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.

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.