By Robert H. Halleck
In my first post, I talked about why "Your First Loss Is Your Best Loss" when it comes to collecting on bad debt and disposing of the collateral. Unfortunately, this is a much more frequent operation in credit unions of late. I drew on my insights from 35+ years in the financial services industry during which I often learned things the hard way. Here's another thing I learned:
Profit in a Depository Institution Is on the Liability Side of the Balance Sheet
Income is derived from loans but your net income–it's hard for a recovering banker to stop using the word profit—comes from your margin. Skillful pricing of deposits close to the balance point where your members are grumbling but not leaving will allow you to have far more prudent lending policies than those needed to stretch for yield because you wanted growth at any price. And we all know "hot money" is not a foundation for solid growth.
Another way to look at it is to remember the words of the old maxim, "If bankers have money, they will make loans. If they have more money, they will make worse loans, and if they still have money, they will make really bad loans." You are much better off controlling your growth and making loans you understand. Your members will thank you. Risk premiums have long since disappeared in the financial services industry. If that's the case, where indeed do your profits originate?
Robert H. Halleck, who retired in 2002 from a 35-year financial services career, remains vicariously involved in the industry through his wife, a credit union CEO.
Read Lesson 3.
