Choosing the Right Banking Program for your Community Association
As a community association board member, one of your chief responsibilities is to protect the financial interests of your association and your fellow residents. That includes making sure that the association’s reserve and operating funds are carefully managed, protected and invested.
Smart decision-making and sound financial stewardship are critical to the association’s long-term financial stability and health. Unfortunately, even the best-intentioned board members may not have the experience or financial knowledge to choose the right banking programs and products to meet their community association’s needs.
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 by-laws, its age, its location, its reserve study and other factors will determine what’s right for your community. Additionally, each state’s 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.
Some financial institutions, including banks, are friendlier to, or specialize in, community associations and a good financial management company will be able to direct you to them. They can help you find a bank that understands your business, provides excellent service, offers competitive rates and is stable.
What else should you look for when choosing the best banking program for your association?
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.
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.
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.
Liquidity. Be sure to maintain adequate liquidity – the equivalent of three months of operating expenses should always be accessible, in case your association needs it.
“When new clients hire FirstService Residential for professional property management, we immediately look for ways to help generate additional income in the cash management space to optimize the budget,” said Drew Ahrensdorf, vice president with FirstService Financial. “It’s rewarding to deliver tangible value by leveraging our bank relationships and proactively providing solutions to our clients."
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,” Ahrensdorf explained.
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, replacement and other major common area expenditures. Reserve studies provide a timeline of when funds will be needed, as well as a funding plan to ensure the association has the necessary funds available when needed.
“In January, 2017, we began managing a 300 unit condominium. This client was about to embark on a multi-million capital improvement project that included significant structural repairs and replacement. The board engaged FirstService Residential’s financial professionals to help guide them through the process,” Ahrensdorf explained. “One of the first things we did was a financial ‘check-up’ and evaluated their reserve portfolio. 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 percent and one percent. This re-allocation generated an additional $7,000 per year in additional interest income to their bottom line.”
A significant responsibility for board members is maintaining the financial health of the association. That includes making sure that operating and reserve funds are invested property, and that the right bank is handling your money. Safety, return and liquidity are the watch words for your best community association banking partner. All three 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.