The start of the workweek at PNC Financial Services Group will bring relief for some workers and anguish for others as the area's largest bank prepares to drop the ax on a portion of its 24,500-person payroll.

Illustration courtesy of Mellon Bank The first home of T. Mellon & Sons' Bank occupied the first floor of this Smithfield Street building where the Oliver Building now stands. Mellon, which was the world's fifth-largest bank in 1946, is now No. 33. And PNC, currently No. 1 in market share regionally, has faltered elsewhere and is about to embark on an effort to lower expenses, identify new revenue opportunities and improve profitability. Click illustration for larger image.

"Everyone, everyone is afraid they are going to lose their jobs," one worried bank employee said last week.

More than jobs are at stake, however. PNC's prestige -- and the future of Pittsburgh's once-dominant banking scene -- is also on the line.

The cost cutting is part of a larger initiative, called "One PNC," designed to lower expenses, identify new revenue opportunities and improve profitability -- all strengthening the bank's efficiency relative to its peers. The Tuesday announcement, coinciding with the release of second-quarter earnings, also is part of the bank's strategy to keep pace with larger and more formidable rivals, many of which have passed it in size over the last decade, and perhaps to allow PNC to reclaim some of its lost glory.

Only two decades ago, PNC was a rising star and darling of the industry, having engineered the 1983 blockbuster merger of Pittsburgh National and Philadelphia's Provident National, at the time the largest U.S. bank merger in history. PNC symbolized a new breed of super-regional banks -- like Columbus, Ohio-based Bank One, NCNB Bank in Charlotte, N.C., and Minneapolis-based Norwest -- busting out of their traditional borders and acquiring other banks across state lines.

It was all part of a sweeping shift in banking, ensuring that the industry would no longer be dominated exclusively by New York and San Francisco.

After gobbling up the second-largest bank in Kentucky and the largest in Cincinnati, PNC eventually claimed a spot as the country's 11th-largest bank, having surpassed legendary crosstown rival Mellon Bank, itself one of the world's largest banks in the decades after World War II.

Somewhere along the line, though, PNC lost focus.

While super-regionals NCNB, Bank One and Norwest went on to become part of the nation's No. 2, No. 3 and No. 5 banks -- Charlotte-based Bank of America, New York-based JPMorgan Chase and San Francisco-based Wells Fargo, respectively -- PNC slid to No. 17 (up one spot in 2005 due to its acquisition of Washington, D.C.'s scandal-tarnished Riggs Bank), watching as a wave of consolidation relegated it to the status of minor player nationally.

With $89 billion in assets, PNC now is smaller than in-state rivals Citizens Financial Group, the Providence, R.I.-based banking subsidiary of Royal Bank of Scotland that purchased the former Mellon retail banking operations in 2001 and has $141 billion in assets in the United States, and Cleveland-based National City Corp., with $140 billion in assets. And it is far below the industry's big five banks in New York, Charlotte and San Francisco, three of which are now trillion-dollar institutions.

"Seven, eight years ago I called (PNC) the 'Beast of the East,' " said Arnie Danielson, a Rockville, Md., banking consultant who follows PNC and other major banks in the Northeast. "Right now, I think of it as a bank that is definitely falling behind."

Another analyst, Dick Bove, a St. Petersburg, Fla.-based banking analyst for Punk, Ziegel & Co., added: "I think it's true the industry has passed it by.

"That doesn't mean to say it's irrelevant."

Indeed, PNC is still strong in Pittsburgh -- No. 1 in market share with 26 percent, followed by National City at 17.7 percent. But at the same time, it is faltering elsewhere.

Citizens Bank, No. 3 in Pittsburgh with 12 percent of the market, is beating PNC "badly" in New Jersey, Philadelphia and other parts of the Northeast, according to Danielson. The Royal Bank of Scotland is an "800-pound gorilla ... sitting all over their territory," Danielson said.

In fact, Royal Bank of Scotland now has a 6.2 percent share of the market in a geographic area that includes New England, New York, New Jersey and Pennsylvania -- compared with PNC's 3.2 percent.

Because of its size, PNC now has virtually no chance at reaching the industry's upper tier, according to analysts, barring some sort of super-combination with like-size regional banks from around the country.

	Kevin Wolf, Associated Press Sign installer Bob Collison removes a Riggs banner in May to expose a PNC Bank sign at a bank branch in Washington D.C. Click photo for larger image.

PNC may not even be able to survive much longer as an independent, stand-alone bank. Several analysts are convinced that PNC is now a potential target of Charlotte-based giant Wachovia Corp., the nation's fourth-largest bank that is considered to be hungry for another acquisition.

"PNC is the best fit for them," Danielson said.

Bove agreed. "Wachovia would be a good acquirer. A lot of people think Wachovia will acquire PNC to broaden its base in the Northeast markets."

Other possibilities, according to Bove, include:

Minneapolis-based US Bancorp, the nation's 7th-largest bank that is considered the most likely buyer after Wachovia.

No. 5 Wells Fargo, which may try to buy PNC if it thought it could get the bank at a good price -- or, in Bove's words, "on the cheap."

No. 6 HSBC, a London-based foreign-owned bank that wants to penetrate U.S. markets and could use PNC's franchise in the Northeast.

PNC Chief Executive Officer Jim Rohr has repeatedly stated his desire for the bank to remain independent, saying as recently as April in an interview with the Post-Gazette that "we certainly would not want to be sold."

But Miami-based banking expert Ken Thomas argues that "every bank always has a for-sale sign on it. You or I can't see it. But other banks see it. ... At some point, it is very likely that banks like Mellon and PNC, the way consolidation goes, will be bought. This is just part of the life cycle of banking."

How did PNC get itself in this position -- that of bit player nationally? How did the rest of the industry, as Bove put it, pass it by?

The consensus opinion is that PNC hunkered down and got defensive, licking wounds from a number of stumbles in the late 1980s, mid-1990s and early part of this decade. Bad real estate loans. Bad bets on interest rate investments. Questionable accounting and record-keeping practices that put it under regulatory oversight.

Meanwhile, regional rivals made big, risky moves.

"It's not as much what they did wrong as what they might have done that could have been better," Thomas said. "It is more what the other banks did right -- not so much what PNC did wrong."

But Bove was a bit harsher in his appraisal, saying that the bank "followed too many fads."

The banks that passed it by "stuck with their concept to be empires" through multiple acquisitions. PNC started with the same thesis, he said, but then changed course a decade or so ago to become more of a fee-based business, acquiring a large share of New York money management firm BlackRock and PFPC, a mutual-fund processing firm. Both generated fees based on the level of business they did. At the same time, PNC started selling off parts of its lending division and whittling down its portfolio.

Its strategy wasn't all that unusual. A number of banks in the 1990s pursued fee businesses such as fund processing and management as a way to lessen the volatility of cyclical swings on the lending side of the business. Fees were thought to be steadier and a growing source of income amid Wall Street's meteoric rise in the '90s. Indeed, neighboring Mellon went so far on the fee front as to sell its retail banking operations to Citizens.

In retrospect, however, the approach taken by PNC "was a huge mistake," Bove said. When the stock market collapsed in 2000 and continued to falter for the next two years, profits dissolved on the fee side of the business and exploded on the traditional banking side.

Neighboring Mellon was hurt, too, but by then, it had become so big in the money management fee business by virtue of its acquisitions of mutual fund giant Dreyfus and mutual fund service firm The Boston Co. that it was better able to weather the storm.

Mellon "zigged when it should have zagged," Bove said. "It got out of retail banking at the exact moment it should have been expanded. And "it paid the price." Mellon, the world's fifth-largest bank in 1946, is now No. 33.

But it was not hurt nearly as much as PNC. Bove nonetheless credits PNC for moving quickly to right itself over the past five years by pushing retail banking services and working harder to promote lending to individuals and businesses.

PNC "took this ship and completely turned it around," Bove said. "That is a significant change. It is no longer attempting to be the best fee-based bank or emulate Mellon. They are now trying to emulate what Citizens is doing."

With the focus back on traditional banking and the competition for new customers tightening, PNC knows that it has to get its costs down to survive and fend off larger rivals in its backyard.

The amount it spends to generate a dollar of revenue -- 63 cents -- is well above industry rivals. Tuesday's announcement, which will include cuts and strategies for new revenue, is about improving the bank's efficiency and improving earnings.

Analysts applaud the move but note that such an initiative is common among financial institutions. Thomas, the Miami banking expert, said the announcement may be a way for PNC to soften criticism that it paid too much this year to acquire Riggs Bank.

"Banks do this all the time," he said. "A lot of times they do this after major expansions, especially one that may have been questioned. 'Now we have an opportunity to justify to investors and Wall Street that we are still bottom line conscious regardless of what we paid for the bank.' "

Some within PNC also view the initiative as a way to make the bank stronger and perhaps position it for future acquisitions.

Analysts, though, said that PNC is only big enough to acquire smaller banks that improve PNC's existing position -- as opposed to an industry-shattering acquisition that would catapult PNC to the upper tier.

Danielson, the analyst based in Maryland, sees PNC looking to the Northeast, especially after its foray this year into the highly competitive Washington, D.C., market. But he believes such a strategy is misguided. PNC, he said, should focus on the areas it dominates -- such as Pittsburgh.

"I think there is more money to be made in Pittsburgh," he said. Expanding to the East instead of westward into Ohio and other markets is "probably a mistake."