Asset Quality
Net Charge-Offs
Also known as NCOs
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
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 interpret
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 | Label | Interpretation |
|---|---|---|
| < 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
Frequently asked
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)
See NCOs across 4,335 US banks
BankRegReports ranks every FDIC-insured institution by NCOs, refreshed quarterly within 48 hours of FFIEC release.