Asset Quality
Nonaccrual Loans
Also known as Nonaccrual, Non-Accrual Loans
Nonaccrual loans are loans on which the bank has stopped recognizing interest income because full repayment is in doubt, generally once a loan is 90 or more days past due (unless it is well secured and in the process of collection) or sooner if full collection is doubtful. They are the core of nonperforming assets.
How is Nonaccrual Loans calculated?
Schedule RC-N reports loans by past-due bucket and nonaccrual status. Once a loan goes nonaccrual, accrued-but-unpaid interest is reversed and no further interest is booked, so nonaccruals directly drag earnings as well as signaling credit stress.
Why does Nonaccrual Loans matter?
Nonaccrual is where credit problems become undeniable: the bank no longer expects to be paid in full. The level and trend of nonaccrual loans feed the nonperforming-loan and Texas ratios and are a primary input to the adequacy of the allowance.
How do you interpret Nonaccrual Loans?
Track nonaccrual loans as a share of total loans and over time. A rising nonaccrual ratio is a leading sign of deteriorating credit; compare it to the allowance (coverage) to judge whether reserves are keeping pace with the problem book.
What do Nonaccrual Loans levels indicate?
| Range | Label | Interpretation |
|---|---|---|
| < 0.5% of loans | Strong | Minimal nonaccrual; clean loan book. |
| 0.5-1.5% | Adequate | Normal level of problem credits. |
| 1.5-3% | Watch | Elevated nonaccruals; credit quality slipping. |
| > 3% of loans | Concern | High problem-loan burden straining earnings and capital. |
Worked example
Frequently asked
What is a non-accrual loan?
A non-accrual loan is a loan on which the bank no longer records interest income because it doubts it will be repaid in full. The bank reverses interest it had accrued but not collected, and it books later payments against principal or as cash received. Banks report these loans on Schedule RC-N of the Call Report.
What does nonaccrual mean?
Nonaccrual means the bank has stopped accruing, or recording as earned, the interest a loan is supposed to pay. It is the accounting status for a loan the bank no longer expects to collect in full, and it is the most severe category of problem loan short of a charge-off.
When is a loan placed on nonaccrual?
Generally when it is 90 days or more past due, unless the loan is both well secured and in the process of collection, or sooner if full collection of principal and interest is in doubt. The bank stops accruing interest and reverses any previously accrued but uncollected interest.
What is the difference between nonaccrual and past-due loans?
Past-due loans are behind on payments but may still be accruing interest (e.g., 30-89 days late). Nonaccrual loans have had interest accrual stopped because repayment is doubtful. Nonaccruals are the more severe category.
Sources
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