Looking Beyond First Horizon's Earnings

Strong capital ratios and improvement in its credit quality has helped First Horizon National (NYS: FHN) retain its BBB+ rating on its long-term debt. The Tennessee-based bank also managed to beat analysts' estimates by reporting better-than-expected second-quarter earnings. Therefore, I decided to take a closer look at this regional bank and find out whether it deserves a place in my portfolio.

First Horizon almost did away with its provision for loan losses in its latest quarter, reducing it by a whopping 99% on a year-over-year basis. In fact, provisions have been falling for a while now. Twelve-month provisions fell to $97 million in June 2011 from $1.18 billion in June 2009. This reflects the bank's confidence in its asset quality. And that confidence isn't without cause.

The company's net charge-offs during the quarter declined by 50% compared with the second quarter of 2010. Nonperforming assets also fell by 17% for the same period.

First Horizon did, however, witness a drop in revenue. While net interest income dropped by 5%, its total revenue fell by 15%, mostly due to plunging non-interest revenue from areas like mortgage banking.

But as savvy investors, we need to look at earnings and beyond to decide whether a stock is worth investing in. Let's narrow things down by comparing the company with its closest peers along a few important parameters:

• Price/earnings (P/E) ratio: This ratio helps us look at a company's earnings relative to its price and determine how cheap or expensive the stock is.

• The price-to-book (P/B) ratio: Widely linked with value investing and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea of a stock's value and indicates value opportunities.

• The tier 1 capital ratio: This metric, dividing the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times. It compares equity and reserves with total risk-weighted assets.

• The dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.

Take a look at the table below to get a better understanding of how First Horizon fares in terms of valuation when compared with its peers.

Source: Capital IQ, a Standard & Poor's company. *Normalized, excluding unusual items.

Usually, banks with lower bad loan percentage have higher P/B ratios. But here, FHN has high capital levels and its assets are improving significantly. Its current P/E ratio is, in fact, the lowest in the group. To get a fuller picture, I considered forward P/E as well, which is also on the low end. If First Horizon is able to get a handle on its revenue problems, it could be an opportunity for Foolish investors.

The bottom line
As far as valuation and operations are concerned, First Horizon looks fairly promising. I would suggest Fools keep an eye on its operations. You can add it to your Watchlist by clicking here.

At the time thisarticle was published Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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