Charges related to repairing a damaged securities lending business at its Boston Co. investment unit rocked Mellon Bank Corp.'s fourth-quarter earnings, helping to push profits down 70% from the year-earlier period.
Fourth-quarter earnings of $41 million also suffered from a $16-million charge related to a stock redemption, the bank said.
But earnings were in line with Wall Street estimates. The bank announced in November it would take a $130-million, one-time charge to reduce interest-rate sensitivity in its securities-lending portfolios.
"If they didn't have that hit they would have had a real good number," said Morgan Stanley & Co. banking analyst Dennis Shea.
Full-year 1994 earnings at the Pittsburgh-based bank dropped 5.8% from 1993's results to $433 million. The decline was partially due to the $38.6 billion-asset bank's August acquisition of mutual fund giant, Dreyfus Corp., which caused an $89-million charge.
But the news wasn't all bad. Mellon showed an increase in lending volume, making 20% more loans in 1994 than in 1993, said Dennis Laplante, an analyst at Foxx-Pitt Kelton.
Net interest income in the fourth quarter and for the year was up 17% and 13%, respectively. The net interest margin surged to 4.85% in the fourth quarter from 4.39% in the year-earlier period.
"Their margin was much stronger than expected. They're benefiting from higher (interest) rates," said Mr. Laplante.
Much of the loan growth was fueled by the bank's credit card, CornerStone. Since it was introduced in the first quarter, Cornerstone has generated about 695,000 new accounts with total outstandings of $725 million.
The bank also has reduced its nonperforming asset portfolio for the full year by 25% to $151 million.
Frank Cahouet, Mellon's chairman, president and chief executive officer, argued that "despite the one-time charge stemming from our securities lending business - which we took on behalf of our clients - we remain the highest capitalized large bank holding company in the United States."
Securities lending is a process by which banks lend securities inside a trust client's portfolio to broker-dealers, and invest the cash collateral in bonds.
Mellon invested the collateral in bonds with long maturities. When the Federal Reserve Board raised short-term interest rates over the summer, the yield on bonds with long maturities declined. +++ Mellon Bank Corp. Pittsburgh Dollar amounts in millions (except per share) Fourth Quarter 4Q94 4Q93 Net income $41 $138 Per share 0.07 0.84 ROA 0.42% 1.50% ROE 1.10% 14.03% Net interest margin 4.85% 4.39% Net interest income 403 347 Noninterest income 405 439 Noninterest expense 741 534 Loss provision 15 25 Net chargeoffs 20 22 Full Year 1994 1993 Net income $433 $460 Per share 2.42 2.73 ROA 1.14% 1.29% ROE 9.79% 12.08% Net interest margin 4.71% 4.39% Net interest income 1,521 1,346 Noninterest income 1,647 1,638 Noninterest expense 2,374 2,084 Loss provision 70 125 Net chargeoffs 67 139 Balance Sheet 12/94 12/93 Assets $38,644 37,052 Deposits 27,570 27,564 Loans 26,733 24,484 Reserve/nonp. loans 403% 297% Nonperf. loans/loans 0.056% 0.83% Nonperf. assets/assets 0.89% 1.39% Leverage cap. ratio 8.60% 9.00% Tier 1 cap. ratio 9.50% 9.70% Tier 1+2 cap. ratio 12.90% 13.22% ===