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Bellingham Herald   Nov. 05, 2009

Horizon Bank continues to suffer from equity problems

By Dave Gallagher

Bellingham-based Horizon Bank continues to have significant problems meeting the demands of its cease-and-desist order, according to its latest regulatory filing.

As of Sept. 30, Horizon Bank's Tier 1 leverage capital ratio - also known as equity ratio and a measure of the health of a bank - had fallen to 0.8 percent, down from 3.2 percent as of June 30 and 6.1 percent at the end of March, according to the Call Report and Thrift Financial Report Data from the Federal Deposit Insurance Corporation.

In a cease-and-desist order issued in March, the FDIC told the bank to get its Tier 1 ratio up to 10 percent of the bank's total assets by the end of November. To even be considered adequately capitalized by FDIC guidelines, a bank needs to have a Tier 1 ratio of 5 percent.

Horizon is expected to publicly release its earning results later this month. Horizon CEO Rich Jacobson did not immediately return phone messages Wednesday, Nov. 4, seeking comment.

Numerous banks across the country have had problems with declining Tier 1 capital ratios, stemming from troubled commercial and residential loans. As foreclosures and defaults mount, followed by continued drops in land values, banks continue to shift equity to cover those losses. As the Tier 1 ratio of a bank falls out of the well-capitalized category, it becomes increasingly difficult to raise capital through traditional means, such as brokered deposits, said Scott Jarvis, director of the Washington state Department of Financial Institutions.

Jarvis would not comment on Horizon Bank specifically, but he expressed concern that community banks in general are getting lost in the shuffle when it comes to getting the industry back on its feet. The largest banks deemed too big to fail and smaller banks considered to be in good shape received government help through the Troubled Asset Relief Program, creating what he said was a double standard when it comes to who gets help.

"We would like to see more TARP money freed up, because there are many community banks that could benefit," said Jarvis, adding that it would be difficult for some community banks to bounce back without an infusion of capital. In a report released earlier this year, DFI expects to see further bank closures unless real estate or capital markets immediately improve.

Across the state, Tier 1 capital ratios have been steadily dropping. According to the DFI, the ratio for Washington banks fell from 10.13 percent in December 2007 to 9.17 percent in June 2009. Among banks that have branches in Whatcom County and are operating under cease-and-desist orders, Everett-based Frontier Bank had a Tier 1 ratio of 3.2 percent as of Sept. 30, while Sterling Savings Bank had a Tier 1 ratio of 6.8 percent.

"It will continue to be a challenge for the next year for community banks," Jarvis said.

In previous interviews, Jacobson said Horizon needs to find an outside investor to raise its Tier 1 capital to the 10 percent level.