By Donal Griffin - Apr 19, 2012 10:38 AM ET
Bank Owing U.S. $935 Million Has CEO Family Bad Debts: Mortgages
Popular Inc. (BPOP), the Puerto Rican bank that owes $935 million to the U.S. government, has surged 30 percent this year as more customers pay their debts on time. Its board members and their relatives aren’t always among them.
Chairman and Chief Executive Officer Richard Carrion’s sister and two of his nephews, one of whom is also a Popular director, have delinquent property loans to the San Juan-based lender, according to a regulatory filing. The bank has also restructured the loans of another director, the board’s head of corporate governance, and classifies his debts as “troubled,” the filing shows.
Banco Popular in North Bergen, New Jersey. Photograph: The Jersey Journal/Landov
“The disclosures are seriously problematic,” said Orin Kramer, whose Boston Provident Partners LP hedge fund owns about 2 million Popular shares. “The role of the board is to protect against credit losses, not create them.”
Carrion, who’s been Popular’s CEO for almost two decades and sits on the board of the Federal Reserve Bank of New York, is seeking to help the bank recover from losses on soured home loans and repay the U.S. after the 2008 bailout. Directors with distressed debts won’t help Popular reduce costs from the bank’s loan portfolio, said Kramer, former chairman of the $70 billion New Jersey State pension fund.
“All related party transactions are subject to internal procedures and banking laws and regulations that require they be made on market terms and conditions,” Teruca Rullan, a spokeswoman for Popular, said in an e-mailed statement.
Any transaction involving directors and their “related business interests must be approved in advance by the board of directors, which is overwhelmingly comprised of independent directors,” she said, declining to comment further on behalf of Carrion’s family members and the directors.
Hedge Fund Investors
Popular has attracted hedge funds wagering on a rebound, including Valinor Management LLC and Paulson & Co., its two largest shareholders, according to data compiled by Bloomberg. The stock, little changed in today’s New York trading, has risen 62 percent to $1.81 from a two-year low on Dec. 19, as the bank grapples with a Puerto Rican recession that began in 2006.
Losses on the bank’s subprime mortgages and commercial and construction loans surged during the financial crisis and regulators had to inject bailout funds from the Troubled Asset Relief Program in November 2008.
The bank has since returned to profitability, posting profits of $289 million for 2011 and 2010 combined, compared with a $1.8 billion loss for the two prior years. The board approved compensation to Carrion worth about $2.55 million in 2011, more than double what he received in 2009.
Popular, Puerto Rico’s largest lender, has yet to repay $935 million to U.S. taxpayers and has the second-highest level of debt outstanding under TARP. Columbus, Georgia-based Synovus Financial Corp. (SNV) owes $968 million.
The bank is succeeding in improving the credit quality of its loans, Popular’s toughest challenge, Carrion said in the lender’s annual report. Net charge-offs in 2011 tumbled to $534 million, less than half of the year-ago total, he said.
Manuel Morales Jr., Popular director and chairman of the board’s corporate governance committee, owes the bank about $1.5 million through different lines of credit, according to a filing. The board agreed to restructure his debts in December, changing most of them to three-year term loans. While Morales is “current” on his obligations, the loans “would be classified as troubled debt restructurings,” according to the bank.
Morales, who runs real-estate companies, has been a Popular director since 1990 and the board considers him an independent member, the bank said in the filing. He was reelected to the panel in 2010 with about 64 percent of votes cast, another filing shows. Morales didn’t respond to requests for comment on why Popular restructured his loans.
“Management felt it was prudent to reduce the amount of the outstanding lines to reflect Mr. Morales’ business needs and convert the remaining portions to term loans with required principal amortization,” Rullan said in a separate e-mail. “The restructuring was approved in the ordinary course of business and made on market terms and conditions.”
A company controlled by Carrion’s nephew, Jose Vizcarrondo, a director since 2004, bought a residential construction project from the bank for $13.5 million in August 2009. The purchase by Vizcarrondo’s TP Two LLC was financed by Popular, which also provided a line of credit, according to a filing. Vizcarrondo’s bid was the highest of three Popular received, the bank said.
The deal hasn’t worked out and Popular has recognized an $8.6 million loss on the loans, the filing shows. The debts were secured against the property and Vizcarrondo isn’t personally liable, the bank said in the filing. He didn’t respond to requests for comment.
Vizcarrondo replaced his father as a Popular director in 2004. The bank has extended at least $33 million to property companies linked to him since, regulatory filings show. One of his firms, Desarrollos Metropolitanos LLC, has “necessary lines of credit” from Popular, according to its website. He was reelected in 2010 with 63 percent of votes cast.
“You don’t want directors that have those kinds of conflicts,” Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, said in a telephone interview. “Today, those kinds of directors, those kinds of conflicts, aren’t helpful. Directors who have independence issues have become problematic.”
Other relatives have also provided headaches for the bank. Another of Carrion’s nephews -- and a brother of Vizcarrondo -- owns 50 percent of a company that got a $3.9 million loan from Popular in 2007 to build a residential project in San Juan, a city of about 400,000. The nephew personally guaranteed the loan, the bank said. His company failed to build the project after legal challenges and Popular began “foreclosure and collection proceedings” in 2010. The loan is now worth $2 million and is “held for sale,” the bank said.
Popular has also recorded a $500,000 loss on a $1.35 million mortgage provided to Carrion’s sister and brother-in- law. They fell behind on their payments in 2009 and Popular began foreclosure proceedings last October. There was $1.58 million outstanding at the end of 2011, including interest, the filing shows.
The bank didn’t name Carrion’s second nephew or his sister in the filing and Popular spokeswoman Rullan declined to provide contact details.
Some investors and analysts dismiss corporate governance concerns. The bank made the loans at market rates and they were approved by the board, Joe Gladue, an analyst with B. Riley & Co. said in a telephone interview.
“While not perfect, we were comfortable enough with their corporate governance to make our investment,” said John Loesch, an analyst and assistant portfolio manager with Diamond Hill Investment Group Inc. (DHIL) in Columbus, Ohio, which more than doubled its stake in Popular last year and now owns about 8.5 million shares. “We increased our investment in Popular when we believed the shares were unusually cheap.”
Diamond Hill, which oversees about $9 billion, is among investment firms that bought up Popular stakes after shares plummeted almost 90 percent during the four years between 2006 and 2009. John Paulson, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, spent about $217 million on more than 6 percent of Popular in the second quarter of 2010, based on an average price of $3.25.
David Gallo’s Valinor, named for the place in J.R.R. Tolkien’s Lord of the Rings where only immortal beings live, leapfrogged Paulson as the biggest shareholder last year at a cost of about $128 million, based on an average price of $2.43. The New York-based fund now holds close to 8 percent.
Global Thematic Partners LLC, founded by Deutsche Bank AG executive Oliver Kratz, owns about 2.5 percent while Empyrean Capital Partners LP spent about $94 million buying up almost 4 percent last year, Bloomberg data show. Former Goldman Sachs Group Inc. (GS) partners Amos Meron and Michael Price run the fund, which shares its name with the highest point in heaven in Dante’s ‘The Divine Comedy.’
Shares tumbled 56 percent last year, the second-worst performance on the 201-member Russell 1000 Financial Services Index. (RGUSFL) The stock traded for $28.87 a share at the end of 2004, and for $18.94 in February, 2007 before the U.S. housing market crashed.
Carrion has taken steps to reduce some of the firm’s exposure to troubled debtors. He sold a portfolio of distressed property loans in September to a joint venture controlled by firms including Popular and Goldman Sachs.
Puerto Rican Recession
Still, Moody’s Investors Service said March 8 that the bank was facing “elevated” credit costs from commercial and residential loans as the Puerto Rican recession that started in 2006 continues.
“The outlook on Popular and its subsidiaries is negative, reflecting the risk that a longer, deeper recession in Puerto Rico would put additional pressure on the company’s financial fundamentals,” Moody’s said.
Carrion is also under pressure from the same regulator that he helps to oversee as a director. The New York Fed filed an enforcement action against Popular last year, ordering the bank to improve its credit risk management and asset quality.
Carrion is one of the New York Fed’s three “Class A” directors, who are elected by other banks to represent their interests. JPMorgan Chase & Co. (JPM) CEO Jamie Dimon and Solvay Bank (SOBS) CEO Paul Mello are also Class A directors on the board, which oversees the regulator.
His previous tenures on the board also coincided with Popular attracting scrutiny from the regulators, records show. He was first elected in 1999, the same year in which the Federal Reserve fined the bank $10,000 because of alleged violations of rules about implementing the National Flood Insurance Act.
Carrion left the New York Fed board at the end of 1999. About three months later, Popular signed an agreement with the regulator, a formal enforcement action that required Carrion to improve the bank’s anti-money laundering procedures.
Bankers elected Carrion again in January 2008, less than a year before taxpayers rescued the bank. He was reelected to another three-year term last December.
Jack Gutt, a New York Fed spokesman, declined to comment on the loans.
Carrion isn’t the only New York Fed board member whose bank has faced enforcement actions. JPMorgan, whose CEO Dimon has been a director since 2007, signed a “written agreement” in July pledging to boost compliance procedures after regulators said it rigged the bidding on investment contracts sold to state and local governments. The bank paid $228 million to settle the charges.
The Fed also issued “cease-and-desist” orders against JPMorgan and other firms last year after a nationwide investigation into mortgage-servicing and foreclosure practices.
Carrion’s lender is the biggest in Puerto Rico, an island of less than four million people, close to the populations of countries such as Croatia and New Zealand. Its dominant position on the island means that conflicted loans are inevitable, said Gladue, the B. Riley & Co. analyst.
“It stands to reason that they’re going to have relationships with insiders and relatives of insiders,” said Gladue. “I don’t see anything improper about these that indicates there’s a lack of control.”
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