The federal regulators have seized Westsound Bank, Bremerton, Washington, and sold its deposits to Kitsap Bank, the Federal Deposit Insurance Corp said on Friday.

The Bremerton-based bank operated nine branches, mostly on the Olympic Peninsula. It was the nation's 33rd institution insured by the FDIC to fail this year, and the second bank to fail in Washington state.

As on 31 March 2009, Westsound Bank had total assets of $334.6 million and total deposits of $304.5 million. Kitsap will not assume the approximately $9.4 million in brokered deposits. The FDIC will pay the brokers directly. Customers who placed money with brokers should contact them directly for more information about the status of their deposits.

''This unfortunate event is the result of very poor lending practices during the past several years,'' said Brad Williamson, bank director for the Department of Financial Institutions.

''While the current management team worked diligently to overcome problems with the bank's portfolio, a combination of the downturn in the local real estate market and the overall economic situation combined to make it impossible for the institution to continue,'' he added.

The regulatory intervention followed numerous warning signs that Westsound was struggling. The bank's parent company, WSB Financial Group, disclosed ''substantial doubt'' about its ability to continue operating in a regulatory filing last month.

The bank was hard hit losses on construction loans. Bad loans at the bank totaled $131.8 million at the end of December.

State regulators seized the bank Friday and put it into receivership under the FDIC. The FDIC then reached an agreement with Kitsap Bank to assume most of Westsound's deposits. Kitsap Bank will also buy $49.3 million worth of cash, cash equivalents, marketable securities and loans secured by deposits, according to the FDIC.

Shutting down Westsound is expected to cost the federal Deposit Insurance Fund about $108 million.

Westsound's branches were located in Clallam, Kitsap, Jefferson and Pierce counties, along with a branch bank in Federal Way.

Terry Peterson, Westsound's president and chief executive, was hired in April 2008, just before DFI and the FDIC issued a joint cease-and-desist order against the bank for lack of safety and soundness. At the time, Peterson said he was working toward making Westsound viable.

Kitsap Bank, based in Port Orchard, operates 26 offices and branches on the Olympic Peninsula and in Pierce County.