With the 2005 earnings season behind us, it is a good time to focus on the communications outlook for 2006 – specifically, what should banks be talking about this year to their investors, customers, employees and other stakeholders.

Much of the media is painting a somewhat bleak picture for banks in 2006. A recent CNNMoney.com story sums up the key communication issues facing banks: “Between bad loans, declining home sales and upside-down interest rates, 2006 is probably going to be a tough year for banks.”

Give Context to Your Results

To combat such perceptions, banks should take the time to explain their approach and philosophy regarding credit quality. For example, community banks should tout the fact that they lend primarily to small businesses with which they have developed close relationships, while avoiding participation in riskier loans.

The housing bubble has long been forecast as ready to burst. Fortunately, the talk is somewhat subsiding. In the December issue of Community Banker, several economists are quoted as seeing a gradual rise in mortgage rates with a somewhat moderate decline in housing demand and housing prices.

Those banks with mortgage operations should place 2006 comparisons in a broader historical context than just to a year ago. Obviously, whenever there is a peak year in a certain sector, the next-year comparisons are always tough. Comparing to a 5-year or 10-year average may help make current-period comparisons more palatable for investors and others.

The same is true of loan and deposit growth. Many banks saw fairly high gains in these areas in 2005, which may not be sustainable in 2006. If that is the case, banks should talk about long-term trends in deposit and loan growth.

Answering the Flattening Yield Curve

The yield curve will continue to be a popular subject in the media this year, as investors and customers hear more about “flattening” and “inversion.” The good news is that, as with the housing bubble, media coverage is becoming more balanced as analysts are now predicting that it is unlikely that a recession will follow a yield curve inversion this time around.

In fact, a few analysts are more concerned about deposit pricing, spikes in loan losses and containing cost of funds – factors seen as affecting earnings more than the yield curve, which historically has not had much effect on net income.

There remains a commonly held view, however, that smaller banks will feel more pain from a continued flattening of the yield curve. In response, these banks should reiterate steps they took in 2005 that will help them weather the storm in 2006, such as increasing their focus on fee income products, portfolio repositioning or cost containment.

Dealing With M&A Speculation

Another hot topic is consolidation. Expect to see a great deal of M&A speculation in the media, especially concerning small banks in hot markets like Atlanta, where larger banks are locked in a heated battle over deposit share.

If a small bank does not want to deal with this headache, it should continue to emphasize its commitment to serving the local community and to remaining independent, taking every opportunity to talk about how the bank’s roots have grown deep in the local region and its intention to continue calling its own shots.

For those banks looking to sell or merge, they should emphasize the positive qualities that would appeal to a possible partner. Develop key messages around such facets as a unique market footprint, strong credit quality and long-term relationships bankers have with local businesses.

As in every year, community banks in 2006 should differentiate themselves from the rest of the banking sector. Community banks often get lost in mainstream media stories on banking, which focus typically on the large bank sector.  As such, many readers assume community banks face the exact same issues as their larger brethren.

It is important for smaller banks to communicate the differences and advantages they enjoy as a community-based institution, especially when talking to shareholders and employees.