BankUnited, Cadence feeling restaurants’ pain from pandemic

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Few businesses have suffered from nationwide stay-at-home orders as much as restaurants, leaving many bankers to wonder if outstanding loans to restaurants will ever be repaid.

One particularly active lender to restaurants, BankUnited in Miami Lakes, Fla., took a large loan-loss provision in the first quarter tied to its restaurant portfolio and has classified 42% of its loans to restaurant and other franchisees as “criticized.”

Another, Cadence Bancorp. in Houston, charged off four restaurant loans for a total of $9.4 million and said Wednesday that 17% of all its troubled loans are to the restaurant sector.

The disclosures in the two companies’ first-quarter earnings results detailed how social distancing measures put in place to slow the spread of the coronavirus have pummeled the restaurant sector. Many restaurants are seeing steep declines in revenue, and their lenders are bracing for waves of delinquencies and even defaults.

“We have identified portfolios and borrowers that we believe will be under an increased threat from the environment,” which includes franchise finance, BankUnited Chairman, President and CEO Rajinder Singh said on a conference call with analysts Wednesday. “We have reached out to every single borrower in these segments.”

BankUnited reported a $31 million loss in the first quarter, compared with net income of $66 million a year earlier. It swung to a loss because it set aside $125.1 million for potential losses, largely tied to loans to industries hardest hit by the pandemic.

Even before the new coronavirus reached the U.S., the restaurant industry was facing pressure brought on by increased labor costs, the cost of raw goods and the rise of food delivery apps. Earlier this year, BankUnited executives said the rise of food delivery means less revenue from high margin items such as desserts and beverages.

Since social distancing measures went into effect, many have switched to delivery or takeout only, or have closed their doors altogether. As stay-home advisories are extended in some of the most affected areas, restaurants face increasingly uncertain futures.

The $33.6 billion-asset BankUnited has approved deferrals for about 500 commercial clients, and about 74% of loan balances tied to franchisees are in some form of deferral. Sixty-two percent of that $648 million franchise portfolio is to restaurants, while the rest involves fitness centers, which are also facing pressure stemming from social distancing.

Cadence said on Wednesday that 44 restaurant clients, representing about half of its outstanding loans to the sector, have made formal requests for forbearance or a restructuring of their loans. Ten clients drew $46 million off existing lines of credit in mid-March.

The $17.8 billion-asset company also reported $114 million in criticized restaurant loans on March 31, representing 17% of all criticized loans, though less than 1% of total loans.

Cadence said about 90% of its restaurant clients had applied for loans under the Paycheck Protection Program. It processed $147 million in PPP applications for restaurants during the program’s initial phase, accounting for about 15% of all approvals.

Executives at Pinnacle Financial Partners in Nashville, Tenn., said recently that about 44% of clients in its restaurant portfolio had requested payment deferrals. At roughly $573 million, that portfolio represents about 2.7% of the $29 billion-asset company’s total loan portfolio.

M&T Bank in Buffalo, N.Y.; Synovus Financial in Columbus, Ga.; and PNC Financial Services Group in Pittsburgh, also called out restaurants as a particularly vulnerable sector, although these companies have comparably smaller restaurant portfolios.

Some segments of the restaurant industry are faring better than others in the current environment, bankers said. The $129 billion-asset Regions Financial in Birmingham, Ala., said full-service restaurants are suffering the most, while quick-service restaurants, which make up about 63% of that portfolio, seemed to be holding up well.

BankUnited executives drew a similar distinction on Wednesday. Restaurants with “heavy drive-through exposure and good digital strategies” are faring better under social distancing, said Thomas Cornish, the company's chief operating officer.

The economic fallout of the pandemic also led BankUnited to withdraw its prior guidance for 2020.

“There is a silver lining to a recession, which is once the recession is behind us the new business cycle starts and the best kind of business you can do is always done in the first two, three years of the next business cycle,” Singh said. “I'm not willing to call it that it is behind us. I'm hoping that next quarter when I talk to you guys I'll be able to call it.”

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Commercial lending Loan modifications Restaurant industry Coronavirus BankUnited
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