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 a wholly owned subsidiary, MB&T Financial Services. MB&T Financial Services is an insurance agency which sells insurance policies to the Bank. The Bank operates 17 branch offices in Monroe County, Michigan and 7 offices in Wayne County, Michigan. The Bank's primary source of income is interest income on its loans and investments and its primary expense is interest expense on its deposits and borrowings.

The national economic recovery is continuing slowly, and conditions in southeast Michigan are also slowly improving. Local unemployment rates improved significantly over the past year, and are now comparable to the state and national averages, but remain above the historical norms. Commercial and residential development property values continue to show some stability with some areas improving slightly. Our total problem assets, which include nonperforming loans, other real estate owned, non accrual investments, and performing loans that are internally classified as potential problems, decreased $7.6 million, or 5.6% during the first quarter of 2012, allowing us to decrease our Allowance for Loan and Lease Losses (ALLL) from $20.9 million to $20.5 million. The loan portfolio decreased $12.8 million during the quarter, and the ALLL as a percent of loans was unchanged at 3.07%. Although local property values and the unemployment rate have stabilized over the past several quarters, we anticipate a slower than normal recovery in our local markets in 2012. We will continue to focus our efforts on improving asset quality, maintaining liquidity, strengthening capital, and controlling expenses.

Net Interest Income increased $159,000 compared to the first quarter of 2011 even though the average earning assets decreased $17.6 million, or 1.5% as the net interest margin increased from 3.11% to 3.18% and the quarter was one day longer. The provision for loan losses decreased from $5.75 million in the first quarter of 2011 to $2.25 million in the first quarter of 2012. Improvement in the risk ratings of loans, a decrease in the historical loss rates, and the decrease in the size of the loan portfolio decreased the amount of ALLL required. As a result, we were able to record a provision that was smaller than the net charge offs for the quarter. Non interest income increased $1.0 million, primarily due to an increase in gains on securities transactions. Non interest expenses decreased $712,000, or 6.6% due to lower losses on Other Real Estate Owned, and lower FIDC deposit insurance assessments. We continue to work to control costs, and we decreased several non interest expense categories. We expect credit related expenses, including the costs of carrying a high level of Other Real Estate Owned (OREO), to continue to improve, but still remain above normal levels, throughout 2012.

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 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses.

Income tax accounting standards require companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all evidence using a "more likely than not" standard. We reviewed our deferred tax asset, considering both positive and negative evidence and analyzing changes in near term market conditions as well as other factors that may impact future operating results. Significant negative evidence is our net operating losses for the last three years, combined with a difficult economic environment and a slow economic recovery projected for southeast Michigan. Positive evidence includes our history of strong earnings prior to 2008, our third consecutive quarterly profit in the first quarter of 2012, our strong capital position, our steady net interest margin, our improving asset quality, and our non interest expense control initiatives. Based on our analysis of the evidence, we believed that it was appropriate to maintain a valuation allowance equal to the full amount of the deferred tax asset as of March 31, 2012.

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, but regional conditions remained weak until 2010. Local unemployment and property values have stabilized and the economic environment in southeast Michigan is continuing to slowly show improvement. Our nonperforming assets decreased 7.0% during the quarter, from $95.2 million to $88.6 million, and total problem assets decreased from $136.8 million to $129.1 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 high cost wholesale funding, which, coupled with a decrease in non accrual loans, has helped improve our net interest margin. While the local economy is slowly recovering, lending opportunities are beginning to increase. We expect the slow recovery to continue in our market area in 2012. The Company expects low deposit growth and a slight reduction in total assets in 2012, and intends to continue to focus efforts on improved credit quality, capital management, and enterprise risk mitigation.

Since December 31, 2011, total loans decreased $12.8 million (2.0%) because the loan demand did not result in enough new loan activity to offset write downs recorded and payments received. At the same time, deposits increased $13.2 million, or 1.3% due to typical seasonal increases in municipal deposits. The reduction in loans and increase in deposits resulted in an increase of $12.4 million (1.0%) in total assets since the end of 2011. Total capital increased $188,000 or 0.2%, as the profit of $1.2 million was offset by the decrease of $1.1 million in the accumulated other comprehensive income (AOCI) due to a decrease in the value of our securities available for sale. The total assets increased at a faster rate than capital, causing the capital to assets ratio to decrease from 6.11% at December 31, 2011 to 6.07% at March 31, 2012.

The amount of nonperforming assets ("NPAs") decreased $6.6 million or 7.0% during the first quarter of 2012. NPAs include non performing loans, which decreased 5.5% from $75.5 million to $71.4 million, and Other Real Estate Owned and Other Assets ("OREO"), which decreased 14.6% from $16.7 million to $14.3 million. Total problem assets, which includes all NPAs and performing loans that are internally classified as substandard, decreased $7.6 million, or 5.6%. The Company's Allowance for Loan and Lease Losses ("ALLL") decreased $0.4 million since December 31, 2011, due to a decrease in the size of the portfolio and an improvement in the quality of the assets in the loan portfolio. The ALLL is now 3.07% of loans, unchanged compared to December 31, 2011 and down from 3.21% at March 31, 2011. The ALLL is 28.69% of nonperforming loans ("NPLs"), compared to 27.63% at year end and 29.02% at March 31, 2011. In light of current economic conditions, we believe that at this level the ALLL adequately estimates the potential losses in the loan portfolio.

Results of Operations - First Quarter 2012 vs. First Quarter 2011

Net Interest Income - A comparison of the income statements for the three months ended March 31, 2011 and 2012 shows an increase of $159,000, or 1.8%, in Net Interest Income. Interest income on loans decreased $1.2 million or 11.7% as the average loans outstanding decreased $71.7 million and the average yield on loans decreased from 5.64% to 5.46%. The interest income on investments, fed funds sold, and interest bearing balances due from banks increased $107,000 as the average amount of investments, fed funds sold, and interest bearing balances due from banks increased $54.0 million but the yield decreased from 2.37% to 2.17%. The yield on investments decreased because the Company is maintaining its strong liquidity position by keeping its excess funds in low yielding short term investments and deposits in the Federal Reserve Bank. A continued low overall level of interest rates and the maturity of some high cost borrowings and brokered certificates of deposit allowed funding costs to decrease more than asset yields. The interest expense on deposits decreased $1,176,000 or 39.0% as the average deposits decreased $17.1 million and the average cost of deposits decreased from 1.17% to 0.72%. The cost of borrowed funds decreased $89,000 as the average amount of borrowed funds decreased $16.5 million but the average cost of the borrowings increased from 2.87% to 2.94%.

Provision for Loan Losses - The Provision for Loan Losses decreased from $5.75 million in the first quarter of 2011 to $2.25 million in the first quarter of 2012. Net charge offs were $2.6 million during the first quarter of 2012, compared to $3.5 million in the first quarter of 2011. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to a decrease in the size of the portfolio, a decrease in the historical loss percentages, and a decrease in the specific allocations, we were able to maintain an adequate ALLL in the first quarter of 2012 even though we recorded a provision that was less than our net charge offs. The ALLL is 3.07% of loans as of March 31, 2012, and, in light of current economic conditions, we believe that at this level the ALLL adequately estimates the potential losses in our loan portfolio.

Other Income - Non interest income increased $1.0 million, or 27.7% compared to the first quarter of 2011, as gains on the sales of securities increased $1.0 million. Service charges and other fees on deposit accounts decreased $27,000, or 2.4%, primarily due to a decrease in overdraft fees on checking accounts. Origination fees on mortgage loan sold increased $39,000, or 47.0% due to higher mortgage loan origination volume in 2012. Income on Bank Owned Life Insurance policies decreased $42,000, or 10.2% due to a decrease in the yields on the policies this year. The gain on securities transactions was the result of some sales of federal agency securities. Securities were sold to rebalance the Bank's interest rate risk. The sales had the additional benefit of producing the gain, which improved the bank's capital ratios.

Other Expenses - Total non interest expenses decreased $712,000, or 6.6% compared to the first quarter of 2011. Salaries and Employee Benefits increased $257,000, or 5.3%, due to increases in medical insurance, life insurance, and payroll tax expenses. Occupancy expense decreased $52,000 due to lower maintenance costs as a result of the mild winter weather. Marketing expense decreased $48,000, or 19.5% mainly due to the elimination of our debit card rewards program. Losses on Other Real Estate Owned (OREO) properties decreased $972,000 compared to the first quarter of 2011 as the property values stabilized in the second half of 2011. We conducted an auction of OREO properties in April, 2012, and the first quarter expense includes $204,000 to write down properties sold at the auction. The sales will close in the second quarter, but the losses were recognized as write downs of the property values in the first quarter. FDIC deposit insurance premium expense decreased $167,000, or 19.7%, due to a change in the assessment method in 2011.

As a result of the above activity, the Profit Before Income Taxes in the first quarter of 2012 was $1,343,000, an improvement of $5.4 million compared to the loss of $4.042 million in the first quarter of 2011. In the first quarter of 2012, we recorded a federal income tax expense of $126,000. The Corporation is currently being audited by the IRS, and the ultimate resolution of the exam is still uncertain. This accrual is to absorb the effect of an uncertain tax position that is being challenged by the IRS. The issue being challenged involves the timing of income recognition and would normally result in an increase in the deferred tax asset. However, the Corporation is maintaining a valuation allowance against 100% of its deferred tax asset, so the estimated tax adjustment must be expensed. No income tax benefit or expense was recorded in the first quarter of 2011 due to the net operating loss carry forwards and the uncertainty of our expected ability to utilize our existing deferred tax assets. The Net profit for the first quarter of 2012 was $1,217,000, compared to a net loss of $4,042,000 in the first quarter of 2011.

As part of its audit, the IRS is also reviewing loan charge-offs for partially worthless loans deducted in 2008 and 2009. Although the charge-offs were in compliance with state and federal bank regulatory agency guidelines, the IRS examining agent conducting the audit has called into question the deductibility of certain charge-offs for income tax purposes based on the facts and circumstances of a loan at the time of the charge-off. We believe that the charge-off deductions were proper when taken. The IRS agent has not yet proposed to disallow deduction of any specific amount of charge-offs. Moreover, any future disallowance by the IRS may only affect the timing of the deduction, rather than resulting in complete loss of the deduction. Presently, it is not yet possible to determine the amount or effect of any potential disallowance and therefore no income tax expense has been recorded to date.

Cash Flows

Cash flows provided by operating activities increased $3.9 million compared to the first quarter of 2011 as the net income increased due to the decrease in the provision for loan losses. Cash flows from investing activities increased $43.1 million in the first quarter of 2012 compared to the first quarter of 2011 due to increased sales and redemptions of investment securities. The amount of cash provided by financing activities was $13.3 million in the first three months of both 2011 and 2012 as the increase in deposits was the same both years. Total cash and cash equivalents increased $76.0 million in the first quarter of 2012.

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. Internal sources of liquidity include the maturities of loans and securities in the ordinary course of business as well as our available for sale securities portfolio. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of March 31, 2012, the Bank utilized $107.0 million of its authorized limit of $265 million with the Federal Home Loan Bank of Indianapolis, none of its $10 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis, and none of its $25 million of federal funds line with a correspondent bank.

The Company's Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first three months of 2012 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

Total stockholders' equity of the Company was $75.9 million at March 31, 2012 and $75.7 million at December 31, 2011. The ratio of equity to assets was 6.07% at March 31, 2012 and 6.12% at December 31, 2011. 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 Capitalized
                                     Amount           Ratio            Amount                   Ratio
As of March 31, 2012:
Total Capital to Risk-Weighted
Assets
Consolidated                       $    86,012           10.86 %   $       79,198                       10 %
Monroe Bank & Trust                     85,525           10.81 %           79,141                       10 %
Tier 1 Capital to Risk-Weighted
Assets
Consolidated                            75,975            9.59 %           47,519                        6 %
Monroe Bank & Trust                     75,428            9.53 %           47,485                        6 %
Tier 1 Capital to Average Assets
Consolidated                            75,975            6.12 %           62,033                        5 %
Monroe Bank & Trust                     75,428            6.08 %           62,007                        5 %




                                             Actual                 Minimum to Qualify as Well Capitalized
                                     Amount           Ratio            Amount                   Ratio
As of December 31, 2011:
Total Capital to Risk-Weighted
Assets
Consolidated                       $    84,970           10.48 %   $       81,084                       10 %
Monroe Bank & Trust                     84,441           10.42 %           81,033                       10 %
Tier 1 Capital to Risk-Weighted
Assets
Consolidated                            74,695            9.21 %           48,650                        6 %
Monroe Bank & Trust                     74,106            9.15 %           48,620                        6 %
Tier 1 Capital to Average Assets
Consolidated                            74,695            6.07 %           61,505                        5 %
Monroe Bank & Trust                     74,106            6.03 %           61,481                        5 %

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 if 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 2011.

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.