NOTE 5: Loans

Loans receivable consisted of the following:

	December 31,
	2015			2014
	(In Thousands)
First mortgage loans:
Residential mortgage (1-4 family)	$	118,133		$	103,420
Commercial real estate		167,930			116,105
Real estate construction		22,958			10,149
Other loans:
Home equity		45,345			40,123
Consumer		14,641			13,827
Commercial		39,072			35,582
Total		408,079			319,206
Allowance for loan losses		(3,550	)		(2,450	)
Deferred loan fees, net		(795	)		(486	)
Total loans, net	$	403,734		$	316,270

Within the commercial real estate loan category above, $12,117,000 and $12,612,000 was guaranteed by the United States Department of Agriculture Rural Development at December 31, 2015 and 2014, respectively. In addition, within the commercial loan category above, $1,917,000 and $3,704,000 were in loans originated through a syndication program where the business resides outside of Montana at December 31, 2015 and 2014, respectively.

The following table includes information regarding nonperforming assets.

	December 31,
	2015			2014
	(Dollars in Thousands)

Non-accrual loans	$	2,030		$	962
Accruing loans delinquent 90 days or more		472			-
Restructured loans, net		46			48
Total nonperforming loans		2,548			1,010
Real estate owned and other repossessed assets, net		595			637
Total nonperforming assets	$	3,143		$	1,647

Total nonperforming assets as a percentage of total assets		0.50	%		0.29	%

Allowance for loan losses	$	3,550		$	2,450

Percent of allowance for loan losses to nonperforming loans		139.32	%		242.57	%

Percent of allowance for loan losses to nonperforming assets		112.95	%		148.76	%

Allowance for loan losses activity was as follows:

	Residential
	Mortgage			Commercial		Real Estate		Home
	(1-4 Family)			Real Estate		Construction		Equity		Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, January 1, 2015	$	684		$	1,098	$	35	$	270	$	46		$	317		$	2,450
Charge-offs		(137	)		-		-		-		(61	)		(25	)		(223	)
Recoveries		-			-		-		1		18			1			20
Provision		364			495		149		71		63			161			1,303
Ending balance, December 31, 2015	$	911		$	1,593	$	184	$	342	$	66		$	454		$	3,550

Ending balance, December 31, 2015 allocated to
loans individually evaluated for impairment	$	-		$	-	$	-	$	7	$	11		$	30		$	48

Ending balance, December 31, 2015 allocated to
loans collectively evaluated for impairment	$	911		$	1,593	$	184	$	335	$	55		$	424		$	3,502

Loans receivable:
Ending balance, December 31, 2015	$	118,133		$	167,930	$	22,958	$	45,345	$	14,641		$	39,072		$	408,079

Ending balance, December 31, 2015 of loans
individually evaluated for impairment	$	730		$	667	$	-	$	207	$	145		$	327		$	2,076

Ending balance, December 31, 2015 of loans
collectively evaluated for impairment	$	117,403		$	167,263	$	22,958	$	45,138	$	14,496		$	38,745		$	406,003

	Residential
	Mortgage		Commercial		Real Estate		Home
	(1-4 Family)		Real Estate		Construction		Equity			Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, July 1, 2014	$	485	$	974	$	30	$	299		$	49		$	288		$	2,125
Charge-offs		-		-		-		(159	)		(65	)		(24	)		(248	)
Recoveries		-		31		-		-			27			-			58
Provision		199		93		5		130			35			53			515
Ending balance, December 31, 2014	$	684	$	1,098	$	35	$	270		$	46		$	317		$	2,450

Ending balance, December 31, 2014 allocated to
loans individually evaluated for impairment	$	140	$	-	$	-	$	-		$	7		$	-		$	147

Ending balance, December 31, 2014 allocated to
loans collectively evaluated for impairment	$	544	$	1,098	$	35	$	270		$	39		$	317		$	2,303

Loans receivable:
Ending balance, December 31, 2014	$	103,420	$	116,105	$	10,149	$	40,123		$	13,827		$	35,582		$	319,206

Ending balance, December 31, 2014 of loans
individually evaluated for impairment	$	1,471	$	-	$	-	$	328		$	55		$	229		$	2,083

Ending balance, December 31, 2014 of loans
collectively evaluated for impairment	$	101,949	$	116,105	$	10,149	$	39,795		$	13,772		$	35,353		$	317,123

	Residential
	Mortgage		Commercial			Real Estate		Home
	(1-4 Family)		Real Estate			Construction		Equity			Consumer			Commercial			Total
	(In Thousands)
Allowance for loan losses:
Beginning balance, July 1, 2013	$	423	$	952		$	15	$	290		$	40		$	280		$	2,000
Charge-offs		-		(199	)		-		(73	)		(88	)		(144	)		(504	)
Recoveries		-		17			-		-			4			-			21
Provision		62		204			15		82			93			152			608
Ending balance, June 30, 2014	$	485	$	974		$	30	$	299		$	49		$	288		$	2,125

Ending balance, June 30, 2014 allocated to
loans individually evaluated for impairment	$	-	$	-		$	-	$	31		$	20		$	15		$	66

Ending balance, June 30, 2014 allocated to
loans collectively evaluated for impairment	$	485	$	974		$	30	$	268		$	29		$	273		$	2,059

Loans receivable:
Ending balance, June 30, 2014	$	93,005	$	91,125		$	8,454	$	37,866		$	12,964		$	33,115		$	276,529

Ending balance, June 30, 2014 of loans
individually evaluated for impairment	$	660	$	280		$	-	$	288		$	101		$	315		$	1,644

Ending balance, June 30, 2014 of loans
collectively evaluated for impairment	$	92,345	$	90,845		$	8,454	$	37,578		$	12,863		$	32,800		$	274,885

Internal classification of the loan portfolio was as follows:

	December 31, 2015
	Residential
	Mortgage		Commercial		Real Estate		Home
	(1-4 Family)		Real Estate		Construction		Equity		Consumer		Commercial		Total
	(In Thousands)
Grade:
Pass	$	116,711	$	167,263	$	22,176	$	45,100	$	14,486	$	38,675	$	404,411
Special mention		-		-		-		-		-		-		-
Substandard		1,422		667		782		156		140		367		3,534
Doubtful		-		-		-		82		4		-		86
Loss		-		-		-		7		11		30		48
Total	$	118,133	$	167,930	$	22,958	$	45,345	$	14,641	$	39,072	$	408,079

Credit risk profile based on payment activity
Performing	$	117,182	$	167,259	$	22,711	$	45,138	$	14,496	$	38,745	$	405,531
Restructured loans		-		-		-		46		-		-		46
Nonperforming		951		671		247		161		145		327		2,502
Total	$	118,133	$	167,930	$	22,958	$	45,345	$	14,641	$	39,072	$	408,079

	December 31, 2014
	Residential
	Mortgage		Commercial		Real Estate		Home
	(1-4 Family)		Real Estate		Construction		Equity		Consumer		Commercial		Total
	(In Thousands)
Grade:
Pass	$	101,949	$	116,105	$	10,149	$	39,795	$	13,772	$	35,353	$	317,123
Special mention		-		-		-		-		-		-		-
Substandard		1,331		-		-		328		41		229		1,929
Doubtful		-		-		-		-		7		-		7
Loss		140		-		-		-		7		-		147
Total	$	103,420	$	116,105	$	10,149	$	40,123	$	13,827	$	35,582	$	319,206

Credit risk profile based on payment activity
Performing	$	102,599	$	116,105	$	10,149	$	40,027	$	13,811	$	35,505	$	318,196
Restructured loans		-		-		-		48		-		-		48
Nonperforming		821		-		-		48		16		77		962
Total	$	103,420	$	116,105	$	10,149	$	40,123	$	13,827	$	35,582	$	319,206

The Company utilizes a 5 point internal loan rating system, largely based on regulatory classifications, for residential mortgage (1-4 family), commercial real estate, real estate construction, home equity, consumer and commercial loans as follows:

Loans rated Pass: these are loans that are considered to be protected by the current net worth and paying capacity of the obligor, or by the value of the asset or the underlying collateral.

Loans rated Special Mention: these loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.

Loans rated Substandard: these loans are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans rated Doubtful: these loans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans rated Loss: these loans are considered uncollectible and of such little value that their continuance as assets without establishment of a specific reserve is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather, that it is not practical or desirable to defer writing off a basically worthless asset even though practical recovery may be effected in the future.

On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial real estate, real estate construction and commercial business loans that have a principal balance of $750,000 or more. Quarterly, the Company reviews the rating of any consumer loan, broadly defined, that is delinquent 90 days or more. Likewise, quarterly, the Company reviews the rating of any commercial loan, broadly defined, that is delinquent 60 days or more. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following tables include information regarding impaired loans.

	December 31, 2015
			Unpaid				Interest		Average
	Recorded		Principal		Related		Income		Recorded
	Investment		Balance		Allowance		Recognized		Investment
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	730	$	730	$	-	$	-	$	690
Commercial real estate		667		667		-		-		334
Real estate construction		-		-		-		-		-
Home equity		200		234		-		1		264
Consumer		134		134		-		-		91
Commercial		297		297		-		-		263

With a related allowance:
Residential mortgage (1-4 family)		-		-		-		-		411
Commercial real estate		-		-		-		-		-
Real estate construction		-		-		-		-		-
Home equity		7		7		7		-		3
Consumer		11		11		11		-		9
Commercial		30		30		30		-		15

Total:
Residential mortgage (1-4 family)		730		730		-		-		1,101
Commercial real estate		667		667		-		-		334
Real estate construction		-		-		-		-		-
Home equity		207		241		7		1		267
Consumer		145		145		11		-		100
Commercial		327		327		30		-		278
Total	$	2,076	$	2,110	$	48	$	1	$	2,080

	December 31, 2014
			Unpaid				Interest		Average
	Recorded		Principal		Related		Income		Recorded
	Investment		Balance		Allowance		Recognized		Investment
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	650	$	650	$	-	$	14	$	655
Commercial real estate		-		-		-		-		140
Real estate construction		-		-		-		2		-
Home equity		328		392		-		6		293
Consumer		48		82		-		2		65
Commercial		229		259		-		9		265

With a related allowance:
Residential mortgage (1-4 family)		821		821		140		-		411
Commercial real estate		-		-		-		-		-
Real estate construction		-		-		-		-		-
Home equity		-		-		-		-		16
Consumer		7		7		7		-		14
Commercial		-		-		-		-		8

Total:
Residential mortgage (1-4 family)		1,471		1,471		140		14		1,066
Commercial real estate		-		-		-		-		140
Real estate construction		-		-		-		2		-
Home equity		328		392		-		6		309
Consumer		55		89		7		2		79
Commercial		229		259		-		9		273
Total	$	2,083	$	2,211	$	147	$	33	$	1,867

The following tables include information regarding delinquencies within the loan portfolio.

	December 31, 2015
											Recorded
			90 Days								Investment
	30-89 Days		and		Total				Total		>90 Days and
	Past Due		Greater		Past Due		Current		Loans		Still Accruing
	(In Thousands)
Residential mortgage (1-4 family)	$	1,163	$	951	$	2,114	$	116,019	$	118,133	$	221
Commercial real estate		177		671		848		167,082		167,930		4
Real estate construction		662		247		909		22,049		22,958		247
Home equity		319		161		480		44,865		45,345		-
Consumer		184		145		329		14,312		14,641		-
Commercial		173		327		500		38,572		39,072		-
Total	$	2,678	$	2,502	$	5,180	$	402,899	$	408,079	$	472

	December 31, 2014
											Recorded
			90 Days								Investment
	30-89 Days		and		Total				Total		>90 Days and
	Past Due		Greater		Past Due		Current		Loans		Still Accruing
	(In Thousands)
Residential mortgage (1-4 family)	$	203	$	821	$	1,024	$	102,396	$	103,420	$	-
Commercial real estate		131		-		131		115,974		116,105		-
Real estate construction		-		-		-		10,149		10,149		-
Home equity		303		48		351		39,772		40,123		-
Consumer		258		16		274		13,553		13,827		-
Commercial		331		77		408		35,174		35,582		-
Total	$	1,226	$	962	$	2,188	$	317,018	$	319,206	$	-

Interest income not accrued on these loans and cash interest income was immaterial for CY 2015, the six months ended December 31, 2014 and FY 2014. The allowance for loan losses on non-accrual loans as of December 31, 2015 and 2014 was $48,000 and $147,000, respectively. There were $2,076,000 ($2,028,000 net of loss reserves of $48,000) of loans considered impaired at December 31, 2015. There were $2,083,000 ($1,936,000 net of loss reserves of $147,000) of loans considered impaired at December 31, 2014.

Loans are granted to directors and officers of the Company in the ordinary course of business. Such loans are made in accordance with policies established for all loans of the Company, except that directors, officers and employees may be eligible to receive discounts on loan origination costs.

Loans receivable (including loans sold and serviced for others) from directors and senior officers and their related parties were as follows:

		(In Thousands)
Balance at July 1, 2013	$	7,705
Principal additions		166
Principal payments		(695)
Balance at June 30, 2014	$	7,176
Principal additions		579
Principal payments		(320)
Balance at December 31, 2014	$	7,435
Principal additions		1,073
Principal payments		(6,132)
Balance at December 31, 2015	$	2,376

Principal payments for CY 2015 include $5,849,000 related to a previously affiliated entity loan. See Note 19: Related Party Transactions for further information.

	December 31,
	2015		2014
	(In Thousands)

Loans serviced, for the benefit of others,
for directors, senior officers and
their related parties	$	1,220	$	5,714

	Year Ended		Six Months Ended		Year Ended
	December 31,		December 31,		June 30,
	2015		2014		2014
	(In Thousands)

Interest income from loans owned
for directors, senior officers and
their related parties	$	14	$	42	$	86