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Wachovia Pushes Forward

The CEO promises to focus on organic growth and cost control.

Wachovia (WB) - Get Weibo Corp. Report eked out stronger-than-expected first-quarter earnings on the back of its acquisitions of Golden West and Westcorp.

Shares rose 2% at midday after the lender said it would seek to hold down costs and focus on organic growth, rather than big acquisitions.

The Charlotte, N.C., bank posted earnings of $2.30 billion, or $1.20 a share, in the first quarter, up from $1.73 billion, or $1.09 a share, last year, beating consensus analyst expectations by about 4 cents.

Much of the earnings growth resulted from the Golden West purchase. Still, softness due to interest rates and the fallout from loans provided to borrowers with questionable credit quality were also evident.

"Right now they are a show-me stock," says Robert Patten, managing director at investment bank Morgan Keegan in New York. "Over the next two quarters they need to show that their mortgages have stabilized."

Wachovia reported net charge-offs of about 0.15% this quarter, up from 0.09% a year ago. Foreclosed loans and those held for sale increased to 0.40% from 0.28% in the same period last year.

"We did see a jump in nonperforming assets, but they are still very low by historical standards," said Don Truslow, chief risk officer at Wachovia, during its earnings call.

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"Looking at loans that are nonperforming, the average loan-to-value is around 74% and the actually level of foreclosed properties is also low," CFO Tom Wurtz commented during the call. "We are pleased with the quality of the portfolio," he added.

Wurtz noted that the bank's exposure to shaky mortgages is relatively low. He defines subprime loans as those with FICO scores (a consumer borrowing rating) below 620 and with loan-to-value ratios under 80%. In all, such loans total about a half a percent of the bank's business.

Patten notes, "Managing non-performing assets ticked up to but didn't translate into charge-offs," though he adds that Wachovia needs to continue to increase revenue. "The issue is they look light on revenues," he says.

Total revenue in the wealth business grew in the latest but only slightly, to about $342 million this quarter from $339 million last March. Corporate and investment-banking revenue fell to $1.09 billion from $1.242 billion last year.

A bright spot appeared to be Wachovia's assets under management, which increased 13% from the end of December to $314.6 billion.

CEO Kenneth Thompson also noted that the company will continue to seek to trim expenses but said that the bank would not look to do it in a programmed fashion.

"I think you will see continued focus on expenses at the company. We are identifying further things we can do and will do and you'll see the same type of restraint going forward," he said. "We're not going to announce further efficiency initiatives. It's in our DNA, and we are going to continue to operate that way."

At this point, Wachovia aims to grow its business organically rather than by mergers and acquisitions, Thompson underscored. "Our focus is not on M&A, our focus is on organic growth anything we would do from an M&A standpoint would be very very small," he noted.