Charge-off: A charge-off is the point at which a bank writes a loan off its books as uncollectible.
How it is calculated
Reported on Schedule RI-B. A charge off reduces the allowance for credit losses rather than earnings directly, because earnings were hit earlier when the provision that built the allowance was taken. Net charge offs are charge offs less recoveries on loans written off in earlier periods.
Formula
Net charge-offs = gross charge-offs - recoveries
How to read it
Charge-offs are the end of the credit story rather than the start of it. The sequence runs past due, then nonaccrual, then charge off, and each step takes a quarter or several, so a rising charge off rate is describing credit that went wrong a year ago.
The common mistake. Reading a low net charge-off rate as current credit quality. Recoveries on old write offs can hold the net figure down while gross charge offs climb, and nonaccrual will have moved first in either case.
Go deeper
- What is a normal nonperforming loan ratio?
- Allowance for credit losses benchmarks
- BankingLens pricing and what a subscription adds: percentile rank against the bank’s own FFIEC peer group, fourteen quarters of trend, and the flags an examiner reaches for first.
See also. Nonaccrual, Allowance for credit losses, CECL, Nonperforming loans.
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