Investigative Reporting Workshop, American University
updated 3/8/2012 7:15:26 AM ET 2012-03-08T12:15:26

The nation’s banks and credit unions had their best year since 2006, as a slowly recovering economy led to modest loan growth and lower levels of nonperforming loans.

Commercial banks made $119.5 billion in net income in 2011, the most since 2006, when they earned $145.2 billion. Credit unions earned $6.4 billion, the most ever.

According to an American University Investigative Reporting Workshop analysis of quarterly federal reports, total troubled assets (nonperforming loans plus repossessed real estate) tumbled to $251 billion as of Dec. 31, down from $322.6 billion a year earlier. As a result, the number of banks with more troubled assets than capital and reserves fell to 321, from 389 a year ago.

That meant banks had to set aside much less money for potential loan losses.

Despite their growing profits, banks are not lending much more. For the full year, bank lending increased by a mere 1.8 percent to about $7.27 trillion. Lending remains well below the $7.8 trillion level of December 2007.

Meanwhile, bank deposit continue to grow -- up more than 21 percent since the end of 2007.

Last fall, there was a lot of talk from the Occupy movement about shifting deposits out of  banks and into credit unions. Apparently, it didn’t happen on a large scale. Credit union deposits increased by about 1 percent in the final three months of 2011, while bank deposits grew by 1.8 percent.

The profit numbers mask a growing issue for the banking industry: Margins are shrinking, putting more pressure on bankers to either find alternative sources of income or to be even more careful in their lending practices. Banks earned 88 cents for every $100 in assets last year, a considerable improvement over the prior three years, but down from $1.28 in 2006. Credit union profits averaged 68 cents for every $100 in 2011, down from 82 cents in 2006.

Related: Look up any credit union's financial health in the BankTracker

The Federal Deposit Insurance Corp., which insures the $10 trillion in deposits in commercial banks, reported last month that, “Both net interest income and noninterest income were lower than in 2010, as full-year net operating revenue declined for only the second time since 1938….” The other decline occurred in 2008, at the height of the financial crisis.

Because interest rates on deposits are at historic lows and because of growth in noninterest-bearing deposits, banks actually paid out $22 billion less in interest last year than in 2010. But they earned nearly $29 billion less in interest income. The same pattern holds true at the nation’s 7,094 credit unions. As a group they took in about $2.1 billion less in interest; their interest payments fell by nearly $2.2 billion.

The noninterest-bearing accounts are growing because during the financial crisis the FDIC extended insurance to cover all amounts in those accounts until the end of this year. Generally, deposit insurance is limited to $250,000 per account. These accounts, called TAG, which is short for “Transaction Account Guarantee," now hold more than $1.4 trillion, nearly 15 percent of all deposits.

Unsurprisingly, because this is a cheap source of funds, the banking industry wants to see that guarantee extended. And because rates are generally so low on deposits, large companies and government agencies don’t mind keeping the money where it is fully protected.

The Independent Community Bankers Association said in a recent release, “For community banks, full FDIC coverage has been essential to retaining business payroll and checking accounts. This coverage helps community banks attract and retain deposits from local businesses and governments, keeping local funds invested in the community.”

Banks pay an additional insurance fee to be in the program, and several hundred, including many of the biggest banks, have opted not to participate.

The independent bankers group says that because any costs of the program are borne by the bank fees, there is no risk to the federal government. Technically, in the event of a widespread banking collapse, the federal government does stand behind the FDIC, though that protection has never been called on.

Related: Look up any bank's record in the BankTracker

Copyright 2013, American University School of Communication

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