What Is Nonperforming Loans?
Loans where the borrower has stopped making payments for 90 or more days, or where the bank no longer expects full repayment.
Nonperforming Loans is a term from U.S. bank regulation and FDIC Call Report accounting — typically a line item, ratio, or supervisory classification used in federal banking oversight. The definition here is the practical depositor-facing meaning. Understanding Nonperforming Loans is part of reading bank-financial data defensibly. Bank-supervisory frameworks (Basel III, CAMELS, prompt-corrective-action) use specific technical definitions that often differ from how the same terms appear in general financial reporting or popular press.
Each bank page on BankHealth surfaces the Nonperforming Loans-relevant values for that specific institution, so the general definition here translates into concrete data on the per-bank pages.
How It Works
Nonperforming loans (NPLs) are the clearest signal of credit quality problems at a bank. A loan is classified as nonperforming when the borrower is 90 or more days past due on payments, or when the bank has placed the loan on nonaccrual status, meaning it no longer expects to collect the full principal and interest owed.
The nonperforming loan ratio expresses NPLs as a percentage of total loans. A ratio below 1% is considered healthy and indicates the bank has strong underwriting standards. Ratios between 1% and 3% are moderate but warrant monitoring. Ratios above 5% are a red flag: during the 2008 financial crisis, banks that eventually failed often showed NPL ratios climbing above 10% in the quarters before seizure.
For depositors, a rising NPL ratio means the bank is absorbing loan losses that eat into its capital reserves. If losses exceed the bank's reserves and capital cushion, it could face regulatory action. The BankHealthData score weights the NPL ratio (inverted, so lower is better) at 30% because it is the strongest leading indicator of potential bank distress. When you look up your bank on BankHealthData, check whether the NPL ratio is stable, improving, or deteriorating, the trend matters as much as the absolute number. Banks with heavy exposure to commercial real estate or energy lending tend to have more volatile NPL ratios.
Related Terms
Loan Loss Reserves
Funds a bank sets aside to cover expected losses on its loan portfolio, acting as a financial cushion against defaults.
Net Charge-Off Rate
The percentage of loans a bank has written off as uncollectible, net of any recoveries, over a given period.
Credit Risk
The risk that borrowers will fail to repay their loans, causing financial losses for the bank.
Bank Failure
When a bank is closed by its chartering authority (state or federal) because it can no longer meet its obligations to depositors and creditors.