Net Charge-Offs (NCOs)
Loans written off as uncollectible minus recoveries.
Definition
Net charge-offs represent the actual realized loan losses. They equal gross charge-offs (loans deemed uncollectible) minus any amounts recovered on previously charged-off loans. The net charge-off rate expresses this as a percentage of average loans.
Formula
NCO Rate = Net Charge-Offs / Average Total Loans × 100
Why It Matters
Net charge-offs are the ultimate measure of credit loss and directly reduce the allowance for loan losses. Tracking the NCO rate over time reveals whether credit quality is improving or deteriorating beyond what provisions anticipated.