Anatomy of a Small Bank

I was just about to recycle the annual report that I received from Brookline Bancorp, a small savings and loan here in Massachusetts that is presumably typical of an old-school bank. Then I thought it might be interesting to see how the sleepy old way of doing business fared in 2008.

The bank had assets of $2.6 billion. Of that, more than $2 billion was money that it expected to get repaid on loans it had issued to borrowers. As long as the Massachusetts real estate market does not collapse, this money should continue to flow in. The bank allows only $28 million for expected loan losses, roughly 1% of the total owed to them. Loans that had been sold upstream and converted into cash had been invested almost exclusively in government-guaranteed securities (some of them Fannie Mae and the like, which were not explicitly guaranteed until recently).

Profit before taxes was $21 million. Roughly 40 percent of that profit was paid in taxes, leaving $12.8 million for investors, down from $21 million in 2006. (I.e., an investor in Brookline would give up roughly 50 percent of his or her profits to the government through the corporate tax and then through state and federal income tax on dividend payments.)

How did the employees do? They were paid $21 million in 2008, up from $19 million in 2006. The 74-year-old CEO was paid more than 10 percent of the total received by all 220 full-time employees. Richard P. Chapman, Jr. earned $2.24 million in 2008 (100X what a teller earns), $2.2M in 2007, and $1.7M in 2006. Was it necessary to pay the guy this much to prevent another bank from hiring him away? Presumably not, as his letter to shareholders indicated that he felt that he was too old to continue as CEO and would be retiring this year.

How does a guy at the end of a long career in local banking see our prospects? “All the risks in 2009 seem on the down side,” writes Mr. Chapman.

[Could the Board have gotten someone to manage 220 people for less than $2.24M? Consider Gary Kelly, the 52-year-old CEO of Southwest Airlines. He earned about $1M in 2008 (source) while managing an enterprise with $11 billion in revenue and more than 35,000 employees.  Gary Kelly works in a much more challenging industry and is at much greater risk of having to work evenings or weekends, especially if there is a problem with one of Southwest’s more than 500 Boeing 737s.]

9 thoughts on “Anatomy of a Small Bank

  1. How would I go about finding who own the majority of the Brookline Bancorp stocks? More importantly how did these investors choose the Board and how did this board decide the top employees compensation?

  2. Tekumse: As with other public corporations in the U.S., the company has exclusive control of the shareholder list. The shareholders do not choose the Board. In a U.S. public company, the existing management and Board nominate any new Board members. So if the current Board is the CEO and his golfing buddies, the future Board will also be the CEO and his golfing buddies (unless he takes up yachting).

  3. Wow the more I read about this the scarier it gets. None of this was ever even remotely implied in all kinds of econ and business classes I took. I was not a business major so they were not that many but still somebody should have said something along the way.

  4. @philg: Board and management assignment works the same in the Netherlands.
    It’s interesting to see that you seem to be in favor of more power for shareholders. Over here, quite the opposite discussion is taking place. Shareholders (with their proposed short term interests) are (partly) held responsible for the banking crisis by requiring better company results. Logic seems to be that this “forces” companies to cheat or take extreme risks. On the other hand major shareholders are whipped because they haven’t done anything to prevent high salaries. But in general compensation is quite modest: to earn 2.2Mio, you should be CEO of DSM (Dutch chemical company) with 23.591 employees.

    Actually, I’m afraid that competetion is part of (human) nature (men in particular). That creates a lot of new ideas and wealth, but also makes sure that too many risks are taken. So every now and then, these bubbles will happen and correction takes place. No matter what regulation you put in place.

  5. Guido: If there had been a regulation preventing management from rewarding themselves with hundreds of millions of dollars in compensation based on short-term profits (which ultimately proved to be fake; see Merrill Lynch and the rest of the publicly owned banks!), the U.S. system of corporate governance might not have led to our collapse. (I guess it was also helped by our government’s conviction that these firms were too big to fail; instead of just impoverishing the shareholders of Wall Street firms, the Feds ended up impoverishing all Americans.)

  6. @philg: that’s why another part of the discussion over here is to limit bonuses (like I said, not comparable to the US) and link them to multi-year (about 7) year performance.

    We have 2 regulatory institutions that will prevent what happened in the US. No more than 4,5 times the income can be spent for a mortgage, thus preventing subprimes.

    It’s strange to see that we in Europe mostly see the US as the Ultimate Capitalist country. We even have an expression going like “we don’t want no American situations over here”. Always related to the extremes of capitalism (poverty, richness).

    But ABN AMRO was taken over by foreign banks RBS/Fortis/Santander and our Finance secretary said: “let the market do its work”. If I’m correct foreign take-overs of banks aren’t even possible in the US. ING Direct came into trouble because they were so successful but could only invest their profits in the US, and ended up in the mortgage mess.

    The US spends huge amounts of money to save the Detroit car companies. Our government let Fokker (Dutch pride: airplane manufacturer) and DAF (Dutch pride: car manufacturer) go bankrupt despite all claims for losing aviation/car industies (knowledge/jobs).

    Sometimes we seem to be more capitalist than the US 🙂

  7. philg… Local transgressions such as the bank CEO in your story pale in comparison to Pension Spiking…

    In this case, public employees (paid with your tax money) create, then inflate, grandiose pension plans, which “bill the taxpayer” to infinity.

    Consider this “double whammy”…

    1) Pay public employees “more than market value” due to unionization then…

    2) Due to Pension Spiking continue to pay them (a high percentage of full-pay) for many retirement years (until their death, unless a survivor-clause in effect, so “we” get to pay many years after their death).

    Do the math. How long can this go on before national bankruptcy?

  8. I may be misunderstanding the small part of the discussion about who has “exclusive control of the shareholder list” but no such thing exists. SEC requires Form 13F to be filed by institutional investors in public companies disclosing their holdings. A list of largest shareholders is usually compiled from these forms. For example (Major holders link on Yahoo Finance)

    If you’re interested in experiments in gaining control of companies via the available mechanism of voting your shares (and pooling with others with similar interests) take a look at

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