Loans to hospitals and other health providers are suddenly becoming riskier bets for banks.
At least five publicly traded banks, including LegacyTexas Financial Group and Triumph Bancorp in Dallas and CapStar Financial Holdings in Nashville, Tenn., reported problems their health care portfolios during the first quarter.
While some banking executives have shrugged off the delinquencies or defaults as isolated incidents, others say health care policy — from some states’ refusal to expand Medicaid coverage following the passage of the Affordable Care Act to uncertainty surrounding the future of the law itself — has escalated the risks in lending to heath care providers. Some banks have become so skittish that they have decided to stop making health care loans.
“It seems like the whole sector has little cracks in it,” said Timothy Lupinacci, an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz who represents financial institutions in bankruptcy matters. “Whether it becomes a full-blown crisis, I don’t know.”
The $8.4 billion-asset LegacyTexas launched a health care lending unit two years ago with high hopes. After writing off a $16.4 million health care loan in the first quarter, the company has decided to exit the business.
“Despite our best intentions, our entry into health care lending has been very, very disappointing,” CEO Kevin Hanigan said on the company’s first-quarter earnings call.
LegacyTexas did not disclose the borrower so it’s unclear if the default was related to Medicaid reimbursements. But more than 70 rural hospitals have closed since 2010 and many are located in states that did not expand Medicaid coverage through Obamacare. Another 700 are at risk of closing, according to the National Rural Health Association.
Lower Medicaid reimbursement levels are also affecting the finances of nursing homes, urgent care facilities and other health providers.
Uncertainty surrounding the law’s future is also spooking lenders. The House, in a victory for President Trump and conservatives, approved legislation Thursday that would replace the ACA with provisions to narrow current health insurance mandates and make other changes. However, it won by just four votes, and opposition from moderate Republicans and the absence of Democratic support bode poorly for its prospects in the Senate.
“It’s just a business with a stroke of the pen that cash flows for certain companies in the business can change materially,” Hanigan said, referring to potential changes in the Affordable Care Act.
“We have gone very, very slow on health care lending because we’ve been just so uncertain about the effect of Obamacare and then what might happen post-Obamacare, if there is a change,” added Keith Cargill, the CEO at the $22 billion-asset Texas Capital Bancshares, also in Dallas, during an April 19 conference call.
Still, plenty of other banks remain committed to health care lending. After all, health care spans a huge array of subsectors, from doctors’ practice groups to nursing homes. In one of the latest large deals, U.S. Bancorp on Tuesday closed a $300 million revolving line of credit with Adventist Health System West, an operator of hospitals and clinics.
“Health care continues to perform extremely well and we still view it as a growth industry,” said Brad Vincent, director of health care banking at the $33 billion-asset BOK Financial in Tulsa, Okla. BOK held $2.2 billion of health care loans at Dec. 31, about 13% of its total loan book.
The $65 billion-asset Zions charged off a $30 million health care loan during the first quarter, after the borrower saw “rapid deterioration in its financial condition when it became subject to a government investigation,” Chairman and CEO Harris Simmons said during an April 24 earnings call. Nonetheless, Michael Morris, Zions’ chief credit officer, called it an “isolated event” and said it would not changes its view of health care lending.
“We don’t believe that it represents or is reflective of any other adverse trend in health care,” he said on the call.
The other banks that reported health care trouble in the quarter also cited a variety of unrelated factors, said Gary Tenner, an analyst at D.A. Davidson. Those included fraud and poor underwriting.
“There didn’t seem to be a consistent cause” of the loan quality decline, Tenner said.
Many health care loans tend to be made through Shared National Credits and those can be problematic for smaller banks, said Matt Olney, an analyst at Stephens. If a bank is not in the senior position on a shared credit, it can be on the hook for big losses, he said. The $1.4 billion-asset CapStar set aside $2 million in reserves in the quarter to cover two nonperforming health care loans; one of those loans was part of a Shared National Credit, Chief Credit Officer Christopher Tietz said during an April 27 call.
Adding to the sector’s woes, some newly formed health care companies have filed for bankruptcy after taking on too much debt to expand. Adeptus Health, the largest operator of freestanding emergency rooms, filed for bankruptcy last month. The Lewisville, Texas, company was founded in 2002. Adeptus loaded up on debt to build new facilities and become unable to meet its debt-service requirements.
Other companies are consolidating operations to cut costs. Kindred Healthcare has closed three Houston-area acute-care hospitals since 2016, the Houston Business Journal reported. Kindred on Wednesday reported a $5.7 million first-quarter loss as it’s also been hurt by lower Medicaid reimbursement rates, according to media reports.
Mike Taylor, head of health care lending at the $14 billion-asset First Midwest Bancorp in Itasca, Ill., said banks that don’t currently make health care loans should tread carefully before expanding into the sector, he said.
“With the potential repeal or replacement of Obamacare, or certain aspects of it, it further emphasizes the need to have experienced lenders who understand the risks associated with health care loans,” Taylor said.
Even banks that have had recent trouble remain committed to the space, including the $2.6 billion-asset Triumph, which charged off an undisclosed amount of health care loans in the first quarter.
“This is a growth opportunity area,” Aaron Graft, Triumph’s CEO, said during an April 20 conference call. “We’re not going to throw in the towel on the business.”