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VOL. 132 | NO. 210 | Monday, October 23, 2017

First Tennessee Parent Company Reports Positive “Stress Test” Results

By Andy Meek

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First Horizon National Corp. has submitted the results of its annual Dodd-Frank Act Stress Test to regulators, which show that the company’s management and board believes it “would maintain capital well in excess of regulatory adequate levels under severely adverse economic and financial conditions.”

The test is slightly different from one bank to the next, with different requirements depending on their asset size. Memphis-based First Horizon, parent of First Tennessee Bank, is grouped with institutions with $10 billion to $50 billion in total consolidated assets, which are subject to a less stringent form of the stress test than banks with more than $50 billion.

For banking companies in First Horizon’s category, the stress test rules require an annual company-run exam using proprietary, internally developed models. Starting in 2015, those banks also had to disclose their most recent stress test results under the “severely adverse” scenario to the public.

The scenario First Horizon and its First Tennessee banking unit planned for, to see if they could withstand, covered nine quarters, from the first quarter of 2017 through the first quarter of 2019, and it included a severe global recession, along with periods of heightened stress in corporate loan markets and corporate real estate markets.

The test scenario was also characterized by:

• Real GDP down 6.5 percent from the pre-recession peak by the second quarter of 2018

• Unemployment rising to 10 percent by the third quarter of 2018

• An annualized consumer price index under 2 percent

• Three-month Treasuries near zero throughout the planning horizon

• Stock prices falling 50 percent through the end of 2017, with market volatility approaching 2008 levels

• Home prices down 25 percent and commercial real estate prices down 35 percent

“Results indicate (First Horizon) maintains capital well in excess of Basel III Adequately Capitalized standards under the hypothetical severe global recession of the 2017 Severely Adverse scenario,” First Horizon says of its test results.

And based on that excess capital, even assuming First Horizon maintains its quarterly dividend rate through the scenario’s timeframe, the company’s management and board believes it has the capacity to manage the risks that the stress test imagines.

First Horizon submitted the results of its test to regulators in July. Two months before that, the company announced an agreement to merge with Capital Bank Financial Corp., which – because of the timing of that announcement – is not included in the bank’s 2017 stress test.

Mid-sized banking companies like First Horizon aren’t subject to other parts of the Dodd-Frank Act stress requirements that include a comprehensive capital analysis and review process, just like larger firms are. They’re not required to prepare and submit a full capital plan to the regulatory agencies, nor are First Horizon’s results subject to a pass/fail requirement.

First Horizon CEO Bryan Jordan has been telling analysts for at least the last several quarters that the bank’s high-level read on the economy is that things are better and “steady,” the word Jordan uses frequently in earnings calls. That was also reflected in his comments a few days ago during the bank’s third-quarter earnings conference call.

First Horizon during the third quarter grew its net income from $63.2 million in 2016 to $67.3 million in Q3 this year.

The company’s earnings per share were also up 2 cents to 29 cents compared to the year-ago quarter, average deposits were up 8 percent at First Tennessee and revenue was up 7 percent, with First Tennessee having also maintained its No. 1 deposit market share position in the state.

Republicans have made the Dodd-Frank Act a target of their ire off and on over the last several years, and some regulators likewise voice concerns about it – and its requirements, like the stress testing. In an interview with “American Banker” a few days ago, for example, Jim Bullard, president of the Federal Reserve Bank of St. Louis, said that when it comes to requirements like the stress tests, “it’s just not so clear what the utility of that is for very small institutions.”

The Federal Reserve Bank of St. Louis’ territory includes banks in Memphis.

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