Mercantile: Strong in good times or bad


January 28, 1991

One on One is a weekly feature offering excerpts of interview conducted by The Evening Sun with newsworthy business leaders. H. Furlong Baldwin is chairman and chief executive officer of Mercantile Bankshares Corp., the parent company of Mercantile-Safe Deposit and Trust Co.

Q. Mercantile is widely seen as one of the strongest banks in the region during a period of downturn in the banking industry. What is the reason for your success?

A.First of all, I guess I would like to suggest that I hope that we are perceived as one of the strongest banks in the region even when there wasn't a downturn in the economy. We have historically -- we've for years and years had a very strong capital to asset ratio, over 10 percent, and of the largest 250 banks in the country, this is one of the first, second or third for the last ten years. And the other great measurement of -- I'd like to think as strength -- is what I call earnings power, which is a return on asset ratio -- which for the last ten years has not been less than 1.5 percent including 1990 when it was 1.6 percent. These, I think, are the measures of strength and I would, as I say, generally like to suggest we are perceived as strong in boom times as well as more difficult times. It has been our history, we have been sometimes even accused of being too conservative. We happen to think that banking and conservatism are synonyms, and we've always felt that the most precious commodity in our business is capital and we've made a conscious and concentrated effort to conserve capital. We have paid out dividends in the ranges of 30-33 percent of our earnings which I think has been typical in recent years of other regional banks. But because our return on asset is so strong, we have been able to pay out a strong dividend and still put a lot of money below the line. We're not slaves to a 10 percent capital to asset ratio, but that's what it has worked out to be. We have said over and over as we talked to shareholders and potential shareholders and security analysts . . . is that the regional bank has never had the luxury of being able to raise capital in good times and bad. Some of the money center banks have been able to do that . We haven't had that luxury so we've always felt it important that we grow our own capital and obtain the earnings opportunities in the best way of doing that. But it has intuitively been our nature; you can't have too much capital in this business. We are one of the few businesses I know where your growth is controlled by an outsider. The third party, the regulator, tells you how quickly you can go or to slow down your growth in acquiring assets, and it's based on a ratio of capital. So since we are at the hands of that third party, it behooves us never to be bumping the minimum ratio; it behooves us to grow as much capital as we can. To retain earnings is the cheapest and best way to do it. So it wasn't looking forward to good times or bad times; it's just historically and traditionally been our nature to maintain a strong capital ratio.

Q. One of the chief reasons for the downturn in banking is seen as the souring of a lot of commercial real estate loans. Unfortunately a lot of observers say that banks had very little alternative but to go into commercial real estate loans because other traditional borrowers had gone to other sources. The question is two parts. One, how did you keep from falling into the commercial real estate trap? And, do you think that there are other alternatives for banks beside commercial real estate?

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