Commercial Lending . Loans in this category include loans to service, retail, wholesale and light  manufacturing businesses. Commercial loans are made based on the financial strength and repayment ability of the  borrower, as well as the collateral securing the loans. The Bank targets owner-operated businesses as its customers  and makes lending decisions based upon a cash flow analysis of the borrower as well as a collateral analysis. Accounts receivable loans and loans for inventory purchases are generally on a one-year renewable term and loans  for equipment generally have a term of seven years or less. The Bank generally takes a blanket security interest in all  assets of the borrower. Equipment loans are generally limited to 75% of the cost or appraised value of the  equipment. Inventory loans are generally limited to 50% of the value of the inventory, and accounts receivable loans  are generally limited to 75% of a predetermined eligible base. The Bank continues to focus on generating additional  commercial loan relationships.  Municipal Lending. Loans to municipalities are generally related to equipment leasing or general fund  loans. Terms are generally limited to 5 years. Equipment leases are generally made for the purchase of municipal  assets and are secured by the leased asset. The Bank is no longer active in the origination of municipal leases;  however, the Bank may still originate loans or leases for municipalities in its market area.  Agriculture Lending. Agricultural real estate loans generally have amortization periods of 20 years or less,  during which time the Bank generally retains a security interest in the borrower’s real estate. The Bank also provides  short-term credit for operating loans and intermediate-term loans for farm product, livestock and machinery  purchases and other agricultural improvements. Farm product loans generally have a one-year term, and machinery,  equipment and breeding livestock loans generally have five to seven year terms. Extension of credit is based upon  the borrower’s ability to repay, as well as the existence of federal guarantees and crop insurance coverage. These  loans are generally secured by a blanket lien on livestock, equipment, feed, hay, grain and growing crops. Equipment and breeding livestock loans are generally limited to 75% of appraised value. Although the Bank’s  agriculture loan portfolio declined during 2012, the Bank continues to focus on generating additional agriculture  operating loan relationships. The Bank does not focus on generating agriculture real estate loans.  Consumer and Other Lending . Loans classified as consumer and other loans include automobile, boat,  home improvement and home equity loans. With the exception of home improvement loans and home equity loans,  the Bank generally takes a purchase money security interest in collateral for which it provides the original financing. Home improvement loans and home equity loans are principally secured through second mortgages. The terms of  the loans typically range from one to five years, depending upon the use of the proceeds, and generally range from  75% to 90% of the value of the collateral. The majority of these loans are installment loans with fixed interest rates. Home improvement and home equity loans are generally secured by a second mortgage on the borrower’s personal  residence and, when combined with the first mortgage, limited to 80% of the value of the property unless further  protected by private mortgage insurance. Home improvement loans are generally made for terms of five to seven  years with fixed interest rates. Home equity loans are generally made for terms of ten years on a revolving basis with  adjustable monthly interest rates tied to the national prime interest rate. The Bank has experienced weak consumer  loan demand and does not expect consumer loan demand to increase until economic conditions improve further and  the unemployment rate declines.  Loan originations are derived from a number of sources. Residential loan originations result from real  estate broker referrals, direct solicitation by the Bank’s loan officers, present depositors and borrowers, referrals  from builders and attorneys, walk-in customers and, in some instances, other lenders. Consumer and commercial real  estate loan originations generally emanate from many of the same sources. Residential loan applications are  underwritten and closed based upon standards which generally meet secondary market guidelines. The loan underwriting procedures followed by the Bank conform to regulatory specifications and are  designed to assess both the borrower’s ability to make principal and interest payments and the value of any assets or  property serving as collateral for the loan. Generally, as part of the process, a loan officer meets with each applicant  to obtain the appropriate employment and financial information as well as any other required loan information. The  Bank then obtains reports with respect to the borrower’s credit record, and orders, on real estate loans, and reviews  an appraisal of any collateral for the loan (prepared for the Bank through an independent appraiser).  Loan Origination and Processing  14 