How do I calculate the non-performing loans (NPL) ratio?

Divide non-performing loans by total loans to get the percentage. Non-performing loans include loans 90 or more days past due and loans on non-accrual status, so the ratio measures what share of a bank's loan portfolio has stopped performing as expected.

The formula for the NPL ratio is:

NPL Ratio = Non-Performing Loans / Total Loans

The result is expressed as a percentage. A bank with $53 million in non-performing loans and $5.2 billion in total loans has an NPL ratio of 1.02%.

Step-by-Step Calculation

1. Identify non-performing loans. These fall into two categories, both disclosed separately in bank financial statements:

Loans 90 or more days past due and still accruing interest

Loans on non-accrual status, where the bank has stopped recognizing interest income because full repayment of principal and interest is no longer expected

Add these two figures together to get total non-performing loans.

2. Find total loans on the balance sheet. Use gross loans (before the deduction for the allowance for credit losses) for consistency. Some analysts use net loans instead, but what matters most is applying the same approach when comparing across banks and over time.

3. Divide non-performing loans by total loans and multiply by 100 to express the result as a percentage.

Worked Example

A regional bank reports the following in its quarterly filing:

Non-accrual loans: $45 million

Loans 90+ days past due and still accruing: $8 million

Total gross loans: $5.2 billion

Non-performing loans = $45M + $8M = $53 million

NPL Ratio = $53M / $5,200M = 1.02%

That means just over one cent of every dollar this bank has lent out is currently not performing as expected.

What Counts as a Non-Performing Loan

The standard definition includes loans past due 90 days or more (regardless of whether the bank is still accruing interest) and loans on non-accrual. But not every bank uses the same definition. Some count only non-accrual loans, excluding the 90-plus-days-past-due-and-still-accruing category.

This distinction matters when comparing NPL ratios across banks. A bank reporting a 0.8% NPL ratio using only non-accrual loans may actually have worse underlying credit quality than one reporting 1.0% using the broader definition. Before drawing conclusions from any cross-bank comparison, check which definition each institution uses in its credit quality disclosures.

Early-Stage Delinquencies as a Leading Indicator

Loans past due 30 to 89 days are not classified as non-performing, but they serve as an early warning signal. Banks report these delinquencies in aging schedules within their financial statements, and a rising trend in 30-to-89-day delinquencies frequently appears before the NPL ratio itself starts climbing.

If 30-to-89-day delinquencies are rising sharply while the NPL ratio remains flat, the NPL ratio will likely catch up in the following quarters as those delinquent loans age past the 90-day threshold. Watching both numbers together gives a more complete picture of where credit quality is heading.

Interpreting Your Result

The NPL ratio by itself is a snapshot. Context is what turns it into useful analysis.

Most healthy banks maintain NPL ratios below 1%. Well-managed community and regional banks in normal economic conditions often run between 0.3% and 0.8%. An NPL ratio above 2% generally signals meaningful credit stress, and ratios above 5% suggest severe deterioration that could threaten the bank's capital position.

These benchmarks shift with the economic cycle. During recessions, NPL ratios across the industry can spike well above normal levels. In the years following the 2008 financial crisis, some banks saw NPL ratios exceed 10%. During periods of strong economic growth, industry-wide NPL ratios tend to compress below 1%.

The trend matters as much as the level. A bank with a 0.9% NPL ratio that has been rising for three consecutive quarters may warrant more concern than one sitting at 1.2% on a steady downward path.

Pair the NPL ratio with the reserve coverage ratio for a fuller picture. A bank with elevated non-performing loans but reserves set aside at two or three times its NPL balance has already provisioned for expected losses. A bank with a similar NPL ratio but thin reserve coverage is in a more exposed position.

How NPL Ratios Vary Across Bank Types

NPL ratios behave differently depending on bank size and lending mix.

Community banks with concentrated commercial real estate portfolios sometimes show higher NPL volatility. A few large problem loans can move the ratio significantly when the total loan base is small. A $500 million bank where a single $5 million loan goes non-performing sees its NPL ratio jump by a full percentage point from that one loan alone.

Larger banks with diversified loan portfolios tend to have smoother NPL ratio trends, since individual problem loans represent a smaller share of the total. During systemic credit events, though, large banks can see NPL ratios spike across multiple loan categories simultaneously.

The loan mix also affects how long problem loans stay on the books. Banks heavy in consumer lending (credit cards, auto loans) tend to have faster charge-off cycles, meaning delinquent loans move through the NPL classification and get charged off relatively quickly. Banks focused on commercial real estate or commercial and industrial lending often carry non-performing loans longer while they work through restructuring or liquidation, which can keep their reported NPL ratios elevated for extended periods even after new problem loan formation has slowed.

The TDR Accounting Change

Prior to the adoption of ASU 2022-02, loans restructured as troubled debt restructurings (TDRs) were often classified as non-performing even if the borrower was current under the modified terms. The updated accounting standard eliminated the TDR designation entirely, and these restructured loans are now evaluated under the general credit loss framework.

This change may have modestly reduced reported NPL levels at some banks, since loans that previously carried the TDR label and the non-performing classification that came with it are no longer automatically flagged. When reviewing historical NPL ratio trends that span this transition, keep in mind that some apparent improvement may reflect the accounting change rather than genuine credit quality gains.

Where to Find the Data

Non-performing loan figures appear in several places:

10-K and 10-Q filings, in the credit quality section, typically in tables breaking out loans by delinquency status and accrual status

Quarterly earnings releases and investor presentations, where most banks provide a non-performing loan summary

Call report data through the FFIEC, which provides standardized non-performing loan figures for all FDIC-insured institutions

The call report data is particularly useful for peer comparisons because the reporting format is standardized, removing the definitional inconsistencies that sometimes appear across individual bank filings.

Common Calculation Mistakes

The most frequent errors when calculating the NPL ratio:

Including OREO (other real estate owned) or other foreclosed assets in the numerator. Adding those converts the calculation into the non-performing assets (NPA) ratio, which uses a different denominator (total assets instead of total loans) and measures a broader scope of problem assets.

Using net loans (gross loans minus the allowance for credit losses) in the denominator for one bank and gross loans for another. Pick one approach and apply it consistently across every bank in your comparison.

Comparing NPL ratios across banks that define non-performing loans differently without adjusting for the difference. A bank that includes 90-plus-day accruing loans in its non-performing total will report a higher ratio than one that counts only non-accrual loans, even if their underlying loan quality is the same.

Confusing the NPL ratio with the NPA ratio. The NPL ratio divides non-performing loans by total loans. The NPA ratio divides non-performing assets (which adds OREO and foreclosed properties to non-performing loans) by total assets. Both measure asset quality, but they answer different questions about the scope of a bank's credit problems.