WASHINGTON - The savings and loan industry posted record earnings of $1.5 billion in the first quarter, the Office of Thrift Supervision reported Tuesday.

The better-than-expected results - equaling a 0.69% return on assets - compare with $600 million in earnings a year earlier and $1.8 billion for all of 1991. The industry has now posted a profit for five straight quarters.

But despite the good news, experts warned that the industry still has big problems ahead of it.

"We shouldn't celebrate," said James Barth, a finance professor at Auburn University and former chief economist with the OTS. "One quarter doesn't make a trend."

In written testimony submitted for a Senate Banking Committee hearing today, Mr. Barth maintains that the industry's profit margins are inadequate to insure its long-term survival.

"Their earnings power is weak," Mr. Barth said in an interview Tuesday, questioning whether the first-quarter profits could be sustained.

Boost from Lower Rates

Like banks, which also posted record first-quarter results, the S&Ls got a big boost in the first quarter from lower interest rates.

Over 90% of the S&Ls made money as the spread widened between interest paid on deposits and interest collected on loans, the OTS reported.

OTS Director T. Timothy Ryan will detail the results today when he testifies before the Senate Banking Committee, which is looking into the condition of the $870 billion-asset S&L industry.

He is expected to testify that the earnings also were helped by continuing government seizures of weak S&Ls, which tend to hurt competitors by paying exorbitant deposit rates.

The OTS seized eight S&Ls in the first quarter with $1.3 billion in assets. The agency has identified 40 more that it will close in coming months.

Currently, 56 S&Ls with $46.7 billion in assets and $31.4 billion in deposits are operating under government conservatorship.

Push for Broader Services

Mr. Barth the former OTS economist, said Congress can improve the industry's chances by permitting S&Ls to engage in a broader range of financial services.

Mr. Barth said 2,096 S&Ls with $876 billion in assets had a return-on-equity capital of just 4.5% in 1991. That's well below the average return on Treasury securities of 7.9% for the year.

In addition, the S&Ls earned on average an anemic 0.26% on their assets, and had a capital-to-asset ratio of just under 5%.

As a group, the nation's 50 largest S&Ls, which hold half of the industry's assets, had an average ROA of 0.21%, an ROE 3.9% and a tangible capital-to-assets ratio of 4.1%.

Big Risk to Insurance Fund

"Some of the biggest institutions are among of the weakest ones in the country," said Mr. Barth. He said these big S&Ls pose a great risk to the deposit insurance fund.

"I think we have a problem with the entire industry long term," said Robert Litan, a senior fellow with the Brookings Institution.

He said the industry still has its assets tied to fixed-rate mortgages, which could sink earnings if interest rates rise.

Mr. Litan said in the next two quarters earnings could peak, and as the recovery progresses, interest rates will rise.

"Eventually, this yield curve is going to flatten out," he said. "It is going to make this business less profitable."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.