How we look at and choose banks and credit unions based on their data
If you’ve spent any time on this site at all, you probably wonder what criteria we use to choose a Better Banking Option. Although there are a multitude of statistics publicly available about banks and credit unions, the data is usually presented in impossibly crammed spreadsheets that are unreadable by anyone who doesn’t have a degree in banking or finance. We look at a few secondary sites which break down this information in a way which is easily understandable, sites which we have a professional relationship with who we can rely on to provide us with accurate and condensed data which is most relevant to community banking.
Below is a series of steps we take when examining which banks are impactful on underserved communities. Our plan is to publish shorter articles soon delving deeper into each of these statistics and what they mean, but this article is to give our readers a better sense of the process we use to look at the banks we recommend.
The first thing we look at is DLI-HMDA (Development Lending Intensity), which is a metric defined by the National Community Investment Fund (NCIF) as the percentage of a financial institution’s housing lending that goes to low-income communities. This is particularly important to us because at standard banking institutions, investing in low-income housing is not particularly profitable or popular, and housing loans are the most common and accessible way for people to build wealth and strengthen their communities. We obtain our DLI-HMDA data from NCIF. Unfortunately, we are unable to get this data for credit unions. Our targets for recommendation for DLI-HMDA are at least 20% of their housing lending, although 40% or more is ideal.
Next, we look at Housing Focus, which refers to the overall percentage of lending which goes to housing loans. It is important in that it affects how we see the DLI data. For example, even if a bank has a DLI of 48%, if only 10% of their assets are going into housing, that then that means only 5% of their total assets are being used in low-and-moderate income housing loans. We obtain our housing focus statistics from NCIF. Again, we are currently unable to get this data for credit unions. We are most likely to recommend banks who devote at least 40% of their lending portfolio to housing.
Next, we look at Small Business Lending, which refers to the percentage of total bank assets that are loaned out to small businesses. These loans are extremely important to the economic health of a community, as the formation of small businesses means more income coming into the area, more jobs, and more services or resources. Additionally, small businesses rely heavily on banks’ resources and loan products. We obtain our small business loan statistics from BankLocal.info. We are most likely to recommend banking institutions which devote at least 5% of their lending to small businesses; however, 15% or more is ideal.
Then we look at Total Assets, which refers to all the assets the bank controls. We look at this because smaller banks have a better history of getting to know their customers and making qualitative rather than simply quantitative decisions when giving out loans or other credit. Larger banks have more rigid requirements for loans and other assistance, and rarely make exceptions to these requirements, which affects smaller businesses and poorer people far more often than their upper-class members. Large banks are also more likely to engage in predatory lending practices and speculative trading. We obtained our total asset data from both NCIF and BankLocal. We look for banking institutions with a total asset size of less than $4 billion, although less than $1 billion in assets is optimal.
Next, we look at Net Loans to Deposits, which refers to the percentage of the bank’s assets which is being loaned out and put to use. This can affect the other data, as even if a bank has a high DLI percentage, if only 60% of their assets are loaned out, this is significantly less money in low-income housing than if they were 90% loaned out. If a bank is loaned out significantly over 100%, this is an indicator than more research is needed, because this means the bank is borrowing significantly from other sources. We obtained our net loans to deposits statistics from NCIF, and this data is unfortunately unavailable for credit unions. We look for banks which are at least 70% lent out but having at least 85% of their assets invested in loans is ideal.
Then, we look at DDI (Development Deposit Intensity), which is an NCIF Social Performance Metric that measures the percentage of a bank’s branches which locate in low-and-moderate-income census tracts. This is less important in the digital age than it used to be, as many banking functions are accessible online, and the need to visit your bank’s physical branch is less frequent. However, low income individuals are less likely to have access to consistent internet, and the placement of branches in low and middle-income areas shows that the bank has an interest in catering to the individuals in those areas. We obtain our statistics from NCIF. This data is unfortunately unavailable for credit unions, but it is possible to estimate the DDI for smaller credit unions by looking at their placements on a map. We look for banking institutions who have at least half of their branches located in low-and-moderate-income census tracts.
Finally, we look at the bank’s CRA rating and their Return on Assets. To learn more about the significance of the CRA and their ratings, read our article about it here. A bank’s return on assets is essentially an indicator of whether a bank is profitable. Both of these factors are not as important as other statistics we look at but are indicators of how well a bank is functioning. We look for a positive return on assets, or if there is a negative return on assets, over -1%. We also look for at least a satisfactory CRA rating.
We also look at a variety of other sources for information on a banking institution’s practice, such as their website and mission, banking designations (such as CDFI, LICU and CDCU), and their history, and we do this especially for credit unions as there is much less publicly available lending data for credit unions. However, these statistical benchmarks help us hold all banking institutions to the same standard and are the best indicators to of what we need most in banking: institutions which are committed to serving the underserved neighborhoods they work in. If you ever have questions about our process, please contact us through our blog or email us at betterbankingoptions@gmail.com.
(Note: this article was published in February of 2019, our process of research and what data is publically available may have changed. We now have a search engine which uses our metrics to rank all Better Banking Options in a given area. Check out both of those links for more info.)