Reflecting increases nationally, deposits at Brockton Credit Union increased by 9.5 percent in the first half of 2001, while money market accounts rose by 24 percent.

After pulling money out of the bear market early in the year, consumers had to put it somewhere and, according to the latest statistics, many chose to put it into safe, insured institutions.

During the last decade of prolonged economic health, core deposits, once the mainstay from which financial institutions drew their funds, declined. After all, experts reasoned, who wants to get such little return on their money when people are making it rich, sometimes even overnight, by putting their money to work elsewhere?

But that seems to be changing. Deposits at federally insured credit unions have risen for the six months ending June 30. Deposits increased 9.7 percent, up from $379.2 billion to $416.1 billion, according to the National Credit Union Administration.

Although industry observers note that the events of Sept. 11 and the resulting tremulous stock market has led to an increased number of consumers holding onto their money, the rise in deposits at credit unions was already apparent by the first quarter of 2001. Deposit savings during that period increased 6.7 percent, up from $305 billion to $325.4 billion, according to the NCUA.

Of course, the stock market is a concern to most consumers, said Jeff Taylor, economist with the National Association of Federal Credit Unions, but other factors contribute to what he terms as the “flight to safety” that insured deposits represent. These include job worries and tax refunds which, despite advertising pleading the contrary, most consumers have saved rather than spent, he said.

“We think during the fourth quarter that’s going to continue because the economy is slowing down, maybe into recession, and the uncertainty in the terrorist attacks,” said Taylor.

The NAFCU tracks data from its member credit unions through a monthly survey and has found that for July, deposits grew 15 percent on an annualized basis, and the rate of increase in August is projected to be about the same, he said.

Asked to speculate on whether deposits will continue to increase, Taylor said, “I think a lot of that depends on whether the economy rebounds. I don’t think the trend will reverse until the economy does.”

“We’re not looking for the loans to outpace deposit growth until the second quarter of next year. Loan growth will pick up and eventually outpace share growth,” he said, depending on how the economy and war on terror fare.

“It will be a quarter or two before we see it [loan growth] recovering … As long as we don’t get into a protracted recession and/or war,” said Taylor.

At press time, the stock market was showing signs of rebounding to its pre-Sept. 11 numbers, which, while not glowing, was nevertheless a change from recent weeks.

But Taylor sounded a cautionary note. “A lot of this money coming in [as deposits at credit unions] is very susceptible to flowing out as fast as it’s flowing in because a lot of it is discretionary. When they get more confident, people will [be] putting it back into the capital markets,” he said.

But the growth projected through the end of the year will result in a large gain over last year’s deposit growth, which was about 5.8 percent, he said.

Although experts say they’d expect to see deposits grow in a bear market, Taylor said there’s a little bit more going on in this case.

“I think if our economy was doing better but the stock market wasn’t doing as well, you wouldn’t see as much, plus the uncertainty of the terrorist attacks,” he said.

Locally, growth in deposits has been “above average,” according to Robert B. Kimmett, senior vice president for public relations and marketing at the Massachusetts Credit Union League. “It’s obviously no surprise people are seeking safe harbor for their investment and are seeking to diversify,” he said. Additionally, investment managers usually advise consumers to keep a certain amount of their portfolios in cash.

Although there is no data that conclusively points to the stock market as the impetus for the increase in credit union deposits, “logic would indicate that the circumstances with the very rapid increases in the market and the amount of money people were bringing to the market, [then] the deflation people saw in the value of their portfolio, is probably more stark than in previous eras,” Kimmett said.

‘Limited Options’
“It’s been a long time since the equities market has declined the way it has recently, so it’s difficult to make those kinds of comparisons. The context you’ll find from one business cycle to another will be colored by other conditions. It has been more than 10 years since the stock market has begun to decline,” said Alan M. Bernstein, senior vice president at EasCorp in Woburn. EasCorp is a corporate credit union that serves as a central bank for area credit unions. It houses much of the working capital for credit unions in addition to investing funds on behalf of its members. It is owned by its member credit unions.

Brockton Credit Union’s deposit growth for the first half of 2001, at 9.5 percent, mirrors the national growth rate but is actually a slower rate of increase than last year’s numbers, which reflected 11.4 percent growth, said Leo A. MacNeil, senior vice president of marketing at the $800 million-asset credit union.

While MacNeil said he suspects “certain conditions” in the stock market as well as economic uncertainty internationally have played a part in the growth in deposits, he said the bulk of the increase is probably attributable to advertising touting the credit union’s checking accounts and the new locations it has opened since June.

Also contributing to deposit growth in Massachusetts is the last of the fallout from the mega-mergers of 1999 and 2000 in the financial services field.

“Based upon this, we’ll probably be up by 10 percent over the whole year,” he said. Money market accounts at the credit union grew by the largest margin at 24 percent.

The local trend is following the national growth trend very closely, said Bernstein. While he agrees with the other reasons cited for growth, including funds being federally insured, he added another. “Credit unions have historically paid more attractive dividend rates on deposits.” During times when the market is lagging, credit unions generally err on the side of benefiting their members, he said.

As to whether the good fortune will continue, Bernstein said it’s hard to predict: “At this point, we’re relying on anecdotal evidence we’re hearing from some of our credit unions that it’s decreasing and growth in August was flat.” Government data on August rates have yet to be released.

Even if the trend toward increased deposits does continue, having all that extra liquidity isn’t necessarily all good for credit unions. It presents its own issues.

“The challenge is credit unions make a lot more money on loans than deposits. They have all this liquidity and they want to loan it out … at the same time, loan demand is slowing and naturally it will probably slow a little more,” said Taylor. Another source of earnings is to invest the money. “They generally do invest in mutual funds and things like that, but mainly a credit union’s bread and butter is fixed investments, CDs. The down market does hurt to a point, but generally it’s the falling interest rates. They need to find alternative investments,” said Taylor. While the housing and auto markets are holding their own, they aren’t profit centers to the degree they were, said Taylor.

“Any major change in the balance sheet is going to require that credit unions study their asset liability management and invest their money in the best possible way. The preferred investment is to loan to members,” said Kimmett. However, loan demands are off because of the grim economic forecast. “So credit unions have to be very strategic in thinking about their investments and being aggressive with loans and not overly aggressive with interest rates on deposits,” he said.

Paying dividends and loaning money to consumers while making money on the spread is becoming increasingly tight, said MacNeil.

“As a credit union, our options are limited. We don’t like imposing fees on our members so the ways to be profitable are usually limited,” to the money to be made on loans or related services such as third-party vendor relationships.

For Brockton, loan demand hasn’t been a problem. Demand for mortgages has continued to increase and the indirect auto lending business has grown “significantly,” MacNeil said, attributing that growth to the hard-won relationships Brockton has with 75 auto dealers in the area.

But even the auto industry is sending out warning signals. For instance, many auto manufacturers are promoting 0 percent financing to try to spur sales.

Brockton is also taking into consideration how recent events will affect future business, said MacNeil.

“We are certainly looking at that in terms of not only the remainder of this year, but what next year will look like in terms of budgeting and plans. We’re closely watching loan payments with layoffs,” he said.

The change in economic conditions and the concerns going forward about job stability “cloud the picture more,” said Bernstein. “To the extent credit unions have built in forecast for high single-digit growth in their lending activity, they have rethought that substantially for this year. That means they can invest the money and try to get the money back that way or try to turn off the spigot of deposits by adjusting deposit rates to make them have a positive spread when they do invest it, or stop people from depositing,” he said.

But credit unions in Massachusetts have insulated themselves to some degree in that traditionally they have high capital ratios in the 13 percent range when the government only requires them to have 6 percent, said Bernstein.