Lines of Business Highlights: General Bank, Capital Management, Wealth Management, Corporate and Investment Banking
CHARLOTTE, N.C. - Wachovia Corp. (NYSE:WB) today reported third quarter 2003 net income available to common stockholders of $1.1 billion, or 83 cents per share, compared with $913 million, or 66 cents per share, in the third quarter of 2002. Earnings per share in the third quarter of 2003 included after-tax net merger-related and restructuring expenses of 6 cents per share, as well as a 1 cent per share gain related to the cumulative effect of a change in accounting principle. In the third quarter of 2002, earnings included 5 cents per share of after-tax net merger-related and restructuring expenses.
“Our earnings momentum has accelerated for the past two years, driven by our strategies to boost revenue growth, reduce credit costs and control expenses,” said Ken Thompson, chairman and CEO. “Our third quarter results again represent strong performance in an economic environment that is still finding its footing. I'm particularly pleased to see record results in each of our four core businesses. Our balanced business model reflects outstanding results in our General Bank and growing strength in our Capital Management, Wealth Management, and Corporate and Investment Bank businesses, which are well positioned for an improving economy. Our management team is disciplined and focused on results, and we believe we are poised to continue to achieve our goal of consistent, annual double digit earnings growth.” Earnings for this goal exclude merger-related and restructuring expenses.
Provision expense declined to $81 million reflecting continued improvement in asset quality, particularly in the Corporate and Investment Bank, as well as the shift in loan mix toward consumer real estate secured loans. Third quarter 2003 net charge-offs declined 41 percent from the third quarter of 2002 to $132 million, or an annualized 0.33 percent of average net loans. Total nonperforming assets including loans held for sale declined 18 percent from the third quarter of 2002 to $1.7 billion in the third quarter of 2003.
Noninterest expense increased 21 percent from the third quarter of 2002, largely due to the addition of the Prudential Financial retail brokerage business to Wachovia Securities, LLC. Excluding the impact of this transaction, expenses would have risen approximately 3 percent.
Average loans in the third quarter of 2003 were $158 billion, a 4 percent increase from the third quarter of 2002, reflecting higher residential mortgage and student loan balances, dampened by continued lower corporate loan demand. Average core deposits increased 11 percent from the third quarter of 2002 to $186 billion, while average low-cost core deposits increased 22 percent from the third quarter a year ago to $146 billion.
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 the cumulative effect of a change in accounting principle. Segment earnings are the basis upon which Wachovia manages and allocates capital to its business segments. Pages 10 and 11 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. General Bank revenue increased 9 percent from the third quarter a year ago, driven by strength in consumer loan and mortgage income and outstanding core deposit growth. Fee income increased 9 percent from the third quarter a year ago on strength in mortgage banking income and debit card transaction volume. Average core deposits increased 9 percent from the prior year, including 22 percent year over year growth in average low-cost core deposits. Average loans increased 13 percent year over year, reflecting 25 percent growth in consumer and small business lending. Excluding a decline in commercial real estate loans, commercial loans would have been up 12 percent year over year. The provision increased 6 percent year over year, with net charge-offs up due to risk reduction strategies. The 5 percent increase in noninterest expense from the third quarter of 2002 reflected technology enhancements, higher incentives due to increased sales production, and increased benefits costs. Retail sales momentum was evident, with another quarter of annuity sales above $1 billion, a 29 percent increase in small business loan production, and a tripling in net new retail checking accounts to 147,000 in the third quarter of 2003 from 48,000 a year ago.
Capital Management
Capital Management includes asset management and retail brokerage services. Capital Management revenue increased 80 percent and noninterest expense increased 86 percent from the third quarter of 2002, largely related to the addition of the Prudential Financial retail brokerage business to Wachovia Securities, LLC. The combination of the two brokerage operations closed on July 1, 2003. Underlying performance also continued to strengthen, with positive net inflows to equity funds and another quarter of strong annuity sales, including bank annuity sales again above $1 billion. Capital Management's balanced business mix has helped keep performance relatively stable during the past two years of unsettled equity market conditions. Assets under management at September 30, 2003, rose 6 percent from September 30, 2002, to $242 billion, including a 7 percent increase in the same period for mutual fund assets to $114 billion (down modestly from the second quarter of 2003). Brokerage client assets of $569 billion at September 30, 2003, included $281 billion from Prudential.
Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. Wealth Management revenue rose 11 percent from the third quarter of 2002. Net interest income grew 15 percent on increases in loans and core deposits. Fee and other income increased 8 percent on higher insurance commissions related to the Cameron M. Harris & Co. acquisition, which was completed in the third quarter of 2002, as well as steady trust and investment management fees. Noninterest expense increased 12 percent year over year largely due to higher benefit and incentive expense as well as to the Cameron M. Harris & Co. acquisition. Average loans grew 11 percent from the third quarter a year ago, while average core deposits, led by money market and checking account balances, also rose 11 percent.
Corporate and Investment Banking
The Corporate and Investment Bank includes corporate lending, investment banking, treasury services and trade finance, and principal investing. Corporate and Investment Bank revenue grew 17 percent from the third quarter of 2002, as strong results in fixed income products and lower principal investing and trading losses more than offset a decline in interest income from lower loan balances in corporate lending. Provision expense fell $307 million from the third quarter of 2002 due to improved credit quality driven by risk reduction strategies. Revenue-related incentives and strategic initiative spending drove noninterest expense up 14 percent. Average loans declined 20 percent due to weak overall demand and portfolio risk reduction strategies. Capital usage declined 22 percent due to improved credit quality and lower loan outstandings. Average core deposits grew 28 percent primarily from growth in commercial mortgage servicing and in international trade finance.
Wachovia Corporation (NYSE:WB) is one of the largest providers of financial services to retail, brokerage and corporate customers throughout the East Coast and the nation, with assets of $389 billion and stockholders' equity of $33 billion at September 30, 2003. Its four core businesses, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank, serve 9 million households, including 900,000 businesses, primarily in 11 East Coast states and Washington, D.C. Its broker-dealer, Wachovia Securities, LLC, serves clients in 48 states. Global services are provided through more than 30 international offices. Online banking and brokerage products and services also are available through Wachovia.com.
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 15, 2003.
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 7 under the captions "Earnings Excluding Merger-Related and Restructuring Expenses and Cumulative Effect of a Change in Accounting Principle" and “Earnings Excluding Merger-Related and Restructuring Expenses, Other Intangible Amortization and Cumulative Effect of a Change in Accounting Principle”, and which are reconciled to GAAP financial measures on pages 18 and 19. Certain non-GAAP financial measures related to the addition of Prudential Financial's retail brokerage business are also presented in this news release and are reconciled to GAAP financial measures on page 20. 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 that the exclusion of merger-related and restructuring expenses and 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 that the exclusion of this expense provides investors with consistent and meaningful comparisons to other financial services firms. Also, Wachovia management makes recommendations to its board of directors about dividend payments based on reported earnings excluding merger-related and restructuring expenses, other intangible amortization and the cumulative effect of a change in accounting principle (cash earnings), and has communicated certain cash dividend payout ratio goals to investors. Management believes the cash dividend 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. In addition, since Wachovia operates one of the largest retail brokerage businesses in our industry, 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. Further, Wachovia consummated its retail securities brokerage combination with Prudential Financial in the third quarter and has excluded the effect of that transaction from certain performance measures, which management believes is useful to investors in comparing those performance measures with historical periods.
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 Bob Kelly will review Wachovia's third quarter 2003 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 1-888-357-9787 for U.S. callers or 1-706-679-7342 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: Thompson.
Replay: Wednesday, October 15 at 1:30 p.m. EDT through 4 p.m. EDT on Friday, November 14. Replay telephone number is 1-706-645-9291; access code 2784044.
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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