What are net charge-offs?
A charge-off is a loan a bank removes from its balance sheet because it does not expect to collect it. Net charge-offs are those amounts minus money later recovered on loans charged off earlier.[S2]
How is the net charge-off ratio worked out?
It is net charge-offs during the period divided by average loans outstanding in that period, times 100.[S1] The rules call for daily averages, and banks must state the basis they used.[S5]
Where do you find it in a 10-K or 10-Q?
Banks give the ratio and its parts for each year, and by loan category.[S1] For a period after the latest year end, the rule asks for the figures only if they or their trend changed materially.[S5] SEC staff observed that some banks give the ratio in their quarterly reports anyway.[S3]
Commenters told the SEC in 2019 that banks typically put these figures in MD&A (management's discussion and analysis), the Business section or the notes.[S3]
Why does the ratio differ between banks?
SEC staff observed that credit cards and other unsecured loans often have higher ratios than mortgages or business loans backed by collateral.[S3] That is why the rule also asks for the ratio by loan category.[S1]
What does the net charge-off ratio leave out?
- Loans that are late but not yet charged off. The FDIC counts loans 90 days or more past due in a separate "noncurrent" figure.[S2]
- Losses the bank expects but has not charged off yet. Those sit in the allowance for credit losses.[S4]
- Timing: a recovery this period can relate to a loan charged off in an earlier period.[S2]