Government regulators have seized Bremerton-based Westsound Bank — which has branches in Port Angeles, Port Townsend and Sequim — and sold it to Kitsap Bank.

Westsound’s branch banks on the North Olympic Peninsula — and its five other branches in Bremerton, Poulsbo, Federal Way, Gig Harbor and Port Orchard — will open Monday as Kitsap Bank branches.

Deposits in the bank — hit hard by massive construction lending losses — are guaranteed by the FDIC (Federal Deposit Insurance Corp.) up to $250,000.

Officials at the DFI — state Department of Financial Institutions — said they did not anticipate losses by Westsound Bank depositors.

Over the weekend, Westsound customers should still be able to withdraw money from ATMs and make debit-card purchases.

Checks drawn on accounts at the bank will continue to be processed. Loan customers should continue to make their payments as usual.

But some online banking services may not be available until Monday.

The state announced its seizure of Westsound Bank on Friday evening, citing “severe asset problems, significant losses and inadequate capital.”

Immediately upon taking possession, the state appointed the FDIC as receiver.

Then the FDIC immediately entered into a purchase-and-assumption agreement with Kitsap Bank, based in Port Orchard.

State regulators were present at the bank’s headquarters in Bremerton and in the branches on Friday.

The bank’s offices appeared to be operating normally until 5 p.m., when the doors were locked.

“It is regrettable to have to take such actions, but DFI did so to ensure the soundness and stability of banking in Washington state,” DFI’s Director of Banks Brad Williamson said in a statement.

“This unfortunate event is the result of very poor lending practices during the past several years.”

Westsound is the 33rd U.S. bank to fail this year as the struggling economy and falling home prices take their toll on financial institutions.

The FDIC said Westsound Bank had $334.6 million in assets and $304.5 million in deposits.

The failure is expected to cost the FDIC deposit insurance fund an estimated $108 million.

The closure of Westsound Bank is the second in Washington State this year. DFI closed the Bank of Clark County on Jan. 16.

Prior to 2009, when Washington Mutual failed, the most recent bank closure in Washington state was the 1993 closure of Emerald City Bank of Seattle.

Seattle-based Washington Mutual became the biggest bank to fail in U.S. history. It was closed in September while suffering from losses from soured mortgages and liquidity problems.

In addition to assuming Westsound’s deposits, Kitsap Bank will purchase $49.3 million of assets comprising cash, cash equivalents, marketable securities and loans secured by deposits.

The FDIC said it will retain the remaining assets for later disposition.

Kitsap will not assume the approximately $9.4 million in brokered deposits at Westsound. 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, the FDIC said.

Westsound Bank got into trouble during the run-up of the housing market when it made high-end home construction loans that didn’t require income verification.

The loans were based on a program offered by the former Countrywide Financial Corp. But after authorities questioned the loans, Countrywide pulled its program and left Westsound without an exit strategy.

The turmoil that followed included an order from the FDIC and much of the leadership left.

As reported in the Peninsula Daily News in April, a statement questioning Westsound Bank’s future was part of the parent company’s last month filing with the federal Securities and Exchange Commission.

WSB Financial Group Inc., the Bremerton-based holding company for the bank, wrote in its annual 10-K filing on Friday that its deteriorating capital position and an order by the Federal Deposit Insurance Corp. causes the company to “believe there is substantial doubt about our ability to continue as a going concern.”

WSB Financial blamed “steep losses” in 2007 and 2008 on enforcement action by the FDIC that has limited its ability to increase deposits.

It has been operating under a cease-and-desist order since last year.

The company also revealed in its filing that the FDIC has found the bank to be in non-compliance in some areas of its enforcement agreement.

In particular it found the bank had violated consumer banking laws, according to the annual 10-K report.

The FDIC “recently” said it wanted to impose further regulatory action, but Westsound objected and said it would appeal that decision if necessary, according to its filing.