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Mellon's dramatic departure from consumer banking in '01 created winners and losers

By Thomas Olson
Sunday, July 10, 2011
 

Ten years ago, the face of banking started to change in Pittsburgh with a landmark deal that experts say brought mixed results.

On July 17, 2001, the former Mellon Financial Corp. -- a city icon and banking titan -- announced it would sell its retail bank to Citizens Financial Corp.

The $2.1 billion sale represented a unique strategy in the banking industry -- to sell off the consumer/small-business bank and invest the proceeds in the highly profitable fee-based businesses of managing and holding trillions in stocks, bonds, 401(k) and other assets for institutional customers worldwide.

Over the next decade, the deal worked out for some, but not all constituent groups, according to shareholders, consumer and the Pittsburgh-area community experts.

-- Mellon shareholders have not done well in the long run, with their stock significantly below the level of a decade ago, according to Wall Street experts.

-- Employment at the two banks combined is about 1,000 higher in the Pittsburgh region than 10 years ago.

-- Consumers tended to stay with Citizens -- which remains the region's second-largest bank. But many business and commercial customers moved to other banks.

-- Local charities found a new provider in Citizens, and Mellon's giving increased. But one high-profile event -- the popular Mellon Jazz Festival -- disappeared.

"Ten years ago, we were all concerned when Mellon said it was selling the bank," said Ernie Hogan, executive director of the Pittsburgh Community Reinvestment Group. "But both banks have proved to be good corporate citizens."

Mellon sold its 346 branches in three states to a bank more focused on consumers. Based in Providence, R.I., Citizens added Mellon's branches to 427 of its own in four New England states. About 1,350 Mellon employees in the Pittsburgh region moved to Citizens when the deal was completed in November 2001.

The deal was the result of discussions between Mellon CEO Martin McGuinn and long-time acquaintance, Citizens CEO Lawrence Fish. Neither could be reached.

Mellon shareholders held stock in a changed company. It changed again in 2007, when Mellon was acquired by Bank of New York Co. That $16.5 billion deal created the world's largest investment manager and custodian: Bank of New York Mellon Corp. -- based in New York.

Shareholders

Shareholders have seen the value of their holdings fall in the past decade.

"It's hard to conclude, based on the market's reaction, that BNY Mellon has performed well. In fact, the price is far lower than it was in 2001," said Gary Townsend, president of Hill-Townsend Capital, a hedge fund in Chevy Chase, Md., that holds many bank stocks.

In the first four years after 2001, Mellon's total return (stock appreciation plus dividends) did not match its big bank and trust peers. But Mellon began to out-perform those peers in 2006. By 2010, BNY Mellon's total return of 9.4 percent edged its peer group's 8.8 percent.

"Now, they are very focused on what they do best," said Frank Barkocy, a veteran bank stock analyst and managing director at Mendon Capital Advisors, a fund manager in New York. "It's a solid operation, and they've continued to grow and expand."

Citizens' parent, Citizens Financial, is not publicly owned. Its parent, the Royal Bank of Scotland, is based in Edinburgh, in the United Kingdom.

Customers

Since it acquired Mellon's retail bank, deposit levels at Citizens have increased, but its market share in the seven-county Pittsburgh area has risen marginally, the latest Federal Deposit Insurance Corp. data shows. Citizens' market share rose to 8.6 percent in June 2010 from 8.3 percent in 2002.

Citizens increased its branch network in the area to 127 from 118 a decade ago, and added 135 automated teller machines to the 225 it acquired, for a total of 360. The bank declined to provide data on household or lending market share.

"Mellon management viewed branches as superfluous, and that bricks and mortar was not the future," said Townsend. "That view, in my judgment, was wrong. But with no commitment to retail banking, it was probably better that they got out."

"My savings account went from Mellon to Citizens, and Citizens showed a little better customer service," said Hogan, of Highland Park. "Mellon was geared more toward high net-worth people."

Citizens President Dan Fitzpatrick said, "We're focused on being the primary banking relationship for as many households as possible where we have branch coverage."

Some business customers didn't migrate to Citizens as easily.

Ulrich Mauser, vice president of Provident Agency Inc., said the Fox Chapel insurance brokerage found Citizens was not as equipped to meet its needs. So it switched to PNC Bank, especially for its treasury management services.

"Citizens didn't have the range of products and services we needed," said Mauser. "It was just a business decision based on PNC's products matching up with our needs."

Community

Based on employment, the Mellon/Citizens deal was a winner for the region. It has produced an additional 1,000 jobs over the past decade, bank figures show.

Mellon employed 8,500 people, including at the retail bank, before the Citizens deal. Today, BNY Mellon employs 7,675 here, and Citizens employs 1,800 -- a total of 9,475.

In terms of charitable contributions, BNY Mellon's giving has risen 38 percent since 2000, it said. Grants, sponsorships, and employee contributions and bank matches totaled about $5.7 million in 2000. That rose to $7.9 million last year.

Last year, BNY Mellon launched a program to help young people transition from foster care to independent adults, furthering their education and finding employment.

"It started in Boston then went to New York, New Delhi and now Pittsburgh," said Donald Goughler, president of Family Services of Western Pennsylvania, the social services provider that runs the program here. It received a $150,000, three-year grant from BNY Mellon last year.

Citizens does not disclose total giving figures, said Henri Moore, a spokeswoman in Philadelphia. Six years ago, Citizens said it set aside $4 million in neighborhood development loans and grants between 2002 and 2004 -- a three-year commitment it expanded to $23 million from 2005 through 2007.

"They're both charitable givers and play leading roles in community events," said Bill Flanagan, executive vice president of the Allegheny Conference on Community Development.

While BNY Mellon's giving still extends to such groups as Travelers Aid Society of Pittsburgh and The Pittsburgh Zoo, the once-famed Mellon Jazz Festival evaporated.

"It's how we spent our summers here. We lost that, and we miss it," said Janis Burley Wilson, director of jazz programs at the Pittsburgh Cultural Trust. "But Mellon still supports jazz all over the city."

Neither she nor BNY Mellon would disclose current contributions to promote jazz.

Headquarters

"We were founded here in 1869. And we will always have our headquarters here because that's extremely important to us," Mellon CEO McGuinn said in 2001 when the sale to Citizens was announced.

But Mellon's merger with Bank of New York in 2007 resulted in the headquarters moving to New York. Pittsburgh became what BNY Mellon dubbed a "center of excellence."

"When a city loses a headquarters, normally you not only lose the prestige of having the headquarters, but you lose a lot of high-paying jobs," said Jay Aldridge, a veteran economic development official. "But in Mellon's case, they've kept up a good presence here.

Citizens Bank of Pennsylvania, as its formally known, set up "dual headquarters," in Philadelphia and Downtown. But Pittsburgh-based executives report to Philadelphia.

 

 
 


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