Shifting Focus Forces Departures at Mellon 1st Banking Division
By KATE BERRY
It took just a few years for Mellon 1st Business Bank to lose its luster.
Founded as 1st Business Bank with the assistance of financier John Anderson, the bank thrived for two decades by providing loans and services tailored to the legions of L.A. entrepreneurs.
It has attracted copycats and helped define the middle-market sector that is now considered one of the industry’s most profitable. It also drew the attention of Pittsburgh-based Mellon Financial Corp., which ended up purchasing 1st Business Bank for $287 million in 1997.
But now there are signs that Mellon 1st Business Bank has shed some of its competitive edge, as its parent shifts from lending toward private wealth management, which puts it at a disadvantage.
Last month, R. Daniel Woerner, the bank’s chairman and chief executive, resigned unexpectedly to take a job with Valley Independent Bank in El Centro, an agriculture bank owned by Dutch banking conglomerate Rabobank.
“My real impetus for leaving was, I question the commitment of Mellon to being in the banking business,” said Woerner.
Ever since Mellon Financial sold its retail and business banking operations three years ago, Mellon 1st Business had been fighting rumors that it could be sold, he said.
“It was a challenge to get resources and to grow the business,” he said. “I was trying to get them to do acquisitions and expand but it was just a difficult thing to do and that’s not where they wanted to spend their capital. The franchise hasn’t gotten any worse, but it could reach a higher potential.”
Other recent departures: co-founder Robert Kummer, who cut his ties to the bank in January, and its former president, Klaus Schilling, who joined First Regional Bank in Century City in April.
The remaining executives are billing the departures as normal. Competitors have a different view.
“They have a great client base but we’ve been taking business away from them,” said V. Charles Jackson, president and chief executive of Community Bank in Pasadena and a former executive director of Mellon Financial Group West. “They do very little lending, so they’re not viewed as truly a competitor in the middle market. Increasingly we’re seeing disaffected clients leaving them.”
Built on lending
With $2.6 billion in assets, Mellon 1st Business has seen the number of net loans and leases fall by 2.6 percent in the 12 months ended March 31, to $901.1 million. In earlier years, typical loan growth has been between 5 percent and 7 percent. The bank has done better attracting deposits; during the March quarter, those rose by 16.1 percent from the year-ago period, to $2.2 billion.
This imbalance has resulted in a decline in the net loans-to-deposits ratio a key measure of lending activity to 41.04 percent at March 31 from 48.94 percent one year earlier. At the end of 2002, this figure was 53.23 percent.
The bank historically has had a low loans-to-deposit ratio because its high-end customers often do not tap their lines of credit, said Joseph Sanford, a founder and former president of Mellon 1st Business Bank who also sits on the board.
“Everybody wants our accounts, so we’re going to have a lot of competition,” Sanford said. “There are a lot of banks being formed right now and some of them have patterned themselves after us, which I think is a compliment.”
As for management changes, Sanford said the company’s bankers long have had price tags on their heads.
“There’s nothing internal that’s driving it,” he said. “Yes, we’re going to lose some (bankers) for some reason or another, but in our business our retention rate is fine.”
The bank’s six-member executive committee is expected to meet in the next few weeks to name a successor to Woerner, with one likely candidate to be F. David Hare, currently executive vice president and chief credit officer.
Formed in 1981 by four career bankers from Union Bank, 1st Business distinguished itself by catering solely to owner-managed companies with revenues of between $3 million and $100 million.
Sanford brought with him a high-level client, Anderson, who became one of seven founding directors. 1st Business Bank had another 30 founders and 650 shareholders and raised $8 million when it opened in 1981. Anderson bought the bank outright in 1989 for $84 million, which at the time was the largest price ever paid for a community bank.
“The bank has done very well and Mellon has been very supportive and proud of the acquisition,” said Anderson, who has continued to advise the bank. “A lot of other banks would like to do what we did with 1st Business Bank so it’s a compliment that other banks would come looking for our bankers.”
To better serve its core business, specific bankers were assigned to each entrepreneur, rather than shuffling clients among account managers. This so-called middle market, now broadly defined to include companies of up to $500 million in revenue, has since become the sweet spot of the commercial banking industry. A slew of banks and financial services companies have jumped into the fray, each seeking a larger piece of the overall business generated by high net-worth customers.
Mellon 1st Business also appears to be reducing its deep ties to the fraternity of L.A.’s elite bankers and businesspeople. Layna Browdy, a spokeswoman for the bank, said that earlier this year it disbanded an advisory board that included Anderson, who is chairman and president of Topa Equities Ltd., along with Peter Mullin, chairman and chief executive of Mullin Consulting Inc., and Robert Ferry, founder and chairman of Korn/Ferry International.
‘Not backing away’
To some degree, the institution is a victim of its own success.
When Mellon acquired 1st Business Bank, several of its rainmakers, including regional vice presidents Donald Johnson and Robert Schack, left to form their own bank, American Business Bank. American has poached dozens of account managers over the years, including David Wolf and Donald Solsby, who ran Mellon 1st Business Bank’s Orange County office.
Moreover, lawyer Alan Rothenberg has made no secret of fashioning 1st Century Bank, which opened in Century City in March, in the image of the former 1st Business Bank even using a similar-sounding name.
Richard Cupp, president and chief executive of 1st Century, said the difficulty is in maintaining the same business model when a larger institution takes over.
“1st Business Bank was a great bank and Mellon is a great bank, but there’s no way a buying bank can sustain the business model of the bank they’ve acquired,” he said.
Many bankers see the local shift as an outgrowth of the strategy of Pittsburgh-based Mellon, which has weaned itself from traditional banking in favor of fee-based services such as mutual funds and asset and cash management.
Some analysts attribute Mellon’s retreat from retail banking in 2002 to losses it sustained on a $100 million loan to WorldCom, the bankrupt telecommunications carrier taken over by MCI. Mellon, which owns Dreyfus Corp. and Boston Co., is now the fifth-largest mutual fund company in the United States.
Cross-selling wealth management services across its client base has become a focus of Mellon, which has more than 2,000 employees at 45 separate locations in 14 Western states.
As evidence of the impact on Mellon 1st Business Bank, some point out that the unit is no longer overseen by a banker at all, since Jeffrey Leininger, a former vice chairman and head of treasury securities, retired in June.
Instead, Mellon Financial’s Chairman and Chief Executive, Martin McGuinn, assigned David F. Lamere, president of the parent company’s private wealth management operation, to oversee Mellon 1st Business and its only other bank, Mellon United Nation Bank in Miami.
Scott Sanford, chairman and chief executive of the Western region for Mellon Financial, said the parent company has not wanted to back off on lending, though it did intend to beef up services to high net-worth clients.
“We have a business that manages $60 billion in private wealth assets, so we have a capability that they (Mellon 1st Business) could never produce themselves,” he said. “I don’t want to overemphasize the private wealth angle because this is a wholesale middle-market lending bank it’s not the tail wagging the dog here. The middle market business focus still remains paramount.”