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[] COPY FRY-6 OMB Number 7100-0297 Approval expires Oec:ember 31, 2015 Page 1 of2

Soard of Governors of the Federal Reserve System

Annual Report of Holding Companies-FR Y-6

NOTE: The Annual Report of Holding Companies must be signed by one director of the top-tier holding company. This individual should also be a senior official of the top-tier holding company. In the event that the top-tier holding company does not have an individual who is a senior official and is also a director, the chairman of the board must sign the report.

· ' -· ,

1. David L Kingland Name of the Holding Company Director and Oflicial Vice President Trt!e of the Holding Company Director and Qfllcial

attest that the Annual Report of H'otding Companies (including the supporting attachments) for this report date has been prepared in confonnance with the instructions issued by the Federal Reserve System and are true and correct to the best of my knowledge and belief.

With respect to information regarding individuals contained in this report, the Reporter certifies that it has the authority to provide this information to the Federal Reserve. The Reporter also certifies that it has the authority, on behalf of each individual, to consent or

The Federal Reserve may assume, in the absence of a request for treatment submitted in accordance with the Board's

"Rules Regarding Availability of lnfonnation, • 12 C.F.R. Part 261, that the Reporter individual consent to public release of all

report concerning that indivi

/ -

Date of Signature

For holding companies oQ1 registered with the SE Indicate status of Annual Report to Shareholders:

0 is included with the FR Y-6 report will be sent under separate cover

0 is not prepared

For Fed ral Reserve Bank Use Only . .

·RSSDID· C.I. . . .

Report at the close of business as of the end of fiscal year This Report is required by law: Section 5(c)(1)(A) of the Bank This report fo nn i s t o be filed by all top-tier bank holding compaHolding Company Act (12 U.S.C. § 1844 (c)(1)(A)}; Section 8(a) nies and top-tier savings and loan holding companies organized of the International Banking Act (12 U.S.C. § 3106(a)); Sections under U.S. law, and by any foreign banking organization that 11 (a)(1). 25 and 25A of the Federal Reserve Act (12 U.S.C. does not meet the requirements of and is not treated as a qualify§§ 248(a)(1), 602, and 611a); Section 211.13(c) of Regulation K ing foreign banking organization under Section 211.23 of (12 C.F.R. § 211.13(c)); and Section 225. 5(b) of Regulation Y (12 Regulation K (12 C.F.R. § 211.23). (See page one of the general C.F.R. § 225.5(b)) and section 10(c)(2)(H) of the Home Owners' · instructions for more detail of who must file.) The Federal Loan Act. Return to the appropriate Federal Reserve Bank the Reserve may not conduct or sponsor, and an organization (or a original and the number of copies specified. person) is not required to respond to, an information collection

unless it displays a currently valid OMB control number.

Date of Report (top-tier holding company's fiscal year-end): December 31, 2014 Month I Day I Year

Reporter's Legal Entity Identifier (LEI) (20-Charactar LEI Code)

Reporter's Name, Street, and Mailing Address MBTCorp Legal Trtle of Holdlng .ComP.a?y . , • .

. 245 East J $.treet /,PO Box 45.0 (Mailing Address oMhe Holding Company) Street I P.O. Box Forest City IA 50436 City State Zip Code

Physical Location (if dilrerent from maling address)

object to public release of infonnation regarding that individual.

confidential

Person to whom questions about this report should be directed: Randall Pruisner Senior VP Name

641585 2825 Area Code I Phone Number I Ex1ension

li U e

Area Code I FAA Number

641-585-5653

[email protected] E-mail Address

Address (URL) for the Holding Company's web page

Does the reporter request confidential treatment for any portion of this submission?

0 Yes Please Identify the report items to which this request applies:

,.. , ... · O In accordance.with the instructions on pages GEN-2

, . . · and . a letter justifying the request is being provided. . tJ Th ' i�t�.nna!ion for which confidential treatment is sought

is being submitted separately labeled "Confidential.·

.N.o.. ' " ., . . . . Public reporting burden tor this lnform&U()ll collectlon is estimated to vary from 1.3 to 101 hours per response, with an of. S.25 hours per response, lnctudlng time to gather and maintain data In the requir rellieW instructions and complete the Information cotlection. Send commenlS this bunlen estimate or any other aspect Of this conection of infonnation, Including suggesUons for reducing this burden to: Secretary, Board of Govemors of the Federal Reserve System, 2oth and C Streets. tor-N, lllA!shlngton, DC 20551, end to the Office ot Management and Budget, Pepenlo'Oflc Reduction Project (710!Ml297), Woshington, DC 20503.

10/2014

mailto:[email protected]

MBT Corp. and Subsidiary

Consolidated Financial Report December 31, 2014

= McGladrey Assurance Tax Consulting

Contents

Independent Auditor's Report on the Financial Statements

Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Supplementary Information

Consolidating Balance Sheet

Consolidating Statement of Comprehensive Income

1-2

3

4

5

6-7

8-32

33

34

I McGladrey

To the Board of Directors MBT Corp. Forest City, Iowa

Independent Auditor's Report on the Financial Statements

Report on the Financial Statements

McGladrey LLP

We have audited the accompanying consolidated financial statements of MBT Corp. and its Subsidiary which comprise the consolidated balance sheets as of December 31, 201 4 and 2013, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for the years then ended and the related notes to the consolidated financial statements.

Management's Responsibil ity for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibil ity

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opin ion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MBT Corp. and its Subsidiary as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

1

Member of the RSM International network of lndE!pendent accounting. tax and consulting firms.

Other Matter

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information is presented for purposes of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Mason City, Iowa June 5, 2015

2


Consolidated Balance Sheets

December 31, 2014 and 2013

2014 2013 Assets

Cash and due from banks $ 6,737,106 $ 4,110,538 Interest-bearing deposits at other institutions 5,011,000 2,589,000

Total cash and cash eq u ivalents 11,748,106 6,699,538 Securities available-for-sale 84,204,097 90, 132, 101 Federal Home Loan Bank stock 884,800 1,519,400 Loans, net 190,085,796 174,903,392 Premises and equipment, net 2,730,565 1,907,975 Accrued interest receivable 2,655,356 2,540,279 Bank-owned life insurance 7,274,862 7,092,481 Other real estate owned 435,451 340,426 Other assets 2,162,339 2,939,889

Total assets $ 302, 181 ,372 $ 288,075,481

Liabil ities and Stockholders' Eq uity

Liabilities Deposits:

Demand $ 38,581,445 $ 31,991,273 NOW accounts 94,569,370 76,372,228 MMDA accounts 18,438,722 19, 192,776 Savings 27,679,324 25,912,688 Time deposits 67,953,364 64,019,697

247,222,225 217,488,662 Federal funds purchased and securities sold under

agreements to repurchase 6,337,270 8,765,799 Borrowings from Federal Home Loan Bank 11,463,028 27,233,135 Accrued expenses and other liabilities 1,943,303 2,417,120

Total l iabilities 266,965,826 255,904,716

Commitments and Contingencies (Note 13)

Stockholders' Equity Common stock, $10 par value; authorized 400,000 shares;

issued and outstanding 150,000 shares 1,500,000 1,500,000 Surplus 1,500,000 1,500,000 Retained earnings 30,702,424 28,353,589 Accumulated other comprehensive income 1,513,122 817,176

Total stockholders' equ ity 35,215,546 32,170,765

Total liabil ities and stockholders' equ ity $ 302,181,372 $ 288,075,481

See Notes to Consolidated Financial Statements.

3


Co11solidated Statements of Comprehensive Income

Years Ended December 31, 2014 and 2013

2014 2013

Interest income:

Interest and fees on loans $ 9,019,433 $ 8,722,050 Interest on securities 2,148,920 2,258,558

Interest on other 9,719 10,759

11, 178,072 10,991,367

Interest expense:

Interest on deposits 1,042,325 1,262,325

Interest on other borrowings 299,650 327,532

1,341,975 1,589,857

Net interest income 9,836,097 9,401,510

Provision for loan losses 290,000 67,50Q

'Net interest income after provision for loan losses 9,546,097 9,334,010

Other income:

Service fees 875,943 931,418

Other income 2,143,426 2,293,032

3,019,369 3,224,450

Other expenses:

Salaries and employee benefits 4,940,063 4,831,107

Occupancy expenses 575,645 528,586

Furniture and equipment expenses 587,188 597,860

Other operating expenses 2,139,650 2,097,526

8,242,546 8,055,079

Income before income taxes 4,322,920 4,503,381

Income taxes 211,484 218,250

Net income 4,111,436 4,285,131

Other comprehensive income (loss)'.

Unrealized gains (losses) on investment securities

available for sale, net 695,946 (2,477,924)

Total other comprehensive income (loss) 695,946 (2,477,924)

Total comprehensive income $ 418071382 $ 1,807,207 -


4

MBT Corp. and Su bsidiary

Consolidated Statements of Stoc kholders' Eq uity


Balance, December 31, 2012 \Jet income Other comprehensive (loss), net of tax Gash distributions to stockholders

Balance, December 31, 2013 \Jet Income Other comprehensive Income, net of tax Gash distributions to stockholders

Balance, December 31, 2014


$

$

Common Stock Surplus

1,500,000 $ 1,500,000 $

1,500,000 1,500,000

1,500,000 $ 1,500,000 $

5

Accumulated Other

Retained Comprehensive Earnings Income Total

25,532,947 $ 3,295,100 $ 31,828,047 4,285,131 4,285,131

(2,477,924) (2,477, 924) (1,464, 489) (1, 464,489) 28, 353,589 817, 176 32, 170,765

4, 111,436 4, 111,436 695,946 695,946

(1,762,601) (1,762,601) 30,702,424 $ 1,513,122 $ 35,215,546


Consolidated Statements of Cash Flows

Years Ended December 3 1 , 201 4 and 201 3

Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by

operating activities: Depreciation Amortization of intangible assets Provision for loan losses Mortgage loans originated for sale Proceeds from sales of mortgage loans held for sale Amortization of premium on securities, net Loss on sale of other real estate and repossessed assets Loss on sale of securities available-for-sale (Gain) on sales of loans held for sale Deferred income taxes (Increase) decrease in accrued interest receivable (Increase) in bank owned life insurance Decrease in other assets Increase (decrease) in accrued expenses and other liabilities

Net cash provided by operating activities

Cash Flows from Investing Activities Proceeds from maturities and calls of securities available-for-sale Proceeds from sales of securities available-for-sale Principal payments received on mortgage backed securities Purchases of securities available-for-sale Redemption (purchase) of Federal Home Loan Bank stock, net Loans to customers, net Proceeds from sale of other real estate Purchases of premises and equipment

Net cash (used in) investing activities

Cash Flows from Financing Activities Net increase (decrease) in deposits Net (decrease) in federal funds purchased and securities

sold under agreements to repurchase Borrowings from Federal Home Loan Bank Principal payments on Federal Home Loan Bank borrowings Cash distributions paid to stockholders

Net cash provided by (used in) financing activities

(Continued)

6

$

201 4 2013

4,1 1 1 ,436 $ 4,285,131

323,457 311,903 1 1 9,049 122,091 290,000 67,500

(8,46 1 , 370) (1 7,112,445) 8,554,981 1 7,325,647

204,455 297,928 1 ,500 1 09,375

10,561 (93,61 1 ) (21 3,202)

15,000 (1 1 5,077) 9,207 (1 82,38 1 ) (703,920) 658,501 172,111

(51 0,446) 46,763 4,900,494 4,743,650

1 5,545,450 8,477,723 5,535,393

1 ,083,274 2,063,337 ( 1 0, 1 72,601 ) (1 7,274,705)

634,600 (646,400) ( 1 5, 712,428) (6,211 ,888)

1 43,500 1 27,179 ( 1 , 1 46,047) (527,138) (9,624,252) (8,456,499)

29,733,563 (11,551,151 )

(2,428,529) (4,027,473) 8,000,000 18,000,000

(23, 770, 1 07) (1,067,679) (1 ,762,601 ) (1,464,489) 9,772,326 (1 10,792)


Consolidated Statements of Cash Flows (Continued)


Net increase (decrease) in cash and due from banks

Cash and cash equivalents

Beginning

Ending

Supplemental Disclosure of Cash Flow Information

Cash payments for:

Interest

Income taxes

Supplemental Schedule of Noncash Investing and Financing Activities

Other real estate and repossessed assets acquired in

settlement of loans


7

$

$

$

$

$

2014 2013

5,048,568 $ (3,823,641)

6,699,538 10,523,179

11!748!106 $ 6,699,538

1!348,002 $ 1,629,835

206!749 $ 165,892

240,024 $ 135,000

MBT Corp. and its Subsidiary


Note 1. Natu re of Business and Significant Accou nting Policies

Natu re of business: MBT Corp. and its wholly owned subsidiary, Manufacturers Bank & Trust Company, Forest City, Iowa (the Bank) (collectively, the Company) provide retail and commercial loan and deposit services to a broad base of customers in northern Iowa and southern Minnesota. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies.

Principles of consolidation: The consolidated financial statements include the accounts of MBT Corp. and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general industry standards.

Accounting estimates and assumptions: The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board (FASB). References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification™, sometimes referred to as the Codification or ASC. In preparing the financial statements, management is required 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 revenue and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, fair value of securities available for sale, the determination of other than temporary impairment and the valuation of other real estate owned.

Revenue recogn ition: Interest income and expense is recognized on the accrual basis based upon the respective principal balances. Other income is recognized at the time the respective services are rendered.

Cash, due from banks and interest-bearing deposits at other institutions: In the normal course of business, the Company maintains amounts due from other banks with one or more of its correspondent banks. The amount due from other banks at any given time could be significant and may exceed federally insured limits. The financial strength of correspondent banks is monitored by management on an ongoing basis. The Company has not experienced any losses in such accounts.

Securities: Securities classified as available for sale are reported at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of deferred income taxes, and consist of debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. A decision to sell a security classified as available for sale would be based on various factors, including significant movements in market interest rates, changes in the maturity of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.

The amortized cost of debt securities classified is adjusted for accretion of discounts to maturity and amortization of premiums over the estimated average life of each security or, in the case of callable securities, through the first call date, using the effective yield method. Such amortization and accretion is included in interest income. Interest income on securities is recognized using the interest method according to the terms of the security. Gains or losses on the sale of securities are recognized in income at the time of the sale and are determined by the differences between the net sales proceeds and the cost of the securities using the specific identification method, adjusted for any unamortized premiums or discounts.

8

MBT Corp. and its Su bsidiary


Note 1. Natu re of Business and Significant Accounting Policies (Continued)

The Company evaluates its debt securities for other than temporary impairment (OTTI) on an ongoing basis for those securities with a fair value below amortized cost. The review takes into consideration current market conditions, issuer rating changes and trends, the credit worthiness of the obligator of the security, current analysts' evaluations, failure of the issuer to make scheduled interest or principal payments, the Company's lack of intent to sell the security or whether it is more-likely-than-not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term OTTI is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Any portion of such a decline in value associated with credit loss is recognized in earnings as an impairment loss with the remaining noncredit-related component being recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, computed using original yield as the discount rate, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the "credit loss."

Federal Home Loan Bank stock: The Bank is a member of the Federal Home Loan Bank of Des Moines and as such, is required to maintain a minimum investment in stock of the Federal Home Loan Bank that varies with the level of advances outstanding with the Federal Home Loan Bank. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. The Company has determined there is no impairment.

Loans: Loans that the Bank has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal reduced by an allowance for loan losses.

A loan is impaired when it is probable that the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Interest on loans is accrued daily on the outstanding balances. Accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled debt restructurings: Troubled debt restructurings exist when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law or agreement between the borrower and the Company) to the borrower that it would not otherwise consider. These concessions could include forgiveness of principal, extension of maturity dates and reduction of stated interest rates or accrued interest. The Company is attempting to maximize its recovery of the balances of the loans through these various concessionary restructurings.

9



Note 1. Nature of Business and Sign ificant Accounting Policies (Contin ued)

Allowance for loan losses : The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company utilizes a formal rating system of its commercial and agricultural loans. Quarterly, an assessment of the portfolio is performed and the adequacy of the allowance for loan losses is then reviewed in light of current economic conditions, historical loan loss experience, specific problem loans, and other relevant factors. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired including loans whose terms have been modified in a troubled debt restructuring (TOR). The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors.

Loans are generally charged off, fully or partially, when management judges the asset to be uncollectible or repayment is deemed to extend beyond a reasonable time frame.

A discussion of the risk characteristics and the allowance for loan losses by each portfolio segment is as follows:

The Company provides a wide range of loans, including lines of credit for working capital and operational purposes, and tern loans for the acquisition of real estate, facilities, equipment and other purposes, agricultural loans, residential mortgage loans and consumer loans. Approval is generally based on the following factors:

• Sufficient cash flow to support debt repayment • Ability and stability of current management of the borrower • Positive earnings and financial trends • Earnings projections based on reasonable assumptions • Financial strength of the industry and business, and • Value and marketability of collateral.

Collateral for commercial loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans typically exceeds the loan amount by a margin sufficient to absorb potential erosion of values in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.

Loans held for sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans. All sales are made without recourse.

Premises and eq u ipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by accelerated methods over the following estimated useful lives:

Buildings and improvements Furniture and equipment

10

Years

10 - 31 5 - 10



Note 1. Nature of Busi ness and Significant Accounting Policies (Continued)

Ban k-owned l ife insurance: Bank-owned life insurance is carried at cash surrender value with earnings recorded in other income.

I ntangible assets: Intangible assets, resulting from previous branch acquisitions and insurance agencies, are being amortized over 10 to 15 years using the straight-line method. Intangible assets are evaluated for impairment if facts and circumstances indicate a loss may have occurred. Intangible assets were determined to not be impaired at December 31, 2014 and 2013.

Foreclosed real estate and repossessed assets: Real estate properties and repossessed assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less selling costs at the date of foreclosure, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for the loan losses. Valuations are periodically performed by management and valuation allowances are increased through a charge to income for reductions in fair value or increases in estimated selling costs.

Transfers of financial assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1 ) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

I ncome taxes: The stockholders of MBT Corp. have elected to become a subchapter S Corporation, whereby the Company will be taxed under sections of federal and state tax law which provide that, in lieu of corporate income taxes, the stockholders separately account for their pro rata share of the Company's items of income, deductions, losses and credits. Manufacturers Bank & Trust Company is subject to state franchise tax.

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2010.

Comprehensive income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income (loss) includes the net change in net unrealized gains and losses on securities available-for-sale, net of reclassification adjustments and taxes.

Reclassifications: Certain amounts in the prior year consolidated statement of cash flows have been reclassified to conform to the current year presentation, with no effect on net income, comprehensive income or stockholders' equity.

Subsequent events: The Company has evaluated subsequent events through June 5, 2015, which is the date the consolidated financial statements were available to be issued.

11



Note 1. Nature of Busi ness and Significant Accounting Policies (Continued)

Cu rrent accou nting developments: In January 201 4, the FASS issued ASU 201 4-04, ReceivablesTroubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 201 4-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the standard requires interim and annual disclosure of both {a) the amount of foreclosed residential real estate property held by the creditor and {b) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 201 4-04 is effective for annual periods beginning after December 1 5, 201 4. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.

Note 2. Restrictions on Cash and Due from Banks

The Federal Reserve Bank requires member banks to maintain cash on hand or a reserve on deposit. The reserve requirements at December 31, 2014 and 2013 totaled approximately $4, 171 ,000 and $4, 134,000, respectively.

Note 3. Securities

Securities available-for-sale as of December 31 , 201 4 and 2013 were as follows:

December 31, 2014

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains (Losses) Value

U.S. Government agencies

and corporations $ 8,252,487 $ 48,001 $ (21,451) $ 8,279,037 State and political subdivisions 70,214,989 1,656,161 (125,909) 71,745,241

Residential mortgage-backed securities 4,143,861 39,823 (3,865) 4,179,819

$ 82,611,337 $ 1,743,985 $ (151,225) $ 84,204,097

December 31, 201 3

Gross Gross

Amortized Unrealized Unrealized Fair

Cost Gains (Losses) Value


and corporations $ 1 3,31 1 ,698 $ 80,447 $ (1 92,653) $ 1 3,1 99,492

State and political subdivisions 70,681 ,033 1 ,697,946 (735,276) 71 ,643,703

Residential mortgage-backed securities 5,279,1 84 39,525 (29,803) 5,288,906

$ 89,271 ,91 5 $ 1 ,8 1 7,91 8 $ (957,732) $ 90, 132,1 01

12



Note 3. Securities (Contin ued)

The following tables show the fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31 , 201 4 and 201 3:

2014

Less than 12 Months 12 Months or Longer Total

Gross Gross Gross

Fair Unrealized Fair Unrealized Fair Unrealized

Value (Losses) Value (Losses) Value (Losses)


and corporations $ 749,253 $ (747) $ 979,296 $ (20,704) $ 1,728,549 $ (21,451) State and political subdivisions 8,086,018 (39,020) 5,987,215 (86,889) 14,073,233 (125,909)

Residential mortgage-backed

securities 550,187 (932) 579,032 (2,933) 1,129,219 (3,865)

$ 9,385,458 $ (40,699) $ 7,545,543 $ (110,526) $ 16,931,001 $ (151,225)

2013 Less than 12 Months 12 Months or Longer Total

Gross Gross Gross

Fair Unrealized Fair Unrealized Fair Unrealized

Value (Losses) Value (Losses) Value (Losses)


and corporations $ 7,619,240 $ (192,653) $ $ $ 7,619,240 $ (192,653) State and political subdivisions 15,783,267 (556,256) 3,726,660 (179,020) 19,509,927 (735,276) Residential mortgage-backed

securities 1,976,874 (13,313) 759,826 (16,490) 2,736,700 (29,803) $ 25,379,381 $ (762,222) $ 4,486,486 $ (195,510) $ 29,865,867 $ (957,732)

Individual securities numbering 50 and 75, as of December 31 , 201 4 and 201 3, respectively, are reflected in the tables above.

For all of the above investments securities, the unrealized losses are generally due to changes in interest rates and not from deterioration in the creditworthiness of the issuer and, as such, were considered temporary by the Company. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for anticipated recovery in fair value.

1 3



Note 3. Secu rities (Contin ued)

The amortized cost and fair value of securities available-for-sale as of December 31, 201 4 and 2013 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgagebacked securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:

2013

Amortized Fair Cost Value

Due in one year or less $ 9,850,982 $ 9,929,234 Due after one year through five years 36,265,617 37,160,71 8 Due after five years through ten years 26,654,265 27,1 24,545 Due after ten years 5,696,612 5,809,781 Residential mortgage-backed securities 4,143,861 4,179,819

$ 821611,337 $ 84,204,097

Securities available-for-sale with carrying amounts of approximately $9,686,000 and $15,333,000 at December 31 , 2014 and 2013, respectively, were pledged as collateral for purposes required or permitted by law. Included in the pledged amounts are investment securities with carrying values of approximately $9,686,000 and $9,294,000 pledged on customer repurchase agreements as of December 31 , 2014 and 2013, respectively.

During the year ended December 31, 2014 and 2013, the Company sold securities generating proceeds of approximately none and $5,535,000, respectively, which resulted in gross realized gains of none and $126,229, respectively, and gross realized losses of none and $136,790, respectively.

The components of other comprehensive income, unrealized gains (losses) on securities, for the years ended December 31, 2014 and 201 3, are as follows:

2014 201 3

Unrealized holding gains (losses) arising during the period $ 732,575 $ (2,597,778) Reclassification adjustment for (losses) realized in net income (10,561)

Net change in unrealized gains (losses) on

secu rities available-for-sale 732,575 (2,608,339) Tax effect (36,629) 130,41 5

Other comprehensive income (loss) $ 6951946 $ {214771924l

14



Note 4. Loans

The composition of the net loans at December 31, 201 4 and 201 3 is as follows:

2014 201 3 Gross loans:

Residential real estate $ 41,013,208 $ 32,622,915 Commercial real estate 42,725,955 39,164,523 Agricultural real estate 31,778,679 32,082,782 Consumer 7,872,005 8,656,513 Commercial 25,821,321 26,415,611 Agricultural 39,704,285 33,551,865

Tax exempt 4,204,571 5, 109,474 193, 120,024 177,603,683

Less allowance for loan losses 3,034,228 2,700,291 Loans receivable, net $ 190,085,796 $ 1 7419031392

The Company provides the following types of loan products:

Commercial and agricultural real estate loans: The Company's goal is to create and maintain a highquality portfolio of commercial and agricultural real estate loans with customers who meet the quality and relationship profitability objectives of the Company. Loans are subject to underwriting standards and processes similar to commercial and agricultural operating and term loans. These loans are analyzed using projected cash flows, and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market, such as geographic location and property type.

Residential real estate loans: The Company originates residential real estate loans in the service area of its subsidiary banks. The underwriting process consists of a credit analysis, employment history, and an analysis of the secured real estate property.

Commercial and agricultural loans: Operating and term loans are originated in the primary service area of the Company. These loans are made to individuals, partnerships, corporations, limited liability partnerships and limited liability companies for the purpose of assisting in the development of a business enterprise. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the business' major owners. Commercial and agricultural loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not perform as forecasted, and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Consumer loans: The Company originates direct consumer loans using a credit analysis as part of the underwriting process. Each loan type has a separate analysis, which consists of several factors, including debt to income, type of collateral, loan to collateral value, credit history, and Company relationship with the borrower.

15



Note 4. Loans (Contin ued)

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses (ALL). Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' actual or perceived financial and managerial strengths, the adequacy of underlying collateral and other relevant factors. It is Management's general practice to obtain a new appraisal or asset valuation for any loan that it has rated substandard or higher, including nonaccrual. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on other factors, including, but not limited to the economy, deferred maintenance, industry, type of property/equipment etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated when determining the realizable value to the Bank.

Certain factors involved in the evaluation are inherently subjective, as they require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.

For the purposes of calculating the ALL, the Bank segregates its loan portfolio into the following segments based primarily on the type of supporting collateral: residential real estate, commercial real estate, agricultural real estate, commercial (non-real estate), agricultural (non-real estate), consumer and taxexempt.

The analysis for determining the ALL is consistent with guidance set forth in GAAP and the lnteragency Policy Statement on the Allowance for Loan and Lease Losses. The analysis has two components, specific and general allocations. The specific component addresses specific allocations established for impaired loans. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement. Expected cash flow or collateral values discounted for market conditions and selling costs are used to establish specific allocations.

The general component addresses the allocation established for primarily non-classified loans. The general component includes a quantitative and qualitative analysis. The quantitative analysis includes the Bank's historical loan loss experience (weighted towards most recent periods) and other factors derived from economic and market conditions that have been determined to have an effect on the probability and magnitude of a loss.

The following table presents, by loan segment, the ALL and changes to the ALL for the years ended December 31 , 2014 and 2013:

Residential Commercial Agricultural Tax

Real Estate Real Estate Real Estate Consumer Commercial Agricultural Exempt Total

Balance, December31, 2013 $ 219,899 $ 1,322,668 $ 234,637 $ 99,156 $ 331,748 $ 451,594 $ 40,589 $ 2,700,291 Loans charged off (29,135) (63,639) (30,531) (123,305) Recoveries 116,677 44,929 4,223 1,213 200 167,242 Provision for loan losses 46,400 84,535 69,165 20,300 20,546 43,500 5,554 290,000

Balance, December 31, 2014 $ 382,976 $ 1,422,997 $ 303,802 $ 60,040 $ 353,507 $ 464,763 $ 46,143 $ 3,034,228

Balance, December31, 2012 $ 456,894 $ 1,357,724 $ 217,931 $ 152,681 $ 276,469 $ 410,854 $ 36,505 $ 2,909,058 Loans charged off (249,366) (51,391) (65,209) (365,966)

Recoveries 2,921 6,959 48,151 31,668 89,699

Provision for loan losses 9,450 16,335 16,706 4,725 7,128 9,072 4,084 67,500

Balance, December31, 2013 $ 219,899 $ 1,322,668 $ 234,637 $ 99,156 $ 331,748 $ 451,594 $ 40,589 $ 2,700,291

16



Note 4. Loans (Continued)

The following table presents, by loan segment, loans that were evaluated for the ALL individually and those that were evaluated collectively as of December 31 , 201 4 and 201 3:

Residential Real

December31, 2014

Loans evaluated for allowance:

Individually

Collectively

Total

Allowance established for loans

evaluated:

Individually

Collectively

December 31, 2014

December 31, 2013

Loans evaluated for allowance:

Individually

Collectively

Total

Allowance established for loans

evaluated:

Individually

Collectively

December 31, 2013

Estate

443,165

40,570,043

41,013,208

109,866

273,110

382,976

429,794

32,193,121

32,622,915

113,915

105,984

219,899

Commercial Real

Estate

886,900

41,839,055

42,725,955

93,583

1,329,414

1,422,997

2,057,339

37,107,184

39, 164,523

279,387

1,043,281

1,322,668

Agricultural Real

Estate

94,052

31,684,627

31,778,679

2,351

301,451

303,802

32,082,782

32,082,782

234,637

234,637

Consumer

17

12,554

7,859,451

7,872,005

5,310

54,730

60,040

14,950

8,641,563

8,656,513

10,803

88,353

99,156

Commercial

186,487

25,634,834

25,821,321

18,749

334,758

353,507

1,629,348

24,786,263

26,415,611

38,780

292,968

331,748

Agricultural

443,150

39,261,135

39,704,285

11,079

453,684

464,763

47,077

33,504,788

33,551,865

8,309

443,285

451,594

Tax

Exempt

4,204,571

4,204,571

46,143

46,143

5,109,474

5,109,474

40,589

40,589

Total

2,066,308

191,053,716

193,120,024

240,938

2,793,290

3,034,228

4,178,508

173,425,175

177,603,683

451,194

2,249,097

2,700,291




The following table shows additional information about those loans considered to be impaired at December 31, 2014 and 2013:

December 31, 2014 For the Year Ended December 31 Unpaid Average Interest

Recorded Principal Related Recorded Income

Investment Balance Allowance Investment Recognized

Impaired loans with no specific allowance:

Residential real estate $ $ $ $ $ Commercial real estate

Agricultural real estate

Consumer

Commercial

Agricultural

Tax exempt

Total $ $ $ $ $

Impaired loans with specific allowance:

Residential real estate $ 443,165 $ 443,165 $ 109,866 $ 333,351 $ 16,490 Commercial real estate 886,900 886,900 93,583 673,426 36,822 Agricultural real estate 94,052 94,052 2,351 47,026 3,184 Consumer 12,554 12,554 5,310 13,169 1,172 Commercial 186,487 186,487 18,749 198,375 11,680 Agricultural 443,150 443,150 11,079 123,242 5,356 Tax exempt

Total $ 2,066,308 $ 2,066,308 $ 240,938 $ 1,388,589 $ 74,704

December31, 2013 For the Year Ended December 31

Unpaid Average Interest

Recorded Principal Related Recorded Income

Investment Balance Allowance Investment Recognized

Impaired loans with no specific allowance:

Residential real estate $ $ $ $ $ Commercial real estate


Consumer

Commercial

Agricultural

Tax exempt

Total $ $ $ $ $

Impaired loans with specific allowance:

Residential real estate $ 429,794 $ 429,794 $ 113,915 $ 350,297 $ 18,875 Commercial real estate 2,057,339 2,057,339 279,387 1,709,833 94,488


Consumer 14,950 14,950 10,803 13,632 1,213

Commercial 1,629,348 1,629,348 38,780 1,319,651 76,888

Agricultural 47,077 47,077 8,309 54,550 3,663

Tax exempt

Total $ 4,178,508 $ 4,178,508 $ 451,194 $ 3,447,963 $ 195,127

18




As a part of the process to calculate the ALL, the Bank reviews several credit quality factors including repayment status (performing, nonperforming and aging) and internal credit rating. In addition, the Bank maintains an independent credit review function to assess assigned internal risk classifications and monitor compliance with internal lending policies and procedures. The risk classification is reviewed at least annually, and on an as needed basis depending on the specific circumstances of the loan.

The following table presents a summary of nonperforming assets as of December 31, 2014 and 201 3:

Nonaccrual: Residential real estate Commercial real estate Agricultural real estate Consumer Commercial

Total nonaccrual loans

Loans past due 90 days or more and not included above: Commercial real estate Agricultural real estate Consumer Commercial Agricultural

Total loans past due 90 days or

more and sti l l accruing

Total nonaccrual and loans

past due 90 days or more

Repossed assets Foreclosed real estate

Total non performing assets

19

2014 Balance

$ 1 47,281 1 93,736

94,654

1 ,520

437,1 91

640,040

640,040

1 ,077,231

435,451

$ 1 ,51 2,682

$

201 3 Balance

108,237 593,024

1,546 10,851

713,658

159,131

1 0,248 2,1 20

171,499

885,157

340,426 $ 1,225,583

MST Corp. and its Subsidiary



The following table presents the aging of payments of the loan portfolio:

Loans Past Due and Stil l Accruing Interest

Current 30-89 90+ Total Nonaccrual Total Loans

December 3 1 , 2014

Residential real estate $ 40,482,975 $ 334,252 $ $ 334,252 $ 195,981 $ 41,013,208 Commercial real estate 41,891,562 49,317 640,040 689,357 145,036 42,725,955

Agricultural real estate 31,684,025 94,654 31,778,679

Consumer 7,857,530 12,955 12,955 1,520 7,872,005

Commercial 25,591,057 230,264 230,264 25,821,321

Agricultural 39,643,626 60,659 60,659 39,704,285

Tax exempt 4,204,571 4,204,571

Total $ 191,355,346 $ 687,447 $ 640,040 $ 1,327,487 $ 437,191 $ 193,120,024

Current 30-89 90+ Total Nonaccrual Total Loans December 31 , 201 3

Residential real estate $ 32, 1 1 0,41 8 $ 404,260 $ $ 404,260 $ 1 08,237 $ 32,622,915 Commercial real estate 38,412,368 1 59 , 131 1 59 , 1 31 593,024 39, 1 64,523 Agricultural real estate 31 ,905,334 1 77,448 1 77,448 32,082,782 Consumer 8,644,719 1 0,248 1 0,248 1 ,546 8,656,513 Commercial 26,387,985 14,655 2, 120 1 6,775 1 0,851 26,41 5,6 1 1 Agricultural 33,546 , 170 5,695 5,695 33,55 1 ,865 Tax exempt 5,1 09,474 5, 1 09,474

Total $ 1 76, 1 1 6,468 $ 602,058 $ 171 ,499 $ 773,557 $ 71 3,658 $ 177,603,683

In the normal course of loan portfolio management, the loan officer assigned to a particular relationship is responsible for assigning the appropriate risk rating on the Bank's risk rating scale. In the event a credit relationship is downgraded to certain risk ratings, the relationship is reviewed no less than quarterly by the Bank's Senior Loan Officer. Loans may be classified as pass, watch, substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obliger or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Those assets which are uncollectible and hold such little value that their continuance of bankable assets is not warranted are classified as loss. Assets that do not expose the bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management's close attention are designated as watch. If left uncorrected, these potential weaknesses could increase the level of risk to the Bank in the future. Assets identified as pass are typically of sound financial condition, generate sufficient cash flow to keep their payments current, have a satisfactory collateral position, and have supplied the bank with current and sufficient financial information to justify their credit worthiness. These assets may have or develop weaknesses that may warrant a downgrade at some future date, however any current circumstances are justified and considered acceptable.

20




The following table reports on the internal credit rating for those loans in the portfolio that are assigned an individual credit rating:

Pass Watch Substandard Doubtful Loss Total

December 3 1 , 2014 Residential real estate $ 39,204,628 $ 1,365,415 $ 426,608 $ 16,557 $ $ 41,013,208 Commercial real estate 35,321,354 6,517,701 886,900 42,725,955

Agricultural real estate 29,221,021 2,463,606 94,052 31,778,679

Consumer 7,833,665 25,786 12,554 7,872,005

Commercial 22,551,925 3,082,909 186,487 25,821,321

Agricultural 31,174,152 8,086,983 443,150 39,704,285

Tax exempt 3,982,431 222, 140 4,204,571

Total $ 169,289, 176 $ 21,764,540 $ 2,049,751 $ 16,557 $ $ 193, 120,024

Pass Watch Substandard Doubtful Loss Total

December 3 1 , 2013 Residential real estate $ 30,428,566 $ 1 ,764,555 $ 41 3,237 $ 1 6,557 $ $ 32,622,915 Commercial real estate 32,695,342 4,41 1 ,842 1 ,756,321 301 ,018 39, 1 64,523 Agricultural real estate 31 ,659,642 423 , 1 40 32,082,782 Consumer 8,606,093 35,470 14,950 8,656,513 Commercial 24,860, 1 95 790,01 6 765,400 26,41 5,61 1 Agricultural 3 1 ,229,424 2,275,364 47,077 33,551 ,865 Tax exempt 4,876, 1 6 1 233,3 1 3 5 , 1 09,474

Total $ 164,355,423 $ 9,933,700 $ 2 ,996,985 $ 31 7,575 $ $ 1 77 ,603,683

Mortgage loans serviced for Federal National Mortgage Association (FNMA) and Federal Home Loan Bank (FHLB) are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 2014 and 2013 were approximately $80,600,000 and $82,000,000, respectively.

Note 5. Premises and Equ ipment

The major classes of premises and equipment and the total accumulated depreciation are as follows:

Land $ Buildings and improvements Furniture and equipment

Less accumulated depreciation

$

21

December 31,

2014 2013

1 87,156 $ 187, 156 3,171 ,736 2,354,783 4,61 0,1 53 4,281 ,059 7,969,045 6,822,998 5,238,480 4,915,023 217301565 $ 119071975



Note 6. Deposits

At December 31, 2014, the scheduled maturities of time deposits are as follows:

2015 $ 38,1 03,958

201 6 19,41 8,584

201 7 6,877,756

201 8 2,066,812

201 9 1 ,471 ,952

Thereafter 1 4,302

$ 67,953,364

The aggregate amount of jumbo certificates of deposit with a minimum denomination of $250,000 was approximately $11,276,000 and $4,948,000 at December 31 , 2014 and 201 3, respectively.

The Bank has one customer that represented approximately 6% of total deposits ($14,915,000) as of December 31, 2014.

Note 7. Borrowings from Federal Home Loan Bank

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). The Bank had advances totaling $11,463,028 and $27,233, 1 35 as of December 31 , 2014 and 2013, respectively. The advances have maturity dates ranging from 201 5 through 2025 and are at interest rates ranging from 0.86% to 5.73%. Advances totaling $2,000,000 contain call features that allow the FHLB to call the borrowed funds prior to maturity. The Bank has pledged $884,500 of Federal Home Loan Bank stock and various agricultural, commercial and 1-4 family residential mortgages held in its loan portfolio, with a carrying value of approximately $77,904,000, as collateral.

The maturities of the borrowings from FHLB are as follows:

2015 2016 2017 201 8 201 9 Thereafter

Note 8. Secu rities Sold Under Ag reements to Repurchase

$ 3,297,622 2,576,577 2,676,578 2,082, 171

322,1 72 507,908

$ 11,463,028

Securities sold under agreements to repurchase, which are secured borrowings, mature with varying dates from the transaction date. Securities sold under agreements to repurchase are reflected as the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities.

22



Note 9. I ncome Taxes

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:

Deferred tax assets: Deferred compensation Intangible assets Other real estate owned Reserve for bad debts Other

Deferred tax liabilities: Revenue and expenses accrued for books deferred for tax Net unrealized gain on securities available-for-sale Property and equipment Other

Net deferred tax asset (liability), included in

other liabil ities

$

$

December 31,

2014 2013

74, 1 00 $ 72,500 6,900 12,100

1 0,800 1 0,200 1 51 ,700 1 35,000

400 243,500 230,200

1 01 ,700 102,900 79,638 43,01 0 29,000 2,700

800 600 21 1 , 1 38 1 49,210

321362 $ 80,990

The components of income tax expense for the years ended December 31, 2014 and 2013 are as follows:

Currently paid or payable Deferred

Note 1 0. Reg ulatory Capital Req uirements

$

$

2014

1 99,484 $ 1 2,000

21 1z484 $

2013

203,250 1 5,000

21 8,250

The Company derives its cash flow from the Bank in the form of dividends received. Banking laws and regulations limit the amount of dividends that may be paid without prior approval of the Bank's regulatory agency.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

23



Note 1 0. Reg ulatory Capital Req uirements (Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31 , 201 4 and 201 3, the Bank meets all capital adequacy requirements to which it is subject.

As of December 31 , 201 4, the most recent notification from the FDIC categorized the Bank as wellcapitalized under the regulatory framework for prompt corrective action. To be categorized as wellcapitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the Bank's category.

The Bank's actual capital amounts and ratios as of December 31 , 201 4 and 201 3 are presented in the table.

December 31, 2014:

Total Capital (to Risk

Weighted Assets)

Bank

Tier 1 Capital (to Risk

Weighted Assets)

Bank

Tier 1 Capital (to Average

Assets)

Bank

December 31 , 201 3: Total Capital (to Risk

Weighted Assets) Bank

Tier 1 Capital (to RiskWeighted Assets) Bank

Tier 1 Capital (to Average Assets) Bank

Actual

Amount Ratio

Minimum Capital Requirement

Amount Ratio

Minimum to Be Well-Capitalized Under

Prompt Corrective Action Provisions

Amount Ratio

$ 36,148,000 15.3% $ 18,914,000 8.0% $ 23,643,000 10.0%

33,245,000 14.1 9,457,000 4.0 14,186,000 6.0

33,245,000 1 1.0 12,143,000 4.0 15,179,000 5.0

$ 33,458,000 14.9% $ 1 7,91 7,000 8.0% $ 22,396,000 1 0.0%

30,757,000 1 3.7 8,958,000 4.0 1 3,437,000 6.0

30,757,000 1 1 .0 1 1 ,206,000 4.0 14,008,000 5.0

24



Note 1 0. Reg ulatory Capital Req uirements (Continued)

In July 2013, the federal banking agencies issued a final rule revising the regulatory capital rules applicable to most national banks and federal savings associations as well as their holding companies generally beginning on January 1, 2015. The rule implements the Basel Committee's December 2010 framework known as "Basel I l l " for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The final rule implements a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement of 4.50%, and a higher minimum Tier 1 capital requirement of 6.00% (which is an increase from 4.00%). Under the final rule, the total capital ratio remains at 8.00% and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations, regardless of supervisory rating, is 4.00%.

Additionally, under the final rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum riskbased capital requirements. The buffer is measured relative to risk-weighted assets. The final rule also enhances risk sensitivity and addresses weaknesses identified by the regulators over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with the requirements of the Dodd-Frank Act.

Except for the largest internationally active banking organizations (which are subject to the "advanced approaches" provisions of the final rule), the new minimum capital requirements generally become effective for all banking organizations on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in over time, beginning on January 1, 2016. Similarly, non-qualifying capital instruments phase out over time.

Note 1 1 . Employee Benefits

The Bank has a profit sharing and 401 (k) plan for eligible employees. Employees are eligible for the 401 (k) portion of the plan at the start of employment and eligible for the profit sharing portion after completing one year of service. The amount of contributions to the plan is at the discretion of the Bank's Board of Directors, limited to a maximum of 50% of each employee's annual compensation. The contributions to the plan were $390,468 and $392,224 for the years ended December 31, 2014 and 2013, respectively.

In addition, the Bank has a discretionary bonus plan for employees. The Bank's bonus plan expenses were $338,929 and $289,304 for the years ended December 31, 2014 and 2013, respectively.

The Bank has a salary continuation agreement with certain officers of the Bank which provides for benefits upon their retirement or for the spouse if the officer dies before retirement and the spouse survives, over a period of 15 years. These deferred compensation benefits are charged to expense during the service periods required to attain full eligibility. The Company has recorded accruals of $1,017,337 and $1,018,390, which represent the estimated present value (using a discount rate of 7%) of the benefits earned under this agreement, as of December 31, 2014 and 2013, respectively. The Bank's expenses for this plan totaled $115,021 and $72,641 for the years ended December 31, 2014 and 2013, respectively.

The Bank is the owner and beneficiary of life insurance policies on the lives of certain officers of the Bank. The cash surrender value of these policies amounted to $7,274,862 and $7,092,481 at December 31, 2014 and 2013, respectively. In connection with this, the Company has agreed to provide the employee with a death benefit from these policies and will accrue over the employee's service period a liability for the actuarial present value of the future death benefit as of the employee's expected retirement date. At December 31. 2014 and 2013, the Company has accrued $464,850 and $432,752, respectively, which is included in other liabilities. The Bank's expenses for this plan totaled $43,806 and $52, 112 for the years ended December 31, 2014 and 2013, respectively.

25



Note 1 2. Lease Commitments

The Bank has entered into various operating lease agreements for rental of banking and insurance offices. Leases have various expiration dates and renewal terms. Rent expense was approximately $170,085 and $158,000 for the years ended December 31, 2014 and 2013, respectively.

The future rental commitments under the leases during their terms are due as follows:

During the Year Ending December 31:

2015 2016 2017 2018 2019 Thereafter

Note 1 3. Commitments and Contingencies

$ 178,720 199,479 203,971 178,847 178,847 593,208

$ 1,533,072

Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company's consolidated financial statements.

Financial instruments with off-balance-sheet risk: The Company is 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. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.

The Company'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 on-balance-sheet instruments.

A summary of the commitments at December 31, 2014 and 2013 is as follows:

Commitments to extend credit Standby letters of credit

2014

$ 54,1 46,000 1 ,053,000

$ 55,1 99,000

2013

$ 60,483,000 1,189,000

$ 61,672,000

Commitments to extend credit are agreements to lend to customers. Commitments generally have fixed expiration dates and may require a payment of a fee. Collateral may be obtained based on the creditworthiness of each customer and may include accounts receivable, inventory, real estate, equipment and other business assets.

26



Note 1 3. Commitments and Contingencies (Contin ued)

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2014, no amounts have been recorded as liabilities for the Bank's potential obligations under these guarantees.

Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Concentrations of credit risk: The majority of the Bank's loans, commitments to extend credit and standby letters of credit have been granted to customers in the Company's market area. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers. The Bank, as a matter of policy, does not extend credit to any individual borrower in excess of $3,000,000 or any corporate borrower in excess of $5,000,000. Although management believes the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the agricultural economic sector.

Note 1 4. Related Party Transactions

The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. These persons and related interests were indebted to the Bank for loans totaling approximately $91,500 and $275,000 at December 31 , 201 4 and 2013, respectively.

Note 1 5. Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the standard establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about tbe _as_s.u.mptions that market participants would use in pricing an asset or liability.

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Note 1 5. Fair Value Measurements (Continued)

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities avai lable for sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds such as U.S. Treasury securities and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow using observable market data. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans and other real estate owned: Impaired loans and other real estate owned are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment) . Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified as a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.

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MBT Corp. and its Subsid iary


Note 15. Fair Value Measurements (Contin ued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Securities available for sale: U .S . Government agencies

and corporations State and political subdivisions Residential mortgage-backed securities

Securities available for sale: U .S . Government agencies

and corporations State and political subdivisions Residential mortgage-backed securities

Total

$ 8,279,037 71,745,241

4,179,819

$ 84,204,097

Total

$ 1 3, 1 99,492 71 ,643,703

5,288,906

$ 90 1 32 1 0 1

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2014

Quoted Prices

In Active

Markets for

Identical Assets

(Level 1)

$

$

Significant

Other

Observable

Inputs

(Level 2)

$ 8,279,037 71 ,745,241

4,179,819

$ 84,204,097

201 3

Quoted Prices In Active

Markets for Identical Assets

(Level 1 )

$

$

Significant Other

Observable Inputs

(Level 2)

$ 1 3, 1 99,492 71 ,643,703

5,288,906

$ 90 1 32 1 0 1

Significant

Unobservable

Inputs

(Level 3)

$

$

Significant

Unobservable Inputs

(Level 3)

$

$



Note 1 5. Fair Value Measurements (Continued)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis are included in the tables below at December 31 , 2014 and 201 3:

2014

Quoted Prices Significant

In Active Other Significant

Markets for Observable U nobservable

Identical Assets Inputs Inputs

Total (Level 1 ) (Level 2) (Level 3)

Assets: Impaired loans $ 1 ,798,386 $ $ $ 1 ,798,386 Other real estate owned 435,450 435,450

$ 2,233,836 $ $ $ 2,233,836

201 3 Quoted Prices Significant

In Active Other Significant Markets for Observable Unobservable

Identical Assets Inputs Inputs Total (Level 1 ) (Level 2) (Level 3)

Assets: Impaired loans $ 3,727,31 4 $ $ $ 3,727,31 4 Other real estate owned 340,426 340,426

$ 4 067 740 $ $ $ 4 067 740

Note 1 6. Fair Value of Financial Instruments

Accounting standards requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by ASC 820. Certain financial instruments and all non-financial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following information presents estimated fair values of the Company's financial instruments as of December 31, 201 4 and 2013 and the methods and assumptions used to estimate those fair values.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and due from banks and interest bearing deposits at other institutions: The carrying amounts reported in the balance sheet for cash and due from banks and interest bearing deposits at other institutions approximate their fair values.

Securities available-for-sale: See description in Note 16.

Federal Home Loan Bank stock: The carrying amount of FHLB stock approximates the fair value.

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Note 1 6. Fair Value of Financial Instruments (Continued)

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for all other loans are estimated using discounted cash flow analyses, using observable market interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. See description for impaired loans in Note 16.

Accrued interest receivable: The recorded value of accrued interest receivable approximates fair value.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings and NOW accounts, is equal to the amount payable on demand. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the observable market rates currently offered for deposits of similar remaining maturities.

Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of federal funds purchased, and borrowings under repurchase agreements approximate their fair values.

Note payable and borrowings from Federal Home Loan Bank: The carrying amount of the note payable approximates its fair value. The fair value of borrowings from FHLB is based on discounted value of contractual cash flows using current rates available on similar borrowings.

Accrued interest payable: The carrying amounts of accrued interest payable approximate their fair values.

Off-balance-sheet instruments: Since the majority of the Bank's off-balance-sheet instruments consist of nonfee-producing, variable-rate commitments, the Bank has determined it does not have a distinguishable fair value.

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Note 1 6. Fair Value of Fi nancial I nstruments (Continued)

The approximate carrying values and fair values of financial instruments were as follows:

201 4 2013 Approximate Approximate

Carrying Value Fair Value Carrying Value Fair Value Financial assets:

Cash and due from banks $ 6,737,000 $ 6,737,000 $ 4,1 11,000 $ 4,1 11,000 Interest-bearing deposits 5,01 1 ,000 5,01 1 ,000 2,589,000 2,589,000 Securities 84,204,000 84,204,000 90,1 32,000 90,132,000 Federal Home Loan Bank stock 885,000 885,000 1,51 9,000 1,519,000 Loans, net 1 90,086,000 1 90,843,000 174,903,000 176,1 62,000 Accrued interest receivable 2,655,000 2,655,000 2,540,000 2,540,000

Financial liabilities: Deposits 247,222,000 248,480,000 217.489,000 219,024,000 Federal funds purchased and

repurchase agreements 6,337,000 6,337,000 8,766,000 8,766,000 Borrowings from Federal Home

Loan Bank 1 1 ,463,000 1 1 ,873,000 27,233,000 28,298,000 Accrued interest payable 1 72,000 1 72,000 178,000 178,000

The Bank assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result. the fair values of the Bank's financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and are more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank's overall interest rate risk.

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M BT Corp. and Subsid iary

Consolidating Balance Sheet

December 3 1 , 201 4

Manufacturers Bank & Trust

MBT Corp. Com pan}'. Eliminations Consolidated Assets

Cash and due from banks $ 8,783 $ 6,737,106 $ 8,783 $ 6,737,106 Interest-bearing deposits at other institutions 5,01 1,000 5,011,000 Securities available-for-sale 84,204,097 84,204,097 Federal Home Loan Bank stock 884,800 884, 800 Loans, net 190,085,796 190,085,796 Premises and equipment, net 2,730,565 2,730,565 Accrued interest receivable 2,655,356 2,655,356 Investment in subsidiary bank 35, 155, 1 98 35,155,1 98 Bank-owned life insurance 7,274,862 7,274,862 Other real estate owned 435,451 435,451 Other assets 51,565 2,11 0,774 2,1 62,339

$ 35,21 5,546 $ 302,1 29,807 $ 35,1 63,981 $ 302, 1 81,372

Liabil ities and Stockholders' Equ ity

Liabilities Deposits:

Demand $ $ 38,590,228 $ 8,783 $ 38,581,445 NOW accounts 94,569,370 94,569,370 MMDA accounts 18,438,722 18,438,722 Savings 27,679,324 27,679,324 Time deposits 67,953,364 67,953,364

247,231,008 8,783 247,222,225

Federal funds purchased and securities sold under agreements to repurchase 6,337,270 6,337,270

Borrowings from Federal Home Loan Bank 1 1,463,028 11,463,028 Accrued expenses and other liabilities 1,943,303 1,943,303

266,974,609 8,783 266,965,826

Stockholders' Equity Common stock 1,500,000 1,500,000 1,500,000 1,500,000 Surplus 1 ,500,000 6,700,000 6,700,000 1,500,000 Retained earnings 30,702,424 25,442,076 25,442,076 30,702,424 Accumulated other comprehensive income 1,513,122 1,51 3,122 1 ,51 3,122 1 ,513,122

35,215,546 35, 155, 198 35, 155, 198 35,215,546

$ 35,215,546 $ 302,129,807 $ 35,163,981 $ 302, 181,372

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M BT Corp. and Subsidiary

Consolidating Statement of Comprehensive I ncome

Year Ended December 3 1 , 2014

Manufacturers Bank & Trust

MBT Corp. Company Eliminations Consolidated Interest income:

Interest and fees on loans $ $ 9,01 9,433 $ $ 9,01 9,433 Interest on securities 2,1 48,920 2,

FRY-6 OMB Number 71-0297 Approval pires er 31, 2015 Page …/media/others/banking/...Resee System...

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Transcript of FRY-6 OMB Number 71-0297 Approval pires er 31, 2015 Page …/media/others/banking/...Resee System...