Most-Profitable Thrifts Thrive by Focusing On Traditional Lending, OTS

Traditional mortgage lending is key to a thrift's profitability, according to a government report released this week.

The 102 federal thrifts with the most consistent returns over the last three years held more fixed-rate, single-family mortgages than the other 1,200 thrifts regulated by the Office of Thrift Supervision.

"Our initial findings clearly show that a residential mortgage specialist that does its job well can make an excellent profit," OTS Director Nicolas P. Retsinas said at a news conference Wednesday.

Less surprisingly, the study also found that these highly profitable thrifts-which range in size from $22 million to $6 billion of assets-are more efficient, earn more income from fees and interest, and control credit risks better than other thrifts.

As of March 31, these thrifts on average held nearly 40% of their assets in fixed-rate mortgages and mortgage-backed securities, compared with an industry average of 21.5%. The top 102 held 20.5% in adjustable-rate mortgages, as opposed to 40.5% for the industry as a whole.

Because fixed-rate mortgages pose greater interest rate risk than adjustable-rate mortgages, the OTS found the most profitable thrifts had higher-than-average levels of risk.

However, Kenneth F. Ryder, OTS executive director of research and analysis, said these thrifts hold more capital to counter the higher levels of risk.

Even after a hypothetical 200 basis point interest rate fluctuation, these institutions still would have capital substantially above "well- capitalized" levels, Mr. Ryder said.

From March 1994 through March of this year, 10 of the 102 thrifts had an average return on assets exceeding 2% basis points; ROA at four thrifts topped 3%. J.P. Morgan Florida Federal Savings Bank led the pack with an average ROA of 3.55%, the OTS said. It was followed by First Savings Bank in Arlington, Tex., and U.S. Trust Company of (Palm Beach) Florida, with ROAs of 3.26% and 3.25%, respectively.

More than half of the top 102 are in the southeastern and central United States, an area encompassing 14 states. The West, where most of the nation's 10 biggest thrifts are located, had the lowest percentage of most- profitable institutions, around 8%. This reflected the lagging California economy during the three-year period, Mr. Ryder said.

The OTS is working on another report, to be released by yearend, that will focus on the business strategies employed by highly profitable thrifts.

"This was the 'what' study, as opposed to the 'why' study," Mr. Ryder explained.

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