Industry Report

Transcription

Industry Report

Industry Report
October 23, 2012
Is the Commonwealth Getting Crowded?
Our Call
Despite credible progress over the past year and attractive valuations, ongoing
macro weakness, elevated problem asset levels and legacy balance sheet issues
leave us relatively cautious on the Puerto Rico banking sector for now.
■ Improving outlook - but not out of the woods yet. The Puerto Rican banking
sector's progress over the last several years has been encouraging (albeit from
a very low base). Most of the companies have rationalized portfolio exposures,
repositioned balance sheets and returned to profitability after several years of
significant losses. To be sure, the sector is on much more solid footing in terms of
profitability, earnings trajectory and capital adequacy. However, despite a more
positive outlook, persistently high problem asset levels, balance sheet overhangs
(TARP, DTA, ownership concentrations), regulatory concerns and a challenging
macroeconomic backdrop, leave us relatively cautious on the group.
Banks & Thrifts
Todd L. Hagerman
(212) 338-4744
[email protected]
Robert Greene
(212) 763-8296
[email protected]
Mentioned Companies:
Symbol
BPOP
FBP
OFG
Rating
Neutral
Neutral
Buy
Price
$19.28
$4.14
$10.22
■ Puerto Rico economic recovery remains subdued. However, with prospects of
a modest near-term recovery (after a deep and prolonged recession), persistently
high unemployment, and ongoing weakness in consumer and commercial real
estate values, industry growth will likely remain sluggish for the foreseeable
future. Consequently, the group's near-term earnings leverage is almost entirely
centered in lower credit costs (i.e., decreasing loan loss provision levels), which
are likely to stay elevated as progress in unwinding the sector's considerable
problem asset portfolios will likely remain slow and methodical.
■ Oriental Financial Group (OFG - BUY): Transformational acquisition
creates compelling value proposition. With OFG's acquisition of BBVAPR a
stronger, less encumbered competitor has emerged in the Puerto Rican banking
market, which will give the company a competitive and strategic advantage
over the next several years, in our view. While OFG’s two closest competitors
continue to grapple with legacy balance sheet issues and elevated problem asset
levels, OFG remains focused on growth and market share gains – while trading
at an inexpensive valuation of 86% of pro-forma tangible book value.
■ First BanCorp (FBP- NEUTRAL): Emerging improvement, but progress
remains slow. To be sure, FBP has made considerable strides in restoring
the company’s profitability, reducing balance sheet risk, and most importantly,
taking pro-active steps to shore up the bank’s capital buffer and excessive
reliance on wholesale funding. With the company reporting its first quarterly
operating profit since 2009 in 2Q12, FBP has reached a very important
milestone. Despite an otherwise attractive valuation, a number of issues keep us
cautious, including exceptionally high NPA levels, subdued growth prospects,
and limited near-term capital flexibility.
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
800 Shades Creek ParkwaySuite 700Birmingham, AL 35209205-949-3500
Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC
Investment Overview
October 23, 2012
Figure 1: Sterne Agee Puerto Rican Bank Coverage – Ratings, Price Targets and EPS Estimates
Company
Popular, Inc.
Doral Bank*
First BanCorp
Oriental Financial Group
10/22/2012
Ticker
Price
Rating
BPOP
DRL
FBP
OFG
Neutral
N/R
Neutral
Buy
$19.19
$0.91
$4.19
$10.26
Puerto Rico Median
Source: SNL Datasource, Company Data, Sterne Agee estimates
*DRL Represents Consensus EPS
2011A
$1.98
-$0.16
-$1.33
$0.68
Sterne Agee EPS
2012E 2013E
$2.05
$0.03
$0.09
$0.71
$2.50
$0.25
$0.20
$1.60
2014E
$2.95
NA
$0.30
$1.75
2012E/
2011A
EPS Growth
2013E/
2014E/
2012E
2013E
4%
119%
107%
3%
22%
733%
122%
126%
18%
NA
54%
9%
55%
124%
18%
Price
Target
$19.00
NA
$5.00
$14.00
Potential
Upside
(1%)
NA
19%
36%
19%
Popular, Inc. (BPOP – Neutral, $19.19)
Investment Thesis: Improving outlook outweighed by balance sheet overhang.
With over 40% of the Puerto Rican deposit market, BPOP remains an imposing player in the
Commonwealth's banking industry. However, with prospects of a modest near-term recovery
(after a deep and prolonged recession), persistently high unemployment, and ongoing
weakness in consumer and commercial real estate values, industry growth will likely remain
sluggish for the foreseeable future. Consequently, BPOP's near-term earnings leverage is
almost entirely centered in lower credit costs (ie, decreasing loan loss provision levels), and
accelerated reductions in problem real estate, including CRE/construction. However, progress
in unwinding BPOP's considerable problem asset portfolio will likely remain slow and
methodical over time. Note: Sterne Agee initiated coverage on BPOP on 6/21/2012
The company has rationalized its portfolio exposure, repositioned its balance sheet and has
slowly returned to profitability after several years of significant losses. To be sure, BPOP is
on much more solid footing in terms of profitability, earnings trajectory and capital adequacy.
However, despite a more positive outlook, persistently high problem asset levels, ongoing
TARP participation, and lack of progress unwinding the company's $405mm net deferred tax
asset keep us on the sidelines, despite an otherwise attractive valuation.
First BanCorp (FBP – Neutral, $4.19)
Investment Thesis: Emerging improvement, but progress remains slow.
To be sure, FBP has made considerable strides in restoring the company’s profitability,
reducing balance sheet risk, and most importantly, taking pro-active steps to shore up the
bank’s capital buffer and reduce its reliance on wholesale funding. With the company
reporting its first quarterly operating profit since 2009 in 2Q12, FBP has reached a very
important milestone. The trajectory of the company’s improvement appears intact, and FBP’s
deep discount to tangible book value certainly makes FBP shares an attractive risk/reward
proposition. However, while the path appears clear for FBP shares to achieve multiple
expansion from the current depressed levels (0.67x TBV), we remain somewhat cautious
given 1) unsustainably high levels of problem assets with NPA’s (11.8% in 2Q12) with an
outlook for only modest near term improvement 2) limited capital flexibility tied to NPA’s
and poor capital formation 3) subdued growth prospects given an anemic Puerto Rican
economy, and 4) lagging “normalized” profitability/return metrics vs. US peers. Additionally,
the company remains under a Written Agreement with the Federal Reserve. The Treasury
also holds 16% of the FBP’s outstanding stock pursuant to its 2011 $424mm
preferred/common conversion.
Oriental Financial Group (OFG – Buy, $10.26)
Investment Thesis: Transformational acquisition creates compelling value proposition.
With OFG’s pending acquisition of BBVAPR and recent capital raise, the company has been
able to deploy its excess capital (29.25% Tier 1 Common) in a manner that will strengthen its
earnings profile, bolster profitability metrics (est. ROTCE of 11-12%) and reduce its credit
exposure (via marks on acquired loans and a larger overall balance sheet). Additionally, the
transaction gives the company greater critical mass and more diversified earnings stream in a
highly competitive Puerto Rican market. Consequently, a stronger, less encumbered
competitor has emerged in the Puerto Rican banking market, which will give the company a
competitive and strategic advantage over the next several years, in our view. While OFG’s
two closest competitors continue to grapple with legacy balance sheet issues and elevated
problem asset levels, OFG can remain focused on growth and market share gains – while
trading at an inexpensive valuation of 82% of pro-forma tangible book value.
Page 2
October 23, 2012
Rehabilitation continues in the PR Banking Sector, but secular headwinds keep us cautious
on the group. Certainly, a great deal of progress has been made in the Puerto Rican banking
sector over the past 5 years, after a period of particularly acute credit-related losses and
ongoing macroeconomic headwinds within the Commonwealth. The top 7 banks endured a
cumulative $5.5B in credit losses from 2007-2011, as an inflated Puerto Rican real estate
market collapsed. Of course, the US Mainland economic slowdown of 2008-2009 exacerbated
an already precipitous decline in the Puerto Rican economy, which has endured a protracted
and deeper recession relative to the US– with projections only for modest economic growth
(if any) in the near/intermediate term (<10% forecast GDP growth).
The massive erosion of capital through the Puerto Rican downturn has been mitigated by a
substantial aggregate equity infusion into the Commonwealth’s banking system. Through a
series of US Treasury investments, private equity sponsors and public offerings, the
Commonwealth’s banking system is on more solid footing, to be sure. However, problem
asset levels remain dangerously elevated, and with limited opportunities for asset divestiture
(particularly in residential real estate given the perceived economics), NPA levels are
expected to improve only incrementally in the near term. Additionally, given the relatively
poor health of the Puerto Rican economy, expectations for balance sheet growth, and
subsequently, core PPNR growth are limited at this point.
Arranging the sliding puzzle: While the problems the Puerto Rican Banks face are not wholly
intractable, given the market share consolidation, lack of excess capital, and overall dim
organic growth prospects, a wholesale reordering of the PR banking market will be slow to
emerge. Our sense is that management teams are largely focused on a strategy of 1)
restoring/sustaining consistent profitability, 2) preserving capital, given limited ability to raise
incremental common equity (low appetite for dilution, weak currencies) 3) incremental
asset/liability repositioning to re-align asset risk profile and reduce funding costs 4) workthrough/restructuring of problem assets vs. outright asset disposition and 5) highly leveraged
to continuing stabilization/improvement in the Puerto Rican economy. That said, the Oriental
Financial group (OFG, BUY) recently undertook a transformational acquisition in 2Q12,
deploying excess liquidity ($350mm in cash) and capital buffer (27.3% Tier 1 Common ratio
at announcement) to purchase BBVA’s ($8.32, NR) Puerto Rican operations (BBVAPR).
The transaction added $3.7B of loans and $3.3B of deposits to the bank’s balance, sheet,
vaulting the company into the #3 deposit share, and completely recasting the company’s
operating profile.
Figure 2: Publicly Traded Puerto Rican Banks – Strategic Priorities
Company
Popular, Inc.
Ticker
BPOP
Est. Deposit Share
41%
Business model
Sustain profitability
Preserve capital
Increase market share
Work through problem assets
Reduce credit costs
Benefit of FDIC transaction
Leveraged to PR recovery
First BanCorp
FBP
17%
Sustain profitability
Preserve Capital
Work through problem assets
Improve funding profile
Targeted growth strategy
OFG
11% *
Strategic transformation
Consolidate Puerto Rico
Shift from retail assets
Reduce securities portfolio
Stabilize earnings stream
Doral Bank
DRL
8%
Restore profitability
Improve/preserve capital buffer
Execute consent order
Adjust risk profile
*Pro-Forma BBVA PR transaction
Page 3
October 23, 2012
Righting the ship after years of earnings volatility. The Puerto Rican banks have slowly
returned to profitability, after roughly 3 years of significant losses both through outsized
credit marks and securities write-downs. For the time being, it would appear as though the
banks’ earnings trajectory has stabilized, as the group (in aggregate) has been able to post a
modest profit in recent quarters. However, Figure 4 demonstrates that challenges remain, as
both DRL and FBP have yet to fully turn the corner on profitability, despite several quarters
of narrowing operating losses. Additionally, the companies’ earnings outlook and subsequent
profitability metrics remain challenged by a tepid Puerto Rican recovery and excessively high
problem asset levels. Despite the improvements, the prospects for a more normalized
operating environment for the PR banking industry remains at least 18-24 months away, in
our view. In short, the earnings improvement is levered to improving credit costs. Given the
excruciatingly slow pace of problem asset improvement, we would expect reserve levels to
remain elevated in the near term, particularly with still-high associated problem asset inflows
(albeit improved). Organic balance sheet growth will remain a challenge, particularly as the
Puerto Rico economy remains stagnant, as the companies continue to run-off non-core/high
risk portfolios. As such, our EPS estimates imply earnings improvement will emerge, albeit
slowly. Additionally, much of our near term EPS growth remains leveraged to lower credit
costs (reserve release accounting for about 55-65% of ptx. Income) through 2013/2014.
Figure 3: BPOP, DRL, FBP &OFG Cumulative EPS*
Figure 4: BPOP, DRL, FBP &OFG Quarterly EPS
Quarterly $/ Shr 2005-Current
Quarterly Operating EPS - 2Q11-Current
BPOP
DRL
FBP
20.0
OFG
15.0
Cumulative EPS ($/Share)
10.0
5.0
0.0
-5.0
-10.0
-15.0
2Q11 $0.57
($0.07)
($1.18)
$0.24
3Q11 $0.28
($0.29)
($0.82)
$0.11
4Q11 $0.20
$0.07
($0.05)
$0.02
1Q12 $0.60
$0.00
($0.01)
$0.25
($0.03)
$0.05
$0.16
2Q12
-20.0
$0.43
Source: SNL Datasource, Company Data Sterne Agee estimates
Operating income excludes securities gains/losses, FDIC loss share income and other
extraordinary or 1-time items
-25.0
-30.0
-35.0
05'Q1
06'Q1
07'Q1
08'Q1
09'Q1
10'Q1
11'Q1
12'Q1
*Indicates reported EPS per share (diluted)
Despite improvements, performance lagging for the foreseeable future. The improvement
in the PR banking sector has been significant – balance sheet strength, profitability, and credit
risk profile have all been enhanced versus the 2006-2010 era. Despite the credible
improvements, the sector has a long way to go in restoring more normalized profitability and
earnings growth metrics. Problem assets still remain at exceedingly high levels, limiting nearterm opportunities for expense reduction (given high credit-related costs). Additionally, the
Puerto Rican economy remains fragile, and the growth outlook through 2014 is tepid, at best.
As such, organic balance sheet growth and core PPNR improvements will likely be slow to
emerge. Consequently, our 2013 and 2014 estimates imply ROTCE’s of 6-8% and ROAA’s
of 0.60%-0.80% for the group, or substantially lagging US peers – which are expected to
perform at a much higher level – with forward ROTCE’s of 9-11% and ROAA’s of 0.800.90%.
Figure 5: Puerto Rican Banks – Earnings Growth and Profitability Estimates vs. US Peers
Company
Popular, Inc.
Doral Bank*
First BanCorp
Ticker
BPOP
DRL
FBP
OFG
10/22/2012
Price
Rating
$19.19
$0.91
$4.19
$10.26
Neutral
N/R
Neutral
Buy
2011A
$1.98
-$0.16
-$1.33
$0.68
Sterne Agee EPS
2012E 2013E
$1.76
$0.03
$0.09
$0.71
$2.40
$0.25
$0.20
$1.60
2014E
$2.99
NA
$0.30
$1.75
2012E/
2011A
EPS Growth
2013E/
2014E/
2012E
2013E
Implied ROTCE
2012E
2013E
Implied ROAA
2014E
2012E
2013E
2014E
-11%
119%
107%
3%
36%
733%
122%
126%
24%
NA
54%
9%
6.4%
0.8%
1.4%
4.8%
7.2%
5.9%
3.0%
12.5%
7.9%
NA
4.4%
12.5%
0.58%
0.00%
0.14%
0.45%
0.72%
0.00%
0.32%
0.79%
0.85%
NA
0.49%
0.86%
Puerto Rico Average
54%
254%
29%
3.4%
7.2%
8.3%
0.29%
0.46%
0.73%
US Average
-4%
36%
13%
6.8%
9.6%
9.8%
0.74%
0.90%
0.88%
*Indicates consensus estimates
Page 4
October 23, 2012
Figure 6: PR Performance vs. Peers (Puerto Rican Banks, and US Banks $25B-$75B in Assets)
Income Statement Ratios
Fee Income/Total Revenues
Trailing Twelve Months
Doral Financial Corp.
Popular, Inc.
Oriental Financial Group Inc.
First BanCorp.
PR Average
Net Interest Margin
as of 2Q12
DRL
BPOP
OFG
FBP
BOK Financial Corp.
BOKF
Huntington Bancshares Inc. HBAN
TCF Financial Corp.
TCB
Comerica Inc.
CMA
First Niagara Financial Group, Inc.
FNFG
Synovus Financial Corp.
SNV
Zions BanCorp.
ZION
First Republic Bank
FRC
US Average
27.9%
22.3%
15.6%
12.6%
19.6%
Popular, Inc.
First BanCorp.
PR Average
48.0%
37.1%
33.3%
31.6%
23.5%
23.4%
22.4%
11.0%
28.8%
TCF Financial Corp.
TCB
First Republic Bank
FRC
Zions BanCorp.
ZION
SNV
FNFG
BOK Financial Corp.
BOKF
Comerica Inc.
CMA
US Average
Core ROAA
Popular, Inc.
First BanCorp.
PR Average
BPOP
FBP
OFG
DRL
4.4%
3.5%
3.2%
2.9%
3.5%
4.8%
4.3%
3.6%
3.4%
3.4%
3.2%
3.2%
3.1%
3.6%
Core ROAE
OFG
BPOP
FBP
DRL
BOK Financial Corp.
BOKF
First Republic Bank
FRC
Comerica Inc.
CMA
FNFG
Zions BanCorp.
ZION
TCF Financial Corp.
TCB
SNV
US Average
0.4%
0.8%
0.3%
-0.1%
0.4%
Popular, Inc.
First BanCorp.
PR Average
BPOP
OFG
FBP
DRL
1.3%
1.3%
1.2%
0.9%
0.7%
0.7%
0.5%
0.5%
0.9%
First Republic Bank
FRC
BOK Financial Corp.
BOKF
Comerica Inc.
CMA
TCF Financial Corp.
TCB
Zions BanCorp.
ZION
FNFG
SNV
US Average
7.4%
4.2%
3.0%
-0.8%
3.4%
13.8%
11.9%
11.5%
8.2%
5.9%
5.8%
5.5%
4.8%
8.4%
Page 5
October 23, 2012
Figure 7: Credit Metrics vs. Peers (Puerto Rican Banks, and US Banks $25B-$75B in Assets)
Credit Quality
NPA's/Loans + OREO (% )
as of 2Q12
First BanCorp.
Popular, Inc.
PR Average
NCO's/Average Loans
DRL
FBP
OFG
BPOP
SNV
TCF Financial Corp.
TCB
Zions BanCorp.
ZION
Comerica Inc.
CMA
BOK Financial Corp.
BOKF
FNFG
First Republic Bank
FRC
US Average
*Includes Restr. Credit
21.5%
16.8%
15.9%
11.6%
16.4%
8.2%
6.5%
3.5%
2.8%
2.1%
2.0%
1.0%
0.2%
3.3%
Reserve/Total Loans
as of 2Q12
First BanCorp.
Popular, Inc.
PR Average
First BanCorp.
Popular, Inc.
PR Average
FBP
BPOP
OFG
DRL
SNV
TCF Financial Corp.
TCB
Zions BanCorp.
ZION
Comerica Inc.
CMA
FNFG
BOK Financial Corp.
BOKF
First Republic Bank
FRC
US Average
2.0%
1.9%
1.3%
1.2%
1.6%
2.0%
1.2%
0.8%
0.5%
0.4%
0.4%
0.2%
0.0%
0.7%
Loan Loss Provisions/Net Charge Offs
OFG
FBP
BPOP
DRL
Zions BanCorp.
ZION
SNV
BOK Financial Corp.
BOKF
TCF Financial Corp.
TCB
Comerica Inc.
CMA
FNFG
First Republic Bank
FRC
US Average
5.6%
4.4%
3.1%
2.4%
3.9%
Popular, Inc.
First BanCorp.
PR Average
OFG
BPOP
FBP
DRL
2.6%
2.3%
2.0%
2.0%
1.8%
1.5%
0.7%
0.4%
1.7%
FNFG
TCF Financial Corp.
TCB
SNV
Comerica Inc.
CMA
Zions BanCorp.
ZION
BOK Financial Corp.
BOKF
First Republic Bank
FRC
US Average
140.1%
121.7%
48.2%
27.0%
84.2%
177.4%
120.6%
44.8%
17.8%
43.3%
25.0%
-159.0%
NA
38.6%
Figure 8: Capital Adequacy vs. Peers(Puerto Rican Banks, and US Banks $25B-$75B in Assets)
Capital Adequacy
TCE Ratio (% )
as of 2Q12
First BanCorp.
Popular, Inc.
PR Average
Tier 1 Common Capital Ratio
as of 2Q12
FBP
OFG
BPOP
DRL
Comerica Inc.
CMA
BOK Financial Corp.
BOKF
First Republic Bank
FRC
TCF Financial Corp.
TCB
SNV
Zions BanCorp.
ZION
FNFG
US Average
10.5%
9.7%
9.1%
5.8%
8.8%
First BanCorp.
Popular, Inc.
PR Average
OFG
FBP
BPOP
DRL
10.3%
10.1%
8.3%
8.3%
7.6%
7.1%
6.9%
5.7%
8.0%
BOK Financial Corp.
BOKF
First Republic Bank
FRC
Comerica Inc.
CMA
Zions BanCorp.
ZION
TCF Financial Corp.
TCB
SNV
FNFG
US Average
29.2%
13.1%
12.3%
7.4%
15.5%
13.4%
12.0%
10.4%
10.1%
9.8%
9.3%
8.8%
7.4%
10.1%
Tier 1 Risk Based Ratio
as of 2Q12
Popular, Inc.
First BanCorp.
PR Average
OFG
BPOP
FBP
DRL
Zions BanCorp.
ZION
First Republic Bank
FRC
BOK Financial Corp.
BOKF
SNV
TCF Financial Corp.
TCB
Comerica Inc.
CMA
FNFG
US Average
32.5%
16.3%
16.0%
12.9%
19.4%
15.0%
13.7%
13.6%
13.4%
11.9%
10.5%
10.4%
9.4%
12.2%
Page 6
October 23, 2012
Puerto Rican Banking Sector Overview
With roughly $50B in deposits, and 3.7mm people, the Island of Puerto Rico has about the
same size and scale of a mid-sized MSA in the US, comparable to the Seattle-TacomaBellevue, or Tampa-St. Petersburg-Clearwater (in terms of population and market size).
However, the underlying dynamics of the Puerto Rican banking sector are unique; geographic
isolation and cultural distinctiveness form a nuanced local market, necessitating that platforms
have deep management experience on the Island. Consolidation/concentration is the key
theme in the PR banking sector, with the #1 competitor (BPOP) holding over 40% market
share, and the top 4 banks owning roughly 80% share. San Juan represents the largest major
market, with roughly 87% of Puerto Rico’s deposits.
Additionally, with negative deposit growth over the past 5-years, ongoing deleveraging (and
generally poorer overall economic health) the prospects for the banking sector on the island
are subdued, to say the least. With economic growth still anemic, loan growth negative and
deposits still shrinking, the PR market remains relatively unattractive. Despite the recent
OFG/BBVA transaction, our sense is that the status quo is likely to prevail for the time being
– particularly as the macro outlook remains subdued.
Figure 9: Puerto Rico Deposit Market Share
Figure 10: Major Puerto Rican Banking Markets
As of 12/31/2011
As of 12/31/2011
Rank
1
2
3
4
5
6
7
8
Institution
2011
Total
Deposits in
Market
($000)
2011
Number of
Branches
Popular Inc.
First BanCorp.
Santander
Bank of Nova Scotia
Citigroup Inc.
Banesco USA
180
48
63
55
25
46
5
1
20,489
8,314
5,323
5,097
4,178
3,535
3,133
7
Puerto Rico Total
423
50,074
Source: SNL Datasource, Sterne Agee estimates
* OFG indicates pro-forma market share
Figure 11: Puerto Rico vs. Top 30 Mainland MSA’s
2005-Current
Market
Share
(% )
41%
17%
11%
10%
8%
7%
6%
0%
Market
San Juan-Caguas-Guaynabo
Ponce
Aguadilla-Isabela-San Sebastian
Mayaguez
San German-Cabo Rojo
Fajardo
Yauco
Guayama
Other
299
29
24
22
9
9
8
10
9
43,361
1,739
1,372
1,308
672
392
391
381
371
Puerto Rico Total
423
50,074
87%
3%
3%
3%
1%
1%
1%
1%
1%
5-Year
Deposit
CAGR
(% )
-2%
3%
17%
1%
3%
26%
11%
27%
54%
-4%
0%
2%
1%
-1%
2%
4%
5%
3%
-1%
-3%
YoY Loan Growth* – 2003-Current
20%
PR
15%
US
YoY
Deposit
Growth
(% )
Figure 12: Puerto Rican Loan Growth
Deposits Per Capita ($000's)
14
2011 2011 Total
Total
Deposits % of
Branches ($mm)
Total
28
10%
Deposits/Branch ($mm)
PR
118.4
US
100.4
5%
0%
Deposit Growth (5-Yr CAGR)
-5%
-3.3%
PR
US
4.8%
-10%
03'Q1
04'Q1
05'Q1
06'Q1
07'Q1
08'Q1
09'Q1
10'Q1
11'Q1
12'Q1
*Median quarterly loan growth for the 7 Puerto Rico domiciled operating subsidiary banks
*Not adjusted for acquisitions
Page 7
October 23, 2012
Capital
The capital question looms large for the Puerto Rican banks. While all would appear to have
substantial capital buffers, persistently high problem assets levels, weak capital formation,
and a uncertain economic recovery would indicate that the sector would be prudent to
preserve capital Additionally, we would note that US Peers have NPA’s of about 15-20% of
tangible common equity, vs. about 120%, (with variance), for PR peers. Although the PR
banks have been reasonably successful in raising capital and perhaps to a greater extent,
employing a number of preferred/common conversion strategies, and non-core asset sales to
boost capital levels. The sector’s capital footing has improved considerably from 2009 – with
lows of about 3% for TCE (%) and 5% Tier 1 Common (%), in early 2009. To date, the sector
has undertaken a number of equity offerings preferred conversions, raising an aggregate of
roughly $4B since the onset of the downturn. Regardless of the improvements, the sector still
has a number of contingencies relating to capital positions. BPOP is one of the largest
remaining participants in the TARP program, and although FBP converted its UST preferred
into common equity, the UST still retains a 16% ownership stake in the company.
Additionally, BPOP, DRL and FBP, all maintain significant deferred tax assets – which as
Basel III rules are phased in over the next several years, will have an adverse impact on
regulatory capital levels.
Figure 13: Mid Cap Bank Tier 1 Common Ratios
Figure 14: NPA’s vs. Tier 1 Common Capital
Puerto Rican banks vs. US Peers
Puerto Rican banks vs. US Peers
OFG
DRL
29%
FBP
FBP
13%
BPOP
5%
32%
US Peers
10%
0%
84%
OFG
7%
US Peers
135%
BPOP
12%
DRL
303%
10%
15%
20%
25%
30%
14%
0%
35%
50%
100%
150%
200%
250%
300%
350%
*OFG Excludes impact of BBVAPR acquisition
*OFG Excludes impact of BBVAPR acquisition
Figure 15: Puerto Rican Banks – Select Balance Sheet items
Deferred Tax Asset and TARP as a % of Tangible Common Equity as of 2011Y
Company Name
Ticker
Popular, Inc.
Doral Finl. Corp.
First BanCorp
Oriental Finl. Group
BPOP
DRL
FBP
OFG
2011Y
Gross
TCE
$mm
DTA
$mm
3,156
483
1,341
624
1,943
545
387
56
DTA
% of
TCE
62%
113%
29%
9%
Allowance
$mm
1,259
433
369
3
Puerto Rico Median
45%
1. Net DTA equals gross DTA net of allowance and deferred tax liabilities
*FBP converted $424mm of TARP preferred into 32.9mm common shares in October, 2011
Net
% of
TCE
40%
90%
28%
0%
34%
TARP
DTA1
$mm
% of
TCE
405
111
5
32
13%
23%
0%
5%
9%
Preferred
$mm
935
0
0
0
% of
TCE
30%
NA
NA
NA
30%
Page 8
October 23, 2012
Figure 16: Puerto Rican Banks Capital Raising Activity 2009-Current
Total Equity
Company
Ticker
Common
Preferred
Capital
Stock
Exchanges
Raised
1,150 1
934
DRL
180 2
221
401
First BanCorp
FBP
528 3
912
1,440
OFG
100 4
0
100
Popular, Inc.
BPOP
Doral Bank
Puerto Rico Total
2,084
4,025
Notes
1. BPOP's public offering was for $1.15B in Depositary Shares, which represented 1/40th interest in Series D Contingent Convertible Perpetual Non-Cumultaive
Preferred Stock. The preferred stock represented by the depositary share automatically converted in 8.33 common shares per depositary share
2. DRL initially raised $600mm in a private placement; however, $420mm was contingent on closing an FDIC assisted transaction, which was not closed. The
company retained $180mm in equity capital.
3. FBP preferred exchanged includes $424 TARP preferred/common exchange. $528mm common equity via private placement among several private equity
investors
4. OFG excludes capital raised in pursuant to BBVAPR transaction
Figure 17: Puerto Rico vs. US Peers - TCE (%)
Figure 18: Puerto Rico vs. US Peers – Tier 1 Common (%)
Quarterly TCE (%) 2007-Current
Quarterly Tier 1 Common Ratio (%) 2007-Current
14.0
13.0
9.0
12.0
8.0
Tier 1 Common Capital Ratio (%)
Tangible Common Equity / Total Assets(%)
10.0
7.0
6.0
5.0
4.0
3.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
2.0
2007Q3
2008Q3
PR Banks Median
2009Q3
2010Q3
2007Q3
2011Q3
Mainland Mid Cap Banks Median
2008Q3
2009Q3
PR Banks Median
2010Q3
2011Q3
Figure 19: Puerto Rico vs. US Peers – Return on Equity
Figure 20: Puerto Rico vs. US Peers – Return on Assets
Core ROAE (%) 2007-Current
Core ROAA (%) 2007-Current
15.0
1.5
10.0
1.0
5.0
0.5
Core ROAA (%)
Core ROAE (%)
0.0
-5.0
0.0
-0.5
-10.0
-1.0
-15.0
-1.5
-2.0
-20.0
2007Q3
2008Q3
PR Banks Median
2009Q3
2010Q3
2011Q3
2007Q3
2008Q3
PR Banks Median
2009Q3
2010Q3
2011Q3
Page 9
October 23, 2012
Puerto Rican Economy
The island economy has been troubled for roughly the last 5-6 years, as an already
underdeveloped economy (overly reliant on Federal aid, leveraged to local government for job
growth, employing 29% of Puerto Rican workers) was hit hard by a collapse in real estate
values beginning in 2006 post the elimination of certain tax benefits. Additionally, given that
the services industry employs roughly 30% of the Puerto Rican population, the drop in tourist
expenditures from 2007-2009 (owing largely to the US recession) only exacerbated the
Commonwealth’s problems. Although the broader US economy endured a contraction of
3.5% in 2009 (preceded by a modest 0.02% contraction in 2008), the recovery remains in
positive territory, with an outlook for roughly 1.5-2.0% growth this year. Puerto Rico, on the
other hand entered the recession earlier, and has experienced a deeper and more prolonged
downturn than the mainland US. Although the economy seems to have stabilized, broader
economic activity appears subdued. There also remains significant slack in the labor market,
in addition to continuing declines in real-estate values. Unemployment has stabilized under
15% (vs. 7.8% for the US), although some of the improvement is attributable to a marked
decline in the labor force participation rate (40% vs. 48%), and broader economic activity
appears to have stabilized, albeit at levels 15-20% lower than pre-crisis levels.
Additionally, ongoing concerns regarding the Commonwealth’s $65.1B in public debt
(concurrent with still-depressed tax revenues), ongoing downgrades of the PR banking sector,
still-weak housing market and prospects for a slow economic recovery, leave us skeptical of
any broad-based material near-term improvement in credit quality and profitability prospects.
Figure 21: Puerto Rico Real GNP % Change
Figure 22: GDB Economic Activity Index
2005-2012E
2005-Current
160
3%
1.9%
2%
1%
155
0.7%
0.5%
150
0%
145
-1%
140
-1.0%
-1.2%
-2%
135
-3%
130
-2.9%
-4%
-4.0%
-3.8%
2009
2010
125
-5%
2005
2006
2007
2008
2011E
120
Jan-05
2012E
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Source: Government Development Bank for Puerto Rico
Figure 23: Unemployment and Labor Force Participation
2005-Current
Figure 24: Puerto Rico HPI – Purchase Only Index
50%
200
23%
48%
190
21%
46%
180
19%
44%
17%
42%
15%
40%
13%
38%
11%
36%
9%
34%
7%
32%
120
30%
Jul-12
110
5%
Jul-05
Jul-06
Jul-07
Jul-08
Unemployment Rate
Jul-09
Jul-10
Jul-11
Labor Force Participation
Source: Company, Government Development Bank for Puerto Rico
Jan-12
Housing Price Index 1995-Present
25%
Index: 1995 = 100
Labor Force Participation
Unemployment Rate
Source: Puerto Rico Planning Board
170
160
150
140
130
100
Q1'95 Q3'96 Q1'98 Q3'99 Q1'01 Q3'02 Q1'04 Q3'05 Q1'07 Q3'08 Q1'10 Q3'11
Source: FHFA
Page 10
October 23, 2012
Credit Quality
Puerto Rico credit quality stabilizing, although problem asset levels remain elevated.
Although problem asset portfolios have generally decreased from peak levels, the pace of
improvement amongst the PR Banks has been slow (albeit consistent) as NPA’s fell only
about 4-6% from 2Q11, and 25-30% from 2Q10, well behind mainland peers, which have
seen a roughly 45-50% drop in NPA’s over the last 24 months. Overall the inflection point
and subsequent improvement in problem asset levels (in addition to associated loss content),
has been subdued for the Puerto Rican banks, reflective of the ongoing sluggishness of the
island economy, and still-fragile state of the Commonwealth’s economy, including the
financial services sector.
Unwinding the mortgage morass. On balance, roughly 50% of the sector’s non-performing
assets are tied to residential real estate, vs. about 25% for US peers. While the PR housing
market has stabilized, elevated levels of non-performing 1-4 family loans remain problematic,
particularly in a relatively isolated economy with little housing stock turnover. Bulk asset
sales would appear a viable option to alleviate the economic strain of extremely high NPA’s.
However, with a limited pool of potential buyers, and an apparent strategic preference to
work-out distressed mortgages (and sell commercial assets) meaningful improvement via
assets sales appears limited in the near-term.
Figure 25: Puerto Rican Banks vs. US Peers – Non-Performing Loan Composition
Company
First BanCorp.
Popular, Inc.
Ticker
Total
NPL's
2Q12
($mm)
1-4
Family
(%)
Consumer
DRL
FBP
OFG
BPOP
801
1,053
122
1,826
Puerto Rico Average
BOK Financial Corp.
Comerica Inc.
TCF Financial Corp.
First Republic Bank
Huntington Bancshares Inc.
Zions BanCorp.
BOKF
CM A
FNFG
TCB
FRC
HBAN
SNV
ZION
144
719
129
324
29
474
786
793
US Average
Comml.
HELOC
(%)
Other
Consumer
(%)
Total
Consumer
(%)
C&I
(%)
CRE
(%)
Multifam.
(%)
Constr.
(%)
Total
Comml
(%)
Other
(%)
61%
31%
75%
38%
0%
0%
0%
0%
0%
2%
0%
1%
61%
33%
76%
40%
0%
8%
2%
7%
24%
35%
19%
32%
0%
1%
1%
2%
15%
13%
3%
14%
39%
57%
24%
56%
0%
9%
0%
4%
51%
0%
1%
52%
4%
28%
1%
11%
44%
3%
16%
13%
22%
41%
66%
25%
13%
11%
1%
3%
15%
4%
12%
5%
3%
2%
4%
1%
1%
1%
0%
0%
0%
0%
22%
17%
38%
45%
79%
31%
16%
13%
12%
22%
28%
4%
4%
24%
8%
14%
35%
40%
25%
28%
1%
35%
19%
51%
2%
0%
5%
2%
17%
2%
1%
2%
26%
18%
5%
9%
0%
6%
51%
17%
76%
80%
62%
43%
21%
68%
79%
84%
3%
3%
0%
12%
0%
1%
5%
2%
26%
6%
1%
33%
14%
29%
4%
16%
64%
3%
Figure 26: Puerto Rican Banks vs. US Peers – Cumulative Losses 2007-2011 and Current Reserves
Company
First BanCorp.
Popular, Inc.
Ticker
Total
Loans
2006Y
($mm)
Cum.
NCO's
2007Y-2012Y
($mm)
Cum.
NCO's
2007Y-2012Y
(%)
2Q12
NPL, 90+
& OREO
(%)
2Q12
Reserve/
NPA's &
90+ PD
(%)
DRL
FBP
OFG
BPOP
3,457
11,229
1,210
32,017
312
1,435
33
3,565
9%
13%
3%
11%
15.3%
12.8%
20.3%
13.8%
10.6%
24.0%
23.8%
19.6%
9%
15.6%
19.5%
4%
5%
2%
7%
15%
16%
9%
3.2%
2.0%
1.4%
3.4%
1.7%
4.8%
2.8%
59.5%
67.7%
45.0%
26.7%
66.9%
27.5%
62.2%
8%
2.7%
50.8%
Puerto Rico Average
BOK Financial Corp.
Comerica Inc.
TCF Financial Corp.
Huntington Bancshares Inc.
Zions BanCorp.
BOKF
CM A
FNFG
TCB
HBAN
SNV
ZION
10,651
47,431
5,662
11,334
26,153
24,655
34,415
US Average
403
2,380
132
748
4,024
4,004
3,071
Page 11
October 23, 2012
Figure 27: Credit Quality: Banks $5B - $75B in assets
Largest NPA Portfolios – 2Q12
Company Name
First BanCorp.
Popular, Inc.
Flagstar Bancorp, Inc.
Washington Federal, Inc.
Glacier Bancorp, Inc.
United Community Banks, Inc.
CapitalSource Inc.
Total
Assets
($B)
8.3
12.9
6.4
36.6
14.4
13.5
26.3
7.4
6.7
8.6
Ticker
DRL
FBP
OFG
BPOP
FBC
WAFD
SNV
GBCI
UCBI
CSE
NPA's
(% )
2012Q2
21.5
16.8
15.9
11.6
10.0
8.6
8.2
7.9
6.9
6.7
*Includes restructured credit
Figure 28: Puerto Rico vs. US (NPA’s / Loans + OREO)
Figure 29: Puerto Rico vs. US (NCO’s / Avg. Loans)
NPA’s (%) 2005-Current
NCO’s (%) 2005-Current
18
5.0
16
4.5
4.0
14
3.5
NCO's / Avg Loans (%)
NPA Loans (%)
12
10
8
6
3.0
2.5
2.0
1.5
4
1.0
2
0.5
0
2005Q1
2006Q1
2007Q1
2008Q1
PR Banks Median
2009Q1
2010Q1
2011Q1
2012Q1
0.0
2005Q1
2007Q1
2008Q1
PR Banks Median
2009Q1
2010Q1
2011Q1
2012Q1
Figure 31: Puerto Rico vs. US (Loan Loss Provision)
Figure 30: Puerto Rico vs. US (Loan Loss Reserve)
Loan Loss Reserve (%) 2005-Current
Loan Loss Provision (%) 2005-Current
4.5
200
4.0
180
160
Loan Loss Provision/NCO (%)
3.5
3.0
ALL/Loans (%)
2006Q1
2.5
2.0
1.5
140
120
100
80
60
1.0
40
0.5
20
0.0
2005Q1
2006Q1
2007Q1
2008Q1
PR Ba nks Media n
2009Q1
2010Q1
Ma inla nd Mid Ca p Ba nks Media n
2011Q1
2012Q1
0
2005Q1
2006Q1
2007Q1
PR Banks Median
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
Page 12
October 23, 2012
Valuation
Below average performance metrics, earnings volatility, keep Puerto Rican Banks at a
meaningful discount to other mid-cap banks.
Currently trading at a median of 0.60x TBV, and 6-8x forward earnings, Puerto Rican banks,
on balance are trading at about a 50% discount (on a price/TBV basis) to US mid-cap banks.
While the group’s valuation has varied wildly in the pre and post-crisis environments, the
directional trend has been unmistakable – as the sector’s price/TBV multiple has plunged
from a peak of nearly 3.5x in 2004 to roughly 0.60x currently. Additionally, while PR Banks
have historically traded at about 70-75% of the US peer multiple (on a P/TBV basis), the
valuation gap has widened post the Puerto Rican downturn, with the group now trading at
roughly 45-55% of US peers. Furthermore, the group’s 6-8x forward multiple also represents
a roughly 25-30% discount to its 9-10x 10-year median. While the valuation appears
attractive on both relative and absolute basis, below-average profitability metrics (and high
cost of capital), ongoing weakness in Puerto Rico, and capital overhangs (TARP, DTA) will
likely keep the group’s multiple subdued in the near/medium term.
Figure 32: PR Banks Valuation – Price/TBV
Figure 33: PR Banks Relative Valuation – Price/TBV
vs. Other PR Banks, 2002-Present
vs. PR and US Peers, 2002-Present
400
400
160%
Current: 0.62x
Relative to US: 50%
350
350
140%
300
120%
250
100%
200
80%
150
60%
100
40%
50
20%
P/TBV (x)
300
250
200
150
100
50
0
10/02
10/03
10/04
10/05
10/06
10/07
BPOP
10/08
FBP
10/09
10/10
10/11
0
10/02 10/03 10/04 10/05 10/06 10/07 10/08 10/09 10/10 10/11 10/12
10/12
PR Banks (absolute)
OFG
Discount/Premium
450
0%
Relative to US Peers
Source: Company Data, Sterne Agee estimates
*DRL excluded due to lack of data from 2008-2010
Figure 34: Puerto Rican Banks vs. US Peers – Current vs. Historical Valuation
Company
Puerto Rican Banks
Popular Inc.
First BanCorp.
Symbol
BPOP
DRL
FBP
OFG
Total
Assets
Closing
Price
37
8
13
6
19.19
0.91
4.19
10.26
52 Wk
High
23.20
2.00
4.99
12.69
% of
High
83%
45%
84%
81%
2013E
EPS
2.50
0.25
0.20
1.60
LTM
10-Year
Current vs.
EPS
Price/
P/FYE
Hist.
Historical
Growth
(%)
2013E
(x)
Multiple
(x)
Multiple
(x)
1-Yr
10-Yr
22%
733%
122%
126%
7.7
3.6
21.4
6.4
5.0
3.5
NA
6.4
10.8
8.5
11.6
8.1
54%
4%
NA
1%
-29%
-57%
85%
-21%
Puerto Rican Median
82%
124%
7.0
5.0
9.6
42%
-27%
US Mid-Cap Median
89%
3%
11.5
10.2
13.2
13%
-13%
Page 13
October 23, 2012
Figure 35: BPOP Puerto Rico and US Bank Peer Group – Valuation Metrics
Company Name
Ticker
Price
10/22/2012
Doral Financial Corporation
First BanCorp.
Popular, Inc.*
DRL
FBP
OFG
BPOP
0.91
4.19
10.26
19.19
PR Banks Average
BOK Financial Corporation
Comerica Incorporated
First Republic Bank
Huntington Bancshares Incorporated
Synovus Financial Corp.*
TCF Financial Corp.
Zions Bancorporation*
BOKF
CMA
FNFG
FRC
HBAN
SNV
TCB
ZION
57.65
29.57
8.32
34.07
6.46
2.41
11.09
21.45
$25-$75B Asset Average
Mkt. Cap
($B)
Yield
52 Wk Range
High
Low
0.12
0.89
0.42
1.95
0.0%
0.0%
2.3%
0.0%
2.00
4.99
12.69
23.20
0.84
0.6%
3.93
5.69
2.91
4.41
5.54
1.85
1.79
3.95
2.6%
2.0%
3.9%
1.2%
2.5%
1.7%
1.8%
0.2%
3.76
2.0%
60.00
34.00
10.35
34.89
7.25
2.51
12.58
22.81
0.56
2.89
9.73
10.80
48.36
22.69
7.14
24.74
4.66
1.25
9.46
14.52
1 day
% Change
YTD
12mo
2.97
-4.56
1.89
-0.47
-5.2
20.1
-15.3
38.1
-28.1
41.6
-2.2
14.9
0.0
9.4
6.5
-0.19
-0.27
0.48
0.21
-2.27
0.42
0.09
-0.14
5.0
14.6
-3.6
11.3
17.7
70.9
7.5
31.8
17.4
27.8
-13.4
31.8
23.3
89.8
4.1
30.6
-0.2
19.4
26.4
Consensus EPS Est
2012E
2013E
2014E
2014E
TCE
Ratio
(% )
Tier 1
Ratio
(% )
TBV
($)
Price
Book
3.6x
15.2x
8.2x
8.1x
NA
13.1x
5.5x
6.4x
5.8
10.5
9.7
9.1
12.9
16.0
32.5
16.3
3.79
6.25
15.23
32.15
0.2x
0.7x
0.7x
0.6x
29.8x
8.8x
8.3x
8.8
19.4
14.36
0.5x
0%
4%
10%
0%
4%
47%
26%
13%
11.4x
11.2x
11.4x
12.5x
9.4x
26.8x
NA
18.5x
12.6x
11.3x
10.7x
11.7x
9.9x
17.2x
10.8x
12.2x
12.6x
10.9x
9.8x
11.6x
9.4x
11.7x
8.6x
10.8x
10.1
10.3
5.7
8.3
8.3
7.1
7.6
6.9
13.6
10.4
9.4
13.7
11.9
13.4
10.5
15.0
37.29
32.76
5.30
19.58
5.49
2.05
8.23
19.65
1.5x
0.9x
1.6x
1.7x
1.2x
1.2x
1.3x
1.1x
13%
14.5x
12.0x
10.7x
8.0
12.2x
16.3x
1.3x
June
SI/
Shares
(% )
2012E
P/E
2013E
NA
16%
50%
26%
30.2x
59.9x
18.0x
11.0x
295%
31%
39%
200%
-16%
24%
260%
NA
NA
NA
-9%
-1%
6%
7%
-4%
56%
NA
52%
102%
15%
Price Performance - Rolling
Three
Six
7 Day
1 Month
Month
Month
12
Months
YTD
0.03
0.07
0.57
1.74
5.04
2.64
0.73
2.72
0.68
0.09
-1.21
1.16
0.25
0.28
1.25
2.37
4.59
2.61
0.78
2.91
0.66
0.14
1.02
1.76
NA
0.32
1.87
2.99
4.59
2.71
0.85
2.93
0.68
0.21
1.29
1.98
12/11
EPS Growth
13/12
14/13
NA
NA
NA
NA
733%
293%
118%
36%
NA
* Indicates Sterne Agee EPS Estimates
Figure 36: BPOP Puerto Rico and US Bank Peer Group – Price Performance and Trading Metrics
Company Name
Ticker
Price
10/22/2012
Doral Financial Corporation
First BanCorp.
Popular, Inc.
DRL
FBP
OFG
BPOP
0.91
4.19
10.26
19.19
PR Banks Average
BOK Financial Corporation
Comerica Incorporated
First Republic Bank
Huntington Bancshares Incorporated
TCF Financial Corp.
Zions Bancorporation
BOKF
CMA
FNFG
FRC
HBAN
SNV
TCB
ZION
$25-$75B Asset Average
57.65
29.57
8.32
34.07
6.46
2.41
11.09
21.45
Mkt. Cap
($B)
Yield
High
Low
1 Day
0.12
0.89
0.42
1.95
0.0%
0.0%
2.3%
0.0%
2.00
4.99
12.69
23.20
45%
84%
81%
83%
62%
45%
5%
78%
3%
-5%
2%
0%
-8%
-2%
-1%
5%
-21%
-6%
-9%
5%
-38%
15%
-6%
34%
-46%
7%
-9%
5%
-28%
42%
-2%
15%
-5%
20%
-15%
38%
0.84
0.6%
73%
47%
0%
-1%
-8%
1%
-11%
7%
9%
3.93
5.69
2.91
4.41
5.54
1.85
1.79
3.95
2.6%
2.0%
3.9%
1.2%
2.5%
1.7%
1.8%
0.2%
96%
87%
80%
98%
89%
96%
88%
94%
19%
30%
17%
38%
39%
93%
17%
48%
0%
0%
0%
0%
-2%
0%
0%
0%
-1%
-4%
4%
2%
-7%
2%
0%
-2%
-2%
-8%
1%
1%
-8%
-2%
-8%
1%
0%
-5%
7%
4%
-1%
23%
8%
11%
7%
-7%
-9%
2%
0%
16%
1%
2%
17%
28%
-13%
32%
23%
90%
4%
31%
5%
15%
-4%
11%
18%
71%
7%
32%
3.76
2.0%
91%
38%
0%
-1%
-3%
6%
2%
26%
19%
60.00
34.00
10.35
34.89
7.25
2.51
12.58
22.81
0.56
2.89
9.73
10.80
48.36
22.69
7.14
24.74
4.66
1.25
9.46
14.52
% of
Montly Short Interest
52 Wk Range
High
Low
March
3,380
2,919
2,502
1,587
881
9,045
10,495
2,521
9,619
54,425
10,435
17,306
April
3,374
1,043
2,346
955
817
8,634
11,477
1,021
7,160
51,382
12,206
16,813
May
3,924
293
2,534
1,154
815
8,618
5,802
991
19,580
48,814
9,614
16,203
3,062
2,280
4,553
2,649
510
8,305
9,332
2,668
13,377
54,186
9,314
14,016
Days
to
cover
3- Month
Traling
Beta
2.4
1.1
11.2
2.6
7.2
8.2
19.8
2.2
1.1
1.5
1.3
1.2
4.3
9.4
1.3
0.7
4.3
2.6
2.0
1.6
6.9
5.7
7.6
9.8
4.1
2.7
5.5
1.4
8.1
5.6
6.1
0.8
1.4
1.2
3.9
5.4
1.2
1.4
1.4
1.4
1.1
Source: Factset, Company Data, Sterne Agee estimates
Page 14
October 23, 2012
Price Performance
Price performance for Puerto Rican banks (as a whole) has been challenged, to say the least.
After outperforming the KBW bank index in 2004 (+41%, vs. 7% for the BKX), the PR peer
group has underperformed the BKX by a cumulative 219% from 2005-2012. Additionally,
the group has not posted a positive year since 2004, with 2006 representing the most recent
high-water mark at -19%. YTD, prospects are looking modestly better, with the 4 banks up
an average 9% (un-weighted), although this remains below the roughly 28% move for the
BKX. YTD, BPOP has been the strongest performing PR bank, up roughly 38% YTD,
followed by a 20% gain for FBP shares. OFG has lagged somewhat, down -15.3%, however,
we would note that its announced acquisition of BBVAPR and subsequent capital raise has
likely contributed to the YTD underperformance. Since 2009, OFG shares have easily fared
the best of the PR banking sector, up about 70% vs.65-95% declines for the remaining banks.
Figure 37: Annual Price Performance
BPOP, PR Banks, BKX and S&P500
Figure 38: Cumulative Price Performance 2009-Current
BPOP, DRL, FBP, OFG and BKX
60%
200%
40%
150%
OFG 70%
20%
100%
0%
50%
-20%
BKX 14%
-40%
0%
BPOP --63%
-60%
-50%
DRL -88%
FBP -97%
-80%
2004
2005
2006
2007
2008
PR Banks
2009
KBW Bank Index
2010
2011
YTD
SPX
Source: Company, Sterne Agee estimates
-100%
Jan-09
May-09
Oct-09
Mar-10
Aug-10
Dec-10
May-11
Oct-11
Mar-12
Jul-12
Sentiment overwhelms fundamentals in driving valuation
Although the group’s earnings stream has historically been somewhat erratic (given a number
moving parts imbedded in each company’s operating structure), we would note that the Puerto
Rican banks’ valuations are unusually decoupled from fundamentals. The historical
correlation between ROTCE and P/TBV for banks tends to be very strong-estimated between
75-85%. However, measuring the PR bank’s results in raw form produces an R-squared of
about 46%, and adjusting the data to exclude outliers (ie, outsized losses), yields an R-squared
of only 49%. As exhibited below, investor perception of the group can swing wildly, even in
periods of relative prosperity, where the price/tangible book multiple can vary by up to 5075% given certain performance metrics. Thus, while tangible improvement may be slow to
emerge for the sector (in terms of earnings power/profitability), modest changes in perception
will have an outsized impact on the company’s valuation and price performance.
Figure 39: PR Banks: Regression Analysis
Quarterly Price/TBV, 2008-Present
Figure 40: : PR Banks: Adjusted Regression Analysis
Quarterly Price/TBV, 2008-Present (Excludes Outliers)
350
R2 = 46%
R2 = 49%
350
300
300
250
Price/Tangible Book (%)
Price/Tangible Book (%)
250
200
150
100
200
150
100
50
50
0
-50%
-40%
-30%
-20%
-10%
0%
-50
10%
20%
30%
40%
50%
60%
0
-20%
ROTCE
-10%
0%
10%
20%
ROTCE
30%
40%
50%
60%
Page 15
October 23, 2012
FIRST BANCORP (FBP; NEUTRAL - $4.19)
INVESTMENT SUMMARY
Turnaround story continues with profitability emerging in 2Q12, however persistently
elevated problem assets, weak core operating profitability, keep on the sidelines. To be sure,
FBP has made considerable strides in restoring the company’s profitability, reducing balance
sheet risk, and most importantly, taking pro-active steps to shore up the bank’s capital buffer.
With the company reporting its first quarterly operating profit since 2009 in 2Q12, FBP has
reached a very important milestone. The trajectory of the company’s improvement appears
intact, and FBP’s deep discount to tangible book value certainly makes FBP shares an
attractive risk/reward proposition. However, while the path appears clear for FBP shares to
achieve multiple expansion from the current depressed levels (0.67x TBV), we remain
somewhat cautious given 1) unsustainably high levels of problem assets with NPA’s (11.8%
in 2Q12) with an outlook for only modest near term improvement 2) limited capital flexibility
tied to NPA’s and poor capital formation 3) Subdued growth prospects given anemic Puerto
Rican economy, and 4) lagging “normalized” profitability/return metrics vs. domestic peers.
Additionally, the top 3 holders of FBP stock own a combined 65% of the outstanding shares,
which includes the 16% position held by the UST treasury (FBP converted its $424mm TARP
into common equity in late 2011). Additionally, the company remains under a Written
Agreement with the Federal Reserve.
Although the company has remained opportunistic in certain respects, including a $450mm
loan sale in 2011, and a 2Q12 Credit Card portfolio purchase ($405mm), heavy lifting
remains in order to fully rehabilitate the company’s operating profile. Our sense is that it will
likely be 2014 and beyond before more normalized profitability metrics emerge. Additionally,
as FBP has a valuation allowance of $367mm allocated against its deferred tax assets
(representing roughly $1.25/shr accretion to tangible book value) there certainly exists greater
intrinsic value than currently reflected in the company’s stated tangible book value. However,
it will be 2014, at the earliest, before the company can begin to unwind its DTA. With
ongoing uncertainty regarding the strength of Puerto Rican economy (and 50/50 odds of a US
recession in 2013), the looming macro risks currently outweigh what has otherwise been a
credible turnaround story. NEUTRAL
Valuation and Target
FBP’s stock price is up about 20% in 2012, or in-line with the SALI bank index. However,
FBP currently trades at a deep discount to tangible book value, at 0.67x TBV on an absolute
basis, and a significant discount to the US domestic peer median at 1.3x TBV. While the
company’s price performance has been largely positive through 2012, we would note that
discounted banks (banks trading below TBV at 12/31/2011) in the SALI bank index have
outperformed significantly through the year, or increased 37%, on average, vs. the 16% YTD
gains for those trading at a premium to TBV. Our 2013 and 2014 estimates are $0.20 and
$0.30, respectively, which reflects primarily lower credit costs (ie lower provisioning), and
only modest PPNR growth in 2013/2014. Furthermore, our estimates imply an ROTCE of 35% and ROAA of 40-50bps through 2013/2014, or significantly lower than domestic US
banks. Our 12-month target valuation of $5 implies 0.76x 2013 estimated tangible book value
and 25-30x our 2013 earnings estimate of $0.20/share.
Risks
The primary risks to our thesis is a weaker than expected Puerto Rican economy, including
the potential for a double dip recession, and a protracted period of historically low interest
rates, including the potential for a deflationary operating environment. FBP’s balance sheet
remains asset sensitive and remains vulnerable to an extended period of low interest rates
and/or deflation. Additionally, FBP has a highly concentrated shareholder base, with the top-3
shareholders (Oaktree Capital [OAK, $41.70, NR], Thomas H Lee Partners and the US
Treasury) owning approximately 65% of the company’s outstanding shares – with the
possibility of a significant liquidity event potentially depressing the company’s share price.
Page 16
October 23, 2012
Key Investment Themes
Back in the black – but consistent profitability yet to emerge. The company posted its first
reported operating profit since 2009, in the most recent quarter, a significant milestone, to be
sure. While the company’s earnings trajectory appears on track, on our estimates imply
positive earnings in 2H12-2014, we would note that our estimates imply still-weak
profitability levels over the next two years. With an implied ROTCE of 3-4% through 2014,
this remains significantly below US peers, and below FBP’s Puerto Rican competitors, BPOP
and OFG. Additionally, we would note that roughly 80% of next year’s earnings are
leveraged to reserve release ($40mm or reserve release, ptx, vs. $50mm ptx net income).
Core PPNR growth is expected to remained subdued, up 7-9% in 2013E (owing to improved
margin/net interest income), and 2-3% in 2014. While our view remains the FBP turnaround
remains in-tact, the company is still several years away from more normalized core growth
and profitability metrics. Additionally, with a historically volatile earnings stream, the
prospect of falling back into negative territory is less than remote, and could prove damaging
to the psyche of investors seeking to trade on the FBP recovery story.
Credit quality improving, but problem loans still represent a concerning 12% of loans. On
an absolute basis, the company’s NPA portfolio has improved since reaching a peak of about
$1.8B in 1Q12 (including the $64mm LEH swap receivable), down to about $1.3B in 2Q12.
Although the absolute reduction in NPA’s has certainly improved the company’s operating
profile, at roughly 11.81% of loans OREO (adjusted for LEH receivable), problem asset
levels remain dangerously elevated. Additionally, improvement has been modest, with NPA’s
declining 1-2% on a linked quarter basis since 2011, and with prospects for meaningful nearterm improvement limited at this point. SALI 2013 EPS implies a 15-20% reduction in
NPA’s, which still corresponds to 8-9% Loans+OREO. Currently, FBP’s NPL portfolio
consists of 31% resi mortgage, 24% C&I, 23% CRE and 19% construction, with mortgage
assets notoriously difficult showing stubbornly little improvement. While the company
executed a bulk loan sale in 2011 ($516mm UPB via a joint venture with Goldman Sachs and
Caribbean Property Group), expectations for meaningful bulk sales are limited in the near
term, despite that the company continues to conduct diligence on asset sales. Indications are
that the company prefers to work-out residential mortgage loans, while selling pools of small
CRE/C&I and REO assets, consistent with the other Puerto Rican banks.
Figure 41: FBP Adversely Classified Loans
Total $ and % of Loans Since 4Q10
Figure 42: Troubled Debt Restructurings
Total TDRs Since 4Q10
1,250
1,200
20.4%
900
20.2%
800
1,150
700
20.0%
1,100
600
($MM)
1,000
19.6%
950
($MM)
19.8%
1,050
500
400
19.4%
300
900
19.2%
850
800
750
4Q10
1Q11
2Q11
3Q11
Total Adversely Classified
4Q11
1Q12
As % of Total Loans
2Q12
200
19.0%
100
18.8%
0
4Q10
1Q11
Non-FHA/VA Resid. Mortgages
2Q11
3Q11
Comml Mortgage Loans
4Q11
C&I Loans
1Q12
Const Loans
2Q12
Other
Page 17
October 23, 2012
Repositioning deposit mix to enhance net interest margin. FBP still continues to hold a high
level of brokered deposits, which represent roughly 35% of the company’s total deposit base.
While core deposit flows have been relatively positive for the company, the drag from
brokered CD’s remains meaningful, with higher cost CD’s adding roughly 15bps to the
company’s cost of deposits on a quarterly basis. Overall, however the company’s deposit
costs have decreased to 1.13%, from 1.54% in the prior year’s quarter. A substantial
improvement, to be sure, but still well above the 40-50bps average for US peers. With
roughly 60-70% of FBP’s brokered CD’s expected to run-off over the course of 2013, we
would expect a benefit to the net interest margin of about 10-15bps in 2013, as deposit costs
continue to shrink, offsetting pressure on asset yields.
Re-mixing asset portfolio to reduce risk profile, maximize growth prospects. FBP’s loan
portfolio has decreased roughly 22% since 2010, as the company continues to right-size its
balance sheet and re-align its risk profile. Importantly, the company has run-off its
construction portfolio from $1.5B in 2009 (11% of loans) to just under $400mm at 2Q12.
The company’s balance sheet is roughly 54% commercial/CRE, 27% residential, and about
15% consumer. However, the company has undertaken a largely consumer-based approach
in its loan growth strategy, targeting personal loans, resi mortgage auto/leasing/ and card as
growth opportunities. Although production volumes are off of a somewhat low base,
consumer loan production of $203mm in the quarter represented a 27% increase – offsetting
ongoing maturities/paydowns of commercial assets.
Figure 43: FBP Deposit Composition
$9.9B as of 2Q12
Figure 44: FBP Brokered CDs by Maturity
$4.8B as of 2Q12
Non-interest bearing
checking accounts
8%
> 1 year
31%
6 mos. - 1 year
Brokered CDs
35%
29%
Savings accounts
23%
3-6 mos.
21%
Interest-Bearing
checking accounts
11%
< 3 mos.
19%
Certificates of deposit
23%
10%
15%
20%
25%
30%
35%
as % of Total Brokered CDs
Figure 45: FBP Gross Loan Portfolio
$13.9B as of 2009
Figure 46: FBP Gross Loan Portfolio
$9.9B as of 2Q12
Other consumer
16%
Other consumer
18%
Residential mortgage
26%
28%
Construction
11%
C&I
36%
Construction
4%
C&I
35%
CRE
11%
CRE
15%
Page 18
October 23, 2012
2Q12 Earnings Review
Turning the corner on profitability
FBP reported 2Q12 EPS of $0.05/share, in a quarter that what largely an extension of ongoing
incremental improvement for the company. Although only a modest gain, the quarter’s
results represented the first reported positive net income (ex. gains from preferred
conversions) since 2009. Overall, a significant milestone for the company as it continues to
work towards sustained profitability. Although earning asset were down somewhat in the
quarter, the company’s NIM was better than expectations at 3.50%, and overall PPNR
increased to $39.5mm in the quarter - driven primarily by improved net interest income.
Problem asset levels continue to trend modestly downward, and the company showed modest
expense leverage in the quarter, as FBP’s efficiency ratio improved to 68.7%, from 71.4% in
1Q12.
Credit quality continue to incrementally improve
NPA’s of $1.3B were down about 2% from 1Q12, with NPL’s falling 5% to $1.1B. The
improvement in problem assets was fairly broad based, as FBP had sequential quarter
decreases across the company’s problem asset portfolio. Construction continues to show the
most marked improvement, with NPL’s down 13% (to $202mm). FBP’s three largest NPL
buckets, mortgage, C&I and CRE (a combined $828mm in NPLs, or roughly 78% of total
NPA’s), all showed incremental improvements from 1Q12, with commercial NPLs down 3%
to $255mm, CRE down 2% to $239mm and residential mortgage down 2% to $333mm.
Net charge-off’s of $52mm were up $5mm from the previous quarter, due largely to an
increase in resi mortgage NCO’s, which increased to $14.2mm (from $5.7mm), owing to
updated real estate appraisal values. Beyond resi mortgage, NCO’s were somewhat mixed, as
an increase in CRE charge-offs (to $6.3mm from $3.6mm in 1Q12) were offset by an
improvement in C&I (to $8.4mm from 12.7mm in 1Q12). Provisions of $24.9mm implied a
$26.8mm reserve release ($0.08/share, atx.), as 67% of the C&I and CRE NCO’s were
charged off against previously established reserves.
Our 2012E estimates remain
conservative in terms of NPL improvement, NCO’s and associated reserve levels. Our EPS
estimates imply a 20-25% decrease in NPL’s (to 8.50-8.60% of loans, vs. 11.81% in 2Q12), a
15-20% decrease in NCO’s (6.90-7.00%, vs. 8.44% in 2Q12), with our reserve assumptions
declining modestly at 3.89% of loans.
Spread income improves as NIM continues to expand
Net interest income of $109mm represented a 6% sequential quarter increase, as average
earning assets were down slightly however the margin expanded by 25bps to 3.50%. The
margin expansion was attributable to significant decline in total deposit costs, to 1.13% from
1.25% in 1Q12, as deposit flows remained positive, and cost of borrowing declined 20bps. In
the quarter, the company had a $100mm repurchase agreement (4.38% cost), $40mm public
funds CD (4.66%) both mature, in addition to the prepayment of $15.4mm 6% medium term
note. With $2.2B of brokered CD’s expected to mature over the next twelve months (with
renewal rates repricing 80-130bps lower) we would expect ongoing liability repricing to
continue to benefit FBPs margin through 2012.
The company’s average loans were down about 2% (ann.) in the quarter, although period end
loans were bolstered by the addition of a $406mm credit card portfolio. However, total resimortgage loans were down 5% (ann.) in the quarter (to $2.8B) and C&I loans fell 30% (ann.)
to $3.7B. Our expectations for 2013 include modest spread improvement from current levels,
with a full year NIM of 3.6%, or up about 3-5bps from 2Q12, with an additional balance sheet
run-off of about 1-2%, which implies full-year net interest income of about $448mm, or up 23% from 2012.
Capital levels improve
FBP’s tangible common equity ratio improved to 10.52% (from 10.45% in 1Q12) and the Tier
1 Common was essentially stable at 13.1%, owing to positive operating results in the quarter,
in addition to a modestly smaller balance sheet. Despite continued improvement in FBP’s
capital profile, the company continues to hold an excess capital buffer unlikely to be drawn
down barring a significant improvement in problem asset levels.
Page 19
October 23, 2012
Figure 47: FBP – End of Period Loans
($ Thousands)
(ann.)
2Q'12
1Q'12
End of Period Loans
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
1Q'11
Residential mortgage loans
Commercial loans
Finance leases
Consumer loans
Loans held for sale
Total
$2,764,066
5,581,921
240,589
1,709,539
60,393
10,356,508
$2,799,224
5,943,735
242,228
1,310,598
44,352
10,340,137
$2,873,785
6,123,790
247,003
1,314,814
15,822
10,575,214
$2,873,966
6,181,773
254,515
1,322,888
13,605
10,646,747
$2,880,989
6,272,215
263,223
1,349,098
20,781
10,786,306
$2,896,692
6,533,673
272,392
1,387,018
305,494
11,395,269
2Q'12
2Q'11
-5%
-24%
-3%
NA
NA
1%
-4%
-11%
-9%
27%
NA
-4%
Figure 48: FBP – End of Period Deposits
($ Thousands)
End of Period Deposits
2Q'12
1Q'12
4Q'11
3Q'11
Non interest-bearing deposits
Interest-bearing depostis
Total
$776,947
9,123,226
$9,900,173
$761,744
9,146,500
$9,908,244
$705,789
9,201,965
$9,907,754
$680,242
9,977,069
$10,657,311
(not ann.)
2Q'12
1Q'12
2Q'11
1Q'11
$720,573
10,352,155
$11,072,728
$707,938
11,008,498
$11,716,436
2Q'12
2Q'11
2%
-0.25%
-0.08%
8%
-12%
-11%
Figure 49: FBP – Non-Performing Assets
($ Thousands)
NPL's
2Q'12
1Q'12
4Q'11
3Q'11
(not ann.)
2Q'12
1Q'12
2Q'11
2Q'12
2Q'11
Non-performing loans held for investment
Commercial mortgage
Commercial and industrial
Construction
Consumer and Finance leases
Total NPL's
REO
Other repossessed property
Other Assets
Total NPA's, excluding loans held for sale
$333,043
239,881
255,253
202,133
35,378
1,065,688
167,341
10,601
64,543
$1,308,173
$341,188
244,391
263,604
231,071
39,159
1,119,413
135,905
12,494
64,543
$1,332,355
$338,208
240,414
270,171
250,022
39,547
1,138,362
114,292
15,392
64,543
$1,332,589
$364,561
188,326
315,360
270,411
45,031
1,183,689
109,514
14,397
64,543
$1,372,143
$380,165
196,037
309,888
280,286
42,065
1,208,441
96,618
14,884
64,543
$1,384,486
-2%
-2%
-3%
-13%
-10%
-5%
23%
-15%
0%
-2%
-12%
22%
-18%
-28%
-16%
-12%
73%
-29%
0%
-6%
Non-performing loans held for sale
Total non-performing assets, including loans held for sale
$0
$1,308,173
$0
$1,332,355
$4,764
$1,337,353
$5,107
$1,377,250
$5,087
$1,389,573
NA
-2%
NA
-6%
$120,585
$457,153
$133,191
$483,943
$130,816
$493,917
$156,775
$519,687
$156,919
$540,878
-9%
-6%
77%
-15%
Past due loans 90 days and still accruing
Allowance for loan and lease losses
Figure 50: FBP – Net Charge-Offs
($ Thousands)
Net Loans Charged Off
FBP
Commercial mortgage
Commercial and Industrial
Construction
Consumer and finance leases
Total FBP
2Q'12
14,211
6,271
8,358
15,186
7,621
51,647
1Q'12
5,731
3,594
12,669
15,392
8,785
46,171
4Q'11
9,077
13,555
17,285
19,492
8,348
67,757
3Q'11
15,816
3,309
22,526
16,823
9,163
67,637
2Q'11
8,937
3,150
10,763
47,207
9,944
80,001
(not ann.)
2Q'12
1Q'12
NA
74%
-34%
-1%
-13%
12%
2Q'12
2Q'11
59%
99%
-22%
-68%
-23%
-35%
Page 20
October 23, 2012
Figure 51: FBP – Quarterly Non-Interest Income
($ Thousands)
Revenue Category
2Q'12
Non-Interest Income
Deposit service charges
Other service charges
M ortgage banking activity
Broker/Dealer income
Other
Total non-interest income
Operating Fee Income
Securities Gains
M inority Interest
Other NR Gains/Losses
Total Non-Interest Income
Net Interest Income (TE)
Total Operating Revenue
1Q'12
4Q'11
3Q'11
2Q'11
(not ann.)
2Q'12
1Q'12
2Q'12
2Q'11
$3,240
1,226
4,057
1,347
6,786
16,656
$16,656
-143
-2,491
0
$14,022
$3,247
1,519
4,475
1,263
5,414
15,918
$15,918
-1,207
-6,236
0
$8,475
$2,988
2,116
3,717
381
4,816
14,018
$14,018
-1,014
1,666
0
$14,670
$3,098
1,485
3,676
173
6,745
15,177
$15,177
12,156
-4,357
-9,012
$13,964
$3,054
1,456
9,336
783
6,250
20,879
$20,879
21,342
-1,536
-1,823
$38,862
0%
-19%
-9%
NA
25%
5%
5%
-88%
-60%
NA
65%
6%
-16%
-57%
NA
9%
-20%
-20%
-101%
62%
-100%
-64%
109,833
126,489
103,324
119,242
101,745
115,763
98,331
113,508
97,101
117,980
6%
6%
13%
7%
3.50%
3.25%
3.03%
2.86%
2.68%
25 bps
82 bps
13%
87%
13%
87%
12%
88%
13%
87%
18%
82%
-18 bps
18 bps
-453 bps
453 bps
Net Interest Margin
Fee Income as % Total Revenue
S pread Income as % of Revenue
Figure 52: FBP – Quarterly Non-Interest Expense
($ Thousands)
Expense Category
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
(not ann.)
2Q'12
1Q'12
2Q'12
2Q'11
Employees' compensation and benefits
Occupancy and equipment
Business promotion
Professional fees
Taxes, other than income
Insurance and supervisory fees
Net loss on real estate owned (REO) operations
Other non-interest expenses
Non-Recurring expense
Total Operating Expenses
$31,101
15,181
3,475
5,322
3,435
13,302
6,786
8,340
0
$86,942
$31,611
15,676
2,547
5,179
3,416
13,008
3,443
10,313
0
$85,193
$29,254
15,603
3,482
4,692
3,442
13,301
8,602
7,450
0
$85,826
$29,375
15,468
2,509
5,983
3,420
15,041
4,952
6,183
0
$82,931
$29,407
15,603
3,628
6,072
3,278
14,404
5,971
8,068
0
$86,431
-2%
-3%
36%
3%
1%
2%
97%
-19%
NA
2%
6%
-3%
-4%
-12%
5%
-8%
14%
3%
NA
1%
Total Non-Interest Expense
$86,942
$85,193
$85,826
$82,931
$86,431
2%
1%
Operating Efficiency Ratio
69.4%
72.3%
76.2%
75.8%
75.0%
-298 bps
-560 bps
Page 21
October 23, 2012
First BanCorp (FBP) Quarterly Income Statement 2012E
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2012
Q1A
2012
Q2A
2012
Q3E
2012
Q4E
2012E
Year
Y/Y %
Change
12,787,164
3.25%
103,324
36,197
12,633,427
3.50%
109,833
24,884
12,590,479
3.57%
113,294
35,000
12,459,701
3.57%
112,117
35,000
12,617,693
3.48%
438,567
131,081
-11%
61 bps
8%
-45%
Noninterest Income
Deposit Service Charges
Other Service Charges
M ortgage Banking Activity
Broker/Dealer Income
Other
Securities Gains
M inority Interest
Other NR G/L
Total Fee Income
Total Oper. Revenue
3,247
1,519
4,475
1,263
5,414
15,918
(1,207)
(6,236)
0
8,475
119,242
3,240
1,226
4,057
1,347
6,786
16,656
(143)
(2,491)
0
14,022
126,489
3,160
1,515
4,044
176
6,880
15,775
0
0
0
15,775
129,068
3,108
2,158
3,903
389
5,779
15,337
0
0
0
15,337
127,453
12,754
6,418
16,478
3,175
24,859
63,685
(1,350)
(8,727)
0
53,608
502,253
2%
-5%
-29%
129%
-9%
-11%
Compensation and Benefits
Occupancy and Equipment
Deposit Insurance
OREO
Other
Operating Expenses
Non-Recurring Expense
Total Expenses
31,611
15,676
11,987
4,437
21,482
85,193
0
85,193
31,101
15,181
11,982
6,786
21,892
86,942
0
86,942
31,138
15,932
13,602
5,744
20,706
87,122
0
87,122
30,424
14,511
11,542
9,032
20,954
86,463
0
86,463
124,274
61,300
49,113
25,999
85,034
345,720
0
345,720
4%
-2%
-8%
4%
10%
2%
34,049
(2,148)
(9,591)
-37%
(13,182)
0
(13,182)
(1,396)
205,217
(0.06)
(0.01)
0.00
0%
6.47
6.28
39,547
14,663
12,029
22%
9,356
0
9,356
9,531
205,952
0.05
0.05
0.00
0%
6.56
6.25
41,946
6,946
6,946
22%
5,403
0
5,403
5,403
206,172
0.03
0.03
0.00
0%
6.60
6.29
40,990
5,990
5,990
22%
4,659
0
4,659
4,659
206,247
0.02
0.02
0.00
0%
6.62
6.32
156,533
25,452
15,375
22%
6,236
0
6,236
18,197
205,897
0.03
0.09
0.00
0%
6.62
6.32
Operating ROA
Operating ROE
Operating ROTCE
0.0%
-0.4%
-0.4%
0.3%
2.6%
3.0%
0.2%
1.5%
1.7%
0.1%
1.3%
1.4%
0.1%
1.3%
1.4%
Efficiency Ratio
71.4%
68.7%
67.5%
67.8%
68.8%
13,106,449
13,085,623
10,340,137
10,389,246
81%
1,438,584
103,243
1,433,023
11.0%
39,198
9.92%
12,999,637
12,913,650
10,356,508
10,183,229
81%
1,440,991
98,792
1,448,959
11.2%
62,952
10.03%
12,849,082
12,784,514
10,252,943
10,304,725
82%
1,453,331
97,546
1,457,703
11.4%
62,552
10.20%
12,720,591
12,656,668
10,150,413
10,201,678
82%
1,460,764
97,546
1,463,824
11.6%
62,152
10.35%
12,918,940
12,656,668
10,150,413
10,269,720
81%
1,448,417
99,282
1,463,824
11.6%
62,152
10.35%
1,119,413
148,399
64,543
0
1,332,355
12.09%
43%
1.39%
1.31%
46,171
7.70%
483,943
4.68%
1,065,688
177,942
64,543
0
1,308,173
11.81%
43%
0.98%
1.55%
51,674
8.44%
457,153
4.41%
1,044,374
174,383
64,543
0
1,283,300
11.69%
43%
1.36%
1.63%
45,000
7.87%
447,153
4.36%
1,013,043
169,152
64,543
0
1,246,738
11.46%
43%
1.37%
1.61%
45,000
7.97%
437,153
4.31%
1,013,043
169,152
64,543
0
1,246,738
11.46%
43%
5.11%
1.52%
187,845
8.00%
437,153
4.31%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Operating Net Income
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Common Dividends Per Share
Dividend payout ratio
Book Value
Tangible Book Value
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Loans - Average
Loans / Earning Assets
Equity - Average
Prefered Equity - Avg.
Equity - EOP
Equity / Assets
Intangible Assets
Tangible Comm. Equity / Assets
Credit Quality
NonAccrual Loans
OREO
Other Assets
NPLs HFS
Total Non-Performing Assets
NPAs / Loans & OREO
Reserve / NPLs
Provision / Avg Loans
PPNR/Average Loans
Net Charge Offs
NCO's / Avg Loans
Loan Loss Reserve
Reserve / Loans
-50%
5%
2%
12%
-126%
-125%
-108%
-106%
-121%
218%
-102%
-107%
2%
0%
-9%
-4%
-4%
-7%
36%
-76%
1%
55%
-11%
30%
0%
-7%
-36%
-9 bps
-11%
-36 bps
Source: Company reports and Sterne Agee estimates
Page 22
October 23, 2012
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2013
Q1E
2013
Q2E
2013
Q3E
2013
Q4E
2013E
Year
Y/Y %
Change
12,397,422
3.60%
110,048
32,000
12,422,713
3.62%
112,118
32,000
12,448,537
3.60%
112,958
28,000
12,467,713
3.59%
112,817
25,000
12,434,096
3.60%
447,941
117,000
-1%
13 bps
2%
-11%
Noninterest Income
Other
Securities Gains
M inority Interest
Other NR G/L
Total Fee Income
Total Oper. Revenue
3,312
1,595
4,475
1,263
5,414
16,059
0
0
0
16,059
126,107
3,272
1,226
4,057
1,347
6,786
16,688
0
0
0
16,688
128,806
3,192
1,560
4,044
176
6,880
15,852
0
0
0
15,852
128,809
3,170
2,201
3,903
389
5,779
15,442
0
0
0
15,442
128,259
12,946
6,583
16,478
3,175
24,859
64,041
0
0
0
64,041
511,982
1%
3%
0%
0%
0%
1%
Deposit Insurance
OREO
Other
Operating Expenses
Total Expenses
31,295
16,146
11,747
4,082
20,954
84,224
0
84,224
31,101
15,181
11,742
6,243
20,954
85,221
0
85,221
31,138
15,932
12,786
5,285
20,954
86,094
0
86,094
30,424
14,511
11,311
8,310
20,954
85,510
0
85,510
123,958
61,770
47,587
23,919
83,815
341,049
0
341,049
41,883
9,883
9,883
25%
7,412
0
7,412
7,412
206,322
0.04
0.04
0.00
0%
6.69
6.39
43,585
11,585
11,585
25%
8,688
0
8,688
8,688
206,397
0.04
0.04
0.00
0%
6.73
6.44
42,715
14,715
14,715
25%
11,037
0
11,037
11,037
206,472
0.05
0.05
0.00
0%
6.79
6.50
42,750
17,750
17,750
25%
13,312
0
13,312
13,312
206,547
0.06
0.06
0.00
0%
6.86
6.57
170,933
53,933
53,933
25%
40,449
0
40,449
40,449
206,434
0.20
0.20
0.00
0%
6.86
6.57
0.2%
2.0%
2.3%
0.3%
2.3%
2.6%
0.3%
3.0%
3.3%
0.4%
3.5%
3.9%
0.3%
2.7%
3.0%
66.8%
66.2%
66.8%
66.7%
66.6%
12,664,579
12,672,489
10,150,413
10,150,413
82%
1,470,535
97,546
1,477,246
11.7%
61,752
10.45%
12,680,410
12,688,330
10,188,478
10,169,446
82%
1,482,321
97,546
1,487,397
11.7%
61,352
10.52%
12,696,260
12,704,190
10,188,478
10,188,478
82%
1,493,646
97,546
1,499,896
11.8%
60,952
10.61%
12,712,130
12,720,070
10,213,949
10,201,213
82%
1,507,283
97,546
1,514,671
11.9%
60,552
10.72%
12,688,345
12,720,070
10,213,949
10,177,387
82%
1,488,447
97,546
1,514,671
11.9%
60,552
10.72%
-2%
1%
1%
-1%
962,391
159,003
64,543
0
1,121,393
10.25%
44%
1.26%
1.65%
42,000
7.48%
427,153
4.21%
914,271
149,462
64,543
0
1,063,734
9.67%
46%
1.26%
1.71%
42,000
7.46%
417,153
4.09%
868,558
140,495
64,543
0
1,009,052
9.14%
47%
1.10%
1.68%
38,000
6.73%
407,153
4.00%
816,444
132,065
64,543
0
948,509
8.54%
49%
0.98%
1.68%
35,000
6.18%
397,153
3.89%
816,444
132,065
64,543
0
948,509
8.54%
49%
4.60%
1.68%
157,000
6.96%
397,153
3.89%
-19%
-22%
0%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Book Value
Tangible Book Value
Operating ROA
Operating ROE
Operating ROTCE
Efficiency Ratio
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Loans - Average
Equity - Average
Equity - EOP
Equity / Assets
Intangible Assets
Credit Quality
NonAccrual Loans
OREO
Other Assets
NPLs HFS
NPAs / Loans & OREO
Reserve / NPLs
PPNR/Average Loans
Net Charge Offs
NCO's / Avg Loans
Loan Loss Reserve
Reserve / Loans
19%
2%
0%
1%
-3%
-8%
-1%
-1%
-1%
9%
112%
251%
549%
549%
122%
0%
547%
122%
4%
4%
3%
-2%
3%
-3%
-24%
-16%
-8 bps
-9%
-42 bps
Page 23
October 23, 2012
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2014
Q1E
2014
Q2E
2014
Q3E
2014
Q4E
2014E
Year
Y/Y %
Change
12,510,318
3.56%
109,817
25,000
12,569,557
3.54%
110,936
25,000
12,632,504
3.52%
112,080
22,000
12,694,465
3.54%
113,269
20,000
12,601,711
3.54%
446,102
92,000
1%
-06 bps
0%
-21%
Noninterest Income
Other
Securities Gains
M inority Interest
Other NR G/L
Total Fee Income
Total Oper. Revenue
3,378
1,595
4,475
1,263
5,414
16,125
0
0
0
16,125
125,942
3,338
1,226
4,057
1,347
6,786
16,754
0
0
0
16,754
127,690
3,255
1,560
4,044
176
6,880
15,915
0
0
0
15,915
127,995
3,265
2,268
3,981
396
5,895
15,804
0
0
0
15,804
129,074
13,236
6,649
16,557
3,183
24,975
64,599
0
0
0
64,599
510,700
2%
1%
0%
0%
0%
1%
Deposit Insurance
OREO
Other
Operating Expenses
Total Expenses
30,043
15,823
11,512
3,755
20,954
82,088
0
82,088
31,101
14,877
11,508
5,744
20,954
84,183
0
84,183
31,138
15,613
12,530
4,862
20,954
85,097
0
85,097
30,424
14,221
11,085
7,645
20,954
84,328
0
84,328
122,706
60,535
46,635
22,006
83,815
335,697
0
335,697
-1%
-2%
-2%
-8%
0%
-2%
43,854
18,854
18,854
25%
14,140
0
14,140
14,140
206,622
0.07
0.07
0.00
0%
6.94
6.65
43,506
18,506
18,506
25%
13,880
0
13,880
13,880
206,697
0.07
0.07
0.00
0%
7.01
6.72
42,898
20,898
20,898
25%
15,674
0
15,674
15,674
206,772
0.08
0.08
0.00
0%
7.09
6.80
44,745
24,745
24,745
25%
18,559
0
18,559
18,559
206,847
0.09
0.09
0.00
0%
7.19
6.90
175,004
83,004
83,004
25%
62,253
0
62,253
62,253
206,734
0.30
0.30
0.00
0%
7.19
6.90
2%
54%
54%
0.4%
3.7%
4.1%
0.4%
3.6%
4.0%
0.5%
4.0%
4.5%
0.6%
4.7%
5.2%
0.5%
4.0%
4.4%
65.2%
65.9%
66.5%
65.3%
65.7%
12,748,691
12,777,311
10,270,125
10,242,037
82%
1,523,203
97,546
1,531,736
12.0%
60,152
10.80%
12,806,060
12,834,809
10,334,314
10,302,220
82%
1,539,407
97,546
1,547,078
12.1%
59,752
10.88%
12,863,687
12,892,565
10,398,903
10,366,608
82%
1,555,646
97,546
1,564,214
12.1%
59,352
10.97%
12,921,574
12,950,582
10,463,896
10,431,400
82%
1,574,225
97,546
1,584,236
12.2%
58,952
11.07%
12,835,003
12,950,582
10,463,896
10,335,566
82%
1,548,120
97,546
1,584,236
12.2%
58,952
11.07%
767,458
132,065
64,543
0
899,523
8.03%
50%
0.98%
1.71%
35,000
6.17%
387,153
3.77%
721,410
132,065
64,543
0
853,475
7.54%
52%
0.97%
1.69%
35,000
6.17%
377,153
3.65%
678,126
132,065
64,543
0
810,191
7.08%
54%
0.85%
1.66%
32,000
5.65%
367,153
3.53%
637,438
132,065
64,543
0
769,503
6.65%
56%
0.77%
1.72%
30,000
5.30%
357,153
3.41%
637,438
132,065
64,543
0
769,503
6.65%
56%
3.56%
1.69%
132,000
5.82%
357,153
3.41%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Book Value
Tangible Book Value
Operating ROA
Operating ROE
Operating ROTCE
Efficiency Ratio
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Loans - Average
Equity - Average
Equity - EOP
Equity / Assets
Intangible Assets
Credit Quality
NonAccrual Loans
OREO
Other Assets
NPLs HFS
NPAs / Loans & OREO
Reserve / NPLs
PPNR/Average Loans
Net Charge Offs
NCO's / Avg Loans
Loan Loss Reserve
Reserve / Loans
1%
0%
-2%
54%
54%
54%
0%
54%
54%
5%
5%
1%
2%
2%
2%
4%
0%
5%
-3%
-22%
0%
0%
-19%
-16%
-7 bps
-10%
-48 bps
Page 24
October 23, 2012
ORIENTAL FINANCIAL GROUP (OFG; BUY - $10.26)
INVESTMENT SUMMARY
Transformational deal remakes the OFG platform – Puerto Rico’s #3 bank (pro-forma)
should be a meaningful presence on the Island. OFG has long been somewhat of an outlier
in the banking realm – with unusually high reliance on wholesale funding, and leveraging an
outsized securities portfolio for revenue growth. The company appeared more like a
leveraged investment fund rather than a traditional bank. With a historical loans/earning
assets ratio of roughly 25-27% (and corresponding net interest income contribution of 3040%) and wholesale funding representing 55-60% of OFG’s funding base, the company’s
balance sheet ratios were certainly out of proportion with more mainstream banking models.
Correspondingly, the company was regarded as more of an afterthought in the retail and
commercial banking sectors, with OFG occupying the #8 market share (out of 9 banks), with
only a modest 26 branches, $1.7B loans, and $2B of retail deposits.
However, by virtue of reduced credit exposure (via lower overall loan balances), OFG has
been better able to weather the credit downturn in Puerto Rico, minimally diluting
shareholders, and leaving the company in a much stronger capital position vs. other PR peers.
With an estimated 29.25% Tier 1 Common Ratio, OFG was able to execute the purchase
(currently pending) of BBVAPR, a move with vaults the company into the #2 position in the
Puerto Rican market, reshaping the company’s balance sheet profile and altering OFG’s
revenue composition to that of a more traditional banking model. Consequently, a stronger,
less encumbered competitor has emerged in the Puerto Rican banking market, which will give
the company a competitive and strategic advantage over the next several years. While OFG’s
two closest competitors continue to grapple with legacy balance sheet issues and elevated
problem asset levels, OFG can remain focused on growth and market share – while trading at
a reasonable valuation of 82% of pro-forma tangible book value. BUY
Valuation and Target
OFG’s stock price is down 15% in 2012, as investors avoid the stock in front of its
secondary offering. However, OFG currently trades at a deep discount to tangible book value,
at 0.67x TBV on an absolute basis, and a significant discount to the US domestic peer median
at 1.3x TBV. While the company’s price performance has lagged in 2012, OFG’s cumulative
return since 2009 has vastly exceed that of the other Puerto Rican banks, with a total return of
70%. Additionally, when considering the earnings impact of the BBVA transaction, OFG is
currently trading at ~6x our estimated 2014 EPS. While the Puerto Rican banking sector has
understandably traded at a deep discount owing to macroeconomic concerns, high problem
asset levels, and lack of capital flexibility, we would note that OFG has few legacy headwinds
and a relatively clean slate from which to operate. Consequently, the company’s profitability
metrics are expected to exceed those of its Puerto Rican counterparts. Our 2013 and 2014
estimates are $1.60 and $1.75, respectively, which reflects primarily the impact of the
BBVAPR acquisition, and very modest balance sheet growth in 2014. Additionally, the
company’s earnings stream is less levered to improving credit costs (ie lower provisioning),
as we forecast no reserve release in our assumptions. Furthermore, our estimates imply an
ROTCE of 11-12% and ROAA of 80-90bps through 2013/2014, lower than US peers, but
roughly double that of its PR counterparts. Our 12-month target valuation of $14 implies
about 1.0x 2013 estimated tangible book value and 8-9x our earnings 2013 estimate of $1.60.
Risks
The primary risks to our thesis is a weaker than expected Puerto Rican economy, including
the potential for a double dip recession, and a protracted period of historically low interest
rates, including the potential for a deflationary operating environment. While OFG’s recent
purchase of BBVAPR enhances the company’s revenue profile, pro-forma TCE falls to 5.65.8%, leaving OFG with substantially less capital cushion in the event of a protracted
economic downturn and associate high levels of credit losses. Additionally, OFG’s operating
profile has changed substantially with the pending acquisition of BBVAPR, with associated
execution and integration risk managing a much larger organization.
Page 25
October 23, 2012
Key Investment Themes
Transformational acquisition enhances earnings quality. OFG has long been considered
something of an anomaly in the banking universe, with a preponderance for utilizing its
securities portfolio as a revenue source. Historically, the company’s interest income was
roughly 50-60% derived from its securities portfolio (mostly mortgage-backed securities),
with the balance stemming from its loan portfolio. Similarly, the balance sheet composition
has been roughly 30% loans/earning assets, with a high reliance on wholesale funding. The
company’s earnings have been volatile, owing to outsized securities gains/losses and OTTI
marks. However, with the BBVAPR acquisition – and the $3.7B of loans the company is
acquiring, OFG’s pro-forma balance sheet takes the shape of a more traditional banking
platform, with roughly 60% loans/earning assets. Additionally the company is deleveraging
roughly $1.8B of its pro-forma investment securities portfolio with shifting focus towards its
core commercial banking platform.
The transaction, which is expected to be 35% and 52% accretive to 2013 and 2014 EPS,
respectively, represents a remarkable transformation for the company. OFG paid $500mm for
BBVAPR, utilizing $350mm of cash on hand, $84mm of noncumulative perpetual preferred
stock, and $65-70mm common and preferred stock (roughly 50/50 split) to fund the
transaction. Pro-forma valuation appeared a bit heavy, at 1.37x adjusted TBV, however, the
economic and tactical benefits are compelling. Higher levels of core funding (57% vs. 35%),
larger scale (pro-forma ~$10B of assets), and the #3 deposit share in Puerto Rico create a
formidable competitor in the Commonwealth. Consequently, the transaction is expected to
improve OFG’s operating ROTCE from 4-5% into the 11-12% range, with a corresponding
increase in ROA from 40-50bps to 80-90bps over the next 2 years –substantially higher than
Puerto Rican Peers.
Figure 53: OFG: Funding Composition
Stand Alone
Figure 54: OFG: Funding Composition
Pro Forma
Brokered Deposits
4%
Brokered
Deposits
9%
Borrowings
34%
Core Deposits
36%
Borrowings
60%
Core Deposits
57%
Figure 55: OFG: Earning Asset Composition
Stand Alone
Figure 56: OFG: Earning Asset Composition
Pro Forma
Other
14%
Other
22%
Loans
30%
MBS
15%
Loans
63%
MBS
56%
Page 26
October 23, 2012
Pro-forma credit quality on solid footing On an relative basis, the company’s problem asset
portfolio remains high, at roughly 11.7% of loans+ OREO (ex covered assets). The $120mm
of nonaccrual loans has improved through 2012, albeit somewhat slowly, although down 11%
from year end levels. However, we would note that while OFG certainly does not compare
favorably to US banks in terms of credit quality, the company’s NPA’s/loans rank in the
middle in terms of its PR peers (higher than BPOP, lower than FBP and DRL). Prior to the
BBVAPR transaction, the company had a 32% ratio of NPA’s/ Tier 1 Common capital/,
implying that OFG had considerably more flexibility in addressing its problem asset portfolio.
With the consummation of the transaction, however, the optics surrounding OFG’s NPA’s
will improve considerably, with NPA’s falling to 2.9-3.0% of loans, on a proforma basis.
Additionally, the incremental credit marks taken on the BBVAPR portfolio are fairly
conservative, with an aggregate incremental credit mark of 7.5% of loans – and a healthy 48%
mark on the company’s $250mm non-performing portfolio – implying cumulative losses of
roughly 16.5% from 2008-current.
Figure 57: NPA’s/Loans+OREO (ex. Covered Assets)
Figure 58: OFG: NPA’s/ Loans+OREO
2009-2013E
11%
DRL
10%
20.59%
9%
8%
FBP
11.81%
7%
6%
OFG
11.67%
5%
4%
BPOP
3%
9.42%
2%
0%
5%
10%
15%
20%
25%
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
Absence of material balance sheet overhang affords capital flexibility One of the more
compelling points in the OFG story is lack of legacy balance sheet issues that continue to
weigh down its peers. The company’s DTA is significantly smaller than other PR peers
(gross DTA at $56 million, or 9% or TCE as of 12/31/2011), and the company did not
participate in the TARP program of 2009. While the company’s competitors are in various
state of unwinding certain legacy balance sheet positions (DTA, high levels of problem assets,
ownership concentrations, TARP, regulatory agreements) OFG’s relatively clean balance
sheet will afford the company significantly more capital flexibility. While the BBVAPR
transaction will take time to digest, OFG’s improved earnings stream (positive capital
formation), and lack of balance sheet overhang will allow the company to more vigorously
deploy capital, internally or externally as it executes on its strategic priorities.
Opportunity for valuation arbitrage Currently, OFG shares are trading at 67% of 2Q12
tangible book value, as OFG shares are down about 15%, YTD – making OFG one of the
weakest performers in the SALI bank index through 2012. With pro-forma 4Q12 TBV
estimated around $12.49 (pro-forma the book value dilution stemming from the BBVAPR
acquisition), we arrive at an adjusted 82% TBV – or a premium to both BPOP and FBP.
After an initial gain of 10% following the transaction announcement, OFG shares have been
largely range-bound between $10-$11. With somewhat heavy deal pricing (1.4x adj. TBV),
23% TBV dilution, a pending common equity raise, compounded with the already embedded
Puerto Rico discount, sentiment on the company seemingly has yet to turn, as OFG shares are
currently trading below deal-announcement levels. However, we would note that at current
levels, OFG shares are trading at 6-7x conservative SALI EPS estimates, and 70-75% of
2013E tangible book value – a compelling discount given the company’s projected
performance metrics of 11-12% ROTCE through 2013/2014. Our price target of $14 implies
1.0x of 2013E TBV – or 36% upside from current levels, even with our relatively
conservative EPS assumptions.
Page 27
October 23, 2012
Eurobank and BBVA - Building a stronger foothold in the PR banking market. The
company began building out its OFG footprint by executing an FDIC assisted transaction in
April of 2010, with the company acquiring certain deposits and assets of San Juan-based
Eurobank. In the transaction, the company acquired 22 branches, $1.7B in assets (Est. fair
value of $1.5B), including $840mm of loans (net of fair value adjustment) in the transaction.
The transaction also created $198.3mm of accretable yield over the life of the loan portfolio –
with a focus on C&I, residential mortgage and consumer loans. The BBVAPR transaction,
while not an FDIC assisted transaction (and is absent the 80% loss share agreement),
represents a larger scale play to consolidate the Puerto Rican banking market. With roughly
$5.2B of assets (at announcement), BBVAPR is more than 2.5x the size of the Eurobank
transaction, funded by $350mm of cash, $350 Cash $84 mm convertible preferred (issued in
June) – and a mix of $33mm preferred stock $36mm Common equity – both offerings have
currently been registered. BBVAPR’s loan portfolio is commercial weighted (consistent with
OFG’s strategic focus) with about 36% of its portfolio in C&I, 28% Auto, and 25% Mortgage.
The company paid about 1.03x TBV, or 1.37x when factoring in the incremental 7.5% mark
taken on its loan portfolio (49% incremental market on its NPL portfolio). To put his in
context of recent transaction, the announced MTB/HCBK merger included a 1.5% estimated
credit mark on HCBK’s largely residential portfolio (vs. 4.4% mark on BBVAPR’s residential
book), and the FMER/CRBC acquisition entailed a 6.8% loan mark.
Page 28
October 23, 2012
2Q12 Earnings Review
Repositioning strategy underway
OFG reported 2Q12 EPS of $0.34/share, in a quarter that continued to highlight the
company’s ongoing repositioning strategy, including lower net interest income from MBS
attributable to securities sales and run-off of the company’s covered loan portfolio. Core
banking operations remain solid, as operating fee income was up about 9% from 1Q12, and
expenses remain well-controlled. Earning assets were down somewhat in the quarter, pursuant
to the company’s repositioning strategy, and NIM was subsequently down 31 bps to 2.29%,
with net interest income falling 15% l/q to $33mm and overall PPNR falling to $15.8mm in
the quarter. Interest income from securities fell roughly $7mm from 1Q12, $4.4mm
attributable to lower securities yields, and $2.6mm due to higher premium amortization. The
company also sold $343mm of MBS in the quarter, recording an $11.9mm gain. Although
overall interest income was down in the quarter, the contribution from loans vs. securities was
roughly 62%/38%, respectively, highlighting the company’s focus on its core banking
activities. While commercial production levels were at the low end of the expected range
($35.5mm in 2Q12, $90.9mm YTD), the company reiterated its goal of $200mm in new
commercial production for the full year, given a still healthy loan pipeline.
Loan balances were down somewhat in the quarter, (down 1.8% to $1.2B, excluding the
covered portfolio), and continued run-off of the company’s securities book remains a focus.
Total AFS securities were down 2.2% from 2Q12, but a full 27% from the prior year’s
quarter. Additionally, the company’s MBS portfolio fell 11% on a l/Q basis (to $2.1B), and is
down 31% from 2Q11. The company’s margin guidance for the full year is expected to reach
2.50% (on the low end of the company’s previous established 2.50-2.60% guidance) which
would imply 20-25bps of expansion through the second half of the year, owing to positive
deposit repricing, which will be offset partially by continued pressure on asset yields and
higher pre-payment speeds on the company’s MBS portfolio.
Problem assets continue to incrementally improve
NPA’s of $139.6mm were down slightly from 1Q12, with NPL’s falling 1.5% to $120.5mm.
The improvement in problem assets was primarily centered in commercial, which fell about
10% to $29.9mm. Problem mortgage loans increased 2% to $90.3mm. We would note that
commercial and mortgage represent a combined 86% of the company’s problem assets.
Underlying delinquency data improved, however. Early stage delinquencies (30-89 day) fell
6% from 1Q12, with early stage mortgage delinquencies (88% of total) falling 5.6% to
$33.7mm. Total delinquencies (30+ days) fell roughly 7.5% to $146.3mm on a l/q basis.
Net charge off’s of $3.7mm were up $1mm from the previous quarter (a 42% increase), due
largely to an increase in resi mortgage NCO’s, which increased to $1.9mm (from $922k),
owing to updated real estate appraisal values. Comml. NCO’s were also up 7% to $1.7mm.
Provisions of $3.8mm implied a slight reserve build with reserve coverage increasing to
3.17% from 3.11% in 1Q12. We continue to expect continued incremental decline in NPA’s
through 2012, with total NPA’s falling roughly 10% as compared to 2011. However, with the
BBVAPR acquisition, credit quality measurements are expected to improve substantially with
the conservative mark on acquired loans, and the addition of BBVAPR’s loan portfolio to
OFG’s balance sheet. We would expect NPA’s to fall to roughly 2.9-3.0% in 2013E (vs.
11.4% ex. covered at 2Q12), owing to a larger loan portfolio and modest absolute
improvements in NPA levels (down 1% from 2012). Additionally, our NCO and provision
assumption jumps significantly, although on a relative basis, NCO’s are expected to decline to
0.60-0.70% of loans (ex covered) vs. 0.91% in 2Q12, with no reserve release assumed in
2013.
Capital levels improve – Preparing for the BBVAPR Acquisition
OFG’s tangible common equity ratio improved to 9.74% (from 9.56% in 1Q12) and Tier 1
Common edged upwards to 29.25% from 29.03%, owing to positive operating results in the
quarter, in addition to a modestly smaller balance sheet. However, the company issued
$84mm in convertible preferred in the quarter, in addition to planned $65-$70mm of
additional Tier 1 capital to be raised via preferred and common issuances. Pro-forma TCE is
expected to be in the 5.6-5.8% range, with Tier 1 Common in the 7.9-8.2% range following
the transaction.
Page 29
October 23, 2012
Figure 59: OFG – End of Period Loans
($ Thousands)
End of Period Loans
2Q'12
M ortgage
Commercial
Leasing
Consumer
Total
$787,359
321,684
30,024
40,282
1,179,349
1Q'12
$803,500
330,076
28,363
38,467
1,200,406
4Q'11
$819,651
301,573
25,768
37,541
1,184,533
3Q'11
$837,164
270,633
21,283
37,241
1,166,321
2Q'11
$849,843
264,962
17,104
33,037
1,164,946
(ann.)
2Q'12
1Q'12
-8%
-10%
23%
19%
-7%
2Q'12
2Q'11
-7%
21%
76%
22%
1%
Figure 60: OFG – End of Period Deposits
($ Thousands)
End of Period Deposits
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
Non-interest bearing demand deposits
Interest-bearing savings and demand deposits
Individual retirement accounts
Retail certificates of deposit
Institutional deposits
Brokered deposits
Total
$188,328
1,104,443
368,050
330,597
85,376
146,148
$2,222,942
$183,800
1,103,664
368,375
343,375
107,363
211,143
$2,317,720
$192,256
1,081,450
361,410
375,890
168,301
255,878
$2,435,185
$181,711
1,054,226
356,952
395,902
184,022
205,552
$2,378,365
$192,034
1,039,131
356,764
429,156
211,032
188,586
$2,416,703
(not ann.)
2Q'12
1Q'12
2%
0%
0%
-4%
-20%
-31%
-4%
2Q'12
2Q'11
-2%
6%
3%
-23%
-60%
-23%
-8%
Figure 61: OFG – Non-Performing Assets
($ Thousands)
NPL's
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
M ortgage
Commercial
Consumer
Leasing
Total NPL's
Foreclosed properties
M ortgage loans HFS
Total NPA's
$90,302
29,888
281
77
120,548
17,721
1,418
$139,687
$88,960
33,082
286
12
122,340
16,356
1,519
$140,215
$97,340
36,988
334
102
134,764
13,812
0
$148,576
$94,520
37,471
334
119
132,444
14,675
0
$147,119
$94,125
35,061
432
130
129,748
12,031
0
$141,779
(not ann.)
2Q'12
1Q'12
2%
-10%
-2%
NA
-1%
8%
-7%
0%
2Q'12
2Q'11
-4%
-15%
NA
-41%
-7%
47%
NA
-1%
Figure 62: OFG – Net Charge-Offs
($ Thousands)
Net Loans Charged Off
OFG
M ortgage
Commercial
Consumer
Leasing
Total OFG
2Q'12
$1,948
1,687
127
-4
3,758
1Q'12
$922
1,570
131
27
2,650
4Q'11
$1,300
976
367
16
2,659
3Q'11
$1,391
385
305
80
2,161
2Q'11
$1,268
713
286
30
2,297
(not ann.)
2Q'12
1Q'12
NA
7%
-3%
NA
42%
2Q'12
2Q'11
54%
NA
-56%
NA
64%
Page 30
October 23, 2012
Figure 63: OFG – Quarterly Non-Interest Income
($ Thousands)
Revenue Category
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
(not ann.)
2Q'12
1Q'12
2Q'12
2Q'11
Non-Interest Income
Wealth management revenues
Banking service revenues
M ortgage banking activities
Other
$5,903
3,407
2,436
63
$5,889
3,286
2,502
-833
$5,927
3,648
2,859
-3,251
$5,387
3,182
2,758
-14
$4,575
3,234
2,435
76
0%
4%
-3%
NA
29%
5%
0%
-17%
Total Operating Fee Income
Securities Gains
OREO G/L
FDIC Loss Share Income
Other Non-recurring Gains
Total Non-Interest Income
11,809
11,872
-886
-5,583
0
17,212
10,844
7,351
-398
-4,827
0
12,970
9,183
52
-1,383
-3,189
-15,018
-10,355
11,313
13,276
-199
-2,422
-4,790
17,178
10,320
5,422
-3
1,020
0
16,759
9%
62%
NA
16%
14%
NA
NA
NA
33%
3%
Net Interest Income (TE)
Total Core Revenue
33,076
44,885
38,861
49,705
27,882
37,065
32,470
43,783
42,813
53,133
-15%
-10%
-23%
-16%
Net Interest Margin
2.29%
2.60%
1.74%
2.01%
2.65%
-31 bps
-36 bps
26%
74%
22%
78%
25%
75%
26%
74%
19%
81%
Fee Income as % Total Revenue
S pread Income as % of Revenue
Page 31
October 23, 2012
Figure 64: OFG – Quarterly Non-Interest Expenses
($ Thousands)
Expense Category
2Q'12
1Q'12
4Q'11
3Q'11
2Q'11
(not ann.)
2Q'12
1Q'12
2Q'12
2Q'11
Compensation and employee benefits
$11,184
Professional and service fees
5,144
Occupancy and equipment
4,270
Insurance
1,442
Electronic banking charges
1,609
Taxes, other than payroll and income taxes
-107
Advertising, business promotion, and strategic initiatives
1,564
Loan servicing and clearing expenses
955
Foreclosure, repossession and other real estate expenses
1,198
Communication
415
Director and investor relations
342
Printing, postage, stationery and supplies
322
Other
668
Total Operating Expenses
$29,006
$10,365
5,298
4,186
1,820
1,558
1,174
848
967
954
412
309
308
885
$29,084
$11,041
5,236
4,419
1,709
1,724
1,299
1,589
907
633
411
328
327
784
$30,407
$11,593
5,309
4,369
1,302
1,375
1,184
1,686
975
819
391
352
292
769
$30,416
$11,230
5,750
4,214
1,646
1,155
858
1,508
1,076
761
425
339
362
1,372
$30,696
8%
-3%
2%
-21%
3%
-109%
84%
-1%
26%
1%
11%
5%
-25%
0%
0%
-11%
1%
-12%
39%
-112%
4%
-11%
57%
-2%
1%
-11%
-51%
-6%
Total Non-Interest Expense
$29,006
$29,084
$30,407
$30,416
$30,696
0%
-6%
Operating Efficiency Ratio
64.6%
58.5%
82.0%
69.5%
57.8%
Page 32
October 23, 2012
Oriental Financial Group (OFG) Quarterly Income Statement 2012E
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2012
Q1A
2012
Q2A
2012
Q3E
2012
Q4E
2012E
Year
Y/Y %
Change
6,006,050
2.60%
38,861
3,000
5,794,674
2.29%
33,076
3,800
5,684,327
2.42%
34,673
3,800
5,108,066
2.48%
31,930
3,800
5,648,279
2.45%
138,540
14,400
-12.6%
Noninterest Income
Wealth M anagement Income
Banking Service Revenues
Other
Securities Gains
OREO G/L
Other NR Gains
Total Fee Income
Total Oper. Revenue
5,889
3,286
2,502
(833)
10,844
7,351
(398)
(4,827)
0
12,970
49,705
5,903
3,407
2,436
63
11,809
11,872
(886)
(5,583)
0
17,212
44,885
5,495
3,341
2,703
(14)
11,524
0
0
0
0
11,524
46,197
5,631
3,721
2,916
(14)
12,254
0
0
0
0
12,254
44,184
22,917
13,755
10,557
(799)
46,431
19,223
(1,284)
(10,410)
0
53,960
184,971
11.4%
-0.2%
6.9%
-74.3%
12.9%
Professional and Service Fees
Occupancy
OREO
Other
Operating Expenses
Total Expenses
10,365
5,298
4,186
954
8,281
29,084
0
29,084
11,184
5,144
4,270
1,198
7,210
29,006
0
29,006
11,941
5,309
4,413
819
8,326
30,807
0
30,807
11,593
4,869
4,331
665
9,623
31,080
0
31,080
45,083
20,620
17,199
3,636
33,440
119,978
0
119,978
-1.0%
-5.2%
-1.2%
23.8%
-3.5%
-1.9%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Book Value
Tangible Book Value
20,621
17,621
12,590
15%
10,653
1,201
9,452
12,896
41,162
0.23
0.31
0.06
26%
15.27
15.17
15,879
12,079
16,015
7%
14,958
1,200
13,758
8,463
40,808
0.34
0.21
0.06
18%
15.32
15.23
15,390
11,590
11,590
25%
8,692
3,000
5,692
5,692
44,281
0.13
0.13
0.06
47%
15.02
14.94
13,103
9,303
9,303
25%
6,978
3,000
3,978
3,978
49,331
0.08
0.08
0.06
74%
15.34
12.49
64,993
50,593
49,498
25%
41,281
8,401
32,880
31,029
43,895
0.75
0.71
0.24
32%
15.34
12.49
0.8%
7.4%
8.3%
0.5%
4.9%
5.5%
0.4%
2.9%
3.4%
0.2%
1.8%
2.4%
0.4%
4.0%
4.8%
58.5%
64.6%
66.7%
70.3%
64.9%
6,577,617
6,461,567
1,200,406
518,196
1,689,718
28%
692,422
68,000
689,289
10.7%
3,851
9.56%
6,418,608
6,375,648
1,179,346
506,348
1,658,952
29%
690,746
68,000
692,202
10.9%
3,815
9.74%
6,343,770
6,311,892
1,182,294
491,158
1,714,378
30%
781,368
110,000
870,534
13.8%
3,785
11.33%
8,280,332
10,248,773
4,685,250
417,484
1,763,119
35%
901,118
152,000
931,702
9.1%
144,843
6.28%
6,905,081
10,248,773
4,685,250
417,484
1,706,542
30%
766,413
99,500
931,702
9.1%
144,843
6.28%
122,340
1,519
16,356
140,215
11.52%
30%
0.71%
4.88%
2,650
0.91%
37,361
3.11%
120,548
1,418
17,721
139,687
11.67%
31%
0.92%
3.83%
3,758
1.31%
37,402
3.17%
118,137
1,400
17,189
136,726
11.40%
31%
0.89%
3.59%
3,800
1.25%
37,402
3.16%
116,956
1,400
16,674
135,029
2.87%
32%
0.86%
2.97%
3,800
1.16%
37,402
0.80%
116,956
1,400
16,674
135,029
2.87%
32%
3.38%
3.81%
14,008
1.15%
37,402
0.80%
Operating ROA
Operating ROE
Operating ROTCE
Efficiency Ratio
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Covered Loans
Loans - Average
Equity - Average
Equity - EOP
Equity / Assets
Intangible Assets
Credit Quality
NonAccrual Loans
NPL's HFS
OREO
NPAs / Loans & OREO (ex covered loans)
Reserve / NPLs
PPNR/Average Loans
Net Charge Offs
NCO's / Avg Loans (ex covered loans)
Loan Loss Reserve
Reserve / Loans (ex covered loans)
-1.4%
-5.3%
74%
2%
-1.9%
9.6%
14.8%
40.2%
19.8%
74.9%
10.9%
1.9%
-1.5%
12.6%
3.5%
14.3%
0.01
-0.17
-2.3%
53.1%
294.3%
-21.8%
-1.9%
6.5%
88.8%
34.0%
3627.3%
-13.2%
14.5%
20.7%
-9.9%
45.6%
1.1%
Page 33
October 23, 2012
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2013
Q1E
2013
Q2E
2013
Q3E
2013
Q4E
2013E
Year
Y/Y %
Change
8,082,033
3.62%
72,140
7,100
8,048,607
3.65%
73,242
7,100
8,040,917
3.70%
74,990
7,100
8,032,164
3.70%
74,908
7,100
8,050,930
3.67%
295,281
28,400
Noninterest Income
Other
Securities Gains
OREO G/L
Other NR Gains
Total Fee Income
Total Oper. Revenue
6,007
10,950
2,502
(20)
19,439
0
0
0
0
19,439
91,580
5,962
10,907
2,436
(20)
19,285
0
0
0
0
19,285
92,527
5,550
10,941
2,703
(20)
19,174
0
0
0
0
19,174
94,164
5,743
11,329
2,916
(20)
19,968
0
0
0
0
19,968
94,876
23,262
44,128
10,557
(80)
77,866
0
0
0
0
77,866
373,147
1.5%
220.8%
0.0%
-90.0%
67.7%
Occupancy
OREO
Other
Operating Expenses
Total Expenses
23,072
10,192
7,602
2,448
11,106
54,421
20,000
74,421
23,908
10,041
7,685
2,635
10,035
54,303
10,000
64,303
24,680
10,203
7,324
2,286
11,151
55,644
5,000
60,644
24,325
9,772
7,244
2,144
12,448
55,933
0
55,933
95,984
40,208
29,855
9,513
44,740
220,301
35,000
255,301
112.9%
95.0%
73.6%
161.7%
33.8%
83.6%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Book Value
Tangible Book Value
37,159
30,059
10,059
25%
7,544
3,000
4,544
19,544
50,843
0.09
0.38
0.06
67%
15.75
12.90
38,224
31,124
21,124
25%
15,843
3,000
12,843
20,343
50,868
0.25
0.40
0.08
32%
15.93
13.08
38,520
31,420
26,420
25%
19,815
3,000
16,815
20,565
50,893
0.33
0.40
0.08
24%
16.18
13.33
38,944
31,844
31,844
25%
23,883
3,000
20,883
20,883
50,918
0.41
0.41
0.08
20%
16.51
13.67
152,847
124,447
89,447
25%
67,085
12,000
55,085
81,335
50,881
1.08
1.60
0.30
28%
16.51
13.67
135.2%
146.0%
80.7%
Operating ROA
Operating ROE
Operating ROTCE
0.8%
8.3%
12.1%
0.8%
8.5%
12.3%
0.8%
8.5%
12.2%
0.8%
8.5%
12.2%
0.8%
8.4%
12.1%
Efficiency Ratio
59.4%
58.7%
59.1%
59.0%
59.0%
10,248,773
10,248,773
4,708,676
406,003
5,143,773
64%
942,361
152,000
953,020
9.3%
144,813
6.49%
10,252,616
10,256,459
4,726,334
394,838
5,152,992
64%
957,651
152,000
962,282
9.4%
144,783
6.58%
10,260,305
10,264,152
4,738,150
386,941
5,158,198
64%
968,897
152,000
975,512
9.5%
144,753
6.71%
10,268,001
10,271,850
4,749,995
379,202
5,162,210
64%
984,161
152,000
992,809
9.7%
144,723
6.87%
10,257,424
10,271,850
4,749,995
379,202
5,154,293
64%
963,267
152,000
992,809
9.7%
144,723
6.87%
48.5%
0.2%
1.4%
-9.2%
202.0%
120,464
1,400
16,340
138,205
2.92%
31%
0.55%
2.89%
7,100
0.60%
37,402
0.79%
124,078
1,400
16,013
141,492
2.98%
30%
0.55%
2.97%
7,100
0.60%
37,402
0.79%
120,356
1,400
15,693
137,449
2.89%
31%
0.55%
2.99%
7,100
0.60%
37,402
0.79%
116,745
1,400
15,379
133,525
2.80%
32%
0.55%
3.02%
7,100
0.59%
37,402
0.79%
116,745
1,400
15,379
133,525
2.80%
32%
2.20%
2.97%
28,400
0.60%
37,402
0.79%
-0.2%
0.0%
-7.8%
-1.1%
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Covered Loans
Loans - Average
Equity - Average
Equity - EOP
Equity / Assets
Intangible Assets
Credit Quality
NonAccrual Loans
NPL's HFS
OREO
Reserve / NPLs
PPNR/Average Loans
Net Charge Offs
Loan Loss Reserve
42.5%
113.1%
97.2%
44.3%
101.7%
112.8%
62.5%
42.8%
67.5%
162.1%
15.9%
44.5%
126.1%
25.0%
7.6%
9.4%
25.7%
52.8%
6.6%
-0.1%
102.7%
0.0%
Page 34
October 23, 2012
Estimates
Earning Assets
Net Interest Margin
Net Interest Income
Provision
2014
Q1E
2014
Q2E
2014
Q3E
2014
Q4E
2014E
Year
Y/Y %
Change
8,025,766
3.72%
73,617
6,800
8,026,495
3.72%
74,442
6,500
8,031,458
3.74%
75,711
6,300
8,042,559
3.74%
75,816
6,300
8,031,570
3.73%
299,586
25,900
-0.2%
Noninterest Income
Other
Securities Gains
OREO G/L
Other NR Gains
Total Fee Income
Total Oper. Revenue
6,127
11,169
2,502
(20)
19,778
0
0
0
0
19,778
93,395
6,081
11,125
2,436
(20)
19,622
0
0
0
0
19,622
94,064
5,661
11,160
2,703
(20)
19,504
0
0
0
0
19,504
95,215
5,858
11,555
2,916
(20)
20,310
0
0
0
0
20,310
96,126
23,727
45,010
10,557
(80)
79,214
0
0
0
0
79,214
378,800
2.0%
2.0%
0.0%
0.0%
1.7%
Occupancy
OREO
Other
Operating Expenses
Total Expenses
22,611
9,988
7,450
2,252
12,074
54,376
0
54,376
23,430
9,840
7,531
2,424
11,712
54,937
0
54,937
24,186
9,999
7,178
2,103
11,361
54,826
0
54,826
23,838
9,577
7,099
1,972
11,020
53,506
0
53,506
94,065
39,404
29,258
8,752
46,167
217,646
0
217,646
-2.0%
-2.0%
-2.0%
-8.0%
3.2%
-1.2%
Operating PPNR
Operating Pre-Tax
Reported Pre-Tax
Tax Rate
Net Income
Preferred Dividends
Net to Common
Average Shares (fd)
Reported GAAP EPS
Operating GAAP EPS
Book Value
Tangible Book Value
39,019
32,219
32,219
25%
24,165
3,000
21,165
21,165
50,943
0.42
0.42
0.09
22%
16.85
14.01
39,128
32,628
32,628
25%
24,471
3,000
21,471
21,471
50,968
0.42
0.42
0.09
21%
17.18
14.34
40,389
34,089
34,089
25%
25,566
3,000
22,566
22,566
50,993
0.44
0.44
0.09
20%
17.53
14.70
42,619
36,319
36,319
25%
27,239
3,000
24,239
24,239
51,018
0.48
0.48
0.09
19%
17.92
15.08
161,155
135,255
135,255
25%
101,441
12,000
89,441
89,441
50,981
1.75
1.75
0.36
21%
17.92
15.08
Operating ROA
Operating ROE
Operating ROTCE
0.8%
8.5%
12.0%
0.8%
8.4%
11.9%
0.9%
8.7%
12.2%
0.9%
9.2%
12.8%
0.9%
8.7%
12.1%
Efficiency Ratio
58.2%
58.4%
57.6%
55.7%
57.5%
10,297,529
10,323,209
4,761,870
377,306
5,169,505
64%
1,001,587
152,000
1,010,364
9.8%
144,693
7.01%
10,349,017
10,374,825
4,773,775
378,250
5,181,171
65%
1,019,049
152,000
1,027,735
9.9%
144,663
7.15%
10,400,762
10,426,699
4,797,644
379,195
5,200,002
65%
1,036,967
152,000
1,046,200
10.0%
144,633
7.29%
10,452,766
10,478,833
4,821,632
380,143
5,224,877
65%
1,056,267
152,000
1,066,335
10.2%
144,603
7.45%
10,375,018
10,478,833
4,821,632
380,143
5,193,889
65%
1,028,468
152,000
1,066,335
10.2%
144,603
7.45%
109,741
1,400
15,072
126,212
2.64%
34%
0.53%
3.02%
6,800
0.57%
37,402
0.79%
103,156
1,400
14,770
119,326
2.49%
36%
0.50%
3.02%
6,500
0.54%
37,402
0.78%
96,967
1,400
14,475
112,842
2.34%
38%
0.48%
3.11%
6,300
0.52%
37,402
0.78%
91,149
1,400
14,185
106,734
2.21%
40%
0.48%
3.26%
6,300
0.52%
37,402
0.78%
91,149
1,400
14,185
106,734
2.21%
40%
1.99%
3.10%
25,900
0.54%
37,402
0.78%
Balance S heet
Assets - Average
Assets - EOP
Loans - EOP
Covered Loans
Loans - Average
Equity - Average
Equity - EOP
Equity / Assets
Intangible Assets
Credit Quality
NonAccrual Loans
NPL's HFS
OREO
Reserve / NPLs
PPNR/Average Loans
Net Charge Offs
Loan Loss Reserve
1.5%
-8.8%
1.7%
1.5%
-14.7%
5.4%
8.7%
51.2%
51.2%
0.0%
62.4%
10.0%
0.2%
62.1%
9.8%
20.0%
8.5%
10.4%
1.1%
2.0%
1.5%
0.2%
0.8%
6.8%
0.0%
7.4%
-0.1%
-21.9%
0.0%
-7.8%
-20.1%
-8.8%
0.0%
Page 35
October 23, 2012
APPENDIX SECTION
IMPORTANT DISCLOSURES:
Regulation Analyst Certification:
I, Todd L. Hagerman and Robert Greene, hereby certify the views expressed in this research report accurately reflect my personal views
about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed by me in this report.
Research Disclosures:
Sterne, Agee & Leach, Inc. makes a market in the following subject companies Popular, Inc., First BanCorp and Oriental Financial
Group.
Sterne, Agee & Leach, Inc.'s research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach,
Inc.'s total revenues, a portion of which is generated by investment banking activities.
Sterne Agee & Leach, Inc. expects to receive or intends to seek compensation for investment banking services from the subject company
and/or companies in the next three months.
Price Target Risks & Related Risk Factors:
Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve
Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect
demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or
industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability
to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could
affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities
Exchange Commission.
Valuation Methodology:
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry
size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and
expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry
or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings
multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects
the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors.
Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc.
Definition of Investment Ratings:
BUY: We expect this stock to outperform the industry over the next 12 months.
NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months.
UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months.
RESTRICTED: Restricted list requirements preclude comment.
Ratings Distribution:
Rating Category
Buy
Neutral
Underperform
Count
224
225
21
Percent
47.66%
47.87%
4.47%
Count
16
12
0
IB Serv./ Past 12Mos.
Percent
7.14%
5.33%
0.00%
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731.
Other Disclosures:
Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not
represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or
more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein
and may act as principal or agent to buy or sell such securities.
Appendix Section, Page I
October 23, 2012
Copyright © 2012 Sterne, Agee & Leach, Inc. All Rights Reserved.
To receive price charts or other disclosures on the companies mentioned in this report, please visit our website at https://
sterneagee.bluematrix.com/sellside/Disclosures.action or contact Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or
(205) 949-3689.
Appendix Section, Page II
Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities for over a century. During the
early years, our founders prominently established themselves in the financial securities industry in the southeastern United States. Today, we
have expanded to serve all regions of the country. Sterne, Agee is headquartered in Birmingham, Alabama with offices in 22 states. Sterne
Agee is one of the largest independent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee Group, Inc., which also
includes The Trust Company of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee
Financial Services, Inc.—www.sterneagee.com
EQUITY CAPITAL MARKETS
Ryan Medo
William Jump
Jon Schenk
INSTITUTIONAL SALES
Director of Institutional Sales
Assoc. Director of Inst. Sales
Managing Dir., Eq. Cap. Mkts.
(404) 814-3960
(212) 763-8221
(205) 949-3623
INSTITUTIONAL TRADING
Head of Trading
JT Cacciabaudo
(212) 763-8288
EQUITY RESEARCH
Robert Hoehn
Director of Research
FINANCIAL SERVICES (CONT.)
Property/Casualty Insurance
CONSUMER
Apparel Retailing & Toys
Margaret Whitfield
Tom Nikic, CFA
SVP, Sr. Analyst
Analyst
(973) 519-1019
(212) 338-4784
Interactive Entertainment / Internet
Arvind Bhatia, CFA
Brett Strauser
Mng. Dir.
VP, Analyst
(214) 702-4001
(214) 702-4009
Mng. Dir.
Analyst
(212) 763-8226
(212) 338-4721
Footwear & Apparel
Sam Poser
Ben Shamsian
(212) 338-4731
Dan Farrell
Nitin Chhabra, FCAS
Mng. Dir.
Analyst
(212) 338-4782
(212) 338-4779
Mng. Dir.
Sr. Analyst
(646) 376-5336
(646) 376-5337
INDUSTRIALS
Aerospace & Defense
Peter Arment
Josh W. Sullivan
Auto, Auto Parts and Auto Retailers
Michael P. Ward, CFA
Mng. Dir.
(646) 376-5375
Leisure & Entertainment
David Bain
Mng. Dir.
(949) 721-6651
Coal, Metals & Mining, Engineering & Construction
(214) 702-4045
Michael S. Dudas, CFA
Satyadeep Jain, CFA
Patrick Uotila, CPA
Restaurants
Lynne Collier
Mng. Dir.
ENERGY
Exploration & Production
Tim Rezvan, CFA
Sr. Analyst
(212) 338-4736
(646) 376-5331
(212) 338-4723
SVP, Sr. Analyst
VP, Analyst
(212) 763-8293
(646) 376-5309
Mng. Dir.
Analyst
Mng. Dir. VP, Sr. Analyst
Mng. Dir.
VP, Analyst
Mng. Dir.
VP, Analyst
(207) 699-5800
(207) 699-5800
(615) 760-1466
(615) 760-1474
(877) 492-2663
(615) 760-1468
(212) 338-4744
(212) 763-8296
Banks & Thrifts
Matthew Kelley
Matthew Breese
Brett Rabatin, CFA
Kenneth James
Peyton Green
Zachary Wollam
Todd L. Hagerman
Robert Greene
Life Insurance
John M. Nadel
Alex Levine
Mng. Dir.
Analyst
Todd Vencil, CFA
Kevin Bennett, CFA
SVP, Sr. Analyst
VP, Analyst
(804) 282-7385
(804) 282-4506
Mng. Dir.
VP, Analyst
(615) 760-1469
(615) 760-1478
HEALTHCARE
Mng. Dir.
Analyst
FINANCIAL SERVICES
Asset Management
Jason Weyeneth, CFA
Charles Warren, CFA
(646) 376-5329
(646) 376-5357
(646) 376-5358
Construction Materials & Diversified Industrials
Oilfield Services & Equipment
Stephen D. Gengaro
Grant Fox
Mng. Dir.
Analyst
Analyst
(212) 338-4717
(212) 338-4748
Pharmaceutical Services
Greg T. Bolan
Himanshu Rastogi, PhD, CFA
TECHNOLOGY
Data Networking and Storage
Alex Kurtz
Amelia Harris
Mng. Dir
Analyst
(415) 402-6015
(415) 402-6018
Mng. Dir
Analyst
(818) 615-2029
(415) 402-6051
Financial Technology
Greg Smith
Jennifer Dugan
Hardware, Mobile Devices, IT Supply Chain
Shaw Wu
SVP, Sr. Analyst
(415) 362-7431
Mng. Dir.
Analyst
(415) 362-6143
(415) 402-6052
Mng. Dir.
(312) 525-8431
LED Supply Chain
Andrew Huang
John Shen
Semiconductors
Vijay Rakesh
Mortgage Finance & Specialty Finance
Henry J. Coffey, Jr., CFA
Jason Weaver, CFA
Calvin Hotrum
Mng. Dir.
VP, Sr. Analyst
Analyst
(615) 760-1472
(615) 760-1475
(615) 760-1476
TRANSPORTATION, SERVICES & EQUIPMENT
Jeffrey A. Kauffman
Sal Vitale
Ryan Mueller
Mng. Dir.
VP, Sr. Analyst
Analyst
Email Address for Sterne Agee Employees: first initial + last [email protected] (e.g., [email protected])
(212) 338-4765
(212) 338-4766
(212) 338-4732

Industry Report

Transcription

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