Cindy Aspinwall, foreground, a research and reconcilement specialist, works at the Lincoln operations center for Bancorp Rhode Island. In the background are Cheri Hareter, left, and Marie Perkins.

The Providence Journal / Kathy Borchers

PROVIDENCE — The president and chief executive officer of Bancorp Rhode Island last week launched a defense of the financial institution’s performance as she worked to fend off a pair of dissident investors intent on forcing her ouster and a possible sale of the Providence-based parent of Bank Rhode Island.

“I think the record over time is important,” said Merrill Sherman, president and CEO of Bancorp Rhode Island. “The basic theory of the bank is that we could occupy a niche and grow that niche and thrive.”

A “high-touch” strategy based on cultivating commercial borrowers in its home state, some poached from the multistate competitors who dominate the Rhode Island market, “has produced a superior shareholder return,” she said.

“Our competition is Citizens and Bank of America and you’ve got to go toe-toe with them every day,” she said during an interview at the bank’s downtown headquarters.

But “high-touch” relationships, which require bank executives to become intimately familiar with a customer’s business and financial needs, come with high costs, admitted Sherman, and that can hurt a bank’s performance in the short run.

Between 2003 and 2007, the bank built four new branches — in Lincoln, East Greenwich, North Kingstown and Pawtucket — and an operations center in Lincoln as well. Building those was expensive and recouping that investment takes time, she said, adding that none of the new branches is breaking even yet.

“We are never going to be the low-cost provider,” she said. “We are getting our arms around controlling expenses.”

But even while giving a nod to the bank’s improved performance last year, a pair of dissident shareholders are continuing their fight with Sherman and Bank RI’s management. The two investors have tried for more than a year to force a sale of the bank, or at the very least a change of management.

“The board of directors should immediately engage outside advisors with a mandate to pursue a strategic transaction that maximizes shareholder value before additional opportunities are lost,” said Richard Lashley and John Palmer in a March 13 letter to Bancorp Rhode Island’s board of directors.

Lashley and Palmer lead PL Capital LLC, an Illinois hedge-fund investment firm that controls 8.5 percent of Bancorp Rhode Island (BARI: Nasdaq) stock. As they did last year, the men are seeking seats on the board.

In a proxy statement mailed to the company’s shareholders, they took a slap at Sherman.

“We are also seeking the board seat currently held by Ms. Sherman because we believe she has failed to fully deliver on her promises to improve the efficiency and performance of the company and the bank, and appears more focused on her own personal timetable and agenda for the company regardless of whether or not it coincides with shareholders’ interests,” the proxy states.

PL Capital has a history of taking on the management of banks it considers underperforming. It seeks to profit from improved earnings, a quick run-up in stock prices or the sale of its targets.

Lashley and Palmer lost a bid last May to gain seats on the Bancorp Rhode Island board as company shareholders sided with the bank’s management in a proxy fight that ended at a shareholders meeting in the Hotel Providence. More than 90 percent of the outstanding shares of common stock were voted, and more than 62 percent of all votes cast were for the directors recommended by the board. The elected directors each garnered more than 1 million more votes (out of the 4.4 million shares voted) than the two nominees put forward by PL Capital, Bancorp Rhode Island reported at the time.

“We’re going to come back,” Lashley said as he exited the hotel meeting room.

This year, the two men are joined by former investment banker Daniel Mullane, of Connecticut, who headed Advest Group Inc. before its sale to the Merrill Lynch brokerage house. He also has been nominated for a board seat.

Bancorp Rhode Island’s management has put up its own slate of candidates, headed by company founder and board chairman Malcolm G. Chace III. The company also announced that it would nominate five directors for reelection this year. In addition to Chace and Sherman, they are Anthony F. Andrade, Ernest J. Chonyei Jr. and Edward J. Mack II.

THE COMPANY’S shareholders will vote on the nominations May 21, during the annual meeting.

In the months leading up to last year’s shareholders meeting, Naperville-based PL Capital accumulated 8.1 percent of Bancorp Rhode Island’s stock. Lashley and Palmer then prodded the bank’s management in letters to the company and its smaller shareholders.

Lashley and Palmer wrote to chide the bank and Sherman about what the dissidents considered to be lackluster performance. They pointed to the bank’s low earnings, low return on assets and weak efficiency rating.

Not much has happened in the last year to change that opinion, Lashley said in a telephone interview earlier this year.

“The downward trend over the last 10 years has not changed,” he said.

In a filing made with the U.S. Securities and Exchange Commission, PL Capital noted that the bank’s “core return on equity” has dropped steadily since 2002 and last year was the lowest in its history.

The partners also contend in the filing that the bank’s “efficiency rating” of 73.4 percent, while improved from last year’s rating of 76 percent, “remains unfavorably elevated relative to its peers and industry standards.” Efficiency ratings of similarly sized banks often fall below 60 percent.

“That’s a dramatic difference from where they are now,” Lashley said.

He and Palmer come to this year’s fight a bit better armed as they have gained control of a slightly larger percentage of Bancorp Rhode Island stock and with an ally in Mullane. PL Capital now controls 387,920 shares, or 8.5 percent, of the bank’s stock –– up from 8.1 percent last year –– and is now its second-largest shareholder.

Chace owns 540,315 shares and Sherman owns 281,685 shares, according to documents the bank filed with the SEC.

Mullane has just 1,000 Bancorp Rhode Island shares, but much experience in the financial sector. He lives in Killingworth, Conn., east of New Haven, but is moving to Tiverton.

He joined Advest, a brokerage house, in 1991 as its vice president for branch development and became its CEO in 1993.

Sherman sounded unimpressed by Mullane’s credentials, which she said are focused on wealth management and not the commercial lending that now makes up about half of the bank’s loan portfolio.

“We do not have a trust [division],” she said. “It is not a line of business we foresee [entering].”

The bank finished the year with $1.5 billion in assets.

In 2002, the commercial loan portfolio was about $282 million. By 2006, commercial loans reached $520 million. Last year, the bank’s commercial loans were valued at $574 million.

The 16-branch bank forecast earnings of $1.94 to $1.99 a share for fiscal 2008 and said it expects low double-digit growth in its commercial portfolio.

Diluted earnings per share were $1.77 in 2003, $2.04 in 2004, $2.04 in 2005, but fell to $1.57 in 2006. Diluted earnings per share last year were $1.84, up 17 percent from the year before.

The stock reached as high as $45.40 on Sept. 21, 2006, just as PL Capital’s first proxy fight began brewing. It was trading well below that last week, bouncing around $33 a share.

By comparison, earnings at Washington Trust Bancorp Inc. (WASH:Nasdaq) were off 4.9 percent last year. Net income in 2007 for the Westerly-based bank was $23.8 million, or $1.75 per diluted share, compared with $25.0 million, or $1.82 per diluted share, for 2006. Washington Trust announces its first-quarter earnings tomorrow.

Webster Financial Corp., the parent of Webster Bank, reported in January that net income for last year was $110.7 million, or $2.01 per diluted share, compared with $133.7 million, or $2.47 per share, for 2006.

IN FEBRUARY, newly minted Newport Bancorp Inc. (NFSB: Nasdaq) reported net income of $757,000, or 17 cents per share (basic and diluted) for the year ended Dec. 31, compared with a net loss of $1.7 million for the year ended Dec. 31, 2006. The company completed its initial stock offering July 6, 2006, therefore earnings per share data is not available for the year ended Dec. 31, 2006.Independent Bank Corp., of Rockland, Mass., reported net income last year of $28.4 million, down from $32.9 million in 2006. Diluted earnings per share fell 17 cents last year, to $2 from the $2.17 earned in 2006. Independent is the parent company of Rockland Trust Co., and recently completed the acquisition of Slade’s Ferry Bancorp., of Somerset, the parent company of Slades Bank.Lashley and Palmer said in the proxy that they don’t always try to force a company’s sale, noting a change of heart with State Bancorp of Long Island, a company they “now intend to hold as a long-term investment.”

But last year, the pair raised Bridgeport, Conn.-based People’s United Financial Inc.(PBCT:Nasdaq), the holding company that owns People’s Bank, as a possible suitor for Bancorp Rhode Island. People’s does not have any branches in Rhode Island.

Shortly after Bancorp Rhode Island management turned aside PL Capital’s attempt to force a sale of the Providence bank last May, People’s United agreed to acquire Chittenden Corp. of Burlington, Vt., in a stock and cash deal.

Announced in late June, the purchase cost about $1.9 billion, of which approximately 55 percent or $1 billion was in cash and 45 percent in stock of People’s United. The deal for Chittenden worked out to about $37 a share, according to news reports at the time, a roughly 30 percent premium to its share price of just above $28.

LASHLEY AND Palmer also broached the name of another bank they once considered as a possible suitor for Bancorp Rhode Island — Eastern Bank Corp. But that opportunity may have passed, the pair noted in their proxy statement, as Eastern Bank last month announced it would acquire a rival Massachusetts institution. Boston-based Eastern said March 11 it has signed an agreement to acquire MassBank Corp. (MASB: Nasdaq) for about $170 million in cash. Eastern, which is the largest bank headquartered in Massachusetts, has agreed to pay $40 in cash for each share of MassBank, a slight premium above its stock price, which has been trading recently above $39 a share.

The deal for Reading-based MassBank marks Eastern’s third acquisition in four years as the mutual bank expands its operations in eastern Massachusetts.

Acquisitions such as these often come with a downside for employees and the Chittenden deal proved no different. Earlier this month, People’s said it would eliminate 420 jobs, about 8 percent of its work force, to save $57 million a year. The bank also said it would close 20 branches in Connecticut, Massachusetts, Vermont and New Hampshire this summer.

Those purchases by potential suitors, coupled with the finance industry’s general sufferings over the mortgage and credit crisis, may not bode well for PL Capital’s chances this time around of forcing a management change at Bancorp Rhode Island or persuading a majority of other shareholders at the May 21 annual meeting to join in urging a sale.

pgrimald@projo.com