How to Use Our C&I Program to Improve Your Credit Quality and Earnings

C&I Loans, Bank Lending

For non-investment grade C&I debt, such as the debt found in our National-to-Local C&I program, the current default rate for the whole sector has dropped to 0.44% in August as calculated by S&P. This excludes a default earlier in the year by Energy Future Holdings (EFH) which ran into problems during the downturn and has used several tactics to delay a bankruptcy. As a result, we exclude them from the analysis as it does not reflect current conditions.


At CenterState Bank, we perform additional analysis and underwriting, and the performance of the loans through our National-to-Local C&I is much better. For example, we only underwrite credits in stable industries where the borrower is a top competitor.  We also do not purchase any credit with debt-to-cash flow above 6 times. This results in some of the highest credit quality within the non-investment grade sector. In fact, of the 20 names that we have offered as participations, our current delinquency rate has been 0.0% and has been that way since the start of the Program. However, to keep comparisons consistent, we will discuss the entire sector of non-investment grade credit and compare it to other bank debt. While the past is not an indication of the future, consider the current 0.44% default rate compared to other bank sectors for the end of the second quarter, 2014:                              


  Default Rate
National-to-Local C&I Credit – CenterState Bank’s Participations 0.00%
National-to-Local C&I Credit – Total Market (August) 0.44%
Total C&I bank sector (per Federal Reserve)     0.81%
Total Commercial Real Estate bank Sector (per Federal Reserve)  1.94%
All Bank Lending (including residential, credit cards, etc.) 4.98%


Our forward analysis indicates that our National-to-Local C&I sector is only going to improve for the following reasons:


  • EBITDA growth is accelerating and is currently at 8.8% per annum. This is better than for most C&I borrowers on bank’s books currently and is the upper end of the historic range of 6.1% to 9.1% for the last several years. While it is true that debt levels are creeping up (5.9x from 5.4x last year), the average ratio of EBITDA (less capital expenditure) to cash interest expense reached a record 3.4x coverage in 2Q. While we are not sure this trend will continue, the current level provides ample cushion for rising rates.
  • General economic improvement – The Bureau of Economic Analysis initial estimates for current GDP is almost 4%. S&P’s expectations are for the economy to expand 3% for the second half of the year and 3.0% for 2015.
  • Extremely low levels of maturities coming due – The amount of pre-2016 credits coming due for maturity is historically small at 0.2%. Less maturities means less need for liquidity, which means less chance for a repayment problem.


While default rates will surely spike again, by all indications that occurrence is a few years out, and when it does our National-to-local C&I Program should perform better than the average bank credit - as it is now and as it did during the last downturn. At an average of Libor + 3.0% (basically Prime), these credits can add instant earnings to your balance sheet and help support this year’s net income and loan balance goals. In addition, we specialize in market leaders in areas like healthcare, consumer products, technology and basic services that help offset real estate concentrations.


Contact us to get more data and information about participating with us in these credits. Your bank’s average credit performance can improve and your return to your shareholders can increase.