As you recall, 2012 turned out to be a better year for many banks than had been expected. In many cases additional lowering of provisions due to continually improving credits, a sometimes myopic focus on costs, some good acquisitions, and increased loan activity with stronger than expected margins enabled revenue growth and bottom line profits.

 

 

But 2013 told a very different story.

 

* Historically low rates resulted in higher branch system losses that forced many banks to dramatically decrease their number of branches. Banks could no longer wait for rates to rise to bail out uneconomic branches. In many cases banks lacked the sophisticated analysis necessary to close the right branches, sometimes pulling the plug on branches that, while they did not put up big numbers by themselves, were critical to important customers or segments.

 

* Compliance and regulatory costs continued to surge as regulators on all levels of government asked for more information and tightened their requirements. As one big bank recounted, regulators pushed it to deal with any compliance oversights involving current customers rather than pursuing new targets or additional sales opportunities.

 

* As an industry, banking failed to effectively fight back against being portrayed as anti-consumer and anti-small business. From her perch on the Senate Banking Committee the new Senator from Massachusetts led a populist movement against high bank fees and exclusionary lending practices. The media frequently featured stories about “heartless” banks that were failing to support their communities.

 

* Within banks themselves “the era of the compliance officer” made bank compliance groups unassailable internally. Not only did their non-revenue producing costs increase, but they caused more bankers to spend more time on internal “paperwork” rather than working with clients. Many bankers naturally prone to avoid being away from their desks used their compliance areas as yet another convenient excuse for failing to sell.

 

* Acquisition opportunities were limited. Too many zombie-like banks remained at the end of 2013 as sellers insisted on higher premiums than buyers could justify. Literally thousands of marginal banks continued in operation. Only another downturn would force them to sell and allow for the massive consolidation that had long been predicted. However, several banks, desperate to increase revenues despite lack of organic growth opportunities, paid too much for acquisitions with their stock prices suffering and their managements under a harsh spotlight as a result.

 

* Provisions began to rise. Provisions for losses and reserves levels reached their low point in 2012; these costs began to rise as regulators looked more skeptically at loans made in 2011 and 2012 and as the economy remained in the doldrums.

 

* Gen X and Millennial customers disintermediated the banks. As Baby Boomers continued to age and reduce their banking needs, younger segments increasingly went outside the banking channel. For example, by the end of 2012 PayPal became the biggest bank as measured by service charge income. But, many banks remained unconcerned, believing that they still owned the customer relationship even though more of their customers thought otherwise.

 

* Non-banks feasted on bank weaknesses and lack of strategy. While many banks struggled, the merchant advance business had it best year ever as more small businesses were either ignored by banks or frustrated by the difficulty of borrowing from them. Check cashers and payday lenders grew substantially as they served the increasing underbanked segment as well as the larger number of customers who viewed themselves as needing to conduct specific and simple financial transactions rather than requiring a bank relationship.

 

* Banks reputations were hammered. Even worse than in previous years, the reputation of the banking industry and an increasing number of “name” institutions was dragged through the mud. Surveys now revealed that used car salesmen and Congress garnered higher ratings for trust.

 

* Community banks underperformed. 2013 was the year when smaller banks suffered even more significantly than their bigger brethren. These banks lacked the required management sophistication and sales rigor necessary to succeed and the scale to offset increasing back office and regulatory costs. Being a local player was no longer very important to customers looking for excellent 24/7 access, professional advice, and speed of action.

 

Despite 2013 being a tough year for the banking industry, many banks sailed through it with strong numbers, improved customer loyalty, and a strong platform for future growth. Some of their characteristics included:

 

* Emphasizing specializations and niches whether in industries, lending structures, noncredit products, or other areas.

 

* Continuing to highlight risk management and operational excellence. Credit processes and quality remained strong at the best performing banks.

 

* Reengaging with small businesses. A few banks decided to buck the trend and focus on microbusinesses and SOHOs, just as other banks were abandoning these huge segments to focus lemming-like on the middle market.

 

* Managing support staff and regulators. A few banks showed a willingness to rein in compliance personnel and “push back” against what they considered unreasonable regulatory requests.

 

* Redefining the role of front line personnel to require that they were consistently focusing on sales, marketing, and high impact customer servicing rather than administrivia. These banks made sure that they defined the bankers’ jobs rather than permitting each relationship manager or branch manager to design his own position.

 

* Exploiting the weaknesses of other banks. So many banks were inwardly focused during 2012 and 2013 that the relative handful of banks that were meeting with targets, offering solutions, and selling had significant success. Rigorous sales activity was the norm at the best performers.

 

* Developing and executing on strategy. The winners knew what they stood for, whom their key customers were and went about fiercely exploiting their advantages to win share. They created a sense of urgency when one did not naturally exist.

 

Overall, 2013 was a year in which the gap between the mediocre and the top performers widened significantly. Industry observers believe that this gap will only grow further in subsequent years. The handful of “best” banks really stepped up in 2013 leaving most of their competitors in the dust. The mediocre seem destined for only tougher times ahead.