First Horizon National Corporation (NYSE:FHN) is continuing to do a good job for shareholders. The regional Southeastern bank makes a strong case for itself by enacting strict cost controls, posts strong loan growth, and benefits from a decreasing net charge-off ratio.
In addition, the bank offers investors a nearly 2% dividend yield while they can sit back and wait for higher market valuations as the U.S. economy kicks into high gear.
Granted, the investment thesis in First Horizon National - as for any other bank - relies heavily on the assumption that the U.S. economy will continue to grow and therefore provide boosts to bank earnings.
Bank earnings are highly correlated with the overall economic activity in a country. And there are clearly a couple of signs, that indicate to me, that the United States is to embark on a strong run going forward.
First off, interest rates are low. This is clearly going to change in the short-term - either in 2014 or 2015 - as the Federal Reserve will have to come to terms with the fact that the U.S. economy is growing strong enough to no longer need artificial life support from the monetary authority. Higher interest rates should boost the bottom line of First Horizon National.
Secondly, U.S. unemployment continues to fall with an unemployment rate in June of 6.1%. This trend of increasing employment should ultimately lead to higher consumer spending and higher house prices, mortgage demand and higher bank valuations.
First Horizon National should be able to capitalize on those macroeconomic trends and see a substantial increase in its valuation in the next couple of years.
I have said it before, but it is worth repeating: Loan growth adds meat to the bones of any bank.
Whether the bank is small or big in size, doesn't matter.
And regional banks oftentimes seem to do a better job at attracting business clients to their respective loan divisions.
First National Horizon certainly is no different: The Southeastern bank reported solid 4% quarter-over-quarter loan growth with gains in specialty and commercial lending, both of which are strong revenue and earnings drivers for First National Horizon.
In addition to loan growth, the underlying credit quality of the bank has also been improving.
This certainly is a cyclical phenomenon, but decreasing charge-off ratios free up earnings available for reinvestment and shareholder remuneration.
In the second quarter of 2014, net charge-offs declined 48% quarter-over-quarter and 53% year-over-year indicating a substantial improvement in the bank's underlying asset quality. Second quarter 2014 net charge-offs stood at just $9 million and further improvements according to the trend line are likely.
If you want to know how disciplined a bank's management team is in enacting cost controls, investors should always look at how the bank tackles noninterest expenses, which often are a massive cost component and include items such as employee salaries and benefits and other overhead costs.
First Horizon National has aggressively tackled its cost base and reduced its annualized noninterest expenses by 25% in the most recent quarter compared against cost levels of $1,133 million in Q2 2011.
Many banks over the last couple of years where forced to cut expenses instead of focusing on growth and First Horizon National did a great job in cutting fat of its cost structure, which should lead to a leaner company that can capitalize on growth in a more efficient way going forward.
I know, regional banks play in another league than large commercial banks like Citigroup or Bank of America, but all banks have sizable loan operations and depend on loan growth in order to drive intrinsic value for shareholders.
The valuation comparison between First Horizon National and Citigroup as well as Bank of America below indicates that investors generally view the earnings prospects of First National Horizon better than the ones of its two larger banking peers.
A lot of it has to do with the absence of large mortgage-related settlements for First National Horizon, but investors also clearly value the bank's prudent approach to cost cutting, improvement in underlying credit quality and a much higher dividend, comparatively speaking, of nearly 2%.
As a result, First Horizon National trades at a nearly 29% premium to book value whereas both Citigroup and Bank of America lag substantially.
The Foolish Bottom Line
First Horizon National is an interesting regional bank alternative to other, more well-known bank names which has made great progress over the last couple of years in cutting costs and setting the company up for growth.
Investors don't always have to buy the biggest names in a particular industry. Smaller companies like First Horizon National also often make convincing value propositions, but remain exposed to the same cyclical tailwinds as the other, bigger players.