When mutual thrift banks become partially public banks they raise capital, but they also raise their chances of locking horns with activist investors.

And that lesson has now been learned by two banks based in Central Massachusetts, with Strata Bank of Medway the latest casualty.

Public Criticism

Strata Bank, which went from a mutual bank to a holding company with publicly traded shares 10 years ago, has been in a public dispute with one of its shareholders, Kenneth R. Lehman. He’s publicly complained about the bank’s financial results and demanded to become a bank director. He even went so far as to take out a full-page ad in a local paper detailing his criticisms of the financial management of Strata.

Lehman said he is now talking directly Strata management, but as of deadline for this publication the dispute had not been resolved.

The Strata saga comes only a year after the start of another similar episode involving an activist investor looking to stop the merger of Westborough and Hudson Savings banks.

While the merger eventually went through in October 2007 — forming Avidia Bank — the deal was postponed for months as the two banks grappled with investors. First there were public criticisms from Marc Bistricer out of Canada, who claimed the merger was bad for the bank’s investors. Two counter offers — one from Bistricer — were floated. Both increased the per share price for Westborough Bank’s holding company, Westborough Financial.

Later, the merger was challenged by Northborough residents Philippe and Gwen Gut, minority shareholders of Westborough Financial, who claimed that the deal was flawed.

Although the merger went through, the shareholders filed suit in Worcester Superior Court, asking that the case be made a class action suit. The court heard arguments from both sides about six weeks ago, and the judge took the matter under advisement. Both sides await the ruling.

“It’s costly for the banks,” said Mark O’Connoll, Avidia’s CEO, of the shareholder lawsuit against Avidia.

Although the Strata and Avidia situations are slightly different, O’Connell sees their causes as the same: certain shareholders wanting more money. And those shareholders don’t necessarily have the best interests of the bank and its customers in mind, he said.

While one might think that the interests of stockholders, customers and bank officials would coincide, that may not be necessarily so.

Flawed Structure

Stanley Ragalevsky and Sean Mahoney, partners at Boston law firm Kirkpatrick & Lockhart Nicholson Graham LLP, claim that the first-step conversions like those done by Westborough Financial and Strata set up two groups that are often at odds.

“Partially converted thrifts are just the dumbest idea, there really isn’t anything in it for the banks,” Ragalevsky said. “And this isn’t the first lawsuit involving partial converted thrifts.”

And once a bank gets investor pressure on performance issues, it can eventually get pressure about other concerns.

After a mutual thrift has made the first-step conversion, investors may push for full conversion to a 100 percent stockholder-owned institution, according to Ragalevsky. “You can get a significant return on your money if you can force a sale and get a price that will double or triple your money,” he said.

In 1998, Medway Savings Bank became Strata Bank and converted to a mutual holding company with a partial stock-owned organization. Strata was represented by a law firm that Lehman helped create but has retired from.

Lehman, who has helped found three community banks and has been an investor in dozens of others, said he has been at such odds as a bank investor before, but wouldn’t provide detail. He declined to discuss the Strata situation in detail as he is now talking directly with bank officials. He also bristles at some of the labels he has earned in the media.

“I’m a developer of banks, I’m not an activist stockholder,” Lehman said.

Financial Distress?

Lehman also said the lawsuit he filed against Service Bancorp Inc., Strata Bank’s holding company, in Suffolk Superior Court will remain as it is for now. The lawsuit seeks a list of all its shareholders, other unspecified related documents and whatever costs he incurs.

Lehman and his wife, both of Arlington, Va., own 11.4 percent of Strata’s stock. In particular, Lehman has criticized the amount of non-performing — or overdue — loans in its portfolio, claiming it was 50 percent higher than any other Massachusetts publicly traded bank as of Dec. 31, 2007.

According to the FDIC, Strata had $10.6 million in noncurrent loans — loans that are more than 90 days past due — in 2007. That’s up from $2.3 million in 2006.

Pamela J. Montpelier, Service Bancorp’s CEO and president, has publicly said that the increase in non-performing loans was due to the economy, and that the bank and the economy have both begun to improve.

Lehman was also unsatisfied with Service Bancorp’s stock performance, which has gone from $33.75 per share last June to $13.50 as of last week. Lehman has said publicly that his 11.4 percent investment, which was worth $4.7 million last September, dropped to $2.9 million in April.

Montpelier did not return calls for comment on this story. In previous public statements she characterized Lehman’s ad as inaccurate, distorted and derogatory, stating that he was not familiar with the inner workings of the bank.

Ragalevsky said the first-step conversion is a “wonderful, shrewd invention dreamed up by investors, and mutual thrifts should rethink any plans to convert since they’ll be giving up a form that has worked for a long time.”

“Mutual thrifts have existed for well over 100 years, benefiting and serving their communities,” said Mahoney, partner with Ragalevsky. “There’s a reason for that.” 

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