Regulators seized City Bank of Lynnwood Friday and turned its banking assets over to Whidbey Island Bank in Coupeville.

Regulators seized City Bank of Lynnwood on Friday and turned its banking assets over to Whidbey Island Bank in Oak Harbor.

The move comes a month after City Bank, which had assets of $1.1 billion and lost $119.5 million in 2009, disclosed its troubles were even deeper than first reported. The Federal Deposit Insurance Corp. gave it until April 10 to raise new capital or sell itself to another bank.

City Bank was the state’s 14th largest, with eight branches and five loan offices from Puyallup to Mukilteo. Its primary regulators were the Washington Department of Financial Institutions (DFI) and the FDIC.

It marks the state’s fifth bank failure this year, and the nation’s 50th. Regulators closed seven banks in other states on Friday. In a bank failure, depositors’ money is insured up to $250,000 per account by the FDIC.

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City Bank’s branches will reopen Saturday as Whidbey Island Bank, which has 18 branches in the Puget Sound area. The parent company, Washington Banking Co., is publicly traded.

City Bank customers can continue writing checks, using online services and ATM and debit cards as usual, and loan customers should continue making payments as usual, regulators said. They will hear from the new owner when it has integrated the banks’ computer systems so they can use Whidbey Island Bank’s branches.

Inadequate capital and severe loan losses caused the closure, DFI said.

“These are exceptionally challenging economic times for those community banks focused on commercial real-estate land acquisition and construction lending,” DFI Director Scott Jarvis said.

City Bank’s branches are just south of Whidbey Island Bank’s existing network, and there is no overlap, the new owner said in a news release. It said it hopes most City Bank employees, about 150, will be able to stay.

“The fewer layoffs and branch closures, the better, from our perspective,” said Brad Williamson, director of banks at DFI.

Whidbey Island Bank acquired 70 percent of City Bank’s deposits and 60 percent of its assets, excluding about $328 million in brokered deposits, $180 million in foreclosed real estate and $132 million in nonperforming loans. The deal includes about $425 million in loans, less than 12 percent of them in construction and development.

On a percentage basis, City Bank had foreclosed on more real estate as of September than any other Washington bank: more than 10 percent of its assets.

“The bank had been hugely impacted by the downturn in the real-estate market,” Williamson said. “For the last 18 months, they have written off tens of millions of dollars.”

Founded in 1961, Whidbey Island Bank will have 26 branches in six counties in Northwest Washington after the acquisition.

While most of Washington’s 90-some banks and thrifts are at least reasonably healthy, more than two dozen are operating under some degree of enhanced regulatory oversight.

The FDIC’s other bank seizures Friday included three in Florida, two in California and one each in Massachusetts and Michigan.

Last year, 140 banks failed in the U.S. That was the highest annual number since 1992, the peak of the savings and loan crisis. The failures last year cost the FDIC’s insurance fund more than $30 billion.

Twenty-five banks failed in 2008 and three in 2007. FDIC Chairman Sheila Bair has predicted bank failures to peak this year and be slightly more than in 2009.

Material from

The Associated Press

is included in this report.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com