PAMELA MONTPELIER
‘Distorted’ information
One of Strata Bank’s largest investors is upset with the bank’s performance and is taking dramatic steps to try to turn it around.
Kenneth R. Lehman of Arlington, Va., who with his wife owns more than 11 percent of the bank’s shares, ran a full-page advertisement in the Milford Daily News last month criticizing the Medway-based institution’s financial performance and management.
Since January, he’s also had a lawsuit pending in Suffolk Superior Court to try to force Strata to turn over its list of shareholders.
The bank contends in counter-filings that Lehman has not offered a good enough reason for why he wants the list. But Lehman says he just wants to “educate stockholders Â… so that they will hold management accountable.”
Strata Bank is only 45 percent stock-owned, with the rest owned by Service Bancorp, a mutual holding company over which a stockholder presumably has less sway.
But Lehman said a bank’s board has a fiduciary responsibility to shareholders regardless of whether they own 100 percent of the shares.
“Just because a mutual holding company board is able to essentially re-elect themselves, doesn’t mean that it’s proper to do so,” Lehman said.
Lehman said his ad, which the Daily News said cost $2,500, was a second-choice effort to make his views known once he realized his lawsuit was moving more slowly than he’d like.
The ad said Service Bancorp has earnings “worse than all but two of 28 Massachusetts publicly traded banking institutions for the six months ended Dec. 31, 2007.” It also accused the bank of having non-performing loans “more than 50 percent higher than any other Massachusetts publicly traded bank” and criticized “the extravagant new Executive and Operations Center that management has built for themselves” as a big reason why the bank’s overhead expenses are high when compared to other stock-owned banks in the Bay State.
Strata Bank President and Chief Executive Officer Pamela Montpelier called Lehman’s tactics inappropriate and the information he’s presented “distorted.” The operations center was leased, not built, last year, she pointed out, and the former space was far too small for the 50 central-office employees who worked there.
“If you are not a board member and not working in the company, you don’t know all the inner workings of what is happening,” Montpelier said. “And you certainly don’t know the history of the bank that has been around since 1871. We’ve had a lot of growth in the last eight years, since I’ve been president. The reason our structure is in place [has been] to increase our franchise and Â… have a network in the community.”
Montpelier said bank employees and customers have been affected by Lehman’s advertisement, which ran April 2. But she said people who are familiar with Strata Bank recognize its “inaccuracies.”
‘Aggressive’ Borrowing
Still, one industry observer said Strata Bank’s performance has been troubled.
“Their equity is not that strong Â… and their earnings are not so hot,” said the observer, a Massachusetts financial industry consultant who asked not to be identified since he was commenting on a specific bank.
He added that the bank’s rate of borrowing money from the Federal Home Loan Bank has been “very aggressive” – approximately $118 million at the end of last year for the bank, which had $412 million in assets at the time.
To fund loans, banks need cash on hand, which they get either from deposits or advances such as those from the FHLB. Stock-owned banks sometimes borrow more money than banks with different ownership, the consultant said, but Strata Bank’s borrowing is high even in the latter group.
Montpelier countered that both the economy and her bank’s results have shown signs of improvement.
While Strata’s rate of non-current loans – 3.1 percent of all loans at the end of December – is higher than that of most Massachusetts banks, Montpelier said just three loans are involved, and all are in collections.
“I really hope people don’t jump to conclusions and, unfortunately, I think that is what Mr. Lehman tried to do,” she said, adding that Lehman has had “very limited” communication with the bank since he became a shareholder.
Montpelier said Strata Bank takes advantage of FHLB advances because of “very, very attractive” interest rates. The FHLB has lowered its rates in recent months; it passes on savings from its own borrowing to all its members.
Some outside observers have compared Lehman’s tactics to those of investor Lawrence Seidman, a New Jersey resident who earlier this year waged a campaign against Massbank, an $801 million, stock-owned institution based in Reading.
Massbank agreed in March to be acquired by mutual Eastern Bank for $170 million, or $40 per share. Seidman, who owned 8 percent of Massbank’s shares, made approximately $2 million in the deal. He had attempted to gain seats for himself and two supporters on the bank’s board, written hostile letters to Massbank President and Chief Executive Officer Gerard H. Brandi and publicly criticized the bank’s performance.
An independent industry observer said at the time that Massbank’s performance was on par with its peers.
Lehman, an attorney who co-founded the Washington, D.C.-based law firm that represented Medway Savings Bank in 1998 when it changed its name to Strata Bank and converted to a mutual holding company and partially stock-owned structure said the comparisons are unjust. Lehman worked on the ownership restructuring.
In November, he wrote to Montpelier, requesting he be appointed to a seat on Service Bancorp’s board, but was turned down. He now says he’s no longer interested in a seat.
Asked if he would like to see Strata Bank sold, he said that is “not a near-term goal.”
Lehman, who noted that he no longer practices law, said he is a long-term stockholder who has bought shares in Service Bancorp over the years at a cost of up to $30 per share. They traded most recently at $15, but were selling at $33.75 apiece last summer – the highest level in the past year, he said.
“Mutual holding company stocks tend to be volatile,” he acknowledged. “But I don’t have any problem with volatility. Declines attributable to the market are something an investor has to live with.
“What I have a problem with,” he said, “is owning a stock where management’s mistakes cause the stock to trade at far below its peers.”
Montpelier said Strata Bank has increased its loan-loss provisions and recently hired two new, highly experienced commercial loan officers. Both, until recently, were senior vice presidents at Flagship Bank in nearby Worcester.
Flagship was a subsidiary of Vermont-based Chittenden Corp., which was acquired in January by People’s United Bank, a $21 billion bank based in Bridgeport, Conn.
