Lines of Business Highlights: General Bank, Capital Management, Wealth Management, Corporate and Investment Banking
CHARLOTTE, N.C. - Wachovia Corp. (NYSE:WB) today reported record third quarter 2004 net income of $1.26 billion, or 96 cents per share, compared with $1.11 billion, or 83 cents per share, in the third quarter of 2003.
Excluding after-tax net merger-related expenses and other items of 4 cents per share in the third quarter of 2004 and 6 cents per share in the third quarter of 2003, offset by 1 cent per share related to a cumulative effect of a change in accounting principle in the year ago quarter, third quarter 2004 earnings were $1.32 billion, or $1.00 per share, compared with $1.17 billion, or 88 cents per share, in the third quarter of 2003.
“Our company produced another record quarter that once again highlights the strength of our balanced business model and how well we are positioned for the future,” said Ken Thompson, Wachovia chairman, president and chief executive officer. “Our General Bank, Corporate and Investment Bank, and Wealth Management businesses generated record revenues and gained market share, while Capital Management continued to reduce costs in the face of declining retail brokerage activity. Our employees’ dedication to providing the highest levels of customer service and sales produced outstanding deposit and loan growth. The integration of our nationwide retail brokerage business is nearly complete, and we’re looking forward to delivering more products and services to more customers across the fast-growing Southeast after we complete our merger with SouthTrust Corporation later this year.”
Revenue increased 5 percent and noninterest expense increased 3 percent from the third quarter of 2003. Provision expense declined from the third quarter a year ago to $43 million in the third quarter this year, reflecting continued improvement in asset quality. Third quarter 2004 net charge-offs declined 51 percent from the third quarter of 2003 to $65 million, or an annualized 0.15 percent of average net loans. Total nonperforming assets including loans held for sale declined 43 percent from the prior year to $956 million, or 0.50 percent of loans, foreclosed properties and loans held for sale at September 30, 2004.
Average loans in the third quarter of 2004 were $168.6 billion, a 7 percent increase from the third quarter of 2003, with strong growth in commercial, driven by middle-market commercial, small business and asset-based lending, and consumer loans, largely in consumer real estate-secured loans and student loans. The increase in average loans included a $2.6 billion impact resulting from a second quarter resolution of tax matters related to the commercial leasing portfolio. Excluding this impact, average loans were up 5 percent from the year ago period.
Average core deposits were $233.0 billion, up 25 percent, and average low-cost core deposits were $194.4 billion, up 34 percent from the third quarter of 2003. The increase included an average $27.4 billion of core deposits associated with an FDIC-insured money market sweep product Wachovia introduced in the fourth quarter of 2003. Low-cost core deposits are those in demand deposit, interest checking, savings and money market accounts, and exclude CAP accounts and CDs.
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 and other intangible amortization. Segment earnings are the basis upon which Wachovia manages and allocates capital to its business segments. Pages 12 and 13 include a reconciliation of segment results to Wachovia's consolidated results of operations in accordance with GAAP.
General Bank
The General Bank includes retail and small business, and commercial customers. The General Bank produced record quarterly segment earnings of $770 million, up 15 percent from the prior year's third quarter. Record total revenue increased 6 percent from the third quarter a year ago, driven by outstanding core deposit growth and continued strength in consumer real estate-secured lending. Fee and other income increased 7 percent from the third quarter a year ago on strong service charge growth, offset by declines in mortgage banking income. Excluding the decline in mortgage banking revenue, fees rose 20 percent from the third quarter a year ago. Noninterest expense increased 3 percent from the third quarter a year ago primarily due to higher variable expenses due to strong revenue production.
Average core deposits increased 10 percent from the prior year quarter, including 16 percent year over year growth in average low-cost core deposits. Average loans increased 9 percent year over year, despite the decline in mortgage lending, largely due to growth in consumer real estate-secured loans, student loans, middle-market commercial loans and small business loans. Provision expense declined 38 percent from the third quarter of 2003, primarily reflecting risk reduction strategies implemented in 2003, as well as solid improvements in both commercial and consumer loan losses and a strengthening economy.
Capital Management
Capital Management includes asset management and retail brokerage services. Year over year earnings were down 17 percent on a revenue decline of 7 percent, largely due to lower brokerage commissions in the challenging retail brokerage environment. Noninterest expense declined 5 percent from the third quarter of 2003, driven by lower broker compensation.
Net equity mutual fund sales continued to be positive, and mutual fund equity assets grew 24 percent from the third quarter of 2003. Deposit balances related to the FDIC-insured money market sweep product grew to $28.9 billion compared with $11.8 billion at year-end 2003, contributing to net interest income growth. The asset shift to the FDIC-insured product more than accounted for the 6 percent decline in mutual fund assets from the third quarter of 2003 to $106.8 billion. Despite the decline in mutual fund assets, total assets under management at September 30, 2004, increased 4 percent from September 30, 2003, to $249.2 billion. Total assets under management and securities lending grew 16 percent from year-end 2003 to $285.4 billion, largely attributable to $37.8 billion from the January 1, 2004, acquisition of a securities lending firm.
Wealth Management
Wealth Management includes private banking, personal trust, investment advisory services, charitable services, financial planning and insurance brokerage. Record Wealth Management revenue rose 9 percent from the third quarter of 2003 and segment earnings were a record $50 million, up 32 percent. Net interest income grew 15 percent on average loan growth of 18 percent from both consumer and commercial lending. Average core deposits grew 12 percent year over year, largely in money market balances. Fee and other income increased 4 percent largely due to improved trust and investment management fees related to pricing and market improvements as well as solid growth in insurance brokerage commissions. Noninterest expense increased 3 percent year over year largely due to higher incentives related to improved revenues. Provision expense declined due to improved credit quality and recoveries.
Corporate and Investment Bank
The Corporate and Investment Bank includes corporate lending, investment banking, global treasury and trade finance, and principal investing. Record Corporate and Investment Bank revenue grew 25 percent from the third quarter of 2003 and segment earnings were $435 million, up 40 percent year over year. Revenue growth was fueled by robust principal investing net gains of $201 million compared with $25 million in net losses a year ago, as well as strong loan syndications, investment grade and merger and acquisition advisory results. The increase in average loans reflected a $2.6 billion impact resulting from a second quarter resolution of tax matters related to the commercial leasing portfolio. Provision expense and capital usage declined year over year due to improving credit quality. Noninterest expense rose 18 percent due to increased personnel and higher incentives related to improved revenues and earnings. Average core deposits grew 18 percent primarily from higher commercial mortgage servicing and trade finance.
Wachovia Corporation (NYSE:WB) is one of the largest providers of financial services to retail, brokerage and corporate customers, with retail operations from Connecticut to Florida and retail brokerage operations nationwide. Wachovia had assets of $436.7 billion, market capitalization of $61.4 billion and stockholders' equity of $33.9 billion at September 30, 2004. Its four core businesses, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank, serve 12 million client relationships (including households and businesses), primarily in 11 states and Washington, D.C. Its full-service retail brokerage firm, Wachovia Securities, LLC, serves clients in 49 states. Global services are offered through 33 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, 2004.
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 2 and on page 9 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 20 and 21. 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 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 that 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 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 that 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.
Additional Information
The proposed merger between Wachovia Corporation and SouthTrust Corporation will be submitted to Wachovia's and SouthTrust's shareholders for their consideration. Shareholders are urged to read the definitive joint proxy statement/prospectus regarding the proposed transaction and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they contain important information. Shareholders may obtain a free copy of the joint proxy statement/prospectus, as well as other filings containing information about Wachovia and SouthTrust, at the SEC's Internet site (http://www.sec.gov). These documents also are available, free of charge, at www.wachovia.com under the tab “Inside Wachovia-Investor Relations” and then under the heading “Financial Reports - SEC Filings”. These documents are also available, free of charge, at www.southtrust.com under the tab “About SouthTrust”, then under “Investor Relations” and then under “SEC Documents”. Copies of the joint proxy statement/prospectus and the SEC filings incorporated by reference in the joint proxy statement/prospectus can also be obtained, without charge, by directing a request to Wachovia Corporation, Investor Relations, One Wachovia Center, 301 South College Street, Charlotte, NC 28288-0206, (704)-374-6782, or to SouthTrust Corporation, P. O. Box 2554, Birmingham, AL 35290, (205)-254-5187. Copies of the joint proxy statement/prospectus may also be obtained from Wachovia's proxy solicitor, Georgeson Shareholder Communications, by calling 1-800-255-8670, and from SouthTrust's proxy solicitor, Morrow & Co. Inc., at 1-877-366-1576.
Earnings Conference Call and Supplemental Materials
Wachovia CEO Ken Thompson and CFO Bob Kelly will review Wachovia's third quarter 2004 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: Wachovia.
Replay: Friday, October 15 at approximately noon Eastern Time through 11 p.m. Eastern Time on Friday, November 19. Replay telephone number is 1-706-645-9291; access code 76176.
*** 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.
