Regulators shut Horizon Bank in Bellingham, Wash., on Friday, the first bank closing of 2010.
The Federal Deposit Insurance Corp. said that Seattle-based Washington Federal Savings and Loan Association has agreed to take on the deposits of Horizon Bank and to purchase essentially all of the bank's assets.
As of Sept. 30, Horizon Bank had assets of $1.3 billion and deposits totaling $1.1 billion.
The 18 branches of Horizon Bank will reopen Saturday as branches of Washington Federal Savings and Loan.
As the economy has soured, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have accelerated and sapped billions out of the federal deposit insurance fund. It fell into the red last year.
The FDIC estimates that the closing of Horizon Bank will cost its insurance fund $539.1 million.
The 140 bank failures last year were the highest annual tally since 1992 at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion last year. The failures compare with 25 in 2008 and three in 2007.
FDIC Chairman Sheila Bair has said the number of bank failures could rise further this year. The agency expects the cost of resolving failed banks to grow to about $100 billion over the next four years.
The FDIC last year mandated banks to prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.
Depositors' money - insured up to $250,000 per account - is not at risk, with the FDIC backed by the government. Besides the fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks.
Banks have been especially hurt by failed real estate loans, both residential and commercial. Banks that had lent to seemingly solid businesses are suffering losses as buildings sit vacant. As development projects collapse, builders are defaulting on their loans.
If the economic recovery falters, defaults on the high-risk loans could spike. Many regional banks hold large concentrations of these loans. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.
Last month, the Obama administration extended until October the $700 billion financial bailout program, saying the fund was still needed to prevent further turmoil in the banking system. Treasury Secretary Timothy Geithner said extending the rescue program also will help homeowners struggling to avoid losing homes to foreclosure and small businesses having trouble getting loans.
Hundreds of banks, including major Wall Street institutions, received taxpayer support through the politically unpopular rescue called the Troubled Asset Relief Program, which had been due to expire at year's end. Congress enacted the program in October 2008, at the height of the financial crisis with markets in free fall.
By AP Business Writers Tim Paradis and Marcy Gordon