LOANS RECEIVABLE, NET

Year-end loans receivable were as follows:



	September 30, 2016			September 30, 2015
	(Dollars in Thousands)
1-4 Family Real Estate	$	162,298		$	125,021
Commercial and Multi-Family Real Estate	422,932			310,199
Agricultural Real Estate	63,612			64,316
Consumer	37,094			33,527
Commercial Operating	31,271			29,893
Agricultural Operating	37,083			43,626
Premium Finance	171,604			106,505
Total Loans Receivable	925,894			713,087

Less:
Allowance for Loan Losses	(5,635		)	(6,255		)
Net Deferred Loan Origination Fees	(789		)	(577		)
Total Loans Receivable, Net	$	919,470		$	706,255

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



Year ended September 30,	2016			2015			2014
	(Dollars in Thousands)
Beginning balance	$	6,255		$	5,397		$	3,930
Provision for loan losses	4,605			1,465			1,150
Recoveries	147			123			367
Charge offs	(5,372		)	(730		)	(50		)
Ending balance	$	5,635		$	6,255		$	5,397

Allowance for Loan Losses and Recorded Investment in loans at September 30, 2016 and 2015 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, 2016
Allowance for loan losses:
Beginning balance	$	278		$	1,187		$	163		$	20		$	28		$	3,537		$	293		$	749		$	6,255
Provision (recovery) for loan losses	408			1,369			(21		)	748			338			1,045			914			(196		)	4,605
Charge offs	(32		)	(385		)	—			(728		)	(249		)	(3,252		)	(726		)	—			(5,372		)
Recoveries	—			27			—			11			—			2			107			—			147
Ending balance	$	654		$	2,198		$	142		$	51		$	117		$	1,332		$	588		$	553		$	5,635

Ending balance: individually evaluated for impairment	10			—			—			—			—			—			—			—			10
Ending balance: collectively evaluated for impairment	644			2,198			142			51			117			1,332			588			553			5,625
Total	$	654		$	2,198		$	142		$	51		$	117		$	1,332		$	588		$	553		$	5,635

Loans:
Ending balance: individually evaluated for impairment	162			433			—			—			—			—			—			—			595
Ending balance: collectively evaluated for impairment	162,136			422,499			63,612			37,094			31,271			37,083			171,604			—			925,299
Total	$	162,298		$	422,932		$	63,612		$	37,094		$	31,271		$	37,083		$	171,604		$	—		$	925,894



	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

The asset classification of loans at September 30, 2016, and 2015, are as follows:



September 30, 2016	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	$	161,255	$	421,577	$	34,421	$	37,094	$	30,574	$	19,669	$	171,604	$	876,194
Watch	200		72		2,934		—		184		4,625		—		8,015
Special Mention	666		962		25,675		—		—		5,407		—		32,710
Substandard	177		321		582		—		513		7,382		—		8,975
Doubtful	—		—		—		—		—		—		—		—
	$	162,298	$	422,932	$	63,612	$	37,094	$	31,271	$	37,083	$	171,604	$	925,894



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

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, 2016 and 2015 are as follows:



September 30, 2016	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	$	—	$	30	$	—	$	30	$	162,185	$	83	$	162,298
Commercial and Multi-Family Real Estate	—		—		—		—		422,932		—		422,932
Agricultural Real Estate	—		—		—		—		63,612		—		63,612
Consumer	—		—		53		53		37,041		—		37,094
Commercial Operating	151		354		—		505		30,766		—		31,271
Agricultural Operating	—		—		—		—		37,083		—		37,083
Premium Finance	1,398		275		965		2,638		168,966		—		171,604
Total	$	1,549	$	659	$	1,018	$	3,226	$	922,585	$	83	$	925,894



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

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, 2016, there were no Premium Finance loans greater than 210 days past due.

Impaired loans at September 30, 2016 and 2015 are as follows:



	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2016	(Dollars in Thousands)
Loans without a specific valuation allowance
1-4 Family Real Estate	$	84	$	84	$	—
Commercial and Multi-Family Real Estate	433		433		—
Total	$	517	$	517	$	—
Loans with a specific valuation allowance
1-4 Family Real Estate	$	78	$	78	$	10
Total	$	78	$	78	$	10



	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

Cash interest collected on impaired loans was not material during the years ended September 30, 2016 and 2015.

The following table provides the average recorded investment in impaired loans for the years ended September 30, 2016 and 2015.



	Year Ended September 30,
	2016		2015
	Average Recorded Investment		Average Recorded Investment
1-4 Family Real Estate	$	144	$	238
Commercial and Multi-Family Real Estate	1,117		2,114
Commercial Operating	6		17
Agricultural Operating	2,919		3,559
Total	$	4,186	$	5,928

For fiscal 2016 and 2015, 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 2016 or 2015. Also, no TDRs which had been modified during the 12-month period prior to default had a payment default during fiscal 2016 or 2015.

Virtually all of the Company’s originated loans are to Iowa- and South Dakota-based individuals and organizations. The Company’s purchased loans totaled $6.4 million at September 30, 2016, which were secured by properties located, as a percentage of total loans, as follows: less than 1% combined in Oregon, North Dakota, North Carolina, 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 $65.4 million of loans secured by hotel properties and $112.6 million of multi-family properties at September 30, 2016. 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 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 $83,000 and $6.1 million at September 30, 2016 and 2015, respectively. There were $1.0 million and $1.7 million accruing loans delinquent 90 days or more at September 30, 2016 and 2015, respectively. For the year ended September 30, 2016, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $2,000, of which none was included in interest income.