Safety of Credit Unions' Insurance

QUESTION: Does the National Credit Union Administration, the government agency that insures credit unions, insure depositor accounts under the same set of rules that the Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp. use? In other words, is my money as safe in a federally insured credit union as in a bank or S&L; protected by federal deposit insurance?--J.C.

ANSWER: Some would say that, as a group, credit unions are even safer. Here's why: There is $1.24 worth of federal deposit insurance backing up each $100 of savings in a credit union. By comparison, the insurance fund for banks has about 94 cents on deposit for each $100 of bank savings, and the S&L; fund's ratio is about 77 cents for each $100.

By another measure--overall financial strength--the nation's credit unions fall somewhere between banks (generally stronger) and S&Ls; (weaker as a group), says Warren G. Heller, an analyst at Veribanc Inc., a Woburn, Mass., company that tracks the financial health of savings institutions.

The safety of federal credit unions improved substantially last July when President Reagan signed into law a bill permitting the capitalization of the credit union insurance fund. With that act, the nation's 15,163 federally insured credit unions contributed millions of dollars to the fund, which quadrupled in size--to $1.1 billion--as a result.

Like bank and savings and loan deposits, federal credit union accounts are insured up to $100,000. (Besides covering the nation's 15,163 federally insured credit unions, the National Credit Union Administration provides insurance for 5,000 of the nation's 9,000 state-chartered credit unions.) In addition, some credit unions have contracts with private insurers to insure accounts whose balances exceed $100,000.

When credit unions fail--there were 38 liquidations and 550 government-arranged mergers last year--insured deposits typically are returned within two weeks.

If you are interested in checking out the relative strength of a particular credit union--there is an important link between an institution's strength and the safety of your deposits when uninsured deposits are involved or in the event of a mass closing of institutions, as has happened with Ohio S&Ls--Veribanc; will provide information on a credit union's assets, equity and profits or losses for a $20 fee.

Veribanc culls the information from reports on file with government regulators, does some analysis and then assigns each institution a color code as an indicator of its financial strength. "Green" credit unions are those that are operating profitably and that have equity totaling at least 5% of their assets. A "yellow" credit union is one whose equity is between 3% and 5% of its assets or that is operating at a loss or both. And a "red" credit union has an equity-to-assets ratio of less than 3% or is losing money to the extent that it would use up its equity in less than a year if that rate of loss were to continue. The company offers the same analysis for federally insured banks, savings and loans and mutual savings banks.

One drawback: the information is six to nine months old. Veribanc's most recent data on banks and savings and loans is from the third quarter of 1984. Its most recent credit union information is from the second quarter of 1984.

The mailing address is Veribanc Inc., P.O. Box 2963, Woburn, Mass., 01888.

Q: My adjustable-rate mortgage is tied to the 11th District average cost of funds index, which I thought I knew how to calculate. But lately, the index has been virtually identical to the average prime rate, meaning there can't be an amount figured in for the bank's cost of doing business. Can you explain?--T.S.

A: Perhaps the most important point is that there is no direct relationship between the prime rate and the 11th District cost of funds index, so named because it reflects the average interest being paid by savings institutions in the 11th Federal Home Loan Bank District, serving California, Arizona and Nevada.

The prime is a benchmark used by banks in determining interest rates for their most credit-worthy customers. Conversely, the cost-of-funds index reflects actual rates paid by savings and loans in acquiring their various sources of mortgage money. Because the major component of the index is interest paid on savings accounts, the index often does not move as rapidly as market interest rates do.

Another important point for borrowers with adjustable-rate mortgages is that there is more than one cost-of-funds index. But in California, the 11th District monthly index is the most popular.

The index is a compilation of the interest that savings institutions pay for deposits, other borrowed funds and advances from the Federal Home Loan Bank, expressed as a percentage of total deposits, advances and borrowings. The calculation is then weighted to account for variations in the number of days in a month and annualized.

For the month of March, 1984, for example, the savings institutions in the 11th District together paid interest of about $1.71 billion on savings, advances and other borrowings--the numerator for the calculation. The denominator--in this case $201.87 billion--was derived by averaging the sum of the February and March month-end balances of total savings capital, advances and other borrowed money.

Next, the quotient was adjusted for the number of days in the month. Specifically, the quotient of 0.0084535 was multiplied by 0.984, the adjustment factor for a 31-day month in a leap year. The resulting figure (0.0083182) was then annualized--multiplied by 12. Expressed as a percent, the cost of funds index for that month thus was 9.982.

Because those numbers aren't widely known by anyone outside the industry, it is virtually impossible for consumers to calculate the monthly index themselves. It is, however, available by calling the Federal Home Loan Bank of San Francisco's hot line (1-800-824-6560) after 4 p.m. on the last working Friday of each month. The Times also publishes the index in its Key Rates table on Saturdays.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, The Times, Times Mirror Square, Los Angeles 90053.

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