First BanCorp in San Juan, Puerto Rico, cited significant credit-quality deterioration in a recent release of second-quarter financial data and said much of the weakening was tied to a troubled Florida developer.
Four other banks have exposure to a bankrupt Florida developer, and one reported a spike in its second-quarter loan-loss provision.
First BanCorp did not identify the borrower, but it appears to be Puig Development Group, a Miami-area developer that specialized in converting rental apartments into condominiums. Puig and several of its units filed for Chapter 11 bankruptcy protection in the Southern District of Florida on May 29. Two other Puig units followed suit last month.
In an interview last week Fernando Scherrer, the chief financial officer for the $17.4 billion-asset First BanCorp, said the company had more than $60 million in loans on nonaccrual status to "a developer who got overextended" in the Florida housing market.
Puig lists $100 million in debt and several banks — First BanCorp, Compass Bancshares, Popular, Ocean Bank, and Commercebank — as secured creditors in its bankruptcy filings for several units.
First BanCorp had $15 million in loans to two Puig condominium projects that filed for bankruptcy, the filings show. Compass Bancshares Inc. in Birmingham, Ala., had $17.9 million; Popular Inc. in San Juan, $15.8 million; and Commercebank, a Coral Gables, Fla., unit of Mercantil Servicios Financieros CA in Caracas, $7.7 million.
Ocean Bank in Miami was listed as having $2.1 million in loans to Puig, though Terry Curry, the company's chief credit officer, said it has about $35 million in total loan exposure to Puig entities, including two properties that have not filed for bankruptcy protection. "We have started the foreclosure process … , and we expect substantial recovery," he said in an interview this week.
Popular declined to comment. Calls to the other banks were not returned by press time.
Puig is not the first developer to sting banks as credit quality worsens, and issues are arising beyond the distressed Florida condo market. Last month a handful of banking companies reported a spike in nonperforming loans and chargeoffs tied to The Village at Penland, a development in Spruce Pine, N.C., that the state's attorney general shut down in early June amid fraud allegations.
Ronald Glass at GlassRatner Advisory and Capital Group LLC in Atlanta, who is acting as Puig's chief restructuring officer, said that its problems surfaced last year when condo investors and subprime lenders began to leave the market.
Poor bookkeeping "made it harder for them to recognize that there was a problem," he said in an interview this week. However, he added that he believes the banks will be able to make recoveries within six months. "I think they are generally in good shape and are looking at full recoveries," he said. "I don't see this as being catastrophic."
Every bank involved in the Puig bankruptcy has reported deteriorating credit quality that included increases in nonperforming loans and chargeoffs during the second quarter, though none specifically mentioned Puig.
In its quarterly filing with the Securities and Exchange Commission Tuesday, Compass said that an increase in nonperforming assets during the first half "was primarily attributable to continued deterioration in a specific commercial real estate construction portfolio in a southeastern market."
Ocean Bank, which reported a loss in the second quarter due to a spike in loan-loss reserves, at the time attributed its action to "writedowns of several real estate loans," including foreclosures on condo conversion loans.
Christine Myatt, a bankruptcy lawyer at Nexsen Pruet Adams Kleemeier in Greensboro, N.C., said that large bankruptcies with several development entities can take months, if not years, to resolve. She was involved in the 2004 bankruptcy proceedings of Bostic Construction, a Greensboro apartment developer that also hired GlassRatner to oversee its finances.
"There is some potential that the banks could recover some or all of the value" of the loans, Ms. Myatt said in an interview. "It depends on the status of the projects and how secure the banks feel about the situation. If the projects are incomplete, they may be secured, but the lenders may end being undersecured."
