Sample State Bank

LOAN POLICY

Board of Directors Approved: June 11, 2014

LOAN POLICY

I. PURPOSE

The Board of Directors of Sample State Bank believes that sound loans are a
desirable and profitable means of employing funds available for investment.
The board recognizes that lending money necessarily includes reasonable
business risks and thus formulates this policy to provide guidance and to
control the quality of these major earning assets. The guidelines defined by
this policy serve as a basis for sound credit decisions by establishing
systematic underwriting, documentation and approval standards.

Loan policy comes from the Board of Directors. In practice, loan policy
evolves from the officers of the Bank, is drafted and discussed by senior
management, is submitted to the Board of Directors for approval, and
becomes policy after this approval is received or recommended changes by
the Board are implemented in the policy. Through this policy statement the
Board of Directors delegates most of the lending responsibilities to the
Bank’s President and the Loan Committee.

Although adherence to this policy is expected, it is understood that, on

occasion, exceptions may be necessary. Whenever such deviations occur,
they should be documented in the credit file with appropriate justification
and proper approval obtained. Additionally, policy exceptions must be
tracked and presented to the Board at their next scheduled meeting.

Management is expected to include a report in each month’s Board of

Director package which explains any loans originated in the prior month
outside of the Bank’s normal underwriting guidelines. This report should
state the name of the borrower, loan number, name of the loan officer, loan
purpose, original amount funded, and description of the policy exception and
what was done to mitigate the additional risk assumed by the Bank.
Additionally, management is also expected to include a report in each
monthly Board package that lists the complete list of outstanding loans with
policy exceptions and a ratio of the dollar amount of outstanding loans with
policy exceptions to the total stockholder’s equity on the Bank’s balance
sheet at month end. The intent of the Board is to ensure this ratio stays 15%
at any one time.

A. Basic Guidelines for the Loan Portfolio

To bring the Bank’s loan portfolio into line with stated policies, the Bank
will follow the guidelines listed below:

 Keep past due and nonaccrual loans to a minimum by applying

aggressive collection procedures to all problem loans.

 The credit committee will meet on a weekly basis to review new and
renewing credits, Bank overdrafts, past-due and non-accrual loans and

2
 the credit presentations of any new and renewing credits.

 Precede all loan decisions with sound credit analysis.

 Take loan documentation seriously.

 Aggressively seek good loan relationships; the Bank believes that a

good loan relationship includes a good deposit relationship, so loan
officers should strive to build a deposit relationship, as well as cross
selling other bank services, with each loan customer.

Our philosophy as a Bank to lending in general changes from time to time.

While this policy establishes our basic approach and guidelines, our actual
lending activities should always be dependent upon the financial condition
of our Bank, its expertise, and size of our lending staff, and market
conditions.

B. External Policy Goals

The Bank’s reputation, its image, and community’s high level of public
confidence in the Bank are extremely important, and the Bank will do
whatever is necessary to maintain its image. Each loan officer is
responsible for doing everything possible to help maintain the Bank’s
reputation as a friendly and professional Bank that routinely delivers
quality service to its customers and the communities it serves.

C. Internal Policy Goals

The Bank’s primary internal objectives are to establish a sound asset

portfolio. The Bank’s objectives will be constrained somewhat by liquidity,
flexibility, and risk considerations and will be pursued, mindful of the
constraints, by exercising tight controls on noninterest expenses and close
management of the total asset/liability mix. The funds remaining after
the Bank achieves its desired liquidity and investment positions will be
used to make sound consumer, commercial, agricultural, and real estate
loans. These loans will be made on a nondiscriminatory basis.

D. Confidentiality

The Bank considers the confidentiality and privacy of all customer

information to be of prime importance. The cornerstone of this institution
is the trust, respect, and confidence of its customers. To promote that
trust, all information regarding the personal, business, and financial affairs
of customers will be kept strictly confidential.

II. ADMINISTRATION

3
 A. Loan Management

Although ultimate authority for all lending activities is vested in the Board
of Directors, the Board hereby delegates the administration of these
responsibilities to the Loan committee.

The President manages the day to day functions of the Bank’s lending
functions including implementing loan policy and monitoring adherence to
the policy. The Loan Committee is responsible for assuring that all loans
made by the Bank meet appropriate federal and state legal requirements.
Loan Officers Committee (also known as the Credit
Committee)

Credit committee membership and responsibilities are outlined in Exhibit

A.

B. Loan Officer Responsibilities

Each loan officer of the Bank is responsible for the maintenance of credit
files and documentation sufficient to support the credit and perfect the
Bank’s collateral position for the lending relationships assigned to them.

It is expected that each loan officer will periodically review and monitor
the disbursement and repayment plan, documentation, and general
status of each loan he/she services. If substantial deviations in the
disbursement or repayment plan are noted, or there are substantial
changes to the operation, or problems are detected which affect the
quality of the credit in a negative manner, the lending representative
should determine the cause and develop a plan for correction. Loan
officer is responsible for creating a Problem Loan Detail Report in
FastGrade. These Problem Loan Detail reports will be prepared monthly
by the loan officer and will be presented to the Bank’s Board of Directors
at each Board meeting until they are paid in full, charged off, or the
circumstances of the loan have improved to the point that the loan is not
longer considered a classified credit.

III. EXCEPTIONS

A. Request for Exception to Loan Policy

All exceptions to loan policy shall be submitted by presentation in FastGrade

to the Loan Committee to be presented at the next Board of Directors
meeting.

The request shall set forth:

1. The reason for the exception.

2. The length of time the exception will exist.

4
 3. The officer's recommendation for handling the exception and
rationale for granting the exception.

A list of exceptions to be tracked can be found in the FastGrade system.

FAIR LENDING POLICY STATEMENT

I. PURPOSE

It is the policy of Sample State Bank to adhere to both the letter and the
spirit of the laws pertaining to fair lending. Fair lending is an integral part of
our financial institution’s plan. We, as the Board of Directors, through this
policy statement take specific action to ensure that negative perceptions,
attitudes, and prejudices do not systematically affect the fair distribution of
credit by our Bank.

II. GUIDELINES

The Board of Directors of this Bank directs management to make sound loans
to all qualified applicants regardless of race, color, religion, national origin,
sex, marital status, age (provided that the applicant has the capacity to
contract), the receipt of public assistance, the borrower’s good faith exercise
of rights under the Consumer Credit Protection Act, familial status (defined
as children under the age of 18 living with a parent or legal custodian,
pregnant women and people securing custody of children under 18) and the
existence of any handicap (collectively referred to as prohibited basis). As
part of this policy, the bank should comply with all of the requirements of the
Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA) and all other
federal and state statutes promoting fair lending.

III. ADMINISTRATION

A. This policy should be disseminated to all loan personnel and to any other
individuals who might be in a position to talk with any prospective loan
applicants, receive loan applications, or make credit decisions.

B. General bank staff are reminded of our Bank’s commitment to fair lending
by:

1. Establishing staff training programs; and

2. Referring to the “Equal Credit Opportunity Act Policy and Procedures”

when training new employees.

C. Providing for the placement of “Equal Housing Lender” posters.

D. All Bank advertising complies with Fair Lending regulations.

5
 E. While the Board of Directors and Bank management have the
responsibility to ensure fair lending for the bank, all Bank personnel are
expected to accept personal responsibility for implementing the
requirements of this policy into their daily job assignments.

GENERAL LENDING GUIDELINES

I. LAWS

Sample State Bank considers compliance to governing laws, rules, and

regulations to be of the highest priority. Therefore, it is the policy of this
bank to comply with both the spirit and the letter of all applicable laws, rules,
and regulations.

II. GEOGRAPHIC LENDING AREA

A. The primary trade area served by Sample State Bank will generally
consist of the following counties that are part of the Bank’s CRA area
including Crawford, Carroll, and Sac counties all within the state of Iowa.

B. The secondary trade area includes adjacent counties.

C. Occasionally, the bank extends credit to borrowers who do not reside in

our established market area.

Loans to borrowers or individuals residing outside of the State of Iowa

shall require the approval of the Bank’s Loan Committee prior to funding
or the Bank legally committing to the loan.
III. LOAN PRICING

Loan officers are provided a loan-pricing matrix to be used as a guideline.

Individual loan pricing decisions must include careful considerations to risk,
existing and potential overall relationship between the bank and the
borrower, operating cost for processing and administration, and competition.

The Bank’s Internal Rate Sheet is incorporated into the FastGrade system
and should be utilized by officer’s to determine loan pricing. Any exceptions
to the internal pricing sheet will be approved by the Bank’s President.

IV. TYPES OF CREDIT AVAILABLE

A. Consumer/Installment Loans

 Loans for new and used vehicles/Auto equity

 Personal/household loans
 Home equity and home improvement loans
 Recreational vehicle loans
6
  Unsecured loans
 Secured deposit loans

B. Real Estate Loans

Residential:

The bank should generate residential real estate loans for its own
portfolio. In addition, the Bank has established secondary market
outlets, giving us the ability to offer competitive, long-term, and fixed-
rate mortgages.

Commercial:

Commercial Real Estate (CRE) loan underwriting will be monitored by

type as defined by:
A. Owner occupied or
B. Investment.

Underwriting standards for Investment CRE loans predicate

compensating underwriting criteria.
The Bank prefers that CRE loans be located locally so the institution
can better monitor the loan and the physical condition and estimated
value of the collateral. Non-local area projects will be considered when
the owners or developers are existing Bank customers.
Consideration will be given to loans located outside of the Bank’s
normal trade territory providing the Bank’s own analysis of the credit
and due diligence of the lead lender is performed and found to be
satisfactory to management. In addition, the underwriting standards
(Loan to Value, Debt Service Coverage Ratio, interest rate, occupancy,
site visits, financial strength, etc.) should be compensatory with the
lack of proximity controls encountered by the location of the project.
Sub-classifications and controls may be implemented as economic
factors and conditions dictate.

Underwriting Standards:

File documentation and analysis standards for CRE loans are as defined
in Section VIII, Loan Criteria and Terms, and the Credit Criteria section
of Appendix C.

Loan to Value:

Refer to maturity guidelines as addressed in Appendix C.

Loan approval authorities by position are listed in Exhibit A.

7
Loan to Value Ratios should not exceed the guidelines established in
Appendix C.

Borrowers are required to provide their down payment prior to the

Bank extending loan advances.

Debt Service Coverage Levels:

The minimum target Debt Service Coverage (DSCR) ratio at loan

origination is 1.25X. A DSCR of 1.10X is considered the minimum
acceptable level but the credit must include compensating factors.
1.5X is considered good and greater than 2X, excellent. Interest rates,
LTV as well as the financial strength of the entity and/or borrowers
become more important as debt service approaches the lower end of
the scale. In the event debt service drops below the minimum level
during the life of the loan, principal reduction is required unless the
entity or guarantors have the ability to service the debt from other
sources.

DSCR will be based upon no more than a 25 year maximum

amortization period. Shorter amortization periods may allow for
slightly lower DSCR as principal reduction is accelerated. Special use
properties typically require lower LTV, higher DSCR and/or shorter
amortization periods. Consideration should be given to the life
expectancy of the collateral.

Periodic analysis of the credit should be performed to measure the

actual financial performance against projections. When necessary a
variety of corrective measures are recommended including; capital
injections, pledging of additional collateral, guarantor involvement, etc.

Exceptions to policy are permitted when documented compensatory

factors permit and are submitted to the board for approval.

Loan Participations purchased must adhere to Section IV. F.

Participation loans requirements.

Appraisal requirements and procedures are listed in Appendix E.

Inherently, CRE loans encounter cyclical changes due to varying

economic conditions, occupancy, environmental issues, and industry
changes among others. The lender should consider all these with
ratings on the credit adjusted accordingly and rerated with the ratings
listed within loan policy.

The Real Estate Construction Loan Closing and Disbursement Processes

are included in Appendix F.

Agricultural:
8
 The Bank should provide conventional financing for the acquisition and
refinancing of farmland. The bank should also use the Farm Service
Agency guarantee loan program whenever deemed necessary. The
bank also offers the outlet of doing secondary market loans direct with
Farmer Mac for long term fixed rate loans that need consideration for
lending limit purposes.

Construction Loans:

Construction loans are loans undertaken on an interim basis to provide

funding for construction on or improvements to real property. This
type of loan requires that added care be taken to assure that advances
are paced with completion of certain phases of construction and that
no intervening liens are allowed to be placed that would jeopardize the
bank’s lien position. These loans are generally multiple advance,
closed end line of credit loans, which are made with a maturity date
that coincides with the completion of construction. They are generally
made only when the Bank has also issued a commitment for the end
loan; however, a construction loan should not be undertaken if there is
not a binding commitment for the end loan, from either the bank or
another lender.

When appropriate, a construction agreement should be completed that

requires specific performance of each party during the course of
construction. In addition to the construction agreement, the loan
officer should investigate the character, expertise, and financial
standing of all related parties. Disbursements should be predicated on
the Bank maintaining its priority lien position and the work having
actually been completed. On-site progress/inspections are of
paramount importance in providing us with accurate information with
which to assess the initial site and to be informed of construction
progress, thereby being able to monitor the loan and prevent the
overfunding of the project.

See the sample site inspection form for construction loans at Exhibit F.

C. Agricultural Loans

Agricultural loans include farm-operating, livestock, machinery and

equipment loans, Farm Service Agency guaranteed and subordinated
loans and Beginner Farmer Loans administered through the Farm Service
Agency (FSA).

The broad categories of agricultural loans listed below are considered

desirable types of credit extensions:

Loans that are short term for the purpose of financing crop and livestock
production, provided that adequate collateral is obtained within

9
 acceptable margins for that type of collateral or guaranteed by the Farm
Service Agency or another federal governmental agency.

Loans for the purpose of purchasing, and secured by, farm machinery,
equipment and implements, with appropriate margins, adequate
insurance and a repayment schedule to insure the borrower’s continuing
equity position.

Recommended loan terms and collateral margin requirements are located

in Appendix C.

D.Commercial Loans

Commercial loans include loans for operating purposes, equipment,

inventory, and account receivable financing.

The broad categories of commercial loans listed below are considered

desirable types of credit extensions:

1. Short-term loans for seasonal working capital purposes. These lines

of credit should generally not exceed one year.

2. Loans used to support accounts receivable and inventory. These

loans should not exceed one year.

3. Equipment loans to business concerns secured by a security interest

in non-specialized business or industrial equipment, with a
repayment schedule providing for the borrower’s continuing equity
in the equipment.

4. Revolving lines of credit. Loans should be supported by adequate

collateral and/or loan agreement providing appropriate safeguards
for the bank. Interest should be scheduled to be paid on a monthly
or quarterly basis.

5. Term loans to well-established, profitable business enterprises

adequately supported by the underlying value of the collateral
and/or written loan agreement providing appropriate safeguards for
the Bank. As a matter of general policy, term loans for machinery
and equipment (including amortization) should not exceed seven
years. Amortization sufficient to fully repay the principal balance is
generally required in substantially equal payments, not less than
quarterly.

6. Loans guaranteed by the Small Business Administration or other

federal or state entities.

7. Loans secured by real estate, where existing improved commercial

real estate property is pledged. The amount of the loan should not

10
 exceed 80% of the appraised value or of the cost, whichever is
lower.

8. Loans secured by assignment of savings accounts and/or

certificates of deposit, readily marketable securities, mutual funds,
cash surrender value of life insurance, or other types of collateral
which can be liquidated or sold for cash immediately within proper
margins.

9. Economic or community development loans under city, state or

federal loan programs.

10. Tax-exempt loans, such as Industrial Revenue Bonds (IRBs),

municipal revenue bonds, and general obligation bonds. It is
important to note that tax-exempt loans are attractive only if
Sample State Bank’s overall financial position warrants tax-free
income.

E. Participation Loans

From time to time, this Bank may purchase participation loans from other
banks. When we do so, we should exercise all the precautions we use
when we originate a loan in-house, including performing our own
independent site inspection of the collateral pledged on the loan. Sample
State Bank will do an in-house independent credit analysis and require the
same documentation that we would require of one of our own loans. The
Bank will analyze the collateral and satisfy ourselves that the lien status is
acceptable. A complete credit file on each purchased participation should
be maintained and sufficient credit information be obtained to monitor the
status of the credit through maturity. If multiple entities are involved in
the credit, a global debt service coverage ratio will be performed to
ensure that all debt payments can be met.

F. Overdrafts/Uncollected Funds

Overdrafts are unsecured loans that unless properly addressed will result
in losses to the bank. The loan officers will monitor the overdrafts on a
daily basis. Credit extension is not to be accomplished by overdrawing a
checking account. Overdrafts will be paid using an automated overdraft
program when experience dictates that the customer will repay quickly
and in the ordinary course of business. Abuse of checking account
privilege and long term overdrafts are no to be tolerated on a regular
basis.
WSB plans to take “meaningful and effective follow-up
action” on overdrawn accounts that have been charged an overdraft fee
on more than six occasions in a rolling twelve month period. Meaningful
and effective being described as contacting the customer to discuss less
costly alternatives to the automated overdraft payment system such as a
linked savings account, a more reasonably priced line of credit consistent
with safe and sound banking practices, or a safe and affordable small
11
 loan; and giving the customer a reasonable opportunity to decide whether
to continue fee-based overdraft coverage or choose another available
alternative.

See Exhibit B – Overdraft Monitoring Policy

G.Letter of Credit

The Bank does on occasion offer its customer’s letters of credit. Letter of
credit requirement and procedures are listed in Exhibit S.

V. LOAN APPROVAL SYSTEM AND COMMITTEE

RESPONSIBILITIES

A. The Bank intends to comply with the legal lending limits described by the
law. The Board of Directors plans to quarterly review and establish bank
lending limit guidelines. Quarterly lending limit computation is approved
in the Bank’s Board Minutes.

B. It is the policy of this Bank to accomplish loan approval at the most

efficient level possible. Lending authorities are delegated to loan officers
based on experience and ability and to the Loan Committee based on the
goal of maintaining consistency in decision-making and overall control of
the lending functions of the bank.

The dollar amount of lending authorities should be defined as the

aggregate credit exposure of a particular borrower. Aggregate credit
exposure includes all direct debt to the borrower, guaranties, co-
signatures and all other debt or commitments for the bank to entities
owned or controlled by the borrower.

C. Loans shall be aggregated for lending authority purposes in the same

manner as required by Federal and State regulations for legal lending limit
purposes.

D. Lending authorities apply to new extensions of credit, renewals, and

modification of terms.

E. Lending authorities are established annually (when circumstances dictate

they can be updated more frequently) by this policy (Exhibit A). The
board of directors should consider the Bank’s lending limit, quality of
lending staff and current lending trends when establishing lending
authorities.

F. All lending representatives should be careful not to formally or informally

commit the bank without proper approval as designated by the lending
authorities outlined in Exhibit A.

12
G. Release of collateral should normally be authorized only by an officer
whose loan authority is such that the loan could have been made with the
reduced collateral or by proper committee approval if a loan officer’s
authorization would have been exceeded.

H. Annual Review Form: All credits that will or already have an aggregate
loan total of $150,000 or more must be presented to the Credit
Committee on an annual basis for approval. The annual review should be
completed on a template provided by the FastGrade software. (Permanent
first mortgage debt secured by the borrower’s primary residence may be
excluded.) Approval of the Credit Committee will be received before any
new loans are funded or any existing loans are extended, renewed, or
modified. A simple majority vote by the Credit committee or special
approval obtained from the bank president is required for approval of
funding of all new and existing loans. Copies of these annual review forms
should be supplied to the Board of Directors at their next regularly
scheduled meeting.

Additional loan requests, renewals, extensions or modifications made

throughout the year by a borrower that will or already has an aggregate
loan total of $150,000 or more will be reviewed by the Credit Committee
utilizing the Annual Review Form format.

Loans Classified Special Mention or worse with an aggregate total of

$100,000 or more must be reviewed annually utilizing the Annual Review
Form. Additional loan requests, renewals, extensions, or modifications
must also be approved by the Credit Committee. Any loan requests,
renewals, extensions, or modifications to any classified loans (rated
substandard, doubtful, or loss) require Board of Director approval prior to
the loan being funded or amended.

Annual Review Forms will include, but are not limited to: Current Sample
State Bank loan totals, current requests, purpose of credit, source of
repayment, schedule and interest rate, ownership structure & history,
capital and debt structure, cash flow and debt service coverage ratio,
collateral description, credit bureau report with beacon score, current
balance sheet with historical trend on balance sheets, risk rating with
justification, copy of complete Federal Tax Return, explanation of loan
classification, background information on the borrowers relationship with
the financial information as needed to support the request.

As part of the Annual Review process, an annual site inspection should be

completed for all collateral securing the loan. This should be completed
on an annual basis, beginning at origination and continuing throughout
the life of the loan for all commercial and agricultural borrowers with
aggregate loan balances of $250,000 or more.

Sample Site Inspection forms are located at Exhibit E, F, G and H of this

policy for the various types of collateral that the Bank may have.

13
 Senior Management may require an inspection more often if there has
been a decline in the repayment ability of the borrower as evidenced by
the annual financial statement analysis, a delinquency problem with the
loan, or if previous inspections were unsatisfactory.

A tickler system will be utilized to verify Annual Review Form, loan

documentation and file updates were completed for the year and to
monitor for exceptions.

All exceptions to Loan Policy must be approved and documented by the

Credit Committee. The policy exceptions must also be reported to the
Board of Directors as discussed above.

VI. RISK RATING SYSTEM

The risk rating system is outlined in Appendix A. This rating is intended to be

used as a tool to help determine the risk associated with the credit, interest
rate, timeliness of reviews and overall management of the credit. All loans
will be assigned a risk rating prior to loan origination. The risk rating will be
assigned using the Bank’s FastGrade software.

All Agricultural and Commercial lines with aggregate loan total of $150,000
or more, excluding first mortgage residential real estate, will have the risk
rating re-affirmed at least on an annual basis.

Any time a change to the risk rating is being proposed, the loan officer is
responsible for completing a risk rating change in FastGrade.

VII. LOAN PORTFOLIO

Loan Portfolio Mix and Aggregate Percentages:

It is expected that the bank will extend credit in four principal areas in the
following portfolio mix:

Commercial Loans 20-40%

Agricultural Loans 20-40%
Commercial Real
Estate Loans 25-40%
Singe family
Real Estate Loans 25-50%
Consumer Loans 5-20%

The Board of Directors periodically reviews concentration data compiled

by the Loan Department.

Concentrations:
14
 In conforming with the December 2006 Interagency Statement on
Guidance on Concentrations in Commercial Real Estate Lending and Risk
Management Practices the bank will monitor the levels and keep the
following concentrations below the following percentage of the banks
capital:

1. The Bank’s total loans for construction, land development and other
land will be less than 100% of the Bank’s total capital.

2. The Bank’s total commercial real estate loans will be less than 200%
of the banks total capital. These real estate loans would include
commercial, agricultural, multi family and other non 1-4 family
residential real estate.

These levels of concentrations will be monitored quarterly by the Bank.

Should these levels approach the maximum allowed a written action plan
to reduce these levels will be established by the President and reported to
the Board of Directors for approval and implementation.

A. Allowance for Loan and Lease Losses:

Policy:

The Board of Directors and Management are responsible for documenting

and maintaining the Allowance for Loan and Lease Losses (ALLL) at an
appropriate level in accordance with Generally Accepted Accounting
Principles (GAAP). Management will maintain an effective loan review
system that corresponds to the size and complexity of the institution to
facilitate accurate and timely identification, monitoring, and responses to
asset quality problems.

The ALLL will be maintained at a level that is adequate to absorb all

estimated inherent losses in the Bank’s loan and lease portfolio in
accordance with GAAP. In addition, appropriate accounting for losses and
an adequate provision for the estimated inherent losses must be
satisfactorily maintained to avoid misrepresentation of the Bank’s
financial condition.

In providing for the ALLL, the Bank shall be consistent with FFIEC
Interagency Policy Statement on the ALLL and OCC Bulletin 2001-37 and
shall include in the analysis procedures for determining loan impairment
per FASB 114 and for segmenting the loan portfolio and estimating loss on
groups of loans consistent with FASB 5. In addition, the Bank shall
consider the relevant qualitative and environmental factors including
trends in the internal risk ratings and delinquent and nonaccrual loans,
results of external loan reviews, concentrations of credit considering both

15
 present and prospective economic conditions, and applicable lending staff
experience.

Following the analysis, management shall summarize the ALLL for the
Board’s review. Any deficiencies on the ALLL shall be remedied in the
quarter of discovery prior to Call Report filing.

Procedures:

The President along with the Loan Committee utilized the FastGrade
software system to analyze the loan portfolio to calculate and maintain an
appropriate ALLL level. The software shall be consistent with the ALLL
policy provisions within the Loan Policy, specifically the direction given by
the FFIEC statement and OCC Bulletin 2001-37 and FASB 5 and 114.

The starting point shall be determining impairment on the FASB 114 loans
and the impact to the financial statement of the bank and the
collectability of these loans in determination of the amount of allowance
required to adequately provide for these loans.

The remainder of the loan portfolio, excluding the impaired loans, will
have a historical loss percentage applied to determine the FASB 5
allocation to the allowance. The historical loss percentages should
include a proper level of detailed segmentation. Management will identify
the “buckets” within the portfolio that are truly causing the increase in
delinquencies and non-performing loans and apply their FASB 5 allocation
based on the segmentation to the loan portfolio. Historical loss
percentages will be reviewed to determine if the most recent data
indicates a further trend. If it does, the Bank will use only the most recent
data. The historical loss percentages will be adjusted for changes in
trends, conditions, and other relevant factors. If negative trends in a
“bucket” are seen, then an action plan to reduce the banks risk will be
devised and presented to Credit Committee and the Board of Directors to
implement.

VIII. LOAN CRITERIA AND TERMS

A. Approval Criteria for Commercial and Agricultural Loans.

Loan officers should be prepared to contribute valuable judgment as well

as technical expertise to each credit application, based upon a thorough
evaluation of basic lending factors. (Appendix C outlines miscellaneous
lending standards.)

1. Purpose

All loans should have a reasonably identified purpose that is

documented in the credit file.

2. Financial Statements
16
 Current financial statements must support loans for the borrower, co-
maker, endorser, and/or guarantor. The statements must be signed by
the borrower or shall be prepared by a well-regarded independent
certified public accountant. (The only exception to this requirement is
when loans to well-known borrowers are secured, within margin, by
highly liquid, well-diversified collateral, such as listed stocks, savings
accounts, or certificates of deposit. It is recommended that financial
statements be obtained to ascertain possible secondary sources of
repayment in the event of a decline in the value of the pledged
collateral and signed by the borrower stating the accuracy of the
financial statement.)

Generally, financial statement requirements for Commercial and

Agricultural loans are as follows:

 Tax Returns: Tax returns are generally required for loans where
the bank receives CPA-compilations or in-house financial
statements.

 Interim Financial Statements: Interim financial statements are

generally required for commercial loans of $250,000 and greater
in non-real estate debt and credits in which there negative trends
in the financials have been identified.
 Term Loans: Term loans with greater than $100,000 in aggregate
outstandings in which there is no credit decision being made
should still have the ongoing receipt of financial statements be a
requirement of the loan. The financials will then be analyzed for
any negative trends in the credit. The type and frequency of the
financial statements should be clearly identified in the loan
agreement or loan documents.

 Personal Financial Statements: Personal financial statements on

which a loan is based or guaranteed should be received annually.
A copy of the complete tax return is generally required.

 Cash flow projections for the next operating year will be

performed.

 Past and projected profit and loss statements will be spread to

help in identifying trends in the credit.

Generally, new borrowers to the Bank should provide financial

information as outlined in Appendix B (credit criteria).

B. Loan Agreements

Loan Agreements are required for any extension of credit when additional
terms, conditions, and agreements not contained in Sample State Bank’s
standard documentation are required to provide safeguards for the Bank.
17
 Size and complexity of the loan agreement will commensurate with the
size and complexity of the transaction.

Administrative controls must be established to ensure proper monitoring,

compliance, and follow up to safeguard the Bank’s position.

C. Repayments

Loans should be made only when a specific source of repayment can be

identified and agreed upon by the bank and the borrower. The primary
source should be the borrower’s income and cash flow; the secondary
source should be collateral liquidation; and a guarantor is best thought of
as the source of last resort.

1. Income and Cash Flow

The borrower’s income stream should be the planned source of

repayment.

2. Collateral

In the event of nonpayment, the loan’s collateral becomes significant.

The liquidity, marketability, and value of the collateral are all important
considerations. Loans should be amortized so that adequate collateral
value is maintained throughout the loan period.

3. Guarantees

Where the credit line of the borrower will be strengthened by the use of
a guarantee of a financially responsible party, then a guarantee may
be used. In cases where a loan is made with heavy reliance on the
strength of the guarantor, strong consideration should be given to the
guarantor’s ability to pay out of income and not on the liquidation of
assets. The guarantors major assets and liabilities should be verified
to help determine their liquidity to support the debt payments and for
the period of time that they can support the payments.

Personal guarantees of all majority stockholders should generally be

required when considering loans of any nature to closely held
corporations. Based on the nature and purpose of the loan and the
analysis of repayment sources the loan officer establishes a realistic
repayment schedule in conformance with the outline attached as
Appendix C.

Attached in Appendix D are guidelines for the primary source of

repayment for real estate loans.

D. Secured/Unsecured Lending

1. Unsecured Lending
18
 It is expected in certain situations, loans will be made by the bank on
an unsecured basis. Unsecured lending is appropriate only when a
borrower’s capital, liquidity, historical operating performance, and
management indicate that such an extension of credit is proper. The
repayment of an unsecured loan should be tied to the purpose of the
loan and anticipated source of repayment. Such an extension of credit
should normally not exceed one year. Generally, unsecured loans
should be limited to 10% of the borrower’s net worth with a maximum
unsecured amount of $500,000.

2. Secured Lending

In addition to the purpose of the loan and the anticipated source of

repayment, secured extensions of credit must be structured in
accordance with the nature and useful life of the collateral. If the
secured debt is self-liquidating, prudent advance rates and effective
monitoring of the collateral are required to ensure that proceeds from
the liquidation of the collateral are sufficient to pay the related debt.
Other secured debt must be secured by marketable collateral, the
value of which is accurately determined in a timely fashion. The
frequency of collateral valuations and loan-to-value ratios must take
into account the expected stability in the value of the collateral.

Loans are considered unsecured unless the bank has legally perfected
its security interest in the collateral. UCC and title searches must be
performed, collateral documents properly executed and liens properly
recorded. The lending officer is responsible for perfecting the bank’s
security interest as well as for ongoing maintenance of collateral
documentation.

E. Collateral Standards

Collateral margin guidelines are outlined in Appendix C. The margins

should be based on cost, market or other appraised values to maintain a
reasonable amount of collateral protection in relation to the inherent risk
in the loan. This does not mitigate the fundamental analysis of cash flow
from the conversion of assets in the normal course of business or from
operations to repay the loan. It is merely designed to provide a value
margin to minimize the risk of loss if the ultimate collection of the loan
becomes dependent on the liquidation of security pledged.

The quality and relative liquidity of the real estate collateral is of

paramount importance. Real estate loans should be margined so that
money received from the collateral, under foreclosure conditions,
adequately retires the loan. To provide for this protection, the loan-to-
value ratios defined in Appendix C are recommended to be used as
minimum standards for real estate collateral.

19
 It may be appropriate in individual cases to originate or purchase
loans with loan-to-value ratios that do not comply with policy or
the supervisor limits established by banking regulation. The
approval of any such loan should be supported by written
justification that clearly sets forth all the relevant credit factors
that support the underwriting decision. The justification and
Loan Committee approval documentation should be maintained in
the credit file. Exceptions are reported to the Board of Directors.

F. Lien Perfection

Documentation preparation and lien searches should be completed prior

to the disbursement of funds. Immediately following the loan closing,
liens should be officially filed and perfected.

G. Appraisals

Appraisals are needed to measure and control the inherent risks

associated with lending and to provide guidance to the lending staff. All
loan officers have the responsibility to understand the value of pledged
collateral.

Appendix E establishes the guidelines for our appraisal processes and sets
out the appraiser list.

H. Flood Certification & Insurance

Government regulation requires a Standard Flood Hazard Determination

be performed on all improved property on which a mortgage is taken,
including when property is taken out of an abundance of caution.

If the Standard Flood Hazard Determination states that the improved

property securing the loan is located in a Special Flood Hazard Area,
government regulation requires flood insurance coverage equal to the
lower of the loan balance or the maximum amount available through
FEMA, $500,000 for business and $250,000 for residential property.
Where the loan exceeds the value of the building, the land should be
excluded in determining the amount of coverage required. This
requirement for flood insurance coverage applies to improved real estate,
i.e., buildings, not land. Some portion of the improved property, and not
just a portion or portions of the real property, must be located in the flood
plain for flood insurance coverage to be required. When a portion of the
real property is in a flood plain, a survey will need to document that
improvements are not located in the flood plain. A competent engineer
can be hired to petition FEMA for a waiver based on grade, building type,
etc.

I. Environmental

20
 On commercial real estate loans and commercial loans secured by real
estate, when applicable, the following will be required of a borrower at the
inception of a loan:

1. Comply with applicable environmental laws and rules; and

2. Clean up a facility or security interest prior to inception of the loan.

When appropriate, the borrower will be required to hire a qualified entity

to perform an environmental audit. The borrower will be required to
comply with all regulatory requirements in the event contamination is
discovered during the audit. If potential exposure exists, audits should be
performed during the term of the loan.

The Bank or any agent of the Bank will not participate in facility
management, or take any action that would put the bank in the position
of “owner operator”. Any property subject to potential contamination
shall be held only as a security interest or the bank should acquire
ownership only in the course of protecting a security interest.

Loan Officers should be familiar with the Comprehensive Environmental

Response Compensation and Liability Act (CERCLA). Legal counsel should
be utilized when any question arises out of CERCLA liability.

J. Site Inspection

1. Originating lending officer prior to loan approval must visually inspect

and document its condition of the project site. Commercial and
Commercial real estate loans above $100,000 require an annual
updated site visit by the assigned loan officer. The Site Inspection
Forms are made a part of this loan policy at Exhibit’s E – H.

Exhibit E is a site inspection form for real estate, and can be utilized for
commercial and residential properties.

Exhibit F is a construction loan inspection card and should be utilized

with all draw requests for construction loans.

Exhibit G is a site inspection form for a general operating business,

such as a manufacturer or dealership of any sort. This form should be
utilized when the primary collateral securing the loans includes:
inventory, equipment, vehicles, etc.

Exhibit H is a site inspection form for agricultural loans. This form

should be utilized when the primary collateral securing the loan
includes: agricultural equipment, row crops, AG chattel, or any other
agricultural asset including farmland.

2. Commercial Construction and Residential Construction Loans are

subject to the Bank’s Draw Procedures.

21
 The loan officer is responsible for completing a site visit and
completing Exhibit F, the Construction Loan Inspection Card, prior to
funding the initial draw request and for any subsequent significant
draw requests during the construction process. Additionally, each
advance request must be supported by copies of third party invoices
and an updated construction budget prepared by the general
contractor and signed by the borrower. This budget should break out
the expenditures to date and what is expected to be spent in the future
to complete the project by category. The total expected cost of the
project should then be compared to the amount of the loan to
determine if there is a potential overage or shortage in the amount of
the loan. Properly executed lien waivers from previous advances
funded should also be obtained before funding a new advance so that
Bank can ensure that the borrower / general contractor used the funds
to pay suppliers, the general contractor, and subcontractors.

K. Non-Desirable Loans

Loans of the following types are not desirable loans by the Bank and
should normally be denied.

1. Capital loans to a business enterprise where the loan cannot be repaid

within a reasonable period except by liquidating the business or
borrowing elsewhere.
2. Loans of purely speculative nature.
3. Loans that involve “self-dealing” or conflicts of interest.
4. Loans secured by stock in closely held corporations, where the stock
has no ready market and financial statements of the individuals
involved do not support the extension.
IX. LOAN DOCUMENTATION

Documentation supporting an extension of credit is the responsibility of the

loan officer. While loan support staff performs much of the maintenance of
the file documents, the responsibility for the contents of the file rests with
the loan officer.

The Bank utilizes DigiDoc for its loan documentation function and utilizes
FastGrade for its loan portfolio management function.
A. Credit File Requirements

General File Requirements

To ensure that the Bank maintains useful and adequate credit files, the
following minimal elements should be included in all credit files:

1. Comments

a. A comment by the loan officer should be made when a loan, loan

commitment, line of credit or other consideration is committed,
that states:
22
  The loan amount, term (time, demand, payments, etc.),
interest rate (APR or amount over the stated index), basis
(secured or unsecured, guaranteed, take-out, repurchase,
etc.), purpose and method and source of repayment.

 All subsequent material changes require additional comments,

particularly when renewing beyond original terms, or
accepting partial payments, extensions and the reason for
deviating from the original terms.

b. Periodic officer comments to include descriptions of loan

advances, comments of meetings, phone calls, site visits, etc.,
plus comments regarding loan status.

c. Correspondence

d. Miscellaneous materials: product brochures, supplier statements,

etc.

e. Comments regarding loan documentation exceptions that are

warranted.

f. Business or Farm call / site visit report and collateral value.

2. Financial Information

a. Consumer Loans

 Installment Loans
o completed application, signed and dated
o credit report
o consumer worksheet
 Real Estate Loans
o financial statements (or application) for the borrower,
guarantors and co-makers, as appropriate
o income tax returns as appropriate
o financial statements (signed and dated)
o cash flows (commercial/agricultural) as appropriate

b. Commercial/Agricultural Loans
 Balance sheet (or application), which is signed and dated and
current within a year for borrower, guarantors and co-makers,
as appropriate.
 Balance sheet trend analysis.
 A profit and loss statement. This information is to be
accumulated in a comparative analysis of prior periods to
establish trends as appropriate.
 Cash flow analysis as appropriate.
23
  Complete tax returns as appropriate.
 Risk rating
 Annual reports the business is required to file.
 Borrowing resolution
 Other financial data, including interim statements,
projections, etc. should be maintained when appropriate.
 Copy of Annual Review Form presentation.

3. Collateral

a. Consumer Loans
 Installment Loans
o Title of item financed or other security document when
applicable
o Assignment
o Life insurance assignments as appropriate
o Evidence of insurance on collateral with bank listed as loss
payee
 Real Estate Loans
o Guarantees/co-signers
o Appraisal or assessment
o Attorney’s title opinion/title insurance or title search
o Perfected mortgage and riders
o Evidence of insurance with bank as listed as mortgagee
o Flood report

b. Commercial/Agricultural
 Lien searches showing the banks lien position
 Perfected lien documents
o Security agreements and schedules
o Financing statements and titles
 Collateral verification, floor plan checks, etc.
 Collateral analysis should be completed on lines greater than
$100,000 on an annual basis.
 Life insurance assignments as appropriate
 Evidence of insurance on collateral with bank listed as loss
payee
 Loan Agreements and Amendments
o Loan documents
 Business Arrangements
o Partnership agreements
o Corporate resolutions
o Personal guarantees
o Collateral agreements supporting personal guarantees
o Completed Loan Documentation Checklist

c. Real Estate Special Requirements

 Mortgage Servicing Transfer Disclosure (1st Liens only)
 Good Faith Estimate of Closing Costs
 Settlement Booklet (purchase only)
24
  Notice to Home Loan Applicant
 Disclosure of Credit Score Information
 Flood Disaster Documentation
o Flood map documentation
o Notification of property located in flood zone (if applicable)
o Flood insurance if applicable
 Notice of rights to rescind as appropriate
 Disclosures
 HUD-1 or HUD 1A
 Verification of deposit (if applicable)
 Verification of employment (if applicable)
 Purchase agreement
 Well test (if applicable)
 Septic System inspection (if applicable)
 Environmental review (if applicable)

d. Any additional comments that may be applicable to the loan.

X. LOANS TO “INSIDERS”/EMPLOYEES

A. Loans to “Insiders”

Insiders, as they pertain to this institution, should be in accordance with

Regulation O, which includes the following:

1. All directors.
2. Shareholders owning 10% or more of the bank, its holding company, or
affiliates.
3. Officers of this bank that are designated annually by the Board of
Directors as Executive Officers.
4. Related business interests.

Loans or other extensions of credit made to an insider, whether direct or

indirect, or to a related interest where an insider has a beneficial interest,
should meet the requirements of the bank’s lending policies as to credit
worthiness, terms and conditions, be fully documented as any other credit
extension and should have prior approval of the Board of Directors.

B. Loans to Personnel

1. Executive Officers

Extensions of credit to executive officers and their related interests are

under more stringent limits than any other credits. For extensions of
credit to executive officers and their interests, we intend to comply
with all state and federal regulatory requirements.

25
 A majority of the Board of Directors, voting in the absence of the
applying officer, whether or not the officer is also a director, should
give its prior approval to any obligation of an executive officer.

2. Other employees

An employee (not an insider or an executive officer) should follow the

regular bank’s approval process.

C. Loans to Immediate Family Members of a Loan Officer

Loans to immediate family members of a loan officer should be approved

by another loan officer with sufficient authority and closed by someone
other that the related officer.

Immediate family members include spouse, children and/or their spouses,

siblings and parents of the loan officer or spouse.

XI. LOAN REVIEW

A. Administration

1. File Documentation/Regulatory Compliance

The loan officers are responsible for reviewing new and

renewal/extended loan files to ensure regulatory compliance, proper
lien perfection, proper approval and appropriate file documentation.
The Bank uses a tickler system to track the collection of these
documents.

2. Credit Committee

a. The Credit Committee meets on a weekly basis to review past due

loans and the collection efforts being pursued.

b. The Credit Committee on a monthly basis should review the

problem loan list. Special attention should be given to continued
deterioration of already identified problem credits and new problem
loans.

c. The Credit Committee approves all loan workout plans for

nonaccrual loans. In addition, the Credit Committee periodically
reviews the status of collection efforts on all nonaccrual loans and
recommends any appropriate changes to the action plan.

d. The Credit Committee makes recommendations to the Board of

Directors regarding charging off loans.

26
 e. Semi-annually the Credit Committee reviews loans charged off to
determine the course of action for any potential recoveries. No
charged off asset will be rebooked by the bank.

3. Board of Directors

a. The board receives a past due report for their monthly review.

b. The problem loan list, nonaccrual loan report and other repossessed
assets

c. The board of directors approves the charging off of loans.

d. Reviews the loan exception report. Loan exceptions will not be

greater than 15% of the Bank’s capital.

B. Loan Review System

1. At least once a year or as deemed necessary an external review of

loans of significant credits should be conducted. This should be done
to monitor the credit quality (risk rating) and monitor adherence to
internal credit policies and loan administration procedures.

2. Deteriorating credit quality of a particular type of loan or pool of loans

could also prompt a special review of significant credits.

3. A review should also be performed for a sampling of smaller loans, past

due, nonaccrual, classified and insider loans.

4. A report that summarizes the results of the loan review should be

submitted to the Credit Committee and the Board of Directors.

XII. COLLECTION GUIDELINES

A. Past Due Loans

It is the policy of this Bank to hold past due loans to an absolute minimum
by applying aggressive correction and/or collection efforts. Loan officers
are responsible for collecting on the loans they made. Loan officers meet
weekly to discuss collection efforts on all loans past due. As loans
become progressively past due, action plans become directed more
toward collection than correction.

B. Problem Loans

Problem loans are generally those that meet the definitions noted below:

a. Identified by a loan officer, by the loan review system or by

management as having a greater that normal risk.

27
 b. Loans classified by the regulators.

c. Loans requiring additional attention due to:

 deteriorating financial condition in the operation, business or

industry;
 reductions in collateral margin which may result in loss exposure;
 violations of loan agreements or covenants
 large or unusual overdrafts and uncollected funds;
 change in top management;
 sudden changes in audit or accounting firms;
 inability to pay off seasonal debt ;
 resistance to supplying current financial information

A problem loan list should be established using the above criteria for
guidelines in identifying potential problem credits. The list should be
updated monthly. To ensure proper control, the Credit Committee
monitors the progress of each loan and makes recommendations to loan
officers regarding corrective action strategies.

C. Nonaccrual Loans

General rule – The Bank shall not accrue interest, amortize deferred net
loan fees or costs, or accrete discount on any asset (1) which is
maintained on cash basis because of deterioration in the financial
condition of the borrower, (2) for which payment in full or principal or
interest is not expected, or (3) upon which principal or interest has been
in default for a period of 90 days or more unless the asset is both well
secured and in the process of collection.
a. An asset is “well secured” if it is secured (1) by collateral in the form of
liens on or pledges of real personal property, including securities, that
have a value sufficient to discharge the debt (including accrued
interest) in full, or (2) by the guarantee of a financially responsible
party. An asset is “in the process of collection” if collection of the asset
is preceding in due course either (1) through legal action, including
judgment enforcement of the debt or (2) in its restoration to a
"current" status described below.

b. For purpose of applying the third test for non-accrual status listed
above, the date on which an asset reaches non-accrual status
determined by its contractual terms. If the principal or interest on an
asset becomes due and unpaid for 90 days or more on a date that falls
between report dates, the asset should be placed in non-accrual status
as of the date it becomes 90 days past due and it should remain in
non-accrual status until it meets the criteria for restoration to accrual
status described below.

Exceptions to the general rule – In the following situations, an asset need

not be placed in non-accrual status:

28
  The asset upon which principal or interest is due and unpaid for 90
days or more is a consumer loan secured by a 1-4 family residential
property. Nevertheless, such loans should be subject to other
alternative methods of evaluation to assure the bank’s net income
is not materially overstated.

 Treatment of previously accrued interest – The reversal of a

previously accrued but uncollected interest applicable to any asset
placed in non-accrual status should be handled in accordance with
generally accepted accounting principles. Acceptable accounting
treatment includes a reversal of all previously accrued but
uncollected interest applicable to assets placed in non-accrual
status against appropriate income and balance sheet accounts.

D. Loan Charge-Offs
Loan losses should be recognized in a timely manner to properly reflect
bank Capital and earnings. The recognition of the losses should occur as
soon as there is a reasonable probability of loss.
Repossessed Assets

Loan amounts in excess of recently appraised values should be charged

off within 90 days of the property becoming a repossessed asset.
Subsequently, additional charge-offs may be recognized dependent upon
appraisals or continued inability to sell the property. No charged off asset
of the Bank will be rebooked.
E. Collection Procedures
1. All loans 60 days or longer past-due will be reviewed monthly by the
Board of Directors. Collection efforts will be reported by the loan
officer responsible for the loans.

2. A Notice to Cure will be sent to borrowers with loans 60 days or longer

past due, unless specific sources of repayment have been identified
and timely payment is anticipated.

3. Normal foreclosure/repossession action will be initiated when a loan

becomes 90 days past due, unless specific sources of repayment have
been identified and imminent payment is anticipated.

4. Charge Down and Charge Off Action:

a. Agricultural/Commercial Loans - typical collection process of getting

control of assets, shifting loan to repossessed assets or other real
estate owned, liquidate asset, charge off shortage. If at any step in
the process we deem the bank's position under secured a charge
down should be taken to the conservative value of the collateral
less estimated costs.

29
 b. Consumer Loans - typical as outlined in 4a except:

- consumer loans to borrowers whom declare bankruptcy should

be charged off within 60 days of receiving notice.

- consumer loans to borrowers determined to be fraudulent should

be charged off within 90 days of discovery.

- consumer loans to borrowers who die should be charged down

when the bank determines the loss exposure.

- closed-end consumer loans to borrowers 120 days delinquent

should be charged off in the month of that delinquency.

- open-end consumer loans to borrowers 180 days delinquent

should be charged off in the month of that delinquency.

c. Residential Loans - typical as outlined in 4a except that if the

borrowers are 180 days delinquent the collateral value should be
assessed and the loan charged down to conservative value less
estimated costs.

F. Other Real Estate Owned

In the event it becomes necessary to pursue foreclosure or repossession

of loan collateral, the Loan Officer will work with qualified legal counsel to
ensure proper and timely actions are taken to protect the Bank’s position.
The Loan Officer will ensure that all such assets are appropriately risk
rated and upon transfer to Other Real Estate Owned (“OREO”) or
repossessed status, will provide the Bank’s loan committee with a
detailed analysis, including an appraisal report, to assist the Bank’s loan
committee with assigning an appropriate carrying value for the asset that
is consistent with Generally Accepted Accounting Principles and
regulatory guidance. Liquidation of the collateral will be the responsibility
of the Bank’s President, upon approval of the OREO workout plan by the
Bank’s loan committee.

In order to properly monitor the status and action items of all OREO
property, the Bank should complete the OREO Workout Plan Template on a
monthly basis for all OREO properties held by the Bank. This form
includes information regarding marking of the property, any action items
that need to be completed or are in process for the property, and also the
current operation of the property if it is an income-producing property.

This report should be completed on a monthly basis for all OREO

properties and indexed in the appropriate loan file.

The OREO Workout Plan Template is made a part of this loan policy at
Exhibit D.
30
XIII. REQUIRED BOARD OF DIRECTOR APPROVAL FOR
CLASSIFIED LOANS

The Bank will not extend, directly or indirectly, any additional credit or modify the
terms of any loan that is classified as: Substandard, Doubtful, or Loss or for a
borrower with a previous charge-off without prior Board of Director Approval.

In order to ensure that this procedure is followed, the Bank’s loan processors are to
complete the following steps before a request from a classified or previously
charged-off borrower is processed:

1) Processor is to check the Bank’s classified loan listing as of the most recent
month-end to determine if the borrower is on the classified list. If the
borrower is not on the list, the processor can continue with processing the
loan. If the borrower is on the classified list, continue on to Step 2;

2) If the borrower is on the Bank’s list of credits classified as Substandard,

Doubtful, or Loss, then the processor should verify that the loan officer has
filled out the Bank’s Loan Workout Plan Form (made part of this loan policy as
Exhibit C), and that the Board of Director’s has approved this form. In order
for this form to be considered approved, it will need to be signed and dated
by the Bank’s President. If the form has not been completed and approved,
the loan processor is required to STOP processing of the loan until the form
is completed and approved If the form has been completed and approved by
the Bank’s Board of Directors, the loan processor may continue on to Step 3;

3) The loan processor should verify that all terms of the additional loan or
modification of the existing loan match the terms that were presented in the
Loan Workout Plan Form that was approved by the Board of Directors. If all
terms do not match what was approved by the Board of Directors, the loan
processor is required to STOP processing the loan until the terms are
changed to match what was approved or the terms that are being submitted
to the loan processor are approved by the Board of Directors. In no
instance should any terms that were not approved by the Bank’s
Board of Directors be granted to a borrower. If all terms of the new
loan or loan modification match the terms approved by the Bank’s Board of
Directors, then the loan processor can continue with processing the loan.

31
APPENDIXES TO LOAN POLICY

Appendix A - Risk Rating System

I. GENERAL

The Bank's Risk Rating system is the cornerstone of its Allowance for Loan
Loss Reserve adequacy. In order to effectively quantify and analyze the risk
in the Bank's loan portfolio, it is important that the appropriate risk ratings
are assigned to each relationship within the portfolio based upon credit
characteristics and potential loss exposure. These criteria are established in
32
 this policy. The designated Risk Ratings are used to identify measure and
monitor the risk associated with the loan portfolio.

II. PROCEDURES

All loans will be assigned a Risk Rating by the originating officer and
entered on to the loan systems at the time the loan is originated.
Ultimately, credit judgment and experience will be incorporated to assign a
final risk rating to commercial relationships.

The account officer has the primary responsibility for providing the first line
of defense against deteriorating credit quality and should continue to
monitor the credit during the life of the loan, making adjustments to the
Risk Rating as necessary. In addition, periodically the quality of the credit
and accuracy of the Risk Rating will be independently verified through the
loan review process. Normally any upgrade of a credit in the 1-5 rating
would occur at the time of renewal or annual review. Any downgrades are to
be addressed immediately.

An upgrade or downgrade of a credit requires at an annual review, renewal

or immediate review the risk rating approval is noted on the signed Annual
Review Form. A change in a relationship risk rated 1-5 and within
established lending authorities requires the signatures of the loan officer
and the Bank’s Loan Committee. For loans that are in excess of the
established lending authorities, the approval by a majority vote of the Credit
Committee must also be obtained. Loan grade changes in the 6-9 risk
rating range will be submitted to the Credit Committee for approval. During
an annual review or renewal, these changes are to be made as a part of the
credit analysis. The Risk Rating Change Form located at Exhibit N should be
completed whenever a risk rating change is requested. This form should be
an attachment to the credit analysis.

Risk Rating #1 - Pass - Extremely high quality, excellent financial

condition and collateral coverage. No identifiable risk of loss.

Risk Rating #2 - Pass - Very strong quality, excellent financial condition,

no identifiable risk of loss but lower in one or two aspects than loans
graded as 1.

Risk Rating #3 – Pass - Mid-Grade loans showing good financial condition

with few, if any, below average characteristics. Most loans in this
category, if measured purely on a risk-of-loss basis, would be considered
above average.

Risk Rating #4 - Pass - Mid-Grade loans showing average financial

condition. Most loans in this category, if measured purely on a risk-of-

33
loss basis, would be considered above average. This is due to “average”
financial condition but strong collateral coverage.

Risk Rating #5 - Pass/Watch - Mid-Grade loans showing average financial

condition but may be susceptible to changing economic conditions that
would raise risk to a minor concern. Normal comfort levels can be
achieved through monitoring financial statements & collateral coverage.

Risk Rating #6 - Special Mention - Borrower risk is of minor concern,

meets repayment terms but may be susceptible to changing economic
conditions. Normal comfort levels can be achieved through monitoring
financial statements & collateral coverage.

Risk Rating #7 - Substandard - Borrower shows some signs of serious

difficulty and/or collateral coverage, may be slow paying or the loan has
various lower quality characteristics.

Risk Rating #8 - Doubtful - Strong potential for some loss with clear
inferior financial and collateral coverage conditions.

Risk Rating #9 - Loss - Highest risk of loss. Very weak in both financial
condition and collateral values. Any loan rated in this category would
likely be a loss at least to the extent that the total loan amount exceeds
the collectable value of collateral.

34
Appendix B - Credit Criteria

1. Management analysis consists of an evaluation of management quality

in terms of the past performance and fulfillment of earlier plans.
Seasoned managers formulate and implement policies concerning
development of new product lines, acquisition, diversification,
divestitures, required rate of return for new investments, and capital
structure with respect to leverage. Seasoned mangers have experienced
the effects of business during good and bad times. Analysis of
management depth evaluates the quality and quantity of people
necessary to assure continuity of the management personnel. Substantial
depth represents those companies with several layers of experienced
people.

2. Financial Reporting by the borrower varies widely from customer to

customer. The most reliable and meaningful form of financial reporting is
an audited financial statement by well-regarded, certified public
accounting firms. In order of desirability, the other forms of financial
reporting are reviews; compilations prepared by an outside accountant,
and internally prepared reviews. It is recommended that copies of tax
returns be provided when a CPA does not audit financial statements.
Analysis of the financial reporting includes the evaluation of the quality
and timeliness of financial information presented by the borrower. Quality
issues include accounting techniques (revenue recognition, inventory
methods, and amortization and depreciation policies) that most
accurately reflect current revenues and expenses to not over or
understate financial performance or condition. Audited financial
statements by well-regarded certified public accounting firms generally
assure compliance with acceptable accounting procedures. Financial
statements presented on a review or compilation basis are of lesser
quality and require the loan officer to ascertain the accuracy of the
financial data within an acceptable, reasonable time – generally 90 days
after year-end and 30 days after quarter or month end. Delays in
receiving financial data should be investigated.

3. Financial Data includes analysis of the trends, operating results,

financial conditions, contingencies, and payment history.

Sales Trend analyzes the borrower’s industry relative to sales trend

(growth, stable, declining) within the industry as well as the correlation of
the industry with the economy as it expands or contracts. The borrower’s
sales trend is compared to the industry with an eye toward predicting the
likelihood of future sales in terms of growth, stability, or decline. The
borrower’s product mix, competitive factors (price, quality, location, and
promotion), labor situation, availability of raw materials, and other related
factors are to be considered relative to their respective impact upon
future sales. Irrespective of the borrower’s capital base, it is difficult to
remain in business when the sales outlook suggests declining sales for a
substantial period of time.
35
 Operating Results are evaluated by analyzing the trend of operating
income in absolute dollars, as a percent of sales, as well as pretax return
on tangible net worth. An upward trend over a five-year period of time
exhibits financial strength and the ability of the borrower to finance itself.
Analysis of cash available for debt service (CADS) equals net income +
depreciation + interest expense. Applicable adjustments should be made
for other items such as gains or losses on sale of assets, net operating
loss carry forwards, shareholder distributions or other non-cash items. All
information available in the borrower’s tax returns including all applicable
schedules should be obtained and utilized in the analysis. This will
exhibit the borrower’s ability to service term debt. A ratio of greater than
1 to 1 over a sustained period of time represents a very strong company
that borrows for seasonal needs and/or is expanding its business and
requires financing for additional working and fixed assets. A ratio of less
than 1 to 1 represents a company that may require continual financing to
sustain operations, that is, cash flow is inadequate to meet both debt
service and routine capital expenditures. Analysis of operating results
should include both historical performance as well as the relationship of
future projected cash inflows or outflows.

Financial Condition is evaluated by analyzing the borrower’s liquidity and

leverage via traditional ratios compared to industry norms. Magnitude of
net worth as a cushion to absorb losses or any asset value decline should
be considered.

Contingencies include a review of the borrower’s off balance sheet

financing (operating leases), indirect liability as guarantor, endorser,
surety, etc. Pending litigation, product warranties, etc. must be
considered in terms of their potential impact upon the borrower’s financial
condition and claim on future earnings.

Payment History includes evaluating the borrower’s paying habits with

respect to trade creditors, bank lines of credit, and term debt. A borrower
that avails itself to taking discounts, rests its line of credit for a minimum
of 30 days, and repays its term debt as agreed represents a strong
borrower.

4. Asset Protection includes an analysis of what assets are available for

creditors including the bank to secure their position. Companies with
encumbered assets (working and fixed) generally represent a good
earnings trend and strong capital position. These borrowers normally do
not have to pledge assets to produce short term to intermediate
financing. Borrowers exhibiting a cyclical or downward earnings trend
and/or weaker capital positions generally will be required to pledge assets
to non-trade creditors. A collateral analysis is to be completed to assure
the banks’ margin is adequate.

36
5. Financial Flexibility includes assessing the borrower’s access to other
sources of financing including the money and capital markets, non-bank
financial institutions (life insurance companies, commercial finance
companies, etc.). Borrowers that have three additional channels of
financing are generally strong companies. The ability to reduce or
eliminate capital expenditures in relationship to cash adequacy should
also be considered. Borrowers without a significant investment in fixed
assets relative to total assets generally exhibit more flexibility.

6. Credit Enhancements include evaluation of additional protection

provided by the pledging of liquid collateral and/or support from the
guarantor(s) exhibiting strong/liquid balance sheets. Credit
enhancements should offer some tangible evidence that borrower’s
overall risk rating has been improved.

7. Other Relevant Factors include but are not limited to, (a) unstable
ownership, (b) collateral dependency (those situations when the borrower
may have to liquidate assets not in ordinary course of business) to repay
debt, (c) bankruptcy, (d) non-accrual status, and (e) asset/liquidation
values under the relative loan outstanding must also be considered in the
assignment of a risk classification.

37
Appendix C - Recommended Loan Terms and Collateral Margin
Requirements

Commercial Loans

Recommended
Recommended Percent of Maximum
Type of Loan Loan to Collateral Value Maturity
Unsecured or secured working
capital loan N/A 12 months
Not to exceed 80 %
(Depends on borrower and market ability
Equipment and other, includes and condition and age of collateral;
autos keeping bank in good equity position) 60 months
Not to exceed 60%
(Depends on borrower and marketability
and condition and age of collateral; Not to exceed 12
Inventory keeping bank in good equity position) months
Not to exceed 60%
(Generally accounts may not be past due
more than 90 days to be eligible for Not to exceed 12
Accounts receivable financing) months

Farm Loans

Recommended
Percent of Loan to Maximum
Type of Loan Collateral Value Maturity
100% of purchase price if borrower has
feed on hand; otherwise, we should
finance 80% of the purchase price plus
Livestock- feeders feeding costs Due at market
100% of slaughter price if borrower has
feed on hand; any amount exceeding
this should be specifically approved by
Livestock-breeding Loan Committee 2-5 years
Crops/operating loans for
expenses for growing crops 100% of actual spring costs 6-18 months
80% of dealer invoice on new; 80% of
Farm equipment selling price on used 3-7 years
Land 70% of appraised value 25 years*
To be paid when
Grain stored in bin on the farm 80% of current cash price marketed or 1 year

*On IFA loans there is a required 30 year loan term.

Commercial Real Estate*

Recommended
LTV ( Loan advance as of % Maximum
Loan Category of appraised value) Maturity

38
 Land Development (being
developed prior to the erection of
structures) 75% 2 years
Construction: Commercial, multi- 1 year**
family and nonresidential 80%
Construction: 1-4 family,
residential 80% 1 year**
Improved property (commercial,
farmland, and non-owner
occupied income producing
property) 80% 25 years
Owner-occupied 1-4 family 80% 25 years***
Raw land 65% 3 years

*Collateral for real estate loans should normally be that of a first lien. However, it should be recognized that in
certain cases, a subordinate lien may be appropriate and the use of such approved. In the case where a
subordinate lien is procured, this subordinate debt, along with all senior debt, should not exceed the loan to
value ratios designated by this chart

**Construction loans should not be made for more than 12 months unless the size of the project clearly
demonstrates a need for a longer construction period.

***On IFA loans there is a required 30 year loan term.

Consumer Lending

Home Equity
Real Estate** Consumer
Persona Overdra
l ft
Purchas Refinan Closed- Open- Automob Automob Unsecur Protecti
e ce end end ile (new) ile (used) ed on
Gross Debt/Income
% (payment
amount)* 28 28 38 38 38 38 38 38
Gross Debt/Income
%
(total debt)* 38 38 38 38 38 38 38 38
Length of
employment
FT or PT 6 mo. 6 mo. 6 mo. 6 mo. 6 mo. 6 mo. 6 mo. 6 mo.
LTV% 80% 80% 90% 90% 90% 90% N/A N/A
Minimum Credit 625 625 625 625 625 625 650 625
score
Minimum $ amount $5,000 $5,000 N/A $5,000 $3,000 N/A N/A $500
Maximum $ amount N/A N/A N/A N/A N/A N/A N/A $ 1,500

*When computing the income of the applicant consideration should be given to reliability of this income.
Bonus, self-employed, commission, part-time, cyclical, or similar income should generally be averaged over a
two-year period in order to be deemed reliable absent other circumstances.

**Real Estate does not include secondary market.

39
Appendix D - Real Estate Lending Repayment Guidelines
structures)
Construction/Commercial, Multi-Family
and Nonresidential
Construction/Residential
Improved Property
(Commercial, farmland and non-owner
occupied income-producing property)
Owner Occupied/1-4 Family and Home
Equity
Raw Land
It is desirable for this type of loan to have
reasonable projections that should provide the
debt to serve self. However, because of the
potential risk in this type of lending, we would
also expect the borrower to be able to service the
debt out of his personal or business net worth and
cash flow.
A permanent takeout commitment from an
acceptable, financially responsible lender, or this
bank should be committed to provide permanent
financing.
The Bank may provide financing for spec homes
(the developer builds the home to use a model
for a period of time). However, no one borrower
should be allowed to have more than 2 spec
homes at a time without preapproval from both
the Board of Directors and the Credit Committee.
The credit committee should closely monitor the
number of spec homes financed by the Bank at
any point in time to ensure that the Bank is not
taking on undue risk.
A permanent takeout commitment from an
acceptable, financially responsible lender; or this
bank should be committed to providing
permanent financing.
Investor-owned – A borrower must demonstrate
adequate net cash flow available to service debt
(assignment of rent should normally be taken)
Farmland – Borrower must demonstrate adequate
cash flow margins in order to determine
repayment ability.
User owned and occupied – Debtor should
possess a strong financial capacity to service
debts. Debt should be amortizing and included
as part of the total collateral package.
Investor-owned – A borrower would demonstrate
adequate net cash flow available to service debt
(assignment of rent should normally be taken).
User owned and occupied – Borrower should
demonstrate the financial ability to service debt.
Borrower must demonstrate adequate cash flow
margins40
in order to provide for repayment.
Appendix E - Real Estate Appraisals and Evaluations

I. Guidelines

An appraisal or evaluation is used to validate real estate values as an

integral part of the decision-making process in credit analysis and
investment underwriting. If the borrower’s cash flow fails to permit servicing
of the indebtedness in a satisfactory manner and support from a financially
responsible guarantor does not appear adequate, the value of real estate
collateral should be sufficient to ensure that there is a reasonable margin of
protection to repay the loan. An appraisal or evaluation also plays an
important role in administering foreclosed properties, both in determining a
carrying value and establishing a probable sales price.

Title XI of the Financial Reform, Recovery, and Enforcement Act of 1989

(FIRREA) requires the agencies to adopt regulations on the preparation and
use of appraisals by federally regulated financial institutions. Such real
estate appraisals are to be in writing and performed in accordance with
uniform standards by an individual whose competency has been
demonstrated and whose professional conduct is subject to effective State
supervision.

Common agency regulations issued pursuant to Section 304 of the Federal

Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) also
require each regulated institution to adopt and maintain written real estate
lending policies that are consistent with safe and sound banking practices
and that reflect consideration of the real estate lending guidelines attached
to the regulation. The real estate lending guidelines state that a real estate
lending program should include an appropriate real estate appraisal and
evaluation. An appraisal and an individual providing evaluation services
should be independent of the loan and collection functions of the institution
and have no interest, financial or otherwise, in the property or the
transaction.

Although the agencies appraisal regulations exempt certain categories of

real estate-related financial transactions from the appraisal requirements,
most real estate over $250,000 are considered federally related transactions
and thus require the services of an appraiser. An agency also may impose
more stringent appraisal requirements than the appraisal regulations require.

Those appraisals that are required to be completed by a licensed or certified

appraiser are considered to be "regulated" appraisals. The table below
establishes when a licensed or certified appraiser must be used:

Transaction Value Residential Non-Residential

>$1 to $250,000 No requirement No requirement

>$250,000 Certified Certified

41
The appraisal must:

1. Conform to Uniform Standards of Professional Appraisal Practice (USPAP),

including requirements for appraiser independence and competency.

2. Include disclosures complying with the Competency Provision of USPAP. If

appraiser competence and/or experience is lacking, the appraiser must
disclose this completely.

3. Disclose the appraiser's opinion of Market Value (Fee Simple Value) based
upon the definition of Market Value set forth in the regulations.

4. Provide detail and depth of analysis that reflect the complexity of the real
estate, and be written and presented in a narrative format or on forms
that are sufficiently descriptive to reveal the estimated market value and
rationale for the estimate.

5. Report, and use as a basis for valuation, the area sales history for the last
year for 1-4 family transactions, or the last 3 years for all other types of
property.

6. Report data on current revenues, expenses and vacancies if the property

is income producing. Current data should be used, not projections.

7. Report and analyze reasonable assumptions for marketing of the property

in light of current conditions. The appraisal report must disclose the
assumptions used.

8. Report current market conditions and trends. Any prevalent market

trends (i.e. vacancy rates, rent concessions, etc.) must be fully disclosed
and justified.

9. Analyze and report appropriate deductions and discounts for any

proposed construction or renovation, partially leased buildings, non-
market lease terms, or any tract development with unsold units. The
property value must be reported on an "as is" basis, and as of the date of
the appraisal.

10. Include a description of the appraiser's USPAP required certification as

well as a statement that the appraisal is not based on a requested
minimum valuation, a specific valuation, or the approval of a loan. All
appraisals must include a statement to the effect that the appraisal was
not conditioned upon the appraiser producing a specific value or a value
within a given range. Appraiser employment or future business cannot be
tied to specific values or loan approval.

11. Contain sufficient supporting documentation and report all pertinent

information. A reader must be able to reach a conclusion based on the
appraisal report alone. An appraisal report should not refer to information
42
 sources that are not widely available to the public.

12. Include an accurate legal description of the real estate, in addition to

the USPAP required description.

13. Identify and separately value any personal property, fixtures, or

intangible items that are not real property, but are included in the
appraisal.

14. Follow a reasonable evaluation method that addresses the following

approaches to market value:

a. Direct Sales Comparison,

b. Income and Capitalization Estimate, and
c. Cost approaches to market value.

These approaches must be fully reconciled, and the elimination of each

approach not used must be fully explained.

II. GENERAL

The Bank requires a written appraisal from an independent licensed or

certified appraiser on commercial and residential 1st real estate mortgage
transactions over $250,000. Appraisals used to make credit decisions must
be no less than 12 months old. Any exceptions to the appraisal policy
require the advanced approval of the Loan Committee, President or top
approval authority as defined within the established Loan Authorities. In
addition, the bank will comply with the real estate requirements created
under FIRREA for real estate transactions occurring in any federal financial
institution.

III. APPRAISERS

All appraisers must be state licensed or certified, as appropriate. However, a

state licensed or certified appraiser may not be considered competent solely
by virtue of being certified or licensed. The selection of the appraiser must
be based on competency, independence, expertise relative to the property
type, and the ability to render a high quality written opinion. Any
determination of competency shall be based upon the individual's
experience and educational background relating to the particular appraisal
assignment for which they are being considered.

A fee appraiser that is independent of the bank must complete all regulated
appraisals. If the only qualified person(s) available to perform an appraisal is
not independent of the bank, the bank must ensure the appraiser exercise
independent judgment by:

a. Prohibiting an individual from performing an appraisal in connection

with a transaction in which the appraiser is otherwise involved.
43
 b. Prohibit any director or officer from participating in any vote or
approval involving assets in which they performed an appraisal.

IV. ENGAGEMENT

All appraisers shall be engaged directly by the Bank and have no direct or
indirect interest, financial or otherwise, in the property or transaction. The
Bank cannot use an appraisal prepared by an individual who was selected or
engaged by the borrower. The Bank cannot use "readdressed appraisals",
which are appraisal reports that are altered by the appraiser to replace any
references to the original client with the Bank's name. The Bank may accept
an appraisal that was prepared by an appraiser engaged directly by another
institution, subject to title XI of FIRREA, if the regulated institution that
accepts the appraisal has:

a. Established procedures for review of real estate appraisals.

b. Reviewed the appraisal under the established review procedures,
finding it acceptable.
c. Documented the review in writing.

V. SELECTION

The Bank will maintain a current list of all approved appraisers. Appraisers
must be approved in advance by the Board of Directors to be used for these
purposes.

To become a Bank approved appraiser, the following must be submitted for

consideration:

a. An example of the appraiser's work.

b. A copy of the appraiser's license or certification.
c. Resume of the appraiser.

A copy of the current approved appraiser list is kept with the Bank’s loan
processor.

VI. REVIEW

Management shall review on an annual basis the performance of all

approved appraisers used within the preceding 12-month period for
compliance with the: a) bank's appraisal policies and procedures, and; b)
reasonableness of the value estimates reported. The Bank shall maintain an
approved appraiser's file, which is to include a listing of all approved
appraisers and the items required to attain the initial and annual approved
appraiser status.

VII. APPRAISAL STANDARDS

Bank lenders should become familiar with related federal regulatory agency
regulations. The objective of an appraisal report is to communicate an
44
 appraiser's reasoning and conclusions in a reasonable manner so that the
reader is led to the appraiser's estimation of market value. The contents of
an appraisal report must conform to the accepted and established
professional standards of nationally recognized professional appraisal
organizations. The form, length and content of appraisal reports may vary,
depending on the type of property being appraised and the nature of the
appraisal assignment.
When an Environmental Risk Study is required on a subject property, it
should be completed prior to engaging an appraiser.

VIII. EXEMPT TRANSACTIONS AND APPROVED EXCEPTIONS

For transactions that are not subject to the minimum level or approved by
the appropriate parties, as exceptions to the appraisal policy, the Bank will
obtain an evaluation that is appropriate for the circumstances. The
evaluation need not meet all of the detailed requirements of an appraisal set
forth by policy or regulations; however, any evaluation must fully support the
estimated value of the collateral. Therefore, the greater the bank's risk, the
more detailed the evaluation should be.

The Bank may accept an appraisal for a loan request less than $100,001
from a non-approved appraiser and will not require the appraiser to be
approved as a single use exception. If this valuation method is used the
lender should complete the applicable appraisal checklist to ensure that
adequate valuation steps have been taken.

IX. INTERNAL REAL ESTATE EVALUATIONS

An internal real estate evaluation may be completed in lieu of an appraisal

report or to obtain a current valuation of the real estate prior to a loan renewal
or modification in current circumstances. These instances are as follows:

1) Transaction value is $250,000 or less.

2) Real estate has been taken as an abundance of caution or no lien on

real estate is taken and the bank is fully protected by other collateral,
or the borrower qualifies for unsecured credit.

3) The transaction involves an existing extension of credit at the bank,

provided that there has been no obvious and material change in
market conditions or physical aspects of the property that threatens
the adequacy of the bank’s real estate collateral protection after the
transaction, even with the advancement of new monies.

4) The transaction is a business loan that has a transaction value of

$1,000,000 or less and is not dependent on the sale of, or rental
income derived from real estate as the primary source of repayment.

45
 5) A real estate loan that is insured or guaranteed by an agency of the US
Government, provided that the transaction is supported by an
appraisal that conforms to appraisal rules or other written
requirements of the Federal agency providing the insurance or
guaranty.

Standards for internal evaluations are as follows:

1) Be performed by a qualified, independent staff selected by the bank,

who is competent and knowledgeable of markets. The evaluator
should not be otherwise involved with or have any interest, financial or
otherwise, in the property. The evaluator must be capable of rendering
unbiased estimates of value and must have real estate related training
or experience relevant to the type of property appraised.

2) The evaluation must be completed and received in sufficient time to be

analyzed before a final credit decision is made.

3) The evaluation should:

a. Describe the property and its location;
b. Discuss its use (especially if non-residential);
c. Include the evaluator's calculations, supporting assumptions for
the estimate of value; and
d. Include a discussion of comparable property values if utilized.

4) The evaluation must be written, signed and dated, and include the
preparer's name and address.

5) The scope of the evaluation should address to the complexity of the

transaction and type of real estate collateral.

For transactions requiring less detailed analysis, such as certain home equity
loans of less than $100,001, the evaluation may be based upon comparable
property sales information from a multiple listing service, current tax
assessed value, or a combination thereof provided by a widely recognized
and reliable property value estimator service.

APPRAISAL REVIEW
For each certified appraisal the Bank officer will review each appraisal to ensure
compliance with the Bank's appraisal policies and ensure appraisals are in
compliance with minimum appraisal standards in 12 C.F.R. 34 as well as Uniform
Standards of Professional Appraisal Practice (USPAP). This review of the appraisal
will be made by an individual independent of the loan in question.

The officer must attest that the 14 minimum appraisal requirements have been met
prior to acceptance of the appraisal and payment for services. This review needs to
verify that the appraisal is complete and that the assumptions used in the appraisals
are reasonable and documented.
46
For land development projects where the loan amount exceeds $1 million and
commercial real estate loans where the loan amount exceeds $2 million, an
independent party must complete an additional Appraisal Review. Generally, the
Credit Department will conduct the secondary review but an experienced commercial
loan officer not associated with the credit will be allowed to be an alternate source of
review.

Sample appraisal checklist forms are included as part of this policy at Exhibit L for
residential appraisals, and at Exhibit M for commercial appraisals.

VALID APPRAISALS
The bank will have loans that mature with a balloon and will need to extend the
balloon loan for another length of time. When the loan is to be extended the bank
will review the old appraisal to determine the value of the property. The value of
the property can be affected by the period of time since the old appraisal, volatility
of the market, inventory of like properties in the area, condition and maintenance
of the property, rezoning of the property, and environmental factors. The bank will
evaluate the old value based upon these factors and document the file that the
value is sufficient or the value is determined to be greater than the old apprised
value. If the bank determines that the value has decreased, a new appraisal will
be ordered and analyzed prior to the loan being extended.

Sample State Bank will automatically provide a copy of the appraisal report to
applicants for credit secured by a lien on a residential structure containing a one-
to-four family home.

Appraisals will be accepted only from the listing of appraisers approved by the
Board of Directors.

Appraisals are not required for loans of $15,000 or less. Loan officer to determine
value by obtaining taxed assessed value and evaluation of local market.

Annually, the Bank’s Board of Directors will approve the list of appraisers to be
used by the Bank.

ENVIRONMENTAL POLICY
The purpose of the Environmental Policy is to establish safeguards and controls to
limit the Bank's exposure to potential environmental liability that can be
associated with real property held as collateral or acquired by the Bank. The Bank
recognizes that environmental contamination and the liability associated with that
contamination may negatively impact the value of real estate collateral and, in
instances where the bank is an owner or operator of contaminated property, the
Bank may incur significant direct liability. Further, the Bank recognizes that, in
addition to impairing the value of the collateral, the borrower's liability for
contamination may threaten the ability of the borrower to service the debt.

47
Procedures for Identifying and Evaluating Environmental Risk

The goal of the Bank is to utilize prudent procedures to evaluate potential

environmental risk, balancing the interests of the Bank in protecting itself from
potential liability against the need to avoid unnecessary expenditures of time and
money. Because certain types of real estate collateral pose a higher degree of risk
of environmental liability, the level of scrutiny given to real estate collateral will be
commensurate with the Bank's perception of the degree of risk posed by the
property at issue.

Generally, the Bank's policy will not include performance of an environmental

assessment in connection with loans secured by 1-to-4 family dwellings. However,
an investigation into possible contamination may be made if the 1-to-4 family
dwelling 1) is known to be located upon property which was formerly used for a
purpose which could pose an environmental risk, or 2) is situated in a locality of
known contamination, or 3) is in close proximity to a high risk industry. Information
regarding these risk factors may be obtained from bank employees' personal
knowledge of the sites, visual inspection, data collected from the prospective
borrower, or any other source which provides sufficient reliable information to
enable the Bank to accurately gauge the level of risk.

In cases where the property offered as collateral may pose a higher degree of risk,
the Bank shall employ the following approach to analysis of environmental risk.

Step 1: The Bank shall perform an initial screening of the property by

requiring the prospective borrower to complete the Environmental Risk
Assessment Questionnaire which is attached to and made a part of this
Policy at Exhibit I. The questionnaire is designed to elicit information
regarding possible contamination. In reviewing the responses to the
questionnaire, the Bank should be alert to:

 Contamination of drinking water if water is supplied either by a well or

other non municipal source;

 Contamination of soil, through chemicals of any sort, including, but not

limited to, petroleum products, pesticides, herbicides, or PCBs.

 The presence of asbestos in building materials, particularly asbestos that

is friable.

 The presence of radon gas;

 The presence of underground storage tanks or above ground storage

tanks;

 The presence of hazardous waste sites in close proximity to the property

offered as collateral;
48
  The presence of lead paint;

 The presence of unidentified waste materials or fill dirt of unknown origin.

Step 2: If the responses to the questionnaire either contain a large number

of "Unknown" answers or contain a number of responses which indicate a
need for environmental concern, the Bank may seek additional information
about the site through a site visit, discussions with current occupants of the
property (if different from the prospective borrowers) or interviews with
adjacent property owners.

Step 3: If the information gathered in step two continues to indicate

possible environmental risk, the Bank may perform a government records
review to assist it in identifying any known contamination incidents on the
property and adjoining properties from the records of federal and state
governmental agencies, including, for example, the EPA, or any other
applicable state agencies.

Step 4: After completing step three, the Bank may choose to conduct a
historical records review to determine, from public documents and, where
appropriate, historical aerial photographs, the former uses of the subject
property and adjacent properties.

Step 5: Where necessitated by responses to individual questions on the

environmental questionnaire, the Bank may utilize the assistance of qualified
professionals to further determine the degree of potential risk for any
specific contaminant. As an example, the Bank may use the services of water
testing professional or a qualified asbestos inspector or a qualified
formaldehyde inspector.

Step 6: Where the amount of the loan is large and the Bank believes the
initial steps outlined above do not sufficiently guard against risk of potential
environmental liability, the Bank may require a Phase I environmental site
assessment as defined in the ASTM subcommittee Phase I Environmental
Assessment Standards. A loan is deemed large when it exceeds $500,000.

Step 7: Following review of the results of the Phase I Site Assessment, the
Bank may determine the potential risk to be sufficiently small to warrant the
making of the loan, the Bank may deem it necessary to turn down the loan
request or the offer of the property as collateral security, or the Bank may
conclude that a Phase U Site Assessment is appropriate.

DOCUMENTATION

Where the Bank has determined that a piece of real estate being taken as
collateral poses a potential environmental risk, or where the amount of the loan
is large, the Bank shall consider utilizing covenants in its loan documents which'
safeguard the Bank against potential environmental losses and liabilities.
Possible contractual clauses include:
49
 Requirement that the borrower comply with environmental laws;
 Requirement that the borrower disclose information about the environmental
status of the real property collateral;
 Requirement that the borrower grant the institution the right to acquire
additional information about potential hazardous contamination by
inspecting the collateral for environmental concerns;
 Provision which enables the Bank to call the loan, refuse to extend funds
under a line of credit, or foreclose if the hazardous contamination is
discovered in the real property collateral;
 Provision which requires the borrower and/or guarantors to indemnify the
Bank for environmental liability associated with the real property collateral.

TRAINING

An effort will be made to provide training to bank personnel sufficient to ensure

that the environmental risk program is implemented and followed and that
appropriate personnel have the knowledge and experience to determine and
evaluate potential environmental concerns that might affect the institution. The
bank's attorneys, environmental consultants and other qualified experts will be
consulted if a particular environmental issue is beyond the expertise of the
Bank's staff.

MONITORING

During the life of the loan, the Bank shall monitor the borrower and the real
property collateral for potential environmental concerns. The Bank should be
notified of any changes in the borrower's business which may result in a
significant increased risk of environmental liability and should exercise its rights
under the loan agreement to either call the loan, refuse to extend funds under a
line of credit, require the borrower to ameliorate the environmental problem or
cease the risky activity, or take such other steps as may be necessary to protect
the value of the real property and the interests of the bank.

AVOIDANCE OF OWNER/OPERATOR LIABILITY

The Bank is mindful of the fact that under CERCLA, the Bank can incur
environmental liability if it goes beyond the status of mere holder of a security
interest in real property and becomes an owner or operator of the property. The
Bank shall therefore exercise caution in its actions to guard against actions
which may be deemed to constitute "participating in the management" of the
business located on the real property collateral.

Further, the Bank understands that it may incur direct liability if it takes title to
real property held as collateral. Therefore, prior to acquiring ownership of real
property collateral either through foreclosure, deed in lieu of foreclosure, or
other similar means, the Bank will evaluate the potential for environmental
liability risk associated with the property or, if the degree of risk is determined

50
to be significant after an appropriate level of inquiry, the Bank shall abandon
the collateral.

COMMERCIAL REAL ESTATE LOANS

When applicable, the following will be required of a borrower at the inception of

a loan:

1. To comply with applicable environmental laws and rules; and

2. To complete the Environmental Risk Assessment Questionnaire that is

made part of this policy in Exhibit I; and

3. To clean up a facility or security interest prior to inception of the loan.

When appropriate, the borrower will be required to hire a qualified entity to

perform an environmental audit. The borrower will be required to comply with
all regulatory requirements in the event contamination is discovered during the
audit. If potential exposure exists, audits should be performed during the term
of the loan. All loan requests with known or suspected risks of a submitted to the
Bank Loan Committee for action.

The bank or any agent of the bank will not participate in facility management,
or take any action that would put the bank in the position of “owner operator”.
Any property subject to potential contamination shall be held only as a security
interest or the bank should acquire ownership only in the course of protecting a
security interest.

Loan Officers should be familiar with the Comprehensive Environmental

Response Compensation and Liability Act (CERCLA). Legal counsel should be
utilized when any question arises out of CERCLA liability.

RESIDENTIAL LOANS

Review the comments and bank reservations made by the appraiser. If the
property has no evidence of existing or potential environmental hazards sufficient
to the soundness of the loan, and the loan officer has no knowledge of any no
further action is needed. If there is evidence of environmental hazards, then
proper action would be required to determine the risk and reported to loan
committee and or the Board of Directors for recommendation of further actions
needed.

EDR LOANCHECK

EDR (Environmental Data Resources Inc.) is the innovator of the largest and most
accurate database of environmental and historical land use information in the
world. With over 23 million records compiled from over 1,200 federal, state, local,
tribal and proprietary databases, EDR maintains the world's largest repository of
environmental information.

51
 EDR provides data that is often utilized for the underlying information found in
Phase I environmental assessments.

An EDR Loancheck provides this underlying data in report format that can reveal
background information on a property and surrounding property within a 1/8 mile
radius. This can be used to assist in assessment of the possible environmental risk
associated with a property. The EDR Loancheck is not intended to replace a Phase
I assessment and should be utilized to assist in determining if additional
environmental investigation is necessary.

The website to order EDR reports: www.edrnet.com

Appendix F - Real Estate Construction Loans

Loan Closing and Disbursement Processes

A. “Construction loans” are loans made for the purpose of building on vacant
land or construction additions to existing structures. Because the incomplete
structure and the land represent the security for the loan, funds are
disbursed in installments as work progresses. One of three methods, or
variants thereof, is used to ensure a lien free, and an adequately
collateralized loan throughout construction. A current site visit should be
documented for each disbursement in excess of $5,000 that also includes

52
 the projects current percentage of completion and calculated current loan to
value. These three basic methods are:

1. Progress payment, also referred to as a draw plan. Under this method,

portions of the loan proceeds are disbursed to the borrower or general
contractor when construction reaches certain stages of completion.
These stages must be stipulated in the construction loan agreement. This
method provides the least protection to the bank since frequently no
information is obtained as to whether the borrower or general contractor
is compensating the subcontractors and material men;

2. Invoice method, under which construction fund payments are usually

made directly to the subcontractors and material men by the bank.
Payments are made on the presentment of invoices. Draw requests
should be supported by lien waivers appropriate to the work performed or
materials provided.

3. Title insurance method, under which a title company assumes the

responsibility for making construction disbursements and for obtaining
the necessary assurance of an unencumbered first lien position for the
lender. An updated title insurance policy is issued with each
disbursement, insuring the lender to the full amount of the construction
disbursements to date. It remains the bank’s responsibility to ensure,
through construction inspections, that work is progressing in accordance
with plans and specifications.

B. Construction loans usually involve a higher degree of risk than other types of
loans. A high degree of expertise is necessary to assure that construction
results in a structure or structures that comply with plans and specifications.
Procedural controls must be sophisticated to the degree necessary to assure
that disbursements are made in such a way that precludes intervening liens
and which prevents misappropriation of relative loans-in-process balances.

C. The following safeguards must be implemented to assure that construction

loans are issued and serviced on a safe and sound basis:

1. No disbursement of funds in advance of construction progress. As a

result, the bank will have sufficient undisbursed loan funds to ensure
project completion;

2. Approval of loan agreements that provide for progress inspection to

ensure that construction has been performed in accordance with
approved plans and specifications, and that labor and material for which
reimbursement is requested is evidenced by the construction progress
prior to disbursement;

3. Approval of construction loans with prior review of the builder’s cost

estimates to determine their accuracy and reasonableness when related
to the proposed sales price;
53
4. Disbursement of construction funds that are properly supported by
inspection reports, percentage of projects completion and current loan to
value calculation;

5. Approval of loan agreements that provide that changes in plans and

specifications can be made only with prior approval of the bank; and

6. The bank should perform periodic inspections to insure progress of the

project represents the amount and purpose of funds advanced.

Exhibit F to this policy is a Construction Loan Inspection Card for

construction loans that can be utilized to track the progress of
construction on a periodic basis.

A log of all expenses, loan advances and lien waivers is required for each
project.

54
Exhibit A - Loan Approval System and Committee
Responsibility
A. LOAN OFFICER AUTHORITIES

Each individual loan officer has the authority to grant unsecured and secured
credit loans within their authorized limit as listed below:

Unsecure Secured Limits

Lending d
Representative Limits

(President & CEO) $100,000 $200,000

(Vice President) $100,000 $ 200,000

(Vice President) $50,000 $150,000

(Loan Officer) $25,000 $150,000

(Loan Officer) $25,000 $150,000

(Loan Officer) $25,000 $150,000

Comments:

A. Loan officers have authority individually to extend credit up to the

amount authorized by an existing, approved and unexpired line of
credit.

B. Individual authorities cannot be combined to approve a loan in excess

of the individual authorities.

C. In compiling the aggregate debt to determine the adequacy of a loan

officer’s lending authority, permanent first mortgage debt secured by
the borrower’s primary residence (up to $250,000) may be excluded,
provided the residential loan and the consumer loan is current and is in
conformity with loan policy.

D. Loan officers are encouraged to seek assistance from the Credit

Committee or other loan representatives on credits outside their area
of expertise, credits with which they are unfamiliar, decisions with
which they are uncomfortable, or other situations such as new
customers or new ventures of existing customers.

B. LOAN COMMITTEE AUTHORITIES

55
A. The Loan Officer Committee (also known as the Loan Committee)
consists of the President, all loan officers and head of loan processing
department.,
B. The Loan Officer Committee meetings will be held on an as-needed
basis but, at a minimum, monthly.

C. The vote of each Loan Committee member weighs equally on the

action being considered. An affirmative vote of the majority of the
participating committee members is required for approval of an action.

D. Approval Functions:

1. This committee has authority to approve all individual loans up to

the Bank’s legal lending limit.

2. Approves interest rate negotiations.

3. Approves changes in loan risk ratings and specific reserves.

4. Approves exceptions to policy

5. Reviews and makes recommendations to the board of directors of

compromises, charge-offs and OREO/Other Asset write-down
recommendations.

6. Reviews and grants approval for the sale of OREO/Other Assets

recommendations.

E. Review Functions for all types of Commercial, Commercial Real Estate,

Agricultural, and Agricultural Real Estate Loans.

1. Annually reviews all customer relationships based on the following

Risk Rating and Exposure:

Risk Rating Exposure

6 or worse $100,000 & above

All credits over $150,000 (permanent first mortgage debt, secured

by the borrower’s primary residence may be excluded) regardless of
rating will be reviewed annually, via the Annual Review Form.

All other credits need to be reviewed by officers annually; however,

it is not necessary to make a formal presentation or analysis.

2. Reviews and discusses weekly or as needed, past due loan reports

from all lending areas and makes recommendations for the
handling of certain loan situations

56
 3. Reviews and approves all actions requiring Board approval prior to
their submission to the Board.

C. BOARD OF DIRECTORS AUTHORITIES

A. Approval Functions

1. Approval of Loan Policy and any changes to it.

2. Review and Approval of all unsecured loans over $100,000.

3. Approval of loans to insiders.

4. Approval of compromises, charge-offs, and write-downs and sale of

OREO/Other Assets.

5. Reviews all exceptions to loan policy.

6. Review and approval of all new loans made the previous month.

B. Review functions for loans:

1. Monthly review of the Classified Loan List.

2. Review past due loans.

3. Review loans maturing for the month.

4. Loan policy exception list.

57