Banks in the Eleventh Federal Reserve District are performing better than their peers. However, signs of strain are still evident following the recession and financial market crisis. Some banks that restructure troubled loans by granting borrowers easier terms subsequently find the loans delinquent again. ; While the number of restructured loans has grown dramatically, these loans remain a small part of the average bank's balance sheet, a review of district data shows. Lenders here are less likely to carry restructured loans than banks around the country, and when they do hold such assets, problems don't appear to be out of line with historical tendencies. These findings indicate that the current experience with loan restructurings in the district is less a cause for alarm and more a helpful response to some borrowers' difficulties.Federal Reserve District, 11th ; Banks and banking ; Mortgage loans

Kory Killgo

English

Research Papers in Economics

SouthwestEconomy    FEDERAL RESERVE BANK OF DALLAS • FOURTH qUARTER 2010 16
District Banks’ Exposure
to Modified Loans Limited
By Kory Killgo
The current experience 
with loan restructurings in 
the district appears to be less 
a cause for alarm and more 
a help  ful response to some 
borrowers’ difficulties.
Banks in the Eleventh Federal Reserve 
District are performing better than their 
peers. 1 However, signs of strain are still 
evident—with loan delinquencies a prime 
example—following the recession and 
financial market crisis. Some banks that 
restructure troubled loans by granting bor-
rowers easier terms subsequently find the 
loans delinquent again.
While the number of restructured loans 
has grown dramatically, these loans remain 
a small part of the average bank’s balance 
sheet, a review of district data shows. Lend-
ers here are less likely to carry restructured 
loans than banks around the country, and 
when they do hold such assets, problems 
don’t appear to be out of line with histori-
cal tendencies.
These findings indicate that the current 
experience with loan restructurings in the dis-
trict is less a cause for alarm and more a help-
ful response to some borrowers’ difficulties.
How Restructured Loans Work
A restructured loan is one in which a 
lender makes a repayment concession be-
cause the borrower’s financial condition has 
changed, making it unlikely or impossible 
for the original terms to be met. Concessions 
include reductions of interest or principal 
payments. A loan isn’t considered restructured 
if it’s extended or renewed under the same 
terms that a similar borrower would receive 
on a new transaction.
Banks renegotiate loans when they be-
lieve more favorable terms will increase the 
prospects of repayment. Supervisory guide-
lines expect such changes to be prudent 
and infrequent. Regulators encourage bank 
boards of directors to approve proposed 
restructurings and require board notification 
of any that are implemented.
If restructurings are not done prudently, 
a borrowing that should be classified as 
nonperforming or declared a loss could 
masquerade as a sound loan, deferring 
recognition of problems. In practice, many 
restructured loans encounter repayment dif-
ficulties, despite the concessions made to 
borrowers. Some industry observers have 
suggested that the poor performance of re-
structurings points to an ineffective process 
that only delays loss recognition.
Assessing whether banks are properly 
handling problem loans requires detailed 
knowledge of the banks’ restructuring pro-
cess—the type of in-depth insight super-
visory personnel gain during onsite bank 
examinations. It also requires exam-level 
data to determine an institution’s indirect ex-
posure to restructured loans, often through 
securities based on them. Even without this 
internal information, publicly available data 
provide some clues.
Growth of Restructured Loans
Banks traditionally reported restruc-
tured business loans but not consumer 
loans and borrowings secured by one- to 
four-family residential properties. In 2008, 
they began reporting restructured loans se-
cured by these residential holdings.
At year-end 2005, before the financial 
crisis, restructured business loans at Elev-
enth District banks totaled just over $100 
million, with about $18 million (18 percent) 
failing to comply with their modified terms 
(Chart 1). In 2008, the dollar volume of 
restructured business loans began grow-
ing and their performance deteriorated—a 
trend that accelerated in 2009. As of Sept. 
30, 2010, district banks reported just over 
$1.2 billion in restructured business loans, 
with $573 million (48 percent) in repayment 
trouble.2
One- to four-family residential real estate 
loans added to the concern. At the beginning 
of 2008, district banks reported $76 million in 
restructured residential loans, with $45 million 
(59 percent) in trouble. By Sept. 30, the figure 
had soared to $1.6 billion, with $592 million 
(37 percent) in difficulty. While some of this 
growth can probably be attributed to govern-
ment initiatives such as the Home Affordable   FEDERAL RESERVE BANK OF DALLAS • FOURTH qUARTER 2010 SouthwestEconomy 17
As of Sept. 30, district banks 
held a total of $2.8 billion in 
restructured loans, with $1.2 
billion (43 percent) at least 
30 days past due on their 
modified terms.
Modification Program that were implemented 
to help avoid foreclosures, reporting require-
ments don’t capture the data that would 
document that impact. 
As of Sept. 30, district banks held a total 
of $2.8 billion in restructured loans, with 
almost $1.2 billion (43 percent) at least 30 
days past due on their modified terms.
Modified Loan Share
Watching a dramatic increase in any 
troubled asset category can be unsettling 
for bankers and regulators. However, it’s im-
portant to put such an upsurge in context. 
It’s particularly useful to look at the 
relative size of restructured loans on banks’ 
balance sheets.
Restructured business loans accounted 
for 0.9 percent of total district business 
lending as of Sept. 30. Also, restructured 
loans accounted for only 10.1 percent of 
all troubled business loans. Relative to the 
overall portfolio, the level of restructured 
business loans appears manageable.3
Figures are slightly higher for re-
structured one- to four-family residential 
property loans. As of Sept. 30, restructured 
loans accounted for 2.6 percent of overall 
residential lending at district banks. Restruc-
tured loans accounted for 17.4 percent of 
total troubled residential loans. 
Across the country, restructured business 
loans rose to $30.8 billion as of Sept. 30 from 
$1.3 billion at year-end 2005 (Chart 2). Such 
business loans accounted for almost 1 percent 
of total business lending nationwide as of 
Sept. 30, slightly higher than the district’s 0.9 
percent. 
Reflecting the deterioration of the 
housing market nationwide, U.S. banks 
held about $83 billion in restructured loans 
secured by one- to four-family residential 
properties on Sept. 30, up from $19 bil-
lion two years earlier. About $31 billion of 
these were at least 30 days past due. Total 
restructured residential loans accounted 
for 4 percent of all residential lending. By 
comparison in the district, restructured resi-
dential loans were 2.6 percent of total resi-
dential loans, largely reflecting the relatively 
moderate decline in Texas housing prices.
It’s also useful to see how widespread 
restructured loans are in the banking in-
dustry. 
In the three years leading up to the 
recession, about 15 percent of banks in the 
district and the nation held restructured 
loans. That percentage has trended upward 
since first quarter 2008, with the rate of 
increase nationwide outpacing the rate at 
area banks (Chart 3). Thirty-one percent of 
district banks held restructured loans as of 
Sept. 30, compared with 51 percent nation-
wide.
Put another way, despite the jump in 
restructurings, about 70 percent of banks 
in the district and half of banks across the 
country reported no such loans.
Chart 1
Recession Leads to Restructured Loan Surge in Eleventh District
Dollars (billions)
Troubled residential loans
Residential loans in compliance
Troubled business loans
Business loans in compliance
2010 2009 2008 2007 2006 2005
0
.5
1.0
1.5
2.0
2.5
3.0
NOTE: Cumulative total depicted. Troubled loans are defined as those 30 days or more past due on their modified terms.
SOURCE: Quarterly Reports of Condition and Income, Federal Financial Institutions Examination Council.SouthwestEconomy    FEDERAL RESERVE BANK OF DALLAS • FOURTH qUARTER 2010 18
Despite the jump in 
restructurings, about 70 
percent of banks in the   
district and half of   
banks across the country 
reported no such loans.
In Line with History
Even with the assistance of beneficially 
revised terms, many restructured loans fall 
behind. Could it be a sign that banks have 
become desperate under the weight of the 
financial crisis and are imprudently modify-
ing loans to delay loan-loss recognition or 
hide from regulators the full extent of their 
credit difficulties? 
If bankers became less discerning in 
pursuing restructurings, proceeding with 
deals even when the likelihood of repay-
ment was lower than usual, we might ex-
pect the restructured loan delinquency rate 
to exceed historical norms. That doesn’t 
appear to be the case.
The percentage of total restructured busi-
ness loans failing to comply with modified 
terms in the district and the nation appears 
Chart 3
Fewer Than One-Third of District Banks Hold Restructured Loans
Percent
Eleventh District
Nation
2010 2009 2008
0
10
20
30
40
50
60
70
80
90
100
SOURCES: Quarterly Reports of Condition and Income, Federal Financial Institutions Examination Council; author’s calculations.
Chart 2
Restructured Loans Rise at U.S. Banks at Recession’s Onset
Dollars (billions)
Troubled residential loans
Residential loans in compliance
Troubled business loans
Business loans in compliance
2010 2009 2008 2007 2006 2005
0
20
40
60
80
100
120
NOTE: Cumulative total depicted. Troubled loans are defined as those 30 days or more past due on their modified terms.
SOURCE: Quarterly Reports of Condition and Income, Federal Financial Institutions Examination Council.  FEDERAL RESERVE BANK OF DALLAS • FOURTH qUARTER 2010 SouthwestEconomy 19
While the delinquency rate  
is high, it has reached similar 
levels before, consistent  
with the view that banks are  
not restructuring loans  
less carefully. 
within the usual range going back to 2001 
(Chart 4).4 While the delinquency rate is high, 
it has reached similar levels before, even when 
restructuring activity was low, consistent 
with the view that banks are not restructur-
ing loans less carefully.
Broader Economic Impact 
While loan restructuring calls for care-
ful oversight by lenders, borrowers and reg-
ulators, it is an important acknowledgment 
of the uncertainties that are a normal part 
of doing business. In a tough economic cli-
mate, the benefits of loan restructuring can 
increase for borrowers and lenders and may 
extend to the broader economy.
Successful residential mortgage loan 
modifications, for example, help reduce fore-
closures and moderate the speed at which 
these properties come to market. This could 
lessen both the disruptive impact on bor-
rowers’ families and the downward pressure 
on neighboring property values. Giving bor-
rowers another chance also helps minimize 
the negative impact on financial markets by 
averting foreclosure costs. In these ways, 
prudent attempts at loan restructuring may 
provide macroeconomic benefits beyond the 
relief experienced by individual borrowers.
Killgo is a financial industry analyst in the Finan-
cial Industry Studies Department of the Federal 
Reserve Bank of Dallas.
Notes 
1 The Eleventh Federal Reserve District is headquartered in 
Dallas and includes Texas, northern Louisiana and southern New 
Mexico.
2 District bank data are adjusted for merger and relocation activity.
3 For a broader view of district bank conditions, see “Eleventh 
District Banking Industry Weathers Financial Storms,” by 
Kenneth J. Robinson, Federal Reserve Bank of Dallas Southwest 
Economy, Second Quarter 2010.
4 This delinquency rate is equal to troubled restructured business 
loans divided by the sum of troubled restructured business 
loans and restructured business loans in compliance with 
modified terms.
Chart 4
Restructured Loan Delinquency Rates Remain in Normal Range
Percent
Eleventh District
Nation
0
10
20
30
40
50
60
70
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
SOURCES: Quarterly Reports of Condition and Income, Federal Financial Institutions Examination Council; author’s calculations.

District banks' exposure to modified loans limited

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District banks' exposure to modified loans limited

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