Washington regulators Friday closed Westsound Bank of Bremerton, Wash., bringing the total number of U.S. bank and thrift failures during 2009 to 33.

Westsound was a subsidiary of WSB Financial Group ( WSFG).

Please see TheStreet.com's Bank Failure Map for an interactive summary of all previous bank and thrift failures during 2008 and 2009.

The Washington Department of Financial Institutions appointed the Federal Deposit Insurance Corp. as receiver. The FDIC immediately entered into a purchase-and-assumption agreement with Kitsap Bank of Port Orchard, Wash., under which Kitsap Bank will take over all of Westsound's retail deposits and branches.

Westsound's nine offices were set to reopen Monday as branches of Kitsap Bank.

Kitsap Bank chose not to take over about $9.4 million in brokered deposits. The FDIC will pay the brokers directly and instructed that group of depositors to contact their brokers.

Westsound Bank had $334.6 million in total assets and $304.5 million in deposits. In addition to the deposits, Kitsap Bank purchased $49.3 million of assets. The FDIC retained the remaining assets for later disposition, and estimated the cost to its insurance fund would be $108 million.

In a press release announcing the closing of Westsound Bank, the Washington Department of Financial Institutions cited "very poor lending practices over the past several years." The institution had been operating under an FDIC cease-and-desist and was fighting further enforcement actions from the agency.

TheStreet.com Ratings had assigned Westsound Bank an E-plus (Very Weak) financial strength rating in March, based on Dec. 31 financial information.

According to preliminary regulatory data supplied by SNL Financial, Westsound's ratio of nonperforming assets (including loans 90 days past due or in nonaccrual status, and repossessed real estate) was 38.21%. Construction and development loans made up the bulk of the nonperformers.

Even though Westsound had a very high number of problem loans and had reported a $31 million net loss for 2008, the bank was still well capitalizedunder ordinary regulatory requirements, with a tier 1 leverage ratio of 8.02% and a total risk-based capital ratio of 10.93% as of March 31.

Unless under a regulatory order requiring higher capital ratios, a bank or savings and loan association needs to maintain a tier 1 leverage ratio of 5% and a total risk-based capital ratio of 10% to be considered well capitalized. These ratios need to be 4% and 8%, respectively, for an institution to be considered adequately capitalized.

TheStreet.com recently published a preliminary list of undercapitalized banks as of March 31. The list likely will be significantly expanded once a complete set of finalized data for all banks and thrifts is available.

Westsound was the second Washington bank to fail this year. On Jan. 16 Bank of Clark County failed and its branches and deposits were acquired by Umpqua Holdings Corp. ( UMPQ).

Georgia leads all states with 11 bank or thrift failures during 2008 and 2009, followed by California with nine failures and then Florida, Illinois, and Nevada, each of which has had four bank or thrift failures.

Free Financial Strength Ratings for Banks and Thrifts

Although it was another costly day for the FDIC, Westsound's failure created no losses for depositors.

Still, the likelihood of losses to depositors with uninsured deposits is higher when the FDIC is unable to find a buyer for a failed institution. The agency has been unable to line up buyers for five failed banks since March 20.

The failure of Westsound also highlights the inconvenience faced by customers with brokered deposits in a failed bank. These depositors usually wait several weeks for their money, since the brokers must provide information to the FDIC and then receive payouts from the agency. The depositors then need to shop for new parking places for the cash, probably at much lower rates than the ones they have locked in.

The FDIC has temporarily increased the basic individual deposit insurance limit to $250,000 on non-retirement balances and has waived insurance limits on non-interest-bearing checking accounts, but the waiver is set to expire at the end of the year, with most other balances reverting to their usual $100,000 limit.

Another thing to consider is that even if your personal deposits are under FDIC insurance limits, you or someone you know are probably associated with a business, organization or government entity (such as a school district) with large deposits of somebody else's money in a local bank. In this environment, it is a very good idea to look into the health of your bank.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans. They are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

RealMoney Barometer Poll
1 What would best describe your stance heading into the coming week of trading?
Bullish
Bearish
Neutral
2 Which of these sectors do you think is set to move up in the coming week?
3 Which of these sectors do you think is set to move down in the coming week?


View the results without voting
Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.