Pay scale decreases threaten to drive out S&L examiner staff.

Pay scale decreases threaten to drive out S&L examiner staff

The Office of Thrift Supervision (OTS) could face a hemorrhage of its best and brightest examiners in Southern California as it seeks to bring a uniform nationwide pay scale to its workers.

"We haven't met good examiners who are not looking for a job," said Babette Heimbuch, president of First Federal Savings Bank of California, based in Santa Monica.

The examination process is the primary means the government has of regulating the thrift industry. Some attribute the savings and loan crisis to negligent oversight by regulators. By the same token, the loss of top-notch examiners at the OTS would seem to cast doubt on the government's ability to rein in the industry.

OTS examiners had been employed by the 12 Federal Home Loan Bank branches until last summer, when the were transferred to the OTS under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The FHLB paid examiners more generous salaries than they would have received under government pay scales. It is estimated that supervisory agents receive between $125,000 and $150,000, field examiners, between $60,000 and $70,000 and analysts, between $35,000 and $40,000.

Although Janice Smith, a spokeswoman for the OTS, said the OTS does not intend to cut anyone's salary, many examiners in the 11th district, which includes California, presumably fear their salaries may become frozen as a result of imposing a unitary pay scale.

Such a drain would occur ironically at a time when many in the financial industry have words of praise for federal examiners.

"Five years ago most examiners should have been retired; now many are in their 20s and 30s and it's more like a public accounting firm," Heimbuch said.

In fact, five years ago the FHLBs took the bold step of replacing the government pay scale with their own, thereby enhancing their ability to recruit more desirable candidates.

Virtually all the S&L executives surveyed agreed with Heimbuch's praise of OTS examiners. "They are doing a much more professional and thorough job, and their people are more knowledgeable," said Gerald D. Barrone, president of downtown-based Coast Savings Bank.

This sort of respect for the examiners should facilitate their transition to the more remunerative private sector. Heimbuch said of the four examiners First Federal dealt with recently, it would consider hiring two or three of them. Barrone said Coast had even recently hired one examiner who had previously visited the S&L on official business.

In California the OTS may be able to stem the tide by picking up examiners from the California Department of Savings and Loan, which is likely to go out of business. Yet, while the pool of willing replacements may be plentiful here, the level of competence would suffer, most S&L executives predicted.

What may surprise many outside the financial industry, the quality of examiners is far from a matter of indifference to management at either S&Ls or banks. Almost all managers regard the examination process as beneficial and in their own interest.

"Banks should look on examiners as we look at physicians; the examinations are necessary for getting another view of the banks' progress since the last examination," said Alex Alt, an industry consultant.

"They can discover problem areas the bank is not aware of, so a bank should look upon them as friends," he added.

"One reason our bank is in good standing is that we listen to their recommendations and advice," said James M. Degnan, executive vice president of American Pacific State Bank, based in North Hollywood.

The examination reports also come in handy to institutions on the prowl. "Whenever anyone does an acquisition of a bank, it would be very foolhardy not to read the examination report of the bank it is buying as a part of their due diligence job," said one banker.

As might be expected, the chief source of criticism of the examination process is its cost, which in most cases the financial institution bears directly. At $2.4 billion (assets) First Federal, the cost of a recent OTS examination exceeded $100,000. At $221 million (assets) Hancock Savings and Loan, based in Mid-Wilshire, the bill was $50,000 for a recent examination, according to Daniel Wolfus, chairman and president.

Generally the company pays on an hourly basis. For OTS examinations, top examiners are billed at $85 per hour. Currently the OTS is considering billing $485 per day for each examiner. The cost thus varies by the size of the institution and the breadth of the examination, pointed out Norm Katz, a partner of MCS Associates, based in Irvine.

On top of that, there is the opportunity cost of management cooperating with the examiners. "They need this and that, a form and the like; they create havoc," one executive complained.

Along the same lines, some managers bristle at the number of examinations conducted by usually three different regulatory bodies, whether federally or state chartered or a thrift or a bank. A federally chartered institution such as Security Pacific is subject to examinations by the Office of the Comptroller of the Currency, the FDIC and as a bank holding company, the Federal Reserve. Mitigating this is the occasional cooperation among regulators. The OTS and FDIC, for instance, are teaming up in an increasing number of cases.

At least for federally chartered banks inspected by the OCC, the examiners may also contain costs in the future under modified procedures which will allow them to rely more heavily on the work done by the company's independent outside auditor, suggested Bram Goldsmith, chairman and CEO of Beverly Hills-based City National Bank. The new procedure will allow OCC examiners to focus more on the big picture -- the direction of management and its ability to get there, Goldsmith explained.

Although multiple examinations may test the patience of some bankers, they do not all have the same purpose. The OTS concentrates on whether the thrift complies with the rules and regulations, while the FDIC is primarily interested in the soundness and health of the institution, with little concern for whether it operates within the letter of the law, Heimbuch said.

Perhaps because the FDIC's task is more akin to discovering the skeletons in a company's closet, it has been singled out by more S&L executives for special criticism. "They look askance at the thrift industry and have subjected us to an unduly severe treatment," complained one S&L executive confidentially. He charged that the FDIC seemed to require the equivalent of a fire sale valuation of S&L assets.

In general, however, criticism of government examiners is surprisingly muted. Alt said one problem in the past was under-staffed examinations: "Problems could arise and they wouldn't discover them."

Some experts even dismiss the steady stream of less than flattering gossip about examiners. "My experience is that examiners are fairly straightforward, and like other activities, there may be some abuses, but they tend to be relatively isolated; a lot of charges of abuse occur when the examiners are merely being hard-nosed and tough," Katz said.

Goldsmith agreed: "They are highly objective, and the only time there may be friction is when the bank knows a lot more about a borrower than the examiner may see in the loan file, so the examiners queries are not based on the whole picture."

In that case, the examiners could legitimately criticize the institution for lack of adequate documentation, Goldsmith added.

Also, few complained that the examiners wielded their power recklessly over a hapless institution. "The examiners don't try to run the bank and we don't try to second guess areas of their expertise," Degnan said.

Not all may share such a positive view of examiners, but those who might be expected to have the harshest words to say about examiners are not talking.

A few do take exception to the view the examination process is salutory to the institution. Heimbuch said, "The only benefit we receive is perhaps the bolstering of public confidence."

Yet most would not agree with Heimbuch except when talking about state examiners. As with state examiners of S&Ls, Department of Banking examiners come in for unfavorable comparisons with their federal counterparts. "State regulators do not have the quality or knowledge of the federal regulators, and they come in less frequently," Goldsmith said.

Whatever their views of the relative merits of different examiners, executives at banks and thrifts who praise some examiners may not be thrilled to read the unexpurged version of their reports kept at their agency and not for the eyes of the executives.

Examiners for the Federal Reserve are encouraged to appraise management candidly, and their opinions can reportedly be quite caustic, said Jerry Loeser, senior vice president and director of government affairs at First Interstate Bancorp. "I saw one report which literally referred to a `big shot who drove a big Cadillac,'" Loeser said, by way of illustration.