In making the case that its investment in branches, technology, and people is starting to pay off in improved profitability, Bancorp Rhode Island Inc. has again fended off a dissident shareholder's bid to win seats on its board.
The investor has vowed to keep the pressure on until the $1.5 billion-asset Providence company improves key performance metrics or agrees to sell itself, but Bancorp Rhode Island has no intention of altering its strategy.
Its focus on organic growth might be expensive, but "we believe we can show greater shareholder value over time because we're building real customers with a real franchise," Merrill W. Sherman, its chief executive, said in an interview last week. "We have a brand coherence and a genuine presence in our communities with real lenders and a real reputation and a real business plan."
But analysts say the company may have already squeezed expenses as much as it can and could grow organically will be tough in a slow-growth state dominated by larger companies.
Bancorp Rhode Island opened in 1996 after its organizers acquired 13 Shawmut National Corp. branches divested in its sale to Fleet Financial Group. The new company spent its first six years developing its infrastructure and building its brand.
Next came the investment stage, when it recruited commercial lenders and top executives in risk management and marketing and accelerated a branch improvement effort by adding three branches, refurbishing some old ones, and relocating others.
It also shifted the balance sheet to be less thrift-like. By 2006 commercial loans had overtaken mortgages to make up the majority (52%) of a $1 billion loan portfolio.
But its investments, along with a flat yield curve, dampened earnings and return on equity in those years.
Bancorp Rhode Island entered its "leveraging" phase last year, and Ms. Sherman said that its 2007 performance indicates that the plan is working. Its net income jumped 17% from a year earlier, to $9 million, or $1.84 a share.
Richard Lashley, a principal at PL Capital Group, a Naperville, Ill., investment firm that owns an 8.6% stake in Bancorp Rhode Island, is not impressed. As he sees it, last year was "the second-worst year in the last 10" for the company; its ROE was under 8% and its efficiency ratio was above 70%.
The company's earnings guidance shows that those metrics are unlikely to improve much this year, he said. "We think profitability has peaked."
But Bancorp Rhode Island — whose first-quarter earnings climbed 7%, to $2.3 million — just won its second proxy battle with PL Capital, gaining the support of all three major proxy firms: Proxy Governance Inc., RiskMetrics Group, and Glass Lewis & Co.
Chris Cernich, an analyst at Proxy Governance, said that though PL Capital is "absolutely right" about Bancorp Rhode Island's decline in key metrics but "what that argument misses is the bank moving through its growth stages."
Mr. Lashley dismisses the three-stage growth strategy, saying Bancorp Rhode Island concocted it after the fact to try to explain away years of lackluster earnings.
"It's a falsehood," he said.
Ms. Sherman said she began talking about the three stages of her company's development in investor presentations last year as "an explanation of where we were and where we saw ourselves going. Whether it was preplanned or not, it is a very realistic way of characterizing it," she said.
Ms. Sherman also said she sees opportunities to raise earnings by cutting costs, shifting the focus further away from mortgages and toward commercial loans, and reaping the benefits of a steepening yield curve.
The company cut expenses by 2% last year, but Ms. Sherman said expenses can be trimmed further by using technology "more judiciously."
For now it is done with building out the branch network, Ms. Sherman said. It now has 16 branches, including at least one in each of the state's six largest cities. Profitability should improve as the average branch size ($62.2 million of deposits at yearend) increases, she said.
Deposits at four new branches grew 9% last year, but two of them are still not profitable, she said.
David Darst, an analyst at First Horizon National Corp.'s FTN Midwest Securities, said he is not sure Bancorp Rhode Island can cut any more expenses. "The improvement has to come from revenue," he said.
Mr. Lashley said Bancorp Rhode Island needs to improve or sell itself. Its sale value has declined about 20% over the past year and a half, "to the high $30s or low $40s" per share, because of its lack of growth and the weaker market for mergers and acquisitions.
He also said PL Capital intends to sue Bancorp Rhode Island over a statement in a RiskMetrics report indicating that the efficiency ratio should decline to 65% in the short term. The managers acted improperly by making that statement, he said, since it had not been disclosed publicly before.
Ms. Sherman would not discuss the issue, but her company said it "does not believe" the statement was made. RiskMetrics stood by the statement but said it was not a critical factor in the decision to back Bancorp Rhode Island's director slate.
Mr. Lashley said PL Capital views the statement as critical. "It damaged our ability to get elected," he said.
Another well-known activist investor, Lawrence B. Seidman, also turned up at Bancorp Rhode Island's annual meeting last month and argued that its earnings per share were no better last year than they were five years earlier.
Mr. Darst said that the "unexpected" appearance of Mr. Seidman warrants attention, because takeover speculation may increase. He said he thinks the shares, which were trading at $33.25 late Monday, could fetch "in the mid-$40s" in a sale.
It is not clear what PL Capital or Mr. Seidman might do, Mr. Darst said, but he anticipates another proxy fight might occur next year. "From here, it's probably going to get more interesting and more costly."
