Why Is First City Bank So Poorly Rated?

We've been talking about First City Bank for some time now--they've had some nice rates on the Best Cash Cow CD and Savings lists--but their clearest problem is their abysmal rating on Bauer Financial. Bauer rates them a zero star, their lowest possible rating, and ranks First City Bank on their "Troubled and Problematic" Report.

I personally spoke to First City Bank's President and Chief Operating Officer, Robert E. Bennett Jr, who was willing to give me a quote about First City's poor ratings:

"I don't care about Bauer's rating; it's based on several ratios. They've never been in our bank or spoken to our people and I assure my customers on a daily basis that First City is a safe bank to work with."

Bennett is clearly optimistic about the bank, despite the poor ratings and accompanying numbers. What exactly drives his thinking on this score is unclear--he wasn't terribly willing to elaborate. But looking at the financials suggested a picture: their noncurrent loans made up roughly 20% of their loan portfolio.

We all know that Florida's been taking the deflation of the housing bubble hard, and it's showing in bank loans. Assets past due have grown from 5 million to 19 million over the past year.

But First City isn't relying on brokered deposits to fund its balance sheet. Those decreased over the past year from $21 million to $5 million. What stepped in instead were transaction accounts, presumably, interest bearing checking accounts. A look at their website shows low rate checking accounts, so First City isn't paying big rates on this funding. CDs also went up, and while this requires more cash to service in the form of higher rates, it also guarantees most of the money will stay for the term of the CD.

They're getting great new sources of funding, but with that boat anchor called real estate lending around its neck they're in a world of hurt. Unless they can stop those loan portfolio losses, the FDIC will likely have to step in. Thankfully, First City is FDIC insured--depositors are covered up to $250,000 per person regardless of what happens.