Understanding the Monthly Household Profit Calculation

The following basic formula used to calculate an account’s profit contribution in Prism Analytics. Profit for each member’s account is totaled to determine the member’s profit contribution. Profit for each member in a household is totaled to determine the household’s profit contribution.

Net Interest Income

Non-Interest Income (Fees)

Non-Interest Expense (Costs)

Provision

Account Profit Contribution

Net Interest Income: Net interest income refers to the interest earnings on a deposit or loan account. For deposits, it is the funding income earned minus the interest expense paid; for loans, it is the interest income earned minus the funding expense paid. To determine the net interest income for either type of account, the account’s average balance, earning balance (or investable amount) and funding rate are required. The average balance, taken directly from the Prism Analytics database, is used in calculations with the reserve factor and float factor from the input tables to provide the investable amount. The funding rate is taken directly from the Profitability Input tab.

Non-Interest Income (Fees): Non-interest income includes all income from fees generated during an update cycle.

Non-Interest Expense (Costs): Non-interest expense includes all expenses from costs generated by the account during and update cycle. These costs might include additional monthly costs generated by the account. These include all costs associated with opening an account and maintaining it, including account origination costs. These costs are taken from the financial institution’s Call Report.

Provision: Provision rate refers to the percentage of the balance that the organization sets aside to cover any future loan losses. (Provision rate applies to loan accounts only). The provision rate is taken from the financial institution’s Call Report.

Profitability Formulas: The following formulas are used to calculate monthly profit contributions; most of them are used to calculate net interest income. All of these formulas are referenced in the step-by-step instructions that follow.

Profit Contribution=	Net interest Income + Non-Interest Income (Fees) - Non-Interest Expense (Costs) - Provision
Net Interest Income =	Funding Income - Interest Expense (Deposits), Interest Income - Funding Expense (Loans)
Funding Income =	Investable Balance x (Funding Rate/12)
Interest Income =	Average Balance x (Interest Rate/12)
Funding Expense =	Funded Balance x (Funding Rate/12)
Interest Expense =	Average Balance x (Interest Rate/12)
Investable Balance =	Average Balance x (1 - Reserve Factor x (1 - Float Factor)
Funded Balance =	Average Balance
Average Balance =	Average Collected Balance (Deposits), Average Outstanding Balance (Loans)

Step-By-Step Calculations:

Calculating Net Interest Income

Net interest income is the difference between the organization’s interest income and expense. For a deposit account, earnings are calculated on the account’s deposit balance minus any interest paid. Interest earned on loan accounts is calculated by subtracting the expense of acquiring the deposits that fund the loan from interest earned on the account. The following basic formulas are used for calculating net interest income:

For Deposits: Funding Income – Interest Expense
For Loans: Interest Income – Funding Expense

Calculating Net Interest Income for a Deposit Account

The investable balance is determined using the reserve and float factors: Investable Balance = Average Balance x (1 – Reserve Factor) x (1 – Float Factor)
Once the investable balance is known, the funding income is calculated. We determine that by multiplying the investable balance by one-twelfth of the funding rate, since this is a monthly, rather than annual, contribution: Funding Income = Investable Balance x (Funding Rate / 12)
Then the interest expense is calculated: Interest Expense = Average Balance x (Interest Rate / 12)
Finally, the expense is subtracted from the income to product net interest income on the deposit account: Net Interest Income = Funding Income – Interest Expense

Calculating Net Interest Income for a Loan Account

First the interest income is calculated. This is done by multiplying the average balance by one-twelfth of the interest rate, since this is a monthly, rather than annual, contribution: Interest Income = Average Balance x (Interest Rate / 12)
Then the funding expense is calculated: Funding Expense = Funded Balance x (Funding Rate / 12)
Once the interest income and the funding expense are known, the expense is subtracted from the income to determine the net interest income on the loan account: Net Interest Income = Interest Income – Funding Expense

Calculating Fee Income

Fees are taken from the financial institution’s Call Report. Fees include such items as:

Monthly service charges (Standard or miscellaneous, less waived charges)
Overdrafts assessed
Returned items incurred
Check fees
ATM fees

Prism Analytics extracts all of this information from the database, the financial institution’s Call Report and credit union industry averages for items not included in the Call Report.

Calculating Costs

Costs are taken from the financial institution’s Call Report. Costs include such items as:

Account origination cost (Total account origination cost / Average account life in months)
Monthly servicing costs

Calculating Provision for Loan Losses

The provision rate for loans is entered on the Profitability Input tab. The provision amount on a particular loan is calculated using this formula: Provision = Average balance x (Provision Rate/12)

Calculating Profit Contribution

After determining the values for each of the items described previously, Prism Analytics derives the monthly account contribution:

Net Interest Income

Non-Interest Income (Fees)

Non-Interest Expense (Costs)

Provision

Account Profit Contribution

Deposit Account Example

This example shows how Prism Analytics calculates the profit contribution for a commercial mortgage loan account with these characteristics:

A current average balance of $30,000
No reserve requirement
A float factor of 2.5%
An interest rate of 3.75 percent
A funding rate of 5.507 percent
An additional monthly fee of $11.00
An account origination cost of $159.93
An average account life span of 5 years (60 months)
A monthly servicing cost of $18.17

Step 1: Calculate net interest income:

Investable Balance = Average Balance x (1 - Reserve Factor x (1 - Float Factor)
- Investable Balance = $30,000 x (1 - 0) x (1 - 0.025)
- Investable Balance = $29,250.00
Funding Income = Investable Balance x (Funding Rate / 12)
- Funding Income = $29,250 x (0.05507 / 12)
- Funding Income = $134.23
Interest Expense = Average Balance x (Interest Rate / 12)
- Interest Expense = $30,000 x (0.0375 / 12)
- Interest Expense = $93.75
Net Interest Income = Funding Income - Interest Expense
- Net Interest Income = $134.23 - $93.75
- Net Interest Income = $40.48

Step 2: Calculate fee income:

Additional Monthly Fees = $11.00
Fee Income = $11.00

Step 3: Calculate costs:

Account Origination Cost = Total Acct Origination Cost / Avg Acct Life in months
- Account Origination Cost = $159.93/60
- Account Origination Cost = $2.67
Monthly Servicing Cost = $18.17
Costs = Account Origination Cost + Monthly Servicing Cost
- Costs = $2.67 + $18.17
- Costs = $20.84

Step 4: Calculate provision for loan losses:

For deposits, the provision for loan losses = $0.00

Step 5: Calculate profit contribution:

Monthly Profit Contribution = Net Interest Income + Fee Income - Costs - Provision
- Net Interest Income = $40.48
- Fee Income = $11.00
- Costs = $20.84
- Provision = $0.00
- Monthly Profit Contribution = $30.64
- Monthly Profit Contribution = $40.48 + $11.00 - $20.84 - $0.00

Loan Account Example