OTS Says Clouds May Loom Despite Near-Record Quarter

The thrift industry earned a near-record $2.12 billion in the second quarter, but rising interest rates and reduced reserves cloud its future, the Office of Thrift Supervision reported Wednesday.

Profits at the 1,115 thrifts supervised by the agency were second only to the $2.23 billion earned in the third quarter of 1998 and were 1% higher than for the second quarter of 1998.

Earnings growth was aided by a combination of reduced overhead expenses and higher fee income, OTS Director Ellen Seidman said.

Sensitivity to interest rates rose for the third consecutive quarter, primarily because of a continued increase in fixed-rate mortgages associated with the refinancing boom, which is slowing.

Capital declined to 8.1% of assets in the second quarter, compared with 8.56% a year earlier. The OTS attributed the dip to $672 million of unrealized losses on securities held by thrifts, compared with $739 million of unrealized gains in the first quarter. Rising interests depressed the value of these securities, which make up 12.6% of total assets.

Reserves fell to 0.68% of assets from 0.77% a year ago. OTS officials said they are concerned that complaints by the Securities and Exchange Commission about financial institutions' earnings management may have caused them to water down reserves. Ms. Seidman said she plans to track the situation closely.

However, she noted problem loans are only 0.65% of total assets, the lowest in 10 years.

"Given the potentially offsetting trend of increases of direct loans and improved asset quality, this may actually be appropriate," Ms. Seidman said. "We're going to watch it. I want to make sure institutions are not artificially lowering reserves because they think some regulator wants it."

OTS-regulated thrifts held $847 billion of assets as of June 30, up 7.6% from a year earlier. Return on average assets for the second quarter was 1.01%, down from 1.07% a year earlier. Return on average equity was 12.44%, down from 12.68%.

Mortgage originations were level despite rising interest rates. Thrifts originated $66.1 billion in mortgages in the second quarter, compared with $67.67 billion a year earlier. Refinancings represented 15.7% of originations, up from 13.7%. Fixed-rate mortgages increased 2.1%, to make up 14.6% of assets, while adjusted-rate mortgages decreased 1.3%, to 30.7% of assets.

Beyond mortgages, thrifts have been diversifying their assets, adding commercial and consumer loans. Ms. Seidman said the OTS is watching to ensure that thrifts are appropriately pricing new business lines.

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