BALTIMORE -- Can a bank ever have too much capital?

The question, much discussed in an industry flush with record profits, is particularly pertinent to Mercantile Bankshares, the largest and strongest independent bank left in Maryland. With an equity-to-assets ratio of 12.4%, compared to a peer level of 8.3%, Mercantile has capital to bum.

Chairman and CEO H. Furlong Baldwin is fond of saying, "There really is no such thing as too much capital." But even Mr. Baldwin admits that Mercantile's current ratio rests "on the high side of adequate."

Wall Street analysts, who would like to see Maryland's third-ranked bank improve its mediocre 13% return on equity, take a sterner view. "They have excess capital to be sure," says John A. Heffern, with NatWest Securities Corp. in Baltimore.

The "problem" has to do with the lack of acquisition prospects and meager loan growth. Mercantile has raised its dividend twice in two years and-announced a stock buyback program. But its earning power is so strong (return on assets was 1.58% for the first nine months) that the $5.6 billion-asset company accumulates retained earnings faster than it can put new loans on the books.

The culprit is Maryland's economy, which still hasn't quite recovered from a humbling recession earlier in the decade. "We've gone through the worst crisis in banking in Maryland since the Depression," says Edward K. Dunn Jr., Mercantile's president.

The recession so weakened Maryland's banks and thrifts that many failed or sold to out-of-state institutions. When the smoke had cleared, only Mercantile, among the top rank, remained independent and stronger than ever.

But the economic problems, exacerbated by Maryland's dependence on a shrinking defense industry, still linger. In January, Mercantile began seeing a revival in commercial loan demand, what Mr. Baldwin describes as "a gathering of momentum."

But net loans have increased only 3% so far this year. That's because some commercial portfolios are trending down, particularly indirect auto, where Mercantile is pulling back from hyperactive competition and shrinking margins.

Many other banks have used credit cards to boost their consumer lending. But that strategy is not available to Mercantile, which offers Visa or MasterCard products through various unaffiliated issuers. Mercantile has never underwritten or processed its own bank card portfolio.

Mr. Baldwin's hope is that, as indirect auto bottoms out, commercial loan growth will become strong enough to significantly boost overall asset growth. Only then can Mercantile begin to bring its equity-to-assets ratio down to a more "normal" 10% level, which would still be higher than peers'.

Mercantile's .approach to capital is typical of the bank's ultraconservative corporate culture, which in turn is inspired by the man at the top. Mr. Baldwin "is what I would call an old-fashioned banker, in the sense that he practices the old-fashioned soundness and safety principles," says John G. Medlin Jr., chairman of Wachovia Corp., Winston-Salem, N.C.

Mr. Baldwin is a formidable presence, both literally and figuratively. Standing 6-foot-4 in his stocking feet, the former college lacrosse player and Marine speaks with supreme self-assurance. After 38 years in the banking business, all of it spent at Mercantile, Mr. Baldwin has accumulated certain unshakable convictions that he loves to proclaim.

One of those beliefs has to do with the primacy of capital.

"This is the game: The prize goes to the individual with capital," he asserts in his deep-throated drawl.

While it may be hard to make, that argument in today's environment of record high earnings, when banks have easy access to Wall Street, Mr. Baldwin believes there will again come a time of troubles. At that point, when regional banks cannot raise capital, the correctness of Mercantile's strategy should become evident.

Another Baldwin tenet is that big is not necessarily better -- in fact, it's worse. Mr. Baldwin warns that banks that try to grow too rapidly will eventually lose control of their own operations.

"We see the NationsBanks and the Citicorps trying to be everything to everybody. And I'm not sure in the service business whether you can do that profitably," he says.

Mercantile, characteristically, sticks to a few niche businesses. It basically makes small business and consumer loans (including mortgages) and offers trust services. And that's about it.

Mercantile also focuses exclusively on its local markets in Maryland, where it has a 7% share of total deposits, and tiny nearby slivers of Virginia and Delaware. Except for a few standby lines of credit, it has no national or international accounts.

In the 1970s, some Mercantile executives wanted to take the company into the then-popular international trade finance business, leveraging off Baltimore's role as a major port. But Mr. Baldwin held firm.

"Baldy kept saying, Tell me again what it is that we will do for our customers in international banking that J.P. Morgan hasn't been doing for 100 years already? Where do we add value?' Our people were smart enough not to be able to come up with an answer," recalls Mr. Dunn.

Mercantile did recently upgrade its cash-management services, but only to strengthen its commercial banking effort. There are also plans to offer proprietary mutual funds through the branches next year, but principally as an adjunct to the trust operation. Branch employees, not licensed salespeople, will refer interested customers to a securities subsidiary.

"A huge rollout of a huge volume business is not what we're trying to do," Mr. Dunn says.

Mercantile's conservatism has made the company unusually dependent on loan volume. Recurring noninterest revenues contribute only 26% of total recurring revenues, with most of that coming from the strong trust operation, which controls twothirds of the personal trust business in Maryland. The peer comparison is 32%, according to Keefe, Bruyette & Woods Inc.

But Mercantile does benefit from rising interest rates because of a high level of noninterestbearing deposits (19% of deposits) and the fact that most of its loans are tied to prime. This phenomenon was at work this year as the net interest margin rose from 4.73% in the first quarter to 4.99% in the third.

"The company, at least from the margin point of view, has moved into its 'sweet spot' relative to the interest rate environment," says Mr. Heffern, the Natwest analyst. Mr. Heffern expects Mercantile to earn $2.17 a share next year, up from $1.93 this year.

The Wall Street consensus estimate for 1995 is a slightly more modest $2.14 a share.

Mercantile's earnings power is impressively consistent. Despite the recession, its net income has risen every year since 1989, even with an uptick in nonperformers.

The reasons for this success: credit quality that is better than peers and a decentralized affiliate system that generates strong revenues. The holding company includes 19 separately chartered banks, each of which is allowed to set its own loan and deposit policy, within certain guidelines.

Most of Mercantile's affiliates are community banks. But the lead bank, Baltimore-based Mercantile-Safe Deposit and Trust Co., which controls 40% of the company's assets, provides the rest of the system with auditing, investment portfolio, credit analysis, and technological support.

The structure works well for Mercantile, but it does buck the industry trend of ever-increasing centralization. Mercantile's market is now crowded with competitors, such as NationsBank Corp., First Union Corp., and Signet Banking Corp., that have invested heavily in new forms of electronic delivery and marketing.

"The risk that Mercantile runs long term is that its customers begin to place a diminished value on the idea of independence and small-town community banking," says NatWest's Mr. Herfern.

The fact that Mercantile would be a desirable acquisition target, based on its role as the largest independent bank left in Maryland, brings the succession issue to the fore. Mr. Baldwin, the CEO since 1976, is now 62. The company has established no set retirement date for him, but he's unlikely to stay on much past age 65.

"It's not my intent to work forever," Mr. Baldwin affirms. "I don't want to be the oldest CEO east or west of the Mississippi River."

It is commonly assumed that Mr. Dunn is the heir-apparent. But he's only three years younger than Mr. Baldwin, so his tenure is likely to be short.

What then? The job could fall to one of eight executive vice presidents that are now ranked below the very top level.

Confident in Mercantile's bench strength, Mr. Baldwin believes the bank will remain a player for a long time to come. "I am comfortable about the future," he says.

Baldwin: Md.'s

'Most Powerful Private Citizen'

H. Furlong Baldwin "Baldy" to friends and enemies alike may not be a nationally known figure. But in the business and political circles of Maryland, he is a giant, a man whom The Baltimore Sun dubbed the state's "most feverishly active and most powerful private citizen."

"There just isn't another person from our industry who touches the bases Baldy touches," says John P. Bowers Jr., executive vice president of the Maryland Bankers Association. "He has clearly evolved as the preeminent banker in the state."

The chairman and CEO of Mercantile Bankshares Corp. is an unlikely power broker. Blunt and outspoken with a patrician air, Mr. Baldwin doesn't mind ruffling important feathers to make a point. An exasperated Gov. William Donald Schaefer, responding to Mr. Baldwin's constant complaints about Maryland's high corporate taxes, publicly labeled him "a damaging and very negative person."

But Mr. Baldwin has something no other banker in Maryland can equal: a fortress-like base of power. Mercantile, with $5.6 billion of assets, is the largest and strongest independent financial institution in Maryland.

There was a time, during the late 1980s, when Mr. Baldwin had some peers, most notably at rival MNC Financial Inc. But MNC. weakened by the recession that hit the state in the early 1990s. sold out to NationsBank Corp. last year. First Maryland Bancorp and Baltimore Bancorp, the other two big Baltimore banks. are also owned by out-of-staters.

That left Mr. Baldwin, as The Sun put it. "as one of the few local business leaders who can write a check for charity without getting approval from Cincinnati, Charlotte, N.C., or Dublin. Ireland."

Mr. Baldwin has used this freedom to good advantage. He helped raise $750 million for the Johns Hopkins medical complex and $40 million to save the Baltimore Symphony Orchestra.

He's 'also not shy about using his lobbying skills to advance Mercantile's own interests. During the late 1980s, Mr. Baldwin helped stymie a legislative push supported by most of the state's other banks to broaden Maryland's interstate banking laws to include additional states.

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