Where to Find Non Performing Loans in Financial Statements? [Expert Answer]
Where to Find Non Performing Loans in Financial Statements? Here is the ultimate guide.
Banks and financial institutions use their financial statements to report how well they performed over the course of a year or quarter, depending on the statement.
A non-performing loan occurs when the borrower doesn’t pay back the money that was borrowed in full, on time, or at all.
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Non-performing loans can be found in financial statements, but figuring out where to look can be difficult, so here are five ways to find non-performing loans in financial statements.
Here is a break down of what we will be covering today.
What are Non-Performing Loans?
Non Performing Loans is a bad debt that banks have on their Financial Statements. Banks are required to disclose Non Performing Loans in their financial statements to protect shareholders from fraud and other liabilities.
Smaller banks might report them in a footnote but larger institutions report it as part of their total loans outstanding.
Types of Non Performing Loans
There are two primary types of non-performing loans. One is called non-accrual, which means that payments have not been made on a loan for at least 90 days and there is no reasonable expectation of payment.
The other type of non-performing loan is known as special mention, which means there are serious delinquencies but they have not yet reached 90 days and there is still a reasonable expectation of payment.
These loans should be monitored regularly to ensure that they do not fall into non-accrual status. Both non-accrual and special mention loans can negatively impact financial stability due to legal liabilities, foregone interest income, unmet expenses for property maintenance or any number of factors that can affect a bank’s profitability.
Where to Find Non Performing Loans in Financial Statements?
Non performing loans are listed under non performing assets or non performing loans which can be found on quarterly filings of publically traded companies or under loan loss reserves in annual filings of privately held companies.
Review Schedule L, Line 12 (Loans and Leases) – Balance Sheet, where they are reported under Current Portion of Non-Performing Financing Obligations Report, Schedule L – Banking Law Compliance Report Summary
Below are 5 ways to find Non-Performing Loans in Financial Statements;
1) Check the Income Statement
When you review a company’s income statement, you’re looking for non-performing loans. You can find these by looking at each line item that is classified as an asset on a balance sheet.
If there are any assets listed with lower values than expected, those are likely non-performing loans. For example, suppose we look at Apple (AAPL) and discover that their cash has decreased from $21 billion to $14 billion between January 1 and December 31.
This means they had some loan activity where they probably lent someone $7 billion without securing that money with collateral or equity—that is not what you want!
That loss of cash translates into a non performing loan for AAPL.
2) Look at the Balance Sheet
Most likely, you’ll find your non-performing loans listed as current liabilities. To identify them easily, scan down through income statements and balance sheets and keep an eye out for any line items that have negative dollar signs (-) next to them.
If you can’t find them there, look for a separate report (or a section of another report) that specifically lists bad debt. After all, it makes sense for companies to break out non-performing loans separately since they’re often cause for concern.
For example, if a loan is clearly not going to be repaid—and not going to generate additional interest income—it might make sense to classify it separately so investors know how much risk they’re taking on by purchasing company stock or bonds.
3) Read Around the Notes
Corporate financial statements are a great place to look for clues about which companies might be struggling. Balance sheets and income statements can contain info on past and future performance; you just have to know where to look.
For example, if you’re trying to find non-performing loans, take a look at long term assets on a balance sheet—you might be surprised how many companies have tied up assets with debt that isn’t being paid back (at least not yet).
4) Check out the Key Metrics
One way to find non-performing loans is by analyzing a financial institution’s Key Metrics, including loan delinquency rates and net charge offs. Some lenders, especially regional banks, highlight these metrics on their websites.
Delinquency rates give you an idea of how many customers are behind on payments, while net charge offs measure how much has been written off for bad debt due up for a bank.
For example, if your financial institution had 5% delinquency rate and 3% net charge off rate at December 31st but 7% and 4%, respectively, at March 31st – it might be a sign that non-performing loans are on their way up.
5) Contact your Company’s Investor Relations Department
If you’re not sure where your company’s non-performing loans are, reach out to your company’s investor relations department.
They might have a better idea of what loans aren’t performing and why. If that doesn’t work, try talking with your accounting department or someone else who handles collections on a regular basis; they might have insights into what needs restructuring and how much it would cost.
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