NOTE 4. LOANS RECEIVABLE, NET

Year-end loans receivable were as follows:

	September 30, 2014			September 30, 2013
	(Dollars in Thousands)

1-4 Family Real Estate	$	116,395		$	82,287
Commercial and Multi-Family Real Estate		224,302			192,786
Agricultural Real Estate		56,071			29,552
Consumer		29,329			30,314
Commercial Operating		30,846			16,264
Agricultural Operating		42,258			33,750
Total Loans Receivable		499,201			384,953

Less:
Allowance for Loan Losses		(5,397	)		(3,930	)
Net Deferred Loan Origination Fees		(797	)		(595	)
Total Loans Receivable, Net	$	493,007		$	380,428

Annual activity in the allowance for loan losses was as follows:

Year ended September 30,	2014			2013			2012
	(Dollars in Thousands)

Beginning balance	$	3,930		$	3,971		$	4,926
Provision (recovery) for loan losses		1,150			-			1,049
Recoveries		367			179			99
Charge offs		(50	)		(220	)		(2,103	)
Ending balance	$	5,397		$	3,930		$	3,971

Allowance for Loan Losses and Recorded Investment in loans at September 30, 2014 and 2013 are as follows:

	1-4 Family Real Estate			Commercial and Multi-Family Real Estate			Agricultural Real Estate		Consumer			Commercial Operating			Agricultural Operating			Unallocated		Total
	(Dollars in Thousands)
Year Ended September 30, 2014

Allowance for loan losses:
Beginning balance	$	333		$	1,937		$	112	$	74		$	49		$	267		$	1,158	$	3,930
Provision (recovery) for loan losses		217			(709	)		151		4			26			502			959		1,150
Charge offs		-			-			-		-			-			(50	)		-		(50	)
Recoveries		2			347			-		-			18			-			-		367
Ending balance	$	552		$	1,575		$	263	$	78		$	93		$	719		$	2,117	$	5,397


Ending balance: individually evaluated for impairment		23			350			-		-			-			340			-		713
Ending balance: collectively evaluated for impairment		529			1,225			263		78			93			379			2,117		4,684
Total	$	552		$	1,575		$	263	$	78		$	93		$	719		$	2,117	$	5,397

Loans:
Ending balance: individually evaluated for impairment		387			5,655			-		-			22			340			-		6,404
Ending balance: collectively evaluated for impairment		116,008			218,647			56,071		29,329			30,824			41,918			-		492,797
Total	$	116,395		$	224,302		$	56,071	$	29,329		$	30,846		$	42,258		$	-	$	499,201

	1-4 Family Real Estate			Commercial and Multi-Family Real Estate			Agricultural Real Estate		Consumer			Commercial Operating			Agricultural Operating			Unallocated		Total
	(Dollars in Thousands)
Year Ended September 30, 2013

Allowance for loan losses:
Beginning balance	$	193		$	3,113		$	1	$	3		$	49		$	-		$	612	$	3,971
Provision (recovery) for loan losses		163			(1,095	)		111		71			(63	)		267			546		-
Charge offs		(25	)		(194	)		-		(1	)		-			-			-		(220	)
Recoveries		2			113			-		1			63			-			-		179
Ending balance	$	333		$	1,937		$	112	$	74		$	49		$	267		$	1,158	$	3,930


Ending balance: individually evaluated for impairment		25			404			-		-			-			-			-		429
Ending balance: collectively evaluated for impairment		308			1,533			112		74			49			267			1,158		3,501
Total	$	333		$	1,937		$	112	$	74		$	49		$	267		$	1,158	$	3,930

Loans:
Ending balance: individually evaluated for impairment		641			6,634			-		-			45			-			-		7,320
Ending balance: collectively evaluated for impairment		81,646			186,152			29,552		30,314			16,219			33,750			-		377,633
Total	$	82,287		$	192,786		$	29,552	$	30,314		$	16,264		$	33,750		$	-	$	384,953

The asset classification of loans at September 30, 2014 and 2013, are as follows:

September 30, 2014	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Total
	(Dollars in Thousands)

Pass	$	115,700	$	222,074	$	52,364	$	29,329	$	30,709	$	32,261	$	482,437
Watch		369		852		273		-		137		369		2,000
Special Mention		81		96		1,660		-		-		63		1,900
Substandard		245		1,280		1,774		-		-		9,565		12,864
Doubtful		-		-		-		-		-		-		-
	$	116,395	$	224,302	$	56,071	$	29,329	$	30,846	$	42,258	$	499,201

September 30, 2013	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Total
	(Dollars in Thousands)

Pass	$	81,719	$	177,513	$	26,224	$	30,314	$	16,251	$	26,362	$	358,383
Watch		239		7,791		3,328		-		13		1,690		13,061
Special Mention		84		102		-		-		-		5,698		5,884
Substandard		245		7,380		-		-		-		-		7,625
Doubtful		-		-		-		-		-		-		-
	$	82,287	$	192,786	$	29,552	$	30,314	$	16,264	$	33,750	$	384,953

The loan classification and risk rating definitions are as follows:

Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

Watch- A watch asset is generally a credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures. Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention. These assets are of better quality than special mention assets.

Special Mention- Special mention assets are a credit with potential weaknesses deserving management’s close attention and if left uncorrected, may result in deterioration of the repayment prospects for the asset. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.

Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position. Assets so classified will have well-defined weaknesses creating a distinct possibility the Bank will sustain some loss if the weaknesses are not corrected. Loss potential does not have to exist for an asset to be classified as substandard.

Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort. Due to pending factors the asset’s classification as loss is not yet appropriate.

Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is no longer warranted. This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is charged against current income. The loan will remain on a non-accrual status until the loan establishes satisfactory payment performance. Past due loans at September 30, 2014 and 2013 are as follows:

September 30, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Non-Accrual Loans		Total Loans Receivable
	(Dollars in Thousands)

1-4 Family Real Estate	$	111	$	37	$	-	$	148	$	115,966	$	281	$	116,395
Commercial and Multi-Family Real Estate		-		-		-		-		223,990		312		224,302
Agricultural Real Estate		-		-		-		-		56,071		-		56,071
Consumer		2		12		54		68		29,261		-		29,329
Commercial Operating		-		-		-		-		30,846		-		30,846
Agricultural Operating		-		-		-		-		41,918		340		42,258
Total	$	113	$	49	$	54	$	216	$	498,052	$	933	$	499,201

September 30, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Non-Accrual Loans		Total Loans Receivable
	(Dollars in Thousands)

1-4 Family Real Estate	$	53	$	-	$	245	$	298	$	81,744	$	245	$	82,287
Commercial and Multi-Family Real Estate		102		-		107		209		192,150		427		192,786
Agricultural Real Estate		1,169		-		-		1,169		28,383		-		29,552
Consumer		29		21		13		63		30,251		-		30,314
Commercial Operating		-		-		-		-		16,257		7		16,264
Agricultural Operating		-		-		-		-		33,750		-		33,750
Total	$	1,353	$	21	$	365	$	1,739	$	382,535	$	679	$	384,953

Impaired loans at September 30, 2014 and 2013 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2014	(Dollars in Thousands)

Loans without a specific valuation allowance
1-4 Family Real Estate	$	142	$	142	$	-
Commercial and Multi-Family Real Estate		4,375		4,375		-
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		22		22		-
Agricultural Operating		-		-		-
Total	$	4,539	$	4,539	$	-
Loans with a specific valuation allowance
1-4 Family Real Estate	$	245	$	245	$	23
Commercial and Multi-Family Real Estate		1,280		1,280		350
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		-		-		-
Agricultural Operating		340		340		340
Total	$	1,865	$	1,865	$	713

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2013	(Dollars in Thousands)

Loans without a specific valuation allowance
1-4 Family Real Estate	$	359	$	359	$	-
Commercial and Multi-Family Real Estate		4,527		4,535		-
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		45		60		-
Agricultural Operating		-		-		-
Total	$	4,931	$	4,954	$	-
Loans with a specific valuation allowance
1-4 Family Real Estate	$	282	$	282	$	25
Commercial and Multi-Family Real Estate		2,107		2,107		404
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		-		-		-
Agricultural Operating		-		-		-
Total	$	2,389	$	2,389	$	429

Cash interest collected on impaired loans was not material during the years ended September 30, 2014 and 2013.

The following table provides the average recorded investment in impaired loans for the years ended September 30, 2014 and 2013.

	Year Ended September 30,
	2014		2013
	Average Recorded Investment		Average Recorded Investment
	(Dollars in Thousands)

1-4 Family Real Estate	$	574	$	596
Commercial and Multi-Family Real Estate		6,526		8,480
Agricultural Real Estate		-		-
Consumer		-		1
Commercial Operating		34		51
Agricultural Operating		29		-
Total	$	7,163	$	9,128

For fiscal 2014 and 2013, the Company’s TDRs (which involved forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates) are included in the table.

No TDRs were recorded during fiscal 2014 or 2013. Also, no TDRs which had been modified during the 12-month period prior to default had a payment default during fiscal 2014 or 2013.

Virtually all of the Company’s originated loans are to Iowa and South Dakota-based individuals and organizations. The Company’s purchased loans totaled $9.7 million at September 30, 2014, which were secured by properties located, as a percentage of total loans, as follows: 1% each in North Dakota and Oregon.

The Company originates and purchases commercial real estate loans. These loans are considered by management to be of somewhat greater risk of uncollectibility due to the dependency on income production. The Company’s commercial real estate loans include $40.7 million of loans secured by hotel properties and $62.3 million of multi-family properties at September 30, 2014. The Company’s commercial real estate loans include $34.8 million of loans secured by hotel properties and $52.0 million of multi-family properties at September 30, 2013. The remainder of the commercial real estate portfolio is diversified by industry. The Company’s policy for requiring collateral and guarantees varies with the creditworthiness of each borrower.

Non-accruing loans were $0.9 million and $0.7 million at September 30, 2014 and 2013, respectively. There were $54,000 and $13,000 accruing loans delinquent 90 days or more at September 30, 2014 and 2013, respectively. For the year ended September 30, 2014, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $152,000, of which none was included in interest income.