How to Choose the Right Community Banking Program

Board members have a fiduciary duty to protect the financial interests of both their homeowners association and fellow residents – and that includes ensuring that their HOA’s operating and reserve funds are properly managed, invested and protected. 

It stands to reason that sound financial stewardship and smart decisions are critical to ensuring the association’s ongoing health and stability – but as volunteers, Board members may not have the financial knowledge or experience to choose the right banking program to meet their community’s needs.  

It is explicitly stated in each community’s bylaws that the Board treasurer is tasked with investing the association’s funds – that means treasurers must understand the right vehicles invest in, how to increase yield while maintaining liquidity, what their optimal allocation should be and more.  There are no one-size-fits-all answers – they depend on each community’s age and location, its by-laws, the results of recent reserve studies and many other factors.  Additionally, each state’s legislation includes requirements for managing association reserve funds to protect homeowners and ensure financial stability. 

Consequently, rather than managing their banking programs themselves, many community associations opt to partner with financial management companies – especially those with deep association experience and strong lender relationships. A good financial management company will work closely with the treasurer and Board to review the association’s investments and craft tailored solutions to help it achieve its goals.

Even if your treasurer and Board are financially savvy, it’s always a good idea to consult with a financial professional when choosing the right banking programs for your association – that will help you select vehicles that are safe, effective and compliant with your community’s bylaws. 

They can also point you towards quality financial institutions.  “It’s beneficial for associations to work with banks that are HOA friendly or specialize in the HOA industry – that will help ease both the account opening process and transaction processing,” says Karla Chung, Vice President, Western Region, for FirstService Financial.  “A good financial management company will have relationships with banks that are stable, understand your business, offer competitive rates and provide excellent customer service.”

What else should you look for when choosing the best banking program for your association?  Read on…

Safety: 

Keeping your association’s funds safe should always be the number one priority, so it’s critical to consider investing only in money market accounts and/or CDs that are insured by the FDIC or other third-party insurers. That also goes for the banks themselves – make sure they’re FDIC members. Not sure if they are?  You can check with your financial management company or research it yourself using the “BankFind” feature on the FDIC website (www.FDIC.gov). 

It’s also important to remember that the FDIC insurance limit for each depositor is a total of $250,000 for all accounts at one bank – however, you can have other accounts totaling $250,000 at multiple banks. Your staff accountant or financial management company should regularly monitor each account’s balances to ensure that incoming reserve contributions and other deposits don’t put you over the threshold.  If you’re bumping up against it, they can help you consider other options.

Liquidity: 

Remember the old Boy Scout motto to always be prepared? That also applies to your bank accounts.  Be sure to maintain adequate liquidity – the equivalent of three months of operating expenses should always be accessible, in case your association needs it. 

As for the rest of your funds, some financial management companies advise their clients to maintain a healthy balance between liquid money market accounts and fixed-rate CD accounts – that helps protect associations from the risk of rising interest rates.

“As interest rates increase, CD yields remain fixed, while money market account rates are likely to go up.  Therefore, it is critical to have a balanced allocation between both types of investment vehicles to ensure you’re not leaving money on the table,” says Drew Ahrensdorf, Product Manager at FirstService Financial. 

So how do you determine how much to allocate into various types of funds?  Do what many Board members do – have a financial management company review your reserve study.  Here’s why.  Reserve studies, which are required in many states, help Boards forecast the expected timing and amount of anticipated repairs, replacement and other major common area expenditures.  Reserve studies also provide a timeline of when funds will be needed, as well as a funding plan to ensure the association has the necessary funds available to cover costs when they occur.

“By reviewing your reserve study, a financial professional can determine the optimal amount of money and length of time, or term, to invest your reserve funds.  That will make sure your association has the right balance between money market accounts and longer term CD investments to both cover costs and produce investment income,” explains Ahrensdorf. 
He adds that a new client, an association in New Jersey, had never before had a professional financial management company examine its reserve study. “By reviewing the timing of their future capital projects, we structured a customized CD reserve portfolio that helped the association go from $10,000 per year of interest income to $70,000, with similar returns expected for the next five to seven years – and may go even higher if interest rates rise,” he says. “We were able to unlock an earning potential they didn’t even know they had.”

Return: 

Your association dollars should work for you, so it’s important to choose investment vehicles that provide the highest levels of return.  Some Boards research this information via bank websites or financial publications like the Wall Street Journal, while others look to their financial management companies to provide banking relationships that offer above-average deposit rates.  If you’re not working with a management company, be sure to read the fine print and ask questions to make sure the rate your bank is offering is not a teaser rate.  Instead, it needs to honor that rate for the long term – and review your portfolio at least quarterly to make sure the rates don’t change. That’s another area where a good financial management company can provide value – by leveraging the volume of its portfolio, it may be able to negotiate stable interest rates on your behalf. 

Board members are charged with ensuring that their operating and reserve funds are invested responsibly, and choosing the right bank and a vehicle that offers safety, liquidity and return is critical to your association’s short- and long-term stability. For more information on how to choose the right banking program for your association, visit FirstService Financial.