Federally chartered thrifts earned $4.75 billion last year, and would have posted record profits if not for the costly bailout of the industry's insurance fund.

Adding the $2.1 billion thrifts paid to capitalize the Savings Association Insurance Fund would have boosted annual earnings to $6.85 billion-nearly 28% more than the industry's record profits of $5.36 billion in 1995.

"This was on the verge of being an extraordinary year for earnings," Office of Thrift Supervision Director Nicholas Retsinas said Thursday.

In the fourth quarter, federal thrifts made $1.5 billion, up 14% from a year earlier. Average return on assets stood at 0.77% in the fourth quarter, up from 0.66% a year ago. Also, the number of troubled thrifts and the amount of assets they held fell to record lows.

This is a sharp turnaround from the third quarter, when the fund capitalization payment caused the industry to post a $483 million loss-its first negative quarter since 1990.

Last year, the industry benefited from a $1.3 billion drop in interest expenses as long-term, high-yield certificates of deposits came due. Fee income rose $800 million last year, to $3.7 billion.

"This shows the continued and expanding strength of the industry," said Steve Davidson, a financial economist at America's Community Bankers.

Thrifts also are expanding into small-business and construction lending, which grew respectively at average annual rates of 21.8% and 11.5% between 1993 and 1996, according to OTS.

Still, mortgage lending remained the industry's core business. Thrifts made $469 billion in mortgage loans in 1996 compared with $9.4 billion in small-business and $39.9 billion in consumer loans.

Delinquency rates fell for home mortgages, nonresidential mortgages, and business loans in the fourth quarter. But they rose slightly for consumer loans.

OTS is watching these delinquency rates closely, Mr. Retsinas said. "We are not lulled by the good news," he said. "We will continue to monitor."

The number of federal thrifts dropped in 1996 to 1,334, down 102. Ten thrifts converted to commercial banks during the year, while 20 switched to state savings bank charters. Another 50 federal thrifts were acquired by commercial banks or state savings banks. One thrift failed, three were liquidated by their owners, and 36 were bought by other thrifts.

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