WASHINGTON - Thrift industry earnings dipped 6.3%, to $2.09 billion, in the third quarter while rising interest rates continue to threaten future profits, the Office of Thrift Supervision said Thursday.

Average return on assets for the 1,111 thrifts supervised by the agency fell 13% in the third quarter, to 0.98%, from the same period in 1998. The industry's cost of funds increased in the quarter as consumers opted for higher returns offered by competitors. Average variable-rate borrowing costs jumped to 9.4% in the quarter, up from 6.8% in the year-earlier period. The average thrift's deposits-to-assets ratio fell to a record low of 57.2%, from 62.6% in third quarter 1998.

"The deposit runoff really has continued, particularly with deposits under $100,000," OTS Director Ellen Seidman said. "This is contributing to net income decline because you've got increased Home Loan Bank borrowing, which comes in at higher rates."

The industry's interest rate sensitivity in the third quarter hit its highest level since OTS began tracking it in 1992. Though concerned, Ms. Seidman said OTS it is comforting that a small proportion of the industry is incurring the greatest risk and those thrifts seem to have it under control.

"We've got a number of institutions that do in fact have a lot of interest rate risk where we're convinced - because of quality of management, the way they react, their low credit risk profiles, and their high capitalization - that this is fine," she said.

The industry's third-quarter assets grew 8.5%, to $863 billion, over the same period in 1998. Total loans increased $45 billion, to $590 billion, in the third quarter, up from $545 billion in the year-earlier period. However, third-quarter mortgage originations dropped to $69.3 billion, from $78.7 billion in third quarter 1998.

While Ms. Seidman commended thrifts for reducing mortgage lending risk by diversifying, she warned charge-off rates nearly doubled in the third quarter, to 115 basis points, among the 143 thrifts with the biggest business lending portfolios.

Still, total troubled assets fell 12.5% in the third quarter, to $5.6 billion, or 0.8% of total assets. Ms. Seidman advised institutions to adjust to lower mortgage demand by trimming sales forces.

"Unless the whole mortgage banking industry contracts relatively quickly, what you end up with is too much capacity chasing too few loans," she said.

"That has tended to lead to potential underwriting problems."

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