Western Commercial Bank is less than five years old, but it already has a distinction, albeit unwelcome: It is, by many measures, Los Angeles County’s most distressed bank.

The Woodland Hills institution has a risk-based capital ratio of 5.7 percent, the lowest of any bank headquartered in the county, while its problem-asset level, at 264 percent of equity, is the highest. And it lost more than $4 million in the second quarter.

“It’s definitely an ‘F’ in our book,” said Dennis Santiago, chief executive of Institutional Risk Analytics in Torrance, a research firm that analyzes the financial health of institutions and assigns letter grades. “Their default rates are climbing like crazy. They’ve got negative net income. I’m looking for a silver lining and I’m not finding one there.”

The Federal Deposit Insurance Corp. recently issued the latest in a series of enforcement orders alleging “unsafe or unsound banking practices” at Western Commercial and ordered the bank to raise at least $10 million by next month or find an acquirer.

But the small bank is not going down without a fight.

Executives developed a plan to raise capital through a private placement and are scrambling to repair a deteriorating loan portfolio. The board also ousted its chief executive in a bid to strengthen management.

The bank is smaller than many of its competitors, with just $111 million in assets, but its problems typify those faced by distressed community banks across the country – more than 130 of which have failed just this year.

Western Commercial specialized in commercial real estate and business loans, which are at the root of most community banks’ struggles. It also was founded at the height of the real estate bubble by a novice executive when loan profits were easy to achieve.

While the bank faces a tough slog back to health, experts said hope is not entirely lost. Last month, for example, Bay Cities National Bank, an undercapitalized community institution in Redondo Beach, received a $460 million infusion from a group of investors and was renamed Opus Bank. With a number of buyers in the market, analysts believe that Western Commercial could appeal to investors looking to get into banking.

“It could be an interesting target for somebody looking for a platform to pick up,” said Alex Cappello, managing director of Santa Monica investment bank Cappello Capital Corp.

Western Commercial declined to comment for this story.

Community connection

Western Commercial was founded by Carl Raggio III, a bank consultant who managed to raise $13.8 million for the de novo institution through a stock offering. He is the son of former Glendale Councilman and Mayor Carl Raggio Jr.

Shortly after launching, management threw a grand-opening celebration in its Woodland Hills office. At the modest affair, attended by representatives of Mayor Antonio Villaraigosa and Councilman Dennis Zine, Raggio spoke of his excitement to be a part of “the dynamic San Fernando Valley business community.”

But several people familiar with the bank said the inexperienced Raggio failed to develop and maintain relationships with area businesses, key for community banks.

It also doesn’t help that Western Commercial literally has little visibility in the community, with its headquarters and only full-service branch tucked away inside an office building. (The bank has one other location, a loan production office, in Oxnard.)

But with the economy still going strong in its first few quarters, the bank grew its loan portfolio rapidly. After six months, Western Commercial had a $17 million loan portfolio; by the end of its first full year, it was up to $43 million.

By the end of 2007, with $75 million in loans and assets north of $90 million, the bank had become profitable. But it had come at a cost: To fund the rapidly growing loan portfolio, Western Commercial relied heavily on brokered deposits, which can be volatile and risky because they are generated by outside brokers who funnel deposit money seeking the best returns.

“They didn’t know their borrowers. They didn’t know their depositors. They were looking for profitability instead of slow growth,” said Gary Findley, a bank consultant and attorney in Anaheim who was hired to represent the bank when it was being organized. “When you go down that path of doing business with people that you really don’t know and you’re going outside of your market or outside of your comfort zone, sometimes you make mistakes.”

The problems came to the surface last year as businesses failed amid the recession and real estate values plunged, leading to rising defaults in the loan portfolio, which was heavily weighted toward business loans and commercial real estate.

After a February 2009 regulatory examination of the bank, the FDIC issued a cease-and-desist order directing Western Commercial to raise at least $1 million and retain qualified management, including “a chief executive officer with proven ability in managing a bank of comparable size, and experience in upgrading a low quality loan portfolio (and) improve earnings.”

Though Raggio had acted as a consultant to troubled banks in the past, he had never run a bank prior to founding Western Commercial. According to a resume posted on his website, he worked for Union Bank in the early 1980s and as a regional vice president at Bank of the West until 1988. He then worked at a mortgage company and as a bank consultant before starting Western Commercial.

Raggio did not return calls placed to his cell phone.

CEO out

The bank managed to raise the necessary capital from its directors, but it was not enough. Early this year, after padding its loan loss reserves, the bank’s capital levels dipped below the minimum level required by regulators.

In a brief and abrupt announcement in June, the bank said that Raggio had resigned. According to several people familiar with the situation, he had butted heads with regulators and was forced to step down.

The bank is awaiting regulatory approval to appoint in his place Joseph Kiley III, a longtime banker who served as head of Imperial Capital Bank in La Jolla for less than three months in 2009 before it was closed by regulators.

At the end of the second quarter, almost one-quarter of Western Commercial’s loans were in default. Third quarter numbers have not been released, but someone familiar with the bank said its loan portfolio may look better as management was able to sell some of its troubled assets.

Western Commercial recently received a consent order and prompt corrective-action directive from regulators for failing adequately to restore the institution’s financial health. Among the stipulations, the bank must raise $10 million.

The bank is owned by WCB Holdings Inc., a one-bank holding company headquartered with the bank.

About two weeks ago, WCB’s thinly traded over-the-counter Bulletin Board stock fell from $1 a share to 7 cents. The price is off 99 percent from its 52-week high of $5.50.

Findley, who noted that the capital raising environment is still tough for banks in desperate need of fresh money, said many of the banks in trouble today are there because of questions about management. The boom times prompted inexperienced bankers to try their hands at running institutions, but many were unprepared for the challenges of a severe and prolonged industry downturn.

“Everybody’s a good lender when the times are good,” said Findley, who remains a stockholder in the bank. “The question is: Are you a good lender when the economy changes?”