Bank Safety and Your Association Funds

By Kathy Naughton, CMCA, AMS / Published August 2024

While the state of Florida has not seen any recent bank failures, the past two years have shown us concerning examples of bank failures across the United States. According to FDIC reports, in 2023 we saw five bank failures, including three of the largest bank failures in U.S. history: First Republic, Signature Bank, and Silicon Valley bank. To date in 2024, the FDIC reports one bank failure: Republic First Bank out of Philadelphia, PA.

     How can association board members determine if their bank is considered safe and in good financial condition? Anyone can go to the FFIEC (Federal Financial Institutions Examination Council) website (ffiec.gov) and access data submitted by banks. The FFIEC site reports publicly available reports of condition and income (call reports) and Uniform Bank Performance Reports (UBPRs) for most FDIC-insured banking institutions. The bank’s financial information is accessible, including deposits per branch, loans, nonperforming loans, written-off loans, and the bank’s loan loss reserve. The problem with these reports is that the data, available as presented, can be very technical and difficult to interpret.

     The banks are rated by bank supervisory authorities using an international rating system known as CAMELS. These ratings are comprised of data relating to six factors represented by the acronym: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity. These CAMELS ratings are confidential, so the banks are not allowed to discuss these reports without written approval of the appropriate banking regulator under penalty of law.

     Since this information is not publicly available, several private companies review all of the call reports and provide their own rating systems. Many of these ratings services provide the basic information free of charge, but there is typically a fee for a more detailed financial report. The information from the call reports and UBPRs is presented in a format that is more easily interpreted by the information seeker. They do not rely on information received from interviews with bank management but independently vet call reports and UBPRs filed. These private ratings companies are a great way to research banks before deciding on where to place association deposits.

     There are several private companies that offer bank ratings, but one of the most consulted of the companies is Bauer Financial, which gives a free rating but charges fees for more detailed reports. Their ratings are updated quarterly and are typically published about six weeks after the end of a quarter.

     Since Bauer Financial is the most widely consulting rating company (bauerfinancial.com), the following is what their star ratings mean:

     Five Stars—Superior. These institutions are on Bauer Financial’ s Recommended Report.

     Four Stars—Excellent. These institutions are also on Bauer Financial’ s Recommended Report.

     Three and ½ Stars—Good

     Three Stars—Adequate

     Two Stars—Problematic

     One Star—Troubled

     Zero Stars—Bauer’s lowest rating.

     Your association can consider a bank “safer” with a three star or higher Bauer Rating, but there are banks that specialize in associations that carry five-star ratings from Bauer. Best practice dictates the board investigate their bank and consider keeping deposits at $250,000 or less to ensure FDIC coverage unless the bank provides products that can insure funds over and above the current FDIC limit.

     Many community associations will have accumulated fund amounts greater than $250,000, especially with the new SIRS requirements for reserve funding put it place in the state of Florida for many condominiums. Having uninsured deposits over $250,000 in any one bank could be considered risky without proper bank products in place to insure the funds. You will find that many banks do not have an association banking department and may not offer products for additional FDIC insurance to associations. Talk to your banker about what products they offer to ensure FDIC protection.

     Many banks that specialize in community associations offer both Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweeps (ICS). These products provide FDIC insurance on deposits greater than $250,000 by spreading funds between the custodian bank and other partner banks who participate in the IntraFi network. These accounts earn interest while maximizing protection for funds beyond the typical FDIC limit. The CDARS products have limited time frames of investment, typically 13, 26, 52, and 104 weeks. There would be a penalty imposed for early withdrawal, and they do require periodic board consideration on whether to renew the investment. The ICS product is typically attached to an existing association bank account and always offers complete liquidity and accessibility through automated sweep capability. Rates will vary by institution, so consult with your banker and be safe out there! 

Kathy Naughton

Vice President of Association Banking, Centennial Bank

     Kathy Naughton is a vice president of the association banking group for Centennial Bank. Kathy has over 16 years in the property management industry, with experience as a portfolio property manager, board member, and banking professional. She is very active with CAI, having served multiple terms on the board of the Southeast Florida chapter and filled one term on the board of the Gold Coast chapter. She also holds both her Certified Manager of Community Associations (CMCA) designation and her Association Management Specialist (AMS) designation. For more information visit www.my100bank.com.