In the City of Brotherly Love, interbank relations are more fractious than fraternal.

First Union Corp.'s acquisition in April of CoreStates Financial Corp., the last of the big locally based banks, has set off a fierce scramble for market share among the survivors.

The worst fears about the consolidation-that it would reduce competition and leave a corporate leadership vacuum-appear not to have been realized.

The battle is most heated for commercial customers that were much neglected in the past: the low end of the middle market, firms with $5 million to $7.5 million in annual sales.

But the competition among Mellon Bank Corp. and PNC Bank Corp. of Pittsburgh, First Union of Charlotte, N.C., and Sovereign Bancorp of Wyomissing, Pa., does not stop there.

These institutions are also after the wallets of consumers, exclusive sponsorship deals with local philanthropic causes, and the mantle of Philadelphia's standard-bearer that was held by CoreStates.

Philadelphia is "our largest retail market," said William Stallkamp, chairman and chief executive officer of Mellon Bank's Philadelphia operation. It's four times as big as Pittsburgh and has a lot going for it."

The new-era Philadelphia bankers are motivated in part by the city's economic comeback of the 1990s. The new affluence has helped incubate hundreds of thriving midsize businesses.

The city was $250 million in debt with a budget of $2.5 billion when Mayor Edward G. Rendell took office in January 1992. The partial closing of a naval yard in the mid-1990s took nearly 12,000 jobs with it. The city's credit rating was suspended and its bonds were junk.

"We were the municipal basket case," said Stephen Mullin, Philadelphia's director of commerce. Although the city was not ready to file for bankruptcy, it was "always lumped together with Bridgeport, Connecticut" in everyone's mind, Mr. Mullin said.

Bankers say Mayor Rendell changed everything. He took on the unions, cut expenses, and got the business community involved in scrutinizing and revamping many city agencies.

"It was a massive effort," said Richard Smoot, president and CEO of PNC's Philadelphia and South Jersey unit.

"Six and a half years ago, this city was in financial extremis," the banker said. The years of growth have "done wonders for everybody."

Now it is a market worth fighting for, and the bankers are going at it.

Jay S. Sidhu, president and CEO of Sovereign, a $22 billion-asset thrift company, has declared that he plans to apply for a commercial bank charter next year and move the headquarters to Philadelphia from the Reading, Pa., area.

"I am spending 60% to 75% of my time in Philadelphia," Mr. Sidhu said in a recent interview. It is "the fourth-largest retail market in the United States and is bigger than Rhode Island in terms of business. We want to be right smack in the middle of that."

Sovereign has been taking advantage of the CoreStates takeover on two fronts: it purchased 93 of the branches divested as a result of the merger- 32 of them in Philadelphia-and it is trying to scoop up some of the high- profile public-service sponsorships and activities that the loss of CoreStates left up for grabs.

Sovereign has become an active member of the Philadelphia Chamber of Commerce. It is sponsoring the Delacroix exhibit at the local art museum, backing the mayor's welfare-to-work program, and helping to fund the regional performing arts center.

"To be a successful community bank, you have to align yourself with the appropriate leadership in government. You need to have visibility," said Mary L. Orlando, Sovereign senior vice president and chief marketing officer.

Mellon, which had bid unsuccessfully for CoreStates before the First Union deal was signed, has also been working hard to improve its standing. It considers itself No. 3 in the market, behind No. 2 PNC and the newcomer from Charlotte.

Mellon has published a series of cobranded advertisements that seek to link the bank name with that of its Dreyfus mutual fund subsidiary. "We're very fortunate to have Dreyfus and we're active in the insurance area too," said senior vice president Lisa B. Zazworskey, retail chief of the Philadelphia and New Jersey region for $48.2 billion-asset Mellon.

One idea is to pitch the Dreyfus product line to small businesses in an effort to win them away from the new CoreStates-First Union.

"CoreStates was our biggest competition in this marketplace," Ms. Zazworskey said. "Their small-business relationships go back generations. The First Union acquisition is clearly an opportunity."

Mellon, once viewed as an interloper in Philadelphia but now part of the in-state establishment, has pinned retail hopes on its 50 supermarket branches-the largest such network in the area-and its checking-with- interest account.

A similar checking product was dropped by CoreStates right before the First Union acquisition.

Although she would not reveal specific numbers, Ms. Zazworskey claimed Mellon's new checking accounts in the Philadelphia market are up 300% since September. Of those, 73% were customers who had been banking somewhere other than Mellon, she said.

PNC wants to offer middle-market and small-business loans at the best possible price. Mr. Smoot touted the company's "massive office in Horsham, Pa., that processes nothing but business loans up to $250,000."

Because its small-business operation is so highly automated, PNC can keep rates low.

"While we have a very viable retail business here, we also have tremendous strength in private and corporate banking," he said.

At CoreStates' old headquarters near City Hall, despite spackling on the walls and exposed sheet rock near the elevator banks suggesting some kind of renovation was afoot, the CoreStates name was still omnipresent in mid- December.

"Usually when there is a bank takeover, the vestiges of the old bank disappear, especially the name," said James Papada, a partner at the Philadelphia law firm of Stradley Ronon Stevens and Young. "That hasn't happened in this case. People who dealt with CoreStates, if you ask them who their bank is, they'll still say CoreStates."

When First Union's deal was announced in November 1997, Sen. Arlen Specter and other political leaders led a public outcry, fearing the city would lose prestige, jobs, and bank branches.

There was confusion about where new positions resulting from the merger would be created, and when former CoreStates chairman Terrence Larsen left the company in July after saying he would stay and run the combined bank's northeastern operation, anxiety in Philadelphia reached a fever pitch.

But in the ensuing months, First Union has moved to calm the fears of employees and customers, in part by putting Charles Connolly in charge of local operations.

Mr. Connolly was born and raised in the city and started his career at CoreStates' predecessor, Philadelphia National Bank, in 1972. He was a CoreStates senior executive vice president at the time First Union took over.

The merger "was very traumatic for the community and the people of CoreStates," Mr. Connolly acknowledged. "But we did a lot of things to make it easier."

One notable example was an agreement to fund a $100 million foundation and to continue CoreStates' $17.5 million annual charitable giving program for five years.

First Union also agreed to leave the old CoreStates lending process in place, which decentralized authority over pricing and hiring, Mr. Connolly said.

"Once we were able to convince the employees that we would have this model, we could minimize the damage with customers," he added.

Mr. Connolly started an aggressive new-business development program, requiring staffers to make 20 calls a month. "That kept them away from the water cooler," where they might grouse about the merger, he said.

He also set up a scoring system designed to keep relationship managers in place.

"Corporate customers have three relationship managers," he explained. The group head "got an A if all three stayed on the account; a B if two stayed, and a C if only one stayed."

This created a few internal accounting problems, he acknowledged, "but who cares? You've got to take care of the customer."

The strategy seems to be working. Executives at PNC, Mellon, and Sovereign admitted that First Union owns the high-end corporate market and has the lion's share of retail deposits.

Even among small businesses, First Union is a strong first among bank lenders, followed by PNC and Mellon, according to Thomas Tolan, acting director for the Small Business Administration's Philadelphia district office.

While the middle market, and especially its lower end, still seems up for grabs, First Union is tops here, too, according to Mr. Connolly.

But the competition insists that the CoreStates acquisition benefited them as well.

"When the deal was announced, we saw opportunity," said Mr. Smoot of PNC. "There are at least 14 banks and thrifts in this marketplace and we have all been very aggressive in the wake of the CoreStates takeover."

Meanwhile, in the community, "there is still a bit of bitterness that remains about CoreStates being bought out," said Mr. Mullin, the city commerce director. "But people's direst forecasts have not been realized. The results have been better than people expected."

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