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Bellingham Herald   March 03, 2009

Horizon Bank slapped with tougher restrictions from state, federal regulators

By Dave Gallagher

Bellingham-based Horizon Bank has been hit with new restrictions by state and federal regulators that include cutting back on its land-development lending as well as getting bad loans off its books.

The Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions issued a cease and desist order against the bank on Monday, March 2. The order is a formal action requiring the bank to take corrective measures in a number of areas within 270 days. Horizon Bank agreed to the order without admitting or denying any of the allegations in it.

The goal in the next 270 days is basically to reduce bad assets and bring in more capital, said Rich Jacobson, Horizon's CEO.

"The core part of bank is doing very well. The problem for us and many community banks has been the concentration of real estate loans. We've been dealing with the fallout starting from the subprime loan problems. We didn't make those loans, but Northwest real estate has been impacted by it," said Jacobson, noting that many of the loan problems were in Snohomish and Pierce counties.

The actual order from the FDIC and WDFI is much more blunt, alleging Horizon was involved in "unsafe or unsound banking practices," writing that the management's policies and practices were detrimental to the bank.

While Horizon will have to curtail its construction and land-development loans, Jacobson said other banking services used by customers will not be impacted, and all deposits remain fully insured to the highest limits set by the FDIC.

"This is something we want taken care of, so we are working diligently to fully comply with the order as quickly as possible," Jacobson said.

The report did not specifically address any of the bank's current residential projects, such as the 739-home Fairhaven Highlands development. The bank formed a partnership with developer David Edelstein to buy nearly 85 acres south of Bellingham off Chuckanut Drive. While admitting it could be a source of raising capital if they sold the land, Jacobson said that is not their intention.

The 10-page order from regulators detailed a variety of specific corrective orders, including:

The bank needs to get its Tier 1 capital - or equity capital - to 10 percent of the bank's total assets. Jacobsen said that as of Dec. 31, Horizon's Tier 1 capital was slightly more that 8 percent. Jacobsen said 10 percent is an attainable goal within the 270-day period.

Along with curtailing construction and land-development loans, the bank will eliminate all remaining assets considered a loss or doubtful for recollection.

Horizon will need to develop more comprehensive plans and policies, including a capital management plan and better monitoring of lender/borrower relationships.

The bank's board of directors will need to increase its participation in Horizon, including increased meetings to view the bank's reports.

Horizon Bank's stock fell 18 percent to $1.94 a share on Monday. The $1.45 billion bank has 19 full-service offices, four commercial loan centers and four real estate loan centers in Whatcom, Skagit, Snohomish and Pierce counties.

Reporter John Stark contributed to this story.