NOTE 3. LOANS RECEIVABLE

Loans receivable consisted of the following:

	March 31,			December 31,
	2016			2015
	(In Thousands)
First mortgage loans:
Residential mortgage (1-4 family)	$	113,364		$	118,133
Commercial real estate		194,479			167,930
Real estate construction		15,673			22,958

Other loans:
Home equity		45,404			45,345
Consumer		14,229			14,641
Commercial		40,614			39,072

Total		423,763			408,079

Allowance for loan losses		(3,940	)		(3,550	)
Deferred loan fees, net		(882	)		(795	)
Total loans, net	$	418,941		$	403,734

Within the commercial real estate loan category above, $11,987,000 and $12,117,000 was guaranteed by the United States Department of Agriculture Rural Development, at March 31, 2016 and December 31, 2015, respectively. In addition, within the commercial loan category above, $1,878,000 and $1,917,000 were in loans originated through a syndication program where the business resides outside of Montana, at March 31, 2016, and December 31, 2015, respectively.

The following table includes information regarding nonperforming assets.

	March 31,			December 31,
	2016			2015
	(Dollars in Thousands)

Non-accrual loans	$	1,580		$	2,030
Accruing loans delinquent 90 days or more		710			472
Restructured loans, net		45			46
Total nonperforming loans		2,335			2,548
Real estate owned and other repossessed assets, net		606			595
Total nonperforming assets	$	2,941		$	3,143

Total non-performing assets as a percentage of total assets		0.46	%		0.50	%

Allowance for loan losses	$	3,940		$	3,550

Percent of allowance for loan losses to non-performing loans		168.74	%		139.32	%

Percent of allowance for loan losses to non-performing assets		133.97	%		112.95	%

Allowance for loan losses activity was as follows:

	Three Months Ended
	March 31, 2016
	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, 2016	$	911	$	1,593	$	184	$	342		$	66		$	454		$	3,550
Charge-offs		-		-		-		(7	)		(24	)		(32	)		(63	)
Recoveries		-		-		-		-			3			-			3
Provision		70		142		60		30			120			28			450
Ending balance, March 31, 2016	$	981	$	1,735	$	244	$	365		$	165		$	450		$	3,940

Ending balance, March 31, 2016 allocated to
loans individually evaluated for impairment	$	-	$	-	$	-	$	-		$	76		$	5		$	81

Ending balance, March 31, 2016 allocated to
loans collectively evaluated for impairment	$	981	$	1,735	$	244	$	365		$	89		$	445		$	3,859

Loans receivable:
Ending balance, March 31, 2016	$	113,364	$	194,479	$	15,673	$	45,404		$	14,229		$	40,614		$	423,763

Ending balance, March 31, 2016 of loans
individually evaluated for impairment	$	605	$	658	$	-	$	265		$	92		$	5		$	1,625

Ending balance, March 31, 2016 of loans
collectively evaluated for impairment	$	112,759	$	193,821	$	15,673	$	45,139		$	14,137		$	40,609		$	422,138

	Three Months Ended
	March 31, 2015
	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	)		-		-		-		(11	)		-		(148	)
Recoveries		-			-		-		-		1			-		1
Provision		98			128		5		36		14			41		322
Ending balance, March 31, 2015	$	645		$	1,226	$	40	$	306	$	50		$	358	$	2,625

Ending balance, March 31, 2015 allocated to
loans individually evaluated for impairment	$	-		$	-	$	-	$	-	$	5		$	-	$	5

Ending balance, March 31, 2015 allocated to
loans collectively evaluated for impairment	$	645		$	1,226	$	40	$	306	$	45		$	358	$	2,620

Loans receivable:
Ending balance, March 31, 2015	$	105,428		$	130,374	$	10,313	$	40,312	$	13,664		$	36,877	$	336,968

Ending balance, March 31, 2015 of loans
individually evaluated for impairment	$	648		$	-	$	-	$	224	$	53		$	566	$	1,491

Ending balance, March 31, 2015 of loans
collectively evaluated for impairment	$	104,780		$	130,374	$	10,313	$	40,088	$	13,611		$	36,311	$	335,477

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

Loans rated Pass – 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 –Loans that 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 – Loans that are inadequately protected by the current net worth and paying capacity of the obligor of 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 – Loans that 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 – Loans that 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 affected in the future.

On an annual basis, or more often if needed, the Company formally reviews the ratings of all commercial 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.

Internal classification of the loan portfolio was as follows:

	March 31, 2016
	Residential
	Mortgage		Commercial		Real Estate		Home
	(1-4 Family)		Real Estate		Construction		Equity		Consumer		Commercial		Total
	(In Thousands)
Grade:
Pass	$	111,955	$	193,438	$	14,875	$	45,035	$	14,118	$	40,202	$	419,623
Special mention		-		-		-		-		-		46		46
Substandard		1,409		1,041		798		287		32		294		3,861
Doubtful		-		-		-		82		3		67		152
Loss		-		-		-		-		76		5		81
Total	$	113,364	$	194,479	$	15,673	$	45,404	$	14,229	$	40,614	$	423,763

Credit risk profile based on payment activity
Performing	$	112,538	$	193,817	$	15,409	$	45,059	$	14,137	$	40,468	$	421,428
Restructured loans		-		-		-		45		-		-		45
Nonperforming		826		662		264		300		92		146		2,290
Total	$	113,364	$	194,479	$	15,673	$	45,404	$	14,229	$	40,614	$	423,763

	December 31, 2015
	Residential
	Mortgage		Commercial				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

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

	March 31, 2016
											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)	$	1,988	$	826	$	2,814	$	110,550	$	113,364	$	221
Commercial real estate		869		662		1,531		192,948		194,479		4
Real estate construction		1,183		264		1,447		14,226		15,673		264
Home equity		474		300		774		44,630		45,404		80
Consumer		205		92		297		13,932		14,229		-
Commercial		445		146		591		40,023		40,614		141
Total	$	5,164	$	2,290	$	7,454	$	416,309	$	423,763	$	710

	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

The following tables include information regarding impaired loans.

	March 31, 2016
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	605	$	607	$	-
Commercial real estate		658		667		-
Construction		-		-		-
Home equity		265		299		-
Consumer		16		16		-
Commercial		-		-		-

With a related allowance:
Residential mortgage (1-4 family)		-		-		-
Commercial real estate		-		-		-
Construction		-		-		-
Home equity		-		-		-
Consumer		76		76		76
Commercial		5		5		5

Total:
Residential mortgage (1-4 family)		605		607		-
Commercial real estate		658		667		-
Construction		-		-		-
Home equity		265		299		-
Consumer		92		92		76
Commercial		5		5		5
Total	$	1,625	$	1,670	$	81

	December 31, 2015
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)
With no related allowance:
Residential mortgage (1-4 family)	$	730	$	730	$	-
Commercial real estate		667		667		-
Construction		-		-		-
Home equity		200		234		-
Consumer		134		134		-
Commercial		297		297		-

With a related allowance:
Residential mortgage (1-4 family)		-		-		-
Commercial real estate		-		-		-
Construction		-		-		-
Home equity		7		7		7
Consumer		11		11		11
Commercial		30		30		30

Total:
Residential mortgage (1-4 family)		730		730		-
Commercial real estate		667		667		-
Construction		-		-		-
Home equity		207		241		7
Consumer		145		145		11
Commercial		327		327		30
Total	$	2,076	$	2,110	$	48

	Three Months Ended
	March 31,
	2016		2015
	Average Recorded Investment
	(In Thousands)

Residential mortgage (1-4 family)	$	668	$	1,060
Commercial real estate		662		-
Construction		-		-
Home equity		236		276
Consumer		119		54
Commercial		166		398
Total	$	1,851	$	1,788

Interest income recognized on impaired loans for the three months ended March 31, 2016 and 2015 are considered insignificant.