Few would argue that it's tough to own a community bank these days. It can be even more difficult to co-own a struggling bank — fifty-fifty — with another family.

Sometimes, disagreements emerge between owners and they try to work them out quietly. And then there's the Moser and Regas families in suburban Chicago. Their problems are no longer quiet, and led the Moser family to file a nasty suit last week in which it alleges the Regas family made a mess of Western Springs Bancorp Inc.

The complaint filed in the Circuit Court of Cook County alleges that the Mosers have incurred sizable losses for Western Springs National Bank and Trust, 20 miles west of Chicago, as a result of the Regases' whims. The Mosers allege the Regases made risky loans to businesses affiliated with the family, wrote bad checks and failed to clue them in to any of this.

"The Regas family treated the bank's assets as their own personal piggy bank," the complaint alleges. "The Regas family was able to continue extending credit to themselves for years because critical information regarding these loans was never disclosed to the Mosers' representatives on the bank's board of directors or the loan committee."

Calls to both families were not returned Tuesday.

Banking attorneys and consultants said that while this case is particularly salacious, it shines a light on issues faced by some small, closely held banks. For years, they said, oversight at such banks was informal, yet appeared sufficient. But when the economic downturn hit it magnified many shortcomings.

"A lot of small banks are far less disciplined in governance and risk management. There is a lot of informal decision-making, and it is fine when times are good, but when the economy turns and credit performance turns, it tends to expose that there were latent weaknesses all along," said E. Wayne Rushton, managing director of Promontory Financial Group and a former chief national bank examiner for the Office of the Comptroller of the Currency.

Recent economic tumult has led to more battles among directors, said David Baris, a partner with BuckleySandler and executive director of the American Association of Bank Directors. "In economic downturns we see a lot more finger-pointing and dissension," he said.

In the lawsuit, the Mosers highlight a number of loans made by the $200 million-asset bank to companies with ties to members of the Regas clan. Those loans were largely in residential real estate development and were made over the course of the past eight years. All are currently nonperforming.

The Mosers also claim in the suit that they were unaware of the alleged dealings because the Regas family insulated itself with a hand-picked chief executive, general counsel and external auditor — all of whom were supposed to be acting on behalf of the bank, but who the Mosers claim were aligned with Regases.

It apparently took a regulatory exam by the OCC to expose Western Springs National Bank's problems. The bank has been operating under a consent order since November, which required it to boost capital ratios. As of June 30, it was undercapitalized and one-fifth of its loans were noncurrent. Among other things, the consent order called for the bank to amend its conflict-of-interest policy, including prohibiting directors and officers from advancing "his or her own personal or business interest … at the expense of the bank."

In the complaint, the Mosers said the Regas family had found a buyer and had talked the Mosers into signing a letter of intent. Both families' investments would be wiped out, yet the complaint alleges James Regas agreed to pay the Mosers $3 million to "make good" on mistakes that had been made. Shortly after signing the letter of intent, the Mosers claim that James Regas refused to pay.

Even with an apparent buyer, recapitalizations are hard to pull off, meaning the bank could be at risk of failing. That may be the reason behind the lawsuit, attorneys said, with the Mosers seeking to protect themselves in case the bank fails and the Federal Deposit Insurance Corp. seeks damages to recoup losses. Mitigating that risk might be particularly important for the Mosers, because George M. Moser also is the chairman and chief executive of Charter National Bank and Trust in nearby Hoffman Estates, Ill.

If Western Springs failed, the FDIC could seize other banks it deems to be affiliated. Banking attorneys said they were uncertain if a successful lawsuit would add such protection. "It is not a bad strategy. I am not sure it will work, but it is certainly worth a try," said Sanford Brown, a partner at Bracewell & Giuliani.

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