This excerpt taken from the BFNB 10-Q filed Nov 7, 2008.
Nonperforming Assets/Other Real Estate Owned and Repossessed Assets
We discontinue accrual of interest on a loan when we conclude it is doubtful that we will be able to collect interest from the borrower. We reach this conclusion by taking into account factors such as the borrowers financial condition, economic and business conditions, and the results of our previous collection efforts. Generally, we will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. When we place a loan in nonaccrual status, we reverse all interest which has been accrued on the loan but remains unpaid and we deduct this interest from earnings as a reduction of reported interest income. We do not accrue any additional interest on the loan balance until we conclude the collection of both principal and interest is reasonably certain. At September 30, 2008, there were no loans accruing interest which were 90 days or more past due and we had no restructured loans.
Impaired loans totaled $21,501,308, $1,881,551 and $6,435,683 at September 30, 2008, September 30, 2007, and December 31, 2007 respectively, which had the effect of reducing net income $1,316,565, $88,501, and $259,958 for the nine months ended September 30, 2008, September 30, 2007 and the year ended 2007. Included in the allowance for loan losses related to impaired loans at September 30, 2008, September 30, 2007, and December 31, 2007 was $3,273,459, $778,701, and $1,378,306 respectively. Impaired loans with a specific allocation of the allowance for loan losses totaled $12,073,909, $1,881,551 and $5,526,724 at September 30, 2008, September 30, 2007, and December 31, 2007 respectively. The average recorded investment in total impaired loans for the nine months ended September 30, 2008, September 30, 2007 and the year ended December 31, 2007 was $15,362,667, $1,961,531, and
$3,080,069, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2008, September 30, 2007 and the year ended December 31, 2007 was $668,045, $243,420, and $324,556, respectively.
Nonaccrual loans were $17,887,473, $549,714, and $2,902,888 as of September 30, 2008, September 30, 2007, and December 31, 2007, respectively. As the economy continues to weaken, some of our borrowers find that they do not have sufficient cash flow to make payments on time, and we place their loans on nonaccrual status. There are currently 32 borrowers that are on nonaccrual at September 30, 2008. Six of those borrowers amount to 62% of the total nonaccrual loans.
If the bank takes properties from a loan work-out, it places it in the other real estate owned asset account (OREO), if it is real estate, or in a repossessed asset account, if it is not real estate. The properties that are received are recorded at the lower of cost or the current value of the collateral. Any write-down in value, before being placed into OREO or repossessed asset account, is included as a charge-off in the allowance for loan loss. Any subsequent gain or loss, including expenses related to the sale, is recorded through the income statement.
At September 30, 2008 we had $2,265,215 in OREO, compared to $328,775 at September 30, 2007, and $15,000 at December 31, 2007. At September 30, 2008 we had $116,000 in repossessed property compared to $0 at September 30, 2007 and December 31, 2007. As of September 30, 2008, there are six properties in OREO, one of which is under contract. The properties in OREO at September 30, 2008 include two parcels of undeveloped land, two developed residential lots, one office building, and one restaurant. During the third quarter of 2008, we wrote down the value of OREO by $370,000, based on a decline in value of the underlying properties.