Brookline Bancorp's deal to buy control of Eastern Finance LLC, a small finance company in New York that lends mainly to self-service laundries, is not as unusual as its sounds.
The $2.2 billion-asset Massachusetts company has owned a minority stake in Eastern Finance since 1999, and Michael Fanger, Eastern's chief executive, has roots in Brookline, a Boston suburb. In fact, his father, a longtime Brookline Bank depositor, tipped off the mutual holding company about Eastern in the first place.
Last week Brookline said it would pay $16.2 million in cash for 58% of Eastern's stock. It bought its first 28% stake in 1999, and the value of that investment has grown an average of 16% a year, according to Mr. Fanger. (He and Eastern's other senior managers will hold the remaining 14%.)
Brookline said the acquisition would be "modestly accretive" in the short term, but Paul R. Bechet, its senior vice president and chief financial officer, said in an interview that he expects its growth to accelerate after the sale, which is expected to close next quarter.
"Fanger knows his business very well, and he is good at it," Mr. Bechet said. "He's got a good growth opportunity; that's what we want him to concentrate on."
Eastern lends to small grocery stores, dry cleaners, and self-service laundries, mostly in the New York area. Brookline is mostly a multifamily and commercial real estate lender in the Boston area.
Banks generally view lending to self-service laundries and grocers as risky; few make such loans without a guarantee from the Small Business Administration, Mr. Fanger said.
Jared Shaw, an analyst with Keefe, Bruyette & Woods Inc. in New York, said there is little risk for Brookline. Eastern has expertise in this niche, he said, and its chargeoffs amount to less than 1% of the $275 million of loans it has originated.
"It's not the traditional multifamily loan in Boston that Brookline makes, but it is still low risk," he said.
Eastern's problem has been access to capital, Mr. Shaw said. "Its owners don't have the access to funding that Brookline does."
It has taken Eastern seven years to amass $100 million of assets, even though it operates in the largest market in the country. Mr. Fanger said financing has been one of the biggest obstacles.
"We've had to devote a substantial amount of time to raising capital," he said. "There's no question that being relieved of that chore will allow us to focus full time on growing the business."
Mr. Fanger said his plans center around expanding Eastern's offerings. His company provides working capital loans to finance equipment purchases, he said, but many large customers would like to buy their buildings.
"With our best customers, we'd like to be able to bid on those transactions," he said. "We've never been able to offer long amortizations at competitive rates."
Eastern would be Brookline's second acquisition. In January 2005 it bought the $435 million-asset Mystic Financial Inc. of Medford, Mass., for $65 million.
Founded in 1871, Brookline was a mutual savings bank for its first 127 years. It sold a minority stake to investors in March 1998, raising $135 million. Five years later it sold the remainder of its stock, raising another $333 million.
Anthony R. Davis, who covers Brookline for BankAtlantic Bancorp's Ryan Beck & Co. Inc. in Livingston, N.J., said the company wanted to use its capital to make deals in the Boston area but looked elsewhere when none turned up.
Ramping up its bread-and-butter business lines, commercial and multifamily real estate lending, was not an option, since Brookline has become increasingly concerned about growing weakness in those sectors, Mr. Davis said.
"They're shaking their heads over the way … [loans] are being priced," he said. "If they can't find any attractive opportunities, they'd rather not play."
Mr. Bechet said the spreads on many of the credits Brookline has reviewed do not reflect the risks it would have to take. He blamed the situation on heightened competition.
"A lot of community banks have entered the field in the last five years, and they have been kind of naive," he said. "They have made pricing decisions that do not make sense."
Mr. Bechet said Brookline has no plans to merge Eastern into Brookline Bank. Mr. Fanger said he expects a free rein as long as his company produces a profit, and he was quick to add that he fully expects it to do so.
"We feel we have an attractive investment opportunity over the next several years," he said.
He said he knew Eastern needed additional financial backing to grow, and he is delighted that it is coming from Brookline Bancorp.
"I grew up in Brookline, so selling to my hometown bank means a lot to me personally," he said.
