Wachovia Earnings Rise 7%

Higher loan volume and brokerage results help.
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Updated from 8:12 a.m. EDT

Wachovia

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said first-quarter earnings rose 7% from a year ago, as higher loan volume more than offset margin compression caused by the flattening yield curve.

Wachovia earned $1.73 billion, or $1.09 a share, in the quarter, compared with $1.62 billion, or $1.01 a share, a year ago. Excluding merger-related expenses, earnings were $1.12 a share in the latest period, matching the Thomson First Call consensus estimate.

Revenue for the quarter was $7.06 billion, beating estimates of $6.92 billion.

Among its segments, revenue rose 14% from a year ago to $3.49 billion in Wachovia's "general bank," which includes retail, small business and commercial customers. Earnings in the segment rose 21% in the segment to $1.1 billion.

The banking revenue increase was driven by "strengthening production in commercial, mortgage and home equity loans and deposits, partially offset by margin compression and slowing growth in home equity lines," Wachovia said.

Within the capital management segment, which includes retail brokerage and asset management, revenue rose 11% to $1.4 billion, while earnings rose 24% to $181 million.

The revenue increase reflected "strength in retail brokerage managed account fees on 42% growth in managed assets to $119.8 billion," the company said. "Momentum in building recurring revenue streams continued as this growth reflected strong client demand for managed accounts."

"We continued to see excellent sales production, top-notch customer service and market share gains throughout our businesses," Wachovia said. "We continued to gain leverage from improving our efficiency, while at the same time investing significantly for future revenue growth."

Average loans for the company were up 18% from the first quarter from last year. The company said that the provision for credit losses grew from $36 million in the same period last year to $61 million in the first quarter this year.

On the earnings call, the company discussed companies' appetite for loans, and the loosening of terms and conditions related to that demand. Wachovia management said that the bank continues to be "discerning and selective" given the amount of liquidity chasing deals. Still, analysts remain skeptical that a downturn in credit quality may be looming. The company said that it had a "reasonably good view" for the coming quarters about its credit quality.

The investment banking group, however, is benefiting from the debt market activity. Wachovia said that the corporate investment bank was "hitting on all cylinders" and it was confident in the pipeline for the next quarter.

The company also discussed the increased merger and acquisition activity in the retail brokerage divisions at other firms, and how that may help Wachovia's growing retail business. Although management would not comment on specific deals, most recently

UBS's

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acquisition of Piper Jaffray's retail group, the company did say that the transactions might be advantageous for Wachovia. As deals occur, the company may be able to benefit from some of the "dislocation" in the market, the company said.