A loan is considered adequately secured only if it is secured by real or personal property having a net realizable value sufficient to discharge the debt in full, or it is guaranteed by a financially responsible party in an amount sufficient to discharge the debt in full. 

A loan is considered in process of collection only if collection efforts are proceeding in due course and, based on a probable and specific event, are expected to result in the prompt repayment of the debt or its restoration to current status. There must be documented evidence that collection in full of amounts due and unpaid is expected to occur within a reasonable time period, not to exceed 180 days from the date the payment was due. The commencement of collection efforts through legal action, including ongoing workouts and re-amortizations, do not, in and of themselves, provide sufficient cause to keep a loan out of non-accrual status.

When one loan to a borrower is placed on non-accrual, we should immediately evaluate other loans to that borrower, or related borrowers, to determine if they should also be placed on non-accrual. All loans on which a borrowing entity, or a component of a borrowing entity, is primarily obligated to the Bank shall be considered as one loan unless a review of all pertinent facts supports a reasonable determination that a particular loan constitutes an independent credit risk and such determination is adequately documented in the credit file. 

The loan shall be considered independent credit risks if the primary sources of repayment are independent of each loan, the loans are not cross-collateralized, or the principal obligors are different persons or entities. Related loans will not be considered independent credit risks if the operations of a related borrower are so financially interdependent with the borrower's operations that the economic survival of one will materially affect the economic survival of the other. 

When a loan is determined to be a non-accrual loan, the earned but uncollected interest income that was accrued in the current fiscal year and is determined to be uncollectible shall be reversed from interest income. 

If the ultimate collectability of the loan (including principal and interest), in whole or in part, is in doubt, any payment received on such loan shall be applied to reduce the principal balance to reduce the recorded investment in the loan to the extent necessary to eliminate such doubt. The doubt is typically removed when the principal balance is reduced to an amount that is equivalent to the fair market value less estimated selling costs of the collateral securing the loan. 

Once the ultimate collectability of the loan is no longer in doubt, payments received in cash on such loans may qualify for recognition as interest income if all of the following characteristics are met at the time the payment is received: 

1. The loan does not have a remaining un-recovered, prior charge-off associated with it, except in cases where the prior charge-off was taken as part of a formal restructuring of the loan. (See the Financial Difficulty Modifications tab). 
2. The loan, after considering the payment, is not contractually past due more than 90 days and is not expected to become 90 days past due, or a repayment pattern has been established that reasonable demonstrates future repayment capacity. 

Loans can be determined to be non-accrual by any officer managing such loan, by the department head of the officer managing the loan, or by Credit Administration. Once a loan has been determined to be non-accrual, the appropriate accounting entries should be made. 

Once a loan is determined to be non-accrual, the account officer or the Special Assets Department is to determine an appropriate action plan to restore to accruing status. If such a plan is not available, proceed with the litigation and/or foreclosure process. 

Loans will be transferred to ORE at the time the Bank takes legal possession of the asset securing the loan in default. The responsibility for managing and transferring assets into ORE vests with the Special Assets Department, which is responsible for following the guidelines for maintenance and accounting for Other Real Estate as described in this policy.

Upon transfer of assets into ORE, a separate file is to be created. This active ORE file should contain an expense and control card detailing all expenditures of holding and disposing of the property, the certificate of title, the request for charge-off showing initial charge-off, and the appraisal to support he carrying value of the property. Additionally, the file may contain all real estate related documentation regarding marketing, advertising, bids and contracts for purchase may be kept digitally on the Special Asset Shared Drive, when such documentation is available. 

Active ORE files will be housed at the physical location of the Special Assets Department. Paid out ORE files will continue to be maintained there for one year. After this one year period, the closed ORE file will be maintained at the Operations Center in Tallahassee. 

​Liability insurance is to be placed on all properties the day the bank takes title to the property. Hazard insurance is also to be placed on all properties with improvements the day the bank takes title to the property. These properties are covered under the Bank’s ORE blanket coverage up to a specified amount. Properties having structural improvements above the specified amount are underwritten separately, requiring special notification to the insurance company when the Bank takes title. All properties are reported to the insurance company monthly. 

Refer also to the Bank's Environmental Risk Management Policy for additional guidance. 

Under Federal and State environmental liability statutes, a bank may be liable for cleaning up hazardous substance contamination of other real estate owned. In some cases, the liability may arise before the bank takes title to a borrower’s collateral real estate. A property’s transition from collateral to bank ownership may take an extended period of time. As the financial problems facing a borrower worsen, a bank may become more involved in managing a company or property. It is extremely important that no officer agree, formally or informally, to make decisions that are typically made by the owner or operator of the property. 

Prior to accepting or taking title to a commercial real estate property, the asset manager will determine, on a case by case basis, whether or not to have an Environmental Phase I completed; however, each property will undergo at a minimum an Environmental Risk Assessment (ERA) as per the Environmental Procedure Matrix. A Phase I is to be obtained on commercial real estate if the previous use of the property has characteristics of being potentially hazardous or had the potential to contain qualities that may raise concerns of contamination. If such reporting is deemed required, the resulting report is to be maintained in the ORE file. In the event a concern is raised from the preliminary analysis (ERA or Phase I), the asset manager is to notify the Special Assets Department head to determine the plan of action concerning a more intensive environmental study. If a property is known to be contaminated, the Bank is not to take title to the property unless there are mitigating factors. In this case, Credit Administration approval is required prior to foreclosure. 

If there are signs of contamination such as foul or unusual odors, discolored vegetation, or stored chemicals on site, a Phase I Environmental Study should be ordered. Also, if the property is located near other sites that are either known to be or suspected to be contaminated, a Phase I study should be ordered. 

Expenses incurred while obtaining or holding ORE are to be approved by the appropriate special assets manager. All invoices should be initialed and forwarded to the Financial Accounting Department in accordance with the Bank’s expense policy. All copies of invoices should be maintained in the ORE file. 

There will be instances when the Bank will expend funds to develop and improve ORE. This will occur when it appears reasonable to expect that any shortfall between the property’s fair value and the Bank’s recorded book value will be reduced by an amount equal to or greater than the expenditure.

At times it will be economically viable to rent a property. In such occasions, the special assets manager will negotiate the lease. The original rental agreement is to be maintained in the ORE file, with a copy forwarded to the Financial Accounting Department. Receipt of ORE income should be documented on the control card of the ORE file, and the check should be forwarded to the Accounting Department. 

​All marketing efforts will be fully documented in the ORE file located on the Special Assets Shared Drive, the Shared Special Assets Access Database, or the ORE Physical File. These documents include but are not limited to a record of inquiries and offers made by potential buyers, methods used in advertising the property for sale, the listing agreements with agents, and any other information reflecting sales efforts. 

The appraised value of the property should be used as the primary basis for establishing an asking price for the property. Remember, however, the ultimate goal is to limit losses relative to holding ORE, including expenses of management, write-off of asset value, and loss of interest during the holding period. Sometimes losses are limited by quickly selling a property as opposed to obtaining a higher price. 

In general, it will be the Bank’s policy to try to sell its properties as quickly and efficiently as possible. It may be in the Bank’s best interest to list the property with a realtor. If properties aren’t sold within the listing period, consideration should be given to choosing a different listing agent. 

​The Bank may hold ORE for a period not to exceed 5 years, unless approval is obtained by the appropriate regulatory authority to extend the holding period. In order to extend the holding period, the Bank must show that it has made a good faith attempt to dispose of the ORE during the initial holding period and that disposal of the ORE within that timeframe would have been detrimental to the Bank. The holding period begins on the date that ownership of the property is originally transferred to the Bank. If the ORE property is a former Banking premise, the holding period begins the date that relocation to the new premises is complete. For properties acquired for future Bank expansion, the holding period begins on the date the decision is made not to expand. 

The Bank will periodically purchase property for future expansion plans. In such cases, the Bank will have one year from purchase to state, by board of director resolution or other official action, definite plans for its use. "Definite" plans do not require such things as contractor cost estimates, architectural plans, etc. and can be: "The property will be used for a full service branch." The Bank has 5 years to actually use the property for future expansion. 

Real estate assets transferred to ORE should be accounted for individually on the date of transfer at the lower of the recorded investment in the loan or fair value of the property less estimated selling expenses. Estimated selling expenses include, but are not limited to, commissions, attorney’s fees, and any other loan fees to be paid by the Bank. The recorded investment in a loan is the unpaid balance, increased by accrued and uncollected interest, un-amortized premium, finance charges, and loan-acquisition costs, if any, and decreased by previous write-downs and un-amortized discount, if any. 

Any excess of the recorded investment in the loan over the property’s fair value must be charged-off against the allowance for loan losses immediately upon the property’s transfer to ORE. Legal fees and direct costs of acquiring title to the property should generally be charged to expenses unless payment of the fees is for the purpose of enhancing the property’s value (for example: obtaining a zoning variance). Payment of back property taxes is considered to be direct costs of acquiring title that are to be expensed. 

When the Bank acquires a parcel of property through foreclosure as a second lien holder, without assuming the first lien, the property should be booked at the loan amount, plus allowable costs. If the Bank assumes the first lien, the asset and liability should be recorded gross. Of course, if the Bank pays off the first lien, the property should be recorded at the lower of the recorded investment including the payoff of the first lien or the fair value of the property. 

State statutes require that an updated appraisal be obtained within 1 year prior to or 90 days after the date of acquisition of the property. Typically the new appraisal should be performed by an appraiser other than the one who performed the latest appraisal on file. In some cases, it may be desirable to utilize the same appraiser such as for special purpose properties, due to limited choice in market area, or other such reasons. 

For on-going valuation purposes, properties will be re-appraised on an annual basis if they have a carrying value of $250,000 or more. Exceptions to this re-appraisal process may be made for properties under contract for sale, or based on legal advice from Bank counsel if active litigation is on-going. For properties less than $250,000 in value the current value will be obtained through an evaluation process. 

On a quarterly basis, ORE properties will be reviewed to assess estimated fair market value. This review will be comprised of a review of market considerations and events that are relevant to the property type and location. For properties with a carrying value of $250,000 or more, this review will be done on a property specific basis. Those with a carrying value below $250,000 will be reviewed on a pool basis. 

If the updated appraisal/valuation indicates a decline in the fair value below the carrying value of the property, a loss will be recognized by a charge to current period earnings. We will attempt to determine whether the property’s decline in value is non-recoverable or temporary, taking into consideration each property’s characteristics and existing market dynamics. If the loss is non-recoverable, the direct write-down method will be used whereas the charge to expense is offset by a reduction in the ORE property’s carrying value and a new basis in the property is established. 

If the reduction in value is deemed to be temporary, the charge to expense will be offset by establishing a valuation allowance for the property. In the event of subsequent appreciation in the value of an ORE property for which a valuation has been established, the increase can only be reflected by reducing the valuation allowance. The valuation allowance for a property can never be adjusted to less than zero, thus prohibiting an increase in the carrying value of a property above the book basis established at the time the property was acquired. 

Gross revenues from ORE should be recognized in the period in which it is earned. Direct costs incurred in connection with holding an ORE property, including legal fees, real estate taxes, depreciation, and direct write-downs should be charged to expense when occurred. 

Gains and losses resulting from a sale of ORE properties for cash must be recognized immediately. A gain resulting from a sale in which the Bank provides financing should be accounted for in accordance with generally accepted accounting principles as summarized below. 

When financing the sale of ORE, the Bank will follow the income recognition guidance in ASC 610- 20 for seller financed sales of Other Real Estate Owned (OREO). Under this standard, the Bank will recognize the entire gain or loss on sale, if any, and derecognize the OREO at the time of sale if (1) an ASC 606 sales contract exists, and (2) control of the OREO has been transferred to the buyer as described in ASC 606. 

In order for an arrangement (such as the loan agreement and a purchase/sale agreement) to be a contract (and OREO to be derecognized), it must meet all of the following 5 criteria: 

1. The parties to the contract have approved the contract and are committed to perform their respective obligations.
2.  The Bank can identify each party's rights regarding the OREO to be transferred. 
3. The Bank can identify the payment terms for the OREO to be transferred. 
4. The contract has commercial substance (that is, the risk, timing, or amount oft he Bank's future cash flows is expected to change as a result of the contract).
5. It is probable that the Bank will collect substantially all of the consideration to which it will be entitled in exchange for the OREO that will be transferred to the buyer (for example: the transaction price). In evaluating whether collection is probably, the Bank should consider only the buyer's intent and ability to pay the transaction price. 

When assessing the buyer’s commitment to perform, the Bank will consider the amount and character of a buyer’s initial equity (typically the down payment) in the property immediately after sale and the existence of recourse provisions are important factors to consider when evaluating criteria (1) and (5). Under criterion (1), for example, if a buyer is not required to make a down payment or does not have recourse risk, the buyer may not have demonstrated a commitment to executing the rest of the contract. Furthermore, a borrower’s inability to provide a down payment to purchase the property, or the absence of recourse provisions, calls into question the ability of the bank to collect substantially all of the transaction price as outlined in criterion (5). 

Facts and circumstances related to the buyer’s intent and ability to pay the transaction price may include the following:

• Amount of cash paid as a down payment 
  • ASC 606 does not prescribe the amount of an adequate down payment. Banks must use judgment to determine if the down payment, considered with all other facts and circumstances, demonstrates the borrower's intent and ability to perform and whether it is likely that the bank will collect substantially all of the amounts due under the contract. 
• Existence of recourse provisions
• Credit standing of the buyer
• Age and location of the property 
• Cash flow from the property 
• Payments by the buyer to third parties 
• Other amounts paid to the selling bank, including current or future contingent payments
• Transfer of non-customary consideration (for example: something other than cash and a note receivable)
• Other types of financing involved with the property or transaction 
• Financing terms of the loan (Reasonable and customary terms, amortization, any graduated payments, balloon payments)
• Underwriting inconsistent with the bank's underwriting policies for loans not involving OREO sales
• Futures subordination of the seller's receivable 

The Bank’s final step, before derecognizing the OREO asset and recording any corresponding gain or loss on sale, is to transfer control of the property to the buyer. In accordance with ASC 606, this is referred to as the bank satisfying its performance obligation as identified in the contract. ASC 606-10 includes the following indicators of the transfer of control:

1. The bank has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The bank has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset. 

For seller-financed sales of OREO, transfer of control generally occurs on the closing date of the sale, when the bank obtains the right to receive payment for the property and transfers legal title to the buyer. Banks must consider all relevant facts and circumstances to determine whether control of the OREO has transferred, which may include the bank’s:

• Involvement with the property following the transaction
• Obligation to repurchase the property in the future
• Obligation to provide support for the property following the sale transaction
• Retention of an equity interest in the property

As part of the Bank's control environment, Financial Accounting will routinely review the following:

• All ORE sales > $100,000 will be reviewed for proper accounting treatment. Sampled testing of transactions < $100,000 will be conducted on an ad hoc basis. 
• All ORE gains on sale greater than $15,000 for properties financed by the Bank. 

In general, an FDM has been made when the Bank modifies a loan and, as a result, will not collect all amounts due. The following should modifications would qualify for disclosure:

• Principal forgiveness 
• Interest rate reduction
• Other-than-insignificant payment delay
• Term extension 
• Any combination of the above modifications

The following indicators should be considered when determining if a client is experiencing  financial difficulties: 

• The client is in default on any of its debt, or it is probable that the client would be in default on any of its debt in the foreseeable future without the modification. 
• The client has declared or is in the process of declaring bankruptcy. 
• There is substantial doubt about whether the client will be able to continue as a going concern.
• On the basis of estimates and projections, the Bank forecasts that the client's cash flows will be insufficient to service any of its debts (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future.
• Without the modification, the client can't obtain funds from sources other than existing creditors at the market rate for similar debt for a non-troubled client.

Once a loan has been determined to be a FDM, an assessment as to accrual status is necessary. Factors reviewed will include the materiality and impact of modifications granted, probability and expectations as to future performance under modified terms, delinquency status and historical payment performance prior to modification, and overall client outlook and expectations for future performance. Where it is probable that the client may default under the newly agreed terms, or when payments have been waived, the loan will be placed on non-accrual status until payment capacity has been indicated by timely payments and/or the outlook for the client has improved. 

Loans may be removed from non-accrual status when timely payments² have been made and future performance is considered probable. 

Additionally, a determination should be made if the modified loan should be treated as a new loan or continuation of the prior loan in order to assess the treatment of deferred fees and costs (disclosure is required either way). The modification should be treated as a new loan only if both of the following conditions are met:

• Terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks.
• Modifications to the terms of the original loan are more than minor

If these conditions are not met, account for the modification as a continuation of the old loan with any effects adjusted prospectively to the loan's effective interest rate. To determine if the changes are more than minor:

• Quantify the present value of cash flows under the new and old loan.
• If the present value of the cash flows under the new loan is at least 10% different than the present value of remaining cash flows under the old loan, you have a “more than minor” modification and therefore a new loan.
• If the difference between old and new cash flows is less than 10%, evaluate relevant facts and circumstances to determine if the more than minor condition has been satisfied.

The evaluation of FDM status shall be undertaken utilizing the Bank’s FDM checklist for loans that meet the following criteria: 

• Risk rated as Performing Substandard or worse; and
• Is $250,000 or more in loan exposure.

Those loans below the cut-off are deemed to be part of the homogenous loan pool and considered to be immaterial.

^{2In general, the Bank requires six timely payments to be sufficient when evaluating performance. In some cases, a longer performance period may be deemed appropriate an/or consideration of other factors such as type of changes made, note structure, etc.}

The Bank will remove FDM designation when the following facts are present: 

• Loan is subsequently rewritten (either renewal of matured loan or refinance of existing loan).
• The client is no longer experiencing financial difficulties (for example: the loan will qualify for a Pass or Pass Watch rating based on the Bank's Asset Classification Policy prior to, or at the time of renewal/refinance).
• The future outlook for the loan is that it will remain in a Pass or Pass Watch risk rating for the foreseeable future, more than 12-months at a minimum. 
• The evaluation of the above will be documented in the Credit Memo, utilizing the FDM checklist for loans of $250,000 or more.