Tech threatens to further commoditize banking, First Horizon chief warns

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Bryan Jordan has been thinking a lot about technology lately.

Jordan, chairman, president and CEO of First Horizon in Memphis, Tenn., believes large investments by big banks and the emergence of fintech firms are going to challenge smaller institutions to find ways to use technology and still connect with clients on a personal level.

Technology "gives you a tremendous way to improve services and the flexibility of banking our customers," he said in an interview Wednesday before a speech at an economic forum in Raleigh, N.C. "But it is very costly and, because it tends to level the field, it is going to require you to figure out how to differentiate your services when you have less contact with the customer."

First Horizon, for its part, is in a much better position to compete now compared to when Jordan took the helm in late 2008. The company spent years working through crisis-era issues — many mortgage-related — that had bogged it down.

The company regained enough momentum to buy a small North Carolina bank in 2015. Last month, Jordan punctuated the comeback by buying Capital Bank Financial in Charlotte, N.C., a move that brought the company's asset size to $40 billion and its branch network in seven Southeastern states to 350 branches. (Jordan recently told investors that his team will exceed its cost savings goals for the acquisition.)

Jordan shared an update on the Capital Bank integration during the interview, while explaining how tax reform could immediately stimulate the economy.

Here is an edited transcript of that conversation.

How will tax reform and rate increases help banks such as First Horizon?
BRYAN JORDAN: The progress we’ve seen in the economy has been going on for several years, and most data points to an acceleration in 2018. Some of that is driven by the strengthening of the global economy. Some of it is also a function of an improved regulatory environment, which has given people confidence to invest, and an expectation of tax reform.

I think tax reform is going to be good for the economy. I think it is going to give people the confidence to invest in their businesses and to grow. That’s good for bankers. It creates the potential for more loan growth. It gives us a strong, more stable and growing economy to lend in and support.

I'm reasonably optimistic about the economic environment. I think that's somewhat reflected in what we’ve seen the Federal Reserve do with raising rates, referring to the December move. I think the median forecast was three moves this year. Whether it ends up being one or three, I think the economy is in a pretty good place.

Could there be a lag before tax reform stimulates the economy? Seems like a lot of businesses have been sitting on cash.
Maybe the greater short-term driver will be the sheer number of organizations that have paid $1,000 bonuses or increased their minimum wages. I think [because of] the convergence of the tax cut, the confidence it gives people and the money that should be coming back into the economy as people get these bonuses, [the benefit] should be sooner rather than later. I’m no political student but it seems as though the Republicans had a political calculation from now to November 2018. I don’t know if it will be that quick … but I know we’ll see the stimulative effect of all these bonuses and increased wages. That’s going to give people more confidence to invest, buy plant equipment and grow.

With tax reform and rising rates, the Capital deal's timing seems fortuitous. How are things so far?
We’re very excited about it and would have been without the tax bill. We weren’t counting on that. These are two franchises that, in my view, fit together as hand in glove as much as any I’ve been involved with in the past. We’re very optimistic about what we see and the opportunities to continue the momentum and grow at a very substantial rate by overlaying calling efforts and products in a seamless fashion.

Our business is one that will be driven by some pretty significant realities. The cost of regulation is part of it but the bigger driver is the cost and impact of technology. Its about having the ability to build scale and extensions of your marketplace, like we were able to do with Capital Bank, that improve the demographic profile of your organization to give you better household income and household growth numbers.

The timing did work out. We see a lot more opportunity today that we didn’t see six months ago.

How do you view technology now that First Horizon is a much bigger company?
Technology is going to present the greatest opportunities and the greatest challenges for this industry over the next five to 10 years. It gives you a tremendous way to improve services and the flexibility of banking our customers. But it is very costly and, because it tends to level the field, it is going to require you to figure out how to differentiate your services when you have less contact with the customer. When customers come into the branch or call the call center you have a lot of contact with them. You don’t have that when they’re banking on their phone. You’ve got to differentiate beyond a technology platform that further commoditizes [banking] … and doesn’t give you as many chances to develop the relationship. That’s an interesting opportunity for our organization.

Are there particular areas in technology that present the most opportunity?
I think customer-enabling technologies will provide the greatest opportunities. We spend a tremendous amount of time looking at what’s going on in the fintech space and what kind of partnerships are being created. Whether developed by JPMorgan, Bank of America, Citigroup or a fintech company, those technologies will go a long way in permeating the entire industry. We're evaluating partnerships to raise the ability of our organization to serve our customers.

The integration of Capital Bank will be the primary focus for the first half of 2018 but there will be a big opportunity beyond that to take a bigger customer base and use it to leverage our technology.

There's still a big gap in the Southeast for First Horizon. How do you fill it in? Does the SIFI threshold factor into your thinking?
I was surprised when we announced the Capital Bank merger, which put us around $40 billion [in assets], about the amount of focus on the SIFI designation. From a practical perspective, the bill that has been agreed to in the Senate banking committee is a fairly realistic way to approach SIFI designations. I worry less about that today.

M&A is a means to grow the organization and deploy capital but it is not a necessity. We think we can continue to grow organically. The presence that Capital Bank has in the Carolinas and South Florida are tremendous opportunities for us to leverage up our organic growth.

There will be potential opportunities to fill in through M&A … but it has to make sense from a shareholder perspective and in terms of the footprint. I'd say that 2018 is a year of integration and I’m not thinking much about what’s next. I want to make sure we execute on what we’ve committed to with Capital Bank and do that well.

Still, you don’t want to be stuck on the sidelines if something shakes loose.
That’s right. You can’t control timing. With the planning we’ve done over the last few months with Capital Bank, and the fact that we’re now in the actual integration phase, we’ll be done with that in the next six to eight months. I don’t think we’ll be wrong-footed if the right opportunity came along. But we also want to make sure we don’t get distracted in the short term because taking care of the customers that we’ve got is the most important thing. Once we’ve done that we can think about how we can grow the franchise. There's so much opportunity with the franchise. We can put together great growth in late 2018 and 2019 by staying focused on capital and focusing on the synergies we see in the Capital footprint.

What’s the greatest opportunity for banks this year? The greatest risk?
I think the greatest opportunity will be the accelerating economy. We have probably shifted from 1.5% to 2% growth to 2.5% to 3%, or maybe 4%. It is positive from the sense that, as an industry, we’ve been competing for limited loan growth in a limited economy. This opens up more opportunity.

The biggest risks are twofold. One is that all economic cycles turn and the further you get from the last cycle the less those [past] lessons seem relevant. Still, I don’t think many of us will easily forget 2008 and 2009 any time soon. I don’t think the economy will turn in the next two or three or four years but it can’t go on forever.

I think technology for institutions outside of the top four or five is going to be a big driver of the way we do business. The big banks can spend and make the investments and be fairly public in the way they talk about it. While we can’t outspend them we have to adapt and tailor our business models in a fairly flexible and nimble way. We can’t sit around and become complacent and stick with what has worked over the last five to 10 years. … We have to adapt our business models to a different economic reality, which will be driven by technology in some respect.

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