- Under regulatory accounting rules, a bank must report a loan as “modified” if it grants a significant financial concession to a borrower experiencing financial difficulty. As of June 30, 2026, modified loans accounted for 0.32 percent of total loans at community banking organizations (CBOs)._ This represents a slight decline from one year ago, while the level of noncurrent loans has steadily increased over the same period to 0.88 percent of total loans._
- Loan payoffs and borrowers returning to market terms may account for some moderation in the level of modified loan balances; however, the widening spread between noncurrent loans and reported modifications indicates that CBOs are formally modifying a smaller share of distressed loans.
- While this trend may be attributable to greater reliance on short-term accommodations that fall below the reporting thresholds, it may also indicate that community bankers are implementing more conservative loan modification criteria in the current credit environment, allowing distressed loans to transition into nonaccrual status without modification._
Questions or comments? Please contact KC.SRM.SRA.CommunityBankingBulletin@kc.frb.org
Endnotes
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1 Community banking organizations are defined as having less than $10 billion in total assets.
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2 Noncurrent loans include loans that are 90 days or more past-due or in nonaccrual status.
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3 The March 2022 Financial Accounting Standards Update (ASU 2022-02) refined what qualifies as a reportable loan modification, allowing certain insignificant delays and minor term extensions to be granted without requiring the loan to be reported as modified.
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.