MarketCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueObligations
      of U.S. Government Agencies
                          
                          $
                          6
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          6Obligations
      of States and Political Subdivisions
                          
                          
                          36,427
                          
                          
                          
                          336
                          
                          
                          
                          (352
                          )
                          
                          
                          36,411$
                          36,433
                          
                          
                          $
                          336
                          
                          
                          $
                          (352
                          )
                          
                          $
                          36,417Available
      for SaleDecember
      31, 2009Gross
                          
                          
                          Gross
                          
                          
                          EstimatedAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          MarketCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueObligations
      of U.S. Government Agencies
                          
                          $
                          256,483
                          
                          
                          $
                          602
                          
                          
                          $
                          (2,457
                          )
                          
                          $
                          254,628Obligations
      of States and Political Subdivisions
                          
                          
                          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
  -11-
  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 June 30, 2010 and December 31, 2009.
 
 June 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 States Government Agencies
                        
                        $
                        14,562
                        
                        
                        $
                        89
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        14,562
                        
                        
                        $
                        89Obligations
      of States and Political Subdivisions
                        
                        
                        5,354
                        
                        
                        
                        160
                        
                        
                        
                        4,308
                        
                        
                        
                        187
                        
                        
                        
                        9,662
                        
                        
                        
                        347Trust
      Preferred CDO Securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,685
                        
                        
                        
                        3,056
                        
                        
                        
                        1,685
                        
                        
                        
                        3,056Corporate
      Debt Securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,741
                        
                        
                        
                        144
                        
                        
                        
                        2,741
                        
                        
                        
                        144Equity
      Securities
                        
                        
                        324
                        
                        
                        
                        216
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        324
                        
                        
                        
                        216$
                        20,240
                        
                        
                        $
                        465
                        
                        
                        $
                        8,734
                        
                        
                        $
                        3,387
                        
                        
                        $
                        28,974
                        
                        
                        $
                        3,852
 
 December
      31, 2009Less 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 States Government Agencies
                      
                      $
                      170,584
                      
                      
                      $
                      2,457
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      170,584
                      
                      
                      $
                      2,457Obligations
      of States and Political 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 June 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  June 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 $1.897 million. The impairment of $2.927
is other impairment that was charged to OCI. Credit losses of $1.663 million
were charged to earnings in 2009.
 
 The
Corporate Debt Securities consist of senior unsecured debt issued by a regional
bank holding company. The market values for this security have declined over the
last two years due to larger credit spreads on financial sector debt. The
Company owns one bond which matures in January, 2017. The Company monitors the
financial condition of the issuer by reviewing financial statements and industry
analyst reports, and believes that the issuer will be able to fulfill the
obligations of this security. The unrealized loss on this investment security is
primarily the result of market treatment of financial sector investments and not
the result of the credit quality of the specific issuer of the security. 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 their amortized cost basis, which may be maturity, the company does
not consider this investment to be other than temporarily impaired at June 30,
2010.
  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 June 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.
  -13-
  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.
  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 June 30, 2010 and December
31, 2009 are as follows (000’s omitted):
  June 30, 2010
                          
                          
                          December 31, 2009Carrying
                          
                          
                          Estimated
                          
                          
                          Carrying
                          
                          
                          EstimatedValue
                          
                          
                          Fair Value
                          
                          
                          Value
                          
                          
                          Fair ValueFinancial
      Assets:Cash
      and due from banks
                          
                          $
                          78,608
                          
                          
                          $
                          78,608
                          
                          
                          $
                          69,746
                          
                          
                          $
                          69,746Securities
                          
                          
                          261,979
                          
                          
                          
                          261,983
                          
                          
                          
                          343,779
                          
                          
                          
                          343,763Federal
      Home Loan Bank Stock
                          
                          
                          13,086
                          
                          
                          
                          13,086
                          
                          
                          
                          13,086
                          
                          
                          
                          13,086Loans,
      net
                          
                          
                          783,762
                          
                          
                          
                          799,514
                          
                          
                          
                          825,847
                          
                          
                          
                          838,965Interest
      receivable and other assets
                          
                          
                          45,261
                          
                          
                          
                          45,261
                          
                          
                          
                          50,580
                          
                          
                          
                          50,580Bank
      Owned Life Insurance
                          
                          
                          49,558
                          
                          
                          
                          49,558
                          
                          
                          
                          47,953
                          
                          
                          
                          47,953Financial
      Liabilities:Demand,
      NOW, savings and money market savings deposits
                          
                          
                          623,217
                          
                          
                          
                          623,217
                          
                          
                          
                          630,065
                          
                          
                          
                          630,065Other
      time deposits
                          
                          
                          400,440
                          
                          
                          
                          406,840
                          
                          
                          
                          401,726
                          
                          
                          
                          408,516Borrowed
      fundsVariable
      Rate FHLB Advances
                          
                          
                          110,000
                          
                          
                          
                          116,247
                          
                          
                          
                          110,000
                          
                          
                          
                          116,938Fixed
      Rate FHLB Advances
                          
                          
                          3,500
                          
                          
                          
                          3,643
                          
                          
                          
                          3,500
                          
                          
                          
                          3,688Putable
      FHLB Advances
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          115,000
                          
                          
                          
                          119,700Repurchase
      Agreements
                          
                          
                          30,000
                          
                          
                          
                          34,250
                          
                          
                          
                          30,000
                          
                          
                          
                          34,896Interest
      payable and other liabilities
                          
                          
                          10,320
                          
                          
                          
                          10,320
                          
                          
                          
                          11,314
                          
                          
                          
                          11,314
  8. FAIR
VALUE MEASUREMENTS
  The
following tables present information about the Company’s assets measured at fair
value on a recurring basis at June 30, 2010, 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.
  -14-
  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.
  Assets
measured at fair value on a recurring basis are as follows (000’s
omitted):
  Investment Securities - Available for
      Sale
                      
                      June 30, 2010
                      
                      
                      December 31,2009Quoted
      Prices in Active Markets for Identical Assets (Level 1)
                      
                      $
                      214,447
                      
                      
                      $
                      264,224Significant
      Other Observable Inputs (Level 2)
                      
                      
                      16,721
                      
                      
                      
                      35,907Significant
      Unobservable Inputs (Level 3)
                      
                      
                      3,582
                      
                      
                      
                      7,215Balance
      at end of period
                      
                      $
                      234,750
                      
                      
                      $
                      307,346
  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
                  
                  
                  -
                  
                  
                  
                  (769
                  )Total
      unrealized gains (losses) included in other comprehensive
      income
                  
                  
                  287
                  
                  
                  
                  (5,367
                  )Net
      purchases, sales, calls and maturities
                  
                  
                  (3,920
                  )
                  
                  
                  -Net
      transfers in/out of Level 3
                  
                  
                  -
                  
                  
                  
                  -Balance
      at June 30
                  
                  $
                  3,582
                  
                  
                  $
                  13,610
  Of the
Level 3 assets that were held by the Company at June 30, 2010, the unrealized
gain for the three months ended June 30, 2010 was $137,000, 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
$3,582,000 as of June 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 atJune
                    30,
      2010
                  
                  
                  Quoted
      Prices in
                    Active
      Marketsfor
                    IdenticalAssets
                    (Level
      1)
                  
                  
                  SignificantOther
                    ObservableInputs
                    (Level
      2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
      (Level 3)
                  
                  
                  Total
      Lossesfor
                    the
      threemonths
                    endedJune
      30,
                    2010
                  
                  
                  Total
      Lossesfor
                    the
      sixmonths
                    endedJune
      30,
                    2009Impaired
      loans
                  
                  $
                  76,923
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  76,923
                  
                  
                  $
                  3,836
                  
                  
                  $
                  5,987Other
      Real Estate Owned
                  
                  $
                  18,242
                  
                  
                  $
                  -
                  
                  
                  $
                  18,242
                  
                  
                  $
                  -
                  
                  
                  $
                  954
                  
                  
                  $
                  1,990
 
 Balance
      at June
                    30,
      2009
                  
                  
                  Quoted
      Prices in
                    Active
      Markets for
                    Identical
      Assets
                    (Level
      1)
                  
                  
                  Significant
      Other
                    Observable
      Inputs
                    (Level
      2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
      (Level 3)
                  
                  
                  Total
      Losses for
                    the
      threemonths
                    endedJune
      30,
                    2009
                  
                  
                  Total
      Losses for
                    the
      six months
                    ended
      June 30,
                    2009Impaired
      loans
                  
                  $
                  53,574
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  53,574
                  
                  
                  $
                  3,162
                  
                  
                  $
                  6,670Other
      Real Estate Owned
                  
                  $
                  16,189
                  
                  
                  $
                  -
                  
                  
                  $
                  16,189
                  
                  
                  $
                  -
                  
                  
                  $
                  4,174
                  
                  
                  $
                  6,030
  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
      AmountJune
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009Commitments
      to extend credit:Unused
      portion of commercial lines of credit
                    
                    $
                    56,590
                    
                    
                    $
                    64,096Unused
      portion of credit card lines of credit
                    
                    
                    5,417
                    
                    
                    
                    4,286Unused
      portion of home equity lines of credit
                    
                    
                    16,025
                    
                    
                    
                    16,034Standby
      letters of credit and financial guarantees written
                    
                    
                    4,751
                    
                    
                    
                    5,008All
      other off-balance sheet commitments
                    
                    
                    14,946
                    
                    
                    
                    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 consist of commitments to fund loans to municipalities
of $3,096,000 as of June 30, 2010 and $2,986,000 as of December 31, 2009, and
commitments to purchase federal agency securities of $11,850,000 as of June 30,
2010.
  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 economy is slowly recovering, while conditions in southeast Michigan
remain weak, but stable. Local unemployment rates remain high and property
values remain low. However, the stability in each of these indicators that began
in the second half of 2009 continued through the second 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 $3.2 million, or 2.0% during the
second quarter of 2010, allowing us to maintain our Allowance for Loan and Lease
Losses (ALLL) at $24 million. The loan portfolio decreased $15.7 million during
the quarter, so the ALLL as a percent of loans increased from 2.93% at March 31,
2010 to 2.97% at June 30, 2010. Although local property values and the
unemployment rate have improved slightly over the past four 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 $997,000 compared to the second quarter of 2009 as the
net interest margin decreased from 3.14% to 3.13% and the average earning assets
decreased $141.0 million, or 10.5%. The provision for loan losses decreased from
$8.0 million in the second quarter of 2009 to $3.75 million in 2010 as the
recent stability in the local economic conditions lessened the need to build the
ALLL. Non interest income increased $3.2 million compared to last year,
primarily due to an increase of $2.7 million in gains on the sale of securities.
All other sources of non interest income increased except for overdraft fees,
which decreased due to a significant decrease in overdraft activity. Our ongoing
efforts to control costs continue to produce results, and our non interest
expenses decreased $2.0 million, or 13.4% compared to the second 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-
  Our
capital ratios remain above the regulatory minimums required to be considered
“well capitalized” under bank regulatory guidelines.  As of June 30,
2010 our total capital was $86,201,000.  We believe that we have
sufficient liquidity to meet the needs of our qualified loan customers, and we
continue to maintain a financially sound and solvent balance sheet. We suspended
the payment of dividends in the third quarter of 2009 due to losses and to
preserve capital. Our board does not expect to reinstate the dividend until it
believes that earnings and capital have returned to levels that support ongoing
payment of dividends.
 
 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 increased from
6.18% at March 31, 2010 to 6.50% at June 30, 2010. The increase in this ratio in
the second quarter was due to the decrease in average assets and the decrease 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 $3.2 million as of
March 31, 2010 to $1.8 million as of June 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 $1.8 million in deferred tax assets adversely impacted our
regulatory capital ratios at June 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, and 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.
  -18-
  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.
 
 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 is still weak in southeast Michigan. Our nonperforming assets
decreased slightly during the quarter, from $114.2 million to $113.4 million,
and total problem assets decreased from $158.3 million to $155.1 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 wholesale funding, including the prepayment of $115.0 million
of FHLB advances, which has helped stabilize our net interest margin. While some
lending opportunities exist, the economy is expected to remain weak in our
market area throughout 2010. 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 $42.1 million (5.0%) 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 $120.0 million (8.7%) in total assets
since the end of 2009. Total capital increased $4.4 million or 5.4%, resulting
from the decrease in the accumulated other comprehensive loss (AOCL), which
resulted from an increase in the value of our securities available for sale. 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 6.82% at June 30,
2010.
 
 The
amount of nonperforming assets (“NPAs”) increased $3.7 million or 3.4% since
year end. NPAs include non performing loans, which increased 4.8% from $86.1
million to $90.3 million, and Other Real Estate Owned and Other Assets (“OREO”),
which decreased 2.4% from $18.8 million to $18.4 million. Total problem assets,
which includes all NPAs and performing loans that are internally classified as
substandard, decreased $0.9 million, or 0.5%. As of June 30, 2010, the largest
concentrations in the NPA category are commercial real estate investment
properties at approximately $18 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 $37,000 since December
31, 2009, resulting from an increase in our FAS 114 allocation from $6.5 million
to $11.5 million, and a decrease from $17.6 million to $12.5 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 2.97% of loans, compared to 2.83% at December 31,
2009. The ALLL is 26.6% of NPLs, compared to 27.9% at year end. 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 six months of 2010. The total
deposit decrease of $8.1 million included a reduction of $7.6 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 six month of
2010.
 
 Results of Operations –
Second Quarter 2010 vs. Second Quarter 2009
 Net
Interest Income - A comparison of the income statements for the three months
ended June 30, 2009 and 2010 shows a decrease of $997,000, or 9.8%, in Net
Interest Income. Interest income on loans decreased $1.5 million or 11.6% as the
average loans outstanding decreased $102.0 million and the average yield on
loans decreased from 5.75% to 5.72%. The interest income on investments, fed
funds sold, and interest bearing balances due from banks decreased $1.8 million
as the average amount of investments, fed funds sold, and interest bearing
balances due from banks decreased $39.0 million and the yield decreased from
4.41% to 2.94%. 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 $1.2 million or 27.2% as the average deposits decreased $36.7
million and the average cost of those deposits decreased from 1.74% to 1.31%.
The cost of borrowed funds decreased $1.1 million as the average amount of
borrowed funds decreased $71.4 million and the average cost of the borrowings
decreased from 4.38% to 3.72%.
 
 Provision
for Loan Losses - The Provision for Loan Losses decreased from $8.0 million in
the second quarter of 2009 to $3.8 million in the second quarter of 2010
primarily due to stabilization of economic conditions, especially local real
estate values. Net charge offs were $3.8 million during the second quarter of
2010, compared to $5.9 million in the second 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. The ALLL is 2.97% of loans as of June 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 $3.2 million, or 87.9% compared to the
second quarter of 2009. Wealth Management Group income increased $235,000, or
25.9%. 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 $131,000, or 9.1%, primarily due to a decrease
in overdraft fees on checking accounts. In the second quarter of 2010, the Bank
sold approximately $94 million of federal agency debt and mortgage backed
securities, using the proceeds to prepay borrowings from the Federal Home Loan
Bank. These investments were sold at a gain of $2.6 million, resulting in the
increase of $2.7 million in gains on sales of investment securities. Mortgage
loan activity increased in the second quarter of 2010, and the origination fees
on mortgage loans sold increased $15,000, or 12.3%. Bank Owned Life Insurance
income increased $174,000 in the second quarter of 2010 compared to the second
quarter of 2009 due to higher yields on the life insurance
policies.  Other non interest income increased $175,000 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 $2.0 million or 13.4% compared
to the second 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 $748,000, or 13.9%, due to a decrease
in staff, elimination of the 401(k) matching contribution and the elimination of
the incentive pay accrual. Professional fees increased $99,000 primarily due to
increases in legal and other professional fees paid for collection activities.
Losses on Other Real Estate Owned (OREO) properties decreased $3.2 million due
to significant writedowns and losses from a large auction of foreclosed
properties in the second quarter of 2009. The OREO losses of $954,000 in the
second quarter of 2010 included writedowns of $994,000 and gains on sales of
$40,000. In the second quarter of 2009, the OREO losses of $4,174,000 included
writedowns of $3,372,000 and losses on sales of $802,000.  FDIC
deposit insurance premium expense decreased $639,000 due to a special assessment
of $663,000 in the second quarter of 2009. In the second quarter of 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. The prepayment of
the borrowings improved the capital ratios and the loss will be recovered
through lower interest expense in the second half of the year.
 
 As a
result of the above activity, the Loss Before Income Taxes decreased $8.4
million from a loss of $8.8 million in the second quarter of 2009 to a loss of
$0.4 million in the second quarter of 2010. An income tax benefit of $3.4
million was recorded in the second quarter of 2009, but the income tax benefit
of $426,000 for the second quarter of 2010 was not recorded due to the
uncertainty of our expected ability to utilize our existing deferred tax assets.
Our second quarter net loss of $372,000 is an improvement of $5.0 million from
the loss of $5.4 million in the second quarter of 2009.
 
 Results of Operations – Six
Months Ended June 30, 2010 vs. June 30, 2009
 Net
Interest Income - A comparison of the income statements for the six months ended
June 30, 2009 and 2010 shows a decrease of $1.8 million, or 8.8%, in Net
Interest Income. Interest income on loans decreased $3.2 million or 11.9% as the
average loans outstanding decreased $100.3 million and the average yield on
loans decreased from 5.82% to 5.76%. The interest income on investments, fed
funds sold, and interest bearing balances due from banks decreased $3.9 million
as the average amount of investments, fed funds sold, and interest bearing
balances due from banks decreased $46.0 million and the yield decreased from
4.53% to 3.11%. 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 $3.4 million or 33.8% as the average deposits decreased $56.4
million and the average cost of those deposits decreased from 1.89% to 1.32%.
The cost of borrowed funds decreased $1.8 million as the average amount of
borrowed funds decreased $53.0 million and the average cost of the borrowings
decreased from 4.44% to 3.88%.
 
 Provision
for Loan Losses - The Provision for Loan Losses decreased from $12.2 million in
the first six months of 2009 to $6.0 million in the first six months of 2010
primarily due to stabilization of economic conditions, especially local real
estate values. Net charge offs were $6.0 million during the first six months of
2010, compared to $6.9 million in the first six months of 2009. The provision
exceeded the net charge offs for the first six months of 2009 as the Bank was
building its ALLL while the economic conditions were still deteriorating. In the
current environment we believe that we can maintain an adequate ALLL with a
provision approximately equal to the net charge offs.
  -21-
  Other
Income – Non interest income increased $3.9 million, or 56.0% compared to the
first six months of 2009. Wealth Management Group income increased $283,000, or
15.5%. 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 $216,000, or 7.7%, primarily due to a decrease
in overdraft fees on checking accounts. In the second quarter of 2010, the Bank
sold approximately $94 million of federal agency debt and mortgage backed
securities, using the proceeds to prepay borrowings from the Federal Home Loan
Bank. These investments were sold at a gain of $2.6 million, resulting in the
increase of $2.4 million in gains on sales of investment securities. Also, in
the first six months of 2009, the Company recognized an Other Than Temporary
Impairment (OTTI) charge of $769,000 on its investment in pooled trust preferred
collateralized debt obligations. There was no additional investment impairment
recognized in the first six months of 2010. Bank Owned Life Insurance income
increased $174,000 in the first six months of 2010 compared to the first six
months of 2009 due to higher yields on the policies. Other non interest income
increased $421,000 due to higher rental income on foreclosed properties and
increased fees from ATM and debit card usage.
 
 Other
Expenses – Total non interest expenses decreased $3.1 million or 11.5% compared
to the first six months of 2009. Salaries and Employee Benefits decreased $1.1
million, or 10.3%, 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. Collection expense decreased $368,000 due to a large
expense in the first quarter of 2009 to secure our lien on a property that
collateralized a loan. Losses on Other Real Estate Owned (OREO) properties
decreased $4.0 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. The OREO losses of $1,990,000 in 2010
included writedowns of $1,814,000 and losses on sales of $176,000. In the first
six months of 2009, the OREO losses of $6,030,000 included writedowns of
$5,201,000 and losses on sales of $829,000. Other real estate expenses increased
$586,000 due to increased property tax, maintenance, and insurance costs on
properties held in OREO. FDIC deposit insurance premium expense decreased
$444,000 due to a special assessment of $663,000 in the second quarter of 2009.
In the second quarter of 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. The prepayment of the borrowings improved the capital ratios
and the loss will be recovered through lower interest expense in the second half
of 2010.
 
 As a
result of the above activity, the Loss Before Income Taxes decreased $11,403,000
from a loss of $11,427,000 in the first six months of 2009 to a loss of $24,000
in the first six months of 2010. An income tax benefit of $4.7 million was
recorded in the first six months of 2009, but the income tax benefit of $633,000
for the first six 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
$24,000 for the first six months of 2010 is an improvement of $6,716,000 from
the loss of $6,740,000 in the first six months of 2009.
  -22-
  Cash
Flows
 Cash
flows provided by operating activities decreased from $3.3 million in the first
six months of 2009 to $1.9 million in the first six months of 2010 as the
smaller net loss was offset by smaller non cash charges for the provision for
loan losses, writedowns of OREO, and OTTI of investment securities. Cash flows
provided by investing activities increased from $80.6 million in the first six
months of 2009 to $130.0 million in the first six months of 2010 primarily due
to an increase in the sales, maturities, and redemptions of investment
securities. The increase in the sales of investment securities was due to the
sales of federal agency debt and mortgage backed securities to prepay FHLB
borrowings in the first six months of 2010. The amount of cash used for
financing activities increased from $111.1 million in the first six months of
2009 to $123.1 million in the first six months of 2010 even though the decrease
in deposits decreased from $96.6 million in 2009 to $8.1 million in 2010 because
the amount of cash used for repayment of FHLB borrowings increased from $13.0
million to $115.0 million. Also, dividends paid decreased from $1.6 million in
the first six months of 2009 to zero in the first six months of 2010 as the
dividend was eliminated in the third quarter of 2009.
 
 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 June 30, 2010, the Bank utilized $113.5 million of its
authorized limit of $275 million 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 six months of 2010 the Company was in compliance with its Funds Management
Policy regarding liquidity and capital.
 
 Total
stockholders’ equity of the Company was $86.2 million at June 30, 2010 and $81.8
million at December 31, 2009. The ratio of equity to assets was 6.82% at June
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 June 30, 2010:Total
      Capital to Risk-Weighted AssetsConsolidated
                    
                    $
                    98,713
                    
                    
                    
                    10.68
                    %
                    
                    $
                    92,385
                    
                    
                    
                    10
                    %Monroe
      Bank & Trust
                    
                    
                    97,999
                    
                    
                    
                    10.62
                    %
                    
                    
                    92,309
                    
                    
                    
                    10
                    %Tier
      1 Capital to Risk-Weighted AssetsConsolidated
                    
                    
                    87,007
                    
                    
                    
                    9.42
                    %
                    
                    
                    55,431
                    
                    
                    
                    6
                    %Monroe
      Bank & Trust
                    
                    
                    86,242
                    
                    
                    
                    9.34
                    %
                    
                    
                    55,385
                    
                    
                    
                    6
                    %Tier
      1 Capital to Average AssetsConsolidated
                    
                    
                    87,007
                    
                    
                    
                    6.55
                    %
                    
                    
                    66,379
                    
                    
                    
                    5
                    %Monroe
      Bank & Trust
                    
                    
                    86,242
                    
                    
                    
                    6.50
                    %
                    
                    
                    66,347
                    
                    
                    
                    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 June
30, 2010 and 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 six 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
June 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 June
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 June 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.
 None.
 
 Item
3. Defaults Upon Senior Securities
 None.
 
 Item
4. Other Information
 No
matters to be reported.
 
 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).
  -26-
  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.
  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)August 5, 2010
                                  
                                  By
                                  /s/ H. Douglas ChaffinDate
                                  
                                  H.
      Douglas ChaffinPresident
      &Chief
      Executive OfficerAugust 5, 2010
                                  
                                  By
                                  /s/ John L. SkibskiDate
                                  
                                  John
      L. SkibskiExecutive
      Vice President andChief
      Financial
Officer
  -27-
  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.
  -28-