At a time when many banks are fighting a spate of negative reports, Mercantile Bankshares Corp. bucked an industry trend yesterday by receiving high marks from a New York ratings agency.
Standard & Poor's Corp. said it affirmed its rating of A1-Plus -- the highest rating possible -- on the Baltimore-based company's commercial paper. As result, Mercantile remained the only top Maryland banking company to have S&P's highest rating.
Commercial paper is a type of unsecured corporate IOU used to raise cash by companies on a short-term basis.
"The affirmations reflect Mercantile Bankshares' excellent earnings record, strong capital levels, and its well-established trust operations,which lend support to the company's financial flexibility," S&P said.
But, like so many of its brethren in recent months, Mercantile could not escape altogether the specter of a real estate slump or its presence in the mid-Atlantic region. Lurking in the unusually positive report from S&P was the possibility that if the Maryland real estate market weakens further, a downward move in the ratings could come.
The parent of Mercantile-Safe Deposit and Trust Co. in Baltimore and 17 other community banks in Maryland, Mercantile is generally regarded as among the most quiet and conservative banking companies in the state.
With $4.3 billion in assets, it has steadfastly hung onto its traditional system.
Each community bank retains great autonomy with separate management and board of directors rather than consolidating into a widespread branch network.
There are no photos in the bank's glossy annual reports. Optimistic pronouncements of a bright future and rosy earnings typically are spurned in favor of dry reports on the company's finances and philosophy. Its customers are often thought of as silk-stocking Baltimoreans.
"We are pleased that Standard & Poor's reaffirms the high rating it previously accorded our commercial paper," said H. Furlong Baldwin, the company chairman and chief executive, in a prepared statement.
Though the good news might have been better, analysts welcomed the S&P analysis as further confirmation of their already favorable assessment of the bank.
"It's a great bank doing a great job," said Peter W. Tuz, a banking analyst with Howard, Weil Financial Corp. in New
Orleans. "It's just out there as such a unique institution in terms of quality and profitability, it's almost ungodly."
At the core of the bank's strong review lies the company's history of steadily increasing earnings. Mercantile earned $34.3 million, or $1.22 a share, during this year's first six months compared with income of $32.3 million, or $1.16 a share, for the first half of 1989.
"Earnings have been great," said Sheila D. Davis, the analyst who prepared the S&P report.
"Even if you go back over 10 years, it's been very steady and they've been well over 1 percent in its return on assets. It's been a great track record."
Ms. Davis also cited the company's highly profitable trust department, which provides an array of financial services to individuals and companies.
As a result, Mr. Tuz said Mercantile was one of only two or three banks out of the 30 or 40 he tracks that is trading above its book value of $15.97 a share. Mercantile closed yesterday down 25 cents at $16.50 a share on the New York Stock Exchange.
The generally positive S&P report came amid a sharp decline in the fortunes of the banking industry that has led the ratings agency to downgrade at least 36 bank holding companies in the last six months, some more than once, while upgrading only four.
Ratings such as those from S&Pare regarded as an important guide to a corporation's financial health. The ratings also help determine what level interest rate a company must offer to attract investors to buy its commercial paper and other securities.
The commercial paper at MNC Financial Inc. was rated A2, First Maryland Bancorp was rated A1, Signet Banking Corp. was rated A2, C&S/Sovran was rated A1, and Baltimore Bancorp had not requested a rating, according to Ms. Davis.
S&P also said it had retained the double-A-minus/A1-plus rating on the certificates of deposit at Mercantile-Safe Deposit & Trust Co., the company's largest banking unit. Under S&P's rating system, the rating meant that Mercantile's CDs of a year or more were assigned the AA- rating and those CDs with a maturity of less than a year have the A1-plus rating.
The ratings agency, however, blamed a "high concentration" of the company's loan portfolio in commercial real estate and construction loans for the revision of its long-term outlook for Mercantile "to negative from stable."
With $3.1 billion in total loans outstanding, the company had about $302 million, or 9.7 percent, in real estate construction, which most analysts said they considered about average. Mercantile's non-performing loans were an unusually meager 0.73 percent of total loans at the end of the second quarter.
Kyle Prechtl Legg, a banking analyst at Alex. Brown Inc. in Baltimore, blamed the negative side of the S&P report on the region's fortunes as a whole rather than anything particularly troublesome at Mercantile.