How to Calculate Nonperforming Loans as a Percentage of an Allowance for Loan Losses

The ratio of nonperforming loans to the bank's allowance for loan losses can help gauge a bank's financial health.
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A nonperforming loan is a loan that is either in default or close to default. A loan goes into default when a debtor fails to repay the loan according to the terms set forth in the loan contract. Typically, loans become nonperforming when the debtor fails to make payments for 90 days. An allowance for loan and lease losses, commonly called ALLL, is a bank's estimated credit losses, which is the amount of the loans the bank will unlikely be able to collect from the debtor. To calculate nonperforming loans as a percentage of an allowance for loan losses, divide the value of nonperforming loans by the value of the allowance for loan losses.


Step 1

Find the sum of the values of the nonperforming loans. The value used for each nonperforming loan should be the entire unpaid loan principal balance, including the loan's past-due payments and future payments, but not including accrued interest. For example, Bank Z has three nonperforming loans with unpaid principal balances of $1,000, $2,000 and $3,000. The sum of the values of these three nonperforming loans is $6,000 ($1,000 + $2,000 + $3,000 = $6,000).


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Step 2

Determine the bank's allowance for loan losses. To do this, estimate the value of all the current loan debts that the bank thinks it will probably not be able to collect payment on. Continuing with the same example, assume that Bank Z estimates that it will be unlikely to collect payment on $10,000 worth of loan debts.


Step 3

Divide the value you obtained in Step 1 by the value you obtained in Step 2. Then multiply this number by 100 to convert it to a percentage. Continuing with the same example, divide $6,000 by $10,000 to get 0.6. Multiply 0.6 by 100 to get 60 percent. This means that 60 percent of Bank Z's ALLL consists of nonperforming loans.


Things You'll Need

  • Financial records for outstanding loans

  • Calculator (optional)


Determining a bank's allowance for loan losses is highly subjective. As such, this value should not be relied upon in isolation as an indicator of the bank's financial health.



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