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 $2.30 billion, or $1.20 per share, in the fourth quarter of 2006 compared with $1.71 billion, or $1.09 per share, in the fourth quarter of 2005.
Excluding after-tax net merger-related expenses of 1 cent per share in the fourth quarter of 2006 and 2 cents per share in the fourth quarter of 2005, earnings were $2.33 billion, or $1.21 per share, in the fourth quarter of 2006 compared with $1.74 billion, or $1.11 per share, in the fourth quarter of 2005.
Full year 2006 net income was $7.79 billion, up 17 percent from 2005, and earnings per share were up 11 percent from 2005 to a record $4.63. Excluding after-tax net merger-related expenses of 7 cents in 2006 and 11 cents in 2005, earnings in 2006 were $7.91 billion, or $4.70 per share, compared with $6.81 billion, or $4.30 per share, in 2005.
"For the fifth consecutive year, Wachovia has delivered double-digit earnings per share growth," said Ken Thompson, Wachovia chairman and chief executive officer. "In the face of a challenging interest rate environment, we worked hard to control expenses, manage risk appropriately, create revenue synergies between our businesses, and prioritize our investments while continuing to provide industry-leading customer service. We believe our mix of businesses and the markets we serve, plus our demonstrated success in execution, will continue to position us well in any market environment."
Results in 2005 included a discontinued operations gain of $214 million after tax, or 14 cents per share, related to the 2005 fourth quarter sale of Wachovia's corporate and institutional trust businesses. Results in 2006 included a gain of $46 million after tax, or 2 cents per share, relating to this disposition. Results in 2006 also include the impact of the acquisitions of Golden West Financial Corporation on October 1, 2006, and Westcorp on March 1, 2006.
In the fourth quarter of 2006 compared with the fourth quarter of 2005, Wachovia:
- Grew revenue 31 percent on higher loans and deposits primarily due to the addition of Golden West and Westcorp, with equally strong fee income growth.
- Increased net interest income 29 percent, reflecting higher average commercial loans, up 12 percent, and average consumer loans, up 161 percent, including the impact of the acquisitions.
- Commercial loan growth was led by middle-market and business banking, commercial real estate and large corporate lending, while consumer loan growth, which reflects the addition of Golden West and Westcorp, was led by higher real estate-secured loans, which included the impact of year-end 2005 loan transfers from loans held for sale.
- Average core deposits rose 26 percent and average low-cost core deposits were up 3 percent. Growth in lower spread loans, a shift in deposit mix and the effects of the inverted yield curve resulted in 16 basis points of margin compression, although the margin improved 6 basis points from the prior quarter.
- Generated across-the-board growth in fee and other income, up 33 percent, led by record investment banking fees, strength in service charges and higher securitization income. Asset management fees reached a new high, reflecting continued growth in retail brokerage managed account relationships, while commissions reflected renewed retail brokerage customer activity. Both trading results and securities gains turned around from losses in the fourth quarter of 2005.
- Noninterest expense rose 18 percent largely reflecting the acquisition impact, and also included higher incentives on revenue growth in the Corporate and Investment Bank and in Capital Management.
- Recorded a provision for credit losses of $206 million largely reflecting growth in auto, credit cards and commercial loan portfolios and a refinement of our reserving methodology on a portion of the business banking loan portfolio. Net charge-offs were $140 million, or an annualized 0.14 percent of average net loans. Total nonperforming assets including loans held for sale were $1.4 billion, or 0.32 percent of loans, foreclosed properties and loans held for sale and included $700 million related to the Golden West acquisition.
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 14 and 15 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 fourth quarter of 2006 compared with the fourth quarter of 2005 included:
- Earnings of $1.7 billion on a 47 percent increase in revenue to $4.8 billion, driven by increased loans and deposits primarily reflecting the addition of Golden West and Westcorp. The business mix continued to shift, reflecting customer preferences for fixed rate instead of variable rate loans and certificates of deposit over demand deposits.
- An increase in average loans reflecting the addition of an average $123.9 billion from Golden West and $15.5 billion from Westcorp. Organic growth was led by middle-market commercial, business banking and commercial real estate.
- Deposit growth led by consumer certificates of deposit and money market funds. Net new retail checking accounts increased by 555,000 in 2006 compared with an increase of 535,000 in 2005.
- 27 percent growth in fee and other income with 19 percent growth in consumer service charges and 16 percent growth in interchange income.
- 20 percent growth in noninterest expense associated with the acquisitions, de novo branch activity and costs related to reentering the credit card business. Despite the increased expense, the General Bank’s overhead efficiency ratio improved 909 basis points to 41.98 percent.
- Increased provision expense as a result of higher retail losses and growth in auto loans.
Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. The fourth quarter of 2006 compared with the fourth quarter of 2005 included:
- 29 percent earnings growth to a record $75 million on modest revenue growth and lower expenses.
- Revenue growth driven by higher fee and other income, including increased commissions and higher banking fees.
- A dip in net interest income as margin compression offset strong momentum in loans and a modest increase in average core deposits.
Corporate and Investment Bank
The Corporate and Investment Bank includes corporate lending, investment banking, and treasury and international trade finance. Fourth quarter 2006 results compared with the fourth quarter of 2005 included:
- Record earnings up 27 percent to $531 million on 28 percent revenue growth to $1.8 billion, driven by record advisory and origination activity in corporate client businesses, and strength in real estate capital markets.
- An 8 percent decline in net interest income reflected spread compression in asset-based lending and leasing, lower trading-related interest income and cross-border leasing runoff.
- A 50 percent increase in fee and other income reflected strength in real estate capital markets, merger and acquisition advisory services, equity underwriting, high grade debt and loan syndications, and improved trading revenue as well as slightly improved principal investing results.
- A 26 percent increase in noninterest expense primarily related to higher variable compensation on higher revenues.
- Core deposit and loan growth from organic growth and acquisitions.
Capital Management
Capital Management includes retail brokerage services and asset management. The fourth quarter of 2006 compared with the fourth quarter of 2005 included:
- Record earnings of $255 million on 15 percent revenue growth with strength in retail brokerage managed account fees as well as higher brokerage transaction activity. Results also reflected the impact of 2006 acquisitions, higher net interest income, higher asset management fees and higher valuations on investments. Managed assets grew 26 percent from year-end 2005 to $133.7 billion at year-end 2006.
- 8 percent growth in noninterest expense primarily due to higher commissions, deferred compensation, other brokerage production costs and the impact of acquisitions. The overhead efficiency ratio improved 483 basis points to 74.92 percent due to revenue growth and expense control efforts.
Total assets under management of $276.0 billion at December 31, 2006, were up 20 percent from December 31, 2005, including $17.8 billion of assets retained from $24 billion transferred to the Parent in the fourth quarter of 2005 in connection with the Corporate and Institutional Trust divestiture. The increase also reflected $10.8 billion in market appreciation, $9.0 billion in net inflows, $5.5 billion in assets from the Metropolitan West Capital Management acquisition and $3.2 billion from the Golden West Atlas Funds. Equity assets reached $100.8 billion, up 22 percent in the same period. Total brokerage client assets grew 11 percent from year-end 2005 to $760.0 billion.
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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. Wachovia has retail and commercial banking operations in 21 states with 3,375 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 742 offices in 49 states and nine service affiliate offices 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 December 31, 2006, Wachovia had assets of $707 billion and market capitalization of $108 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 January 23, 2007.
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 11 under the captions "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 22 and 23. 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 fourth quarter 2006 results and present an outlook for 2007 in a conference call and audio webcast beginning at 8 a.m. Eastern Standard Time today. This review may include a discussion of certain non-GAAP financial measures. Supplemental materials relating to fourth 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 Fourth 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: Tuesday, January 23, at 11:30 a.m. EST and continuing through 5 p.m. EST Friday, February 23. Replay telephone number is 706-645-9291; access code: 3748883.
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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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