Smaller banks hope they have the right medicine for the current ills of health care providers.

The health care industry is facing challenges similar to the ones that bankers have confronted in recent years. Large health care providers are preparing for new policies and pressure to reduce costs, while those challenges are forcing smaller players to consider selling.

These changes are opening a door for banks to make more loans to those providers. Many large and midsize banks, such as Regions Financial (RF), Huntington Bancshares (HBAN) and KeyCorp (KEY), have already turned to the health care sector to book loans.

Still, smaller banks want to get in on the action. Several community banks are making moves to devote more time and resources to pursue health care providers.

"There's a lot of transformation taking place right now in" health care, says Randy Laszewski, leader of regional and community banking for KPMG in the mid-South and Carolinas regions. "Rural community providers, hospitals and doctors are a niche that plays well for a community bank."

Health care has been evolving for years, but change has been accelerated by policy changes, including the infusion of federal stimulus money and the Patient Protection and Affordable Care Act, widely known as Obamacare, industry experts say.

The American Recovery and Reinvestment Act in 2009 included funds to improve health care information technology. This prompted health care providers to pursue upgrades to technology for keeping medical records, says Mike Sweeney, the platform leader for health care at EverBank Commercial Finance, a unit of the $16.5 billion-asset EverBank Financial (EVER) in Jacksonville, Fla.

The Parsippany, N.J., commercial finance unit focuses on financing equipment purchases, such as ultrasound machines and electronic health records, for hospitals and private practices. Transactions generally range from less than $100,000 to several million dollars.

"Many people think there has been pent-up demand because medical device sales were softer than expected during the recession," Sweeney says. "There is dated technology that needs to be updated."

Additionally, part of the Affordable Care Act, which was signed into law by President Obama in 2010, calls for the development of accountable care organizations. Different service providers form an alliance to offer a more seamless experience for the patient. Reimbursements from Medicare are then tied to the coordination among the providers, quality of care and ability to reduce costs.

To form these groups, service providers must invest in new technology so all of the partners can view medical records electronically.

"Health care is a good industry to lend to because it has many different nuances," says Jefferson Harralson, an analyst KBW's Keefe, Bruyette & Woods. "Anytime there is a change, it creates opportunities for some companies."

Some rural providers and hospitals are "increasingly challenged to maintain [profit] margins as they are being squeezed on the cost side and the compliance side," Laszewski says. This could lead more providers to consider selling.

Provident Bank, a unit of Provident New York Bancorp (PBNY), has financed medical practice roll-ups in the past. Before completing such deals, the Montebello, N.Y., bank spends time ensuring that potential borrowers are aware of industry trends, says Jim Peoples, president for the bank's northern and central markets.

"Many of our borrowers are on the leading edge of what they have to do to be as successful in the future as they have been in the past," Peoples says.

Provident Bank has been involved in health care lending for years, though it is now looking to expand as part of its entry into New York City. The $4 billion-asset bank has also increased its focus on lending in the dental sector.

Besides financing medical practice mergers, Provident has also originated loans for a range of other deals such as financing for assisted-living centers and equipment purchases, Peoples says.

The bank considers health care a sector that is ripe for lending as retiring Baby Boomers need more extensive medical care at places like assisted-living facilities. "As these demographics change, it is a growth market," Peoples says.

Spending on health care in the United States has risen significantly in the last decade, reaching $2.7 trillion in 2011, or $8,680 per U.S. citizen. The total also represents an 80% increase from spending a decade earlier, according to the Centers for Medicare & Medicaid Services.

Cost control has become a priority for policymakers, and health care providers have started looking at ways to improve efficiency. This could spur borrowing as providers need financing for better equipment to become more efficient, industry experts say.

Smaller banks may struggle to compete against their larger rivals for loans to bigger and well-established hospitals because of competitive pricing, Harralson says.

Instead, there are numerous smaller hospitals, assisted-living facilities and urgent-care centers that small banks should focus on, industry experts say. There are also small- and midsize businesses that provide a range of health care services and produce medical devices that need financing.

Targeting a new industry that is highly regulated is a challenge, industry experts say. Community banks must have lenders that are knowledgeable about the health care industry to manage risk. Since health care is a broad field, Harralson suggests that community banks "pick out a niche that they understand and feel comfortable with" and focus on that area.

Several banks, including Provident and EverBank, have obtained expertise by hiring teams of lenders from rivals. Provident said in July that it had hired a group of lenders from the former Herald National Bank to help its grow its health care lending in the New York market. BankUnited (BKU) in Miami Lakes, Fla., bought Herald National.

EverBank gained expertise in health care lending after it bought Tygris Commercial, a commercial finance and leasing company, in 2010. The rebranded EverBank Commercial Finance has deepened its bench by hiring from rivals.

MidFirst Bank in Oklahoma City announced earlier this month that it would buy a specialty lender in Atlanta that provides working capital lines of credit to the health care industry and other commercial clients.

Lending to the health care sector could be a good way for community banks to diversify their portfolios, as long as they have the right expertise and proper risk management in place, industry experts say.

"Health care is always going to be around," Laszewski says. "The models may change, but it is something we will always need. It is a growing industry and one that should have opportunities for banks."

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