Lenders Living Alone And Liking It

Midsize banks find that niches help keep the acquirer away

In his 47th-floor office at One Mellon Bank Center in Pittsburgh, Martin G. McGuinn is ready for a fight. Since assuming the chairman's post at Mellon Bank Corp. on Jan. 1, the ex-Marine has been bolstering his defenses against a possible takeover. Management has been streamlined, and laggard businesses--credit cards, ATM servicing, and most mortgages--have been put on the block. And he's shoring up Mellon's strongest suit: managing money for wealthy clients through such tony subsidiaries as Dreyfus Fund and Boston Co.

Like many midsize banks, Mellon, with $50 billion in assets, likes being independent. Last year, it shook off a Bank of New York Co. offer and so far has avoided disappearing into one of the newly minted megabanks such as the linkups of BankAmerica and NationsBank or Banc One and First Chicago. McGuinn says Mellon is too different to fit in with the big guys. "They're thinking of growing deposits and assets and loans on the balance sheet and brick-and-mortar branches," says McGuinn. "It's a national, retail, mass-market strategy. That's not our strategy at all."

STOCK BOOSTERS. Nor is it the strategy of other midtier banks. They are staying free by burrowing into niches--asset management, securities underwriting, small-business lending. They hope these businesses will produce steady fee income and boost stock multiples, making it harder for an acquirer to do a deal. "The industry's a lot less homogenous than it used to be," says David S. Berry, research director at investment bank Keefe, Bruyette & Woods Inc. "It will be even less so five years from now."

Some banks that discovered their niche a long time ago are now bolstering their franchises. First Tennessee National Corp. in Memphis is using its experience selling bonds since the 1920s to expand its securities business. Says First Tennessee Chairman Ralph Horn: "A few years ago, we were just a good retail bank with a bond operation."

Another bank with a historic niche is GreenPoint Financial Corp. New York-based GreenPoint has more than 150 years of experience lending money to immigrants, who often have no credit history. GreenPoint does so through so-called no-documentation mortgages. The bank requires no paperwork, but borrowers must make a larger downpayment--25% to 50%--and pay interest 0.6 to 1.2 percentage points higher than on typical mortgages. "They're much more profitable than conventional lending," says GreenPoint Chairman and CEO Thomas S. Johnson. So much more that GreenPoint is expanding nationwide.

ADVICE, TOO. Going after another ignored sector--small business--is the ticket for Detroit's $24 billion Comerica Inc. About 90% of its loans go to businesses with sales of $500 million or less--many of them auto-parts suppliers in need of financial advice as well as money. "Our loan officers often become de facto chief financial officers of the companies we lend to," says Eugene A. Miller, Comerica's chairman and CEO.

At Mellon, McGuinn has won kudos by selling off mass-market businesses--such as a $1.9 billion credit-card portfolio dealt to Citigroup--and expanding its fund-management business internationally. Mellon has set up joint ventures with Bank of Tokyo-Mitsubishi Ltd. of Japan and, lately, with Credit Lyonnais. "These are moves in the right direction," says Kevin C. Holt, analyst with the Milwaukee investment firm of Strong Capital Management Inc., which owns more than 300,000 shares of Mellon stock.

While some banks can rely on top niche performance to stay independent, it's not certain all can do so. "Is management at all of those middle levels good enough to keep up with the big banks? The jury's still out on that," says James Shutz, a banking analyst at the Chicago Corp. In the end, analysts say midtier banking's niche highflyers could become too successful--making themselves must-have takeover targets at any price.

Before it's here, it's on the Bloomberg Terminal.