Etched in stone over the vault of the 117-year-old former headquarters of Mercantile Trust & Deposit Co. on Baltimore's Redwood Street is the bank's Latin motto, cavendo tutus, loosely translated as "safety through caution."
As an admonition to prudence, the motto worked well for what became Mercantile Bankshares Corp. Through more than a century, it prospered, helping to finance booms in railroads and other businesses. Through mergers and acquisitions, it became one of Maryland's biggest financial institutions, with 20 subsidiary banks around the state, including Potomac Valley Bank and Citizens National Bank in the Washington suburbs.
"Mercantile had a really stellar record of sticking to the business it knew well, commercial lending," said James L. Shea, a Baltimore lawyer and a member of the bank's board of directors. "But in today's world, standing still really means you're moving backwards."
In the summer of 2001, as the economy cooled and interest rates fell, Mercantile announced that its quarterly earnings would be about 62 cents per share, flat compared with previous quarters and unusual for a bank that had decades of steady growth. Shares in Mercantile fell about 4 percent in the days after the announcement; the share price went back up a couple of months later.
Trapped in an interest-rate squeeze exacerbated by less demand for commercial loans, Mercantile's new chief executive, 47-year old former lawyer and investment banker Edward J. Kelly III, looked for a new way to boost its bottom line. Kelly found his answer deep in the bank's 139-year-old vaults.
In the 19th and early 20th centuries when Baltimore was a financial capital rivaling New York, families that made fortunes from steamships, railroads and other industries stored their silverware in Mercantile safe-deposit boxes and turned to the bank to manage their trusts and estates. Kelly estimated that of the bank's $15.6 billion money-management portfolio, about $5 billion comes from just 70 Baltimore area families.
"It's a high concentration of the older money in town, what you would describe as family money," Kelly said. "We need to capitalize on this legacy."
But at Mercantile in recent years, the business of wealth management -- taking care of investments for wealthy clients and administering their finances -- seemed to be a prosaic legacy.
"It was under-performing," said Gary B. Townsend, a banking analyst at Friedman, Billings, Ramsey & Co. in Arlington. "Since [Kelly] has come on board, he's been focused on addressing some of the weaknesses."
Kelly spent about nine months evaluating the trust business before deciding to expand it rather than sell it. He hired new executives from other financial-services and money-management firms and replaced about 40 people on Mercantile's professional staff.
The changes led to some friction at the bank, as any changing of the guard would. Kelly's predecessor was H. Furlong Baldwin, the influential dean of Baltimore's banking community who was first hired as a check counter at Mercantile in 1956.
"The fact is that there are always challenges in integrating the old and the new," Kelly said.
Reports of conflict seem overstated to some Baltimore businessmen familiar with the bank's operations. "I don't think there's any tension," said Frank A. Bonsal Jr., a Baltimore venture capitalist. "There's no rift there whatsoever."
Even so, sources close to Kelly and the board have suggested that Baldwin, who signed on for three years as chairman of the board when he retired as chief executive in 2001, might not remain for his entire term. Baldwin was traveling last week and unavailable for comment.
After building a management team, Kelly took a lesson from Baldwin, who helped build Mercantile by buying almost 20 community banks in the past 30 years, and went shopping, but not for banks.
First, in March, Mercantile bought a stake in Winston Partners, a hedge-fund manager. Then it bought 20 percent of Geneos Wealth Management Inc. Last month Mercantile paid $19 million for Boyd Watterson, an asset manager in Ohio. And this month, the bank that sniffed at the idea of discount financial-services firms finally bought one, Peremel & Co., a discount brokerage in Baltimore.
Kelly has also expanded some of the bank's asset-management services, such as Mercantile's mutual funds, which used to require a $25,000 minimum investment. Yearly net sales in the funds were about $4 million until last year. Soon after the minimum was lowered to $1,000, $186 million poured into the funds in just three months.
The bank also created a fund that invests in other hedge funds, high-risk investment funds usually availably only to institutions or wealthy individuals. The minimum investment for Mercantile's fund is $75,000, lower than the industry average.
Such changes, increasing the number of services the bank offers and making them more available to different types of customers, is aimed at increasing revenue from sources other than interest on commercial loans.
Now Mercantile earns 24 percent of its income from fees, such as those from money management, compared with an average of 30 percent for similar sized banks around the country. Some banks earn as much as 40 percent from fees.
In the 18 months since Kelly's appointment, non-interest income has grown by about 9 percent, while total interest income has fallen 17 percent, a victim of interest-rate cuts.
"This highlights how sensitive we are" to interest rates and the need for other types of income, Kelly said.
But the bank remains conservative, according to data from SNL Financial, a research firm based in Charlottesville. For example, Mercantile's ratio of total equity to total assets, a measure of how conservatively the bank uses its capital, is 12 percent, while the average for similar banks is 9 percent. That caution also means that the bank has fewer nonperforming assets in its loan portfolio; 0.3 percent, compared with an average 0.6 percent at other banks its size.
Mercantile's earned $190.2 million last year, 38 percent more than other banks its size and largely because of its commercial loans. And commercial lending is going to remain the foundation of Mercantile, despite an increased focus on other kinds of revenue.
"I think [asset management] will be a good ancillary business, but it's a very competitive one," Townsend said. "On the other hand, the banking business is where they will continue to make the bulk of their revenues and profits."