Mercantile CEO Kelly weathering turbulence

THE BALTIMORE SUN

FOR A BIG-TIME New York lawyer and investment banker, stepping in to run Mercantile Bankshares should have been a piece of cake. It has been anything but easy for Ned Kelly.

Since Edward J. Kelly III took over in March 2001, he has had to take some bold steps to run the bank the way he sees fit. He nudged out H. Furlong Baldwin, the man who ran Mercantile for 25 years and brought Kelly to Baltimore. The two are no longer on speaking terms.

He ousted fellow New Yorker Wallace Mathai-Davis, his choice to run the bank's wealth management division, because of personality clashes. He fired Mathai-Davis' replacement, John J. Pileggi, claiming the employee committed fraud. Now Kelly and Pileggi are dueling it out in court, dredging up dirt from e-mail and private documents as primary weapons.

If office turmoil weren't enough, Kelly, 51, has faced one of the toughest interest rate environments, which has held back profits. Higher rates help fuel Mercantile's bottom line.

"It has been more challenging than I would have guessed," Kelly said over lunch in his office on the second floor of the bank's downtown headquarters. "I didn't know how hard."

Now, Kelly thinks he has finally gotten control of the state's largest independent bank.

Rising interest rates have helped perk up profits. Mercantile made $229 million for the year, a nearly 17 percent increase over 2003. Its stock price has risen a solid 12.3 percent over the past 12 months to $50.47 a share.

Mercantile is even expanding its market. This week it said it will buy Community Bank of Northern Virginia in a $212 million deal to tap the fast-growing Washington suburbs and build its wealthy-client base. It's the second bank Mercantile has snapped up since Kelly took over, adding about $3 billion in assets to the balance sheet.

"I feel pretty encouraged," Kelly said.

Despite the bumpy entry, Kelly says he has never wavered from his vision. That's to make Mercantile "the premiere" financial institution in the Mid-Atlantic. He envisions a bank that will easily be twice its size within 10 years - $30 billion in assets - offering an array of services. He dismisses chatter that he's out to sell the bank and reduce it to another asterisk in the city's history.

"I want to be in a position that we can grow with our customers," he said.

That kind of talk by a Baltimore banker hasn't been heard in years. A number of the largest banks in the region sold out long ago, leaving Mercantile, Provident and a handful of smaller institutions.

One of Kelly's biggest challenges is to regroup Mercantile's wealth management division, which has had enough personnel problems to make even the staunchest customer blush.

After Mathai-Davis was ousted in the summer of 2003, his replacement, Pileggi, was booted after just six months on the job along with another colleague. According to Mercantile's lawsuit, Pileggi failed to tell bank officials that the colleague's mother stood to win a large referral fee if the bank selected an advisory firm she recommended.

Pileggi sued for $240 million, claiming he was defamed. In his lawsuit, he accused Kelly of running a bank that was mean-spirited and dysfunctional and "encouraged" a culture of profane and insensitive remarks. He said the bank was out to "smear" him. Mercantile's $8 million lawsuit used Pileggi's e-mails to allege that the former employee was disloyal and not only misled bank officials on acquisition talks but also had an affair with a bank employee.

Kelly declined to talk about the lawsuit. He said he thinks he has hired the right person for the job, Jay M. Wilson, a Baltimore native who ran Mercantile's investment and wealth division from 1994 to 1997 before leaving the company. Wilson's father was president of the bank in the 1970s.

"I think we have all of the pieces in place," Kelly said.

It wasn't supposed to be this tough for Kelly. Many executives never face so many obstacles in such a short period of time. He came to Baltimore a top investment banker at J.P. Morgan Chase & Co. and headed its Global Financial Institutions group. He also was Baldwin's hand-picked successor. Now, Baldwin works out of an office in Cross Keys instead of at the bank.

Kelly acknowledges that he underestimated the challenges of the job and finds aspects of being a lawyer and investment banker easier than managing a large bank.

"It was easy for me to give people extraordinarily good advice and move on to the next thing," Kelly said.

But he's optimistic - cautiously so - that the bank will thrive.

"What always frightens me," Kelly said, "is what I don't know."

Bill Atkinson's column runs Tuesdays and Fridays. Contact him at 410-332-6961 or by e-mail at bill.atkinson@balt sun.com.

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