Mad Money

Cramer on Regional Banks: ‘Hottest Group Out There’


The success of First Interstate BancSystem’s IPO on Wednesday, where deal participants earned a quick 12%, has put regional banks in the spotlight, Cramer said Thursday.

“In fact,” he said, “I think this might be the hottest group out there right now.”

If that’s the case, then investors probably want to know who’ll be next to grab Wall Street’s attention. Well, how about a company that’s very similar to First Interstate but could be even better?

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That’s First Horizon National . The Memphis, Tenn.-based outfit is shedding much of its specialty-lending practice and a mortgage-banking division while focusing on growing its regional operations. Cramer thinks the bank is very close to becoming a preferred bank of the FDIC, which would put First Horizon in good position to scoop up the assets of troubled institutions at incredibly low prices.

Regional Flair?

First, a little background: With 180 locations, FHN is the largest Tennessee bank. These branches, which generate 41% of total revenues, are at the heart of First Horizon’s business, Cramer said, and the company enjoys number-one status in the northeast, east and mid-south parts of the state.

Digging a little deeper, FHN boasts a few great metrics, too. First, it collects a 3.2% net interest margin, or the spread between what it pays in interest on deposits and what it charges for loans, on its entire business. That number jumps to 3.7% when you consider only First Horizon’s regional banking and capital markets business.

Also, the nonperforming loan rate for FHN is 5%, but much of that is linked to its non-core national loan portfolio. The “deadbeat ratio,” as Cramer called it, for the core business is just 2.6%. What’s also important to note, he said, is that First Horizon’s bad loans have peaked. And they did so in the second quarter of 2009, earlier than just about every bank that Cramer follows.

The last metric – and this is where the FDIC comes in – involves FHN’s tier 1 capital ratio, which is up to 16.4% versus 8% two years ago. This thick cushion against potential losses, as well as First Horizon’s ability to repay TARP, makes it a very attractive candidate in regulators’ eyes for those previously mentioned asset sales. Luckily for FHN, Georgia is right next door, and it boasts the most failed banks of any state – 35 out of 202 – since 2008.

These positives seem to point to a good future for First Horizon, but Cramer wanted viewers to know that the bank isn’t perfect. He described it as a C+ student on its way to a B+. But that’s what money managers like – it’s potential to rebound. And with 17 analysts rating this one a “hold,” there’s still plenty of time to buy in.

Cramer said First Horizon could be the next Huntington Bancshares , which is up 53% since he last recommended it on July 9, 2009. At the time, few others were willing to bless the Ohio bank, and now he’s doing the same to FHN.

“I think First Horizon’s got the same trajectory ahead of it,” Cramer said, “and you don’t want to miss this next gem in the world of banking.”

Call Cramer: 1-800-743-CNBC

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