Thrifts Earn Record Profits, But Deposits Continue to Slip
May 19, 2011
WASHINGTON -- The nation's thrift industry earned a record $1.89 billion in the second quarter, but deposits continued to decline, the U.S. Office of Thrift Supervision reported. The strength in earnings resulted primarily from an increase in net interest income, as return on assets rose to its highest level since the 1950s, said Kenyatta Coyle, OTS executive director of research and analysis. One area of concern, Mr. Coyle said, is the continued decline in thrift deposits, which fell at an annual rate of 6.7% to $454.2 billion in the second period from $470 billion at the end of 2010. Deposits now fund only 68.1% of thrifts' assets, a record low. Thrifts have been switching from deposits to other sources of funding in order to avoid the high cost of deposit insurance they pay to the Savings Association Insurance Fund. If thrift deposits continue to shrink at their current rate, the industry eventually will be unable to pay the interest on Financing Corp. bonds sold in the late 1980s to help bail out the thrift industry. The $793 million annual FICO interest tab is paid with deposit premiums from thrifts. One alternative source of funding is advances from Federal Home Loan System banks, which increased $6.6 billion in the second quarter, Mr. Coyle said. Thrift holding companies also have been shifting deposits to their bank subsidiaries, where deposit insurance is much cheaper. According to the OTS report on the 1,397 thrifts it regulates, second-quarter earnings rose from $1.83 billion in the first quarter. Return on assets, a key measure of profitability, rose to 0.99% in the second quarter from 0.96% in the first quarter. The last time return on assets was higher was in 1959, Mr. Coyle said. The industry's equity-capital ratio declined slightly to 8.05% in the second quarter from its historic peak of 8.08% in the first quarter. Capital levels remain strong, however, with more than 97% of institutions meeting or exceeding the highest regulatory capital category, according to Mr. Coyle. The number of problem thrifts fell to 33 in the second quarter from 37 in the first quarter. Assets of those institutions fell to $7 billion from $11 billion. Troubled assets fell to $9.3 billion, or 1.21% of total assets, from $9.7 billion, or 1.27%. Troubled assets are noncurrent loans plus repossessed collateral. Mr. Coyle said some of the improvement in asset quality may stem from several accounting and reporting changes. He added that several quarters of data will be needed to gauge whether the improvement is fundamental or a result of the changes.
