First Bancorp Puerto Rico (FBP)

First Bancorp Puerto Rico (FBP) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $6.50 price objective. We assign a 1.0x multiple to our 2Q17E TBV, below the 1.6X for peers, due to the overhang of PR fiscal issues that may reduce TBV. Our revised implied 2Q17E TBV of 1.0x is consistent with a 5% ROE. We assign a 10x multiple to our 2017E EPS, in line with peers. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are a worse-than-expected restructuring of PR government debt, deterioration in the Puerto Rican economy that could hurt the ongoing credit and earnings recovery at FBP, a change in management's strategy to dispose troubled assets, and potential regulatory risk stemming from the ongoing implementation of the Dodd-Frank financial rules. Upside risks to our price objective are a much stronger economic improvement in Puerto Rico and a better-than-expected improvement in asset quality trends at FBP. First Hawaiian Inc. (FHB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $31 PO and assign a 2.2x multiple to 2017E TBV and 17x multiple on 2017E EPS, representing premium target multiples for the median smid-cap banks under coverage. We have weighted the P/E and P/TBV factors equally. A superior profitability profile suggests an above peer multiple. Our DCF assumes a two- stage cost of capital of 8% and a terminal growth rate of 4%. Risks include 1) FHB's reliance on the Hawaiian economy with 80% of the franchise spread across Hawaii, Guam, and Saipan poses downside risk to EPS from a severe economic downturn in this region. 2) While FHB has a history of conservative underwriting its exposure to auto loans could serve as an overhang if investor concerns around the health of the auto sector and consumer increase. 3) Expectations for continued divestiture by French bank BNP (owns 82% of shares o/s) could temper stock performance. First Horizon National Corp. (FHN) We use a three-prong valuation framework (P/E, P/TBV, DCF) to arrive at our $16 price objective and assign a 1.5x multiple to 2Q17E TBV and a 14x multiple to 2017E EPS (inline with median for our mid-to-small cap universe). We believe that this valuation discount is warranted given the below average earnings growth that we forecast for FHN. Our P/TBV and P/E targets reflect our expectation that earnings growth and profitability will remain challenged by a low growth low interest rate environment. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. Downside risks to our price objective are a double dip in home prices and slower residential real estate recovery. Upside risks are FHN being taken out above our price objective and better performance in the economy than we expect. Franklin Financial Network, Inc. (FSB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $36 price objective and assign a 1.8x multiple to our 2Q17E TBV, given that we believe the market would pay no premium for FSB's 2016 estimated returns of 14%, below the median of its peer group (High performing, Southeast peers, and SMIDs). We place a 14x multiple on our 2017E EPS, a premium to its peer group given above average expected EPS growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are: 1) execution risk leading to slower than expected loan growth or lower than expected improvement in the efficiency ratio, 2} BankofAmerica <2” 68 2016 Future of Financials Conference | 17 November 2016 Merrill Lynch HOUSE_OVERSIGHT_014382