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Originally published January 8, 2010 at 6:24 PM | Page modified January 9, 2010 at 12:32 AM

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Horizon Bank closed by regulators

The failure of Horizon Bank, the 12th-largest in Washington state, will cost the FDIC an estimated $539 million.

Seattle Times business reporter

Horizon Bank of Bellingham, which has struggled for more than a year under a crushing weight of bad real estate loans, was closed by state regulators Friday evening — the first U.S. bank to fail in 2010, though undoubtedly not the last.

Washington Federal, a much bigger and financially stronger Seattle-based lender, will take over nearly all of Horizon's $1.3 billion in assets and $1.2 billion in deposits.

The Federal Deposit Insurance Corp. will share losses with Washington Federal on $1 billion of Horizon's assets, limiting the Seattle bank's downside risk while strengthening its competitive position in northwest Washington. Details of that loss-sharing agreement weren't disclosed.

"Our shareholders will be very well protected," Washington Federal chief executive Roy Whitehead said in a phone interview from Horizon's former headquarters in Bellingham. "This will be very accretive to earnings beginning Day One."

Washington Federal paid nothing for Horizon. Whitehead said he also expects to get a check from the FDIC, after it spends the weekend sorting through Horizon's books and figuring out how much the bank's liabilities exceeded its assets.

The FDIC also expects to pay out $188 million to cover high-interest deposits brought to the bank by brokers.

All told, the FDIC expects Horizon's failure to cost the agency's insurance fund $539.1 million.

Horizon, the 12th-biggest bank headquartered in Washington state, has 18 branches in Whatcom, Skagit, Snohomish and Pierce counties, as well as four commercial loan centers and four real estate loan centers.

Horizon's three drive-up branches, which normally are open on Saturdays, will reopen today with normal business hours as Washington Federal branches. Horizon's 15 other branches will reopen on Monday.

Over the weekend, Horizon customers can access their accounts through ATMs or online, write checks and use debit cards as usual.

Eventually, Whitehead said he expects to combine seven or eight Horizon branches with nearby Washington Federal branches. In two or three of those cases, he said, the Washington Federal branch will be the one to close.

Most of Horizon Bank's 249 employees will be unaffected, he said, but "everybody that's displaced will have an opportunity to post for a new position with Washington Federal."

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Washington Federal has been holding positions open and slowing its hiring in anticipation of picking up a distressed bank, he said.

Washington Federal now has 150 branches in eight states and had $12.6 billion in assets as of Sept. 30. After adding Horizon's assets, it will rank among the 50 largest banks in the country.

Horizon was brought down by a heavy concentration of loans to homebuilders and developers. As of Sept. 30, 81.3 percent of its $975 million loan portfolio consisted of real estate loans.

When the housing bubble popped, those borrowers couldn't repay their loans. Horizon foreclosed on millions of dollars in properties, and charged off millions more in bad loans. Those chargeoffs eroded the bank's capital base: Tangible capital shrivled from $120.5 million on Sept. 30, 2008, to $12.2 million a year later.

"Institutions with large concentrations in real estate loans, they've been writing down asset values month after month after month," said Brad Williamson, director of the state Division of Banks. "It's a race against time — absent new capital, it's just a matter of time before you run out of capital."

Williamson said his agency had been watching Horizon "very closely" for more than a year, and "it became clear about two quarters ago that the institution needed fairly immediate recapitalization."

In March 2009, regulators placed the bank under tighter supervision, restricting its lending practices and other operations. Last month, the FDIC ordered the bank to raise new capital or combine with a stronger institution by Jan. 2.

Shares in Horizon Financial plummeted as the bank sank deeper and deeper; on Friday they closed at 22 cents, giving the company a market capitalization of less than $2.7 million.

Horizon's executives had agreed to surrender the bank's charter and had known for about a week that Friday would be the bank's last day, Williamson said.

Given how many of Washington banks urgently need new capital, and the unwillingness of most investors to provide it without assistance from the FDIC, said Williamson, "there probably will be more banks closed this year."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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