The Federal Reserve released its FOMC Statement today and there were no surprises. The Fed reiterated its support for "exceptionally low levels of the federal funds rate for an extended period." That means savers will continue to earn almost no rate of return on savings accounts and very little on longer-term certificates of deposit. This may force many investors to think about putting cash into other investments, such as bonds.

The statement pointed out that Europe's problems along with a detoriating real estate market and high levels of unemployment will keep the economy subdued for some time to come. Those expecting a roaring V-shaped recovery are starting to realize that's not going to happen. At this point, the world economy is one more shock away from falling back into recession.

For savers this is more of the same. Savings rates and CD rates will continue to drift lower. The bright side has been the significant slide in mortgage rates since peaking in mid-April. The average 30-year mortgage rate is now 4.76%, down from 5.25 in April 2010.

Low rates will also continue to support the stock market. Dividend stocks like Verizon (VZ), AT&T (T), and Pfizer (PFE) lead Dow stocks in terms of yield and offer those needing income one way of generating it. Verizon for instance pays 6.85% versus an average savings rate of 1.31%. But unlike FDIC bank stocks, they also offer the potential loss of principle.

The good news for savers and bond holders alike is the absence of inflation. According to the Fed statement:

"Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time."

Those spreading panic about soaring inflation in 2009 were dead wrong, at least so far. The economy needs a strong heartbeat to stir inflation and all we have now are some sporadic pulses. Despite any sign of inflation, gold remains near a 52-week high as investors remain spooked about Europe's sovereign debt issues.

New Dominion Direct is a bank which has just started a major new push into online banking, and offers some strong rates which rank among the most competitive in BestCashCow.com's savings chart and many categories in BestCashCow.com's CD charts. We therefore noticed immediately when Bauer Financial recently socked New Dominion Direct with a big drop in its rating, from a three and a half star rating to a two star rating. That is a pretty substantial drop, and even though Bauer only updates its rates every three months, an unusually large deterioration all at once.

What's driving this problem? New Dominion's first quarter report suggests it right from its first sentence. "Charlotte, N.C., May 10, 2010--New Dominion Bank today reported that it returned to profitability in the first quarter of 2010, as net interest margins widened while non-interest expenses and foreclosure-related losses declined from last year's peaks."

Since we know that Bauer ratings are driven by a series of ratios, it's easy to suggest that a bank that only recently became profitable again would get socked with some bad news in the ratios. Add to this a short-term cash flow issue evidenced by a cut in short-term interest payouts, which in turn encourages customers to put their money in longer-term issues that New Dominion won't have to pay out on any time soon, and what you're looking at is bad numbers today, but not necessarily tomorrow.

A big key is how badly New Dominion got hit by foreclosure losses--a year ago, they had ZERO foreclosure losses. But over the past two quarters that went to 1.67 million dollars, before trailing off to just this last quarter's count of $58,109, a huge drop from just a few months ago.

For their part, New Dominion's got a plan, going after non-interest expenses and loan volume to give them a better position. And indeed, it does seem like a short-term issue that may improve. Of course, New Dominion is an FDIC insured bank, meaning all deposits are insured by the federal government for up to two hundred and fifty thousand dollars. While the Bauer hit is a pretty substantial issue, deposits will be safe as long as they are careful to stay below FDIC limits.

EvaBank in Eva, Alabama currently has a terrific 2.84 percent on a five year CD, but they've also got a zero star rating from Bauer Financial.

Speaking to several bank employees, including the CFO, underscored about what I thought was going on--it's all an issue of capital. Between development loans in the real estate bubble that went sour and an ongoing loss of capital due to the souring of the rest of the market, EvaBank is venting capital.


All lending is down on the year. Real estate loans down six percent, commercial down a crippling twenty four, individual down nineteen and agricultural down about ten. Real estate, however, did see a tiny hike this quarter, about half a percent.

Savings is pretty much up on the year--demand deposits, now and ATS accounts and other savings deposits are up, but money market deposit accounts are down. This is given them a bit of a cash cushion but at the same time represents a serious liability. If those balances were pulled it'd be death for this bank.

But the biggest problem here seemed to be on the balance sheet, average assets during quarter. It was down four and a half percent on this time last year, and that, at least to me, suggests a much more systemic problem. This Alabama bank didn't run amok on excessive real estate lending it can't collect (oh, that does play a role here, just not as big a role as many had to face), it's just slowly getting bled dry by loss of asset.

However, EvaBank tells me they're readying prospectuses to drive some new capital in place, although even this is tinged by the ongoing but largely unknown threat of the recent oil spill. But with growth falling and income falling with it, that goes a long way to suggesting why EvaBank of Eva, Alabama is a zero star bank. Still, even with this ranking, it's important to remember that EvaBank is an FDIC member, and thus, account holders are insured by the federal government for two hundred fifty thousand dollars.