S&L; Quarterly Profit Drops 17.5%, Despite Huge Gains : Thrifts: Second-quarter net income fell to $1.27 billion. California institutions earned $94.8 million despite the weak real estate market.

Profits at the nation’s savings and loans fell 17.5% to $1.27 billion in the second quarter despite huge gains from lower interest rates, the government said Wednesday.

But the industry still earned a record $2.81 billion for the first half of this year, surpassing a previous high of $2.7 billion for the six months that ended March 30, 1986.

California’s 111 private sector thrifts enjoyed a big boost in earnings, with net income of $94.8 million during the second quarter, compared to a profit of $55.9 million recorded in the same period last year, according to the OTS.

Despite the profit improvement, OTS Director Timothy Ryan said he remains concerned about the economic prospects of California thrifts because of the state’s weak real estate market.

Nationwide, second-quarter thrift profits were down from a record $1.54 billion in the year’s first quarter because of an increase in money set aside for provisions for bad loans.

Loan-loss provisions rose to $1.25 billion, up from $1.18 billion in the prior quarter, OTS said. The biggest provisions were made by the giant Homefed Bank of California, with $13.5 billion in assets. It became the biggest thrift ever to fail when federal regulators seized it in July.

“The industry is stable and capable of sustained profitability,” Ryan said.

Thrifts are well on their way to earning record profits this year, even if interest rates start to climb, said Martin Regalia, an economist with Savings & Community Bankers of America.

The industry is profiting from the widest gap between long-term and short-term interest rates since the 1970s and from consolidation as ailing thrifts are bought up and the government closes failed ones, Ryan said.

But he stopped just short of claiming victory in the cleanup of the thrift crisis, calling on Congress to vote more funds to finish the job.

Government shutdown of failed thrifts has been stalled for five months by a stalemate in the House over whether to approve more funds for the thrift cleanup. Lawmakers doubt any more funds will be approved before next spring.

Savings and loans have staged a big turnaround in the last four years, largely because of a massive government program that has cost taxpayers $87 billion since 1989.

The number of insolvent thrifts has dropped from 632 institutions--or 20% of the industry in June, 1988--to 11. Earnings have recovered from a loss that once reached $8 billion.

The industry has strengthened its capital base, a key cushion against losses and a measure of thrifts’ health, to 5.7% of assets from 0.33% in June, 1988.

At the same time, the industry has shrunk by a third to 2,013 thrifts with assets of $840 billion, up from $1.28 billion in 1988. Thrifts’ non-current loans as a percentage of assets were more than 3%.

“It is pretty much good news,” said Cynthia Glassman, research director for Furash & Co. Inc., a Washington-based financial institutions consultant.

Thrifts earned net interest income of $6.01 billion in the second quarter, up from $5.33 billion in the year-ago period. These gains were because of the 4.54 percentage point gap between the amount thrifts earn on 30-year fixed mortgages and the price they must pay for 90-day certificates of deposits.

“I fully expect this kind of performance to continue, even when interest-rate spreads narrow,” Regalia said.