How to Calculate Annualized Net Charge Off

Banks and financial institutions that make loans always expect a proportion of those loans to fail. The borrower will default and the bank will not collect the full amount owed. Those loans are charged off. Institutions usually publish their charge-off rates, as part of their financial reporting. These rates can indicate how good the bank’s underwriting process is -- the lower the charge-off rate, the tighter the lending standards.

Begin with the gross charge-offs for the year -- that is all loans that have been written off by the bank as probably uncollectible.

Subtract from the gross charge-offs the total amount of charged-off loan money that has actually been recovered from delinquent borrowers over the year. This gives the net charge-off amount.

Divide this net charge-off amount by the average level of loans outstanding over the year, to give the annualized net charge-off rate.