Non-Performing Loans to Loans Ratio - NPLs

Non-Performing Loans to Loans Ratio

The NPL (nonperforming loans) to Loans Ratio is helpful in determining the stress in a portfolio of loans. The higher the ratio the more trouble the lender is having in that portfolio.

How to Calculate the Non-Performing Loans to Loans Ratio

The non-performing loans to loans ratio is calculated by adding 90+ day late loans (and still accruing) to nonaccrual loans, and then dividing that total by the total amount of loans in the portfolio.

Example: ($1M [nonaccrual] + $1M [90+ days late]) / $10MM [total portfolio] = 20%

Non-performing loans ratio isn’t something that’s reported as an individual item on the FFIEC reports. Instead, we do some math.

In BankProspector we calculate the non-performing to performing loans ratio for you for each portfolio.

A  non-performing loan can be defined as any loan that is 90+ days late. There are other reasons that loans go into default (like technical default or covenant default) but those factors aren’t considered in the NPL/Loans calculation.

To get the non-performing loans total for a portfolio add the 90+ day late loans and the non-accrual loan totals.

To get the non-performing loans to loans ratio take the total from above and divide it by the total portfolio.

How to Use the Non-Performing Loans Ratio in Your Deals

Portfolios with fewer than 6% non-performing loans are deemed healthy.

There’s no hard and fast rule as to how a lender will behave with regards to selling notes or with regards to the regulatory trouble that a bank will or won’t have but generally speaking anything above 6% non-performing in any given portfolio is higher than desirable.