Help, my yields don’t look right! Sound familiar?
I think we can all relate to that moment where things just don’t look right, but are unsure of where to start. Let us give you a hand in peeling that onion.
While an account’s last average monthly yield is quite straight forward,
Average balance / Interest * accrual method (days in month / by days in year)
it’s not so easy to pinpoint the changes affecting the forecasted yields, as there are many moving parts.
This report will clearly show how an account’s projected interest and yield are determined. Some accounts that do not have maturity data will be simple, such as:
(Average Balance * Yield) * Accrual = Interest.
With the forecasted average balance being a simple average,
Last Current EOM balance + next EOM balance / 2
Here is what an account analysis report looks like for a non-maturing asset or liability.
Other account types will involve maturity roll-off and new balance additions, with their rates weighted into the equation. Below, you will see how Compass starts with last month’s ending balance and yield, subtracts maturities for the month, and calculates what would then be remaining in the account and its weighted rate. Next, it adds the new balances into the equation at their new issued rate. The totals are then calculated using the weighting of the balances exiting, the balances coming in, and those that remained in the account for the entire month.
This is an example of how a planning model duplicates the changes expected in interest and yield just as it would in real life at your institution.
The Account Analysis report is extremely useful in helping you view the activity that is affecting change to yields. It may be the impact of exiting maturity dollars, the rates you are currently charging for new loans, or a combination of small influences within both that cause a change to the account yield over time.
Even the detail contained within a repricing instrument can become clear when using the account analysis report view. As seen below, two new columns have been added when an account contains repricing data. The interest and yields will now include the effect of dollars repricing higher or lower, as well as the effect from scheduled maturities and forecasted new balance.
While the detailed calculations can be found on p. 179 in your Compass User’s Manual, most of you can eliminate painstakingly working out these calculations (which is why we purchase software) just by reviewing the logic displayed in these highly informative reports.
Sue West
President