Attendees: Fred Davis, Paul Johnson and Bud Talley
The Financial Advisory Committee meeting was called to order at 7:10PM at Bud Talley’s home.
Discussion Items:
- The committee reviewed the HOA’s January Financial Reports (the latest ones made available to the committee). The committee then discussed at some length the fact that the aggregate deposit balances that the HOA had on deposit at First Associations Bank on January 31, 2013 was $470,264.11, an amount that exceeded by 220,264.11 the present maximum FDIC deposit insurance limit of $250,000 for each depositor. The committee agreed that this very large uninsured deposit balance exposed the HOA to a potentially very large loss in the event that the bank was declared insolvent by bank regulatory authorities and turned over to the FDIC. The committee believes that near-term attention should be given to eliminating this potential large loss exposure. Accordingly, the committee will quickly begin work on a plan to address this serious risk exposure. The committee also believes that there is no reason for the HOA to maintain $274,253.40 demand deposit balance, an amount that is far above any negative cash flows that the HOA would likely experience in any moth or series of consecutive months. While it is true that the current interest rate differential between CDs and demand deposit accounts is now unusually small due to current extraordinary low market interest rates, the HOA is still foregoing a modest amount of income by maintaining an unnecessarily large non-interest-bearing demand deposit balance.
Given the HOA’s large uninsured deposit balance at First Associations Bank, one committee member with experience in bank financial analysis attempted to do an evaluation of the current financial condition of the bank. The member found that First Association Bank (which is located in Dallas) specializes in servicing the banking needs of HOA organizations. Also, several weeks ago First Associations Bank was acquired by a California bank holding company named Pacific Premier Bancorp. This holding company then merged First Associations Bank into the holding company’s bank, Pacific Premier Bank. Consequently, over three-quarters of our HOA’s aggregate deposit balances are now with Pacific Premier Bank – a bank with assets of approximately $1.5 billion.
The committee member then did a preliminary analysis of the financial condition of Pacific Premium Bank. He found that the bank had a strong capital position and appeared to have a relatively high quality loan portfolio. However, these conclusions are based solely on a quick examination of the bank’s year-end financial statements. A much more thorough analysis of the bank’s financial condition will be done within about two weeks when the bank’s first quarter financial reports are released. However, even if this more thorough analysis concludes that Pacific Premium Bank is a strong bank, our HOA, simply as a matter of principle should NEVER maintain aggregate deposit balances at any one bank that exceed the FDIC’s $250,000 deposit insurance limit. - The committee then discussed the pending roof reserve and the broader reserve study that the HOA intends to conduct in the near future. The committee strongly recommends that both reserve studies be conducted this year. The committee believe that the most serious long-term financial threat to our HOA is ending up with seriously under-funded reserves that would eventually required the HOA to impose large special assessments on the residents. Therefore, the sooner our HOA can quantify the reserves that will be needed, the sooner we can be confident that the reserves being build up are sufficient.
- The committee considered the financial implications of the Grounds Committee’s proposed three-year landscaping enhancement program that is now being developed. We understand that the Grounds Committee intends to ask the board to transfer a sizeable portion of this year’s snow removal surplus to the relatively small $10,000 landscaping enhancement provision that is now in the HOA’s 2013 budget. In concept, the Finance Committee supports this proposal. However, the committee believes that some of the roughly $30,000 current snow removal surplus should be reserved to meet potential snow removal costs during both November and December.
- For the next meeting, the finance committee has been given the following “homework assignment”:
- to give consideration to what potentially adverse financial developments (beyond seriously underfunding our reserves and suffering a large deposit loan loss from a bank failure) might impact the HOA sometime in the future, and,
- how the HOA could alleviate such potential threats.
- The committee’s chairman will prepare a brief statement regarding the finance committee’s major responsibilities and current activities to be published in the next HOA newsletter.
- The next meeting of the committee will be held on Monday, May 6th at Bud Talley’s.
- The meeting adjourned at 8:00PM.
Respectfully submitted, Bud Talley, FAC Chairman, samtalley@aol.com, (703) 378-4162