Community association banking: Tips, processes, and more

What is community association banking?

In Tennessee, community association banking provides tailored financial services that help community associations manage their funds with confidence. These programs make it easier to handle dues, assessments, capital projects, and everyday expenses while giving board members clear visibility into where funds are held and how they’re accessed. Community association banking simplifies financial management for communities with unique regulatory and reserve fund needs so boards can stay focused on what matters most: their residents and their community’s long-term success.

This article is not intended to and does not constitute legal advice or create an attorney-client relationship. Board members should consult their association’s attorney to discuss the legal implications of their decisions or actions prior to proceeding.
 

Who is responsible for community finances?

The board treasurer is tasked, by the governing documents, with investing your community association’s funds. So it’s of utmost importance that the treasurer understands how to increase yield while maintaining liquidity, how much to invest, and where to invest it. There are no prescriptive answers that fit every association; the community’s bylaws, its age, its location, its reserve study, and other factors will determine what’s right for your community. Additionally, Tennessee legislation includes requirements for managing association reserve funds to protect homeowners and ensure financial stability.

Because of the complexity involved in managing a banking program, many community associations choose to work with a financial management company, especially one with strong lender relationships and association experience. A good financial management company will work closely with the board and treasurer to assess the association’s investments and create custom solutions to help the board achieve its goals. The right professionals will help your association choose the appropriate banking programs and other financial tools that abide by local law and your governing documents.
 

Tips for choosing a community association banking program

1. Bank experience with community associations

   Choose banks that specialize in community association banking and have a track record. Associations benefit when the bank’s team understands reserve fund requirements, common interest community assessments, and the implications of Tennessee property management laws.
    

2. Safety and fraud protection

   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 — they should be 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.
   
   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 confirm 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.
    

3. Technology and services integration

   A strong community association banking program offers easy online portals, integration with accounting software, and lockbox or ACH options for dues collection. Look for features like multi-user access and automated reconciliation to reduce administrative burden and errors.
    

4. Dedicated support and relationship management

   Opt for banks that provide a dedicated community association banker or service team. Having a single point of contact helps when questions arise. That relationship can improve responsiveness and service when timing matters.
    

5. Fee structure and account flexibility

   Examine fees for account maintenance, transactions, lockbox services, and special features. Reserve accounts should have strong interest opportunities. Also confirm whether operating and reserve accounts are separated so that funds are managed according to the board’s policy and regulatory best practices.
    

6. Lending options and capital improvement support

   Some community association banking programs offer credit facilities or lines of credit for community associations needing to fund capital improvements or major repairs. If your association anticipates a big project or special assessment soon, choosing a bank that also offers lending can increase efficiency.
   
   It’s important to maintain adequate liquidity — the equivalent of three months of operating expenses should always be accessible, in case your association needs it.
    

7. Local knowledge and state-law alignment

   Tennessee’s community associations are subject to specific regulations, such as the Tennessee Condominium Act of 2008 and nonprofit corporation rules. When evaluating community association banking, pick banks familiar with Tennessee’s unique environment and the compliance demands for HOAs or condo associations in the state.
    

8. Rates and 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, read the fine print and ask questions to confirm that 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.

Understanding how to determine where your funds go

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. Reserve studies help boards forecast the expected timing and amount of anticipated repairs, replacements, and other major common area expenditures. Reserve studies provide a timeline of when funds will be needed, as well as a funding plan to provide the association with the necessary funds when they’re needed.

For example, FirstService Residential recently helped a 300-unit condominium significantly increase their interest earnings. This client was about to embark on a multimillion-dollar capital improvement project that included significant structural repairs and replacements. The board engaged FirstService Residential’s financial professionals to help guide them through the process.

Given the association’s need for liquidity, since they were about to spend significant sums of money over the next few years, we noticed that they had almost $1 million in a money market fund earning 0.01%. Furthermore, those deposits were not FDIC-insured. We proposed re-allocating those balances to FDIC-insured money market accounts earning between 0.60% and 1.00%. This re-allocation generated $7,000 per year in additional interest income to their bottom line.
 

What should board members do?

A significant responsibility for board members is maintaining the financial health of the association. That includes confirming that operating and reserve funds are invested properly, and that the right bank is handling your money. Safety, return, and liquidity are critical to the long- and short-term health and stability of your association.

To learn more about how FirstService Residential and its cash management experts can help your community association get on sound financial footing, contact us today.