As mortgage interest rates edge up, expect more small banks and thrifts to revise earnings projections downward, analysts said.

These institutions lack the natural hedge for interest rate increases that is found at most large national lenders, which generally hold sizable servicing portfolios.

Thirty-year fixed rates have risen to their highest level since June 6, 1997, according to the most recent survey from Freddie Mac.

Spring and summer, traditionally the busiest seasons for mortgage lenders, will probably be quieter this year because of the rise in rates.

Most recently, Premier Bancshares of Atlanta said on Monday that it would earn 14 cents to 16 cents a share during the second quarter, down from analysts' projections of 26 cents, in part because rising mortgage rates had cut into the bank's lending volume.

"Mortgage companies that don't have a good macro hedge" are sure to be affected by rising rates, said Kenneth Posner, a Morgan Stanley analyst. "The right way to hedge volume is more servicing."

When rates go up, origination and refinancing volume naturally go down. But servicing portfolios are more valuable, because there is no runoff from homeowners refinancing loans. Small banks and thrifts often sell off their loan servicing to large players that can service the loans cheaper.

Premier Bancshares' problems were not entirely because of rises in rates-the $2 billion-asset bank has also done a string of acquisitions that resulted in restructuring costs.

Thrifts with sizable mortgage businesses can expect a two-part jolt if the Federal Reserve raises interest rates, Mr. Posner said. "They'll be hit with margin pressure," he said.

Additionally, many large mortgage lenders use a sophisticated string of options to further hedge fluctuations in their portfolio and pipeline volume. Smaller community banks and thrifts often do not have such complicated financial stops in place.

Nonetheless, small banks and thrifts would be foolish to keep out of the business entirely, said John Moore, an analyst with Wachovia Securities.

Premier Bancshares expects a 16% return on equity in its mortgage unit, he said.

"When mortgage activity is strong, you've got to do the business," he said.

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