[1] It is usually expressed as a percentage of what the financial institution earns on loans in a time period and other assets minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets).
Net interest margin is similar in concept to net interest spread, but the net interest spread is the nominal average difference between the borrowing and the lending rates, without compensating for the fact that the earning assets and the borrowed funds may be different instruments and differ in volume.
NIM is calculated as a percentage of net interest income to average interest-earning assets during a specified period.
For example, a bank's average interest-earning assets (which generally includes, loans and investment securities) was $100.00 in a year while it earned interest income of $6.00 and paid interest expense of $3.00.
In particular, for a bank or a financial institution, if the bank or financial institution has a significant amount of non-performing assets (such as loans where full repayment is in doubt), its NIM will generally decrease because interest earned on non-performing assets is treated, for accounting purposes, as repayment of principal and not payment of interest due to the uncertainty that the loan will be fully repaid.