WASHINGTON — The Office of Thrift Supervision has lost money in each of the past three fiscal years and does not expect to be in the black again until 2003, according to internal budget estimates.

The figures provide more ammunition for critics who argue the agency should be merged into the Office of the Comptroller of the Currency.

Since 1996, when the thrift agency turned an $18 million profit, its bottom line has gotten worse each year. Net income dipped $15 million in 1997 alone. Net losses began in 1998, at $168,000, and ballooned to $10 million in 1999 and $13.1 million in 2000. The agency expects to lose $4.1 million this year and nearly $2 million next year.

If the projections hold, the five consecutive years of operating losses will be the longest unprofitable stretch in the brief history of the agency, which was formed in 1989 in the wake of the savings and loan crisis. The OTS, which funds itself by collecting assessments from the institutions it regulates, has been able to absorb the losses by dipping into a reserve fund made up of retained earnings from profitable years and a supply of operating capital that dates back to its formation. That operating capital fund, which stood at $102 million in 1997, had fallen to $78.8 million in 2000.

Losing money threatens the independence of an agency long targeted for consolidation with its larger counterpart, the OCC. Both agencies are units of the Treasury Department.

“This issue adds to the questions about the long-term viability of the OTS,” said independent banking analyst Bert Ely. “The number of thrift charters out there continues to decline, and there has been a corresponding erosion of their assessment income.”

But OTS representatives counter that aggressive cost cutting and a recent across-the-board increase in assessment rates will soon have the agency back on track financially. The agency projects a return to profitability with net income of $45,000 in 2003.

Between 1998 and 2000 the agency slowly chipped away at its personnel costs, reducing head count by 45 employees, or about 3.5%. This year alone the OTS expects to trim another 60 employees, through early retirement and other force reduction programs. The cuts are expected to save $3 million to $4 million in salaries alone in fiscal 2002.

On the assessment side, the OTS has been the victim of industry mergers and a slow but steady migration away from the thrift charter. In 1992 the OTS regulated 1,871 thrifts; by the first quarter of 2001 that number had fallen to 1,059. Assessment income has fallen 4.5% over the last five years, to $127 million last year.

Both the OTS and the OCC have complained that they find it difficult to raise their assessments to meet costs because they face competition from state regulators who can charge less because the Federal Deposit Insurance Corp. and the Federal Reserve Board do some of the exams.

In 2001, for the first time in eight years, the OTS instituted an across-the-board 3.5% increase in assessments. It also doubled the premium it charges to examine thrifts with Camels ratings of 3, 4, or 5.

The increases are expected to raise the agency’s overall assessment income to $144 million in 2001.

An OTS spokesman said that the agency has also tried to reduce its travel- and facilities-related expenses, and that it uses Treasury-wide purchasing programs to hold down information technology costs.

Supporters say the financial health of the OTS is good and will continue to get better, and they dismiss claims that large budget deficits are signs of long-term unsustainability.

“I think it is a completely bogus argument,” said Robert R. Davis, the managing director of government relations for America’s Community Bankers. “Looking at the budget deficit is completely the wrong focus.”

In fact, he said bashing a regulator for not running a surplus is disingenuous. “In 1996 there was an $18 million surplus. The industry would have been howling bloody murder if they had continued to maintain surpluses like that. The industry would have said ‘You’re charging us too much.’ ”

But Mr. Ely, the banking consultant, apparently remains unconvinced. “They are contending that they are going to be able to reverse these trends,” he said, referring to the decline in the number of thrifts and the loss in assessment income. “But the jury is still out on that.”

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