Mellon Financial Corporation
Mellon Financial Corporation
Incorporated: 1869 as T. Mellon & Sons
Sales: $5.9 billion (2000)
Stock Exchanges: New York
Ticker Symbol: MEL
NAIC: 52211 Commercial Banking; 52221 Credit Card Issuing; 551111 Offices of Bank Holding Companies
With nearly $2.8 trillion in assets, Mellon Financial Corporation operates as an international financial services firm catering to businesses, institutions, and individuals. Its financial products and services related to businesses and institutions include investment management, trust and custody, foreign exchange, securities lending, contribution services, fund administration, stock transfer, proxy solicitation, employee benefits consulting, and outsourcing for benefit plans and banking services. Mellon also provides services concerning capital markets, venture capital, asset-based lending, loan underwriting, and leasing and real estate finance. The company provides mutual funds, private asset management, electronic brokerage services, and banking services to individuals.
Born on a potato farm in Ireland in 1813, Thomas Mellon decided at an early age that farming was not his life’s calling. When he was five years old, his family moved to Pennsylvania, where he could often be found reading a book as he rode a plow across his father’s fields. He became a lawyer in 1839, and although his practice did well, his investments in real estate, construction, and mortgages fared even better. In 1869, Judge Thomas Mellon retired from public service and founded T. Mellon and Sons, a private banking house at 145 Smithfield Street in Pittsburgh.
The bank prospered during the post-Civil War years, and a second bank, run by Mellon’s sons, opened soon after the first. In the Panic of 1873, when half the banks in Pittsburgh failed, the Mellon’s never closed either bank. Although Thomas Mellon died in 1908, his sons, Andrew and Richard, were able to build upon their father’s foundation to create the giant that would eventually play a key role in fueling industry throughout Pennsylvania and most of the rest of the country.
The Mellon’s invested their profits from the bank in other enterprises, such as Alcoa (Aluminum Company of America), originally known as the Pittsburgh Reduction Company, and Gulf Oil Corporation, founded by William Larimer, Thomas Mellon’s grandson. Gulf Oil grew to become the world’s tenth-largest industrial corporation, and Alcoa became the world’s largest aluminum manufacturer. The Mellons’ monumental success with Mellon Bank and other such ventures was partly responsible for the long-held belief in Allegheny County, Pennsylvania, that “nothing moves in Pittsburgh without the Mellons.”
Four financial institutions founded in the 19th century contributed to the growth and history of Mellon Bank. Besides T. Mellon and Sons, they were: the Farmers Bank of Delaware, established in 1807 by Henry Ridgely; the Harrisburg Bank, founded in 1814 by William Wallace, Robert Harris (son of the founder of the city of Harrisburg), and 11 other Pennsylvania businessmen; and the Girard Savings Institution of Philadelphia, established by Benjamin Wood Richards in 1835. This institution, which eventually came to be known as Girard Bank, was named in honor of Stephen Girard, a multi-millionaire who left $7 million to the city of Philadelphia and lent money to the American government during the War of 1812.
Andrew Mellon Takes Leadership of the Firm: 1882
After serving as president of T. Mellon and Sons from 1869 to 1882, Thomas Mellon retired and turned the bank over to his son Andrew. Under Andrew’s leadership, the bank financed the creation of Union Transfer and Trust Company; joined the national banking system as Mellon National Bank in 1902; formed its first foreign bureau in 1908 to provide banking services for customer activity outside the United States; and established a long tradition of growth through acquisitions and mergers.
In the late 19th century, goods were often sold with a three-or four-month grace period between delivery and payment due dates. T. Mellon and Sons profited from the common practice of buying at a discount the documents that showed the amount due and holding them until maturity to collect the full value. This business made T. Mellon and Sons the largest private bank between New York and Chicago. The bank soon decided to expand its range of operations, however, to include trust estates and related work, and created the Fidelity Title and Trust Company with the help of other investors. Fidelity was an instant success, so much so that it found itself turning away business in order to avoid conflicts of interest between clients. Consequently, in 1889 it set up its own rival company, the Union Transfer and Trust Company, which became the Union Trust Company not long after. In an effort to consolidate the Mellons’ banking interests, the family decided in 1902 that Mellon National Bank should become an almost wholly owned subsidiary of Union Trust. In 1921, Andrew Mellon was appointed secretary of the treasury by President Calvin Coolidge. While he served in Washington, D.C., remaining under presidents Warren Harding and Herbert Hoover, his brother Richard became president of the bank.
Surviving Economic Hard Times: Late 1920s to Early 1930s
Since Mellon National Bank was a federally chartered corporation and Union Trust and Union Savings were state banks, the Mellons were able to take advantage of both banking systems. Together, the banks could finance virtually any enterprise in the country by the 1920s. In 1929, Richard Mellon formed Mellbank Security Company, a bank holding company that helped save numerous smaller banks in western Pennsylvania during the Great Depression. Mellon’s knack for giving sound advice to its customers, together with its ability to maintain sufficient liquidity and one of the highest ratios of cash to deposits in the nation, played a major role in the bank’s survival through the 1930s. From 1931 to 1932, the combined earnings of Mellon National and Union Trust totaled nearly $12 million. Indeed, since the Mellon name and conservative reputation were well known by the 1920s, many of the panicked customers who withdrew their savings from other banks after the crash flocked to Mellon National. Seeing the crowds team into the bank, Richard Mellon reportedly muttered, “I told those damn architects to make more room in the lobby.”
After Richard’s death in 1933, his son, Richard K. Mellon, took over as president. When Mellon National Bank and Union Trust Company merged in 1946, Richard became chairman of the newly formed Mellon National Bank and Trust Company. Mellon Bank also entered the retail market by expanding its branch network and merging with Mellbank.
By the middle of the 20th century, Mellon began to build a reputation for technological innovation, especially in cash management. The company bought its first computer in 1955, one of the first banks in the nation to do so. In 1958, Mellon established the Mellbank Regional Clearing House, the forerunner of its Datacenter Group, for overnight processing of checks from correspondent banks.
One measure of Mellon’s power was the size of its trust assets: in 1967, Mellon Bank controlled a third of all the trust assets in Pennsylvania. That same year, “outsiders”—people who were not Mellon descendants—first filled the bank’s top two positions. Richard K. Mellon became honorary chairman of the board, John A. Mayer, president since 1959, became chairman, and A. Bruce Bowden was appointed president. As president, Mayer had helped Mellon double its savings deposits, nearly double its mortgages holdings, and issue credit cards to 250,000 people. His success was the fruition of a program begun by Richard K. Mellon to expand Mellon’s reach from its traditional base of wealthy individuals to all kinds of banking customers.
In 1972, Mellon National Corporation was created as a one-bank holding company to own Mellon National Bank and Trust Company, which officially became Mellon Bank.
By the mid-1970s, Mellon was still one of the most conservative banks in the country, a philosophy that served it well in 1975, when many progressive banks got into trouble with real estate investment trusts, a popular investment item in the 1960s and 1970s. Banks had lent billions of dollars for real estate and construction ventures. With these loans, real estate development companies built so many condominiums, single-family homes, and other buildings that they found themselves short of buyers. Mellon, however, had advised its customers to avoid the real estate investment trusts and was untouched by this crisis.
In 1982, Mellon’s assets totaled $19 billion, more than the combined assets of the next three largest banks in Pittsburgh. The company had also become a strong commercial lender with sophisticated credit-accounting techniques, and managed nearly $13 billion in trusts, including many corporate pension and benefit plans. “It was always easy to identify the leadership in Pittsburgh,” Joseph Lasala, a former Philadelphia city representative, told Philadelphia magazine in 1986. “There’s one of everything. One big industry—steel … and one big bank— Mellon.”
We have built our company upon a well-defined strategy: provide a breadth of financial solutions to our customers —what they need, when they need them, how they want them delivered. It’s the core of our success in the marketplace, the root of shareholder value, our foundation for growth.
Difficulties in the 1980s
On the whole, however, the 1980s were a difficult time for Mellon Bank. Although it nearly doubled its assets between 1982 and 1987, its quick expansion overseas and into “high growth industries” such as energy and real estate was poorly timed. Under the leadership of Chairman J. David Barnes, Mellon created an energy lending division and a loan production office in Dallas, Texas, in 1982—just after oil prices peaked. Foreign operations, which accounted for nearly one-third of Mellon’s profits in 1982, caused some of the worst damage. Like many large banks, Mellon’s international expansion was poorly timed. Overexposure in Mexico, Brazil, and other Third World nations resulted in many problem loans. Mellon eventually closed almost half of its 20 foreign branches. The company also realigned its international operations to focus on multinational corporate customers rather than overseas borrowers.
The merger of Mellon and Girard Bank in 1982 also exemplified Mellon’s eagerness to expand. Girard had merged with the Corn Exchange Bank in 1951, installed its first computer in 1962, and, over the next ten years, pioneered the development of automated retail services in Philadelphia. Its automated bank system would eventually gain industry recognition as state of the art. Girard also acquired the Farmers Bank of Delaware in 1981, renaming it Girard Bank Delaware. Girard’s earnings dropped significantly in October 1982, but Mellon finalized the merger anyway, in November, 1982. Girard’s growth came to a sudden halt after the merger, and in 1984 the bank’s shaky balance sheet—which included a vast portfolio of delinquent loans—contributed to a 14 percent decline in Mellon’s earnings for the year. It also prompted Mellon officers to head to Philadelphia to “Mellonize” things. Their take-charge approach made Girard veterans and customers uncomfortable. In addition to firing several Girard executives, Mellon went so far as to rename Girard Bank Mellon Bank (East), while Girard Bank Delaware became Mellon Bank (DE).
In 1985, Mellon, which had adopted the name Mellon Bank Corporation a year earlier, merged with Commonwealth National Financial Corporation, the Harrisburg-based financial-services holding company formed in 1969 by the merger of the Harrisburg National Bank and Trust Company, Conestoga National Bank, and the First National Bank of York. Mellon also enhanced its integrated banking software and financial data-processing systems through the acquisition of Carleton Financial Computations Inc., in South Bend, Indiana. Also that year, Mellon purchased several subsidiaries of the Fidata Corporation that offered securities transfer, securities pricing, and trust accounting services. By the late 1980s, Mellon was selling its data-processing expertise to some 400 small banks across the country.
Mellon entered the high-growth consumer-banking market in Maryland in 1986, when it bought certain assets of Community Savings and Loan, of Bethesda, and created Mellon Bank (MD). It also opened Mellon Securities Ltd., London, to serve the investment needs of United States-based customers, and added Triangle Portfolio Associates to its eight investment-management subsidiaries.
In 1987, Mellon recorded the first loss in its history, due to increased reserves for Third World loans and for certain domestic credits. When this first-quarter loss was announced, stock shares plummeted and Chairman Barnes resigned. The Mellon family, which held 15 percent of the bank’s stock, chose an acting replacement for the CEO and, after an extensive search, approved the appointment of Frank Cahouet. Formerly president of the Federal National Mortgage Association, Cahouet was best known in the finance industry for reviving San Francisco’s Crocker National Corporation, although it was sold before he could complete his mission. Cahouet recruited Anthony P. Terracciano, former vice-chairman at Chase Manhattan Corporation, to serve as president and chief operating officer.
Cahouet immediately froze salaries and ordered the 19,500-member staff reduced by 10 percent, to Wall Street’s approval. The following year, in 1988, the company formed Grant Street National Bank, a separate entity created solely to clean Mellon’s bad-debt slate by liquidating many of its weak domestic loans. The bank was partly backed by Mellon funds and junk bonds, sold to investors who hoped sales of property securing the bad loans would be profitable.
- Judge Thomas Mellon establishes T. Mellon and Sons.
- Company joins the national banking system as Mellon National Bank.
- Andrew Mellon is appointed secretary of the treasury by President Calvin Coolidge; his brother Richard takes over as president of the firm.
- Mellbank Security Company is formed.
- Mellon National Bank and Union Trust Company merge to form Mellon National Bank and Trust Company.
- The firm becomes one of the first banks in the nation to install a computer.
- Mellbank Regional Clearing House is established.
- Mellon National Corporation is created as a one-bank holding company to own Mellon National Bank and Trust Company, which officially becomes Mellon Bank.
- The firm announces the acquisition of Girard Bank.
- Company adopts the name Mellon Bank Corporation.
- Mellon records the first loss in its history; Frank Cahouet is named chairman and CEO.
- Fifty-four branches offices of Philadelphia Saving Fund Society are acquired.
- The company purchases The Boston Company.
- Mellon merges with The Dreyfus Corporation.
- Company acquires FUL Inc. and the Business Equipment Finance unit of USL Capital Corp.
- Martin G. McGuinn is named chairman and CEO; the firm adopts the name Mellon Financial Corporation.
- Mellon announces plans to sell its retail and small business banking operations to Citizens Financial Group for $2.1 billion.
Cahouet’s plan was to return the company to its original position as a regional bank by becoming a more niche-oriented institution. During the late 1980s, Mellon concentrated on providing loans and other services to medium-sized companies, breaking its pattern of overextension to large, multinational corporations and foreign governments. This long-term goal to become a super-regional bank, however, put Mellon in direct competition with PNC Financial, the parent company of Pittsburgh National Bank, which had operated very successfully on the middle-market level for years.
Mellon’s approach emphasized its service businesses—trust and investment, data processing, and cash management—which showed no signs of slowing down. In 1988, the company acquired Backroom Systems Group, which offered personal computer software designed to automate labor-intensive tasks for financial institutions. Determined to maintain its leadership in the data-processing industry, Mellon also continued to develop BancSource, a data-processing system that would eventually perform all customer loan and deposit processing.
Growth and Expansion in the 1990s
The final decade of the 20th century marked the first time that Pennsylvania allowed true statewide banking; previously, state law governed how many branches a bank could open beyond county borders. The new law allowed banks to offer services where they made sense in terms of market coverage, not physical boundaries.
As such, Mellon spent much of the 1990s strengthening its regional position through strategic acquisitions. In 1990, Mellon purchased 54 Philadelphia branch offices of Philadelphia Saving Fund Society (PSFS) from Meritor Savings Bank. In order to fund the deal, Mellon sold its consumer finance business, Mellon Financial Services Corp., to Associates Corporation of North America. The firm also partnered with Giant Eagle Inc. in Pittsburgh to open its first full-service supermarket office, offering Mellon customers extended banking hours.
The following year, Mellon purchased United Penn Bank for $90.2 million. Cahouet stated in a New York Times article that the deal, “[d]emonstrates the corporation’s commitment to our home state of Pennsylvania and provides us with a strong presence in one of the few key population centers of the state we do not presently serve.” In 1992, Mellon snatched up the remaining PSFS branches from Meritor, after the Federal Deposit Insurance Corp. seized its assets after five years of losses. After the purchase, Mellon PSFS secured the leading position in the five-county Philadelphia region in total deposits, deposit market share, and number of retail offices. By the end of that year, it had also landed the leading position among 28 super-regional banks ranked by The American Banker in terms of return on average assets and equity.
In 1993, Mellon acquired The Boston Company, a provider of various institutional banking services, from Shearson Lehman Brothers in a deal worth $1.45 billion. It also purchased AFCO Credit Corp., an insurance premium financing division of The Continental Corporation. At the same time, the firm sold three outsourcing businesses related to its data processing services. In 1992, outsourcing revenues totaled $94 million, falling short of company expectations.
The Dreyfus Purchase: 1994
It was during this time period that mutual funds were becoming increasingly popular. Instead of saving money in traditional bank accounts, many savers opted to put money into investment products such as mutual funds. Mellon acted upon this trend and became the largest bank manager of mutual funds in 1994 with the $1.85 billion purchase of New York-based Dreyfus Corporation. The purchase of Dreyfus, the sixth-largest mutual fund company in the U.S., was the largest mutual fund acquisition in banking history.
While concentrating on its mutual funds business, Mellon also beefed up its retail banking operations. The firm entered the New Jersey market with the purchase of Glendale Bancorporation. The deal allowed Mellon to begin branch banking under the Mellon PSFS name in both traditional banking offices and in supermarkets. In 1994, the firm also partnered with Acme Markets Inc. in a deal that brought supermarket banking to Acme stores in Philadelphia, Delaware, and New Jersey.
Mellon continued its expansion into the mid-1990s. In 1995, the company joined with Chemical Banking Corp. to form Chemical Mellon Shareholder Services, one of the largest shareholder services firms catering to publicly held firms. Mellon also acquired Certus Financial Corp.’s investment management division, renaming the unit Certus Asset Advisors. That same year, the firm formed Mellon Financial Markets Inc., an underwriting subsidiary that provided underwriting, trading, and sales services to investors.
In 1996, Mellon expanded its leasing products and services with the purchase of Chicago-based FUL Inc. and the Business Equipment Finance division of USL Capital Corp. The company also penetrated the Florida market by acquiring Ganz Capital Management Inc., an investment management service provider based in Miami. Mellon also expanded its product line in 1997 by purchasing Buck Consultants Inc., an employee benefits and compensation firm. In order to take advantage of the growing Internet-based brokerage service market, Mellon bought Pacific Brokerage Services Inc. Operating under the name Dreyfus Brokerage Services Inc., the firm catered to online traders.
During late 1990s, the banking industry experienced a wave of consolidation along with corporate takeovers. Mellon’s solid reputation made it a prime target. The number of U.S. banks had dropped to 9,500 by 1997, down from 14,000 banks in 1985. A Goldman Sachs banking analyst commented in a 1997 Fortune article that Mellon had “collected a group of businesses that major banks want to be in. This is one of the last great trophy franchises out there.”
From Traditional Bank to a Financial Services Firm
Cahouet’s insistence to keep Mellon intact however, thwarted takeover attempts from the likes of Bank of New York. The firm instead, continued focus on expanding into new, high-growth markets. It acquired Florida-based United Bank-shares Inc. and California-based 1st Business Corp. Mellon also focused on international expansion, forming alliances with banks in Brazil, Chile, Hong Kong, Japan, and Singapore. The firm also teamed up with ABN AMRO Bank N.V., a Netherlands-based company. Operating under the name ABN AMRO Mellon Global Securities Services, the joint venture provided custody products and services to financial institutions.
In 1999, Cahouet retired, naming Martin G. McGuinn chairman and CEO of Mellon. In September of that year, the firm changed its name to Mellon Financial Corp. signaling its commitment to operate as a leading financial service company. Management set new strategic initiatives in place that focused on investing in its high-growth, high-return businesses. In order to achieve its new goals, the firm sold its mortgage servicing, credit card, and network services transaction processing businesses.
By the start of the new millennium, Mellon had successfully transformed itself from a traditional commercial bank into an investment service firm. In 2000, the firm acquired the remaining 25 percent of U.K.-based Newton Management Limited (it had already purchased the other 75 percent in 1998.) It also gained full control of ChaseMellon Shareholder Services, a joint venture between Mellon and Chase, and renamed it Mellon Investor Services. Net income for the year grew to over $1 billion for the first time in company history.
A weakening economy in 2001 forced Mellon to cut costs and focus on its most profitable ventures. In July 2001, the firm announced that it planned to sell its retail, small-business, and middle-market banking operations to Citizens Financial Group in a deal worth $2 billion. Eyeing asset management, fund servicing, and private banking as avenues for future growth, Mellon management was confident that the firm would remain a major player in the investment banking industry.
Mellon Private Asset Management; Mellon Private Banking; Mellon United National Bank; The Boston Company Asset Management LLC; Certus Asset Advisors Corp.; Dreyfus Brokerage Services Inc.; The Dreyfus Corp.; Dreyfus Investment Services Corp.; Founders Asset Management LLC; Franklin Portfolio Associates LLC; Laurel Capital Advisors LLP; Mellon Bond Associates LLP; Mellon Capital Management Corp.; Mellon Equity Associates LLP; Newton Management Limited; Pareto Partners; Prime Advisors Inc.; Boston Safe Deposit and Trust Company; Buck Consultants Inc.; CIBC Mellon Global Securities Services Co.; CIBC Mellon Trust Company; Dreyfus Retirement Services; Mellon Europe-London; Mellon Fund Administration; Mellon Investor Services; Russell/Mellon Analytical Services; Mellon Bank N.A.; Mellon PSFS; Mellon Bank Community Development Corp.; AFCO Credit Corp.; Mellon Corporate Financing; Mellon Financial Markets LLC; Mellon Ventures Inc.
Principal Operating Units
Wealth Management; Global Investment Management; Global Investment Services; Mellon Global Investment Services and Management Alliances with Non-U.S. Financial Institutions; Specialized Commercial Banking; Large Corporate Banking.
FleetBoston Financial Corp.; J.P. Morgan Chase & Co.; PNC Financial Services Group Inc.
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—update: Christina M. Stansell