NOTE 3. LOANS RECEIVABLE, NET

Year-end loans receivable were as follows:

	September 30, 2015			September 30, 2014
	(Dollars in Thousands)

1-4 Family Real Estate	$	125,021		$	116,395
Commercial and Multi-Family Real Estate		310,199			224,302
Agricultural Real Estate		64,316			56,071
Consumer		33,527			29,329
Commercial Operating		29,893			30,846
Agricultural Operating		43,626			42,258
Premium Finance		106,505			-
Total Loans Receivable		713,087			499,201

Less:
Allowance for Loan Losses		(6,255	)		(5,397	)
Net Deferred Loan Origination Fees		(577	)		(797	)
Total Loans Receivable, Net	$	706,255		$	493,007

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

Year ended September 30,	2015			2014			2013
	(Dollars in Thousands)

Beginning balance	$	5,397		$	3,930		$	3,971
Provision (recovery) for loan losses		1,465			1,150			-
Recoveries		123			367			179
Charge offs		(730	)		(50	)		(220	)
Ending balance	$	6,255		$	5,397		$	3,930

Allowance for Loan Losses and Recorded Investment in loans at September 30, 2015 and 2014 are as follows:

	1-4 Family Real Estate			Commercial and Multi-Family Real Estate			Agricultural Real Estate			Consumer			Commercial Operating			Agricultural Operating			Premium Finance			Unallocated			Total
	(Dollars in Thousands)
Year Ended September 30, 2015

Allowance for loan losses:
Beginning balance	$	552		$	1,575		$	263		$	78		$	93		$	719		$	-		$	2,117		$	5,397
Provision (recovery) for loan losses		(229	)		(180	)		(100	)		(58	)		(68	)		3,004			464			(1,368	)		1,465
Charge offs		(45	)		(214	)		-			-			-			(186	)		(285	)		-			(730	)
Recoveries		-			6			-			-			3			-			114			-			123
Ending balance	$	278		$	1,187		$	163		$	20		$	28		$	3,537		$	293		$	749		$	6,255

Ending balance: individually evaluated for impairment		-			241			-			-			-			3,252			-			-			3,493
Ending balance: collectively evaluated for impairment		278			946			163			20			28			285			293			749			2,762
Total	$	278		$	1,187		$	163		$	20		$	28		$	3,537		$	293		$	749		$	6,255

Loans:
Ending balance: individually evaluated for impairment		121			1,350			-			-			11			5,132			-			-			6,614
Ending balance: collectively evaluated for impairment		124,900			308,849			64,316			33,527			29,882			38,494			106,505			-			706,473
Total	$	125,021		$	310,199		$	64,316		$	33,527		$	29,893		$	43,626		$	106,505		$	-		$	713,087

	1-4 Family Real Estate		Commercial and Multi-Family Real Estate			Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating			Premium Finance		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

The asset classification of loans at September 30, 2015, and 2014, are as follows:

September 30, 2015	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Premium Finance		Total
	(Dollars in Thousands)

Pass	$	124,775	$	307,876	$	35,106	$	33,527	$	29,052	$	29,336	$	106,505	$	666,177
Watch		212		1,419		26,703		-		712		1,079		-		30,125
Special Mention		10		-		877		-		-		4,014		-		4,901
Substandard		24		904		1,630		-		129		9,197		-		11,884
Doubtful		-		-		-		-		-		-		-		-
	$	125,021	$	310,199	$	64,316	$	33,527	$	29,893	$	43,626	$	106,505	$	713,087

September 30, 2014	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Premium Finance		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

Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.” 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.

The adverse classifications are as follows:

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 for Retail Bank or 210 days or more for Premium Finance 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 reversed against current income.

Past due loans at September 30, 2015 and 2014 are as follows:

September 30, 2015	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	$	142	$	-	$	-	$	142	$	124,855	$	24	$	125,021
Commercial and Multi-Family Real Estate		-		-		-		-		309,295		904		310,199
Agricultural Real Estate		-		-		-		-		64,316		-		64,316
Consumer		152		-		13		165		33,362		-		33,527
Commercial Operating		-		-		-		-		29,893		-		29,893
Agricultural Operating		-		-		-		-		38,494		5,132		43,626
Premium Finance		702		362		1,728		2,792		103,713		-		106,505
Total	$	996	$	362	$	1,741	$	3,099	$	703,928	$	6,060	$	713,087

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

When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 210 days or more for Premium Finance loans and 90 days or more for other loan categories. As of September 30, 2015, there were no Premium Finance loans greater than 210 days past due.

Impaired loans at September 30, 2015 and 2014 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2015	(Dollars in Thousands)

Loans without a specific valuation allowance
1-4 Family Real Estate	$	121	$	121	$	-
Commercial and Multi-Family Real Estate		446		446		-
Commercial Operating		11		11		-
Total	$	578	$	578	$	-
Loans with a specific valuation allowance
1-4 Family Real Estate	$	-	$	-	$	-
Commercial and Multi-Family Real Estate		904		904		241
Agricultural Operating		5,132		5,282		3,252
Total	$	6,036	$	6,186	$	3,493

	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		-
Commercial Operating		22		22		-
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 Operating		340		340		340
Total	$	1,865	$	1,865	$	713

Cash interest collected on impaired loans was not material during the years ended September 30, 2015 and 2014.

The following table provides the average recorded investment in impaired loans for the years ended September 30, 2015 and 2014.

	Year Ended September 30,
	2015		2014
	Average Recorded Investment		Average Recorded Investment


1-4 Family Real Estate	$	238	$	574
Commercial and Multi-Family Real Estate		2,114		6,526
Commercial Operating		17		34
Agricultural Operating		3,559		29
Total	$	5,928	$	7,163

For fiscal 2015 and 2014, 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 above.

No TDRs were recorded during fiscal 2015 or 2014. Also, no TDRs which had been modified during the 12-month period prior to default had a payment default during fiscal 2015 or 2014.

Virtually all of the Company’s originated loans are to Iowa- and South Dakota-based individuals and organizations. The Company’s purchased loans totaled $8.1 million at September 30, 2015, which were secured by properties located, as a percentage of total loans, as follows: 1% combined in Oregon and North Dakota and less than 1% in Minnesota, North Carolina, South Dakota and Connecticut.

The Company originates and purchases commercial real estate loans. These loans are considered by management to be of somewhat greater risk of not being collected due to the dependency on income production. The Company’s commercial real estate loans include $51.1 million of loans secured by hotel properties and $99.6 million of multi-family properties at September 30, 2015. 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 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 $6.1 million and $0.9 million at September 30, 2015 and 2014, respectively. There were $1.7 million and $0.1 million accruing loans delinquent 90 days or more at September 30, 2015 and 2014, respectively. For the year ended September 30, 2015, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $0.9 million, of which none was included in interest income.