Wachovia (NYSE:WB) announced encouraging full-year earnings results Tuesday, aided by a strong fourth quarter and improving net interest margin, coupled with strength in its market-related business. And there was considerable help from acquisitions during the year, particularly in the fourth quarter, when Wachovia completed the $24.2 billion acquisition of Golden West Financial.

The bank reported record full-year net income of $7.79 billion, up 17% from 2005. Full-year earnings per share were $4.63, up from $4.11 for 2005. Because of the challenging yield curve environment in 2006, net interest margin declined to 3.12% from 3.24% in 2005, but fourth-quarter numbers seem to show that the downward trend in margin is reversing itself. Credit quality remained strong. Wachovia is the nation's fourth-largest bank, with total assets of nearly $700 billion.

Wachovia completed two major acquisitions of consumer lenders in 2006, including Golden West and Westcorp. As a result, the bank's fourth quarter average loans increased by 74%, including $123.9 billion from Golden West and $15.5 billion from Westcorp. On a day when competitors Bank of America (NYSE:BAC) and PNC Financial Services (NYSE:PNC) disappointed investors with earnings announcements, Wachovia's stock was up $0.38 to $56.65. Shares of Wachovia have underperformed both the peer group and the S&P 500 in the past year, reflecting the impact of both the inverted yield curve and the cost of the acquisitions. Wachovia now has a dividend yield in excess of 4%, and its stock is once again in sight of its 52-week high.

CEO Ken Thompson also cited record fees in Wachovia's investment banking, wealth management, and capital management divisions during the quarter, contributing to a 33% gain in fee and other income. However, both return on equity and return on assets decreased in the quarter, to 13.09% and 1.31%, respectively, lagging many of its competitors.

As of today, the market gives Wachovia a P/E multiple between that of the larger banks like Bank of America and the smaller banks like SunTrust (NYSE:STI) or even Wells Fargo (NYSE:WFC). With its acquisitions last year, Wachovia has increased its bet on the consumer and his or her ability to pay the monthly mortgage. If Wachovia can maintain strong credit quality with the additional adjustable-rate mortgages in its consumer loan portfolio, net interest margin should continue to improve. That, coupled with continued organic growth in fee income, should start to close the P/E gap with similar-sized competitors like Wells Fargo, whose shares returned more than 21% last year.

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Fool contributor Michael Mancini does not own any shares of the companies mentioned in this article.