Richard P. Chapman, Brookline Bancorp’s chairman and chief executive officer, is not going to let one bumpy quarter sour him on automobile lending.
The $2.4 billion-asset Massachusetts thrift company’s fourth-quarter profit fell 45% from a year earlier, mostly because of a large increase in its loan-loss provision, to $3 million. Brookline said that $2.5 million of the provision was related to its auto loan portfolio.
Though auto lending can be volatile, Mr. Chapman said he would much prefer to focus on lending than pursue fee income through insurance or money management, as many other bank and thrift companies have done.
“We have pretty much stuck to the old-fashioned business of living off margin income,” Mr. Chapman said in an interview last week.
For the full year, net auto chargeoffs jumped by 116% from 2006, to $4 million, and in the fourth-quarter chargeoffs increased 19% from the previous quarter, to $1.46 million.
Edward Timmons, an analyst at Stifel Nicolaus & Co. Inc., said the risk is that the credit quality could deteriorate more in upcoming quarters. “That’s not an indictment of Brookline’s underwriting standards. It’s more of the general economic conditions.”
Other companies also have reported trouble with auto loans as deteriorating economic conditions and higher oil prices squeeze consumers.
At the $84.7 billion-asset Sovereign Bancorp Inc., an ill-timed expansion in auto lending in mid-2006 has mushroomed into a growing credit problem, according to analysts who follow the Philadelphia thrift company. Sovereign’s chargeoff ratio for auto loans rose 113 basis points in the fourth quarter from a year earlier, to 1.96%.
Nevertheless, Sovereign said it is “bullish” on auto loans because of the short duration and plans to grow its portfolio.
Mr. Chapman said Brookline is “protected by geography” from severe deterioration. Its auto lending is done mostly through dealers in eastern Massachusetts and neighboring Rhode Island, New Hampshire, and Connecticut — a region that Mr. Chapman said is weathering the downturn better than some other parts of the country.
Brookline is, however, tightening the criteria for borrowers. Those with credit scores below 660 accounted for 11.3% of the auto loans in the portfolio at yearend. But of the loans originated in the fourth quarter, only 7.2% were to borrowers with credit scores that low.
Brookline entered auto lending in February 2003, bringing on a team from U.S. Trust Co. It had completed its second-step conversion to a public company in July 2002, raising about $330 million in capital and it was looking for opportunities to put the money to work.
Mr. Chapman said the team was available because it had been let go after U.S. Trust merged with Royal Bank of Scotland’s Citizens Financial Group Inc., which already had its own fully staffed auto lending business.
“It was a unique opportunity, and it has worked out well,” Mr. Chapman said. “We went from a standing start in February 2003 to roughly a $600 million portfolio at the end of 2007.”
He said Brookline averages about $25 million to $30 million monthly in auto loans, though it intends to slow the pace this year because of deteriorating economic conditions.
The average life of an auto loan is under 30 months, which Mr. Chapman said was particularly attractive early on when interest rates were rising. “There’s a lot of cash flow, and we were able to recycle that cash flow into much higher-yielding loans.”
He said auto lending helps Brookline diversify its portfolio, of which roughly half, or $1 billion, is mortgages. Autos make up its second largest loan segment at $594 million as of Dec. 31.
The company also owns a majority stake in Eastern Funding, a specialty lender to small businesses such as dry cleaners, coin-operated laundries, and neighborhood markets. Those loans total about $140 million, and the average rate earned on them last year was 10.58%.
Mr. Timmons said losses also rose on the Eastern Funding portfolio, hitting 1.02% of average loans outstanding in the fourth quarter, compared to a rate of 0.82% for the full year.
But he said the double-digit yields make those loans worthwhile, particularly since Brookline’s residential mortgage and commercial loans continue to perform very well.
Mr. Chapman said he prefers spread businesses because fee-based business lines such as money management and insurance can eat up a lot of management’s time. Though some companies have a thriving money management business, he questions whether the insurance business is profitable for many of the companies that have tried it.
Brookline’s capital ratio is still above 20%, so it continues to look for other business investment opportunities, Mr. Chapman said.
It bought Medford Co-operative Bank in January 2005 and is open to making another bank acquisition, he said. But “prices have been high,” so it began to return some of the capital to shareholders by paying extra dividends in 2003, he said.
Mr. Timmons views Brookline as more of a target than an acquirer, because both the CEO and chief financial officer are over 60 years old and the company is in a demographically attractive market, he said. It has 16 branches in Middlesex, Norfolk, and Suffolk counties, and the median household income of $79,700 for that area is 25% above the state median and 55% above the national median.
Mr. Timmons said that a sale is unlikely to happen soon with the credit cycle causing a virtual halt on all merger activity in the banking sector, but that he expects buyers to approach Brookline once the uncertainty clears.
Mr. Timmons set a target of $12 for Brookline’s share price partly because of the potential takeout value.
He also said Brookline’s stock price has little downside risk, given the company’s tangible book value of $8.10 a share.
The stock was trading at $10.05 late Monday.
