A couple of years ago we charged down an impaired loan due to a collateral shortfall. The customer had three loans, an operating LOC, an equipment note, and a real estate note. The real estate note was adequately collateralized but somehow the charge down was applied to the RE note instead of the operating note.

We've recently been examining how we are handling nonaccrual and charged off/down notes. This customer came up, and we discussed the possibility of charging down the other notes $150K, and increasing the RE note by $150K. We are essentially reversing the charged down portion, but since we are turning around and charging down the other notes by $150K, it's a wash.

The purpose of doing this would be to take the RE loan to cash-basis nonaccrual. It has a separate revenue stream from the other notes, and has been performing. This would allow us to realize interest-income on this RE note on a cash-basis, while leaving it on nonaccrual status.

Is it ok to essentially reverse the charge down on the RE note if we in turn charge down the other notes?

Are we thinking correctly that the RE note could be cash-basis nonaccrual once this has been accomplished?

Thanks to everyone who replies!

Since your external accountants will be attesting to the accuracy of your financial records, this is really a discussion to have with them. These would be internal accounting record changes and would not impact the customer.