Cautious Optimism That Second Half Will Continue Positive Trends

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SUMMERVILLE, S.C.-David D'Annunzio hates to rely on an overused phrase, but "cautiously optimistic" seems to be the only way to describe the forecast for the second half of 2011.

"We're cautiously optimistic that the second half of the year will be dramatically better than what we've experienced over the last 18 months," said D'Annunzio, chair of the executive committee of CUNA's CFO Council and CFO/SVP at Heritage Trust FCU here.

That year and a half, he explained, "was predominantly influenced by our members losing their jobs, and job loss does not necessarily fall inline with credit scores. So we experienced charge-offs in all tiers of our loan portfolios...and that had a dramatic impact on our bottom line in 2010," D'Annunzio explained. "So to some extent we feel that the majority of the folks that are going to go through that economic turmoil of losing their job have more or less had that experience. Even though job creation is not as strong as we'd hope for, the majority of folks that are employed will continue to be."

D'Annunzio pointed out that the combination of lagging job growth and increasing gas prices, however, could have an impact: members will have less disposable income, which could affect their ability to repay loans-or at least repay them in a timely fashion.

"In terms of where we end the year, I think we'll still see an improvement when looking at 2010 versus 2011, but we may see another pick-up in delinquencies in the second half of the year based on what happens with the economy and gas prices," he said. "But we still expect it to be better than last year and we expect to end the year with better income than we've seen in the last two or three years."

Like many other credit unions, D'Annunzio's has seen a surge in deposits, which he views as being "a flight-to-safety issue, and that the general marketplace does see credit unions as a safer place to do business," but he added that deposit cycles have begun to trend back toward normal as consumers begin spending in more traditional patterns. Deposits are up about 6.8% from last year, and "I'd say we're in a range where deposits are increasing 5-7% year-over-year for the last two or three years, but the expectation is that it's going to hit a plateau this year."

Lending, on the other hand, is down 5% over last year, particularly in the auto realm. Despite that, "philosophically, we haven't changed our pricing strategy in any significant way," said D'Annunzio. "We have always targeted to be in the upper quartile in our offering rates, both on the lending and depository side of the equation, with the occasional promotion to attract new members and new business. In this environment, we don't run any promotional pricing on the depository side, and as a result our cost of funds has continued to decline."

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