First Banking Failure of 2010 To Cost FDIC $539 Million

2010’s First Banking Failure Reveals That Almost Half Of Failed Horizon Bank’s Assets Were Worthless

After a holiday rest of three weeks since the last banking failures on December 18, 2009, regulators announced the first banking failure of 2010.   The honor of the first failed bank of 2010 belongs to Horizon Bank of Bellingham, WA.   The FDIC entered into a purchase and assumption agreement with Washington Federal Savings and Loan Association to assume all deposits and essentially all the assets of failed Horizon Bank.

Horizon was an 18 branch bank with $1.3 billion in total assets and $1.1 billion in total deposits.   The deposits of the failed bank were assumed at par by Washington Federal.   As has been the case in virtually all recent banking failures, the acquiring bank agreed to purchase nearly all of the failed banks assets under a loss-share transaction with the FDIC.   In the case of Horizon Bank, the FDIC entered into a loss-share transaction with Washington Federal covering $1.0 billion (or 77%)  of the $1.3 billion in purchased assets.

The FDIC’s rationale for utilizing a loss-share transaction is that by keeping failed banking assets in the private sector, losses will be minimized.   Another benefit of the loss-share transaction is that it allows the FDIC to more easily solicit bids for failed banks by limiting potential losses of the acquiring bank.

The Horizon Bank failure will cost the FDIC an estimated $539 million, which amounts to a shocking 41% of Horizon Bank’s assets at the time of closing.   The closing of Horizon Bank certainly came as no surprise – last year Horizon received a “cease and desist” order from the FDIC and was viewed as critically undercapitalized by regulators.   For the quarter ending September 30, 2009, Horizon Bank reported a net loss of $35 million and $128 million in non performing assets and was unable to raise additional capital.  The only real surprise for 2010’s first banking failure was how little the bank’s loan portfolio was really worth.

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