Your Bank. A Partner in Corralling the Finances. by Kathy Danforth

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1 Your Bank A Partner in Corralling the Finances by Kathy Danforth Gone are the days when a bank s security and services were measured in terms of the thickness of the vault s walls and their ability to resist men in masks. However, banks have geared up to meet new levels of complexity, and their services can help improve collections, increase interest earned, prevent fraud, and conserve that valuable resource volunteer board members. Plus, your bank can help you be in a position where unexpected expenses are part of the plan. Janet Romano with Florida Shores Bank worked in association management for almost a decade before moving into the association banking 18 Aug 2011 FLCAJ

2 arena. Since her move to banking, she says, I ve been working with associations getting them set up with lockbox, setting up cash flow and working with reserves to get the most for their investments, and doing a lot of financial planning and budgeting. Every single association, even if they are next door to another association, has unique financial needs and challenges. Romano describes several services that can benefit communities. A lockbox service can free up staff or management company time from processing payments. Romano points out, If it interfaces with the association software system, payment reporting can be automatically uploaded. In evaluating the system, the association will want to know if check and coupon images are available, if the service is free or incurs costs, what reports are generated, etc., and talking to a community using the system may prove helpful. Romano notes that in evaluating a lockbox service it is important to determine if it allows bill pay from other banks, auto debit, and online payments with a credit card or e-check. We have percent of our lockbox users making payments by bill pay. Auto-debit is more popular, with 25 percent of the users. We only have two to three percent paying by credit card, but it s a very useful tool because sometimes they don t have the cash and their payment would have been late. This way the association gets paid and they pay it later. We think its use is going to be growing. Remote capture is a great way to deal with deposits if an association has people who aren t using payment coupons or if they get checks for a lot of miscellaneous things like pool keys or room rentals, Romano explains. The bank puts a machine like a teller in the association office, and the association can run checks through the machine so they re automatically deposited without going to the bank. Other tools include automatic bank reconciliation and online banking You absolutely need that, Romano states. Direct deposit of payroll checks can be a plus, and some banks offer free accounts for employees. Romano advises that boards should ensure their bank participates in the Certificate of Deposit Account Registry Service (CDARS) program. Basically, they spread larger amounts of money around to different banks for the customer to keep it all insured and provide a consolidated statement. That raises the cap on FDIC insurance from $250,000 to Tough financial decisions will remain at every association. But your bank may have the expertise and technology to avoid some issues and ease day-to-day operations. Ask what your bank can do for you you may be pleasantly surprised! $50,000,000, Romano reports. For most associations with 100 units or more, CDARS is essential to keep everything insured. It s more convenient for the board to have reserves consolidated in one statement, and with $1,000,000 in reserves the board members would have to deal with at least five banks at five locations if they were not in CDARS. Romano recommends looking at all the fees and interest rates on operating accounts and reserve accounts. Your banker should be willing to come out and do cash planning and cash flow with you so you re always earning the most you can by utilizing money market accounts, she advises. Another very good service that many banks who work with associations offer is sending two bank statements. One FLCAJ Aug

3 is sent to the management and a second to the treasurer so the treasurer will always have access to an original statement. It helps cut down on fraud. Bank safety is still an issue, as Romano notes, Fifteen banks in Florida have closed so far in Even if the money is insured and they are taken over by another bank, there may be a lot of changes. CD rates may go down, they may start charging for things that were free before, you may have to order new checks, etc. It is very disruptive to change banks. To avoid this type of transition if possible, Romano recommends checking bank ratings from Bauer Financial, a private ratings agency (bauer financial.com). It is free to see the star ratings, which ranks banks on a scale of one to five. A summary report is available for $10 and a more detailed report for $20, based on quarterly reports required by the FDIC. Romano adds, My only caution is that Bauer does not begin rating banks until they are two full years old. There are plenty of new banks that are safe, though I kind of feel it s safer to wait for a Bauer rating. I would ask a newer bank, How is your loan portfolio? and What is your percentage of bad loans? to help evaluate them. You want someone who will be in association business long term. Romano also states, I highly recommend using a bank with an actual physical presence in the area. I don t believe in banking with a bank in another state because there are very different sets of law and circumstances, and you need someone who understands what your financial year looks like. If you are in search of a bank that serves associations, Romano suggests, Go to your CAI chapter and find out who s a member and who s fairly local. Besides entrusting the bank with your money, you may want them to entrust you with theirs. This is not a guaranteed turnabout-is-fairplay arrangement, as Romano observes, Many banks will willingly take deposits and then they don t do loans. As well as loans for repairs, associations may want to set up a line of credit, which Romano recommends as a good financial tool. These are often set up to cover a high insurance deductible, as Romano points out, If there s an emergency you can secure the property. It s very hard to get a special assessment quickly when your people are all over the country. While planning 20 Aug 2011 FLCAJ

4 for the unexpected sounds logic-challenged, a line of credit does provide versatility in prudently expecting the unplanned. Romano says, The line of credit can be used for other than the stated purpose, but we require that the bank be notified of the use and plan for repayment within 60 days. To commit money, the bank will want a relatively warm, fuzzy feeling that it will be repaid. Romano says, The bank will need two years of year-end financial statements, a set of the association s recorded documents, and a current budget. They will want to see a reserve study to make sure that any major upcoming repairs are funded by reserves and are not going to add to the loan burden. The most important thing we want is an age delinquency list so we can make sure everyone s paying their maintenance fees at the current level and the increase isn t going to push people into a hardship situation, Romano explains. If more than 10 percent of owners are delinquent over 90 days, that means they can t handle the maintenance at the current level and they probably shouldn t take out a loan. We re also looking for well-established, wellmanaged communities. We feel more comfortable with a CAM manager or CPA firm taking care of the financial aspects. Having volunteer board members administering a $100,000 line of credit is scary, not so much for the bank as for the other association members, Romano comments. We want to make sure they have internal controls in their office we can tell from the audited financial reports that they re managing it in a proper way. A major thing we re looking at is whether it s an owner-occupied community, Romano states. If 40 percent are investors with renters, we re going to shy away from that loan. If it s Gulf-front or oceanfront and people rent it seasonally, I m not concerned about that; but if a unit rents year-round and it s just income-producing, the owner may have no interest in maintaining the property. We re looking for owner occupants and second-home owners. The effect of the loan amount on maintenance fees is also a consideration. As a general guideline, we don t want the loan repayment to FLCAJ Aug

5 22 Aug 2011 FLCAJ increase the cost of living in the association by over 50 percent, Romano explains. Also, we try to keep the ratio of the loan portion per unit to the current unit value at less than 10 percent. Romano notes, All these are guidelines it takes a lot of judgment as well. For example, if there s a unitowner vote and there s 70 percent of the people who want a repair and will make the commitment to pay this back over five years even though it doubles the maintenance fee, we ll make an exception. A line of credit will incur upfront costs, including a state tax, bank fee, recording fee, attorney fee for writing the closing documents, and attorney s costs for the association lawyer saying they have the authority to borrow the money. Romano says, Associations usually pay one to one-and-a-half percent of the loan amount in these upfront fees, and the line of credit is usually good for five years with no annual fees. The association only pays interest on the amount they ve withdrawn for the time they have it. If an association has a $100,000 line of credit and they need $20,000 for a plumbing leak and they repay it in 90 days, they ll only pay the interest for 90 days on $20,000. Tough financial decisions will remain at every association. But your bank may have the expertise and technology to avoid some issues and ease day-to-day operations. Ask what your bank can do for you you may be pleasantly surprised!