Choosing the Right Banking Program for Your Community

Board members have the significant responsibility of safeguarding the financial well-being of their homeowners association (HOA) and its members. This involves ensuring that the HOA’s funds are effectively managed, invested, and protected.

The financial health and stability of any association depend greatly on prudent financial management, yet board members, often volunteers, may not possess the necessary financial expertise to select the best banking program for their community.

Community bylaws clearly assign the duty of investing association funds to the Board treasurer. This role necessitates a thorough understanding of suitable investment options, strategies for enhancing yield while maintaining liquidity, and determining optimal allocation. However, the right approach can vary significantly based on factors such as the community’s age and location, bylaws, and recent reserve studies. Additionally, state laws impose specific requirements for managing association reserve funds to ensure financial stability and protect homeowners.

As a result, many associations choose to collaborate with financial management companies that have extensive experience and solid relationships with lenders. These companies work closely with treasurers and Boards to review investments and develop tailored strategies to achieve the association’s goals.

Even if the board is financially knowledgeable, consulting with a financial professional when choosing the banking program for the association is a wise move. This ensures that selected investment vehicles are secure, effective, and compliant with community bylaws.

Here are some key considerations for selecting the optimal banking program for your association.

Safety

Ensuring the safety of your association’s funds should always be the top priority. It's essential to invest only in FDIC-insured money market accounts or CDs, or accounts insured by other third-party insurers. Ensure that your bank is an FDIC member, which can be verified through your financial management company or by using the FDIC's “BankFind” tool online.

Remember, the FDIC insures a total of $250,000 per depositor for all accounts at one bank. However, you can maintain accounts totaling $250,000 at different banks. Regular monitoring of account balances by your financial team can help prevent exceeding these limits, and they can suggest alternative options if needed.

Liquidity

Being prepared is crucial, and this includes ensuring your bank accounts have sufficient liquidity. Maintaining access to at least three months of operating expenses is advisable to cover any unforeseen needs.

For the remaining funds, a mix of liquid money market accounts and fixed-rate CDs is often recommended by financial management companies to protect against interest rate fluctuations.

To determine the right allocation across fund types, many Boards have financial management companies review their reserve studies. Reserve studies, which are often mandated by state law, help forecast the timing and cost of major repairs and replacements, providing a funding plan to ensure necessary funds are available when needed.

By analyzing a reserve study, financial experts can identify the optimal investment term and fund balance. This ensures the association maintains the right mix of money market accounts and long-term CD investments to manage costs and generate income.

For instance, a New Jersey association experienced a significant increase in interest income after a professional financial management company reviewed its reserve study and optimized its investment portfolio.

Return

Maximizing returns on association funds is essential. Some boards research bank websites or financial publications to find the best rates, while others rely on financial management companies for access to preferable deposit rates. If not working with a management company, it’s important to ensure the bank doesn’t offer short-term teaser rates and that the rates are consistently reviewed for changes.

Ultimately, it is the Board's responsibility to ensure that operating and reserve funds are invested wisely. Selecting banks and investment vehicles that offer safety, liquidity, and strong returns is crucial for both the short-term and long-term stability of the association.