The size of your bank reveals a lot more than you might think (part II)

 

In a previous post, we wrote how the size of your bank reveals a lot more than you might think. (TLDR: Want to work with a bank that focuses on communities? The data is in: consider the smaller ones.)

In this follow-up blog post, we take a closer look at the range of ways in which banks make community investments.

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Before we get started, let’s remember what banks are designed to do

By design, banks are tools for community investment: they pool community cash in order to fund community projects.

People put money into bank accounts. This cash then supports people to take out loans — to buy a building for their small business, or to buy machinery to improve their farm operations, or to update their home, for example. People with a loan pay interest back to the bank, in addition to the amount they borrowed. A bit of this interest goes to the people depositing money into bank accounts, and the rest of the interest goes to the bank.

(Imagine if someone asked you to hold onto their money for a while…and then imagine if hundreds or thousands more people asked you to do this. You’d have a decent chunk of cash under your control… what a business model! This is banking. So how are you picking who is holding onto your money… and what the heck are they doing with it?)

This sort of community financing — loans from a bank — is a relatively inexpensive source of funding when compared to other sources of funding, like private equity (in which other people take an ownership stake in the business or farm or house) or credit card financing or payday loans, for which interest rates are often much higher than what a bank can offer. Banks can offer relatively inexpensive loans because the cost of their main source of funding — the money people store away in bank accounts — is nominal if not nearly free versus other forms of capital (the cost of deposits for a bank is whatever banks pay you in interest, plus the cost to manage your account, like giving you monthly statements and making sure someone is available to take your call or answer your questions, if you have them, and the cost of bringing you to the bank in the first place, via marketing or sales).

Because loans from a bank are a relatively inexpensive form of capital versus other financing options, the availability of bank financing for communities is really important. Without it, communities need to pay more for cash… or go without cash… both of which means less maintenance and growth for communities.

Let’s take a look at the varying degrees to which different banks make different community investments

Community investments are loans to businesses (small and large), loans to farms (small and large), loans for housing and construction, financing for public works (like roads and bridges and parks), and loans for households (like loans to buy a car or pay for college).

Banks put anywhere from 0% to 97% of the money in the bank into community investments. It’s a large range. The other 3%-100% of money in the bank not put into community financing is put into financial markets, toward transactions abroad, and into bank operations.

Community investments are generally diversified, so you won’t find a bank putting 97% of the money in the bank into any one community activity, like small business loans. Rather, you’ll see banks putting a fraction of money into small business loans, and some into housing loans, and some into public works financing, and so forth.

Below is a chart of how the thousands of banks within the US banking industry invest in different community activities, from those that do the least (those in the bottom 1 percentile) to those that do the most (those in the 99th percentile.) To summarize: 99% of banks in the US put anywhere between 0% and 75% of the money in the bank into housing loans; anywhere from 0% to 68% of money into business loans; anywhere from 0% to 60% of money into farm loans; anywhere from 0% to 38% of money into public works financing; and anywhere from 0% to 17% of money into construction loans.

The share of money in the bank that banks invest in communities, from the bottom 1% of banks to those in the 99th percentile

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

These ranges exist for a few reasons: (1) banks are structured to finance different things, (2) that may be influenced by local market demands (banks in rural areas are more likely to do farm lending than those in urban areas, for example), and (3) lending activities reflect the priorities of the bank’s leadership.

The size of the bank can be your starting point to understand what the bank is structured to do.

Note: not all banks are focused on making community investments as the main part of their business

Several dozen banks in the US — about 1% of banks — have more than $50 billion in the bank. The other 99% of banks — several thousand — have less than $50 billion in the bank.

As you can see in the graph below, more than 50% of the money in banks with more than $50 billion is invested in something other than communities (as stated above, these other activities include financial markets, investments outside the US, and bank operations).

Banks with less than $50 billion in the bank put the majority of their dollars into communities, on average.

The average share of money in the bank that banks of different sizes invest into something other than communities

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

So with this context — banks with under $50 billion in the bank on average put the majority of dollars in the bank into communities, while banks with more than $50 billion, on average, do not — let’s take a deeper look at the particular areas of community financing done by different banks.

The range of small business lending by banks within the US

A small business loan is defined as a loan to a business for $1 million or less. Across the bank industry, banks put anywhere between 0% to 38% of the money in the bank into small business loans.

The smaller the bank, the more likely it is, on average, to be specialized in financing small business.  

The average share of money in the bank that banks of different sizes put into small business loans

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

The smallest banks -- those with less than $250 million in the bank -- put on average 14% of the money in the bank into small business loans.

The largest banks -- those with more than $1 trillion in the bank -- put on average 1% of the money in the bank into small business loans.

What does this mean for you and your bank account?

This means that if you put your money in a bank account with a smaller bank rather than a larger bank, you on average may create 14 times more community funding for small businesses with your money.

How?

A good way to think about this is how a bank uses $10,000, for example.

According to the chart above, a bank with less than $250 million in the bank is, on average, going to invest 14% of that $10,000 into small business loans. A larger bank — one with more than $1 trillion in the bank — will only invest 1% into making small business loans.

So if you put $10,000 in a bank account with a smaller bank, the bank may put 14% of it into small businesses, while the largest banks may only put 1% of it into small business loans.

This may sound surprising at first -- large banks have so much money, you’ll say… even 1% of a large bank’s money is a lot of money, you’ll rationalize… and you’d be right. 1% of a trillion dollars is more than 14% of $250 million. But that doesn’t change the fact that there are bank accounts available to you where your money would be creating 14 times more financing for small business, in result of your banking decision.

The range of large business lending by banks within the US

A large business loan is defined as a loan to a business for more than $1 million. Across the bank industry, banks put anywhere between 0% to 51% of total dollars in the bank into large business loans.

While the smallest banks lead the bank industry in their focus to finance small business, mid-sized banks with with $1 billion to $50 billion in the bank lead the industry, on average, in their focus to finance large business loans.

The average share of money in the bank that banks of different sizes put into large business loans

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

If you put $10,000 in a bank account with a mid-sized bank, the bank may on average put 24% of it into large business loans, while the smallest banks may on average put 6% of it or less into loans for large business.

If you’re looking for a large business loan, or are interested in supporting banks making large business loans, you might want to check out mid-sized banks.

Banks financing small farms

Loans to small farms are defined as farm loans under $500,000. 98% of banks put anywhere between 0% to 41% of the money in the bank into making loans for small farms. 

Just like they lead the bank industry for their focus in making small business loans, small banks also lead the industry, on average, for their focus in small farm lending.  


The average share of money in the bank that banks of different sizes invest into small farm lending

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

The smallest banks in the US allocate, on average, 9% of the money in the bank for small farm lending. The largest banks in the US on average allocate less than 1% of the money in the bank for small farm lending.

When you bank your money with a small bank versus a large bank, up to 9x more of your money, on average, can support small farms. 

Banks financing large farms

Loans to large farms are defined as farm loans for more than $500,000. 98% of banks put anywhere between 0% to 34% of money in the bank into loans for large farms. 

Surprisingly, it is the smallest banks, on average, which lead the bank industry in small farm lending, that also lead the bank industry in making large farm loans.

The average share of money in the bank that banks of different sizes put into large farm loans

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

One reason smallest banks lead larger banks in their large farm lending focus may be that smaller banks are more likely to be headquartered in rural areas versus larger banks and, as outlined above, the local market in which the bank is headquartered contributes to the focus of the bank.

Banks financing housing

Housing loans are defined as loans for residential properties. 98% of banks put anywhere between 0% to 75% of the money in the bank into home lending. 

Smaller banks are more focused on financing home ownership than the largest banks in the country.

The average share of money in the bank that banks of different sizes put into lending for housing

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

When thinking about supporting banks that focus on financing home ownership, another relevant data point worth considering is if the bank keeps the home loans on its books, or sells the loan. Banks that make home loans and hold them, versus banks that make home loans and sell them, can be thought of as having a longer-term relationship with its borrowers, and hence a longer-term stake in the value of the communities in which their borrowers live.

Banks financing public works

Public works financing is loans and securities for local government to fund schools, water & sewer systems, roads, airports, rapid transit, athletic stadiums, and general cash flow needs. 98% of banks put anywhere between 0% to 38% of the money in the bank into financing for public works. 

The smaller the bank, the more likely it is, on average, to finance public works.

The average share of money in the bank that banks of different sizes put into public works financing

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

On the whole, the overall trend of bank financing for public works parallels that of small business and farm lending: the share of dollars in the bank dedicated to public works steadily increases as bank size decreases.

The smallest banks, an average, put 8% of the money in the bank into public works, while banks with more than $50 billion put on average 1% to 2% toward public works.

Banks financing construction

Construction loans are defined as loans for land development, and other land loans. 98% of banks put anywhere between 0% to 17% of money in the bank into making loans for construction. 

Banks in the $500 million - $1 billion range lead the industry in focus for financing construction loans, and the smallest banks are on average 4x more likely to finance construction lending than the largest banks.

The average share of money in the bank that banks of different sizes put into construction loans

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

Finally, let’s look at household lending.

Banks financing households

Household loans are defined as automobile loans and other consumer loans, including student loans and loans for personal expenditures like medical expenses and appliances. 98% of banks put anywhere between 0% to 23% of the money in the bank into lending to households. 

The larger banks — though not the biggest of banks — tend to lead the market in financing loans for household use at 3x the rate of the smallest banks.  

The average share of money in the bank that banks of different sizes put into lending for households

Data Source: Federal Financial Institutions Examination Council, Call Report and Uniform Bank Performance Report. Q1 2019.

In summary

Most banks do a bit of everything. 

Over 90% of banks put the majority of dollars in the bank into financing communities. The largest banks tend not to.

The smallest banks in the US, on average, lead the banking industry in their focus for financing small business, small and large farms, and public works (schools, bridges, roads, and other cash needs for local governments).

Mid-sized banks in the US, on average, are the most likely to fund large business loans, housing, and construction.

The largest banks in the US, on average, do not lead the bank industry on any community investment category when looked at as a percent of total dollars in the bank: apples-to-apples and dollar-to-dollar versus other banks.

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