Even before Congress passed landmark health-care reform legislation, Torrey Pines Bank in San Diego had been ramping up its marketing to doctors and other health-care professionals.
Early this year, the $1.2 billion-asset bank established a team to focus on the health-care industry led by longtime Southern California banker Don Schempp. At the same time, it unveiled a partnership with the San Diego County Medical Society through which the organization is endorsing the bank to its members and the bank is advertising in the society's publications.
Though the seven-year-old bank has always targeted doctors, lawyers and other professionals, it is shifting gears to beef up its commercial and industrial lending, while scaling back on real estate construction lending. Its own credit quality has held up well, but after several competitors that had overloaded on construction loans failed, it was eager to diversify, says Crystal Watkins, Torrey Pines' director of marketing.
It could turn out to be a well-timed move. Though Watkins insists that the prospect of a revamped health-care system had no influence on Torrey Pines, some industry experts say banks with a strong foothold in the professional services niche could benefit down the road as doctors' offices expand to meet the needs of the newly insured.
To be sure, community banks have long coveted such business. Not only are medical and other professionals among the most creditworthy of all borrowers, they also tend to be a steady source of core deposits, and are regular users of cash management and payroll services. Their owners are generally affluent enough to need wealth management services as well.
The real estate crash, though, has significantly heightened community banks' interest in serving professional services firms, says Alistair Jessiman, managing director at the New York consulting firm Novantas LLC. With demand for construction and real estate loans as weak as it's been in a generation, many banks are pledging to refocus on the sector while others are entering the business for the first time.
"Banks need to find high-quality earning sources right now, because they need to rebuild capital," Jessiman says. "They also need to earn more from their clients on a risk-adjusted basis, because they can't earn more from loans that end up going bad."
Jessiman spoke of one Northern California bank that branched out from its specialty in serving professional service firms to take up residential construction lending-including making loans in Las Vegas. After getting badly burned by soured loans, the bank has recommitted itself to focusing on professional clients within its local market, Jessiman says.
Those entering the market face stiff competition from banks of all sizes that already have an expertise in serving these clients. Bigger banks competing in this niche also have the advantage of larger lending limits.
In the Tampa area, a bank looking to lure more professionals has to contend with the $911 million-asset Bank of Tampa. At the end of 2009, it was doing business with 30 percent of the law firms in Hillsborough County, 25 percent of the medical practices and had a 15 percent share of other owner-managed businesses, according to marketing director Chris Sinton.
"There are more banks now chasing that business, but we don't view [competition] as a big issue, at least for now," says Sinton, whose bank has been targeting professionals for 25 years.
Theo Moumtzidis, a managing vice president at First Manhattan Consulting Group in New York, says banks new to this segment should first get up to speed on professional firms' complex cash management needs, particularly those of medical practices that must deal with insurance companies for payments.
"More banks have failed than succeeded, and the reason is that it takes commitment and time to begin to understand their business," he says. "You also have to support your front line. If you don't have the resources to hire experts, you can't expect your lenders to wake up magically the next day and be deposit specialists - you need to support them with training."
Torrey Pines has catered to professional services firms since its founding in 2003, and stepped up its presence in January by recruiting Schempp to head its new health-care team. Schempp, a 37-year veteran in the field, came to Torrey Pines last year from Temecula Valley Bank before it failed in July. Watkins says Torrey Pines, which is trying to grow its commercial and industrial loan portfolio, is also set to launch a new marketing campaign in the near future to bring in more law firms as customers.
Some banks that cater to professional services firms are working to fend off the competitors encroaching on their turf, Novantas' Jessiman says. Others, such as Fidelity Bank in Atlanta, are playing offense. The $1.8 billion-asset Fidelity has added more than 100 lenders since the beginning of 2009 from other banks in the Atlanta region that have either failed or stopped lending because they are so hampered by bad loans, says James Miller, its chief executive officer.
Some of those lenders have expertise in working with professional services firms and have brought their books of business with them. Overall, Fidelity's commercial loan originations in 2009 rose 28 percent from a year earlier, to nearly $378 million.
Professional services firms also tend to bring in other customers who may have borrowing needs, particularly law and accounting firms who advise their clients on financial matters, Miller says.
"We get most of our referrals for new business from professional services firms, so we really want to bank these firms as much as possible," he says.
It remains to be seen exactly how health-care reform, which will extend coverage to millions of uninsured Americans over the next four years, will ultimately affect the banking services offered by the likes of Fidelity, Bank of Tampa and Torrey Pines. Moumtzidis says the enactment of health-care reform will likely increase the volume of insurance payments to medical practices, which could lead to a greater need for remote deposit capture and other cash management services. Moreover, some practices will be looking to expand and will need credit for equipment and additional office space, he says.
Jesse Torres, the president and CEO at the $41 million-asset Pan American Bank in Los Angeles, agreed that opportunity exists in payments processing and says banks equipped to handle the increased volume of payments will be in the best position to win the deposit relationships of health-care providers. On the consumer side, Torres says he also expects to see a surge in demand for health savings accounts.
But Bank of Tampa's Sinton says it's "a little early right now to say there's a big opportunity here." In recent years more doctors have moved away from smaller practices and into a salaried jobs at hospitals, he says, and at this point there's no way of knowing what effect health reform could have on that trend. "I think it's going to be years down the road before we know what the impact will be on our business," Sinton says.