Sterling National’s profitability prescription

Specialty finance represents 22% of Sterling National Bank’s loan portfolio, surpassed only by commercial real estate lending, which accounts for 34% of the $11.5 billion-asset bank’s lending. Its specialty lines even exceed C&I lending, which accounts for 18% of the credit pie.

Sterling, headquartered in Montebello, N.Y., has enjoyed significant organic growth as well as the benefit of a string of mergers and acquisitions. Specialty financial lines represent one of its strategies. 

As Thomas Geisel, executive vice-president and president of specialty finance, explains, the bank’s typical pattern is to develop an expertise locally. Then the bank will build it out regionally, typically by following expanding customers, and then nationally, taking advantage of both existing expertise as well as hiring teams that have specialized experience in the expanding activity.

Geisel, a former bank president himself, says this has worked for Sterling in asset-based lending, factoring, trade finance, payroll finance, municipal finance, equipment finance, and mortgage warehousing. The newest expansion from a New York-area base will be health-care lending, specifically targeting middle-market health-care firms. Sterling defines this as companies generating revenues of $500 million or less.

Sterling announced the formation of a national team of health-care finance specialists in October, with the group to be headed by Dan Chapa, senior managing director. Geisel and Chapa see this as an opportune time to tackle health care.

Medical specialty fits trends

Roughly 20% of the U.S. Gross Domestic Product consists of health care, Geisel notes, and “that’s expanding at a pretty rapid rate.” Geisel says that aging baby boomers need increasing care, and several major factors will spur more demand for credit and related financial services.

The centerpiece is the Affordable Care Act (“Obamacare”), which is driving significant shifts in how health care is provided in this country. Geisel says an evolution toward more preventative care, rather than care provided when someone already is unwell, is increasing demand and the need for facilities to handle it.

Obamacare is creating requirements for increased recordkeeping and administrative capability. All these factors are driving a consolidation movement in the health-care industry. Sterling will expand nationally to provide assistance with acquisitions, recapitalizations, working capital, and growth capital.

“This means a tremendous opportunity for growth in health-care finance,” says Chapa, a former CEO of Healthcare Finance Group, LLC, a specialty finance company serving the middle market.

Dual strategic thrust

Geisel says Sterling will follow a two-pronged expansion strategy. First, it will follow its existing health-care customers as they expand their own operations into contiguous markets, beyond the bank’s initial footprint. Second, it will rely on Chapa and his team to seek out national opportunities, something team members have all done for previous employers.

Historically, middle-market health-care companies have not been served by specialists, according to Chapa. Often, they have looked to business bankers at local banks. Some large banks do have specialists, but they bring the baggage of being very large providers. “We’ll bring them the best of both worlds,” says Geisel. While Sterling has surpassed the $10 billion mark, he says it brings the agility of a community bank, while also offering bankers with health-care backgrounds.

The team’s background will give Sterling two complementary inroads to finding business. Typically, Sterling has approached this sector by working contacts among “centers of influence,” like accounting firms, lawyers, consultants, turnaround experts, and others who advise health-care companies. But because of its specialized experience, Sterling increasingly calls on CEOs and COOs of health-care customers and prospects.

Knowing the industry entails recognizing the risks of banking health-care providers. Geisel points out that Obamacare—a political football—will be a continual risk factor. Another risk is the role of government reimbursement to health-care providers, a shifting financial factor that requires understanding to apply it to client relationships. Government reimbursement influences private-sector financial dealings, such as private insurance payments, as well.

Value of experienced players

“It’s more and more difficult for a generalist to be good at this,” says Chapa. This will favor a related activity for Sterling: syndications of health-care credits. While the main focus will be on generating loans for the bank’s own portfolio, management intends to serve as the lead agent for larger transactions. The bank has already done some of this locally.

Sterling doesn’t publicize portfolio details beyond those given earlier. Geisel, asked about growth expectations, allows that the slice of the portfolio pie for specialty finance is expected to grow in size, and that the health-care portion of that slice will likely grow more quickly.

This article originally appeared as part of the cover story “6 real-world ideas for 2016” in the December 2015-January 2016 Banking Exchange magazine