Lines of Business Highlights: General Bank, Capital Management, Wealth Management, Corporate and Investment Bank
CHARLOTTE, N.C. - Wachovia Corp. (NYSE:WB) today reported net income of $1.88 billion, or $1.17 per share, in the third quarter of 2006 compared with $1.66 billion, or $1.06 per share, in the third quarter of 2005.
Excluding after-tax net merger-related expenses of 2 cents per share in the third quarter of 2006 and 3 cents per share in the third quarter of 2005, earnings were $1.90 billion, or $1.19 per share, in the third quarter of 2006 compared with $1.72 billion, or $1.09 per share, in the third quarter of 2005.
"Wachovia once again delivered double-digit earnings per share growth due to strong fundamentals and focused execution," said Ken Thompson, Wachovia chairman and chief executive officer. "In the face of a challenging yield curve environment, we continued to improve efficiency, while asset quality remained strong. Our industry-leading customer service helped sales productivity remain stable, and our expanded consumer franchise including auto lending, credit cards and Westcorp retail branches in California generated results ahead of our expectations. With the closing of the Golden West merger on October 1, we're very excited about our prospects as we extend our brand promise to customers nationwide."
Results include the impact of the acquisition of Westcorp on March 1, 2006. The acquisition of Golden West Financial Corporation closed on October 1, 2006, and therefore is not included in Wachovia's September 30, 2006, financial results. In the third quarter of 2006 compared with the third quarter of 2005, Wachovia:
- Grew revenue 5 percent on higher fee income and growth in loans and deposits, including the addition of Westcorp, although the benefit of a larger balance sheet was limited by margin compression.
- Increased net interest income 4 percent, reflecting higher average commercial loans, up 14 percent, and average consumer loans, up 36 percent.
- Commercial loan growth was led by middle-market and business banking, commercial real estate and large corporate lending, while consumer loan growth was led by higher real estate-secured loans, which included the impact of year-end 2005 loan transfers from loans held for sale, as well as the addition of Westcorp.
- Average core deposits rose 4 percent and average low-cost core deposits were relatively stable. Growth in lower spread loans, a shift in deposit mix and the effects of a more inverted yield curve resulted in 15 basis points of margin compression.
- 6 percent growth in fee and other income was led by 15 percent growth in service charges and 10 percent growth in fiduciary and asset management fees. Growth in insurance commissions was more than offset by lower retail brokerage commissions as customers migrate to retail brokerage managed account relationships. In addition, principal investing and trading results were lower, while securities gains rose from the third quarter of 2005.
- Noninterest expense rose modestly as lower incentives and a favorable resolution of franchise tax matters were offset by the impact of acquisitions. The overhead efficiency ratio improved to 57.44 percent, down 234 basis points.
- The increase in the provision for credit losses to $108 million largely reflected growth in auto lending and other consumer loans as well as lower commercial loan recoveries. Net charge-offs were $116 million, or an annualized 0.16 percent of average net loans. Total nonperforming assets including loans held for sale were $782 million, or 0.26 percent of loans, foreclosed properties and loans held for sale.
Lines of Business
The following discussion covers the results for Wachovia's four core business segments and is on a segment earnings basis, which excludes net merger-related and restructuring expenses, other intangible amortization and discontinued operations. Segment earnings are the basis on which Wachovia manages and allocates capital to its business segments. Pages 13 and 14 include a reconciliation of segment results to Wachovia's consolidated results of operations in accordance with GAAP.
General Bank
The General Bank includes retail, small business and commercial customers. The third quarter of 2006 compared with the third quarter of 2005 included:
- Earnings of $1.2 billion on an 18 percent increase in revenue to $3.8 billion, driven by loan and deposit growth, including the addition of Westcorp. Sales production remained stable although the mix is shifting from demand deposits to certificates of deposit and in consumer real estate, from variable rate to fixed rate loans.
- 20 percent growth in average loans led by growth in commercial and consumer loans as well as the addition of an average $14.7 billion from Westcorp.
- Deposit growth led by consumer certificates of deposit and money market funds. Net new retail checking accounts increased by 467,000 year-to-date, compared with an increase of 420,000 in the same period of 2005.
- 19 percent growth in fee and other income included 25 percent growth in consumer service charges and 25 percent growth in interchange income, partially offset by a 5 percent decline in mortgage banking-related fee and other income.
- 7 percent growth in noninterest expense included Westcorp, branch expansion activity and costs related to reentering the credit card business. Despite the increased expense, the General Bank's overhead efficiency ratio improved 458 basis points to 44.75 percent.
- Provision expense rose in connection with Westcorp.
Capital Management
Capital Management includes retail brokerage services and asset management. The third quarter of 2006 compared with the third quarter of 2005 included:
- Earnings of $237 million on 9 percent revenue growth as strength in retail brokerage managed account fees, wider deposit spreads and the impact of two June 2006 acquisitions overcame lower retail brokerage transaction activity. Managed assets grew 21 percent from year-end to $128.8 billion at September 30, 2006.
- 3 percent growth in noninterest expense primarily due to increased production-based incentives and the impact of the acquisitions. The overhead efficiency ratio improved 454 basis points to 74.59 percent due to strong net interest income growth, retail brokerage managed account fee growth and expense control.
- Total assets under management of $250.1 billion at September 30, 2006, were up 9 percent from December 31, 2005. Equity assets reached $93.7 billion, up 14 percent in the same period, including $5.5 billion in assets from the Metropolitan West Capital Management acquisition and market appreciation. Total brokerage client assets grew 7 percent from year-end 2005 to $729.9 billion.
Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. The third quarter of 2006 compared with the third quarter of 2005 included:
- 15 percent earnings growth to $71 million on modest revenue growth and lower expenses.
- Revenue growth driven equally by net interest income and fee and other income growth.
- 2 percent growth in net interest income fueled by strong momentum in loans and a modest increase in average core deposits.
- Modest growth in fee and other income driven by higher banking fees and higher trust and investment management fees on increased asset valuations, partially offset by a decline in insurance commissions.
Corporate and Investment Bank
The Corporate and Investment Bank includes corporate lending, investment banking, and treasury and international trade finance. Third quarter 2006 results compared with the third quarter of 2005 included:
- Earnings of $404 million as lower incentive expense partially offset a 6 percent decline in revenue driven by lower market-related revenue.
- A 9 percent decline in net interest income reflected spread compression in asset-based lending and leasing, lower trading-related net interest income, and cross-border leasing runoff.
- A 4 percent decline in fee and other income largely reflected lower principal investing gains and lower results from commercial mortgage activity.
- A 2 percent decline in noninterest expense primarily related to lower incentive expense.
- Core deposit and loan growth from organic growth and acquisitions.
- The provision reflected net loan loss recoveries.
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Wachovia Corporation (NYSE:WB) is one of the nation's largest diversified financial services companies, providing a broad range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services. Including the Golden West merger, which closed on October 1, 2006, Wachovia has retail and commercial banking operations in 21 states with 3,400 retail banking offices from Connecticut to Florida and west to Texas and California. In addition, two core businesses operate under the Wachovia Securities brand name: retail brokerage with 737 offices in 49 states and in Latin America, and corporate and investment banking in selected industries nationwide. Other nationwide businesses include mortgage lending in 39 states and auto finance covering 46 states. Globally, Wachovia serves clients through more than 40 international offices. Online banking is available at wachovia.com; online brokerage products and services at wachoviasec.com, and investment products and services at evergreeninvestments.com. At September 30, 2006, Wachovia had assets of $559.9 billion and market capitalization of $88.2 billion. On the same date, based on pro forma data, Wachovia's combined assets were approximately $700 billion and combined market capitalization was $107 billion.
Forward-Looking Statements
This news release contains various forward-looking statements. A discussion of various factors that could cause Wachovia Corporation's actual results to differ materially from those expressed in such forward-looking statements is included in Wachovia's filings with the Securities and Exchange Commission, including its Current Report on Form 8-K dated October 16, 2006.
Explanation of Wachovia's Use of Certain Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this news release includes certain non-GAAP financial measures, including those presented on page 1 and on page 10 under the captions "Earnings Excluding Merger-Related and Restructuring Expenses", "Earnings Excluding Merger-Related and Restructuring Expenses, and Discontinued Operations" and "Earnings Excluding Merger-Related and Restructuring Expenses, Other Intangible Amortization and Discontinued Operations", and which are reconciled to GAAP financial measures on pages 21 and 22. In addition, in this news release certain designated net interest income amounts are presented on a tax-equivalent basis, including the calculation of the overhead efficiency ratio.
Wachovia believes these non-GAAP financial measures provide information useful to investors in understanding the underlying operational performance of the company, its business and performance trends and facilitates comparisons with the performance of others in the financial services industry. Specifically, Wachovia believes the exclusion of merger-related and restructuring expenses, discontinued operations and the cumulative effect of a change in accounting principle permits evaluation and a comparison of results for on-going business operations, and it is on this basis that Wachovia's management internally assesses the company's performance. Those non-operating items are excluded from Wachovia's segment measures used internally to evaluate segment performance in accordance with GAAP because management does not consider them particularly relevant or useful in evaluating the operating performance of our business segments. In addition, because of the significant amount of deposit base intangible amortization, Wachovia believes the exclusion of this expense provides investors with consistent and meaningful comparisons to other financial services firms. Wachovia's management makes recommendations to its board of directors about dividend payments based on reported earnings excluding merger-related and restructuring expenses, other intangible amortization, discontinued operations and the cumulative effect of a change in accounting principle, and has communicated certain dividend payout ratio goals to investors on this basis. Management believes this payout ratio is useful to investors because it provides investors with a better understanding of and permits investors to monitor Wachovia's dividend payout policy. Wachovia also believes the presentation of net interest income on a tax-equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry standards. Wachovia operates one of the largest retail brokerage businesses in our industry, and we have presented an overhead efficiency ratio excluding these brokerage services, which management believes is useful to investors in comparing the performance of our banking business with other banking companies.
Although Wachovia believes the above non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP basis financial measures.
Earnings Conference Call and Supplemental Materials
Wachovia CEO Ken Thompson and CFO Tom Wurtz will review Wachovia's third quarter 2006 results in a conference call and audio webcast beginning at 10 a.m. Eastern Time today. This review may include a discussion of certain non-GAAP financial measures. Supplemental materials relating to third quarter results, which also include a reconciliation of any non-GAAP measures to Wachovia's reported financials, are available on the Internet at Wachovia.com/investor, and investors are encouraged to access these materials in advance of the conference call.
Webcast Instructions: To gain access to the webcast, which will be "listen-only," go to Wachovia.com/investor and click on the link "Wachovia Third Quarter Earnings Audio Webcast." In order to listen to the webcast, you will need to download either Real Player or Media Player.
Teleconference Instructions: The telephone number for the conference call is 888-357-9787 for U.S. callers or 706-679-7342 for international callers. You will be asked to tell the answering coordinator your name and the name of your firm. Mention the conference Access Code: Wachovia.
Replay: Monday, October 16, at noon EDT and continuing through 5 p.m. EST Friday, November 17. Replay telephone number is 706-645-9291; access code: 6572253.
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Investors seeking further information should contact the Investor Relations team: Alice Lehman at 704-374-4139 or Ellen Taylor at 704-383-1381. Media seeking further information should contact the Corporate Media Relations team: Mary Eshet at 704-383-7777 or Christy Phillips at 704-383-8178.
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