Potential outweighs challenges in serving homeowners associations

Aaron Siegle, president of Twin Cities-based First Resource Bank, is eager to stack his bank's expertise serving complex commercial clients against those of the largest players in the market. "We can decide quickly," Siegle says. "We can provide service. We can be flexible. We get things done." .As his bank steps onto the competitive field of providing services to homeowners associations (HOAs) — a place where the largest banks dominate — Siegle's confidence does not waver. "That's where we win," he beamed..Last fall, the $600 million First Resource Bank launched OnPoint Financial, a stand-alone division focused on providing lending and deposit services to the behemoth, deposit rich, and not-so-simple HOA market. Siegle said the decision to formalize services under a separate brand was rooted in recent positive experiences with HOAs, having built an experienced team eager to serve, and seeing a market he believes offer plenty of room for growth..Sizing up the opportunity.There are roughly 370,000 HOAs in the United States. More than half of owner-occupied households in the United States belong to an HOA, including roughly 80 percent of newly constructed single family homes. As of 2023, 75.5 million people lived in a community governed by an HOA..The financial core of an HOA is mandatory monthly assessments paid by every member/homeowner: These are funds set aside to fulfill association obligations such as common-area maintenance, utilities, insurance, legal compliance, landscaping, as well as saving for future needs. That last piece is known as "reserve funding." There is no benchmark for how much of an assessment should be directed toward reserve funding, but HOAs in sound fiscal health likely set aside more than 50 percent of their assessments for reserve-fund projects. Some states, including Minnesota, mandate that HOAs set aside reserves every month. When the cost of capital improvements or replacement projects exceeds its reserve fund, an HOA will either levy a special assessment on homeowners, take out a loan, or figure out some combination of the two.."There are banks that have built their entire business on making loans to associations or simply providing them checking and savings accounts," said Tim Broms, executive director of the Minnesota chapter of the Community Associations Institute (CAI). "There is always money in these accounts.".HOAs comprise a substantial part of homeownership in the Upper Midwest. .Indiana: Approximately 5,100 HOAs, 343,000 homes and 859,000 people living in HOAs.Illinois: Approximately 19,000 HOAs, 1,483,000 homes and 3,807,000 people living in HOAsIowa: Approximately 3,000 HOAs, 120,000 homes and 289,000 people living in HOAsMichigan: Approximately 8,500 HOAs, 542,000 homes and 1,407,000 people living in HOAsMinnesota: Approximately 7,900 HOAs, 612,000 homes and 1,531,000 people living in HOAsMontana: Approximately 2,000 HOAs, 62,000 homes and 148,000 people living in HOAsNebraska: Approximately 2,000 HOAs, 42,000 homes and 104,000 people living in HOAsNorth Dakota: Approximately 1,000 HOAs, 2,000 homes and 48,000 people living in HOAsSouth Dakota: Approximately 1,000 HOAs, 17,000 homes and 42,000 people living in HOAsWisconsin: Approximately 5,500 HOAs, 421,000 homes and 751,000 people living in HOAs.In the Twin Cities, according to Zillow, the average monthly HOA assessment is $636, which is the fourth highest in the country, behind Hawaii, New York City and Miami, respectively. .Many of the large banks actively pursuing HOA deposits are based outside the Midwest. The $535 billion Charlotte, N.C.-based Truist has a stake in the HOA market, as does First Citizens Bank in Raleigh, N.C., which acquired the assets of the failed Silicon Valley Bank in 2023. First Citizens reported that 5 percent of its total first quarter 2024 deposits, or $7.7 billion, were held in its community associations vertical. .New York-based Popular Bank launched its HOA vertical, Popular Association Banking, in 1994 to give it nationwide access to deposits and lending. It currently serves more than 1,500 HOAs in more than 30 states. Other institutions that have carved out a niche as being a preferred partner for HOAs, at scale, include South State Bank, Western Alliance Bank and Pacific Premier Bank. .In the Midwest, a subsidiary of Chicago-based Wintrust, Barrington Bank & Trust Company, N.A., spun up an HOA division in 1999, branded as Wintrust Community Advantage. In many cases, separate branding helped institutions focus on the unique needs of the market: Treasury management, specifically ACH and ICS, investment services, specifically CDs, and loans. Succeeding with ACH is key, as it is fundamental to moving monthly payments for hundreds of thousands of homeowners, and receiving all that associated fee income..Being new to the HOA market comes with a learning curve, though. Complications, Siegle explained, include onboarding all these accounts, having a board sign off on things, even identifying the authorized signer. "That's why there aren't many community bank players in this space," he said..Building up to OnPoint.Matt Kelley, director of the JAM FINTOP Network, a venture capital firm that invests in the bank technology space on behalf of nearly 100 banks, called the HOA market "pretty rich from a deposit perspective." Two of its companies, Core10 and ZSuite, offer technology solutions for bankers looking to serve the HOA market.."When a bank is thinking about going after this niche, you need a combination of the right salespeople who can sell into the HOAs and go after the baseline kind of deposit relationships, the money movement opportunities and thereafter kind of credit and lending opportunities," Kelley said. "You really have a couple of different opportunities to provide banking products and services to that HOA, but to do it at scale is going to require integrating transaction level data." .The data integration Kelley refers to needs to occur between banks and the software used by management companies to manage and process assessments and payments. He referred to programs such as CINC Systems, Vantaca, AppFolio, Rent Manager, Caliber and others. "Banks are going to have to just do things differently; they can't run that relationship through their core banking vendor stack. It will not be sufficient to serve a particular industry niche that is moving most of their operating elements onto software," Kelley said..Technology is but one side of the coin, however; the other is the sales initiative. Success when entering a new market often hinges on having the right leader out front. For OnPoint, Siegle was adamant that the right leader was Matt Shook, an Indiana native who joined the bank in 2017. "Matt is a unicorn," Siegle said. "We've probably grown 500 percent since Matt's been on board.".More than a year before First Resource launched OnPoint, it had been gaining ground in the HOA market by "taking deposits for HOA management companies, doing loans, just creating solutions," Shook said..Siegle and Shook joined the CAI-MN, which also serves the Dakotas and Iowa, and started showing up at networking events, where many times they were the only bankers in the room..Broms explained that CAI-MN offers membership to three sub-groups: Business partners, or any company that can do business with an HOA, such as a bank; individuals who live in an HOA, or serve on an HOA board; and association management companies. "Part of our job is to create opportunities for those people to interact with one other," Broms said. "I always remind business partners, while their potential client is a board of directors of an association, or a management company, they should never forget to talk to contractors because you never know if a contractor is going to be involved in an association that needs a loan or an attorney, because they are always involved with loans.".From the very start of their involvement with CAI-MN, Siegle and Shook "jumped in with both feet," Broms said. "There are very few events that they aren't at. They've done a good job.".Shook was equally complimentary to Broms and his team: "I anticipated it would take us a full year or two or three to get any headway whatsoever," Shook said, "but it happened almost immediately.".The involvement of a management company, a firm that provides administrative, legal and accounting support to HOAs, helps banks because it centralizes decision-making. Onboarding an HOA management company can bring in between several dozen to several hundred new accounts all at once. "We feel we've got a suite of products where we can provide a little bit higher level execution than maybe some other local banks," Siegle said. Most management companies utilize a software platform, which acts as the conduit for financial transactions..In 2023, First Resource brought in an HOA client with more than 100 accounts, which it onboarded in less than one week. "To get appropriate signers and just logistically and operationally … is a massive process," Shook explained. "We didn't have to go and hire any specialists. Our people have decades of experience in customer service and client funding. And a lot of them have been in the HOA space themselves.".It's not unusual for bankers active in this space to have HOA management certifications, or to have come from HOA management companies..Loans without liens.A homeowner who needs a new roof or perhaps wants to put in an inground pool will likely turn to their bank seeking home equity financing. When an HOA needs to reroof buildings in its community or decides to add or replace a pool, it has two options. It can turn to its reserves to pay, or borrow, if its bylaws allow it. The challenge for HOAs is to build and maintain adequate reserves for planned repairs, especially in inflationary periods. It's also a challenge to convince HOA boards and interested homeowners that a loan is a good idea.."I used to say that if I had a pile of cash sitting around, I would be first in line to loan it to an association," Broms said. "There is virtually no risk."."It's a unique product because there's no hard asset behind it," explained Siegle, who has structured loans to HOAs. "There's not a first mortgage on a piece of real estate or a lien on a vehicle. And so every community is a little bit different.".Because homeowners are required to pay the dues, the collateral on an HOA loan is the assignment of dues, Siegle explained. "You have to have had some experience doing it for it to go well," he said. A key factor is structuring a loan so the HOA doesn't also exhaust its reserve fund. ."We have an interest in the community being a great place to live because that's our source of cash flow," Siegle said. "We do everything we can to structure it appropriately, upfront, so there is enough of a cushion on cash flow that it's gonna service our loan but you don't have to go out and assess everybody with big dollars right up front.."Quite honestly — knock on wood — we've not experienced distress within the portfolio because of how it's set up upfront," said Siegle, who worked as an FDIC regulator before joining First Resource Bank. "It's all about the initial due diligence.".The community banker work ethic plays a role for them too. HOA board meetings are predominantly held locally. Siegle and Shook frequently attend themselves, or send members of their team; it's a commitment to service that out-of-state banks often can't replicate. Growth also hinges on peer referrals, and the pair report success there, too. "We now have associations and management companies coming to us asking us, 'What are you seeing out there?' because we're all kind of in this tight-knit industry," Siegle said..Less than one year after forming OnPoint Financial, Siegle says their HOA business comprises between 5 and 10 percent of their total banking portfolio. And, they are finding that the HOA marketplace is truly an ecosystem. "It started with associations and then we got to know the management companies and then we got to know the other vendors … all of a sudden we're financing a construction project and that construction company ends up banking with us," Siegle said. Very quickly, First Resource's OnPoint Financial has become a center of influence in a market that's not necessarily underserved, but mostly served by a different banking ethos. "That's where we win," Siegle said again.