Mellon Growing
...third quarter earnings harvested

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (Oct. 20, 1998) -- It's the month of the pumpkin, but Mellon is having its say, too.

Today Mellon Bank (NYSE: MEL) reported earnings of $0.82 per share, in line with estimates and up 12% from last year. Are you ripe for numbers? Let's hit more of 'em.

Net income rose 14% to $218 million. Noninterest revenue gained 12% to $712 million as trust and investment fees increased 14% to $432 million. Overall operating expenses rose 9.6% to $734 million.

"Mellon's third-quarter performance is further evidence that our strategy of being a broad-based financial services company with a bank at its core is working well," said Frank Cahouet, Mellon chairman, president and CEO. And, "Mellon's earnings look pretty good," was said by a Fool named Jim in an instant message online following the report.

Looking at most relevant numbers, tangible earnings per share increased to $0.93, up 16% from last year. Return on tangible common equity was 45.9% and return on tangible assets was 2.13%, an impressive figure. Meanwhile, Mellon's nonperforming asset ratio is at a record low. As you might recall from our banking study, return on assets (ROA) is one of the more important measures for a bank, and more meaningful than return on equity (ROE).

To review what ROA is: return on assets = asset turnover * net margin.

Asset turnover itself is represented by revenues / total tangible assets.

Mellon's return on tangible assets of 2.13% (annualized) is up from 2.05% last year in the same quarter. For the trailing nine month period, Mellon's annualized return on assets is 2.15% versus 2.06% last year.

With Dreyfus under its wing, Mellon is now one of the ten largest bank managers of mutual funds, and its trust and investment fees exemplify this. Fee revenue as a percentage of total revenue was 66% this quarter and 66% for the nine months just ended. That's an increase from 61% during last year's first nine months. And last month, Mellon joined forces with United Overseas Bank, Singapore's fourth-largest bank, in order to offer funds to investors in that country, while also completing its purchase of a 75% stake in Newton Investment Management Ltd., a UK fund management firm. (Hey Fool, did you know that there's a Fool UK?)

Mellon's quarterly report is a sight to behold, and its comprehensive quality is commendable. I haven't seen a more complete, broken-down report since Pfizer (NYSE: PFE) last shared results.

Mellon's report is sixteen pages when printed, with detailed numbers on all facets of the business. I spoke to Dale Wettlaufer (TMF Ralegh) -- the financial Fool who took us through this industry, of course -- and his quick ten minute study of Mellon's report was filled with comments like, "Nice. That's good. Steady. Steady. That ROA is impressive. Looks good. Lower overhead. Low credit losses. Great. Ok. That looks good." In general, everything looked good and there were no surprises (which, with a banking company, is a good thing). If you're a Mellon shareholder, you'll certainly want to read the quarterly report in order to learn much more. To see it and potentially print it, click here.

Also, you can listen to taped comments from CFO, Steven Elliot, regarding Mellon's third quarter by calling 412-236-5385 until Friday, October 30. I'll be listening soon.

Mellon ended the day at $61 after touching $63. The stock is up from the low of $45 that it hit eleven days ago. (We learned today from Dave Fish of Moneypaper that anyone who beat the 9/25/98 deadline had a share of Mellon purchased on 10/7/98 at $48.56 (plus the fee), and ChaseMellon was contacted on 10/15/98 to open the new DRP accounts. Orders received after the deadline will be purchased about 11/7/98.) At $61, Mellon trades at 18.8 times 1998 earning estimates of $3.24 per share, and 16.8 times 1999's estimate of $3.62. Earnings per share are expected to grow 12.6% annually and the stock yields 2.40%. (Our first share bought at $48 is earning a dividend yield of 3%.)

With tangible book value of $8.59 per share and a common book value of $16.69 per share, Mellon trades at 7.1 and 3.6 times these measures of book value, each signifying a valuation premium above market average. Many leading companies of this kind trade at 2 to 2.5 times common book value, though some recent takeovers have been completed at valuations of four times common book, and Mellon's own take-over premium (which it refused) was above that.

For comments, questions, or discussion, as always, please visit the Drip message boards linked in the top right of this page. For more discussion of Mellon specifically, swoop by the Mellon message board.

Fool on!

--Jeff Fischer

FoolWatch -- It's what's going on at the Fool today.

10/20/98 Close

Stock Close Change CPB 56 7/16 -1 5/16 INTC 84 9/16 -7/16 JNJ 80 11/16 -2 1/8
Day Month Year History Drip (1.48%) 2.75% 15.13% (1.96%) S&P 500 0.14% 4.61% 9.63% 11.83% Nasdaq (0.58%) (3.23%) 4.38% 2.85% Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $56.438 09/01/98 9.727 INTC $80.238 $84.563 10/07/98 7.850 JNJ $71.405 $80.688 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $453.02 $28.66 09/01/98 9.727 INTC $780.50 $822.57 $42.07 10/07/98 7.850 JNJ $560.53 $633.40 $72.87 Base: $2000.00 Cash: $186.08** Total: $2095.07

The Drip Portfolio has been divided into 85.474 shares with an average purchase price of $23.399 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:
9/21/98: Sent $77 to buy/enroll in MEL.