If you own stock in a bank or similar financial institution, “nonperforming” should sound like a four-letter word when it describes assets. A bank often makes a substantial piece of its profits from interest on loans made to customers. These loans can comprise a large portion of the assets on its balance sheet. Nonperforming assets are those on which the bank is receiving reduced or no income, such as on past-due loans. Most nonperforming assets represent a high risk for shareholders. These assets lead to lower profits and might lead to bank failure in extreme cases.
Download a bank’s most recent Form 10-Q quarterly report or Form 10-K annual report from the investor relations section of its website or from the U.S. Securities and Exchange Commission’s online EDGAR database.
Find the amount of nonaccrual loans and past-due loans in the footnotes to the financial statements in the financial report. Nonaccrual loans are those that are no longer accruing interest and on which the borrower is more than 90 days past due. Past-due loans are generally more than 90 days past due but still accrue interest. For example, assume a bank reported $200 million in nonaccrual loans and $100 million in past-due loans at the end of its most recent quarter.
Identify the amount of troubled debt restructurings that the bank lists in the footnotes. Troubled debt restructurings represent loans that a bank renegotiated with borrowers who had difficulty making payments. The bank typically loosens its terms to accommodate the borrower – such as by reducing the interest rate – and expects to earn lower income on these loans than it initially expected. In our example, assume the bank has $50 million in troubled debt restructurings.
Find the amount of other real estate owned in the footnotes. Other real estate owned typically consists of properties the bank acquires after borrowers fail to pay their mortgages. In the example, assume the bank reports $250 million in other real estate owned.
Add the bank’s nonaccrual loans, past-due loans, troubled debt restructurings and other real estate owned to calculate its nonperforming assets. Concluding the example, add $200 million, $100 million, $50 million and $250 million to get $600 million in nonperforming assets.
- Compare a bank’s nonperforming assets to its total loans and to its total assets, and compare these portions over time to identify and trends. Also compare these portions with those of a bank’s competitors to see how risky the bank is compared to its peers.