Joel Kovner has a prescription for the future of community banking: find a demographic niche and stick to it like like a Band-Aid.

Mr. Kovner, a former executive with Kaiser Permanente who holds a doctorate in medical economics, founded First Professional Bank in Santa Monica, Calif., in 1982 to serve the medical profession.

The timing was prescient, and the prognosis is good.

"I think everybody in their lifetime has two or three good ideas - and if you're very lucky, you get to implement them," said Mr. Kovner, chairman and chief executive of First Professional. "I'm the first person to tell you that luck plays a huge part in this."

Since 1982, health care has become one of the fastest-growing sectors of the economy. Today, it accounts for 17% of total gross domestic product. By 2002, that figure it is expected to exceed 20%.

First Professional has benefited from the sheer heft of the industry. In recent years, the $315 million-asset bank has been one of the best- performing banks in Southern California. And it is weathering the area's deep recession relatively well - considering that many of the region's professional banks are losing money - returning 0.39% on its assets in 1994, compared to 0.92% in 1993 and 1.02% in 1992.

The danger, of course, comes from a lack of diversification, said Howard Levenson, chief executive of Western Financial, an investment bank that caters to community banks in San Diego.

"Over the years, banks that cater to certain types of customers - women's banks, professional banks, ethnic banks - have done quite well," he said. "Some, clearly, haven't. When things are going well within that segment, there's no question the bank can do well. (But) you have to wonder that if President Clinton's health care proposal had passed what it would have done to the bank's clientele."

Nonetheless, and despite deep changes going on in the health care business, First Professional's growth has been substantial: 22% in 1994. Mr. Kovner predicts that with rates topping out, this year's earnings will be significantly higher.

Barry Rubens, a Santa Monica bank consultant, said the bank has exploited an underserved segment of the community like no other niche bank he knows of. He said that since the bank has a significant chunk of doctors' personal business, it is fairly insulated from the vagaries of the health care industry as a whole.

"Every community bank out here is trying to figure out what to do, how to make money," Mr. Rubens said. "What First Professional has done is found a way and gone after it."

First Professional's earnings fell 7% in 1994 to $1.25 million. The primary reason: Most of the bank's interest income comes from securities. With a 35% loan-to-deposit ratio, investing all that money in an up-rate environment can be tricky.

Another reason for the earnings drop was negative loan growth. Though the bank's deposits grew 21.8% in 1994, its total loans decreased 11.9%.

The move to cheaper managed care, popularly known as health maintenance organizations, has meant lower loan demand. Today, about one-third of the bank's business is from HMOs. Another third is from traditional fee-for- service providers, and the other third is from single-service practitioners such as radiology or anesthesiology professional groups.

The move towards managed care has negatively affected certain parts of the health care industry, Mr. Kovner said.

"In California, there was a major shift in recent years from traditional indemnity care because it (managed care) is correctly perceived as being more efficient," he said. "But the health care industry as a whole is still very vibrant."

First Professional banks 24 of the 29 largest health maintenance organizations in California. However, such groups, because of their size, go to much larger banks for their borrowing.

First Professional's primary service is taking care of the medical community's deposits. About 90% of its deposits are picked up by courier. At least one of its three branches is open seven days a week. Almost 40% of its deposits are nearly cost-free demand deposits, and it pays below market for the rest. It's money market rate, for instance, is 1%. First Professional's interest expense to total assets is 76 basis points lower than the California average.

It's customers place their money there, Mr. Kovner said, for the service. "If you're totally service driven, you have to be open on Sunday," he said.

Mr. Kovner feels that 12 years of operation have proved that a deposit- driven, service-oriented bank can flourish. He picked the medical community, but he believes that all banks that pick a demographic or business niche - including minority banks - have a bright future.

"We believe in the next 10 years the market for geographically or demographically niched banks is going to be huge," he said.

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