Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks

About this Release

These data are compiled from the quarterly FFIEC (Federal Financial Institutions Examination Council) Consolidated Reports of Condition and Income. Data for each calendar quarter become available approximately sixty days after the end of the quarter.

Method of Calculation

The charge-off and delinquency rates presented on the Federal Reserve Board's web site are calculated from data available in the Report of Condition and Income (Call Report), filed each quarter by all commercial banks. Call Reports filed before March 2001 consisted of four separate reports: the 031 and 032, filed by banks having assets of $300 million or more as well as any bank with a foreign office, and the 033 and 034, filed by smaller banks. The smaller banks were given the option of reporting charged-off and delinquent loans, and certain other loan items, using their own loan classifications instead of regulatory loan classifications. As of March 31, 2001, the Call Report includes only two forms, the 031, for banks with a foreign office, and the 041, for all other banks.¹ The option to use internal loan classifications was eliminated with the introduction of the new report forms (although a phase-in period of one year is allowed).

Described below are the procedures used by the Federal Reserve to calculate charge-off and delinquency rates, including the techniques used to deal with the option small banks had before 2001 to use their internal loan classifications for their charged-off and delinquent loans.

The Calculation of Charge-off Rates

Charge-off rates for any category of loan are defined as the flow of a bank's net charge-offs (gross charge-offs minus recoveries) during a quarter divided by the average level of its loans outstanding over that quarter.² Charged-off loans are reported on schedule RI-B and the average levels of loans on schedule RC-K.

To account for the fact that the number of loan categories for charge-offs is greater in RI-B than in RC-K, the Federal Reserve uses schedule RC-C, which reports loans outstanding as of quarter-end, to allocate the average loans reported in RC-K into the needed additional loan categories. (Before March 31, 2001, the additional detail was used to disaggregate real estate loans into residential loans and commercial loans and consumer loans into credit card loans and other loans; as of March 31, 2001, credit card and other consumer loans appear on RC-K, so that RC-C is used only to disaggregate real estate loans.)

For 033 and 034 (that is, smaller) banks, agricultural loans were reported on RI-B and RC-K as memorandum items.³ This arrangement raised the problem of determining from which loan category in the bodies of these schedules agricultural loans should be subtracted before calculating charge-off rates for loans other than agricultural loans.⁴ The smaller banks' option to use internal loan classifications complicates this issue. However, regulatory loan classifications require that loans to agricultural enterprises that are secured by real estate be reported as real estate loans. Accordingly, it has been assumed that agricultural loans in the body of these schedules are included in the category "commercial and all other loans." For those banks whose reported agricultural loans on these schedules exceed "commercial and all other loans," the remaining loans are taken out of real estate loans. Some banks' internal classifications could consider loans to agricultural enterprises secured by real estate to be "agricultural" loans.

Reports 033 and 034 also require disaggregation of the "commercial (time and demand) and all other loans" categories in RI-B and RC-K into commercial and industrial (C&I) loans and other loans. The separation is accomplished (after any changes to this series required by the agricultural loan procedure described above) by using ratios for 032 banks, for which these schedules are more detailed.

Beginning with the March 2001 Call Report, the detail reported by all banks for charged-off loans is sufficient to eliminate the need for the procedures described above for 033 and 034 banks.⁵

The Calculation of Delinquency Rates

The delinquency rate for any loan category is the ratio of the dollar amount of a bank's delinquent loans in that category to the dollar amount of total loans outstanding in that category. Delinquent loans are reported on schedule RC-N and total loans on schedule RC-C.

For 033 and 034 banks, the calculation of the ratio is complicated by potential definitional inconsistencies between categories of delinquent and total loans. To account for this potential, reported delinquent loans were adjusted with data from schedule RC-K. Schedule RC-K is useful for this purpose because smaller banks also were also able to report loans on this schedule according to their internal classifications, making them definitionally consistent with reported delinquent loans.

Specifically, delinquent loans for smaller banks on RC-N were adjusted by multiplying them by the ratio of quarter-end loans on RC-C to the average loans for that quarter from RC-K. Adjusted levels of delinquent loans were calculated for each loan category and for each 033 and 034 bank. The adjusted delinquent loans were then aggregated and used with reported loans from RC-C to calculate delinquency rates for each small-bank loan category.

Another complication in calculating delinquency rates for 033 and 034 banks is that they reported agricultural loans on RC-N as a memo item. The procedures used to deal with this problem are the same as those used for charge-off rates. That is, agricultural loans in the memorandum item are subtracted first from "commercial (time and demand) and other loans" in the body of RC-N and then from real estate loans; the remaining delinquent loans in "commercial (time and demand) and other loans" are disaggregated into C&I and other loans according to ratios from 032 banks. The additional detail available in the 041 report (for banks without a foreign office) eliminated the need for these procedures as of the first quarter of 2001.

Procedures Used before June 13, 2001

On June 13, 2001, the charge-off and delinquency rates on the Federal Reserve's web site were updated to include the quarter ending March 31, 2001. In addition, the data for earlier quarters were revised in the manner described below.

Charge-Off Rates

Before June 13, 2001, net charge-off rates for the period through December 31, 2000, were calculated with charge-offs from schedule RI-B as the numerator and the average of consecutive quarter-end loans from schedule RC-C as the denominator. The reported measures of average loans in schedule RC-K were not used because that schedule is less detailed than RI-B and RC-C. Because 033 and 034 reporters were allowed to classify items in RI-B according to internal loan categories, possible mismatches with RC-C, which follow federal regulators' definitions of loan categories, were handled by multiplying loans on RC-C by the ratio of the reported average level of total loans over the quarter (from RC-K) to the average of consecutive end-of-quarter levels of total loans (from RC-C). For agricultural loans, charge-offs for 033 and 034 banks were represented by charge-offs for 032 banks.

Delinquency Rates

In the series published before June 13, the problem of potentially inconsistent reporting of loan categories on schedules RC-N and RC-C for smaller banks was handled by using information on schedule RC-K, as described above. However, instead of applying this technique directly to 033 and 034 banks, banks not among the 1,000 largest were used as a proxy. For agricultural loans, delinquency rates for 033 and 034 banks were represented by delinquency rates for 032 banks.