Horizon Bank reined in by regulators

Federal and state regulators have imposed tough new restrictions on Horizon Bank of Bellingham, saying its operations and lending practices have endangered depositors' money.

Among other things, the bank must raise new capital, get bad loans off its books, cut back its construction and land-development lending and get the board more actively involved in overseeing operations.

Horizon also can't pay cash dividends without approval of the Federal Deposit Insurance Corp. and the state Department of Financial Institutions. The bank's parent company, Horizon Financial, suspended dividend payments in December.

In their order, which Horizon Bank agreed not to contest, the FDIC and DFI said they "had reason to believe that the bank had engaged in unsafe or unsound banking practices."

They criticized the bank's management for "policies and practices (which) are detrimental to the bank and jeopardize the safety of its deposits," and said the board had "failed to provide adequate supervision over and direction to" management.

The order, while called a "corrective action plan," necessarily raises concerns about Horizon's future. A similar order last summer preceded the federal seizure of Washington Mutual.

"It's as serious as they come," said Jeff Rulis, a banking analyst for D.A. Davidson in Lake Oswego, Ore. "They're basically saying, 'Address these things or we'll close your bank.' "

Regardless of what lies in store for Horizon, its depositors are protected up to the FDIC limit of $250,000.

Horizon also disclosed Monday that the Federal Reserve Bank of San Francisco, citing "the seriousness of the supervisory concerns," last month barred the company from handing out any "golden parachute" severance packages to senior executives without approval from regulators.

Since the banking crisis hit full-force last year, regulators have become more aggressive about overseeing and, if necessary, closing banks. At least two Northwest banks besides Horizon — Westsound Bank of Bremerton and Columbia River Bank of The Dalles, Ore. — are operating under regulatory supervision.

As of Dec. 31, Horizon Bank had nearly $1.5 billion in assets. It has 19 branch offices, four commercial-loan centers and four real-estate loan centers in Whatcom, Skagit, Snohomish and Pierce counties.

At the end of 2008, past-due loans, nonperforming loans and foreclosed assets totaled $174.8 million, nearly 12 percent of the bank's total assets. The bank's allowance for loan losses was $25.3 million.

In November, Horizon Financial filed a shelf registration with the Securities and Exchange Commission to sell up to $100 million in stock, debt or a combination or both. But with the holding company's stock price at less than $2, Rulis said, raising new capital will be a tough sell.

Horizon shares closed Monday at $1.94, down 43 cents, or 18.1 percent.

Rulis also noted Horizon's heavy reliance on brokered deposits — "hot money" that chases high CD rates and can quickly flow out of a bank. As of Dec. 31, brokered deposits accounted for nearly 21 percent of the bank's total deposit base.

"Ball it all up, and these guys have got their work cut out for them," said Rulis, who rates Horizon Financial "underperform." "I don't think it's a foregone conclusion they will close, but it's going to be tough."

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