Earnings were better than expected for much of the industry in the first quarter, but the mortgage business dragged down many banks' margins and bottom lines.

Rising interests rates hit banks on several fronts, but no business was as vulnerable as mortgage lending. Industrywide, mortgage originations fell 40%, to $209 billion, according to the Mortgage Bankers Association. Some banks reported that their originations were down by two-thirds.

"Anyone involved in mortgages has felt pain over the last year," said Gerald Cronin, an analyst at McDonald Investments of Cleveland.

"When you have a period of high refinancing, it's easy to beef up revenues."

Rising interest rates and the virtual disappearance of refinancing activity have dammed what had been a steady stream of mortgage revenue for the majority of banks.

"Clearly, in the March quarter the mortgage sector has not seen robust growth," said Bradley A. Berning, an analyst with U.S. Bancorp Piper Jaffray. "Rising rates have slowed refinance, and that has been reflected in earnings."

Mortgage-fee income at First Tennessee National Corp. of Memphis plunged 41%, to $99.9 million.

"It's been a huge issue at First Tennessee. It's one reason they preannounced their earnings," Mr. Cronin said.

He noted that the banking company gets about a third of its revenue and 20% to 25% of its profit from mortgages.

But while rising interest rates and pricing pressures have brought most banks' margins down, the faltering mortgage area has hit regional and smaller banks harder than some of the bigger players.

Mortgage fees at SouthTrust Corp. of Birmingham, Ala., fell 45%; and Regions Financial Corp., also of Birmingham, suffered a 33% decline. But Chase Manhattan Corp. and Wells Fargo & Co. made up the shortfall through diversification.

"The larger players with more diversified businesses have areas that can perform well when others aren't," Mr. Berning said. "Banks with servicing platforms can balance out the losses in refinancing and origination."

While Chase's revenues from residential mortgage origination fell 52% from the first quarter last year, to $44 million, its servicing revenue jumped 131%, to $150 million. Wells Fargo reported a 2% increase in mortgage net income, to $57 million, despite a 57% drop in originations. Its servicing portfolio grew 9%, to $284 million.

Analysts said the share prices of smaller banks - and Internet-only mortgage companies - reflect the adverse environment.

First Tennessee's stock, after reaching a 12-month high of $45.188 last May 13, was trading at about $19 late last week. SouthTrust, which reached a high of $42.50 on May 7, was trading under $25. And Regions Financial, which peaked at $39.125 May 7, was trading at just above $20.

Chase, which hits its 12-month high of $98.50 on March 23, closed Thursday at $77.3125. Wells Fargo, which had its 12-month high of $45.188 on July 9, closed at $41.1875.

Observers note that these ups and downs are inevitable. "Banks recognize that the housing market is cyclical, and [mortgages] didn't impact their aggregate earnings," said Doug Johnson, senior policy analyst with the American Bankers Association.

Mike Crawford of B. Riley & Co. said that if interest rates go down again, "there will be a whole new body of homeowners looking to refinance."

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