What does the rising trend in gold pricing mean to the community banking sector. In a word ( or two) gold’s rise indicates the expectations of lower interest rates and a lower dollar in the international exchange world. Lower interest rates portend a more challenging profit picture for banks. The spread between what a bank pays for its money and the rate it can charge for lending could narrow hurting gross profit margins. We’ve seen these cycles before and the efficient operators are likely to adjust to the environment and remain profitable. As investors we need to remain diligent in reviewing earnings reports and stay the course of Value Investing.

Recent economic data is confirming the opinion offered here some time ago that we are in for a long and gradual recovery from the financial collapse of last year. Unemployment is still on the rise and productivity numbers are static. My opinion is that we will be in for a choppy stock market over the coming quarters and that it will be a market of stocks. Individual stock selection will be the key. Do your fundamental homework!

The FDIC insurance fund has been hit for about 50% of its previous levels due to the costs involved with failed bank closures. 102 banks have failed over the past 2 years with 77 this year to date alone. There are an estimated 300 more banks on the “problem” list. What does all this mean? The answer has many ramifications not unlike the issues addressed while manipulating a Rubic’s Cube.
Here is one outcome I will predict with a high degree of certainty—– The FDIC insurance premiums paid by Banks is going to keep rising thus putting further pressure on profit numbers.

A trillion dollars is 1000 Billion! The magnitude of the numbers is staggering and gets lost in all the rhetoric. The Government is throwing this kind of money at the problems in what I’m going to call the ” Tarp Trap” Let’s get back to an American basic. Small business is where the recovery needs to be focused. Community Banks serve the small businesses of America and can be looked upon as an indicator of sorts. Second quarter earnings results still show incidents of weakness and loan problems—- but ALSO show signs that some areas are stabilizing. Banks are leveling ongoing business flow and importantly the customer base appears steady. This is the base from which real recovery will emerge.

One element of the Obama plans that makes sense is the Mortgage Modification Plan. Under this banner borrowers can have their present mortgage modified so the payment level is one they can handle and stay out of foreclosure.
All that has to occur is for the banks to implement the process. You guessed it, they have been dragging their feet. Let’s hope the pressures that the government is putting on the banks to get with the program gets the ball rolling.

In reviewing the earnings reports community banks are now posting for the Quarter ending 6/30/09—- I have noticed one potential red flag—- the percentage of commercial real estate loans that are non-owner occupied.
History shows that non-performing commercial loans are much more prevalent in non-owner properties. Those commercial interests occupied by an owner company is reflective of overall business operations and less subject to real estate speculation errors. I would be on the alert if a bank carries more than 30% of its commercial loans in the non- owner occupied category.

There have been numerous articles posted over the weekend and today that point out that pricing in sectors of the housing markets around the country may be putting in a soft rounding bottom. For instance, the Condo market in downtown San Diego has been absolutely crushed. The facts are that too many condos were built in too short of a time span and pricing took on the tone of a true bubble. Now with properties available for One Half of their last sales there is definitely buyer interest but NO CREDIT available. The funds are in the institutions but the knee jerk response to the loose lending practices of the past has resulted in a tightening that has hamstrung the markets. For a recovery to continue lenders need to find a compromise position that will allow Real Estate to continue its bottoming process.

Financial headlines today relate the great turf war now occurring among the various regulatory bodies. These entities signified by a hodgepodge of initials all want to grab as much power as possible. They want to be on the cutting edge for future control activities.
We shall have to wait and see how it all works out but hears a hope—– may whoever oversees our systems have a grain of good old Common Sense. Hopefully in the future whatever initials are in charge will have the insight to realize that when a borrower is being lent 125% of the appraised value of their home plus a $5,000 cash back award —-and they have provided no financials to the lender—- a problem could occur down the line.

Banks seem to be posting good earnings—- in most cases—- HOWEVER, In almost every case concern over the credit quality of loan portfolios is voiced. I believe the worries are well founded particularly as they pertain to commercial loans. Investors need to take off the blinders and not only focus on the numbers but watch the qualitative indicators for the loan portfolio.

Today will be one filled with micro-headlines regarding not only what was said, by whom but also editorial commentary on what is the “real meaning” of the content. Let’s stay tuned and watch the show.