Interview: William Horlitz

Editor's Note: William Horlitz, a bank regulator for 39 years, retired as deputy assistant to the Minnesota Commissioner of Commerce in January. He was the state's top bank regulator for the last year, after spending nine years as the assistant to the top bank regulator. Editor Tom Bengtson caught up with Horlitz recently at a Saint Paul restaurant where they had the following conversation:.Q. You commuted to the Commerce Department in downtown Saint Paul from Rochester, Minn. How did you deal with a daily 150-mile roundtrip commute?.When I started with the FDIC on Dec. 3, 1973, I was working for my dad in the construction business. About six months into my FDIC job, my dad got sick and he was running a construction project in Rochester. So while I was training to be a bank examiner during the day, three nights a week I drove to Rochester to meet with the construction crew. So I started my career commuting from Minneapolis to Rochester, and I am ending my career, commuting from Rochester to the Twin Cities..When you travel and you are used to being behind the wheel of a car it is not that big of a deal. Had I moved to the Twin Cities, I probably would have moved to the western suburbs and the commute during rush hour would have been just as long..Q. Tell us about your career..I started with the FDIC in the Twin Cities, worked for a couple of years, then was sent to Willmar, Minn., where I became a commissioned examiner and stayed for seven years. Then when the manager position for the Rochester territory opened up I applied for it, got it, and was there from 1984 to 2002. While there, I had a pretty good crew and we did examining all over the United States, spent a lot of time in New England and New York. During the oil and gas crisis we were in Texas and Oklahoma..Q. As you reflect on your career, what thoughts come to mind?.I remember the first real crisis. I was at Peter's Resort on Lake Minnewaska watching the news when it was announced that Penn Square Bank had been taken over by the FDIC and I thought to myself, "Gee, I wonder who I know is going to be there next week?" It turned out to be me. That had a lot of sensationalism to it because it was a big failure in the oil patch. There were congressional hearings that took place over it. They had originated a couple billion dollars in oil and gas participations that they had sold to some of the biggest banks in the country. Continental Illinois indirectly failed because of its Penn Square investments and that was the 8th-largest bank in the country. Northern Trust, Seattle First National, all those companies had a lot of paper from Penn Square Bank..Then the ag crisis hit. High interest rates outstripped farm earnings so there were struggles with ag concentrations. But the one interesting thing about the ag crisis was that no more than one bank per county failed during the ag crisis. There were a lot of banks in each county so management clearly made a difference. .The interest rate disintermediation created a crisis for the S&L industry but not all the S&Ls failed either. Ones that took aggressive approaches and got into commercial lending, which they didn't understand, got into a lot of trouble. A number of them resisted the temptation to go after commercial lending, tolerated 18 to 24 months of negative earnings and then ended up surviving — even to this day..Then you fast-forward to the current great recession; there has been a lot of over-building. We had a significant number of bank failures in Minnesota, 21 to date, so we over-built up here, particularly the last 20 percent. There was a lot of non-core funding that fed that..Q. Did too many banks start up in the 1990s?.At the end of my FDIC career and the beginning of my state career there were a lot of de novo charters. The de novo charters predominantly involved individuals who were displaced from larger banks. They were getting severance packages, they had money to invest and they were experienced lenders so they had loan portfolios. They were able to do a charter, fund a pretty good size bank. There were also individual mortgage brokers who had some wealth and did some chartering. They had the capital. They met the statutory factors for FDIC insurance so it's America, you get an opportunity..Q. Do you see similarities between the crises?.We always said if there is a common thread to all of the crises, it was concentrations in a sector, be it oil and gas, agriculture, or real estate. There was easy access to funding and there was out-of-area lending. And then under-pinning all that was perhaps some relaxation in underwriting standards. I did an analysis of the 25 most profitable banks in Minnesota at the end of 2011; how did they differ from the average banks? If you backed out provisions for loan losses all were about the same for return on assets, so it really was the allowance for loan and lease losses. So why did a third of them get into some kind of trouble and two-thirds not? It was appetite for risk..Q. The Commerce Department recently was re-accredited by the Conference of State Bank Supervisors. What can you tell us about that?.This is our fifth accreditation. The accrediting program started in 1990 to make sure departments have the staff and training in place to maintain standards. This is important since the state works together with the Feds on examinations..Q. What are your thoughts on the future of the Commerce Department?.We have a very solid, fully staffed division but the biggest impediment going forward is whether we are going to be able to maintain the quality of staffing we have with the inability to pay market salaries to these professionals. We want people with finance degrees and now we are basically a place that provides training until they get a job someplace else. On my staff — about half of whom were hired during my tenure — are some of the best and brightest people I've ever worked with. It is fun to watch these people, sponges of knowledge, wanting to learn. They all came on during this crisis. We threw them in the deep water right away and they responded; they showed they can do the work..Q. What are you going to do in the future?.I am not going to commute 150 miles a day to work. I hope to remain engaged to some extent in the industry, although not on a full-time basis. And, I want to see the world. I like to travel. Last summer I bought a new boat; I only got 10 hours on it. I want to get more than 10 hours on it this year. I have good health, my wife has good health and we would like to take advantage of the freedom that gives us.