WASHINGTON — Banks collected a record number of deposits in the fourth quarter, while consumer and corporate loan growth continued to falter, the Federal Deposit Insurance Corp. said Thursday.
Deposits surged by $247.2 billion during the quarter, to $7.8 trillion, besting the record set two years earlier by 23%, the agency said in its quarterly briefing report.
But total loans and leases grew less than 1%, to $7.2 trillion, the smallest quarterly increase in nearly five years, while mortgages increased only 0.05%, the smallest increase in three years.
The FDIC also warned that asset quality may continue to weaken as shrinking net interest margins and problems with residential mortgages helped boost bad loans.
Overall, the industry's earnings declined 5% from the third quarter, to $35.7 billion, the lowest quarterly total for the year, but full-year earnings still set a record for the sixth straight year. The industry earned $145.7 billion for the year, eclipsing the 2005 total by $11.8 billion.
The annual earnings record was attributed largely to noninterest income, which rose 8.4%, to $240.7 billion. In contrast, total loans grew 0.8% in the fourth quarter, to $7.2 trillion. Much as they had in the third-quarter report, FDIC officials warned that institutions appear to be having less success fending off the inverted yield curve. Also, the earnings record was set primarily by large institutions, officials said.
"Smaller institutions obtain a larger share of their revenue from net interest income," said Ross Waldrop, the FDIC's senior banking analyst. "Larger institutions have more diversified revenue streams, including income from trading activities, securitization, investment banking, and other sources of noninterest income."
Noncurrent loans grew 8% in the quarter, to $56.7 billion. The increase, the biggest one in six years, resulted largely from problems with residential mortgages, the agency said. Noncurrent mortgages grew 15.6%, and real estate construction and development loans that were noncurrent grew 34.8%. Noncurrent home equity loans grew 28.3%, the agency said.
The FDIC also noted an upsurge in real estate chargeoffs. While net chargeoffs fell 17.2% in the fourth quarter, to $26.7 billion, chargeoffs on loans other than credit cards rose 21.6%. Residential mortgage chargeoffs had a nearly 200% increase, to $888 million, a three-year high, the agency said.
"We saw noncurrent loans fall in the middle of last year to the lowest point that we had seen in the history of our data," said Richard Brown, the FDIC's chief economist. "Now we're seeing them tick back up. … These credit cycles tend to play out again over years."
Agency officials attributed problems to the subprime mortgage market — including hybrid adjustable-rate mortgages — and declining net interest margins for small institutions. According to reported results, the industry's average margin shrank 18 basis points from the quarter before, to 3.2%.
"We do see emerging signs of credit distress among subprime and adjustable-rate mortgages. This is especially the case with so-called hybrid mortgages," Mr. Brown said.
"These borrowers in many cases are no longer seeing the gains that were boosting their equity positions in 2004 and 2005, and that makes it necessary for them to service their loan out of current income, and as we can see, more of them are having trouble doing so," he said.
The industry's ratio of loss reserves declined to $1.37 for every $1 of noncurrent loans — from $1.48 in the third quarter — the lowest level since the third quarter of 2003.
Additionally, the FDIC said banks and thrifts were less able to contend with shrinking margins by boosting volume than they had been in previous quarters.
"The industry set aside more in the fourth quarter for bad loans than at any time since the second quarter of 2003," Mr. Waldrop said. "Still, … the industry today confronts these challenges from a position of strength. Profitability, while not quite at an all-time high, is nevertheless very strong by historical standards. Balance sheets at the end of 2006 were strong and clean."
The deposit growth was caused largely by foreign office deposits and large-denomination deposits, the agency said, likely from corporations meeting yearend balance-sheet deadlines. Foreign deposits grew 8.2% from the third quarter, to $1.2 trillion, a 30% rise from a year earlier.
Though the FDIC does not specifically track large corporate deposits, it said uninsured deposits at institutions with more than $10 billion of assets grew $73 billion in the quarter. Uninsured deposits overall grew $103.8 billion, compared with a $17 billion drop in uninsured deposits in the third quarter.
Deposit growth was lower in other areas. Deposits in domestic offices grew 2.4%, the agency said, while time deposits grew only 1.2%, the smallest quarterly increase in two and a half years. Insured deposit growth declined 20 basis points, to 1.2%.
"The surge in overall deposits wasn't matched by a comparable surge in insured deposits. The growth there was a little bit more normal," Mr. Waldrop said. "We have seen a slowdown or a leveling off in the growth rate in time deposits … As far as the other category of domestic deposits, which would be your interest-bearing deposits other than time [deposits], the growth there still remains relatively low. It's positive, but not particularly strong."
Fourth-quarter earnings received a boost from one-time gains enjoyed by corporations that restructured during the quarter, the FDIC said. The industry reported a 1.2% increase in total quarterly noninterest income from the fourth quarter of 2005, to $56 billion, but that increase becomes about 13.7% when adjusted for the restructurings, the agency said.
Among the companies who enjoyed gains from a restructuring was JPMorgan Chase & Co., which reported a pretax gain of $1.08 billion from the sale of its corporate trust unit to Bank of New York Co.
Banks also received a boost from securities gains, netting $624 million in the fourth quarter.
No bank failed in 2006 (the agency's two-year-plus streak of zero failures ended Feb. 2), but the agency's list of problem institutions grew by three, to 50 institutions. Indicating that at least one large institution had joined the list, the assets of those on the list jumped $4.3 billion, to $8.3 billion.
During the quarter, 46 charters were added, and 108 charters were merged into other institutions. During the year 191 charters were added, the largest total since 2000. Four mutually owned savings institutions with $1 billion of assets converted to stock ownership in the quarter. Twenty-two such institutions with $11.8 billion of assets converted during the year.