---
title: "Net Charge-Offs: definition, formula, and thresholds"
description: "Net charge-offs (NCOs) are the loans a bank has written off as uncollectible, less amounts recovered on previously charged-off loans. They are the realized credit losses that actually deplete the allowance."
canonical_url: https://www.bankregreports.com/glossary/net-charge-offs/
source: BankRegReports
category: "Asset Quality"
units: "$"
schedule: "Schedule RI-B"
---

# Net Charge-Offs

> Net charge-offs (NCOs) are the loans a bank has written off as uncollectible, less amounts recovered on previously charged-off loans. They are the realized credit losses that actually deplete the allowance.

## Formula

```
Net Charge-Offs = Gross Charge-Offs - Recoveries
```

Schedule RI-B reports gross charge-offs and recoveries by loan type. Net charge-offs are the difference, and dividing by average loans (annualized) gives the net charge-off ratio. NCOs are subtracted from the allowance as losses are realized.

## Why it matters

Charge-offs are credit losses made real: the point where a problem loan becomes an actual hit to the allowance and, if reserves fall short, to capital. The NCO trend by loan category shows where a bank's credit pain is concentrated.

## How to read it

Read net charge-offs as the annualized NCO ratio and against the provision. Charge-offs running above provisions drain the allowance; persistently high NCOs in one category (cards, CRE, C&I) pinpoint the source of credit stress.

## Thresholds

| Range | Reading | What it means |
|---|---|---|
| < 0.15% of loans | Strong | Negligible realized losses. |
| 0.15-0.50% | Adequate | Normal through-cycle loss rate. |
| 0.50-1.5% | Watch | Elevated losses; credit cycle turning. |
| > 1.5% of loans | Concern | Heavy realized losses pressuring the allowance and capital. |


## Worked example

A bank that charges off $9 million of loans and recovers $1 million records $8 million of net charge-offs. On a $1.4 billion average loan book that is a 0.57% annualized NCO ratio. Elevated, and a signal to check whether the provision is keeping the allowance whole.

## Questions

### What is the difference between a charge-off and a net charge-off?

A gross charge-off is the amount of a loan written off as uncollectible. Net charge-offs subtract recoveries on previously charged-off loans, giving the true realized loss for the period.

### How do net charge-offs relate to the provision and allowance?

Net charge-offs reduce the allowance for credit losses as losses are realized; the provision expense replenishes it. If charge-offs persistently exceed provisions, the allowance erodes and the bank is under-reserving.

## Sources

- [FFIEC Call Report Schedule RI-B (Charge-Offs and Recoveries)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF)

## Related metrics

- [Net Charge-Off Ratio](https://www.bankregreports.com/glossary/nco-ratio/): The Net Charge-Off ratio (annualized) measures loans actually written off as uncollectible (less subsequent recoveries) divided by average loans outstanding. It is the realized credit loss experience of the bank.
- [Allowance for Credit Losses](https://www.bankregreports.com/glossary/allowance-credit-losses/): The allowance for credit losses (ACL), called the allowance for loan and lease losses (ALLL) before the CECL standard, is the reserve a bank holds against losses it expects on its loans. It is deducted from gross loans on the balance sheet, and under CECL it covers expected losses over each loan's whole life.
- [Provision for Credit Losses](https://www.bankregreports.com/glossary/provision-credit-losses/): The provision for credit losses is the expense a bank records to build or maintain its allowance for credit losses. Under the CECL standard it reflects expected lifetime losses, and it sits between revenue and net income on the income statement.
- [Nonaccrual Loans](https://www.bankregreports.com/glossary/nonaccrual-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.

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