Lines of Business Highlights: General Bank, Capital Management, Wealth Management, Corporate and Investment Bank
CHARLOTTE, N.C. - Wachovia Corp. (NYSE:WB) today reported record net income of $1.71 billion, or $1.09 per share, in the fourth quarter of 2005 compared with $1.45 billion, or 95 cents per share, in the fourth quarter of 2004.
Excluding after-tax net merger-related expenses of 2 cents per share in the fourth quarter of 2005 and 4 cents in the fourth quarter of 2004, earnings were $1.74 billion, or $1.11 per share, in the fourth quarter of 2005 compared with $1.50 billion, or 99 cents per share, in the fourth quarter of 2004.
Full year 2005 net income was a record $6.64 billion, up 27 percent from 2004, and earnings per share were up 10 percent from 2004 to a record $4.19. Excluding after-tax net merger-related expenses of 11 cents per share in 2005 and 14 cents in 2004, earnings in 2005 were $6.81 billion, or $4.30 per share, compared with $5.42 billion, or $3.95 per share, in 2004.
These results included a discontinued operations gain of $214 million after-tax, or 14 cents per common share, related to the 2005 fourth quarter sale of Wachovia's corporate and institutional trust businesses. In addition, the fourth quarter of 2005 included higher than normal expenses that better position the company for future earnings growth, as well as securities losses recognized as part of balance sheet repositioning.
"We're proud of our record fourth quarter results and fourth consecutive year of double-digit earnings increases despite rising funding costs and related industry-wide pressure on margins. Our employees' dedication and unwavering customer focus are driving Wachovia's growth and market share gains," said Ken Thompson, Wachovia chairman and chief executive officer. "During the fourth quarter of 2005, we continued to reposition and reinvest for the future. We completed the SouthTrust integration, closed two acquisitions and a divesture, and opened 50 new branches. With our team's record of superb execution, I have great confidence we'll achieve our goals for continued growth."
Results include the impact of the acquisition of SouthTrust Corporation on November 1, 2004. In the fourth quarter of 2005 compared with the fourth quarter of 2004, Wachovia:
- Increased revenue 7 percent. Revenue growth reflected strong capital markets-related income as well as a larger balance sheet, with average loans up 21 percent.
- Grew net interest income 6 percent, reflecting higher loans and deposits. Commercial loan growth was across-the-board while consumer loans were higher due to real estate-secured lending, including the effect of a net $9.2 billion of home equity lines transferred to the loan portfolio in the fourth quarter of 2004 from loans held for sale. Core deposit growth continued to be solid, with a 10 percent increase in average core deposits and a 7 percent increase in average low-cost core deposits.
- Generated 7 percent fee and other income growth, led by higher asset management and investment banking fees, strong principal investing results, and other banking fees. Growth was partially offset by securities losses, lower retail brokerage commissions and trading losses.
- Increased noninterest expense 9 percent on higher personnel expense, largely related to the efficiency initiative, and to variable incentive expense, higher legal costs and charitable contributions. These factors produced a higher than normal expense base, offset by merger efficiencies.
- Recorded a provision for credit losses of $81 million. Net charge-offs were $51 million, or an annualized 0.09 percent of average net loans. Total nonperforming assets including loans held for sale were $752 million, or a record low 0.28 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, discontinued operations and other intangible amortization. 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. Results include SouthTrust. The fourth quarter of 2005 compared with the fourth quarter of 2004 included:
- 11 percent revenue growth driven by higher net interest income and fee and other income.
- Strength in low-cost core deposits and higher commercial and consumer loans drove a 10 percent increase in net interest income. Net new retail checking accounts increased by 115,000 in the fourth quarter of 2005, compared with an increase of 103,000 in the prior year fourth quarter.
- 13 percent growth in fee and other income generated primarily by strong debit card interchange income and retail service charges. In addition, a larger mortgage servicing portfolio and higher mortgage originations contributed to growth.
- 10 percent growth in noninterest expense due to higher personnel costs related to investment in growth initiatives and higher sales production, as well as increased charitable contributions.
Capital Management
Capital Management includes retail brokerage services and asset management. The corporate and institutional trust businesses sold in the fourth quarter of 2005 are reflected in the Parent segment because they are divested businesses. The fourth quarter of 2005 compared with the fourth quarter of 2004 included:
- 3 percent revenue growth on 29 percent growth in brokerage managed account assets to $106.5 billion, generating solid growth in recurring income.
- 19 percent growth in net interest income largely due to improved deposit spreads.
- Expenses grew slightly due to efficiency initiative costs and corporate contributions. Efficiencies gained from the completed brokerage integration largely offset expense growth. The overhead efficiency ratio improved 202 basis points to 82.70 percent.
- Total assets under management of $253.5 billion at December 31, 2005, declined modestly from December 31, 2004. Equity assets reached $83.1 billion, led by positive equity mutual fund sales and improved equity markets. Total brokerage client assets grew 5 percent from year-end 2004 to $683.6 billion at December 31, 2005.
Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. Results include the impact of the May 2005, acquisition of Palmer & Cay, Inc., an insurance brokerage firm. The fourth quarter of 2005 compared with the fourth quarter of 2004 included:
- Record revenue driven by 26 percent growth in fee and other income and a 10 percent increase in net interest income.
- Net interest income growth fueled by a 23 percent increase in average loans and an 11 percent increase in average core deposits.
- Fee and other income included the impact of Palmer & Cay, as well as improved trust and investment management fees on record sales production.
- Noninterest expense growth reflected the impact of Palmer & Cay and higher personnel costs.
Corporate and Investment Bank
The Corporate and Investment Bank includes corporate lending, investment banking, and treasury and international trade finance. Fourth quarter 2005 results compared with the fourth quarter of 2004 included:
- 14 percent revenue growth reflecting a 32 percent increase in fee and other income offsetting a 5 percent decline in net interest income.
- Net interest income declined due primarily to a change in the mix of trading assets, which lowered the overall spread in the trading portfolio, and to runoff in a leasing portfolio.
- The growth in fee income reflected strong principal investing gains and record results in advisory and underwriting fees, led by strong structured products, equity originations and loan syndications. Growth was partially offset by trading losses and lower commissions.
- A 20 percent increase in noninterest expense due primarily to higher variable compensation and expenses related to both revenue and efficiency projects.
- Strong core deposit growth primarily from higher commercial mortgage servicing and international correspondent banking, and increased loans primarily reflecting higher large corporate loans.
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Wachovia Corporation (NYSE:WB) is one of the largest providers of financial services to retail, brokerage and corporate customers, with banking operations from Connecticut to Florida and west to Texas, and retail brokerage operations nationwide. Wachovia had assets of $520.8 billion, market capitalization of $82.3 billion and stockholders' equity of $47.6 billion at December 31, 2005. Its four core businesses, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank, serve more than 13 million household and business relationships primarily through 3,131 offices in 15 states and Washington, D.C. Its full-service retail brokerage firm, Wachovia Securities, LLC, also serves clients through 719 offices in 49 states, Washington, D.C., and six Latin American countries. The Corporate and Investment Bank serves clients in selected industries nationwide. Global services are offered through 40 offices around the world. 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 January 19, 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 Bob Kelly will review Wachovia's fourth quarter 2005 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 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: Thursday, January 19, at 11:30 a.m. ET and continuing through 5 p.m. ET Friday, February 24. Replay telephone number is 706-645-9291; access code 3430512.
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Investors seeking further information should contact the Investor Relations team: Alice Lehman at 704-374-4139, Ellen Taylor at 704-383-1381 or Jeff Richardson at 704-383-8250. 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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