Wachovia Corp.'s second-quarter earnings topped Wall Street estimates, despite narrowing margins, as lending and fee-based operations made equally strong contributions.
The March 1 acquisitions of Westcorp Inc. and Westcorp's auto finance subsidiary, WFS Financial Corp., helped, as did growth in noninterest revenue.
G. Kennedy Thompson, Wachovia's president, chairman, and chief executive, said on a conference call Thursday that fee income "continued to be the driver for organic revenue growth" and that Westcorp and WFS had "excellent production."
However, net interest income fell from the first quarter, and executives said continued margin compression could stymie growth in Wachovia's lending operations for the rest of the year.
"We just feel that it is going to be a pretty competitive environment," Thomas Wurtz, the Charlotte company's chief financial officer, said on the call. "So I just think it could be an unattractive environment for the remainder of the year."
Lending operations at the $554 billion-asset Wachovia stand to get a lift from its acquisition of Golden West Financial Corp., a thrift company in Oakland, Calif.
The $3.9 billion deal was announced May 7 and is expected to close in the fourth quarter. Mr. Wurtz said that the acquisition should help Wachovia's net interest income this year and that it is expected to be dilutive to its shares; in both cases it depends on when the deal closes, he said.
Wachovia's earnings rose 9.1% compared with the first quarter and 14.2% compared with last year's second quarter, to $1.9 billion. Excluding $15 million of charges related to the Westcorp acquisition, earnings per share of $1.18 topped the average analyst estimate by 3 cents, according to Thomson Financial.
Fee income rose 1.9% from the first quarter and 20.4% from a year earlier, to $3.6 billion. Service charges rose 8.4% from the first quarter and 17.8% from a year earlier, to $622 million. The quarter included $25 million of securities gains and a $116 million unrealized gain from principal investing.
In the interview Mr. Wurtz estimated that Westcorp contributed $90 million in net income in the second quarter. Wachovia's margin, which shrank by 3 basis points from the first quarter and 5 basis points from a year earlier, to 3.18%, would have been worse without Westcorp's contribution, he said.
Net interest income rose 4.3% from the first quarter and 8.4% from a year earlier, to $3.6 billion, but during the call Mr. Wurtz lowered guidance for 2006, projecting that it could be flat compared with 2005. "I think it is safe to assume we will continue to see some compression in the margin over the remainder of the year," he said.
Compression would probably be tied to the continued migration of commercial and consumer clients to higher-cost deposits, Mr. Wurtz said in the interview. On the lending side, he said, Wachovia could "give in on pricing" to add commercial loans, though he said it would not compromise credit standards.
Wachovia said credit quality this year should be better than previously forecast and should offset a letdown in net interest income. "The changes to our guidance are really relatively subtle, and in our model they don't produce any material difference in bottom-line results," Mr. Wurtz said during the conference call.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said the new guidance could lead to lower full-year earnings or a reliance on more one-time gains over the next two quarters.
"When we look at the earnings, they continue to chug along," Mr. Cassidy said. Wachovia has been "a very methodical operator, grinding it out," he said.
The $129 billion-asset Golden West also reported earnings Thursday. It said net income was $390.4 million, flat compared with the first quarter but up 8% from a year earlier. (See story page 9.) Earnings per share of $1.25 were 4 cents below Wall Street expectations. The total deferred interest, or accumulated negative amortization, in its loans receivable and mortgage-backed securities rose 37% compared with the first quarter and was up 472% from a year earlier.
Mr. Thompson said on the conference call that Golden West's results "were consistent with what we had expected given the rising interest rate environment that we have been experiencing."
Wachovia reported second-quarter loans of $282.9 billion, up 0.7% from the first quarter and 22.9% from a year earlier. Commercial loans rose 0.2% from the first quarter and 13.3% from a year earlier. Despite a full quarter of contribution from Westcorp, consumer lending fell 0.1% from the first quarter but rose 36.6% from a year earlier.
Deposits fell 0.3% from the first quarter but rose 9.2% from a year earlier, to $327.6 billion. Non-interest-bearing deposits fell 1.5% from the first quarter but increased 5.2% from a year earlier. Interest-bearing deposits were flat from the first quarter but rose 10.3% from a year earlier.
Noninterest expense was up 0.5% from the first quarter and 12.5% from a year earlier, to $4.3 billion.
The loan-loss provision fell 3.3% from the first quarter but rose 18% from a year earlier, to $59 million. Net chargeoffs fell 13.6% from the first quarter and were unchanged from a year earlier, at $51 million.
Wachovia had earnings gains in all four of its main business lines compared with the first quarter. Net income in the general bank rose 5.6% from the first quarter and 21.2% from a year earlier, to $1.2 billion.
Earnings in its corporate and investment bank rose 1% from the first quarter and 47% from a year earlier, to $522 million. Profits in its capital management group rose 7.1% from the first quarter and 33.6% from a year earlier, to $195 million. Wealth management earnings rose 1.7% from the first quarter but fell 9.2% from a year earlier, to $59 million.
