Mellon's Numbers
...after shockingly good earnings
by Dale Wettlaufer (DaleW@fool.com)


Alexandria, VA (July 22, 1998) --Having written about Mellon Bank (NYSE: MEL) yesterday, I didn't get the chance to re-figure the financials to account for second quarter earnings, which the company reported yesterday. I can't believe I didn't pay better attention to this company before, as I believe it looks very attractive. The company's second quarter earnings were ridiculously good. Here's a quick review of Mellon's quarterly results and a recap of what Mellon does. Plus, I have updated the company's spreadsheet to account for these results, included below.

Mellon Bank gained $11/16 to $69 9/16 today after releasing shockingly good quarterly results yesterday. The Pittsburgh-based bank holding company reported second quarter EPS of $0.81, up 14.1% over last year. Earnings growth wasn't so much the story -- capital productivity was, as the quarter's annualized return on equity before goodwill amortization reached 24%, a good five percentage points better than the rest of the regional banking sector. Even more impressive than that, the company's return on assets (ROA) before goodwill amortization broke through 2.11%, which transcends merely "very good." Both elements of the company's ROA, net margin and asset turnover, were excellent. On a trailing basis, net margin before goodwill amortization was 21.1% and asset turnover before goodwill amortization was 9.6%, with the latter being 2.4 percentage points higher than the average for large banks.

Mellon is far from being a traditional bank, though the definition of "bank" is changing monthly. Mellon breaks itself into four units: Consumer Fee Services, Consumer Banking, Business Fee Services, and Business Banking. The company has nearly 447 banking "stores" and 729 ATMs in Pennsylvania, Maryland, and New Jersey, but that's pretty much only the start of Mellon's business. Its best-known subsidiary is money management company Dreyfus. Along with the other money management companies among its subsidiaries (such as the recently acquired Founders Asset Management), Mellon had $350 billion in assets under management at the end of the quarter. The company has Mellon Mortgage locations in 17 states, principally Oregon, Washington State, and Pennsylvania. Additionally, Mellon is a major investment data services company and has $1.7 trillion in funds under administration in trust, custody, and funds administration. Rounding out the company's lines of business, the company has a benefits consulting unit; operates a specialty lender, AFCO, which is an insurance premium finance company; and is active in equipment leasing and capital markets.

With all of this going on and its mind-blowing capital productivity, the company does not deserve to trade at the same forward earnings multiple as the rest of the banking group. Based on the company's return on assets, growth, cash flow, annuity-like businesses, a better valuation comparison for the company would be Fifth/Third Bancorp (Nasdaq: FITB), which trades at 27.1 times 1999 EPS estimates before goodwill amortization. At that level, Mellon would trade just under $100 per share. Another comparable is the bank that looks less like a bank and more like a securities firm -- securities custody and trust company and asset manager State Street Corp. (NYSE: STT). Priced at 22 times 1998 EPS estimates, a comparable P/E valuation would bring Mellon closer to $89 1/2 per share. Clearly, the company's management and board think this is where the company should be valued, having turned down a $90 per share merger offer from Bank of New York (NYSE: BK). Few other bank holding companies look like this one or are as productive, so Mellon's stance on valuation is understandable.

Now, the numbers (financials in millions):

Price/Valuation

Share Price.....$69 9/16
Market Cap.....$18,625.98
Price/Book.....4.40
Price/ Tangible Book.....8.96
BVPS.....$15.93
Price/Assets.....39.26%
Price/Net Loans.....61.77%
Price/Deposits.....56.11%
Price/Tangible Assets.....41.12%
Price/Revenues.....4.42

P/E.....24.03
Amortization-Adjusted P/E.....20.90
Discount/Premium to Group.....5.5%
EPS.....$2.92
Cash EPS.....$3.35
Diluted Sharecount.....265.85
1998 EPS Estimate.....$3.23
1999 EPS Estimate.....$3.63
Multiple on 1998 Est......21.69
Multiple on 1999 Est......19.30
Amort-Adjusted Multiple on 1999.....17.23
Discount/Premium to Group.....11.3%

Capital Productivity/Efficiency

Asset Turnover2.....9.60%
Asset Turnover.....9.25%
ROE2.....22.84%
ROE.....19.86%
Amortization Adjusted ROE.....40.04%
ROA.....1.95%
ROA2.....2.030%
Net margin2.....21.13%
Net Margin.....18.38%
Efficiency Ratio.....64.92%
Interest Income/AEA.....6.34%
Interest Expense/AEA.....3.00%
Net Interest Margin.....3.33%
Net Share Buybacks (Including preferred).....$556.0
Dividends on Common.....$331.0
Retention Rate.....62.85%
Payout Ratio on Amort. Adjusted Earnings.....37.15%
Internal Capital Generation Rate.....25.17%
Owners' Yield.....4.76%

Balance Sheet

Cash & Nonearning Assets.....$5,708.0
Cash & Nonearning Last Year.....$5,225.0
Long Term Debt.....$3,994.0
Shareholder's Equity.....$4,234.0
Last Year Equity.....$3,570.0
Tangible Equity.....$2,078.0
Last Year Tangible Equity.....$2,373.0
Tangible Assets.....$45,292.0
Last Year Tangible Assets.....$42,515.00
Total Assets.....$47,448.0
Earning Assets.....$41,740.0
Last Year Assets.....$43,712.0
Total Liabilities.....$42,223.0
Goodwill.....$2,156.0
Last Year's Goodwill.....$1,197.0
Gross Loans.....$30,654.0
Loan Loss Reserves.....$498.00
Loan Loss Reserves %.....1.62%

Leverage

Equity/Tangible Assets.....9.35%
Average Equity/Average Assets.....8.56%
Average Equity/Average Assets (Tangible).....5.07%
Assets/Equity.....11.68
Avg. Assets/Avg. Equity (Tangible).....19.73
Loans to Deposits.....92.34%
LT Debt/Equity.....94.33%
Leveraged Capital Ratio.....6.70%
Tier 1 Capital Ratio.....6.50%
Total Risk Based Capital Ratio.....10.80%

Income Statement

Revenues.....$4,216.00
Interest Income (TTM).....$2,782.0
Interest Expense (TTM).....$1,319.0
Net Interest Income.....$1,463.0
Provision for Loan Losses.....$128.00
Noninterest Income (TTM).....$2,753.0
Noninterest Expense (TTM).....$2,853.00
Net Income for Common (TTM).....$775.05
Amortization Adjusted Earnings.....$891.05
Noninterest income/interest income.....99.0%
Noninterest income/revenues.....65.30%
Noninterest income/NII.....188.17%
Amort. Adjusted Net/Revs......21.13%
Amortization of Goodwill.....$116.00

Credit Quality

Nonperforming Loans.....$107.00
Nonperforming Assets.....$170.0
Loan Loss Provision/Net Interest Income.....8.75%
Loan Loss Provision/Gross Loans.....0.42%
Net Charge Offs.....$168.00
Nonperforming Assets Ratio.....0.55%
Reserves/Nonperforming Loans.....292.94%
Months Charge-Offs in Reserves.....32.0
Loan Loss Provision/Net Charge Offs.....76.19%

Deposits

Deposits.....$33,197.0
Deposits/Liabilities.....78.62%
Non Jumbo/Jumbo CDs.....2.4

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7/22 Close

Stock Close Change CPB $54 3/16 + 3/8 INTC $82 3/8 + 3/4 JNJ $77 5/8 +1 3/8
Day Month Year History Drip 0.50% 6.15% 10.70% (5.72%) S&P 500 (0.08%) 2.67% 19.96% 22.36% Nasdaq (0.47%) 3.96% 25.43% 23.59% Last Rec'd Total # Security In At Current 06/30/98 3.017 CPB $54.259 $54.188 07/01/98 9.724 INTC $80.239 $82.375 07/07/98 6.010 JNJ $69.708 $76.250 Last Rec'd Total # Security In At Value Change 06/30/98 3.017 CPB $163.70 $163.48 ($0.22) 07/01/98 9.724 INTC $780.21 $800.98 $20.77 07/07/98 6.010 JNJ $418.95 $458.26 $39.32 Base: $1700.00 Cash: $286.05** Total: $1708.77

The Drip Portfolio has been divided into 72.501 shares with an average purchase price of $23.448 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
7/21/98: Sent $60 to buy more CPB, and $40 to buy more JNJ.