The symptoms are familiar: too many construction loans made when money was plentiful and real-estate values defied gravity. And now the disease that has killed more than 200 banks is spreading to another part of the U.S.

Six banks in Washington state have failed this year, while about one-fourth of the banks and savings institutions based there are operating under toughened regulatory scrutiny known as "cease-and-desist" orders, according to the Federal Deposit Insurance Corp.

In comparison, about 19% of banks in Georgia, home to more failed banks than any other U.S. state since the start of 2008, face such operating constraints. Cease-and-desist orders often are a sign that a bank is in deep financial trouble, though the restrictions don't necessarily mean that the bank will fail.

"There are areas around the country that may be worse, but I would put the Pacific Northwest right up there," said Joey Warmenhoven, a trader specializing in small-bank stocks at McAdams Wright Ragen, a brokerage firm in Portland, Ore.

The struggles of many banks based in the region are a contrast to signs of stabilization for the industry as a whole. Loan-loss provisions declined 17% in the first quarter from a year earlier, and the quarterly increase in loans at least 90 days past due or not accruing interest was the smallest since 2007's third quarter, according to the FDIC.

The six Washington banks to fail in 2010 represent about 7% of the state's banks at the start of this year. One Oregon bank has failed. The largest financial institution in terms of assets to fail, Frontier Bank of Everett, Wash., had $3.5 billion in assets and 51 branches when it was seized by regulators April 30. Frontier succumbed to the weight of its construction-loan portfolio.

In all of 2009, three banks failed in Washington, three failed in Oregon and one failed in Idaho.

Banks That Went Bust



Track U.S. bank failures since January 2008.

Another measure of the distress can be found in the Texas ratio, which assesses the probability of failure based on nonperforming loans, reserves, capital and other factors. Some 25 banks in Washington, Oregon and Idaho had a high probability of failure based on that ratio in early 2010, more than double the number a year earlier, according to McAdams Wright Ragen.

Some bankers and analysts are worried that turmoil at banks in the Pacific Northwest could slow the overall industry's recovery. Construction loans are a particular sore spot, hurt by slackened demand from California residents who scooped up vacation and retirement homes in the region before the real-estate bubble burst.

Observers said the damage on bank balance sheets and bottom lines is intensifying because the economy of the Pacific Northwest often lags behind the rest of the U.S. by as much as a year.

Like banks in other parts of the country upended by declining real-estate values and the economic slump, sick financial institutions in Washington, Oregon and Idaho are scrambling for new investors who will help them replenish shrinking capital levels.

Monday, Sterling Financial Corp. said Thomas H. Lee Partners LP and Warburg Pincus LLC would invest $278 million in the Spokane, Wash., company, giving the two private-equity firms a combined 40% stake in the state's second-largest federally insured financial institution by assets behind Washington Federal Inc. Terms of the deal require Sterling, with $10.5 billion in assets and 178 branches, to raise an additional $442 million from other investors.

In the first quarter, Sterling posted a net loss of $88.8 million, more than triple its year-earlier loss of $24.8 million. Regulators consider the bank to be undercapitalized and have demanded that it raise money and meet certain other capital requirements.