Thrift industry earnings soared in the first quarter to $2.1 billion despite a marked slowdown in mortgage lending, the Office of Thrift Supervision reported Wednesday.

Profits at the 1,129 thrifts supervised by the agency were 50% greater than in the fourth quarter-when bottom lines suffered large hits from merger expenses-and nearly 11% greater than in the first quarter of 1998.

But rising interest rates this winter contributed to a 19% drop in single-family mortgage lending to $66.1 billion in the first quarter, from a record $81.5 billion three months earlier.

Thrifts overcame the letdown in the mortgage boom primarily by slashing overhead costs and lowering reserves for losses, agency officials said. Also, refinancings remain popular.

OTS Director Ellen Seidman said that higher profits and lower expenses in the face of fewer home loans is a sign the industry is adapting well to economic changes.

"That's very heartening," she said. "It does show continuing nimbleness on the part of the industry."

However, she warned thrifts against skimping on record keeping, monitoring systems, or internal controls, and suggested trimming expenses by scaling back marketing efforts and sales forces.

Ms. Seidman also said OTS is wary of increases in subprime and other risky lending activities, slightly looser underwriting standards at some institutions, and increased lending to speculative residential construction projects.

But OTS is not concerned about decreased reserves because they reflect a record low in the level of troubled assets, $6.1 billion, and greater use of mortgage-backed securities, which do not require reserves. Lenders are switching to more mortgage-backed securities from adjustable-rate mortgages to meet consumer demand for 30-year, fixed-rate home loans, Ms. Seidman explained.

Assets held by federal and state-chartered thrifts as well as federal savings banks grew 2.1% to $835 billion in the first quarter, despite some charter conversions and acquisitions by banks.

Return on assets reached 1% in the first quarter, up from 0.69% in the previous quarter, and return on equity rose to 12.28% from 8.21%.

But the industry capital-to-assets ratio fell to 8.14% in the first quarter from 8.23% in the previous quarter because of the rise in assets and lower unrealized gains on some securities.

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