Generally we place loans in nonaccrual status when principal or interest is delinquent for 90 days or more ( unless the loan is well secured and in the process of collection ) or circumstances indicate that full collection is not expected .
When a loan is placed in nonaccrual status , we reverse current year accrued interest to the extent principal plus accrued interest before the transfer exceeds the net realizable value of the collateral . Any unpaid interest accrued in a prior year is capitalized to the recorded investment of the loan , unless the net realizable value is less than the recorded investment in the loan , then it is charged-off against the allowance for loan losses . Any cash received on nonaccrual loans is applied to reduce the recorded investment in the loan , except in those cases where the collection of the recorded investment is fully expected and the loan does not have any unrecovered prior charge-offs . In these circumstances interest is credited to income when cash is received . Loans are charged-off at the time they are determined to be uncollectible . Nonaccrual loans may be returned to accrual status when principal and interest are current , prior charge-offs have been recovered , the ability of the borrower to fulfill the contractual repayment terms is fully expected , the borrower has demonstrated payment performance , and the loan is not classified as doubtful or loss .
In situations where , for economic or legal reasons related to the borrower ’ s financial difficulties , we grant a concession for other than an insignificant period of time to the borrower that we would not otherwise consider , the related loan is classified as a troubled debt restructuring , also known as a formally restructured loan for regulatory purposes . A concession is generally granted in order to minimize economic loss and avoid foreclosure . Concessions vary by program and borrower and may include interest rate reductions , term extensions , payment deferrals , or an acceptance of additional collateral in lieu of payments . In limited circumstances , principal may be forgiven . Loans classified as troubled debt restructurings are considered risk loans ( as defined below ).
Loans that are sold as participations are transferred as entire financial assets , groups of entire financial assets , or participating interests in the loans . The transfers of such assets or participating interests are structured such that control over the transferred assets , or participating interests have been surrendered and that all of the conditions have been met to be accounted for as a sale .
Allowance for Loan Losses : The allowance for loan losses is an estimate of losses in our loan portfolio as of the financial statement date . We determine the appropriate level of allowance for loan losses based on periodic evaluation of factors such as loan loss history , estimated probability of default , estimated loss severity , portfolio quality , and current economic and environmental conditions .
Loans in our portfolio that are considered impaired are analyzed individually to establish a specific allowance . A loan is impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement . We generally measure impairment based on the net realizable value of the collateral . Risk loans include nonaccrual loans , accruing restructured loans , and accruing loans 90 days or more past due . All risk loans are considered to be impaired loans .
We record a specific allowance to reduce the carrying amount of the risk loan by the amount the recorded investment exceeds the net realizable value of collateral . When we deem a loan to be uncollectible , we charge the loan principal and prior year ( s ) accrued interest against the allowance for loan losses . Subsequent recoveries , if any , are added to the allowance for loan losses .
An allowance is recorded for probable and estimable credit losses as of the financial statement date for loans that are not individually assessed as impaired . We use a two-dimensional loan risk rating model that incorporates a 14-point rating scale to identify and track the probability of borrower default and a separate 6-point scale addressing the loss severity . The combination of estimated default probability and loss severity is the primary basis for recognition and measurement of loan collectability of these pools of loans . These estimated losses may be adjusted for relevant current environmental factors .
Changes in the allowance for loan losses consist of provision activity , recorded in “ Provision for loan losses ” in the Consolidated Statements of Income , recoveries , and charge-offs .
Investment in AgriBank : Our stock investment in AgriBank is on a cost plus allocated equities basis .
Other Property Owned : Other property owned , consisting of real and personal property acquired through foreclosure or deed in lieu of foreclosure , is recorded at the fair value less estimated selling costs upon acquisition . Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses . Revised estimates to the fair value less costs to sell are reported as adjustments to the carrying amount of the asset , provided that such adjusted value is not in excess of the carrying amount at acquisition . Related income , expenses , and gains or losses from operations and carrying value adjustments are included in “ Miscellaneous income ( loss ), net ” in the Consolidated Statements of Income .
Other Investments : The carrying amount of the investments in the Rural Business Investment Companies , in which we are a limited partner and hold a non-controlling interest , is at cost and is included in “ Other assets ” in the Consolidated Statements of Condition . The investments are assessed for impairment . If impairment exists , losses are included in “ Miscellaneous income ( loss ), net ” in the Consolidated Statements of Income in the year of impairment . Income on the investments is limited to distributions received . In circumstances when distributions exceed our share of earnings after the date of the investments , these distributions are applied to reduce the carrying value of the investments and are not recognized as income .
Premises and Equipment : The carrying amount of premises and equipment is at cost , less accumulated depreciation and is included in “ Other assets ” in the Consolidated Statements of Condition . Calculation of depreciation is generally on the straight-line method over the estimated useful lives of the assets . Gains or losses on disposition are included in “ Miscellaneous income ( loss ), net ” in the Consolidated Statements of Income . Depreciation and maintenance and repair expenses are included in “ Other operating expenses ” in the Consolidated Statements of Income and improvements are capitalized .
Post-Employment Benefit Plans : The District has various post-employment benefit plans in which our employees participate . Expenses related to these plans are included in “ Salaries and employee benefits ” in the Consolidated Statements of Income .
Certain employees also participate in the AgriBank District Retirement Plan . The plan is comprised of two benefit formulas . At their option , employees hired prior to October 1 , 2001 , are on the cash balance formula or on the final average pay formula . Benefits eligible employees hired between October 1 , 2001 , and December 31 , 2006 , are on the cash balance formula . Effective January 1 , 2007 , the AgriBank District Retirement Plan was closed to new employees . The AgriBank District Retirement Plan utilizes the " Projected Unit Credit " actuarial method for financial reporting and funding purposes .
A certain former employee also participates in the AgriBank District Pension Restoration Plan . This plan restores retirement benefits to certain highly compensated eligible employees that would have been provided under the qualified plan if such benefits were not above certain Internal Revenue Code limits . Beginning in 2017 , the pension liability attributable to the Pension Restoration Plan at the Association and the related accumulated other comprehensive income are included in the Statements of Condition .
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