Wachovia Corp New (WBPS) 10-K 2005 FY Annual report

Delivering Sustainable Growth

2005 Annual Report

Business Description

As the nation’s fourth largest banking company and third largest retail brokerage firm, Wachovia (NYSE:WB) provides 13.4 million household and business clients with a full range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services.

Wachovia Bank’s retail and commercial banking operations form a leading presence in 15 states from Connecticut to Florida and west to Texas. Wachovia Securities LLC serves retail brokerage clients through more than 700 offices in 49 states and six Latin American countries. Global services also are offered through more than 40 international banking offices. Online banking is available at wachovia.com; online brokerage products and services at wachoviasec.com; and investment products and services at evergreeninvestments.com.

At December 31, 2005:

n	Assets: $520.8 billion
n	Market capitalization: $82.3 billion
n	Stockholders’ equity: $47.6 billion
n	Common shares outstanding: 1.6 billion
n	Listing: NYSE
n	Ticker symbol: WB

Delivering Sustainable Growth . . .

Strong financial performance and

a customer-driven product

and delivery strategy propel

Wachovia’s momentum.

Contents

Letter to Our Shareholders		2
Corporate Citizenship		7
Corporate Overview		8
Overview of Major Businesses		9
Guide to Our Financial Discussion		12
Management’s Discussion and Analysis		14
Management’s Report on Internal Control over Financial Reporting		62
Reports of Independent Registered Public Accounting Firm		63
Consolidated Financial Statements		65
Glossary		123
Board of Directors, Operating Committee and General Bank Branch Listing		124
Shareholder Information(Dividend and Stock Price tables on pages 1, 31, 45, 46, 47 and 49)	Inside Back Cover

EPS up 15% on a compound annual basis since 2003
Financial Performance Highlights

	Years Ended December 31,
(Dollars in millions, except per share data)	2005			2004		2003
Total revenue(Tax-equivalent)	$	26,119			22,990		20,345
Income from continuing operations before cumulative effect of a change in accounting principle		6,429			5,214		4,247
Net income available to common stockholders		6,643			5,214		4,259
Diluted earnings per common share
Income from continuing operations before change in accounting principle		4.05			3.81		3.17
Net income available to common stockholders	$	4.19			3.81		3.18
Return on average tangible common stockholders’ equity		27.85	%		24.61		24.21
Total assets	$	520,755			493,324		401,188
Stockholders’ equity	$	47,561			47,317		32,428
Actual common shares(In millions)		1,557			1,588		1,312
Dividends paid per common share	$	1.94			1.66		1.25
Book value per common share		30.55			29.79		24.71
Common stock price		52.86			52.60		46.59
Market capitalization	$	82,291			83,537		61,139
Financial centers/brokerage offices		3,850			3,971		3,328
Employees		93,980			96,030		86,114

Continued momentum drives results
(In billions, except earnings per share)

Common stock dividends up 46% since 4Q03
Including predecessor Union National Bank, dividends paid every year since 1910

For an explanation of our use of non-GAAP financial measures, please see table 1 on page 45.

Delivering Sustainable Growth


Double-digit
earnings per share
growth for four
consecutive years


113% increase in
dividend since
year-end 2001


No. 1 in customer
service among
banking peers
for five years


11th largest
banking company
globally
(market capitalization)


Strong balance
sheet— two debt
rating upgrades

Wachovia Corporation 2005 Annual Report 1

Letter to Our Shareholders

Dear Shareholders,

Wachovia generated record results in 2005 by focusing on the right things: meeting our customers’ needs, controlling costs and investing in our future.

Our employees executed extremely well on our revenue strategies and expense initiatives, including merger cost savings. This is where I believe Wachovia clearly distinguishes itself: execution — getting the job done. That’s why we’re in an excellent position to continue delivering sustainable growth for our shareholders.

We enter 2006 with great momentum, and important strengths and advantages:

n	A track record of superior financial performance.
n	Strong debt ratings.
n	Excellent credit quality and risk management.
n	Industry-leading customer service.
n	Solid organic growth, with market share gains.
n	A disciplined expense culture.
n	And, unlike many competitors, we’ve continued to invest heavily for future growth.

2 Wachovia Corporation 2005 Annual Report

In addition, we hit several key quantitative milestones in 2005:

n	Record earnings of $6.6 billion, or $4.19 per common share — the fourth consecutive year of double-digit growth in earnings per share.
n	An 11 percent increase in our quarterly dividend to 51 cents per common share, or $2.04 annualized. The quarterly dividend is up 113 percent over the past five years.
n	$5.7 billion in capital returned to shareholders including dividends of $3.0 billion, or 46 percent of earnings excluding merger-related, restructuring and other charges, and stock repurchases of $2.7 billion.
n	92 percent total return to shareholders, outpacing the KBW bank index of 37 percent, and the No. 1 total return performance among the nation’s 20 largest banks since 2001 when First Union and the former Wachovia merged.
n	Double-digit growth in deposits to $325 billion, which ranks third largest nationally in domestic deposits. In fact, we’ve been among the leaders in growing low-cost core deposits for the past three years.
n	Double-digit growth in loans to $259 billion, ranking us fifth largest in the nation and No. 1 in commercial loans in our marketplace.

Building competitive businesses

When I wrote my first letter to you six years ago, I said we were going to focus strategically on strengthening Wachovia’s four core businesses. Today, I’m proud that each one of those businesses either is or is on the verge of becoming a great franchise in its own right, and combined, they create a very appealing value proposition for our customers and our shareholders. The most important thing I can do in my job is to support the leaders in these businesses and ensure they get the resources they need.

Our largest business, the General Bank, gained market share and generated $3.9 billion in earnings on record revenue in 2005. I believe it is the best in the industry. While all banks benefited from customer preferences for deposits over the past few years, our General Bank is among the industry’s leaders because of its best-in-class customer care philosophy and sales management practices.

Ben Jenkins, head of our General Bank, whom our board recently named vice chairman, is the catalyst. He is simply a great leader who has built a culture of excellence in our General Bank.

Ben’s team in the General Bank continued to maintain strong earnings momentum by growing top line revenues at twice the rate of expense growth, including the impact of the SouthTrust acquisition. Not only has his team been a market leader in deposit growth, but they’ve also increased overall financial center sales production throughout the course of the year.

Looking forward, the General Bank has an ample opportunity to continue its revenue growth trajectory. We are currently rebuilding our mortgage origination capability and we have reentered the credit card business. Both of these businesses will focus on Wachovia’s distribution channels and customer base.

Also contributing to bottom line growth has been the General Bank’s focus on disciplined expense management. We enter 2006 fully enjoying savings from our SouthTrust acquisition as we met all timelines we set for ourselves and spent less than planned to complete the integration.

In our Corporate and Investment Bank, we continue to gain market share and add lead bank relationships. In the key product areas in investment banking that serve our corporate clients, we have gained more domestic market share than any other firm on Wall Street since the beginning of 2001. We have also built one of the top structured products businesses in the industry. But as can be expected in a diversified global markets business, not all product groups hit on all cylinders at the same time. Our equities business is one that had a challenging year, but we made a number of key additions to the equities team and evidence of a turnaround came at year end. Our momentum remains strong and we expect these trends to continue.

Steve Cummings, who heads this business, has set the bar very high in creating a Corporate and Investment Bank where teamwork and integrity are valued as much as winning new business. We’ve built this business organically, rather than through acquisition, and along the way we’ve deliberately sought out talented professionals who will thrive following our business model and value proposition.

I once ran our Corporate and Investment Bank in its early years, so I feel great pride when I consider what it has become. In 2005, it generated record revenue growth and record earnings of $1.7 billion.

We have ambitious growth plans for our Corporate and Investment Bank, which will require significant investment in systems and technology and in intellectual capital. The good news is that our Corporate and Investment Bank has become a magnet for talent because we are winning in key markets and we are focused on organic growth. We also understand bottom line results must be achieved even with continued heavy investment in talent and technology, and we look for this group to self fund its growth plans.

Wealth Management focuses on the high net worth client segment. Although it is our smallest business, it ranks as the fourth largest wealth manager in the nation, according to Barron’s magazine. In 2005, Wealth Management experienced high double-digit growth with record earnings of $256 million on record revenues. The Wealth Management team accomplished this while narrowing their target market and enhancing their sales force.

Stan Kelly, who heads our Wealth Management business, has led his team superbly through this transformational process. Wealth is focused on winning additional clients on top of the 3, 900 new relationships added in 2005, and on broadening and deepening our relationships with affluent customers. Another priority in Wealth is to ensure that our commercial insurance brokerage business is working to cross-sell its products to our commercial customers in the General Bank.

Wachovia Corporation 2005 Annual Report 3

Letter to Our Shareholders

That’s a significant revenue opportunity for us, enhanced by the May 2005 acquisition of a commercial insurance brokerage firm, which doubled our size and moved us into the Top 10 rankings in this business.

Our fourth business line is Capital Management. This business includes our Wachovia Securities retail brokerage firm and our asset management practice. This business has the necessary scale to succeed after years of piecing the platform together through acquisitions. We have 10, 500 registered representatives whose clients have more than $680 billion of assets with us. That makes Wachovia Securities the third largest brokerage firm in the United States. In addition, our asset management firm, Evergreen Investments, manages more than $250 billion in assets.

Now the opportunity is to achieve our earnings potential in these businesses. David Carroll is the right leader to make that happen. He assumed responsibility for the Capital Management business last year, and I am pleased with the progress after a year of restructuring that positions this division for better earnings growth in the future. We completed the integration of the Prudential retail brokerage joint venture; consolidated two internal insurance divisions; restructured our Evergreen Investments business for improved performance; hired more than 900 new financial advisors; and divested our corporate trust, custody and stock transfer businesses. Already we are seeing improved financial specialist results; we’re selling considerably more bank products through our brokerage channel and increasing the focus of brokerage in our bank branches, and we’re capitalizing on the distribution advantages that retail brokerage provides for products originated in our Corporate and Investment Bank.

Capital Management increased earnings 20 percent in 2005 to $579 million as they controlled costs and achieved all our planned efficiencies from the Prudential retail brokerage integration. Our margins and our income are positioned to improve substantially when retail volume increases and equity

markets strengthen. In addition, CMG surpassed a milestone $100 billion in brokerage managed account assets, which is significant because managed accounts generate longer-term recurring income.

Leveraging our businesses
As the performance of our four businesses attests, our diversified business model provides great balance and serves our shareholders very well. We have created a full-service financial firm with complementary products and cross-business partnerships, and we’re seeing increasing synergies among our teams. For example:

n	Our Wachovia Client Partnership strategy has deepened relationships with customers and driven product referrals among our businesses, and in the process, added nearly $190 million in additional revenue in 2005 from cross-sales of mortgages, loans, deposits and other products.
n	Our retirement and investment products strategy, which also crosses all of our business lines, helped increase individual retirement account sales nearly 150 percent and the number of participants in retirement plans 19 percent from 2004.
n	Cross-sales of capital markets products to our commercial customers were up over 50 percent in 2005 from 2004.
n	Cross-sales between Capital Management and the Corporate and Investment Bank increased and jointly originated revenue was up 16 percent.

These strategies contributed meaningfully to our success in delivering strong earnings growth in 2005 despite industry pressures on funding costs and profit margins.

Strengthening our core
In an environment of narrow profit margins and stiff business competition, one of the most important steps we can take to remain strong and competitive is to control expense growth. We intend to be a revenue-driven company, but you can’t consistently grow the bottom line without keeping a watchful eye

4 Wachovia Corporation 2005 Annual Report

on expenses. As I wrote last year, we’re in the middle of a very methodical, three-year initiative designed to ensure — business-by-business and process-by-process — that we are continuously becoming more effective and efficient. Our goal is to reduce our overhead efficiency ratio (the amount we spend to generate each dollar of revenue) to 52 to 55 percent, which would place us in the middle of the pack of our peer group. That positioning is right for us because we want to continue investing in such things as upgrading and expanding our retail branch network, in technology improvements company-wide and in attracting top talent.

In addition, after many months of research and deliberation, we chose to outsource some functions that could be performed remotely without negatively affecting customer service. We’ve selected highly skilled domestic and global partners who can do the job more efficiently and at lower cost. This enables us to use our technology dollars to invest in more sophisticated technology that supports our growth businesses.

Much has been made of this decision. The truth is, we’re adding more jobs domestically today than we’re losing. As noted earlier, we’ve added substantial depth in our Corporate and Investment Bank, we’ve doubled the hiring of commercial relationship managers, and we’ve continued to bring in talent in many other areas that are essential to serving our customers and ensuring revenue growth.

You may also recall in the letter I wrote at the beginning of this decade, we announced we were restructuring our company and selling some businesses to rebuild capital strength. Since that time, we’ve built a strong balance sheet, placed our company firmly on a growth path, and added millions of new customers.

Today, our most-pressing strategic need is to be able to offer our existing customers the full suite of products and services they’ll need throughout their lifetime. As I mentioned earlier, in 2005 we announced our intention to reenter the credit card business as a direct issuer and to expand our existing mortgage business. These products can produce strong profit

margins by leveraging the customer base and distribution infrastructure that we have already built.

We also plan to expand our auto dealer financial services business with a pending acquisition that brings an industry-leading management team to our consumer loan business. It gives our commercial bank access to a larger base of nationwide automotive dealers and provides attractive opportunities for additional commercial loan growth. It also gives us a toehold in the attractive California banking market with 19 financial centers in the Orange County, Los Angeles and San Diego metro areas.

As for 2006, we believe this could be a year in which our financial performance significantly outpaces our industry. We feel uncommonly prepared to deliver sustainable growth:

n	We’re in great financial shape.
n	We’re executing very well.
n	Employee engagement and performance is industry leading.
n	We’re in an enviable position in relation to our competitors.
n	We remain a market leader in some of the nation’s most attractive markets.

With all of these advantages, we have no intention of taking our eyes off the ball. We’ll continue to focus on being the best at providing excellent service to our customers, at being the employer of choice, and in making a real and lasting contribution to the communities we serve.

So, as proud as we are of our financial performance, we’re equally proud of the recognition Wachovia has received as we work toward our goal of being the best, most trusted and admired financial services company. In 2005, among other honors, we were named “Banker of the Year” by American Banker magazine and among 2005’s “Best Business Leaders” by BusinessWeek magazine. Working Mother, Training, Latina Style, Essence and other magazines regularly cite Wachovia as an employer of choice. And we were honored to receive the

Wachovia Corporation 2005 Annual Report 5

Letter to Our Shareholders

2005 Secretary of Defense Freedom Award for our support of employees who are serving our country in the military.

As I’ve told employees in Town Hall meetings this past year, these accolades belong to them. We’re extremely proud of the way they have maintained their focus on our No. 1 priority: serving our customers — even while successfully integrating the former SouthTrust branches, moving into new territories in Texas and New York, and seeking out efficiencies.

We were inspired and heartened by our employees’ efforts to help their customers and their colleagues in the wake of the hurricanes of 2005 — from making sure each employee was located and safe, to giving up vacation time to volunteer for relief work, to stepping up with cash donations.

Their spirit and dedication give me great confidence in our ability to achieve Wachovia’s goals for delivering sustainable growth, and I sincerely appreciate all their efforts.

I’d especially like to express my appreciation to Wallace Malone, our vice chairman and the former chief executive officer at SouthTrust. I’ve had the privilege for the past year to have a true partner in Wallace as we integrated our two companies. With that mission complete, Wallace has decided to retire from our company after a long and distinguished career in banking. I know shareholders will join with me in thanking Wallace for his service and for creating tremendous shareholder value in his years at the helm.

I would like to wish good fortune to Bob Kelly, our chief financial officer since mid-2000, who has taken the leadership of another major U.S. financial institution. We are fortunate to have another talented individual ready to immediately assume the responsibilities of CFO: Tom Wurtz, who has been our treasurer for the past seven years. In working closely with Tom, I have been impressed with his financial management abilities, his deep understanding of our businesses and his judgment. Tom’s dedication, commitment and vision will provide us with a seamless transition and consistency in our strategy, which is serving us so well.

In addition, I’d also like to thank our dedicated board of directors for their wise counsel and guidance throughout the year. And we are especially grateful for the support of our customers and communities. We continue to be dedicated to bringing them enduring value.

As always, we especially thank our shareholders for your interest and support of Wachovia.

Sincerely,

G. Kennedy Thompson
Chairman and Chief Executive Officer
February 24, 2006

6 Wachovia Corporation 2005 Annual Report

Corporate Citizenship

One of the nation’s leading community development lenders

n	Rated “outstanding” by the Office of the Comptroller of the Currency for Community Reinvestment Act Compliance
n	$25.6 billion in community loans and investments
n	$283 million in equity to create over 4,500 affordable rental housing units
n	$12 million in community development grants and in-kind donations
n	Helped 450 low- to moderate-income families buy homes each week

n	Created more than 1,400 jobs in lower-income communities through $114.6 million in lending through New Markets Tax Credits projects
n	Trained 22,000 families and individuals in personal computer, Internet and money management skills through our financial literacy programs led by employee volunteers in conjunction with community groups; offered in English and Spanish

One of the nation’s leaders in corporate philanthropy and community involvement

n	One of the nation’s Top 10 corporate donors (BusinessWeekmagazine)
n	Recognized as the “Outstanding Corporation” for philanthropy and community involvement (Association of Fundraising Professionals)
n	$128 million to charitable organizations through employee, company and foundation giving
n	$15 million in grants to 23 organizations in 11 states through the Wachovia Teachers and Teaching Initiative designed to help teachers develop skills to advance student achievement in under-resourced schools
n	Reading First, our literacy education program, involved employees in nearly 4,900 partnerships with local classrooms, with 98,000 books donated to classroom libraries

n	Wachovia employees logged more than 650,000 hours volunteering in their communities by building homes, mentoring children, reading in schools, tutoring adults in financial literacy, and more
n	Over 1,500 grants amounting to more than $210,000 made to the charity of choice for employees who volunteered at least 24 hours
n	Wachovia and its employees contributed more than $4 million to relief efforts after hurricanes Katrina, Rita and Wilma
n	Donated $1 million in proceeds from Wachovia Championship PGA TOUR golf tournament to Teach For America

Providing corporate leadership in environmental stewardship

Funding and Investing Policies

n	Cognizant that our funding and investment decisions play an important role in protecting the environment, combating poverty and fostering economic development
n	Adhere to all environmental laws and regulations in jurisdictions where we operate and expect customers to do the same

Energy Efficiency

n	Encouraged homeowner energy savings through Energy Efficient Mortgage Program in partnership with Fannie Mae
n	Incorporated energy-efficient lighting systems and energy consumption control features in our recently constructed facilities

Waste Reduction

n	Recycled more than 20,000 tons of paper in 2005
n	Introduced a company-wide recycling program for office supplies

Industry Leadership

n	Founder and sponsor of The Forum for Corporation Conscience
n	Founding member of the Environmental Bankers Association
n	Included in the FTSE4Good Global Index, a leading socially responsible investment index

Wachovia Corporation 2005 Annual Report 7

Driving our growth is
an uncommon partnership
of banking and brokerage
businesses that
leverage
the collective wisdom
of our skilled relationship
managers and financial
advisors to
bridge a lifetime
of customer needs

Diversified Business Mix

n	Steady revenue stream in a challenging environment and upside potential in an improving economy
n	Relatively stable mix of interest income and fee income
n	About half of Wachovia’s 2005 revenue came from banking operations and half from a broad array of brokerage, asset management, wealth management, and corporate and investment banking businesses

Broad Distribution Network

n

3,900 financial centers and brokerage offices, 5,100 ATMs, telephone and Internet

n

Sales force of 37,700 bank sales and service associates; 10,500 registered representatives, including 2,500 licensed financial specialists and 8,000 full-service brokers, of which 1,300 are in financial centers; 980 wealth management advisors; 500 insurance brokers in 46 insurance brokerage offices; 1,300 commercial and small business relationship managers; and 1,100 corporate and institutional coverage officers

Preferred by Customers

n	Customer satisfaction and loyalty rankings among industry best in class
n	Wachovia ranks No. 1 among all retail banks in ability to attract and retain customers (A.T. Kearny Organic Growth Index)

Growth Potential

n	Core relationship products average core deposits up 20% and average loans up 32%
n	Broad product array with expanded branch network, credit card and mortgage offerings, and auto dealer services
n	Positioned for growth in global payments industry

8 Wachovia Corporation 2005 Annual Report

Overview of Major Businesses

General Bank

Description
Our General Bank provides a broad range of banking products and services to individuals, small businesses, commercial enterprises and governmental institutions in 15 states and Washington, D.C. We focus on small business customers with annual revenues up to $3 million; business banking customers with annual revenues between $3 million and $15 million; and commercial customers with revenues between $15 million and $250 million.

2005 Business Fundamentals

n	$12.8 billion total revenue
n	$163.5 billion average loans
n	$207.3 billion average core deposits
n	$4.1 billion investment sales
n	11 million retail and small business households
n	42,200 employees
n	2,500 licensed financial specialists
n	10.5 million online product and service enrollments and 3.2 million active online customers

Capital Management

Description
Capital Management leverages its multi-channel distribution to provide a full line of proprietary and nonproprietary investment and retirement products and services to retail and institutional clients. Retail brokerage services are offered through the 2,700 offices of Wachovia Securities in 49 states and Washington, D.C., and in Latin America. Evergreen Investments, a large and diversified asset management company, manages investments for a broad range of retail and institutional investors.

2005 Business Fundamentals

n	$5.2 billion total revenue
n	$683.6 billion broker client assets
n	$311.1 billion assets under management and securities lending
n	$103.9 billion mutual fund assets
n	$149.6 billion separate account assets
n	$68.9 billion retirement plan assets
n	10,500 registered representatives

Wealth Management

Description
With nearly 200 years of experience in managing wealth, Wealth Management provides a comprehensive suite of private banking, trust and investment management and financial planning services to high net worth individuals, their families and businesses. More than 50 teams of relationship managers and specialty advisors focus on serving clients with $2 million or more in investable assets, while four family offices focus on families with $25 million or more in investable assets. Wachovia Insurance Services provides commercial insurance brokerage and risk management services, employee benefits, life insurance, executive benefits and personal insurance services to businesses and individuals.

2005 Business Fundamentals

n	$1.3 billion total revenue
n	$13.9 billion average loans
n	$65.6 billion assets under management
n	$130.4 billion assets under administration
n	44,500 client relationships
n	980 wealth management advisors
n	500 insurance brokers

Corporate and Investment Bank

Description
Our Corporate and Investment Bank serves domestic and global corporate and institutional clients typically with revenues in excess of $250 million, and primarily in these key industry sectors: healthcare; media and communications; technology and services; financial institutions; real estate; consumer and retail; industrial growth; defense and aerospace; and energy and power. The Corporate and Investment Bank includes Corporate Lending, Investment Banking, and Treasury and International Trade Finance lines of business. The Corporate and Investment Bank also serves an institutional client base of money managers, hedge funds, insurance companies, pension funds, banks and broker dealers.

2005 Business Fundamentals

n	$5.8 billion total revenue
n	$102.7 billion lending commitments
n	$38.6 billion average loans
n	$23.5 billion average core deposits
n	3,800 corporate client relationships
n	2,400 institutional investor relationships

Wachovia Corporation 2005 Annual Report 9

General Bank

	Market Position
	n	Dominant East Coast presence
	n	No. 1 in Southeast
	n	No. 3 nationwide deposit share
	n	No. 1 middle-market lender in footprint
	n	No. 4 bank-owned ATM network
	n	No. 4 domestic online bank
	n	Top 12 nationwide mortgage lender
	n	No. 3 primary mortgage lending satisfaction (J.D. Power and Associates)
	n	Top 3 nationwide real estate financial services

Value Proposition
The General Bank provides deposit, lending and investment products and services for customers at every stage of life, whether they are saving for a home, for a child’s education or for a business ... whether they are building wealth or building a business ... or planning for retirement. The General Bank’s 37,700 sales and service associates and 1,300 commercial and small business relationship managers provide knowledgeable and reliable guidance, whether customers choose to meet with them personally, visit one of our 3,100 financial centers or 5,100 automated teller machines, call our telephone banking center or visit online at wachovia.com.

The General Bank also serves the specialized financial needs of businesses of all sizes with a variety of business checking and savings products, treasury services, global trade services, loans, leases and capital markets products and services.

Capital Management

	Market Position
	n	3rd largest full-service retail brokerage firm
	n	4.4 million broker client accounts
	n	1.3 million participants in retirement plans
	n	Top 20 largest mutual fund company (FRC)
	n	2nd largest bank annuity provider based on Kehrer-LIMRA survey
	n	Best in Class for retirement services to small businesses (PlanSponsormagazine) and client satisfaction (Boston Research Group)
	n	2005 Dalbar Customer Service Award to Evergreen Investments

Value Proposition
Capital Management is focused on helping clients achieve a lifetime of financial goals with many choices and resources structured around their individual needs.

Our 8,000 financial advisors and 2,500 financial specialists help clients make educated decisions regarding their investments and help them plan their financial future using our proprietary Envision product, with an emphasis on disciplined investing and unbiased advice. Evergreen Investments provides comprehensive investment solutions to individuals, institutions and endowments. Securities lending services are offered through Metropolitan West Securities, LLC. The Retirement and Investment Products Group is a leading provider of retirement services for individual investors, corporations and plan participants, offering individual retirement accounts, variable and fixed annuities, full-service defined contributions, defined benefit and nonqualified plan administration, and reinsurance services.

10 Wachovia Corporation 2005 Annual Report

Wealth Management

	Market Position
	n	4th largest in wealth market based on Wachovia Securities and Wealth Management assets under management for clients with $1 million or more (Barron’s 2005 survey)
	n	High net worth leader of the year (Private Asset Management 2005)
	n	Top 3 personal trust provider
	n	Top 10 commercial insurance brokerage firm
	n	Top 3 multifamily office practice (assets under advisement of $10 billion) (Bloomberg report)

Value Proposition
Wealth Management offers a fully integrated and objective approach that incorporates all the disciplines related to managing our clients’ wealth — from creation and growth to preservation and transfer to future generations. A dedicated relationship manager coordinates a team of financial advisors to meet each client’s individual needs. Through a separate, independent practice called Calibre, we also provide sophisticated family office solutions to ultra high net worth families that go beyond meeting financial needs by ensuring each future generation is prepared to be effective stewards of the family’s legacy.

Wachovia Insurance Services provides commercial property casualty insurance brokerage, risk management services, employee benefits, life insurance, executive benefits and personal insurance nationwide through 46 offices in 23 states and Washington, D.C.

Corporate and Investment Bank

	Market Position
	n	Strong industry position across a full capital markets product set
	n	Top 3 leveraged loan syndications and U.S. collateralized debt obligations
	n	Top 10 issuer of domestic high yield, high grade, preferred stock and equity
	n	No. 1 U.S. CMB Sloan contributor and master servicer
	n	Top 3 U.S. asset-based lending lead arranger
	n	Top 3 provider of large corporate cash management
	n	No. 1 customer service global financial institutions in Western Europe, Asia and the Americas

Value Proposition
The Corporate and Investment Bank has become a premier partner to corporations and institutional investors through an intense focus on client needs, combined with significant capital-raising capability and a leading treasury services platform. The Corporate and Investment Bank has an integrated team approach, a breadth of products and services and deep industry expertise to help grow and sustain corporate clients in any economic environment. The clients in this arm of Wachovia Securities are primarily CEOs, CFOs and treasurers of companies with annual revenues above $250 million, as well as managing partners of private equity firms, institutional investors, financial institutions and corporations with import/export needs.

The Corporate and Investment Bank’s 5,800 employees provide Wachovia with a deep pool of relationship coverage officers, product specialists, portfolio managers, and fixed income and equity sales, trading and research professionals.

Wachovia Corporation 2005 Annual Report 11

Guide to Our Financial Discussion

We value our relationship with our investors and pledge to keep you informed about our company.
On the following pages, we strive to help you understand more about our financial results, our sources of earnings and our financial condition.

Management’s Discussion and Analysis

Executive Summary		14	We begin with an executive summary of our company and our
Tables on pages 14 and 47			strategy of balance and diversity in our lines of business. We also
			summarize our financial results and the underlying trends and
			factors that affected these results.
Outlook		15	We discuss our expectations for the future and provide a financial
			outlook for the upcoming year.
Critical Accounting Policies		17	We describe the more significant accounting policies that affect our
			results, and the extent to which we use judgment and estimates in
			applying those policies.
Corporate Results of Operations		20, 42	We describe in more detail the topics highlighted in the
Net interest income and margin (tables on pages 20, 45-47, 49, 60, 66 and 96)			Executive Summary.
Fee and other income (tables on pages 20, 46-47, 49, 66 and 96)
Noninterest expense (tables on pages 21, 47, 49, 66 and 96)
Merger-related and restructuring expenses (tables on pages 21, 47, 49, 66, 96 and 102)
Income taxes (tables on pages 14, 21, 23-26, 47, 49, 66, 68, 76, 96 and 104)
Business Segments		21, 43	Then we review results from our business segments in depth,
Key performance metrics (tables on pages 23-26 and 96-97)			including the metrics we used to evaluate segment results.
General Bank (tables on pages 23 and 96-97)
Capital Management (tables on pages 24 and 96-97)
Wealth Management (tables on pages 25 and 96-97)
Corporate and Investment Bank (tables on pages 25 and 96-97)
Parent (tables on pages 26 and 96-97)
Balance Sheet Analysis		27, 44	The two primary groups of assets that we hold on our balance
Earning assets (tables on pages 20 and 59-60)			sheet are securities and loans, which we call earning assets. We
Securities (tables on pages 20, 27, 59, 65, 78 and 81)			discuss these earning assets and related topics such as the mix
Loans (tables on pages 20, 27-28, 50-52, 59-60, 65 and 85)			of our loan portfolio and asset quality here.
Asset quality (tables on pages 29, 46 and 53-55)
Charge-offs (tables on pages 29, 46, 53 and 55)
Commercial real estate (tables on pages 27-28 and 52-53)
Commitments (tables on pages 23-26 and 96)
Industry concentrations (table on page 28)
Loans held for sale (table on page 51)
Goodwill (tables on pages 56, 65 and 87)
Liquidity and Capital Adequacy		30, 44	Here we describe our funding strategies and our management
Core deposits (other deposit tables on pages 20, 57 and 65)			of liquidity - or the ease with which an asset may be converted
Purchased funds (tables on pages 20, 59, 60, 65 and 88)			into cash at no or little risk, or how funds may be raised in
Long-term debt (tables on pages 20, 47, 59, 60, 65 and 89)			various markets.
Stockholders’ equity (tables on pages 1, 31, 65 and 67)
Subsidiary dividends (table on page 121)
Regulatory capital (tables on pages 46, 58 and 93)
Debt ratings	Inside Back Cover
Off-Balance Sheet Transactions		31	We also provide information about our "off-balance sheet" activities
Off-balance sheet summary tables on pages 31, 114 and 119			such as guarantees and retained interests from securitizations.
Risk Management		33	This section discusses the types of risk to which our business is
Allowance for loan losses and reserve for unfunded			exposed in the ordinary course of business and our strategies for
lending commitments (tables on pages 29, 46, 53-54 and 86)			mitigating that risk.
Credit risk management
Derivatives (tables on pages 108-112)
Earnings sensitivity (table on page 39)
Interest rate risk management (graph on page 38)
Liquidity risk management (table on page 36)
Market risk management (table and graphs on page 35)
Operational risk management
Trading activities (tables on pages 48, 59-60, 65-66, 68 and 77)

12 Wachovia Corporation 2005 Annual Report

Selected Financial Data		45-49	These tables provide often-requested information, including
Explanation of our use of non-GAAP financial measures			multi-year and quarterly comparisons of our results.
Selected statistical data
Five-year summaries of income
Selected quarterly data
Management’s Report on Internal Control over Financial Reporting		62	In this letter, we affirm our responsibilities related to the reliability of
			our financial reporting. We continue to be committed to presenting
			financial results that are complete, transparent and understandable.
Reports of Independent Registered Public Accounting Firm		63-64	In these reports, our auditor, KPMG, expresses their independent
			opinions on our consolidated financial statements and internal
			controls over financial reporting.
Consolidated Financial Statements		65-68	These four statements, and theNotes to Consolidated Financial
Consolidated balance sheets			Statementsthat accompany them, have been prepared by manage-
Consolidated statements of income			ment and are audited by KPMG, our independent registered public
Consolidated statements of changes in stockholders’ equity			accounting firm.
Consolidated statements of cash flows
Notes to Consolidated Financial Statements		69-122	In these notes, we describe the policies we use in accounting for
Summary of significant accounting policies			our assets, liabilities and operating activities. We also discuss our
Business combinations and dispositions			significant acquisitions and divestitures and provide additional
Trading account assets and liabilities			information about our primary assets, including securities and
Securities			loans, and funding sources, such as short-term borrowings and
Variable interest entities, securitizations and retained			long-term debt, along with our off-balance sheet commitments.
beneficial interests, and servicing assets			Specific details are included for our stock-based compensation,
Loans, net of unearned income			income taxes and business segments. We believe you will find
Allowance for loan losses and reserve for unfunded lending commitments			useful information to help you more fully understand our financial
Goodwill and other intangible assets			statements in these disclosures, which are provided to meet
Other assets			accounting and reporting requirements and are presented in
Short-term borrowings			stipulated formats.
Long-term debt
Common and preferred stock and capital ratios
Accumulated other comprehensive income, net
Business segments
Personnel expense and retirement benefits
Merger-related and restructuring expenses
Income taxes
Basic and diluted earnings per common share
Derivatives
Commitments, guarantees and contingencies
Fair value of financial instruments
Wachovia Corporation (parent company)
Ratios		46-48	Throughout this document, we provide information about the key
Capital and leverage (tables on pages 46 and 58)		31	performance indicators by which we measure our success in
Common stockholders’ equity to assets (table on page 49)			driving shareholder value, including measures that serve as
Dividend payout ratio (graph on page 1 and tables on pages 45 and 48)		15	benchmarks for our management team's compensation.
Economic profit (tables on pages 23-26)		22
Efficiency ratio (tables on pages 23-26 and 96-97)		15
Net interest margin (table on page 60)		20
Profitability (ROA and ROE) (tables on pages 46, 48 and 49)
Risk-adjusted return on capital (tables on pages 23-26 and 96-97)		22
Glossary of Financial Terms		123	More definitions to help you understand our businesses.
Board of Directors and Operating Committee		124	These are the people who lead our company.
Stockholder Information	Inside Back Cover		We end with information about our Annual Meeting, how to contact
			us, and for our fixed income investors, we provide a summary
			table of our debt ratings.

Wachovia Corporation 2005 Annual Report 13

Management’s Discussion and Analysis

The following discussion and analysis is based primarily on amounts presented in our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. This discussion contains forward-looking statements. Please refer to our 2005 Form 10-K for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements.

Summary of Results of Operations

	Years Ended December 31,
(In millions, except per share data)	2005		2004		2003
Net interest income(GAAP)	$	13,681		11,961		10,607
Tax-equivalent adjustment		219		250		256
Net interest income(a)		13,900		12,211		10,863
Fee and other income		12,219		10,779		9,482
Total revenue(a)		26,119		22,990		20,345
Provision for credit losses		249		257		586
Other noninterest expense		15,139		13,791		12,319
Merger-related and restructuring expenses		292		444		443
Other intangible amortization		416		431		518
Total noninterest expense		15,847		14,666		13,280
Minority interest in income of consolidated subsidiaries		342		184		143
Income taxes		3,033		2,419		1,833
Tax-equivalent adjustment		219		250		256
Income from continuing operations before cumulative effect of a change in accounting principle		6,429		5,214		4,247
Discontinued operations, net of income taxes		214		—		—
Income before cumulative effect of a change in accounting principle		6,643		5,214		4,247
Cumulative effect of a change in accounting principle, net of income taxes		—		—		17
Net income		6,643		5,214		4,264
Dividends on preferred stock		—		—		5
Net income available to common stockholders	$	6,643		5,214		4,259
Diluted earnings per common share from continuing operations	$	4.05		3.81		3.18
Diluted earnings per common share available to common stockholders	$	4.19		3.81		3.18

^(a)Tax-equivalent.

Executive Summary

Our earnings are primarily generated through four core businesses: the General Bank, the Corporate and Investment Bank, Capital Management and Wealth Management. In the following discussion, we explain this diverse group of businesses and why we believe our shareholders and customers benefit from this balance and diversity. In addition, through out this document, we address key performance indicators of our financial position and results of operations that drive shareholder value and serve as benchmarks to compensate management. We discuss trends and uncertainties affecting our businesses, and analyze liquidity and capital resources.

Our business model is based on a mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. This means that in addition to the typical lending and deposit-taking activities of traditional banking companies, we also offer investment products and services for retail customers, and capital markets financing alternatives for institutional and corporate clients. This business mix produces revenue from the interest income earned on loans and securities, as well as fee income from faster-growth but less predictable asset management, retail brokerage and investment banking businesses. Fee income represented 47 percent of our total revenue in both 2005 and 2004.

Our businesses generated strong sales by serving a broad range of customers, which drove record net income available to common stockholders in 2005 of $6.6 billion, up 27 percent from 2004, and record earnings per common share of $4.19, up 10 percent from 2004. Results in 2004 included the former SouthTrust Corporation for only two months following the November 1, 2004, consummation of this merger. In accordance with the purchase method of accounting, prior periods were not restated. Results in 2005 included a $214 million after-tax gain on the sale of most of our corporate and institutional trust (CIT) businesses, which is reflected as a gain on sale of discontinued operations as discussed further in theOutlooksection. In addition, results include after-tax net merger-related and restructuring expenses of 11 cents per share in 2005 and 14 cents per share in 2004.

In 2005 compared with 2004, revenue rose 14 percent to $26.1 billion, with strong balance sheet growth overcoming margin compression resulting from the addition of lower-yielding trading assets and the effects of a flattening yield curve. Net interest income growth of 14 percent reflected 20 percent growth in average earnings assets due both to the SouthTrust acquisition and to organic growth. Fee and other income growth of 13 percent included, in addition to SouthTrust, increased debit card interchange fees, capital markets fees and trading revenues, as well as, in 2005, gains on the sale of equity securities received in settlement of problem loans. Lower market activity dampened retail brokerage commissions, while growth in managed account assets contributed to higher fiduciary and asset management fees.

Wachovia is one of the nation’s largest lenders, and the credit quality of our loan portfolio can have a significant impact on earnings. Our credit quality remained among the best in the banking industry in 2005. Our net charge-off ratio of 0.09 percent was down from 0.17 percent in 2004. Total nonperforming assets, including loans held for sale, declined 40 percent from 2004. Provision expense declined 3 percent from 2004, reflecting sustained improvement in credit quality. We continue to mitigate risk and volatility on our balance sheet by actively monitoring

14 Wachovia Corporation 2005 Annual Report

and reducing potential problem loans, including their sale when prudent. We continue to foresee positive trends in the economy and solid asset quality over the next few quarters.

Average net loans in 2005 increased 32 percent from 2004 to $227.9 billion, primarily due to the SouthTrust impact. Average consumer loan growth of 31 percent was led by real estate-secured loans, including the effect of a net $9.3 billion of primarily home equity lines transferred from loans held for sale to the loan portfolio in the fourth quarter of 2004. Average commercial loan growth of 34 percent reflected strength in middle-market commercial and large corporate lending. Average core deposits increased 20 percent from 2004 to $278.7 billion and average low-cost core deposits increased 18 percent from year-end 2004 to $239.0 billion at December 31, 2005.

Controlling expense growth and improving revenue growth continued to be a strategic focus in 2005, with our business units and the corporation making progress toward overhead efficiency targets for 2007. Overall, we are targeting an overhead efficiency ratio in the range of 52 percent to 55 percent by 2007. Further information about our goals for improving efficiency is in theLetter to Our Shareholdersand theOutlooksections.

Total noninterest expense rose 8 percent from 2004, primarily reflecting, in addition to SouthTrust, increased variable pay linked to higher revenues, as well as continued investments that better position us for future earnings growth. Expense growth was offset in part by merger and other expense efficiencies.

As we manage interest rate risk, we believe our investment and hedging strategies are designed to achieve our goal of stable and growing net interest income in a variety of rate environments. We believe we are well positioned with our current, slightly liability sensitive stance, given market expectations for modest continued increases in short-term rates and likely alternatives to the current market forward rate projections.

Our diversified business model and strategic focus on efficiency helped drive solid performance by our four major businesses amid industry challenges such as a flattening yield curve and a weak retail brokerage environment. All four of our major businesses generated record earnings and three of the four generated record revenue for the second consecutive year.

The General Bank’s earnings rose 28 percent from 2004 on record revenue largely due to increased earning assets related to the SouthTrust acquisition and other loan growth as well as continuing strong deposit growth. The General Bank’s overhead efficiency ratio was 49.49 percent.

Capital Management grew earnings 20 percent from 2004 despite a modest decline in revenues as expense savings from the now-completed retail brokerage integration offset

lower brokerage transaction activity. The results of Capital Management for each year exclude the CIT businesses that were sold in December 2005.

Wealth Management generated a 24 percent increase in earnings on record revenue, up 19 percent. These results reflected strong growth in loans and deposits, improved trust and investment management fees, and the May 2005 acquisition of an insurance brokerage firm.

Our Corporate and Investment Bank generated 3 percent earnings growth on record revenue, up 11 percent, with record results in advisory, underwriting and other investment banking fees, gains on the sale of equity securities received in settlement of loans, and higher trading and principal investing results. Net interest income declined due to higher funding costs associated with our commercial leasing portfolio, and a change in the mix of trading assets, which lowered the overall spread in the trading portfolio. Expenses rose due to higher variable compensation and strategic hiring in key positions.

In 2005, Wachovia’s board of directors increased the quarterly dividend paid to common stockholders by 11 percent to 51 cents per share, or $2.04 annualized. We paid common stockholders total dividends of $3.0 billion, or $1.94 per common share, up 17 percent from 2004. Our goal is to return 40 percent to 50 percent of our earnings to shareholders as dividends, and in 2005 our dividend payout ratio was 46.30 percent, or 44.80 percent excluding merger-related and restructuring expenses, other intangible amortization and discontinued operations, which is the basis we use in measuring our goal.

Additionally, two leading debt rating agencies, citing the benefits of Wachovia’s business model and disciplined risk management, upgraded their ratings of our corporate and subsidiary debt in 2005. Fitch Ratings long-term and short-term ratings for Wachovia Corporation and for Wachovia Bank, National Association, improved to AA-/ F1+ from A+/F1. Standard & Poor’s raised its counterparty credit ratings on Wachovia Corporation to A+/A-1 from A/A-1 and its counterparty ratings on Wachovia Bank, National Association, to AA-/A-1+ from A+/A-1. Our balance sheet is strong and “well capitalized” under regulatory guidelines with a tier 1 capital ratio of 7.50 percent and a leverage ratio of 6.12 percent at December 31, 2005.

Outlook

Our diversified business model and strong execution in our four major businesses on their efficiency initiatives and revenue growth strategies give us confidence Wachovia will be one of the leading growth companies in our industry. We continue to make excellent progress in meeting our corporate objectives of revenue growth and disciplined expense control, increased distribution of products and services, hallmark customer service and balance sheet strength.

Wachovia Corporation 2005 Annual Report 15

Based on our consistent performance, confidence in our business model, capital strength and improving market conditions, we have updated our financial outlook for 2006. Economic assumptions used to formulate the 2006 outlook include growth in the real gross domestic product (GDP) of 3.40 percent; inflation (based on the Consumer Price Index) of 2.90 percent; a federal funds rate of 4.75 percent by December 2006; a 10-year Treasury bond rate of 4.40 percent by December 2006; and growth in the S&P 500 index of 7.00 percent.

The following outlook is for the full year 2006 compared with an “adjusted” 2005 amount, which includes our reported results and the reported results for the nine months ended September 30, 2005, for Westcorp, an auto dealer financial services business that we expect to acquire in the latter part of the first quarter of 2006. Amounts discussed below exclude merger-related and restructuring expenses and the effect, if any, of accounting proposals.

n	Net interest income growth in the low single-digit percentage range on a tax-equivalent basis from an adjusted $14.6 billion.
n	Fee income growth in the low double-digit percentage range from an adjusted $12.3 billion.
n	Noninterest expense growth in the low single digits from an adjusted $15.8 billion.
n	Minority interest expense increase in the mid-teens percentage range from an adjusted $367 million.
n	Loan growth in the mid-teens percentage range from an adjusted $240.6 billion, including consumer loan growth in the high teens from an adjusted $107.9 billion, and commercial loan growth in the low double-digit range from an adjusted $132.7 billion.
n	Net charge-offs in the 15 basis point to 25 basis point range, up from an adjusted 15 basis points, with provision expense also expected to be in the 15 basis point to 25 basis point range.
n	An effective income tax rate of approximately 34 percent to 35 percent on a tax-equivalent basis.
n	A tier 1 capital ratio above 7.5 percent, a leverage ratio above 6.0 percent, and a tangible capital to tangible asset ratio above 4.7 percent.
n	A dividend payout ratio of 40 percent to 50 percent of earnings excluding merger-related and restructuring expenses, and other intangible amortization.
n	Use of excess capital to opportunistically repurchase shares, to reinvest in our businesses and to undertake financially attractive, shareholder friendly acquisitions.

Recent proposals on leveraged lease accounting and uncertain tax positions by the Financial Accounting Standards Board (FASB), if adopted as currently proposed, may have an impact on our financial results in future periods. The impact, if adopted as currently proposed, would include (i) a one-time noncash charge to the results of operations recorded as a cumulative effect of a change in accounting principle, and (ii) in the leveraged lease proposal, the recognition as income in future periods of amounts in the aggregate approximating the amount of the one-time charge. TheAccounting and Regulatory Matterssection has additional information about these FASB proposals along with the impact of the change in treatment of stock awards to retirement-eligible employees.

We have successfully completed the integration of SouthTrust systems, products and signs to the Wachovia platform. Deposit and branch conversions in overlapping states were completed in June 2005 and in the states in our extended footprint in October 2005. We expect 2006 to reflect our original expectation for annual after-tax savings of $255 million.

In addition, we announced agreements in 2005 to acquire or invest in opportunities we believe will augment the diversity of our business model and deepen our customer relationships. For example, through selective acquisitions, we doubled the size of our insurance brokerage operation; we acquired a nationwide residential mortgage broker; we expanded our international correspondent banking business; and we enhanced the high net worth division of Evergreen Investments. We also announced the pending acquisition of a nationally known auto dealer financial services business in a transaction that is expected to close in the latter part of the first quarter of 2006. And we re-entered the credit card market as a direct issuer in January 2006. Proceeds of a $100 million termination fee paid by MBNA Corporation in 2006 as a result of the Bank of America/MBNA merger will primarily be invested in systems and personnel to build our credit card business as well as other initiatives to support earnings growth.

In December 2005, we sold most of our CIT businesses, including our (i) corporate trust, institutional custody, document custody and structured finance trust services units, and (ii) stock transfer units, in two separate transactions for an aggregate initial sale price of $740 million. These transactions generated a fourth quarter 2005 net pre-tax gain of $447 million, or $214 million after tax, and reduced goodwill and other intangibles by $210 million. We may realize an additional gain of up to $80 million pre-tax or $50 million after tax related to the corporate trust and institutional custody transaction, depending upon the level of business retained by the purchaser during the 12-month period following the completion of that transaction. The gain on sale has been presented, net of applicable income taxes, as discontinued operations in the consolidated statements of income. Financial results of the CIT businesses have

16 Wachovia Corporation 2005 Annual Report

not been presented as discontinued operations based on materiality, but have been excluded from results presented for our Capital Management business segment and included in the Parent for all periods presented. Not included in this transaction was our securities lending unit, a business we entered two years ago with the acquisition of Metropolitan West Securities, and our institutional retirement plan business, Wachovia Retirement Services. We are firmly committed to and will continue to operate and grow the securities lending and retirement plan businesses.

We continue to evaluate our operations and organizational structures to ensure they are closely aligned with our goal of maximizing performance through increased efficiency and competitiveness in our four core businesses. We are striving to make Wachovia a more efficient company, but it is not our intention to have the lowest overhead efficiency ratio in our peer group because we expect to continue to invest in higher growth businesses. We believe we will slow annual expense growth by $600 million to $1.0 billion by 2007. We believe this will result in position reductions in the range of 3, 500 to 4, 000, approximately 20 percent of which will result from normal attrition, although we also expect to add positions in higher growth businesses. To date, we have identified initial expense reduction opportunities in the range of $650 million to $750 million annually and work continues.

In conjunction with these efforts, we have established overhead efficiency targets, excluding merger-related and restructuring expenses, other intangible amortization, discontinued operations and changes in accounting principle, for each of our four businesses and for the overall company to achieve by 2007. These 2007 targets are as follows:

n	General Bank	45 percent to 47 percent
n	Capital Management	75 percent to 77 percent
n	Wealth Management	60 percent to 62 percent
n	Corporate and Investment Bank	49 percent to 51 percent
n	Wachovia Corporation	52 percent to 55 percent

Segment tables in theBusiness Segmentssection have additional information.

When consistent with our overall business strategy, we may consider disposing of certain assets, branches, subsidiaries or lines of business. We continue to routinely explore acquisition opportunities in areas that would complement our core businesses, and frequently conduct due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities could occur.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles (GAAP) and they conform to general practices within the applicable industries. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations. We have identified five policies as being particularly sensitive in terms of judgments and the extent to which significant estimates are used: allowance for loan losses and the reserve for unfunded lending commitments (which is recorded in other liabilities); fair value of certain financial instruments; consolidation; goodwill impairment; and contingent liabilities. Other accounting policies, such as pension liability measurement and stock option fair value determination, also involve a significant amount of judgment and estimates, but the impact of the estimates involved is not significant to our consolidated results of operations. Periodically, the Audit Committee of our board of directors reviews these policies, the judgment and estimation processes involved, and related disclosures.

Our policy on the allowance for loan losses applies to all loans, but is different from the methodology used to allocate the provision for credit losses for segment reporting purposes, which is discussed inNote 14: Business Segmentsin theNotes to Consolidated Financial Statements. The policy on fair value of certain financial instruments applies largely to the Corporate and Investment Bank and the Parent, both of which hold large portfolios of securities and derivatives. The policy on consolidation also affects the Corporate and Investment Bank and the Parent, both of which are involved in structuring securitization transactions. The policies on goodwill impairment and contingent liabilities affect all segments.

Allowance for Loan Losses and Reserve for Unfunded Lending CommitmentsThe allowance for loan losses and reserve for unfunded lending commitments, which we refer to collectively as the allowance for credit losses, are maintained at levels we believe are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the consolidated financial statements. We monitor qualitative and quantitative trends, including changes in the levels of past due, criticized and nonperforming loans. In addition, we rely on estimates and exercise judgment in assessing credit risk.

We employ a variety of modeling and estimation tools for measuring credit risk. These tools are periodically reevaluated and refined as appropriate. The following provides a description of each component of our allowance for credit losses, the techniques we currently use and the estimates and judgments inherent to each.

Our model for the allowance for loan losses has four components: formula-based components for both the commercial and consumer portfolios, each including an

Wachovia Corporation 2005 Annual Report 17

adjustment for historical loss variability; a reserve for impaired commercial loans; and an unallocated component.

For commercial loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed for commercial loans classified by credit grade. Average losses for each credit grade are computed using the annualized historical rate at which loans in each credit grade have defaulted and the historical average losses realized for defaulted loans.

For consumer loans, the formula-based component of the allowance for loan losses is based on historical loss data, historical delinquency patterns, vintage analyses, credit score-based forecasting methods and stress tests for each product classification.

For both commercial and consumer loans, the formula-based loss components include additional amounts to establish reasonable ranges that consider observed historical variability in losses. Factors we may consider in setting these amounts include, but are not limited to, industry-specific data, portfolio-specific risks or concentrations, and macroeconomic conditions. At December 31, 2005, the formula-based components of the allowance were $1.9 billion for commercial loans and $730 million for consumer loans, compared with $1.9 billion and $759 million, respectively, at December 31, 2004.

We have established a specific reserve within the allowance for loan losses for impaired loans. We define impaired loans as commercial loans on nonaccrual status. We individually review any impaired loans with a minimum total exposure of $10 million in the Corporate and Investment Bank and $5 million in other segments. The reserve for each individually reviewed loan is based on the difference between the loan’s carrying amount and the loan’s estimated fair value. No other reserve is provided on impaired loans that are individually reviewed. At December 31, 2005, the allowance for loan losses included $10 million and the reserve for unfunded lending commitments included $7 million for individually reviewed impaired loans and facilities. At December 31, 2004, these amounts were $31 million and $16 million, respectively.

The allowance for loan losses is supplemented with an unallocated component. This component reflects in part the inherent uncertainty of estimates and is designed as the final tool to fully capture probable incurred losses in the loan portfolio. The amount of this component and its relationship to the total allowance for loan losses may change from one period to another. We anticipate that the unallocated component of the allowance will generally not exceed 5 percent of the total allowance for loan losses. At December 31, 2005, the unallocated component of the allowance for loan losses was $135 million, or 5 percent of the allowance for loan losses, compared with $90 million, or 3 percent, at December 31, 2004. The increase in the unallocated component reflects the impact of recent hurricanes.

The reserve for unfunded lending commitments, which relates only to commercial business, is based on the modeling process that is consistent with the methodology described above for the commercial portion of the allowance for loan losses. In addition, this model includes as a key factor the historical average rate at which unfunded commercial exposures have been funded at the time of default. At December 31, 2005 and 2004, the reserve for unfunded lending commitments was $158 million and $154 million, respectively.

The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments as described above do not diminish the fact that the entire allowance for loan losses and reserve for unfunded lending commitments are available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments. Additionally, our primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology employed in its determination.

Fair Value of Certain Financial InstrumentsFair value is defined as the amount at which a financial instrument could be exchanged in a transaction between willing, unrelated parties in a normal business transaction. Financial instruments recorded at fair value include:

n	Instruments held for trading, including debt and equity securities and derivatives, with unrealized gains and losses recorded in earnings.
n	Debt and equity securities and retained interests in securitizations classified as available for sale, with unrealized gains and losses recorded in stockholders’ equity.
n	Derivatives designated as fair value or cash flow accounting hedges, with unrealized gains and losses recorded in earnings for fair value hedges and stockholders’ equity for cash flow hedges.
n	Principal investments, which are classified in other assets and which include public equity and private investments, with realized and unrealized gains and losses recorded in earnings.

If market prices are not available, we estimate fair value using models employing techniques such as discounted cash flow analyses. The assumptions used in the models, which typically include assumptions for interest rates, credit losses and prepayments, are independently verified against market observable data where possible. Where market observable data is not available, the valuation of financial instruments becomes more subjective and involves a high degree of judgment. Certain principal investments are recorded at values for which gains are not recorded

18 Wachovia Corporation 2005 Annual Report

until certain events confirm that the value has changed, such as a subsequent round of funding by the investee or receipt of distributions from private equity funds.

At December 31, 2005, 35 percent of our total assets and 14 percent of our total liabilities were recorded at fair value. Of this total, 86 percent were valued using quoted market prices for the same or similar securities; 13 percent using modeling techniques where the significant assumptions were based on market observations; and 1 percent using modeling techniques where significant assumptions were based on internal estimates rather than market observations. In addition, the determination of fair value affects loans held for sale, which are recorded at the lower of cost or market, with any changes in value recorded in earnings.

ConsolidationIn certain asset securitization transactions that meet the applicable criteria to be accounted for as sales, we sell assets to an entity referred to as a qualifying special purpose entity (QSPE), which we do not consolidate. In order for a special purpose entity to be considered a QSPE, it must meet a series of requirements at the inception of the transaction and on an ongoing basis. These requirements strictly limit the activities in which a QSPE may engage and the types of assets and liabilities it may hold. In some cases, these criteria are subject to interpretation. To the extent any QSPE fails to meet these criteria, we may be required to consolidate its assets and liabilities.

We also sell assets to and have involvement with other special purpose entities, some of which are variable interest entities (VIE). Under the provisions of FASB Interpretation No. 46R (FIN 46R),Consolidation of Variable Interest Entities, a VIE is consolidated by a company holding the variable interest that will absorb a majority of the VIE’s expected losses, or receive a majority of the expected residual returns, or both. The company that consolidates a VIE is referred to as the primary beneficiary.

A variety of complex estimation processes involving both qualitative and quantitative factors are used to determine whether an entity is a VIE, and to analyze and calculate its expected losses and its expected residual returns. These processes involve estimating the future cash flows of the VIE, analyzing the variability in those cash flows, and allocating the losses and returns among the parties holding variable interests. Also, there is a significant amount of judgment required in interpreting the provisions of FIN 46R and other related guidance and applying them to specific transactions.

In our case, FIN 46R applies to certain financing activities primarily conducted for corporate clients, including conduits that we administer, transactions such as collateralized debt obligations and collateralized mortgage obligations, partnerships, synthetic lease trusts and trust preferred securities.

The FASB has projects under way addressing what activities a QSPE may perform and how the assessment of a VIE is performed. The outcome of these projects may affect the entities we consolidate in future periods. TheAccounting and Regulatory Matterssection has additional information on these FASB projects.

Goodwill ImpairmentWe test goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. If the carrying amount of reporting unit goodwill exceeds its implied fair value, we would recognize an impairment loss in an amount equal to that excess.

As discussed in theBusiness Segmentssection, we operate in four core business segments. We determined that our reporting units for testing goodwill are our lines of business that are one level below the core business segments, where applicable. These reporting units are Wealth Management; General Bank: Commercial, and Retail and Small Business; Capital Management: Retail Brokerage Services and Asset Management; and Corporate and Investment Bank: Corporate Lending, Treasury and International Trade Finance, and Investment Banking.

Fair values of reporting units in 2005 were determined using two methods, one based on market earnings multiples of peer companies for each reporting unit, and one based on discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses. The earnings multiples for the first method ranged between 9.9 times and 18.2 times. The estimated cash flows for the second method were discounted using market-based discount rates ranging from 6.2 percent to 16.6 percent.

Our goodwill impairment testing for 2005 indicated that none of our goodwill was impaired.Note 1: Summary of Significant Accounting PoliciesandNote 8: Goodwill and Other Intangible Assetsin theNotes to Consolidated Financial Statementsprovide additional information related to the evaluation of goodwill and to the carrying amounts by core business segments.

Contingent LiabilitiesWe are subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against us and/or our subsidiaries with respect to transactions in which we and/or our subsidiaries acted as a lender, an underwriter, a financial advisor, a broker, or acted in a related capacity. Reserves are established for legal and other claims when it becomes probable we will incur a loss and the amount can be reasonably estimated. Changes in the probability assessment can lead to changes in recorded reserves. In addition, the actual costs of resolving these contingencies may be substantially higher or lower than the amounts reserved for these claims.

Wachovia Corporation 2005 Annual Report 19

Corporate Results of Operations

Our results for 2005 reflect the impact of the November 1, 2004, merger of Wachovia and SouthTrust Corporation.

Average Balance Sheets and Interest Rates

	Years Ended December 31,
	2005						2004
	Average		Interest			Average		Interest
(In millions)	Balances		Rates			Balances		Rates
Interest-bearing bank balances	$	2,516		3.23	%	$	3,578		1.43	%
Federal funds sold		24,008		3.31			24,940		1.37
Trading account assets		33,800		4.94			28,944		4.28
Securities		115,107		5.14			100,960		4.90
Commercial loans, net		132,504		5.69			99,026		4.63
Consumer loans, net		95,418		5.81			73,007		5.24
Total loans, net		227,922		5.74			172,033		4.89
Loans held for sale		15,293		5.71			16,735		4.42
Other earning assets		9,944		5.36			11,064		3.30
Risk management derivatives		—		0.23			—		0.41
Total earning assets		428,590		5.58			358,254		4.90
Interest-bearing deposits		242,152		2.00			196,142		1.12
Federal funds purchased		54,302		3.08			47,321		1.35
Commercial paper		11,898		3.05			12,034		1.35
Securities sold short		10,279		3.31			11,025		2.88
Other short-term borrowings		6,675		1.87			6,087		0.90
Long-term debt		47,774		4.46			39,780		4.00
Risk management derivatives		—		0.14			—		0.12
Total interest-bearing liabilities		373,080		2.68			312,389		1.71
Net interest income and margin	$	13,900		3.24	%	$	12,211		3.41	%

Net Interest Income and MarginWe earn net interest income on the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and other funding sources. Tax-equivalent net interest income increased 14 percent in 2005 from 2004 due to balance sheet growth reflecting the SouthTrust merger as well as strong organic growth. Balance sheet growth offset compression in the net interest margin, which declined 17 basis points to 3.24 percent primarily due to growth in structured product and mortgage warehouses, increased low-yielding trading assets, lower contributions from hedge-related derivatives, and the impact of a flattening yield curve. The average federal funds rate in 2005 was 187 basis points higher than the average for 2004, while average longer-term two-year rates increased 147 basis points and the 10-year treasury note rate increased 2 basis points.

In order to maintain our targeted interest rate risk profile, derivatives are used to manage the interest rate risk inherent in our assets and liabilities. We routinely deploy hedging strategies designed to protect future net interest income. These strategies may reduce current income in the short-term, although we expect them to benefit future periods.

In 2005, net interest rate risk management-related derivative income contributed $432 million to net interest income, representing a 10 basis point impact on our net interest margin, compared with $1.1 billion, or 30 basis points, in 2004. Risk management-related derivatives are those that have been designated and accounted for as accounting hedges.

Fee and Other Income

	Years Ended December 31,
(In millions)	2005		2004			2003
Service charges	$	2,151		1,978			1,731
Other banking fees		1,491		1,226			1,017
Commissions		2,411		2,601			2,318
Fiduciary and asset management fees		2,943		2,772			2,345
Advisory, underwriting and other investment banking fees		1,109		911			787
Trading account profits		245		35			110
Principal investing		401		261			(139	)
Securities gains (losses)		89		(10	)		45
Other income		1,379		1,005			1,268
Total fee and other income	$	12,219		10,779			9,482

Fee and Other IncomeTraditionally banks earn fee and other income from service charges on deposit accounts and other banking products and services, and these continue to be a significant component of our fee income. In addition, we have balanced our earnings with a diversified mix of businesses that provide alternative investment and financing products and services for the more sophisticated needs of our clients. These alternative products produce income in our brokerage, asset management and investment banking businesses from commissions and fees for financial advice, custody, insurance and financing alternatives such as loan syndications and asset securitizations. Additionally, we realize gains when we sell our investments in debt and equity securities. The fees on many of these products and services are based on market valuations and therefore are sensitive to movements in the financial markets. Fee and other income growth of 13 percent in 2005 from 2004 included the impact of SouthTrust and also reflected:

n	Improved debit card interchange income, which is included in other banking fees.
n	Lower commissions reflecting weak retail brokerage markets.
n	Improved fiduciary and asset management fees, reflecting growth in brokerage managed account assets.
n	Improved investment banking fees, with record results in advisory and underwriting.
n	Stronger trading revenues and principal investing results.
n	Securities gains of $89 million, which included securities gains in our Corporate and Investment Bank of $91 million principally related to structured products activity.

20 Wachovia Corporation 2005 Annual Report

n Gains of $122 million on the sale of equity securities received in settlement of loans and a $38 million gain on the sale of our investment in a United Kingdom asset-based lending subsidiary, which are included in other income.

Noninterest Expense

	Years Ended December 31,
(In millions)	2005		2004		2003
Salaries and employee benefits	$	9,671		8,703		7,708
Occupancy		1,064		947		851
Equipment		1,087		1,052		1,021
Advertising		193		193		160
Communications and supplies		633		620		598
Professional and consulting fees		662		548		460
Sundry expense		1,829		1,728		1,521
Other noninterest expense		15,139		13,791		12,319
Merger-related and restructuring expenses		292		444		443
Other intangible amortization		416		431		518
Total noninterest expense	$	15,847		14,666		13,280

Noninterest ExpenseNoninterest expense increased 8 percent in 2005 from 2004 largely due to the SouthTrust merger, offset by merger and other expense efficiencies. In addition, higher salaries and employee benefits reflected higher revenue-based incentives and strategic hiring, and included implementation costs related to the efficiency initiative.

We grant stock-based awards to employees in the form of stock options and restricted stock. We adopted the fair value method of accounting for stock options in 2002, and salaries and employee benefits expense included $333 million in 2005 and $320 million in 2004 related to options and restricted stock. Accordingly, as discussed in theAccounting and Regulatory Matterssection, the implementation of the revised stock-based compensation accounting principles is not expected to have a material impact, other than the impact of the timing of expense recognition associated with awards to retirement-eligible employees.Note 1: Summary of Significant Accounting Policies andNote 12: Common and Preferred Stock and Capital Ratiosin theNotes to Consolidated Financial Statementsalso have additional information.

We sponsor a defined benefit pension plan for our employees, and salaries and employee benefit expense included $65 million in 2005 and $59 million in 2004 of retirement benefit cost for this plan. This expense reflected estimated returns on the plan assets of 8.5 percent each year, while actual returns were 11.7 percent and 11.4 percent, respectively. In accordance with current accounting principles, the differences between estimated and actual returns are deferred and, along with other amounts, recognized over the estimated remaining service periods of the plan participants. At December 31, 2005, we had deferred net losses and other items of $1.7 billion, which will be recognized as a

component of retirement benefit cost over the next 12 years on a straight-line basis.Note 15: Personnel Expense and Retirement Benefitsin theNotes to Consolidated Financial Statementshas additional information on this and other pension and post-retirement plans, including how we determine the key assumptions used to measure the benefit obligation and retirement benefit expense. The funding of our pension obligation does not represent a significant liquidity commitment for us.

Merger-Related and Restructuring ExpensesMerger-related and restructuring expenses in 2005 of $292 million included $227 million related to the SouthTrust merger, $63 million related to the retail brokerage integration, which was completed in the second quarter of 2005, and $2 million related to the commercial insurance brokerage acquisition. In 2004, we recorded $444 million of these expenses relating to SouthTrust and the retail brokerage and First Union-Wachovia transactions, including $3 million in reversals.

We currently expect total merger-related and restructuring expenses for the SouthTrust merger to be $333 million before tax, of which $268 million had been recorded by December 31, 2005, with the remaining to be incurred in the first quarter of 2006.

Income TaxesIncome taxes based on income from continuing operations were $3.0 billion in 2005, an increase of $614 million from 2004. The related effective income tax rates were 32.05 percent in 2005 and 31.70 percent in 2004. The increase in this rate was primarily the result of higher pretax income in 2005. On a fully tax-equivalent basis, the related income tax rates were 33.59 percent in 2005 and 33.87 percent in 2004.

Business Segments

We provide a diversified range of banking and nonbanking financial services and products primarily through our four core business segments, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank. In this section, we discuss the performance and results of our core business segments and the Parent in 2005 compared with 2004. TheComparison of 2004 with 2003section has details on business segment trends over that period.

We originate and securitize commercial loans, principally commercial mortgages, and consumer loans, including consumer real-estate secured, mortgage, auto and student loans. The General Bank results include sales and securitizations of mortgage loans, where we generally do not retain significant interests, other than servicing rights, and gains on sales are included in other fee income. The Corporate and Investment Bank results include securitizations of commercial loans, with gains reflected in both trading profits and in other fee income. We generally retain servicing rights on commercial loan securitizations, but not significant

Wachovia Corporation 2005 Annual Report 21

retained interests. In addition, the Corporate and Investment Bank securitizes assets on behalf of customers for whom we may have warehoused the collateral prior to the transaction. Gains and losses on these transactions are recorded in trading profits, along with any gains or losses on the assets while we held them. The Parent results include securitizations of other consumer loans in which we have retained interests and/or servicing rights. Gains and losses on these consumer loan securitizations are recorded in other fee income. Certain of these consumer loans are included in the General Bank results as if they had not been securitized; the Parent results include the impact of de-recognizing these loans from the consolidated balance sheet by recording a negative, or contra, loan balance.

Business segment data excludes merger-related and restructuring expenses, other intangible amortization, the gain on sale of discontinued operations and changes in accounting principle.

Note 14: Business Segmentsin theNotes to Consolidated Financial Statementsdiscusses in detail the management reporting model upon which our segment information is based, and also provides a reconciliation of business segment earnings to the consolidated results of operations.

Key Performance MetricsBusiness segment earnings are the primary measure of segment profit or loss we use to assess segment performance and to allocate resources. Economic profit, risk-adjusted return on capital (RAROC) and efficiency ratios are additional metrics, all of which are based on and calculated directly from segment earnings, that assist management in evaluating segment results.

The first two measures are calculated as follows:

Economic Profit = Economic Net Income – Capital Charge
RAROC = Economic Net Income / Economic Capital

Economic profit is a measure of the earnings above an explicit charge for the capital used to support a transaction or business line. It is calculated as a dollar amount of return. RAROC is a ratio of return to risk and is stated as a percentage.

The return component of both of these measures is economic net income, which reflects two adjustments to segment earnings. First, we replace current period provision expense with expected losses (a statistically derived forward-looking number that represents the average expected loan losses over time), and we remove certain noncash expenses. The risk component for these measures is economic capital, which is discussed below, as is the capital charge used in calculating economic profit.

Economic CapitalA disciplined and consistent approach to quantifying risk is required to achieve an accurate risk-based pricing and value-based performance reporting system. We employ an economic capital framework developed to

measure the declines in economic value that a transaction, portfolio or business unit could incur given an extreme event or business environment. The greater the frequency and severity of potential negative outcomes, the greater the levels of capital required.

The five types of risk to which we attribute economic capital are:

n	Credit Risk:Credit risk, which represented 53 percent of our economic capital in 2005, is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed-upon terms.
n	Market Risk:The major components of market risk, which represented 23 percent of economic capital, are interest rate risk inherent in our balance sheet, price risk in our principal investing portfolio and market value risk in our trading portfolios.
n	Operational, Business and Other Risk:Operational risk is the risk of loss from inadequate or failed internal processes, people and systems or from external events. This risk is inherent in all our businesses. Business risk is the potential losses our business lines could suffer that have not been captured elsewhere (such as losses from a difficult business environment). Business and operational risk capital are the primary types of capital held by non-balance sheet intensive businesses such as trust, asset management and brokerage. Other risk represents the loss in value that other miscellaneous and fixed assets could realize that are not captured as market risk. Operational, business and other risk represented 24 percent of our economic capital in 2005.

Our economic capital models are calibrated to achieve a standard of default protection equivalent to a “AA” rated institution. These models were developed to determine economic capital under a consistent, specific, internal definition of risk (that is, uncertainty in economic value). Accordingly, our required aggregate economic capital can be materially different from other capital measures developed under GAAP, regulatory or rating agency frameworks.

We measure the financial returns achieved by a transaction or business unit after deducting a charge for the economic capital required to support the risks taken. We calculate this charge by multiplying the attributed economic capital times the cost of our equity capital (derived through a capital asset pricing model approach).

Since 2002, the cost of capital has been 11 percent. The cost of capital is reviewed annually by our treasury division and approved by the RAROC Advisory Committee, which is a subcommittee of the Asset and Liability Management Committee. TheRisk Governancesection has more information about these committees.

22 Wachovia Corporation 2005 Annual Report

We use our RAROC and economic profit measures in a variety of ways. They are used in the pricing of transactions such as loans, commitments and credit substitutes in each of our business segments. These transactional measures are aggregated to provide portfolio, business line, and ultimately business segment RAROC and economic profit measures. Incremental activities such as new product analysis, business line extensions and acquisitions are also measured using these tools. RAROC and/or economic profit are significant components of line incentive compensation programs and senior management incentive plans.

Changes in MethodologyWe continuously update segment information for changes that occur in the management of our businesses. For example, in the first quarter of 2005, we transferred certain insurance business lines to Wealth Management from Capital Management. Additionally, as noted earlier, the results of certain units of Capital Management are included in the Parent segment as divested businesses. The gain on sale of the CIT businesses is excluded from theBusiness Segmentinformation and is presented as discontinued operations. While these changes are not significant to the results of operations of our segments, we have updated the prior period amounts to allow for a consistent comparison of segment results. The impact to segment earnings for full year 2004 as a result of these changes was:

n	A $10 million decrease in the General Bank.
n	A $58 million decrease in Capital Management.
n	An $8 million increase in Wealth Management.
n	A $46 million decrease in the Corporate and Investment Bank.
n	A $106 million increase in the Parent.

General BankThe General Bank segment includes our Retail and Small Business and Commercial lines of business. The General Bank’s products include:

n	Retail Bank:Checking, savings and money market accounts; time deposits and IRAs; home equity, residential mortgage, student and personal loans; debit and credit cards; mutual funds and annuities.
n	Small Business:Deposit, loan and investment products and services to businesses with annual revenues up to $3 million.
n	Commercial Banking:Commercial deposit, lending, treasury management, dealer financial services and commercial real estate solutions to businesses typically with annual revenues between $3 million and $250 million.

General Bank

Performance Summary

	Years Ended December 31,
(Dollars in millions)	2005			2004		2003
Income statement data
Net interest income(Tax-equivalent)	$	9,678			8,007		7,312
Fee and other income		2,876			2,432		2,193
Intersegment revenue		205			168		179
Total revenue(Tax-equivalent)		12,759			10,607		9,684
Provision for credit losses		277			314		470
Noninterest expense		6,315			5,515		5,336
Income taxes(Tax-equivalent)		2,263			1,734		1,415
Segment earnings	$	3,904			3,044		2,463
Performance and other data
Economic profit	$	2,968			2,321		1,797
Risk adjusted return on capital (RAROC)		53.26	%		53.22		42.80
Economic capital, average	$	7,023			5,497		5,649
Cash overhead efficiency ratio(Tax-equivalent)		49.49	%		51.99		55.10
Lending commitments	$	111,608			93,608		65,457
Average loans, net		163,549			127,984		113,849
Average core deposits	$	207,270			172,369		152,727
FTE employees		42,226			43,404		34,595

Results reflect the November 1, 2004, acquisition of SouthTrust. Key General Bank trends in 2005 compared with 2004 included:

n	28 percent earnings growth on 20 percent higher revenue due to organic growth as well as increased earning assets related to SouthTrust.
n	21 percent growth in net interest income generated by strength in low-cost core deposits and higher commercial and consumer loans.

n	Deposits reflected continued strong growth in checking accounts as we leverage our growing branch network. Core deposit growth was driven primarily by consumer certificates of deposit and money market deposits, reflecting some shift in the deposit mix due to the rising rate environment; and
n	Middle-market lending led commercial loan growth while real estate-secured lending led consumer loan growth. Early results were solid from the introduction of new mortgage products and a refined small business lending strategy, which we expect to accelerate branch loan sales production in the future.

n	18 percent higher fee and other income driven, in addition to higher volume largely related to SouthTrust, by higher service charges, debit card interchange income, and mortgage banking income and origination fees.
n	Continued improvement in the overhead efficiency ratio, despite the SouthTrust impact and our de novo

Wachovia Corporation 2005 Annual Report 23

branch initiative, due to merger efficiencies and strong expense management.

The General Bank continues to do exceptionally well in attracting and retaining low-cost core deposits, with average low-cost core deposit balances increasing 16 percent from 2004 including the addition of SouthTrust. Core deposits include savings, interest-bearing checking accounts, noninterest-bearing and other consumer time deposits and deposits held in our CAP Accounts. Low-cost core deposits exclude consumer certificates of deposit.

Capital Management

Performance Summary

	Years Ended December 31,
(Dollars in millions)	2005			2004			2003
Income statement data
Net interest income(Tax-equivalent)	$	633			533			232
Fee and other income		4,595			4,704			3,956
Intersegment revenue		(45	)		(46	)		(66	)
Total revenue(Tax-equivalent)		5,183			5,191			4,122
Provision for credit losses		—			—			—
Noninterest expense		4,270			4,435			3,526
Income taxes(Tax-equivalent)		334			275			218
Segment earnings	$	579			481			378
Performance and other data
Economic profit	$	429			333			270
Risk adjusted return on capital (RAROC)		42.45	%		35.81			38.53
Economic capital, average	$	1,363			1,344			980
Cash overhead efficiency ratio(Tax-equivalent)		82.37	%		85.45			85.57
Lending commitments	$	208			119			61
Average loans, net		357			290			176
Average core deposits	$	29,171			25,078			2,591
FTE employees		17,474			18,892			19,633

Capital ManagementCapital Management includes Retail Brokerage Services and Asset Management. The results of Capital Management for each year excludes the corporate and institutional trust businesses that were sold in December 2005. Capital Management provides a full line of investment products and financial and retirement services, including:

n	Retail Brokerage Services:Stocks, bonds, mutual funds, fixed and variable annuities, reinsurance, asset management accounts, and other investment products and services.
n	Asset Management:Mutual funds, customized advisory services and defined benefit and defined contribution retirement services.

Key Capital Management trends in 2005 compared with 2004 included:

n 20 percent earnings growth despite a modest decline in revenue as expense efficiencies achieved from the

	now-completed brokerage integration more than offset lower retail brokerage commissions.
n	A 19 percent increase in net interest income largely as a result of significant average core deposit growth and improved deposit pricing.
n	A 2 percent decline in fee and other income as higher retail brokerage recurring income, including managed account fees, was offset by lower retail brokerage commissions due to sluggish transaction activity. Brokerage managed account assets, which produce recurring income, reached a record $106.5 billion at December 31, 2005.

n	$4.3 billion in revenue from our retail brokerage businesses included transactional revenues of $1.9 billion and recurring and other income of $2.4 billion.
n	$873 million in revenue from our asset management businesses, down $2 million due to a $17 million decline from the 2004 sale of the two non-strategic businesses, partially offset by higher equity assets under management and a modest benefit from the SouthTrust merger.

n A 4 percent decline in noninterest expense largely due to ongoing efficiencies gained from the retail brokerage integration.

Mutual Funds

	Years Ended December 31,
	2005					2004					2003
(In billions)	Amount		Mix			Amount		Mix			Amount		Mix
Equity	$	32		31	%	$	29		27	%	$	24		22	%
Fixed income		24		23			27		26			29		27
Money market		48		46			50		47			56		51
Total mutual fund assets	$	104		100	%	$	106		100	%	$	109		100	%

Assets Under Management and Securities Lending

	Years Ended December 31,
	2005					2004					2003
(In billions)	Amount		Mix			Amount		Mix			Amount		Mix
Equity	$	83		33	%	$	81		32	%	$	72		29	%
Fixed income		111		44			112		44			108		44
Money market		59		23			63		24			67		27
Total assets under management	$	253		100	%	$	256		100	%	$	247		100	%
Securities lending		58		—			41		—			—		—
Total assets under management and securities lending	$	311		—		$	297		—		$	247		—

Total assets under management and securities lending grew slightly from year-end 2004 to $311.1 billion. Total net outflows in assets under management were approximately $6 billion in 2005, offset by net asset appreciation of approximately $3 billion since year-end 2004 from increased market valuations. Equity assets reached $83.1 billion at December 31, 2005, including a record $31.9 billion in equity mutual fund assets driven by positive equity mutual

24 Wachovia Corporation 2005 Annual Report

funds sales and improved equity markets. Continued positive net equity fund sales along with increased equity market valuations are creating a higher revenue-yielding mix of funds.

Wealth Management

Performance Summary

	Years Ended December 31,
(Dollars in millions)	2005			2004			2003
Income statement data
Net interest income(Tax-equivalent)	$	588			497			423
Fee and other income		708			590			562
Intersegment revenue		7			5			6
Total revenue(Tax-equivalent)		1,303			1,092			991
Provision for credit losses		6			(1	)		12
Noninterest expense		893			769			732
Income taxes(Tax-equivalent)		148			118			91
Segment earnings	$	256			206			156
Performance and other data
Economic profit	$	189			137			94
Risk adjusted return on capital (RAROC)		47.83	%		40.86			32.05
Economic capital, average	$	513			458			447
Cash overhead efficiency ratio(Tax-equivalent)		68.53	%		70.45			73.95
Lending commitments	$	5,840			4,711			3,951
Average loans, net		13,915			11,050			9,512
Average core deposits	$	13,693			11,956			10,111
FTE employees		4,657			3,911			3,842

Wealth ManagementWealth Management includes private banking, personal trust, investment advisory services, financial planning and insurance brokerage services (property and casualty, employee benefits and high net worth life) for wealthy individuals, their families and businesses. Products and services include:

n	Customized deposit, credit and debt structuring services, including professional practice lending, insurance premium, marine and aircraft financing.
n	Legacy management such as personal trust, estate settlement and charitable services.
n	Risk management services encompassing property and casualty, group health and benefit, and life insurance.
n	Investment management products and services including hedge funds, investment real estate and private equity placements.
n	Advisory services including business succession planning and not-for-profit, individual and family philanthropic consulting.
n	Family office services, such as independent investment manager search and selection, family office administration, and family governance and stewardship consulting.

Results include the impact of the May 2005 acquisition of Palmer & Cay, Inc., a commercial insurance brokerage firm, as well as SouthTrust. Key Wealth Management trends in 2005 compared with 2004 included:

n	24 percent earnings growth on 19 percent higher revenue.
n	18 percent growth in net interest income driven by higher volume in both consumer and commercial lending and by deposit growth.
n	20 percent higher fee and other income due to the commercial insurance brokerage acquisition as well as improved trust and investment management fees on higher valuations in improved markets.
n	Higher provision expense of $6 million compared with a net benefit in 2004. In addition, 16 percent noninterest expense growth largely related to the commercial insurance brokerage acquisition and higher personnel costs, including higher severance related to business transformation and to incentives on increased revenue production.
n	Slight growth in assets under management from year-end 2004 to $65.6 billion.

Corporate and Investment Bank

Performance Summary

	Years Ended December 31,
(Dollars in millions)	2005			2004			2003
Income statement data
Net interest income(Tax-equivalent)	$	2,232			2,387			2,257
Fee and other income		3,695			2,925			2,253
Intersegment revenue		(169	)		(128	)		(116	)
Total revenue(Tax-equivalent)		5,758			5,184			4,394
Provision for credit losses		(27	)		(41	)		250
Noninterest expense		3,042			2,580			2,326
Income taxes(Tax-equivalent)		1,020			974			676
Segment earnings	$	1,723			1,671			1,142
Performance and other data
Economic profit	$	1,009			1,042			530
Risk adjusted return on capital (RAROC)		29.54	%		33.62			20.36
Economic capital, average	$	5,441			4,606			5,657
Cash overhead efficiency ratio(Tax-equivalent)		52.83	%		49.77			52.93
Lending commitments	$	102,673			81,461			69,728
Average loans, net		38,621			31,756			32,983
Average core deposits	$	23,496			18,341			14,529
FTE employees		5,796			4,723			4,314

Corporate and Investment Bank Our Corporate and Investment Bank segment includes the following lines of business:

n	Corporate Lending:Large corporate lending and commercial leasing.
n	Investment Banking:Equities, merger and acquisition advisory services, the activities of our fixed income

Wachovia Corporation 2005 Annual Report 25

	division (including interest rate products, credit products, structured products and non-dollar products), loan syndications, and principal investing (which encompasses direct investments primarily in private equity and mezzanine securities, and investments in funds sponsored by select private equity and venture capital groups).
n	Treasury and International Trade Finance:Treasury management products and services, domestic and international correspondent banking operations, and international trade services.

Key Corporate and Investment Bank trends in 2005 compared with 2004 included:

n	3 percent earnings growth on 11 percent higher revenue as higher fee and other income overcame a decline in net interest income. Revenue growth also reflects market share gains and increases in lead bank relationships.
n	26 percent growth in fee and other income largely due to:

n	Record results in advisory and underwriting fees, with particular strength in structured products and merger and acquisition advisory activity.
n	A gain of $122 million on the sale of equity securities received in settlement of loans and a $41 million gain on a structured products consumer loan securitization.
n	Strong trading profits and principal investing gains, driven by both direct and fund investments.

n	A 6 percent decline in net interest income primarily due to higher funding costs associated with the 2004 resolution of tax matters related to our commercial leasing portfolio and a change in the mix of trading assets, which lowered the overall spread in the trading portfolio.
n	An 18 percent increase in noninterest expense due to higher variable compensation and increased strategic hiring in key positions.
n	22 percent average loan growth reflecting higher corporate loans and the impact of SouthTrust. Recoveries continued to be a net benefit to the provision for credit losses.
n	A 28 percent increase in average core deposits primarily from higher commercial mortgage servicing and international correspondent banking. In commercial mortgage servicing, we service commercial mortgages and commercial mortgage-backed securities and hold the related escrow and other deposits.

ParentParent includes all asset and liability management functions, including managing our investment portfolio for liquidity and interest rate risk. Parent also includes goodwill and other intangible assets, and related funding costs,

Parent

Performance Summary

	Years Ended December 31,
(Dollars in millions)	2005			2004			2003
Income statement data
Net interest income(Tax-equivalent)	$	769			787			639
Fee and other income		345			128			518
Intersegment revenue		2			1			(3	)
Total revenue(Tax-equivalent)		1,116			916			1,154
Provision for credit losses		(7	)		(15	)		(146	)
Noninterest expense		1,035			923			917
Minority interest		367			297			174
Income taxes(Tax-equivalent)		(413	)		(304	)		(157	)
Segment earnings	$	134			15			366
Performance and other data
Economic profit	$	73			(17	)		307
Risk adjusted return on capital (RAROC)		13.84	%		10.26			24.07
Economic capital, average	$	2,592			2,321			2,355
Cash overhead efficiency ratio(Tax-equivalent)		55.50	%		53.57			34.41
Lending commitments	$	508			408			482
Average loans, net		11,480			953			1,807
Average core deposits	$	5,091			3,864			3,164
FTE employees		23,827			25,100			23,730

certain revenues and expenses that are not allocated to the business segments; the results of our HomEq Servicing business, which is responsible for home equity loan servicing, including that generated and retained by our mortgage company, as well as servicing for third party portfolios; and the results of wind-down or divested businesses, including the divested CIT businesses.

Key trends in the Parent segment in 2005 compared with 2004 included:

n A revenue increase due to higher fee and other income, offset by a small decline in net interest income.

n	Higher fee and other income included a $122 million increase in securities gains and a $117 million increase in other income.
n	Other income included a gain of $38 million associated with the sale of an asset-based lending subsidiary in the United Kingdom and a $35 million increase in income from asset securitizations, which included $74 million of losses related to auto loan securitization activity. Other income in 2004 included a loss of $68 million associated with a sale and leaseback of corporate real estate.

n	A 13 percent increase in average securities to $107.2 billion reflecting proceeds from deposit growth and higher balance sheet positions as discussed in theBalance Sheet Analysissection.
n	A 12 percent increase in noninterest expense.

26 Wachovia Corporation 2005 Annual Report

This segment reflects the impact of Prudential Financial’s 38 percent minority interest in Wachovia Securities Financial Holdings, LLC. Total minority interest expense, which also includes other subsidiaries, was $367 million in 2005 compared with $297 million in 2004.

Balance Sheet Analysis

Earning AssetsOur primary types of earning assets are securities and loans. Year-end 2005 earning assets were $451.8 billion, a 5 percent increase from $430.3 billion at year-end 2004. Average earning assets in 2005 were $428.6 billion, which represented a 20 percent increase from 2004, primarily reflecting the impact of SouthTrust.

SecuritiesThe securities portfolio, all of which is classified as available for sale, consists primarily of high quality, mortgage- and asset-backed securities, principally obligations of U.S. Government agencies and sponsored entities. We use this portfolio primarily to manage liquidity, interest rate risk and regulatory capital, and to take advantage of market conditions that create more economically attractive returns on these investments. The increase in securities available for sale from December 31, 2004, reflects higher business unit positions, deposit growth and greater use of cash securities in lieu of derivatives to maintain our relatively neutral interest rate risk position. TheInterest Rate Risk Managementsection further explains our interest rate risk management practices. The average rate earned on securities available for sale was 5.14 percent in 2005 and 4.90 percent in 2004. Unrealized net securities losses in 2005 compared with net gains in 2004 were due to the effect of higher rates primarily affecting our fixed rate mortgage-backed securities.

We retain interests in the form of either bonds or residual interests in connection with certain securitizations. The retained interests result primarily from the securitization of residential mortgage loans, home equity lines, auto loans and student loans. Included in securities available for sale at December 31, 2005, were residual interests with a market value of $860 million, which included a net unrealized gain of $215 million, and retained bonds from securitizations with a market value of $5.2 billion, which included a net unrealized gain of $59 million.

LoansIn 2005, we took several steps to enhance loan growth with several small acquisitions and investments we expect will strengthen our loan portfolio mix with a greater proportion of consumer loans, including auto loans through our expanded dealer financial services network, direct issuance of credit cards and a renewed focus on mortgage loan originations through our bank branch network. In commercial lending, we have pursued risk reduction strategies in recent years to actively reduce potential problem loans and certain large corporate loans. We will continue to actively monitor loan quality and take proactive steps to reduce risk when warranted.

Securities Available for Sale

	Years Ended December 31,
(In billions)	2005			2004		2003
Market value	$	114.9			110.6		100.4
Net unrealized gain(loss)	$	(0.5	)		1.8		2.2
Memoranda(Market value)
Residual interests	$	0.9			0.9		1.1
Retained bonds
Investment grade(a)		5.1			5.2		11.2
Other		0.1			—		—
Total	$	5.2			5.2		11.2

^(a)Substantially all had credit ratings of AA and above.

Loans – On-Balance Sheet

	Years Ended December 31,
(In millions)	2005		2004		2003
Commercial
Commercial, financial and agricultural	$	87,327		75,095		55,453
Real estate–construction and other		13,972		12,673		5,969
Real estate–mortgage		19,966		20,742		15,186
Lease financing		25,368		25,000		23,978
Foreign		10,221		7,716		6,880
Total commercial		156,854		141,226		107,466
Consumer
Real estate secured		94,748		74,161		50,726
Student loans		9,922		10,468		8,435
Installment loans		6,751		7,684		8,965
Total consumer		111,421		92,313		68,126
Total loans		268,275		233,539		175,592
Unearned income		9,260		9,699		10,021
Loans, net(On-balance sheet)	$	259,015		223,840		165,571

Loans – Managed Portfolio(Including on-balance sheet)

	Years Ended December 31,
(In millions)	2005		2004		2003
Commercial	$	161,941		145,072		112,041
Real estate secured		110,299		97,021		80,146
Student loans		11,974		11,059		10,526
Installment loans		10,598		10,359		8,965
Total managed portfolio	$	294,812		263,511		211,678

The increase in net loans from year-end 2004 reflected 11 percent growth in commercial loans, with an increase in commercial lending activity in the latter half of the year. Commercial loans reflected strength in middle-market commercial and large corporate lending, partially offset by lower commercial real estate mortgages. The 21 percent growth in consumer loans from year-end 2004 reflected the net impact of transfers from and to loans held for sale, including $12.5 billion of home equity loans transferred to the portfolio at year-end 2005. Additionally, the increase reflected movement into fixed rate products, particularly in the home equity market.

Wachovia Corporation 2005 Annual Report 27

Year-End 2005 Commercial and Industrial Loans and Leases^(a)

Industry Classification

			Committed
(In millions)	Outstanding		Exposure(b)
Manufacturing
Consumer products	$	1,231		4,212
Food and beverage		1,095		3,618
Steel and metal products		1,165		3,300
Publishing and printing		998		2,958
Electronics		923		2,280
Construction and construction materials		892		2,552
Chemicals		819		2,785
All other manufacturing		5,245		17,480
Total manufacturing		12,368		39,185
Financial services		18,090		42,730
Services		15,197		39,314
Property management		10,637		17,450
Retail trade		9,014		19,011
Wholesale trade		7,598		15,644
Individuals		6,675		9,450
Building contractors		3,114		7,638
Transportation		3,046		7,934
Public administration		1,779		15,438
Public utilities		1,447		12,525
Mining		1,150		5,150
Telecommunications and cable		1,073		3,386
Agriculture, forestry and fishing		816		1,475
Insurance		732		9,354
All other(c)		20,491		20,502
Total	$	113,227		266,186

(a)	Net of unearned income.
(b)	Committed exposure includes amounts outstanding and unfunded
lending commitments and letters of credit. It does not include risk mitigating credit swap derivatives.
(c)	Leases included in “All other.”

Year-End 2005 Commercial Real Estate Loans

Project Type Classification

			Committed
(In millions)	Outstanding		Exposure(a)
Single family	$	3,669		7,862
Retail		5,689		7,046
Office buildings		5,220		6,357
Apartments		5,215		6,317
Land-improved		2,903		4,557
Industrial		2,691		3,155
Condominiums		2,219		4,565
Land-unimproved		1,616		2,109
Lodging		885		965
Other		3,831		4,648
Total	$	33,938		47,581

(a) Committed exposure includes amount outstanding.

Distribution by Facility Size(Percent)
Less than $10 million	48	%	42
$10 million to $25 million	27		29
$25 million to $50 million	19		22
All other	6		7
Total	100	%	100

Our loan portfolio is broadly diversified by industry, concentration and geography. Additionally, the portfolio is well-collateralized:

n	Commercial loans represented 58 percent and consumer loans 42 percent of the loan portfolio at December 31, 2005.
n	78 percent of the commercial loan portfolio is secured by collateral.
n	98 percent of the consumer loan portfolio is secured by collateral or guaranteed.

Of our $94.7 billion consumer real estate-secured loan portfolio:

n	74 percent is secured by a first lien.
n	67 percent has a loan-to-value ratio of 80 percent or less.
n	90 percent has a loan-to-value ratio of 90 percent or less.
n	47 percent is priced on a variable rate basis.

Our managed loan portfolio grew 12 percent from year-end 2004, reflecting the growth discussed above and real estate-secured securitizations. The managed loan portfolio includes the on-balance sheet loan portfolio, loans held for sale, loans securitized for which the retained interests are classified in securities, and the off-balance sheet portfolio of securitized loans sold where we service the loans.

Nonperforming AssetsNonperforming assets decreased 40 percent from year-end 2004, and were a record low 0.28 percent of loans, foreclosed properties and loans held for sale. Nonaccrual loans declined $335 million, or 35 percent, from year-end 2004 and reflected sales of $314 million. New inflows to commercial nonaccrual loans were $751 million from year-end 2004. Impaired commercial loans were $392 million at December 31, 2005, down from $712 million at December 31, 2004.

Past Due LoansAccruing loans 90 days or more past due, excluding loans that are classified as loans held for sale, were $625 million at December 31, 2005, compared with $522 million at December 31, 2004. The increase primarily related to the guaranteed segment of the student lending portfolio. Of total past due loans, $52 million were commercial loans or commercial real estate loans and $573 million were consumer loans.

Net Charge-offsNet charge-offs as a percentage of average net loans of 0.09 percent in 2005 were down 8 basis points from 2004. In 2005, commercial net charge-offs were $36 million, down $43 million from 2004, and consumer net charge-offs were $171 million, down $50 million from 2004. The low level of net charge-offs reflects our strategic decision

28 Wachovia Corporation 2005 Annual Report

to actively manage down potential problem loans and a higher level of recoveries during a beneficial credit cycle. In addition, as older vintages of consumer loans mature or pay down, a higher quality consumer loan mix remains.

Provision for Credit LossesOur strategy is to mitigate risk and volatility on our balance sheet by actively monitoring and reducing potential problem loans, including the sale of at-risk credits when prudent. The provision for credit losses declined 3 percent from 2004 to $249 million in 2005. The 2005 provision included $45 million related to the impact of recent hurricanes, as discussed below, and $18 million related to loan sales and transfers compared with a benefit of $31 million in 2004. Our outlook for 2006 anticipates a provision relatively in line with our outlook for charge-offs, in the range of 15 basis points to 25 basis points of average net loans, and reflects our pending acquisition of the auto dealer financial services business and its subsidiary bank. More information on the provision for credit losses, including the impact of transfers to loans held for sale, is inTable 10: Allowance for Loan Losses and Nonperforming Assets.

Allowance for Loan Losses and Reserve for Unfunded Lending CommitmentsOur risk management strategies have resulted in reduced risk in our loan portfolio. The allowance for loan losses decreased $33 million from year-end 2004 to $2.7 billion at December 31, 2005, reflecting in part a $53 million reduction related to loans sold or transferred to loans held for sale, which combined with reduced overall risk in our loan portfolio, was partially offset by the allowance related to normal loan growth. The unallocated portion of the allowance increased $45 million from year-end 2004 to reflect the impact of recent hurricanes, the full effect of which continues to be reviewed. The reserve for unfunded lending commitments was $158 million at December 31, 2005, and $154 million at year-end 2004. The reserve for unfunded lending commitments relates to commercial loans and is included in other liabilities. Further information is inNote 7: Allowance for Loan Losses and Reserve for Unfunded Lending Commitmentsin theNotes to Consolidated Financial Statements. Information on the methodology we use in maintaining these balances is in theCritical Accounting Policies section.

Loans Held for SaleLoans held for sale include loans originated for sale or securitization as part of our core business strategy and the activities related to our ongoing portfolio risk management strategies to reduce exposure to areas of perceived higher risk. At December 31, 2005 and 2004, core business activity represented substantially all loans held for sale.

Our core business activity represents loans we originate with the intent to sell to third parties and primarily includes residential and commercial mortgages, and beginning in the second quarter of 2005, auto loans. Home equity lines were included in loans held for sale prior to December 2005, when management changed its intent for

Asset Quality

	Years Ended December 31,
(In millions)	2005			2004		2003
Loans, net	$	259,015			223,840		165,571
Allowance for loan losses	$	2,724			2,757		2,348
Allowance as % of loans, net		1.05	%		1.23		1.42
Allowance as % of nonaccrual and restructured loans		439			289		227
Allowance as % of nonperforming assets		378	%		251		205
Net charge-offs	$	207			300		652
Net charge-offs as % of average loans, net		0.09	%		0.17		0.41
Nonperforming assets
Nonaccrual loans	$	620			955		1,035
Foreclosed properties		100			145		111
Loans held for sale		32			157		82
Total nonperforming assets	$	752			1,257		1,228
Nonperforming assets to loans, net, foreclosed properties and loans held for sale		0.28	%		0.53		0.69

Year-End 2005 Nonaccrual
Commercial and Industrial Loans and Leases

Industry Classification

(In millions)	Outstanding
Services	$	80
Retail and wholesale trade		63
Manufacturing		51
Finance		24
Telecommunications		20
Property management		15
Building contractors		14
All other		40
Total	$	307

these lines and transferred the balance of $12.5 billion to the loan portfolio on December 31, 2005. We also transferred $1.2 billion of auto loans to loans held for sale in connection with securitization activity in 2005.

In 2005, we sold or securitized $32.8 billion in loans out of the loans held for sale portfolio, including $12.6 billion of commercial loans and $20.2 billion of consumer loans. Of the loans sold, $56 million were nonperforming. In 2004, we sold or securitized $21.0 billion of loans out of the loans held for sale portfolio, including $5.9 billion of commercial loans and $15.1 billion of consumer loans. Of these loans, $24 million were nonperforming. In addition, in 2004, we transferred $9.3 billion of home equity lines from loans held for sale into the loan portfolio.

We transferred $156 million of commercial loans and $13 million of related unfunded exposure to loans held for sale in 2005 as part of our portfolio management activities.

GoodwillIn connection with acquisitions, we record purchase accounting adjustments to reflect the respective fair values

Wachovia Corporation 2005 Annual Report 29

of the assets and liabilities of acquired entities, as well as certain exit costs related to these mergers, which have the effect of increasing goodwill. Purchase accounting adjustments are preliminary and are subject to refinement for up to one year following consummation.

In 2005, we recorded adjustments to our initial estimates of the fair value of SouthTrust’s assets and liabilities, recorded additional exit cost purchase accounting adjustments of $147 million and recorded a net $72 million adjustment to deferred income taxes. Together, these adjustments resulted in an increase to goodwill of $75 million and, at December 31, 2005, goodwill attributable to SouthTrust was $10.0 billion. SouthTrust-related purchase accounting adjustments are final.

In 2005, we favorably resolved certain exit cost liabilities related to the Wachovia Securities retail brokerage transaction and recorded a $61 million reduction in goodwill to reflect the exit cost purchase accounting impact. Goodwill relating to this transaction was $533 million at December 31, 2005.

Liquidity and Capital Adequacy

Liquidity planning and management are necessary to ensure we maintain the ability to fund operating costs effectively and to meet current and future obligations such as loan commitments and deposit outflows. Funding sources primarily include customer-based core deposits but also include purchased funds, maturing assets and other cash flows from operations. Wachovia is one of the nation’s largest core deposit-funded banking institutions. Our large deposit base, which is spread across economically strong southeast and southwest regions and high per-capita income East Coast and middle Atlantic regions, creates considerable funding diversity and stability. In addition to core deposits, wholesale funding sources provide a broad and diverse supplemental source of funds on both a secured and unsecured basis. Typically wholesale funding can be obtained for a broader range of maturities than core deposits, which adds flexibility in liquidity planning and management.

TheLiquidity Risk Managementsection has more information about this subject. Briefly, we manage our balance sheet in a manner we believe will provide adequate liquidity in a variety of underlying circumstances, ranging from current conditions to multiple, progressively more adverse situations. We estimate funding requirements and funding sources appropriate to each scenario and make current balance sheet adjustments if needed to maintain positive estimated liquidity in all identified circumstances.

Our senior and subordinated debt securities and commercial paper are highly rated by the major debt rating agencies, which reduces our funding costs. As noted below, we remained “well capitalized” for regulatory purposes at December 31, 2005.

Core DepositsCore deposits increased 7 percent from December 31, 2004, to $293.6 billion at December 31, 2005. Compared with 2004, average core deposits increased $47.1 billion to $278.7 billion and average low-cost core deposits increased $35.7 billion to $239.0 billion, including the SouthTrust impact.

The ratio of average noninterest-bearing deposits to average core deposits was 22 percent in both 2005 and 2004. The portion of core deposits in higher rate, other consumer time deposits was 15 percent at December 31, 2005, and 13 percent at December 31, 2004. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they generally are not available for immediate withdrawal. They are also less expensive to service.

Purchased FundsAverage purchased funds, which include wholesale borrowings with maturities of 12 months or less, were $98.7 billion in 2005 and $81.7 billion in 2004. The increase was primarily related to the SouthTrust merger. Purchased funds were $93.3 billion at December 31, 2005, and $83.9 billion at December 31, 2004, reflecting higher foreign and other time deposits, offset by the impact of the fourth quarter 2005 deconsolidation of a conduit we administer, which is discussed in theOff-Balance Sheet Transactionssection.

Long-term DebtLong-term debt increased $2.2 billion from December 31, 2004, to $49.0 billion at December 31, 2005, and included $1.5 billion of floating rate notes issued by an insurance subsidiary in 2005. In 2006, scheduled maturities of long-term debt amount to $8.8 billion. We anticipate either extending or replacing the maturing obligations.

Under our current shelf registration statement filed with the Securities and Exchange Commission, we have $19.6 billion of senior or subordinated debt securities, common stock or preferred stock available for issuance. In addition, we have available for issuance up to $7.6 billion under a medium-term note program covering senior or subordinated debt securities. Also, Wachovia Bank, National Association, has available a global note program for the issuance of up to $38.6 billion of senior or subordinated notes. In 2005, we issued $4.9 billion of subordinated bank notes under the global note program.

In January 2006, we issued a junior subordinated note and a forward contract for the sale of noncumulative perpetual preferred stock to a trust. The $2.5 billion of securities qualify as tier 1 capital and represent approximately 60 basis points of tier 1 capital, if the proceeds are divided into the December 31, 2005, risk-weighted assets of $404.1 billion plus the proceeds at a risk-weighting of 20 percent. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors.

30 Wachovia Corporation 2005 Annual Report

Credit LineWachovia Bank, National Association has a $1.9 billion committed back-up line of credit that expires in 2010. This credit facility contains a covenant that requires us to maintain a minimum level of adjusted total equity capital. We have not used this line of credit.

Dividend and Share Activity

	Years Ended December 31,
(In millions, except per share data)	2005		2004		2003
Dividends on common stock	$	3,039		2,306		1,665
Dividends per common share	$	1.94		1.66		1.25
Common shares repurchased		52		47		35
Average diluted common shares outstanding		1,585		1,370		1,340

Stockholders’ EquityThe management of capital in a regulated banking environment requires a balance between optimizing leverage and return on equity while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. Our goal is to generate attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios.

Stockholders’ equity increased modestly from year-end 2004 to $47.6 billion at December 31, 2005, including repurchases of 52 million common shares at a cost of $2.7 billion in connection with our share repurchase programs and net depreciation in the securities portfolio. The higher level of share repurchases in 2005 compared with 2004 reflected opportunistic deployment of excess capital partially related to the late 2004 SouthTrust acquisition as well as to higher earnings. In August 2005, our board of directors authorized a new 100 million share buyback program in addition to a 50 million share buyback program already in place. At December 31, 2005, we were authorized to buy back a remaining 124 million shares of common stock. Our 2005 Form 10-K has additional information related to share repurchases.

In 2004 and 2005, we entered into transactions involving the simultaneous sale of put options and purchase of call options on 10 million shares of our common stock. We entered into these equity collars to manage potential dilution associated with our employee stock options. These transactions were recorded as assets or liabilities with changes in fair value recorded in earnings. In 2005, we recorded net losses of $15 million related to market value changes of these collars. All of these transactions were exercised or have expired. We purchased 7.5 million shares related to these collars in 2005.

Subsidiary DividendsWachovia Bank, National Association, is the largest source of subsidiary dividends paid to the parent company. Capital requirements established by regulators limit dividends that this subsidiary and certain other of our subsidiaries can pay. Under these and other limitations, which include an internal requirement to maintain all

deposit-taking banks at the well capitalized level, at December 31, 2005, our subsidiaries had $4.0 billion available for dividends that could be paid without prior regulatory approval. Our subsidiaries paid $4.1 billion in dividends to the parent company in 2005.

Regulatory CapitalOur capital ratios were above regulatory minimums in 2005 and we continued to be classified as “well capitalized.” The tier 1 capital ratio decreased 51 basis points from December 31, 2004, to 7.50 percent, driven primarily by balance sheet growth. Our total capital ratio was 10.82 percent and our leverage ratio was 6.12 percent at December 31, 2005, and 11.11 percent and 6.38 percent, respectively, at December 31, 2004.

Summary of Off-Balance Sheet Exposures

	December 31, 2005
	Carrying
(In millions)	Amount		Exposure
Guarantees
Securities and other lending indemnifications	$	–		62,597
Standby letters of credit		108		35,568
Liquidity agreements		8		27,193
Loans sold with recourse		47		9,322
Residual value guarantees		–		1,344
Total guarantees	$	163		136,024

Off-Balance Sheet Transactions

In the normal course of business, we engage in a variety of financial transactions that under GAAP either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk. The following discussion also includes retained interests from securitization transactions.

GuaranteesGuarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or change in an underlying asset, liability, rate or index. Our guarantees are generally in the form of securities and other lending indemnifications, standby letters of credit, liquidity agreements, loans sold with recourse or residual value guarantees.

Securities and Other Lending IndemnificationsWe indemnify clients of our securities lending business. Our clients’ securities are loaned, on a fully collateralized basis, to third party broker/dealers. We indemnify our clients against broker default and support these indemnifications with collateral that is marked to market daily. We generally require cash or other highly liquid collateral from the broker/dealer. At December 31, 2005, there was $63.9 billion in collateral supporting the $62.6 billion loaned. Accordingly, there is no carrying amount associated with these indemnifications.

Wachovia Corporation 2005 Annual Report 31

Standby Letters of CreditWe issue standby letters of credit to customers in the normal course of our commercial lending businesses. Standby letters of credit are guarantees of performance primarily issued to support private borrowing arrangements, including commercial paper, bond financings and similar transactions. We also assist commercial, municipal, nonprofit and other customers in obtaining long-term tax-exempt funding through municipal bond issues and by providing credit enhancements in the form of standby letters of credit. Under these agreements and under certain conditions, if the bondholder requires the issuer to repurchase the bonds prior to maturity and the issuer cannot remarket the bonds, we are obligated to provide funding to the issuer to finance the repurchase of the bonds. We were not required to provide any funding to finance the repurchase of the bonds under these agreements in 2005.

Undrawn standby letters of credit amounted to $35.6 billion at December 31, 2005, and $30.8 billion at December 31, 2004. For letters of credit, we typically charge a fee equal to a percentage of the unfunded commitment. We recognized fee income on unfunded letters of credit of $251 million in 2005 and $230 million in 2004. The risk associated with standby letters of credit is incorporated in the overall assessment of our liquidity risk as described in theLiquidity Risk Managementsection. TheCredit Risk Managementsection describes how we manage on- and off-balance sheet credit risk.

Liquidity AgreementsWe arrange financing for certain customer transactions through multi-seller commercial paper conduits that provide customers with access to the commercial paper market. Conduits purchase a variety of asset-backed loans and receivables, trade receivables, securities and other assets from borrowers and issuers, and issue commercial paper to fund those assets.

We provide liquidity facilities on substantially all of the commercial paper issued by the conduits we administer. These conduits are considered VIEs under the provisions of FIN 46R, and our liquidity facility exposure is considered a variable interest. In November 2005, one of the conduits issued a subordinated note to a third-party investor that resulted in that investor becoming the holder of the majority of the expected loss, as determined under FIN 46R, and thus we ceased consolidation of the conduit. Subsequently, this deconsolidated conduit purchased substantially all of the assets of the other conduit we administer, which resulted in the consolidated conduit having no assets or commercial paper outstanding at December 31, 2005. The deconsolidated conduit had $9.7 billion of commercial paper outstanding at December 31, 2005.

From time to time, we securitize assets originated through our normal loan production channels or purchased in the open market, including fixed rate municipal bonds. In

securitization transactions, assets are typically sold to a QSPE, which then issues beneficial interests in the form of senior and subordinated interests, including residual interests, collateralized by the assets. The QSPE is a legally distinct, bankruptcy remote entity that is used in these transactions to isolate the cash flows associated with the assets from originator default. This legal isolation and the allocation of risk to different tranches of securities issued by the QSPE allow securitization transactions to generally receive cost-advantaged funding rates. In certain cases, the investors in the debt issued by the QSPE are conduits that are administered by other parties. We provide liquidity agreements on the commercial paper issued by the conduits to fund the purchase of the QSPE’s debt.

The provisions of the liquidity agreements require us to purchase an interest in the assets financed by the conduits if the conduits are unable to continue to issue commercial paper to finance those assets. The ability to market commercial paper is affected by general economic conditions and by the credit rating of the party providing the liquidity agreement. To date, there has not been a situation where these conduits could not issue commercial paper. We received $2 million in 2005 and $4 million in 2004 in fees for providing these liquidity agreements.

In addition, at the discretion of the conduit administrator and in accordance with the provisions of the liquidity agreements, we may be required to purchase assets from the conduits we administer and/or those administered by third parties. In some cases, the fair value of the assets may be less than their par value, and consequently, we record a loss for the difference between these values. Any losses for assets purchased from the deconsolidated conduit would be after losses absorbed by the third-party holder of the subordinated note. In 2005 and 2004, we did not have significant losses associated with these purchases.

We received fees of $69 million in 2005 and $49 million in 2004 for servicing assets held by QSPEs to which we provide liquidity or in which we have retained interests.

In fixed rate municipal bond securitizations, similar to other securitization transactions, the bonds are sold to a QSPE, which issues short-term tax-exempt securities and residual interests collateralized by the assets. Investors purchase these tax-exempt debt securities and generally we retain the residual interests. We also provide liquidity agreements on these debt securities issued by the QSPEs. The market for tax-exempt securities is generally very liquid, but in the event the debt securities could not be remarketed due to market conditions, the liquidity agreements would require us to purchase the debt securities from the QSPE at par value.

Loans Sold with RecourseIn certain loan sales or securitizations, we provide recourse to the buyer that requires us to repurchase loans at par value plus accrued interest on

32 Wachovia Corporation 2005 Annual Report

the occurrence of certain events, which are credit related, within a certain period of time. In many cases, we are able to recover amounts paid from the sale of the underlying collateral. In 2005 and 2004, we did not repurchase a significant amount of loans associated with these agreements.

Residual Value GuaranteesWe provide residual value guarantees as part of certain leasing transactions of corporate assets, including railcars, office buildings and corporate aircraft. The lessors in these leases are generally large financial institutions or their leasing subsidiaries. These guarantees protect the lessor from loss on sale of the related asset at the end of the lease term. To the extent that a sale results in proceeds less than a stated percent (generally 80 percent to 89 percent) of the asset’s cost less depreciation, we will be required to reimburse the lessor under our guarantee. Residual value guarantees outstanding at December 31, 2005, included $1.3 billion representing assets under operating leases, of which $1.1 billion related to operating leases of railcars.

Retained InterestsAs discussed above, we periodically securitize assets originated through our normal loan production channels or warehoused on behalf of clients through purchases in the open market. In securitization transactions, assets are typically sold to off-balance sheet, special purpose entities. Certain securitization transactions result in a complete transfer of risk to investors, and in others, we retain risk in the form of senior or subordinated notes or residual interests in the securities issued by the off-balance sheet entities. Retained interests from securitizations recorded as either available for sale securities, trading account assets or loans amounted to $6.4 billion at December 31, 2005, and $6.5 billion at December 31, 2004.

In 2005, we securitized and sold $9.6 billion of consumer loans, retaining $191 million in the form of investment grade securities and $210 million in the form of residual interests. Included in other income were net gains of $10 million in 2005 related to these securitizations. This compares with net gains of $20 million related to securitizations in 2004, when we securitized and sold $6.1 billion of consumer loans, retaining $195 million in the form of investment grade securities and $141 million in the form of residual interests.

We have credit, liquidity and market risk associated with our retained interests. Determining the fair value of our retained interests is subjective and is described in more detail in theCritical Accounting Policies section. In addition, theSecuritiessection includes more information.

Risk Governance and Administration

OverviewOur business exposes us to several risk types including strategic business risks, credit, market, liquidity, operational, compliance, reputation, litigation and other risks. Our corporate risk governance structure enables us

to weigh risk and return to produce sustainable revenue, reduce earnings volatility and increase shareholder value.

Board of Director Committees and Management

Operating CommitteeOur risk governance structure begins with our board of directors, which evaluates risk and oversees the management of risk through its Risk Committee and Audit Committee.

The board of directors has approved management accountabilities and supporting committee structures to effect risk governance. Our chief executive officer is responsible for the overall risk governance structure. Our chief risk officer reports directly to our chief executive officer and is responsible for independent evaluation and oversight of our credit, market and operational risk-taking activities and our risk governance processes.

We oversee strategic business risk and our general business affairs through the Management Operating Committee. This committee meets monthly and is composed of the senior management of the company, including all executives who report directly to the chief executive officer.

Four Components of Risk GovernanceOur risk management strategy is aligned around four components of risk governance: our business units; our independent risk management function joined by other corporate staff functions including legal, finance, human resources and technology; internal audit; and risk committees.

Our business units are responsible for identifying, acknowledging, quantifying, mitigating and managing all risks. Business unit management determines and executes our strategies, which puts them closest to the changing nature of risks and therefore best able to take action to manage and mitigate those risks. Our management processes, structure and policies help us comply with laws and regulations and provide clear lines of sight for decision-making and accountability.

Our risk management organization provides objective oversight of our risk-taking activities and translates our overall risk appetite into approved limits. Risk management works with the business units and functional areas to establish appropriate standards and also monitors business practices in relation to those standards. Risk management proactively works with the businesses and senior management to ensure we have continuous focus on key risks in our businesses and emerging trends that may change our risk profile.

Our internal audit group, which reports directly to the Audit Committee of the board of directors, provides an objective assessment of the design and execution of our internal control system including our management systems, risk governance, and policies and procedures. Internal audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant financial,

Wachovia Corporation 2005 Annual Report 33

managerial and operating information is complete, accurate and reliable; and that employee actions comply with our policies and applicable laws and regulations.

Our risk committees provide a mechanism to bring together the many perspectives of our management team to discuss emerging risk issues, monitor risk-taking activities and evaluate specific transactions and exposures. All risk committees ultimately report to the Senior Risk Committee, which is chaired by the chief executive officer, which in turn reports to the board of directors, and is composed of certain members of the Management Operating Committee. The Senior Risk Committee is charged with monitoring the direction and trend of risks relative to business strategies set by the Management Operating Committee and relative to market conditions and other external factors. It reviews identified emerging risks and directs action to appropriately mitigate those risks. This committee also ensures that responsibilities and accountabilities for risk management and corrective action on control matters are properly delegated to appropriate individuals and implemented on a timely basis. The Senior Risk Committee directly oversees the activities of these five key management committees: Credit Risk, Market Risk, Operational Risk, Asset and Liability, and Conflicts of Interest.

Credit Risk ManagementCredit risk is the risk of loss due to adverse changes in an issuer’s, borrower’s or counter-party’s ability to meet its financial obligations under agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure of that transaction and the parties involved. While we are subject to some credit risk in our trading, investing, liquidity, funding and asset management activities, it is typically only incidental in these businesses. Credit risk is central to the profit strategy in lending and other financing activities, and as a result, the majority of our credit risk is associated with these activities.

Credit risk is managed through a combination of policies and procedures and authorities that are tracked and regularly updated in a centralized database. The board of directors grants credit authority to the chief executive officer, who in turn, has delegated that authority to the chief risk officer. Credit authorities are further delegated through the independent risk management organization. Most authority to approve credit exposure is granted to officers in the risk management organization, who are experienced in the industries and loan structures over which they have responsibility, and are independent of the officers who are responsible for generating new business.

There are two processes for approving credit risk exposures. The first involves standard approval structures (such as rapid decision scorecards) for use in retail, certain small business lending and most trading activities. The second approach involves individual approval of commercial exposures

based, among other factors, on the financial strength of the borrower, assessment of the borrower’s management, industry sector trends, the type of exposure, the transaction structure and the general economic outlook.

Credit Risk Review is an independent unit that performs risk process reviews and evaluates a representative sample of individual credit extensions. Credit Risk Review has the authority to change internal risk ratings and is responsible for assessing the adequacy of credit underwriting and servicing practices. This unit reports directly to the Risk Committee of the board of directors.

Economic capital for all credit risk assets is calculated by the credit risk management group within the risk management organization.

Commercial CreditAll commercial loans are assigned internal risk ratings reflecting the probability of the borrower defaulting on any obligation and the probable loss in the event of a default. Commercial credit extensions are also evaluated using a RAROC model that considers pricing, internal risk ratings, loan structure and tenor, among other variables. This produces a risk and return analysis, enabling the efficient use of economic capital attributable to credit risk. The same credit processes and checks and balances are used for unfunded commitments as for funded exposures.

The Credit Risk Committee approves policy guidelines that limit the maximum level of credit exposure to individual commercial borrowers or a related group of borrowers. These guidelines are based on the internal ratings associated with the credit facilities extended to each borrower as well as on the economic capital associated with them. Concentration risk is also managed through geographic and industry diversification and loan quality factors. The Credit Risk Committee approves industry concentration and country exposure limits.

Borrower exposures may be designated as “watch list” accounts when warranted by either environmental factors or individual company performance. Such accounts are subjected to additional review by the business line management, risk management and credit risk review staff, and our chief risk officer in order to adequately assess the borrower’s credit status and to take appropriate action. In addition, projections of both nonperforming assets and losses for future quarters are performed monthly. We have also established special teams composed of highly skilled and experienced lenders to manage problem credits. These teams handle commercial recoveries, workouts and problem loan sales.

Commercial credit checks and balances, the independence of risk management functions and specialized processes are all designed to avoid credit problems where possible, and to recognize and address problems early when they do occur.

34 Wachovia Corporation 2005 Annual Report

Retail CreditIn retail lending, we manage credit risk primarily from a portfolio view. The risk management division, working with the line of business, determines the appropriate risk and return profile for each portfolio, using a variety of tools including quantitative models and scorecards tailored to meet our specific needs.

By incorporating these models and policies into computer programs or “decisioning engines,” much of the underwriting is automated. Once a line of credit or other retail loan is extended, it is included in the overall portfolio, which is continuously monitored for changes in delinquency trends and other asset quality indicators. Delinquency action on individual credits is taken monthly or as needed if collection efforts are required.

VAR Profile by Risk Type
(In millions)	2005					2004
Risk Category	High		Low		Avg		High	Low	Avg
Interest rate	$	25.9		10.0	15.1		20.3	4.7	12.4
Foreign exchange		2.1		0.2	0.8		3.0	0.2	1.2
Equity		16.2		5.6	10.4		20.0	6.2	10.7
Commodity		1.3		0.1	0.5		0.9	—	0.2
Aggregate	$	28.4		11.9	19.2		27.4	11.8	18.7

Daily VAR Backtesting

(Dollars of revenue in millions)

Histogram of Daily Profit and Loss in 2005

(Dollars of revenue in millions)

Market Risk ManagementMarket risk represents the risk of declines in value that on- and off-balance sheet positions could realize given a variety of market movements, such as changes in interest rates, equity prices and foreign exchange rates. We trade a variety of equities, debt securities, foreign exchange instruments and other derivatives to provide customized solutions for the risk management needs of our customers and for proprietary trading. Market risk is inherent in all these activities.

Market risk management activities are overseen by an independent market risk group, which reports outside of the business units to the risk management group. Risk measures include the use of value-at-risk (VAR) methodology with limits approved by the Market Risk Committee and subsequently by the Risk Committee. The Market Risk Committee also approves a variety of other trading limits designed to match trading activities to our appetite for risk and to our strategic objectives.

The VAR methodology assesses market volatility over the most recent 252 trading days to estimate within a given level of confidence the maximum trading loss over a period of time that we would expect to incur from an adverse movement in market rates and prices over the period. We calculate 1-day VAR at the 97.5 percent and 99 percent confidence levels, and 10-day VAR at the 99 percent confidence level. The VAR model is supplemented by stress testing on a daily basis. The analysis captures all financial instruments that are considered trading positions. Our 1-day VAR limit in 2005 was $30 million. The total 1-day VAR was $18 million at December 31, 2005, and $21 million at December 31, 2004, and primarily related to interest rate risk and equity risk. The high, low and average VARs in 2005 were $28 million, $12 million and $19 million, respectively.

Operational Risk ManagementOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is inherent in all our businesses. Operational risk is divided into the following functional risk areas: vendor risk, compliance, technology, financial, fiduciary, human capital, business continuity planning, legal, change and implementation risk, and internal and external fraud.

Operational risk is managed through an enterprise-wide framework for organizational structure, processes and technologies. This framework has been developed and implemented by an independent operational risk team that reports to the risk management group. This team is composed of a corporate operational risk group as well as operational risk leaders aligned with our business units and support functions. In addition to our governance process, we devote significant emphasis and resources to continuous refinement of processes and tools that aid us in proactive identification and management of material operational risks, including a rigorous self-assessment

Wachovia Corporation 2005 Annual Report 35

process. Additionally, we focus on training, education and development of a risk management culture that reinforces the message that all employees are responsible for the management of operational risk. We believe proactive management of operational risk is a competitive advantage due to lower earnings volatility, greater customer satisfaction and enhanced reputation.

One component of operational risk is compliance risk. This risk is managed by our compliance group, which works within the business lines but reports centrally to the risk management group under the leadership of our chief compliance officer. This structure allows compliance risk management to consult with the business unit as policies and procedures are developed and enables close monitoring of daily activities. As part of our compliance program, we devote significant resources to combat money laundering and terrorist financing, and to safeguard our customers’ data.

Managing merger risk and change in general is another key component of operational risk. We use a well-documented, disciplined process to manage the inherent risk of change (for example, merger integrations, outsourcing and new product developments) and to assess organizational readiness. The organizational readiness assessment process provides readiness and risk information related to staffing, training, customer communication, compliance, vendors, corporate real estate, technology infrastructure, application systems, operational support and reconcilement. We pay close attention to the overall organizational capacity and interdependencies, and to our ability to execute.

We also focus on managing other key operational risks such as business continuity, reliance on vendors, and privacy and information security. These risks are not unique to our institution and are inherent in the financial services industry. We link business performance measurements to operational risk through risk profiles, quality of the internal controls and capital allocation.

Liquidity Risk ManagementLiquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. In our liquidity management process, we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs.

The Liquidity Risk Management table focuses only on future obligations. In this table, all deposits with indeterminate maturities, such as demand deposits, checking accounts, savings accounts and money market accounts, are presented as having a maturity of one year or less.

Funding sources primarily include customer-based core deposits, purchased funds, collateralized borrowings, cash flows from operations, and asset securitizations and sales.

Liquidity Risk Management

December 31, 2005
					Over One		Over Three		Over
			One Year		Year Through		Years Through		Five
(In millions)	Total		or Less		Three Years		Five Years		Years
Contractual Commitments
Deposit maturities	$	324,894		304,660		15,170		4,599		465
Long-term debt		48,971		8,826		16,833		5,337		17,975
Operating lease obligations		4,540		592		1,071		903		1,974
Capital lease obligations		18		3		6		4		5
Investment obligations		817		817		—		—		—
Other purchase obligations		980		783		161		36		—
Total	$	380,220		315,681		33,241		10,879		20,419

Cash flows from operations are a significant component of liquidity risk management and consider both deposit maturities and the scheduled cash flows from loan and investment maturities and payments, along with dividend payments.

We purchase funds on an unsecured basis in the federal funds, commercial paper, bank note, national certificate of deposit and long-term debt markets. In addition, we routinely use securities in our trading portfolio and in our available for sale portfolio as collateral for secured borrowings. In the event of severe market disruptions, we have access to secured borrowings through the Federal Reserve Bank. Our ability to access unsecured funding markets and the cost of funds acquired in these markets are primarily dependent on our credit rating, which is currently P-1/A-1 for short-term paper and Aa3/A+ for senior debt (Moody’s and Standard & Poor’s, respectively). Our goal is to maintain a long-term AA credit rating. We believe a long-term credit rating of AA will provide us with many benefits, including access to additional funding sources at lower rates (assuming a static interest rate environment). Conversely, a downgrade from our current long-term debt ratings would have an adverse impact, including higher costs of funds, access to fewer funding sources and possibly the triggering of liquidity agreements. Providing funding under liquidity agreements could result in our forgoing more profitable lending and investing opportunities as well as dividend payments because of funding constraints.

Asset securitizations provide an alternative source of funding. Except for the customer-oriented conduit activities, we do not rely heavily on the securitization markets as a source of funds but instead we use securitizations to diversify risk and manage regulatory capital levels. Widening of the credit spreads in the securitization market may make accessing these markets undesirable. If securitizations become undesirable, we may discontinue certain lending activities and/or increase our reliance on alternative funding sources.

36 Wachovia Corporation 2005 Annual Report

The Asset and Liability Committee is responsible for liquidity risk management. This committee approves liquidity limits and receives thorough periodic reports on our liquidity position. The liquidity reporting details compliance with limits and with guidelines. It includes a review of forecasted liquidity needs based on scheduled and discretionary asset and liability maturities. It evaluates the adequacy of funding sources to meet these needs. In addition, stress tests are evaluated to determine required levels of funding in an adverse environment. These stress tests include reduced access to traditional funding sources in addition to unexpected draw-downs of contingent liquidity exposures (for example, liquidity agreements with conduits).

DerivativesWe use derivatives to manage our exposure to interest rate risk, to generate profits from proprietary trading and to assist our customers with their risk management objectives. All derivatives are recorded on the balance sheet at fair value with realized and unrealized gains and losses included either in the results of operations or in other comprehensive income, depending on the nature, purpose and designation of the derivative transaction. Derivative transactions are often measured in terms of notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is not usually exchanged, but is used only as the basis on which interest or other payments are calculated.

For interest rate risk management, we use derivatives as a cost- and capital-efficient way to hedge on-balance sheet assets, liabilities and future financial transactions. Derivatives used for interest rate risk management include various interest rate swap, futures, forward and option structures with indices that relate to the pricing of specific on-balance sheet instruments. Trading and customer derivatives include a wide array of interest rate, commodity, foreign currency, credit and equity derivatives.

Swap contracts are commitments to settle in cash at a future date or dates, which may range from a few days to a number of years, based on differentials between specified financial indices as applied to a notional principal amount. Futures and forward contracts are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time, a financial instrument or commodity at a contracted price that may also be settled in cash, based on differentials between specified indices. Credit derivatives are contractual agreements that in exchange for a fee provide insurance against a credit event including bankruptcy, insolvency, credit downgrade and failure to meet payment obligations of one or more referenced credits.

We measure credit exposure on our derivative contracts by taking into account both the current market value of each contract in a gain position, which is reported on the balance sheet, and a prudent estimate of potential change in value over each contract’s life. The measurement of the potential future exposure for each derivative is based on a simulation of market rates and generally takes into account legally enforceable risk mitigating agreements for each obligor such as netting and collateral.

We manage the credit risk of these instruments in much the same way we manage credit risk of our loan portfolios, by establishing credit limits for each counterparty and by requiring collateral agreements for dealer transactions. For nondealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When we have more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with that counterparty. TheCredit Risk Managementsection has more information on the management of credit risk.

The market risk associated with interest rate risk management derivatives is fully incorporated into our earnings simulation model in the same manner as financial instruments for which the interest-bearing balance is reflected on the balance sheet. TheInterest Rate Risk Managementsection describes the way in which we manage this risk. The market risk associated with trading and customer derivative positions is managed using VAR methodology, as described in theMarket Risk Managementsection.

More information on our derivatives used for interest rate risk management is included inNote 1: Summary of Significant Accounting Policies, Note 3: Trading Account Assets and LiabilitiesandNote 19: Derivativesin theNotes to Consolidated Financial Statements.

Interest Rate Risk ManagementOne of the fundamental roles in banking is the management of interest rate risk, or the risk that changes in interest rates may diminish income we earn on loans, securities and other earning assets. The following discussion explains how we oversee the interest rate risk management process and describes the actions we take to protect earnings from interest rate risk.

A balance sheet is considered asset sensitive when its assets (loans and securities) reprice faster or to a greater extent than liabilities (deposits and borrowings). An asset-sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when interest rates decline. Our large and relatively rate-insensitive deposit base funds a portfolio

Wachovia Corporation 2005 Annual Report 37

Market Rate Scenarios

of primarily floating rate commercial and consumer loans. This mix naturally creates a highly asset-sensitive balance sheet. Our focus on new customer acquisition and quality customer service has enabled us to generate deposit growth that has far outpaced loan growth, significantly adding to our naturally asset-sensitive position. To achieve more neutrality, we maintain a large portfolio of fixed rate discretionary instruments such as loans, securities and derivatives.

We often elect to use derivatives to protect assets, liabilities and future financial transactions from changes in interest rates. When deciding whether to use derivatives instead of investing in securities to reach the same goal, we consider a number of factors, such as cost, efficiency, the effect on our liquidity and capital, and our overall interest rate risk management strategy. We choose to use derivatives when they provide greater relative value or more efficient execution of our strategy than securities. The derivatives we use for interest rate risk management include various interest rate swaps, futures and forwards and in many cases are designated and accounted for as accounting hedges. We fully incorporate the market risk associated with interest rate risk management derivatives into our earnings simulation model in the same manner as other on-balance sheet financial instruments.

We analyze and manage the amount of risk we are taking to changes in interest rates by forecasting a wide range of interest rate scenarios for time periods as long as 36 months. In analyzing interest rate sensitivity for policy measurement, we compare forecasted earnings per share in both “high rate” and “low rate” scenarios to the “market forward rate.” The policy measurement period is 12 months in length, beginning with the first month of the forecast. Our objective is to ensure we prudently manage interest-bearing assets and liabilities in ways that improve financial performance without unduly putting earnings at risk. Our policy is to limit the risk we can take through balance sheet management actions to 5 percent of earnings per share in both falling and rising rate environments.

The “market forward rate” is constructed using currently implied market forward rate estimates for all points on the

yield curve over the next 36 months. Our standard approach evaluates expected earnings in a 400 basis point range, or 200 basis points both above and below the “market forward rate” scenario. Our various scenarios together measure earnings volatility to a December 2006 federal funds rate ranging from 2.64 percent to 6.64 percent.

We simultaneously measure the impact of a parallel and nonparallel shift in rates on each of our interest rate scenarios. A parallel shift would, as the term implies, shift all points on the yield curve by the same increments. For example, by the twelfth month in our policy measurement period, short-term rates such as the federal funds rate would increase by 200 basis points over the “market forward rate,” while longer term rates such as the 10-year and 30-year treasury bond rates would increase by 200 basis points as well. A nonparallel shift would consist of a 200 basis point increase in short-term rates, while long-term rates would increase by a different amount. A rate shift in which short-term rates rise to a greater degree than long-term rates is referred to as a “flattening” of the yield curve. Conversely long-term rates rising to a greater degree than short-term rates would lead to a steepening of the yield curve.

The impact of a nonparallel shift in rates depends on the types of assets in which funds are invested and the shape of the yield curve implicit in the “market forward rate” scenario. In the first half of 2004, the threat of rising rates, but uncertain timing, kept the yield curve very steep. Before the Federal Reserve’s Federal Open Market Committee’s tightening campaign began, our investment and hedging strategies were designed to manage both repricing risk and curve flattening that typically accompanies a rapid rise in short-term rates. Much of the anticipated flattening has occurred throughout 2004 and 2005. At December 31, 2005, the spread between the 10-year treasury note rate and the federal funds rate was 30 basis points, which is below the long-term average of 124 basis points. While we still believe further flattening is possible, and we will continue to measure the impact of a nonparallel shift in rates, we feel the risk of earnings volatility due to further flattening has somewhat subsided.

Considering the balance of risks for 2006, we will focus primarily on managing the value created through our expanded deposit base as we protect the net interest margin against the pressures of rising short-term rates, and relative to 2005, a flatter yield curve. We expect to rely on our large base of low-cost core deposits to fund incremental investments in loans and securities. The characteristics of the loans we add will prompt different strategies. Fixed rate loans, for example, diminish the need to buy discretionary investments, so if more fixed rate loans were added to our loan portfolio, we would likely allow existing discretionary investments to mature or to be liquidated. If more variable rate loans were added to our loan portfolio, we would likely

38 Wachovia Corporation 2005 Annual Report

allow fixed rate securities to mature or to be liquidated, and then add new derivatives that, in effect, would convert the incremental variable rate loans to fixed rate loans.

Policy Period Sensitivity Measurement

	Actual Fed			Implied Fed		Percent
	Funds Rate at			Funds Rate at		Earnings
	January 1, 2006			December 31, 2006		Sensitivity
Market Forward Rate Scenarios(a)		4.26	%		4.64		—
High Rate Composite					6.64		(1.5	)
Low Rate					2.64		1.7

^(a)Assumes base federal funds rate mirrors market expectations.

Earnings SensitivityThe Policy Period Sensitivity Measurement table provides a summary of our interest rate sensitivity measurement.

Our model’s forward rate expectations imply an additional 25 basis points to 50 basis points of tightening for the federal funds target rate by year-end 2006. If these expectations prove to be correct, the spread between the 10-year treasury note rate and the federal funds rate would compress from a positive 30 basis points of slope at December 31, 2005, to an inverted yield curve of negative 26 basis points of slope by year-end 2006. The current market expectations, therefore, do not reflect a yield curve shape consistent with a scenario where short-term rates rise an additional 200 basis points. Therefore, our high rate sensitivity to the “market forward rate” scenario is measured using three different yield curve shapes. These yield curves are constructed to represent the likely range of yield curve shapes that may prevail in an environment where short-term rates rise 200 basis points above current market expectations. The reported sensitivity is a composite of these three scenarios.

In December 2005, our earnings simulation model indicated earnings would be negatively affected by 1.5 percent in a “high rate composite” scenario relative to the “market forward rate” over the policy period. Additionally, we measure a scenario where short-term rates gradually decline 200 basis points over a 12-month period while longer-term 10-year treasury note and 30-year treasury note rates decline by less than 200 basis points relative to the “market forward rate” scenario. The model indicates earnings would be positively affected by 1.7 percent in this scenario.

While our interest rate sensitivity modeling assumes management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and we implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, we formulate strategies aimed at protecting earnings from the potential negative effects of changes in interest rates.

Financial DisclosureWe have always maintained internal controls over financial reporting, which generally include those controls relating to the preparation of our consolidated financial statements in conformity with GAAP. As a bank holding company, we are subject to the internal control reporting and attestation requirements of the Federal Deposit Insurance Corporation Improvement Act, and therefore, we are very familiar with the process of maintaining and evaluating our internal controls over financial reporting. We also are focused on our disclosure controls and procedures, which as defined by the Securities and Exchange Commission, are generally those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in our reports filed with the SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our Disclosure Committee, which includes senior representatives from our treasury, risk, legal, accounting and investor relations departments, as well as from our four core business segments, assists senior management in its oversight of the accuracy and timeliness of our disclosures, as well as in implementing and evaluating our overall disclosure process. As part of our disclosure process, accounting representatives in our finance division and representatives from our four core business segments prepare and review monthly, quarterly and annual financial reports, which also are reviewed by each of the business segment’s chief financial officers and senior management. Accounting representatives in our finance division also conduct further reviews with our senior management team, other appropriate personnel involved in the disclosure process, including the Disclosure Committee and internal audit, and our independent auditors and counsel, as appropriate. Financial results and other financial information also are reviewed with the Audit Committee of the board of directors on at least a quarterly basis. In addition, accounting representatives in our finance division meet with representatives of our primary federal banking regulators on a quarterly basis to review, among other things, income statement and balance sheet trends, any significant or unusual transactions, changes in or adoption of significant accounting policies, and other significant non-financial data, as identified by our representatives. The chief executive officer and the chief financial officer also meet with the federal banking regulators on a semiannual basis. As required by applicable regulatory requirements, the chief executive officer and the chief financial officer review and make various certifications regarding the accuracy of our periodic public reports filed with the SEC, our disclosure controls and procedures, and our internal control over financial reporting. With the assistance of the Disclosure Committee, we will continue to assess and monitor our disclosure controls and procedures, and our internal controls over financial reporting, and will make refinements as necessary.

Wachovia Corporation 2005 Annual Report 39

Accounting and Regulatory Matters

The following information addresses significant new developments in accounting standard setting that will affect us, as well as new or proposed legislation that will continue to have a significant impact on our industry.

Share-Based PaymentsIn December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised) (SFAS 123R),Share-Based Payments, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in income. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R is effective for share-based awards granted on or after January 1, 2006. Early adoption is permitted. We adopted the fair value method of accounting for stock options in 2002. Accordingly, the implementation of SFAS 123R was not expected to have a material impact on our consolidated financial position or results of operations. However, interpretations now indicate that, upon implementation of SFAS 123R, awards granted to retirement-eligible employees must be expensed in full at the date of grant and awards granted to employees who will become retirement-eligible during the stated vesting period must be expensed from the date of grant to their retirement-eligible dates. Currently, awards to retirement-eligible employees are expensed over the full stated vesting period. We believe the impact of this change in accounting for awards to retirement-eligible employees will increase compensation expense in the period in which the grant is made by approximately $80 million before income taxes, assuming we continue to grant awards at our current levels and on our current terms. This amount would have been recognized over the full stated vesting period, generally five years in our recent awards.

Leveraged Lease AccountingAs previously disclosed, the FASB has been discussing several matters relating to leveraged lease accounting. Currently, SFAS No. 13,Accounting for Leases, (SFAS 13) as amended and interpreted, states that if a change in an important lease assumption changes the total estimated net income under the lease, then a recalculation of the net investment in the leveraged lease must occur. The FASB has issued a proposed FASB Staff Position (FSP) that would amend SFAS 13 to provide that changes affecting the timing of cash flows but not the total net income under a leveraged lease will also trigger a recalculation of the lease. Under the proposed FSP, recalculations affecting existing leveraged leases would result in a one-time noncash charge to be recorded as a cumulative effect of a change in accounting principle on the date of adoption. The adoption date in the proposed FSP is December 31, 2005, although the FASB has since indicated the effective date will be January 1, 2007. The proposed FSP provides that amounts would be recognized as income over the remaining terms of the

affected leases, which in the aggregate would approximate the amount of the charge initially taken. The proposed FSP was subject to a comment period, is currently being deliberated by the FASB, and the provisions and effective date of the proposed FSP are subject to change. We cannot predict with certainty what the final FSP will provide.

We have two broad classes of leveraged lease transactions that would be affected if the final FSP is the same as the proposed FSP: Lease-In, Lease-Out transactions (LILOs) and a second group of transactions that the Internal Revenue Service (IRS) broadly refers to as Sale-In, Lease-Out transactions (SILOs). SILOs principally include service contract and qualified technological equipment leases. As previously disclosed, in 2004 Wachovia and the IRS settled all issues relating to the IRS’s challenge of the tax position on LILOs entered into by First Union Corporation and legacy Wachovia Corporation. The resolution of these LILO issues led to a change in the timing of cash flows under the lease transactions. Accordingly, if the FSP is finalized as proposed and based on our interpretation of the proposed FSP, we currently estimate we would be required to recognize a one-time after-tax noncash charge to the results of operations for LILOs between $500 million and $800 million on the effective date of the final FSP. Under the proposed FSP, this amount would be recorded as a cumulative effect of a change in accounting principle, which would be presented on the consolidated statements of income after “income before cumulative effect of a change in accounting principle,” and would be recognized as income over the remaining terms of the affected LILOs. Retrospective restatement of prior periods is not permitted under the proposed FSP. Assuming the final FSP is the same as the proposed FSP, we currently estimate that the amounts to be recognized as income over the remaining terms of the affected LILOs would not have a material impact to our earnings per share in future periods. In addition, we also believe the recognition of the one-time noncash charge for LILOs would not have an impact on our financial outlook relating to revenue and expense items or capital ratios for 2006 as described in theOutlooksection.

The proposed FSP may also affect our SILOs. The IRS has announced its intention to challenge the industry-wide tax treatment of SILOs. We believe our tax treatment of SILOs is consistent with well-established tax law and it is probable we would prevail if litigation were to become necessary. However, assuming the final FSP and the final FASB Interpretation relating to uncertain tax positions discussed below are finalized as proposed, and in the event we were unable to meet the recognition threshold of the FASB Interpretation, we might incur a material one-time noncash charge to our consolidated results of operations for SILOs. This one-time charge for SILOs would be recorded as a cumulative effect of a change in accounting principle and an amount approximating the charge would be recognized as income over the remaining life of the affected SILOs.

40 Wachovia Corporation 2005 Annual Report

We are currently unable to predict with certainty the financial impact, if any, of a one-time charge for SILOs.

Income TaxesThe FASB has issued a proposed FASB Interpretation,Uncertain Tax Positions, to clarify the criteria for recognition of income tax benefits in accordance with SFAS No. 109,Accounting for Income Taxes. Under the proposed Interpretation, a company would recognize in its financial statements its best estimate of the benefit associated with a tax position only if it is considered “probable”, as defined in SFAS No. 5,Accounting for Contingencies, of being sustained on audit based solely on the technical merits of the tax position. The effective date in the proposed Interpretation is December 31, 2005, although the FASB has since indicated the effective date will be January 1, 2007. Implementation of the final Interpretation will occur through a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. Under the proposed Interpretation, only tax positions that meet the “probable” threshold at the effective date would continue to be recognized; however, the FASB has indicated the threshold will be changed to “more likely than not” in the final Interpretation. We are currently analyzing the proposed Interpretation and have not determined its potential impact on our consolidated financial position or results of operations, including, as noted above, for SILO transactions. The proposed Interpretation was subject to a comment period, is currently being deliberated by the FASB, and is subject to change. We cannot predict with certainty what the final Interpretation will provide.

Financial InstrumentsThe FASB has issued three separate exposure drafts that address accounting for the transfer and holding of financial instruments. These proposals would amend SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and one would also amend SFAS No. 133,Accounting for Derivative Instruments. The proposals would (i) revise or clarify the criteria for derecognition of financial assets after a transfer; (ii) change the recognition method at the date of transfer for certain retained positions, including servicing assets, to fair value from an allocated carrying amount; (iii) provide an option to elect recognition of servicing assets at fair value, with changes in fair value recorded in income; (iv) provide an option to elect recognition of hybrid financial instruments at fair value as one financial instrument, with changes in fair value recorded in income (currently, hybrid financial instruments are required to be separated into two instruments, a derivative and a host, and generally only the derivative instrument is recorded at fair value); and (v) require that beneficial interests in securitized assets be evaluated for derivatives, either freestanding or embedded, under SFAS 133 (currently, this is not required). These proposals have effective dates for transfers after July 1, 2006, and additional transition provisions that depend on the types of financial transfers involved. The FASB has indicated in its final deliberations that the pro-

posals regarding servicing assets and hybrid financial instruments will be finalized and issued in the first quarter of 2006, while the proposals related to the transfers of financial assets are not expected to be finalized and issued until later in 2006. We cannot predict with certainty what the final amendments will provide. We are currently assessing the impact of these proposed amendments on our consolidated financial position and results of operations. In addition, we transfer commercial mortgage loans to trusts that issue various classes of securities backed by the loans (CMBS) to investors. Recently, the FASB has initiated a project regarding securitization structures that use a QSPE, including CMBS transactions, and the related servicing activities. The FASB is considering the need for clarifying guidance, which may result in changes to the structure of and/or the accounting for these transactions. We cannot predict with certainty whether any guidance will be issued or what the transition provisions for implementing the guidance will be.

Business CombinationsThe FASB issued a Proposed Statement,Business Combinations, which would replace SFAS No. 141,Business Combinations, in June 2005. While the Proposed Statement retains many of the current fundamental concepts, including the purchase method of accounting, it proposes changes in several areas. Under the Proposed Statement, consideration paid in a business combination would be measured at fair value, with fair value determined on the consummation date, rather than on announcement date, as is the current practice. Additionally, fair value would include obligations for contingent consideration and would exclude transaction costs, which would be recorded as expenses when incurred. Currently, contingent consideration is not recorded until payment is probable and transaction costs are included in determination of the purchase price. Also, loans would be recorded at fair value, reflecting both interest rate and credit factors, and the acquiree’s allowance for loan losses would no longer be carried forward. The Proposed Statement would be effective for business combinations that consummate beginning in 2007. The Proposed Statement was subject to a 120-day comment period and will be followed by final deliberations by the FASB, and therefore, is subject to change. We cannot predict with certainty what the final Statement will provide.

Regulatory MattersVarious legislative and regulatory proposals concerning the financial services industry are pending in Congress, the legislatures in states in which we conduct operations and before various regulatory agencies that supervise our operations. Given the uncertainty of the legislative and regulatory process, we cannot assess the impact of any such legislation or regulations on our consolidated financial position or results of operations. For a more detailed description of the laws and regulations governing our business operations, please see our 2005 Annual Report on Form 10-K.

Wachovia Corporation 2005 Annual Report 41

In June 2004, the Basel Committee on Bank Supervision published new international guidelines for determining regulatory capital. The U.S. regulators have published a draft containing certain guidance on their interpretation of the new Basel guidelines. Under the proposed regulations, we will be required to determine regulatory capital under new methodologies, in parallel with the existing capital rules, beginning in 2008. In 2009, we will determine regulatory capital solely under the new rules, which include certain required minimum levels in 2009 through 2011. The new regulations will result in regulatory capital that would be more risk sensitive than under the current framework, and represent a significant implementation effort for us to be in compliance with the new regulations. The necessary project management infrastructure and funding have been established to ensure we will fully comply with the new regulations.

Earnings Analysis for Fourth Quarter 2005

In the fourth quarter of 2005 compared with the fourth quarter of 2004, net income rose 18 percent to a quarterly record $1.7 billion, and diluted earnings per common share rose 15 percent to $1.09. These amounts included an after-tax gain of $214 million, or 14 cents per common share, presented as discontinued operations related to the sale of our CIT businesses, and the full impact of SouthTrust in the fourth quarter of 2005.

Total revenue rose 7 percent to $6.6 billion in the fourth quarter of 2005 compared with the fourth quarter of 2004, with 6 percent growth in tax-equivalent net interest income and 7 percent growth in fee and other income. Net interest income growth reflected higher loans and deposits. Fee and other income growth was led by higher fiduciary and investment banking fees, stronger principal investing results, and other banking fees, partially offset by lower retail brokerage commissions and higher trading losses. In addition, the fourth quarter of 2005 included higher than normal expenses that better positioned the company for future earnings growth, as well as securities losses recognized as part of balance sheet repositioning. These higher expenses were due primarily to increased personnel expense largely reflecting implementation costs related to the efficiency initiative, and to variable incentive expense, higher legal costs and charitable contributions. These factors produced a higher than normal expense base, offset in part by merger efficiencies. The provision for credit losses declined 26 percent from the fourth quarter of 2004 due primarily to the credit quality of the loan portfolio.

In the General Bank, record revenue was driven by higher net interest income and fee and other income. Net interest income growth was driven by strength in checking accounts and higher commercial and consumer loans. Fee and other income growth was generated primarily by strong debit card interchange income and retail service charges. However, excluding the SouthTrust impact, higher earnings credits in a rising rate environment dampened commercial

deposit charges and commercial money market outflows slowed. The rate environment also slowed growth in home equity lines and the lending mix began shifting from variable rate to fixed rate, and loan margins tightened. Expenses rose due to higher personnel costs related to investment in growth initiatives and higher sales production, as well as to increased charitable contributions.

In Capital Management, a 3 percent increase in revenue, generated by solid growth in net interest income and managed account fees, was partially offset by lower commissions on brokerage transaction activity. Growth in net interest income of 19 percent was largely due to improved deposit spreads. A slight increase in noninterest expense was due to efficiency initiative costs and corporate contributions, partially offset by brokerage integration efficiencies.

Wealth Management also generated record revenue driven by a 26 percent increase in fee and other income and a 10 percent increase in net interest income. Average loans grew 23 percent and average core deposits were up 11 percent. Fee and other income reflected the impact of the insurance brokerage transaction, as well as improved trust and management fees on record sales production. Noninterest expense growth reflected the insurance brokerage transaction and higher personnel costs.

In the Corporate and Investment Bank, 14 percent revenue growth reflected a 32 percent increase in fee and other income, which offset a 5 percent decline in net interest income due to lower spreads in the trading portfolio and to runoff in the leasing portfolio. Fee income growth reflected stronger principal investing gains and record results in advisory and underwriting fees, led by strong structured products, equity originations and loan syndications, partially offset by trading losses and lower commissions. Strong core deposit growth came primarily from higher commercial mortgage servicing and international correspondent banking, and increased loans primarily reflected higher corporate loans.

In the Parent, total revenue decreased 58 percent primarily due to a decline in fee and other income reflecting decreases in securities gains and higher underwriting costs. Noninterest expense rose 32 percent primarily due to higher legal costs.

Comparison of 2004 with 2003

Results in 2004 include SouthTrust for only the two months since consummation, so this transaction had relatively little impact on 2004 results compared with 2003 except as noted.

Corporate Results of OperationsIn 2004, we earned $5.2 billion in net income available to common stockholders, up 22 percent from 2003, and diluted earnings per common share were $3.81, up 20 percent from 2003. Total revenue grew 13 percent to $23.0 billion, with strong balance sheet growth overcoming margin compression

42 Wachovia Corporation 2005 Annual Report

largely related to the addition of lower-spread trading assets, growth in lower-spread consumer real-estate secured loans, consolidation of our commercial paper conduits and growth in FDIC-insured sweep accounts and related investments. Key factors in these results, in addition to the SouthTrust impact, included 12 percent growth in tax-equivalent net interest income on 23 percent growth in average earning assets to $358.3 billion; 14 percent growth in fee and other income; and 10 percent growth in noninterest expense.

The 14 percent increase in fee and other income reflected in part the full year impact in 2004 of the July 1, 2003, retail brokerage transaction on commissions and on fiduciary and asset management fees. Service charges increased 14 percent, reflecting growth in checking accounts. Other banking fees increased 21 percent, reflecting growth in interchange income from debit and credit card transactions. Advisory, underwriting and other investment banking fees increased 16 percent, driven by growth in investment grade loan syndications and equity capital markets originations. Principal investing had net gains in 2004 of $261 million, due largely to higher realized gains in the recovering financial markets, compared with net losses of $139 million in 2003. Net securities gains were $91 million from sales of securities received in settlement of problem loans, offset by net losses from portfolio sales of $43 million and impairment losses of $58 million. Net securities gains in 2003 included net gains from portfolio sales of $245 million offset by $200 million in impairment losses. Other income declined 21 percent from 2003 primarily due to a $264 million decline in asset securitization income, including $57 million of losses on auto loan securitizations, and a $68 million loss associated with a sale and leaseback of corporate real estate.

Noninterest expense increased 10 percent primarily reflecting increased variable pay on higher revenues, as well as the full year effect of the retail brokerage transaction and continued investments for the future, and, to a lesser extent, the SouthTrust merger.

Income taxes were $2.4 billion in 2004, an increase of $586 million from 2003 due to higher pretax income. In 2003, income taxes included a benefit of $58 million related to the public issuance of $300 million in preferred stock by a real estate investment trust (REIT) subsidiary.

Business SegmentsGeneral Bank segment earnings were $3.0 billion in 2004, an increase of 24 percent, reflecting 10 percent growth in revenue largely driven by growth in core deposits and consumer real estate-secured loans. Additionally, provision expense declined by a third from 2003, primarily reflecting risk reduction strategies implemented in 2003, solid improvements in both commercial and consumer loan losses and a strengthening economy.

Capital Management’s segment earnings increased 27 percent based on revenue growth of 26 percent and expense growth of 26 percent, largely related to the full year impact in 2004 of the retail brokerage transaction completed on July 1, 2003. Revenue was $5.2 billion and included revenue from the retail brokerage businesses, which increased $957 million to $4.3 billion largely because 2004 included a full year of results related to the retail brokerage transaction. Retail brokerage transactional revenues of $2.2 billion increased 14 percent, while recurring and other revenues of $2.1 billion were up 47 percent. Revenue from the asset management businesses rose $100 million to $875 million related to growth in assets under management and to the January 1, 2004, acquisition of a securities lending firm with $23 million in revenues. Total assets under management and securities lending grew 21 percent from year-end 2003 to $297.2 billion, which included $42.7 billion related to the securities lending business. Assets under management growth also reflected net asset appreciation of approximately $7.0 billion since year-end 2003 from increased market valuations. Total assets under management at December 31, 2004, increased 4 percent from December 31, 2003, to $256.3 billion.

Wealth Management’s segment earnings were $206 million, an increase of 32 percent as higher revenues outpaced expense growth. Net interest income rose 17 percent on increased loans and core deposits, and fee and other income increased 5 percent due to solid growth in trust and investment management fees and improving insurance revenues. Noninterest expense rose 5 percent primarily due to higher incentives related to improved revenues and earnings. Included in total assets under management are wealth assets under management of $64.7 billion at December 31, 2004, which represented a 10 percent increase from year-end 2003 due to improved market valuations and additions from acquisitions.

Corporate and Investment Bank segment earnings increased 46 percent to $1.7 billion, reflecting revenue growth of 18 percent while noninterest expense increased 11 percent. Total fee and other income grew 30 percent due to strong growth in other capital markets fees, particularly in advisory and underwriting, and vastly improved principal investing results. Net interest income rose 6 percent driven by strong deposit growth in international, commercial mortgage servicing and treasury services. Fee and other income growth included principal investing gains of $261 million compared with losses of $139 million in 2003, reflecting higher realized gains and lower write-downs on both direct investments and fund investments. Additionally, advisory, underwriting and other investment banking fees increased $126 million to $886 million due to strong market share gains and the resulting growth in origination revenues in loan syndications, investment grade securities and equity capital

Wachovia Corporation 2005 Annual Report 43

markets. Trading account profits declined $48 million to $86 million. Securities gains were $114 million compared with securities losses of $48 million in 2003. Noninterest expense rose 11 percent due to increased revenue-based variable pay and higher other personnel costs, coupled with increased investment in growth initiatives. Provision expense showed a net recovery of $41 million, including $46 million related to the recovery of write-downs on loans sold out of the loan portfolio, as improving credit conditions resulted in decreased charge-offs.

The Parent segment had earnings of $15 million compared with segment earnings of $366 million in 2003. Total revenue in the Parent declined $238 million to $916 million primarily as a result of a $222 million reduction in securities gains and a $148 million reduction in income from asset securitizations, including $57 million in losses on auto loan securitizations, which were partially offset by a $148 million increase in net interest income. The Parent results in 2004 also reflected the $68 million loss on the sale and leaseback of corporate real estate. Additionally, income tax benefits increased $142 million.

Balance Sheet AnalysisThe majority of the year-over-year 23 percent increase in average earning assets to $358.3 billion in 2004 came from the addition of $49.3 billion in SouthTrust earning assets acquired on November 1, 2004. Securities available for sale increased $10.2 billion to $110.6 billion, reflecting securities added from the SouthTrust merger and deposit growth, offset by the sale of lower yielding securities and the impact of terminated securitizations. Net loan growth in 2004, in addition to the SouthTrust loan portfolio, stemmed largely from growth in consumer real estate-secured loans and in key commercial growth categories, including commercial real estate construction, which more than doubled from year-end 2003 primarily due to SouthTrust. Nonperforming assets increased 2 percent from year-end 2003, primarily due to the addition of SouthTrust nonaccrual loans of $342 million of which $36 million were charged off and $125 million were transferred to loans held for sale. The provision for credit losses declined 56 percent from 2003 to $257 million.

The allowance for loan losses increased by $409 million from year-end 2003 to $2.8 billion at December 31, 2004, reflecting the addition of SouthTrust’s allowance of $510 million at consummation, offset by a reduction of $91 million from transfers to loans held for sale and loans sold out of the loan portfolio. We sold or securitized $21.0 billion in loans out of the loans held for sale portfolio, including $5.9 billion of commercial loans and $15.1 billion of consumer loans, primarily residential mortgages and home equity loans.

Liquidity and Capital AdequacyCore deposits increased 34 percent from December 31, 2003, to $274.6 billion at December 31, 2004. Average low-cost core deposits grew 33 percent to $203.3 billion in 2004 from 2003 as our strategies encouraged an increase in the proportion of low-cost core deposits over higher cost deposit balances in the low interest rate environment of that period. The period-end deposit increase included $17.6 billion of core deposits associated with the FDIC-insured sweep product and $37.1 billion in SouthTrust deposits at consummation. We began marketing our FDIC-insured sweep product to brokerage customers in the fourth quarter of 2003.

Average purchased funds increased 13 percent to $81.7 billion in 2004 primarily from increases in average federal funds purchased and from the consolidation of commercial paper conduits we administer. Long-term debt increased $10.0 billion from December 31, 2003, to $46.8 billion at December 31, 2004, primarily due to debt issuances and to the addition of SouthTrust. Stockholders’ equity increased $14.9 billion reflecting the issuance of 298 million shares of common stock at a cost of $14.0 billion in connection with the SouthTrust merger. We paid $2.3 billion, or $1.66 per share, in dividends to common stockholders in 2004 compared with $1.7 billion, or $1.25 per share, in 2003. Our tier 1 capital ratio decreased 51 basis points from December 31, 2003, to 8.01 percent, driven primarily by higher risk-weighted assets and the impact of SouthTrust.

44 Wachovia Corporation 2005 Annual Report

Financial Tables

Table 1
EXPLANATION OF OUR USE OF NON-GAAP FINANCIAL MEASURES

     In addition to the results of operations presented in accordance with U.S. generally accepted accounting principles (GAAP), our management uses, and this annual report contains, certain non-GAAP financial measures, such as expenses excluding merger-related and restructuring expenses; the dividend payout ratio on a basis that excludes other intangible amortization, merger-related and restructuring expenses, discontinued operations and the cumulative effect of a change in accounting principle; and net interest income on a tax-equivalent basis.

     We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends, and they facilitate comparisons with the performance of others in the financial services industry. Specifically, we believe the exclusion of merger-related and restructuring expenses permits evaluation and comparison of results for ongoing business operations, and it is on this basis that our management internally assesses our performance. Those non-operating items also are excluded from our 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. For additional information regarding segment performance, see the Business Segments section and Note 14 to Notes to Consolidated Financial Statements. This annual report contains information regarding estimates of our future expenses excluding merger-related and restructuring expenses. The amount and timing of those future merger-related and restructuring expenses, however, are not estimable until such expenses actually occur, and therefore, reconciliation information relating to those future expenses and GAAP expenses has not been provided.

     In addition, because of the significant amount of deposit base intangible amortization, we believe the exclusion of this expense provides investors with consistent and meaningful comparisons to other financial service firms. Also, our management makes recommendations to our board of directors about dividend payments based on reported earnings excluding other intangible amortization, merger-related and restructuring expenses, discontinued operations and the cumulative effect of a change in accounting principle and has communicated certain dividend payout ratio goals to investors on this basis. We believe this dividend payout ratio is useful to investors because it provides investors with a better understanding of and permits investors to monitor our dividend payout policy.

     This annual report also includes net interest income on a tax-equivalent basis. We believe 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 practice.

     Although we believe that the above mentioned non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP is presented below.

	Years Ended December 31,
(In millions, except per share data)	2005			2004		2003			2002		2001
Net interest income(GAAP)	$	13,681			11,961		10,607			9,955		7,775
Tax-equivalent adjustment		219			250		256			218		159
Net interest income(Tax-equivalent)	$	13,900			12,211		10,863			10,173		7,934
DIVIDEND PAYOUT RATIOS ON COMMON SHARES
Diluted earnings per common share(GAAP)	$	4.19			3.81		3.18
Other intangible amortization		0.17			0.20		0.24
Merger-related and restructuring expenses		0.11			0.14		0.19
Discontinued operations(GAAP)		(0.14	)		-		-
Cumulative effect of a change in accounting principle		-			-		(0.01	)
Earnings per share (a)	$	4.33			4.15		3.60
Dividends paid per common share	$	1.94			1.66		1.25
Dividend payout ratios(GAAP)(b)		46.30	%		43.57		39.31
Dividend payout ratios (a)(b)	��	44.80	%		40.00		34.72

(a) Excludes other intangible amortization, merger-related and restructuring expenses, discontinued operations and the cumulative effect of a change in accounting principle.

(b) Dividend payout ratios are determined by dividing dividends per common share by earnings per common share.

Wachovia Corporation 2005 Annual Report 45

Financial Tables

Table 2
SELECTED STATISTICAL DATA

	Years Ended December 31,
(Dollars in millions, except per share data)	2005			2004		2003		2002		2001
PROFITABILITY
Return on average common stockholders’ equity		14.13	%		14.77		13.25		11.72		7.98
Net interest margin (a)		3.24			3.41		3.72		3.97		3.59
Fee and other income as % of total revenue		46.78			46.88		46.61		43.68		44.24
Effective income tax rate		32.05	%		31.70		30.16		23.29		29.39
ASSET QUALITY
Allowance for loan losses as % of loans, net		1.05	%		1.23		1.42		1.60		1.72
Allowance for loan losses as % of nonperforming assets (b)		378			251		205		150		164
Allowance for credit losses as % of loans, net		1.11			1.30		1.51		1.72		1.83
Net charge-offs as % of average loans, net		0.09			0.17		0.41		0.73		0.70
Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale		0.28	%		0.53		0.69		1.11		1.13
CAPITAL ADEQUACY
Tier 1 capital ratio		7.50	%		8.01		8.52		8.22		7.04
Total capital ratio		10.82			11.11		11.82		12.01		11.08
Leverage		6.12	%		6.38		6.36		6.77		6.19
OTHER DATA
FTE employees		93,980			96,030		86,114		80,868		84,046
Total financial centers/brokerage offices		3,850			3,971		3,328		3,250		3,400
ATMs		5,119			5,321		4,408		4,560		4,675
Registered common stockholders		177,924			185,647		170,205		181,455		191,231
Actual common shares(In millions)		1,557			1,588		1,312		1,357		1,362
Common stock price	$	52.86			52.60		46.59		36.44		31.36
Market capitalization	$	82,291			83,537		61,139		49,461		42,701

(a) Tax-equivalent.

(b) These ratios do not include nonperforming loans included in loans held for sale.

46 Wachovia Corporation 2005 Annual Report

Table 3
SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA

	Years Ended December 31,
(In millions, except per share data)	2005			2004			2003		2002		2001
SUMMARIES OF INCOME
Interest income	$	23,689			17,288			15,080		15,632		16,100
Tax-equivalent adjustment		219			250			256		218		159
Interest income (a)		23,908			17,538			15,336		15,850		16,259
Interest expense		10,008			5,327			4,473		5,677		8,325
Net interest income (a)		13,900			12,211			10,863		10,173		7,934
Provision for credit losses		249			257			586		1,479		1,947
Net interest income after provision for credit losses (a)		13,651			11,954			10,277		8,694		5,987
Securities gains (losses)		89			(10	)		45		169		(67	)
Fee and other income		12,130			10,789			9,437		7,721		6,363
Merger-related and restructuring expenses		292			444			443		387		106
Other noninterest expense		15,555			14,222			12,837		11,306		9,724
Minority interest in income of consolidated subsidiaries		342			184			143		6		1
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle (a)		9,681			7,883			6,336		4,885		2,452
Income taxes		3,033			2,419			1,833		1,088		674
Tax-equivalent adjustment		219			250			256		218		159
Income from continuing operations before cumulative effect of a change in accounting principle		6,429			5,214			4,247		3,579		1,619
Discontinued operations, net of income taxes		214			-			-		-		-
Income before cumulative effect of a change in accounting principle		6,643			5,214			4,247		3,579		1,619
Cumulative effect of a change in accounting principle, net of income taxes		-			-			17		-		-
Net income		6,643			5,214			4,264		3,579		1,619
Dividends on preferred stock		-			-			5		19		6
Net income available to common stockholders	$	6,643			5,214			4,259		3,560		1,613
PER COMMON SHARE DATA
Basic
Income from continuing operations before change in accounting principle	$	4.13			3.87			3.20		2.62		1.47
Net income		4.27			3.87			3.21		2.62		1.47
Diluted
Income from continuing operations before change in accounting principle		4.05			3.81			3.17		2.60		1.45
Net income		4.19			3.81			3.18		2.60		1.45
Cash dividends	$	1.94			1.66			1.25		1.00		0.96
Average common shares - Basic		1,556			1,346			1,325		1,356		1,096
Average common shares - Diluted		1,585			1,370			1,340		1,369		1,105
Average common stockholders’ equity	$	47,019			35,295			32,135		30,384		20,218
Book value per common share		30.55			29.79			24.71		23.63		20.88
Common stock price
High		56.01			54.52			46.59		39.50		36.38
Low		46.49			43.56			32.72		28.75		27.81
Year-end	$	52.86			52.60			46.59		36.44		31.36
To earnings ratio (b)		12.62	X		13.81			14.65		14.02		21.63
To book value		173	%		177			189		154		150
BALANCE SHEET DATA
Assets	$	520,755			493,324			401,188		342,033		330,634
Long-term debt	$	48,971			46,759			36,730		39,662		41,733

(a) Tax-equivalent.

(b) Based on diluted earnings per common share.

Wachovia Corporation 2005 Annual Report 47

Financial Tables

Table 4
NET TRADING REVENUE - INVESTMENT BANKING (a)

	Years Ended December 31,
(In millions)	2005		2004		2003
Net interest income(Tax-equivalent)	$	461		565		406
Trading accounts profits		222		92		157
Other fee income		293		289		226
Total net trading revenue(Tax-equivalent)	$	976		946		789

(a) Certain amounts presented in prior years have been reclassified to conform to the presentation in 2005.

Table 5
SELECTED RATIOS

	Years Ended December 31,
	2005			2004		2003		2002		2001
PERFORMANCE RATIOS (a)
Assets to stockholders’ equity		10.83	X		12.09		11.25		10.55		13.37
Return on assets		1.31	%		1.22		1.18		1.12		0.60
Return on common stockholders’ equity		14.13			14.77		13.25		11.72		7.98
Return on total stockholders’ equity		14.13	%		14.77		13.27		11.78		8.00
DIVIDEND PAYOUT RATIOS
Common shares		46.30	%		43.57		39.31		38.46		66.21
Preferred and common shares		46.30	%		43.57		39.15		38.72		64.13

(a) Based on average balances and net income.

48 Wachovia Corporation 2005 Annual Report

Table 6
SELECTED QUARTERLY DATA

	2005										2004
(In millions, except per share data)	Fourth			Third		Second		First			Fourth		Third			Second		First
Interest income	$	6,490			6,044		5,702		5,453			4,969		4,301			4,019		3,999
Interest expense		2,967			2,657		2,344		2,040			1,672		1,336			1,181		1,138
Net interest income		3,523			3,387		3,358		3,413			3,297		2,965			2,838		2,861
Provision for credit losses		81			82		50		36			109		43			61		44
Net interest income after provision for credit losses		3,442			3,305		3,308		3,377			3,188		2,922			2,777		2,817
Securities gains (losses)		(74	)		29		136		(2	)		23		(71	)		36		2
Fee and other income		3,063			3,229		2,841		2,997			2,781		2,672			2,571		2,765
Merger-related and restructuring expenses		58			83		90		61			116		127			102		99
Other noninterest expense		4,125			3,921		3,698		3,811			3,718		3,544			3,393		3,567
Minority interest in income of consolidated subsidiaries		103			104		71		64			54		28			45		57
Income from continuing operations before income taxes		2,145			2,455		2,426		2,436			2,104		1,824			1,844		1,861
Income taxes		652			790		776		815			656		561			592		610
Income from continuing operations		1,493			1,665		1,650		1,621			1,448		1,263			1,252		1,251
Discontinued operations, net of income taxes		214			-		-		-			-		-			-		-
Net income	$	1,707			1,665		1,650		1,621			1,448		1,263			1,252		1,251
PER COMMON SHARE DATA
Basic earnings
Income from continuing operations	$	0.97			1.07		1.05		1.03			0.97		0.97			0.96		0.96
Net income		1.11			1.07		1.05		1.03			0.97		0.97			0.96		0.96
Diluted earnings
Income from continuing operations		0.95			1.06		1.04		1.01			0.95		0.96			0.95		0.94
Net income		1.09			1.06		1.04		1.01			0.95		0.96			0.95		0.94
Cash dividends		0.51			0.51		0.46		0.46			0.46		0.40			0.40		0.40
Common stock price
High		55.13			51.34		53.07		56.01			54.52		47.50			47.66		48.90
Low		46.49			47.23		49.52		49.91			46.84		43.56			44.16		45.91
Period-end	$	52.86			47.59		49.60		50.91			52.60		46.95			44.50		47.00
SELECTED RATIOS (a)
Return on assets		1.30	%		1.29		1.31		1.31			1.22		1.18			1.22		1.26
Return on total stockholders’ equity		14.60			13.95		14.04		13.92			13.50		15.12			15.49		15.37
Stockholders’ equity to assets		8.92	%		9.25		9.36		9.44			9.03		7.83			7.91		8.21

(a) Based on average balances and net income.

Wachovia Corporation 2005 Annual Report 49

Financial Tables

Table 7
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS

	December 31,
(In millions)	2005		2004		2003		2002		2001
ON-BALANCE SHEET LOAN PORTFOLIO COMMERCIAL
Commercial, financial and agricultural	$	87,327		75,095		55,453		57,728		61,258
Real estate - construction and other		13,972		12,673		5,969		4,542		7,969
Real estate - mortgage		19,966		20,742		15,186		17,735		17,234
Lease financing		25,368		25,000		23,978		22,667		21,958
Foreign		10,221		7,716		6,880		6,425		7,653
Total commercial		156,854		141,226		107,466		109,097		116,072
CONSUMER
Real estate secured		94,748		74,161		50,726		46,706		42,912
Student loans		9,922		10,468		8,435		6,921		2,471
Installment loans		6,751		7,684		8,965		10,249		12,040
Total consumer		111,421		92,313		68,126		63,876		57,423
Total loans		268,275		233,539		175,592		172,973		173,495
Unearned income		9,260		9,699		10,021		9,876		9,694
Loans, net(On-balance sheet)	$	259,015		223,840		165,571		163,097		163,801
MANAGED PORTFOLIO (a)
COMMERCIAL
On-balance sheet loan portfolio	$	156,854		141,226		107,466		109,097		116,072
Securitized loans - off-balance sheet		1,227		1,734		2,001		2,218		5,827
Loans held for sale		3,860		2,112		2,574		1,140		1,478
Total commercial		161,941		145,072		112,041		112,455		123,377
CONSUMER
Real estate secured
On-balance sheet loan portfolio		94,748		74,161		50,726		46,706		42,912
Securitized loans - off-balance sheet		8,438		7,570		8,897		11,236		11,115
Securitized loans included in securities		4,817		4,838		10,905		17,316		15,120
Loans held for sale		2,296		10,452		9,618		4,254		3,311
Total real estate secured		110,299		97,021		80,146		79,512		72,458
Student
On-balance sheet loan portfolio		9,922		10,468		8,435		6,921		2,471
Securitized loans - off-balance sheet		2,000		463		1,658		2,306		2,975
Securitized loans included in securities		52		-		-		-		-
Loans held for sale		-		128		433		618		2,974
Total student		11,974		11,059		10,526		9,845		8,420
Installment
On-balance sheet loan portfolio		6,751		7,684		8,965		10,249		12,040
Securitized loans - off-balance sheet		3,392		2,184		-		-		5
Securitized loans included in securities		206		195		-		-		-
Loans held for sale		249		296		-		-		-
Total installment		10,598		10,359		8,965		10,249		12,045
Total consumer		132,871		118,439		99,637		99,606		92,923
Total managed portfolio	$	294,812		263,511		211,678		212,061		216,300
SERVICING PORTFOLIO (b)
Commercial	$	173,428		136,578		85,693		59,336		42,210
Consumer (c)	$	56,741		38,442		13,279		2,272		2,900

(a) The managed portfolio includes the on-balance sheet loan portfolio, loans securitized for which the retained interests are classified in securities on-balance sheet, loans held for sale on-balance sheet and the off-balance sheet portfolio of securitized loans sold, where we service the loans.

(b) The servicing portfolio consists of third party commercial and consumer loans for which our sole function is that of servicing the loans for the third parties.

(c) Amounts presented in prior years have been reclassified to conform to the presentation in 2005.

50 Wachovia Corporation 2005 Annual Report

Table 8
LOANS HELD FOR SALE

	Years Ended December 31,
(In millions)	2005			2004			2003			2002			2001
Balance, beginning of year	$	12,988			12,625			6,012			7,763			8,146
CORE BUSINESS ACTIVITY (a)
Core business activity, beginning of year		12,293			12,504			5,488			6,991			3,447
Balance of acquired entities at purchase date		873			653			-			-			180
Originations/purchases		47,130			38,192			35,831			27,443			22,712
Transfer from loans held for sale, net		(12,743	)		(9,374	)		(806	)		(3,800	)		(193	)
Lower of cost or market value adjustments		-			(2	)		(67	)		(52	)		(52	)
Performing loans sold or securitized		(32,156	)		(20,824	)		(24,399	)		(23,755	)		(18,207	)
Nonperforming loans sold		-			(2	)		(47	)		(11	)		(2	)
Other, principally payments		(9,009	)		(8,854	)		(3,496	)		(1,328	)		(894	)
Core business activity, end of year		6,388			12,293			12,504			5,488			6,991
PORTFOLIO MANAGEMENT ACTIVITY (a)
Portfolio management activity, beginning of year		695			121			524			772			4,699
Balance of acquired entities at purchase date		-			-			-			-			117
Transfers to loans held for sale, net
Performing loans		82			680			437			1,941			1,161
Nonperforming loans		25			136			121			306			291
Lower of cost or market value adjustments		-			1			45			(1	)		(136	)
Performing loans sold		(611	)		(136	)		(577	)		(1,768	)		(4,252	)
Nonperforming loans sold		(56	)		(22	)		(180	)		(63	)		(376	)
Allowance for loan losses related to loans transferred to loans held for sale		(5	)		(59	)		(134	)		(435	)		(335	)
Other, principally payments		(113	)		(26	)		(115	)		(228	)		(397	)
Portfolio management activity, end of year		17			695			121			524			772
Balance, end of year (b)	$	6,405			12,988			12,625			6,012			7,763

(a) Core business activity means we originate loans with the intent to sell them to third parties, and portfolio management activity means we look for market opportunities to reduce risk in the loan portfolio by transferring loans to loans held for sale.

(b) Nonperforming loans included in loans held for sale at December 31, 2005, 2004, 2003, 2002 and 2001, were $32 million, $157 million, $82 million, $138 million and $228 million, respectively.

Wachovia Corporation 2005 Annual Report 51

Financial Tables

Table 9
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES (a)

	December 31, 2005
			Real
	Commercial,		Estate-
	Financial		Construction		Real
	and		and		Estate-
(In millions)	Agricultural		Other		Mortgage		Foreign		Total
FIXED RATE
1 year or less	$	2,895		72		216		4,890		8,073
1-5 years		5,417		141		1,182		32		6,772
After 5 years		6,578		113		870		-		7,561
Total fixed rate		14,890		326		2,268		4,922		22,406
ADJUSTABLE RATE
1 year or less		25,822		6,529		5,158		3,969		41,478
1-5 years		33,941		6,808		10,098		1,155		52,002
After 5 years		12,674		309		2,442		175		15,600
Total adjustable rate		72,437		13,646		17,698		5,299		109,080
Total	$	87,327		13,972		19,966		10,221		131,486

(a) Excludes lease financing.

52 Wachovia Corporation 2005 Annual Report

Table 10
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS

	Years Ended December 31,
(In millions)	2005			2004			2003			2002			2001
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year	$	2,757			2,348			2,604			2,813			1,620
Provision for credit losses		227			290			549			1,110			1,583
Provision for credit losses relating to loans transferred to loans held for sale or sold		18			(31	)		75			357			284
Balance of acquired entities at purchase date		-			510			-			-			766
Allowance relating to loans acquired, transferred to loans held for sale or sold		(71	)		(60	)		(228	)		(554	)		(503	)
Net charge-offs		(207	)		(300	)		(652	)		(1,122	)		(937	)
Balance, end of year	$	2,724			2,757			2,348			2,604			2,813
as % of loans, net		1.05	%		1.23			1.42			1.60			1.72
as % of nonaccrual and restructured loans (a)		439	%		289			227			164			183
as % of nonperforming assets (a)		378	%		251			205			150			164
LOAN LOSSES
Commercial, financial and agricultural	$	156			221			471			890			768
Commercial real estate - construction and mortgage		22			9			18			22			10
Consumer		278			296			396			377			301
Total loan losses		456			526			885			1,289			1,079
LOAN RECOVERIES
Commercial, financial and agricultural		136			148			148			93			75
Commercial real estate - construction and mortgage		6			3			4			2			8
Consumer		107			75			81			72			59
Total loan recoveries		249			226			233			167			142
Net charge-offs	$	207			300			652			1,122			937
Commercial loan net charge-offs as % of average commercial loans, net		0.03	%		0.08			0.37			0.84			0.82
Consumer loan net charge-offs as % of average consumer loans, net		0.18			0.30			0.47			0.54			0.49
Total net charge-offs as % of average loans, net		0.09	%		0.17			0.41			0.73			0.70
NONPERFORMING ASSETS
Nonaccrual loans
Commercial, financial and agricultural	$	307			585			765			1,269			1,294
Commercial real estate - construction and mortgage		85			127			54			105			87
Consumer real estate secured		221			230			192			208			117
Installment loans		7			13			24			3			36
Total nonaccrual loans		620			955			1,035			1,585			1,534
Foreclosed properties (b)		100			145			111			150			179
Total nonperforming assets	$	720			1,100			1,146			1,735			1,713
Nonperforming loans included in loans held for sale	$	32			157			82			138			228
Nonperforming assets included in loans and in loans held for sale	$	752			1,257			1,228			1,873	��		1,941
as % of loans, net, and foreclosed properties (a)		0.28	%		0.49			0.69			1.06			1.04
as % of loans, net, foreclosed properties and loans held for sale (c)		0.28	%		0.53			0.69			1.11			1.13
Accruing loans past due 90 days	$	625			522			341			304			288

(a) These ratios do not include nonperforming loans included in loans held for sale.

(b) Restructured loans are not significant.

(c) These ratios reflect nonperforming loans included in loans held for sale. Loans held for sale are recorded at the lower of cost or market value, and accordingly, the amounts shown and included in the ratios are net of the transferred allowance for loan losses and the lower of cost or market value adjustments.

Wachovia Corporation 2005 Annual Report 53

Financial Tables

Table 11
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31,
	2005					2004					2003					2002					2001
			Loans					Loans					Loans					Loans					Loans
			% of					% of					% of					% of					% of
			Total					Total					Total					Total					Total
(In millions)	Amt.		Loans			Amt.		Loans			Amt.		Loans			Amt.		Loans			Amt.		Loans
COMMERCIAL
Commercial, financial and agricultural	$	1,348		33	%	$	1,384		32	%	$	582		32	%	$	864		33	%	$	932		35	%
Real estate -
Construction and other		141		5			155		5			59		3			75		3			59		5
Mortgage		273		7			268		9			113		8			128		10			105		10
Lease financing		39		9			35		11			57		14			66		13			45		13
Foreign		58		4			67		3			64		4			77		4			64		4
CONSUMER
Real estate secured		305		35			382		32			221		29			196		27			127		25
Student loans		91		4			56		5			39		5			4		4			-		1
Installment loans		334		3			320		3			156		5			192		6			145		7
UNALLOCATED		135		-			90		-			1,057		-			1,002		-			1,336		-
Total	$	2,724		100	%	$	2,757		100	%	$	2,348		100	%	$	2,604		100	%	$	2,813		100	%

54 Wachovia Corporation 2005 Annual Report

Table 12
NONACCRUAL LOAN ACTIVITY (a)

	Years Ended December 31,
(In millions)	2005			2004			2003			2002			2001
Balance, beginning of year	$	955			1,035			1,585			1,534			1,176
COMMERCIAL NONACCRUAL LOAN ACTIVITY
Commercial nonaccrual loans, beginning of year		712			819			1,374			1,381			939
Balance of acquired entities at purchase date		-			321			-			-			209
New nonaccrual loans and advances		751			575			1,051			2,275			1,719
Gross charge-offs		(178	)		(230	)		(489	)		(912	)		(778	)
Transfers to loans held for sale		(25	)		(134	)		(69	)		(239	)		(20	)
Transfers to other real estate owned		(27	)		(3	)		(12	)		(12	)		(45	)
Sales		(313	)		(135	)		(256	)		(278	)		(150	)
Other, principally payments		(528	)		(501	)		(780	)		(841	)		(493	)
Net commercial nonaccrual loan activity		(320	)		(428	)		(555	)		(7	)		233
Commercial nonaccrual loans, end of year		392			712			819			1,374			1,381
CONSUMER NONACCRUAL LOAN ACTIVITY
Consumer nonaccrual loans, beginning of year		243			216			211			153			237
Balance of acquired entities at purchase date		-			21			-			-			33
New nonaccrual loans and advances, net		(29	)		10			106			178			262
Transfers from (to) loans held for sale		15			(4	)		(58	)		(58	)		(288	)
Sales and securitizations		(1	)		-			(43	)		(62	)		(91	)
Net consumer nonaccrual loan activity		(15	)		6			5			58			(117	)
Consumer nonaccrual loans, end of year		228			243			216			211			153
Balance, end of year	$	620			955			1,035			1,585			1,534

(a) Excludes nonaccrual loans included in loans held for sale and foreclosed properties.

Wachovia Corporation 2005 Annual Report 55

Financial Tables

Table 13
GOODWILL AND OTHER INTANGIBLE ASSETS

	December 31,
(In millions)	2005		2004		2003		2002		2001
Goodwill	$	21,807		21,526		11,149		10,880		10,616
Deposit base		705		1,048		757		1,225		1,822
Customer relationships		413		443		396		239		244
Tradename		90		90		90		90		90
Total goodwill and other intangible assets	$	23,015		23,107		12,392		12,434		12,772

	Years Ended December 31, 2005 and 2004
	Employee			Occupancy
	Termination			and
(In millions)	Benefits			Equipment			Other			Total
ACTIVITY IN THE EXIT COST PURCHASE ACCOUNTING ADJUSTMENT ACCRUAL
Wachovia/SouthTrust - - November 1, 2004
Purchase accounting adjustments	$	168			-			21			189
Cash payments		(1	)		-			(17	)		(18	)
Balance, December 31, 2004		167			-			4			171
Purchase accounting adjustments		54			62			33			149
Cash payments		(98	)		(27	)		(34	)		(159	)
Noncash write-downs		-			(26	)		-			(26	)
Balance, December 31, 2005	$	123			9			3			135

	Years Ended December 31, 2005, 2004 and 2003
	Employee			Occupancy
	Termination			and
(In millions)	Benefits			Equipment			Other			Total
ACTIVITY IN THE EXIT COST PURCHASE ACCOUNTING ADJUSTMENT ACCRUAL
Wachovia Securities retail brokerage - July 1, 2003
Purchase accounting adjustments	$	22			77			19			118
Cash payments		(2	)		(35	)		(19	)		(56	)
Noncash write-downs		-			(17	)		-			(17	)
Balance, December 31, 2003		20			25			-			45
Purchase accounting adjustments		125			247			25			397
Cash payments		(57	)		(40	)		(20	)		(117	)
Noncash write-downs		-			(4	)		-			(4	)
Balance, December 31, 2004		88			228			5			321
Purchase accounting adjustments		(9	)		(42	)		-			(51	)
Cash payments		(75	)		(126	)		(3	)		(204	)
Noncash write-downs		-			(60	)		-			(60	)
Balance, December 31, 2005	$	4			-			2			6

56 Wachovia Corporation 2005 Annual Report

Table 14
DEPOSITS

	December 31,
(In millions)	2005		2004		2003		2002		2001
CORE DEPOSITS
Noninterest-bearing	$	67,487		64,197		48,683		44,640		43,464
Savings and NOW accounts		81,536		83,678		63,011		51,691		47,175
Money market accounts		100,220		91,184		65,045		45,649		39,022
Other consumer time		44,319		35,529		27,921		33,763		39,649
Total core deposits		293,562		274,588		204,660		175,743		169,310
OTHER DEPOSITS
Foreign		18,041		9,881		9,151		6,608		9,116
Other time		13,291		10,584		7,414		9,167		9,027
Total deposits	$	324,894		295,053		221,225		191,518		187,453

Table 15
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE

	December 31, 2005
(In millions)
MATURITY OF
3 months or less	$	5,760
Over 3 months through 6 months		3,122
Over 6 months through 12 months		3,839
Over 12 months		8,626
Total time deposits in amounts of $100,000 or more	$	21,347

Wachovia Corporation 2005 Annual Report 57

Financial Tables

Table 16
CAPITAL RATIOS

	December 31,
(In millions)	2005			2004		2003		2002		2001
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital	$	30,308			28,583		23,863		21,411		18,999
Total capital		43,709			39,633		32,307		30,732		29,550
Adjusted risk-weighted assets		404,068			356,766		279,979		260,609		269,726
Adjusted leverage ratio assets	$	495,601			448,205		375,447		316,473		306,745
Ratios
Tier 1 capital		7.50	%		8.01		8.52		8.22		7.04
Total capital		10.82			11.11		11.54		11.79		10.96
Leverage		6.12			6.38		6.36		6.77		6.19
STOCKHOLDERS’ EQUITY TO ASSETS
Year-end		9.13			9.59		8.09		9.38		8.61
Average		9.24	%		8.27		8.89		9.49		7.49
BANK CAPITAL RATIOS
Tier 1 capital
Wachovia Bank, National Association		7.45	%		7.86		7.60		7.42		7.55
Wachovia Bank of Delaware, National Association		14.07			15.76		15.46		14.35		12.51
Total capital
Wachovia Bank, National Association		10.70			11.52		11.72		11.81		11.68
Wachovia Bank of Delaware, National Association		16.27			18.28		18.28		16.58		13.98
Leverage
Wachovia Bank, National Association		6.26			6.15		5.85		6.25		6.29
Wachovia Bank of Delaware, National Association		10.52	%		12.18		9.72		11.04		7.92

(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 percent to 4.00 percent.

58 Wachovia Corporation 2005 Annual Report

Table 17
INTEREST DIFFERENTIAL

	2005 Compared with 2004									2004 Compared with 2003
	Interest			Variance						Interest			Variance
	Income/			Attributable to (b)						Income/			Attributable to (b)
	Expense									Expense
(In millions)	Variance			Rate			Volume			Variance			Rate			Volume
EARNING ASSETS
Interest-bearing bank balances	$	30			55			(25	)		1			5			(4	)
Federal funds sold and securities purchased under resale agreements		453			475			(22	)		170			72			98
Trading account assets (a)		429			205			224			425			(34	)		459
Securities (a)		962			252			710			808			(330	)		1,138
Loans (a)		4,676			1,706			2,970			422			(259	)		681
Loans held for sale		135			208			(73	)		344			10			334
Other earning assets		167			215			(48	)		123			(6	)		129
Total earning assets excluding derivatives		6,852			3,116			3,736			2,293			(542	)		2,835
Risk management derivatives		(482	)		(482	)		-			(91	)		(91	)		-
Total earning assets including derivatives	$	6,370			2,634			3,736			2,202			(633	)		2,835
INTEREST-BEARING LIABILITIES
Deposits		2,649			1,931			718			203			(288	)		491
Short-term borrowings		1,328			1,176			152			327			158			169
Long-term debt		544			206			338			113			(11	)		124
Total interest-bearing liabilities excluding derivatives		4,521			3,313			1,208			643			(141	)		784
Risk management derivatives		160			160			-			211			211			-
Total interest-bearing liabilities including derivatives		4,681			3,473			1,208			854			70			784
Net interest income	$	1,689			(839	)		2,528			1,348			(703	)		2,051

(a) Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates. Lease financing amounts include related deferred income taxes.

(b) Changes attributable to rate/volume are allocated to both rate and volume on an equal basis.

Wachovia Corporation 2005 Annual Report 59

Financial Tables

WACHOVIA CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES

	YEAR ENDED 2005							YEAR ENDED 2004
					Average								Average
			Interest		Rates						Interest		Rates
	Average		Income/		Earned/			Average			Income/		Earned/
(In millions)	Balances		Expense		Paid			Balances			Expense		Paid
ASSETS
Interest-bearing bank balances	$	2,516		81		3.23	%	$	3,578			51		1.43	%
Federal funds sold and securities purchased under resale agreements		24,008		795		3.31			24,940			342		1.37
Trading account assets (a) (c)		33,800		1,668		4.94			28,944			1,239		4.28
Securities (a) (c)		115,107		5,913		5.14			100,960			4,951		4.90
Loans (a) (b) (c)
Commercial
Commercial, financial and agricultural		80,901		4,554		5.63			59,970			2,653		4.43
Real estate - construction and other		13,158		760		5.78			7,395			296		4.00
Real estate - mortgage		20,187		1,194		5.92			16,050			725		4.52
Lease financing		10,223		727		7.12			8,467			721		8.51
Foreign		8,035		303		3.77			7,144			187		2.61
Total commercial		132,504		7,538		5.69			99,026			4,582		4.63
Consumer										��
Real estate secured		77,152		4,511		5.85			54,928			2,981		5.43
Student loans		11,126		548		4.92			9,891			372		3.76
Installment loans		7,140		488		6.84			8,188			474		5.79
Total consumer		95,418		5,547		5.81			73,007			3,827		5.24
Total loans		227,922		13,085		5.74			172,033			8,409		4.89
Loans held for sale		15,293		874		5.71			16,735			739		4.42
Other earning assets		9,944		533		5.36			11,064			366		3.30
Total earning assets excluding derivatives		428,590		22,949		5.35			358,254			16,097		4.49
Risk management derivatives (d)		-		959		0.23			-			1,441		0.41
Total earning assets including derivatives		428,590		23,908		5.58			358,254			17,538		4.90
Cash and due from banks		12,524							11,311
Other assets		67,896							57,202
Total assets	$	509,010						$	426,767
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits
Savings and NOW accounts		79,762		833		1.04			72,078			369		0.51
Money market accounts		96,826		1,950		2.01			79,526			794		1.00
Other consumer time		39,695		1,206		3.04			28,304			757		2.67
Foreign		13,922		422		3.03			7,933			115		1.45
Other time		11,947		436		3.66			8,301			163		1.98
Total interest-bearing deposits		242,152		4,847		2.00			196,142			2,198		1.12
Federal funds purchased and securities sold under repurchase agreements		54,302		1,673		3.08			47,321			637		1.35
Commercial paper		11,898		363		3.05			12,034			163		1.35
Securities sold short		10,279		341		3.31			11,025			318		2.88
Other short-term borrowings		6,675		124		1.87			6,087			55		0.90
Long-term debt		47,774		2,133		4.46			39,780			1,589		4.00
Total interest-bearing liabilities excluding derivatives		373,080		9,481		2.54			312,389			4,960		1.59
Risk management derivatives (d)		-		527		0.14			-			367		0.12
Total interest-bearing liabilities including derivatives		373,080		10,008		2.68			312,389			5,327		1.71
Noninterest-bearing deposits		62,438							51,700
Other liabilities		26,473							27,383
Stockholders’ equity		47,019							35,295
Total liabilities and stockholders’ equity	$	509,010						$	426,767
Interest income and rate earned - including derivatives			$	23,908		5.58	%				$	17,538		4.90	%
Interest expense and equivalent rate paid - including derivatives				10,008		2.34						5,327		1.49
Net interest income and margin - including derivatives (d)			$	13,900		3.24	%				$	12,211		3.41	%

(a) Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates. Lease financing amounts include related deferred income taxes.

(b) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

60 Wachovia Corporation 2005 Annual Report

YEAR ENDED 2003							YEAR ENDED 2002								YEAR ENDED 2001
				Average								Average								Average
		Interest		Rates						Interest		Rates						Interest		Rates
Average		Income/		Earned/				Average		Income/		Earned/				Average		Income/		Earned/
Balances		Expense		Paid				Balances		Expense		Paid				Balances		Expense		Paid
$	3,836		50		1.31	%		$	3,312		63		1.90	%		$	2,359		92		3.92	%
	16,780		172		1.02				10,702		195		1.83				9,458		400		4.23
	18,395		814		4.43				14,774		769		5.20				12,965		782		6.03
	78,593		4,143		5.27				62,142		3,924		6.32				51,681		3,626		7.02
	56,404		2,390		4.24				59,724		2,858		4.78				56,094		4,572		8.15
	5,393		190		3.52				5,305		217		4.10				4,726		281		5.95
	16,388		720		4.39				18,365		942		5.13				11,466		776		6.77
	6,915		739		10.69				7,235		762		10.54				6,548		685		10.46
	6,652		189		2.84				6,875		239		3.48				6,109		339		5.55
	91,752		4,228		4.61				97,504		5,018		5.15				84,943		6,653		7.83
	48,894		2,824		5.78				41,971		2,884		6.87				39,281		3,100		7.89
	7,919		305		3.85				3,916		183		4.66				1,000		57		5.66
	9,762		630		6.45				11,061		829		7.50				8,624		772		8.95
	66,575		3,759		5.65				56,948		3,896		6.84				48,905		3,929		8.03
	158,327		7,987		5.04				154,452		8,914		5.77				133,848		10,582		7.91
	9,110		395		4.34				7,401		375		5.06				7,083		522		7.38
	7,199		243		3.38				3,388		178		5.25				3,600		255		7.08
	292,240		13,804		4.72				256,171		14,418		5.63				220,994		16,259		7.36
	-		1,532		0.53				-		1,432		0.56				-		-		-
	292,240		15,336		5.25				256,171		15,850		6.19				220,994		16,259		7.36
	10,888								10,313								8,784
	58,373								54,119								40,667
$	361,501							$	320,603							$	270,445
	53,117		260		0.49				49,091		464		0.95				41,979		1,012		2.41
	55,816		565		1.01				41,711		657		1.57				23,461		944		4.02
	30,553		923		3.02				36,492		1,442		3.95				36,037		1,941		5.39
	8,101		104		1.28				7,323		131		1.78				7,318		294		4.01
	7,700		143		1.86				7,285		153		2.10				11,916		553		4.64
	155,287		1,995		1.28				141,902		2,847		2.01				120,711		4,744		3.93
	44,326		525		1.19				32,242		558		1.73				28,055		1,364		4.86
	7,196		72		1.00				3,063		34		1.10				2,912		112		3.84
	7,925		209		2.64				6,322		155		2.45				5,256		161		3.06
	5,166		40		0.77				2,630		27		1.04				3,539		99		2.81
	36,676		1,476		4.02				38,902		1,667		4.29				38,538		1,845		4.79
	256,576		4,317		1.68				225,061		5,288		2.35				199,011		8,325		4.18
	-		156		0.06				-		389		0.17				-		-		-
	256,576		4,473		1.74				225,061		5,677		2.52				199,011		8,325		4.18
	43,636								38,972								30,796
	29,154								26,178								20,417
	32,135								30,392								20,221
$	361,501							$	320,603							$	270,445
		$	15,336		5.25	%				$	15,850		6.19	%				$	16,259		7.36	%
			4,473		1.53						5,677		2.22						8,325		3.77
		$	10,863		3.72	%				$	10,173		3.97	%				$	7,934		3.59	%

(c) Tax-equivalent adjustments included in trading account assets, securities, commercial, financial and agricultural loans, and lease financing are (in millions): $87, $89, $38 and $5, respectively, in 2005; $92, $113, $40 and $5, respectively, in 2004; and $90, $118, $40 and $8, respectively, in 2003.

(d) The rates earned and the rates paid on risk management derivatives are based on off-balance sheet notional amounts. The fair value of these instruments is included in other assets and other liabilities.

Wachovia Corporation 2005 Annual Report 61

Management’s Report

WACHOVIA CORPORATION AND SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Management of Wachovia Corporation and subsidiaries (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

     Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2005.

     Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

     Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management.

     KPMG LLP, an independent, registered public accounting firm, has audited the Company’s consolidated financial statements as of and for the year ended December 31, 2005, and the Company’s assertion as to the effectiveness of internal control over financial reporting as of December 31, 2005, as stated in their reports, which are included herein.

G. Kennedy Thompson	Thomas J. Wurtz
Chairman, President and	Senior Executive Vice President and
Chief Executive Officer	Chief Financial Officer
February 24, 2006

62 Wachovia Corporation 2005 Annual Report

Independent Auditors’ Report

WACHOVIA CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Wachovia Corporation

     We have audited management’s assessment, included in the accompanying Wachovia Corporation and Subsidiaries: Management’s Report on Internal Control over Financial Reporting, that Wachovia Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Wachovia Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, management’s assessment that Wachovia Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Also, in our opinion, Wachovia Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wachovia Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 24, 2006, expressed an unqualified opinion on those consolidated financial statements.

Charlotte, North Carolina
February 24, 2006

Wachovia Corporation 2005 Annual Report 63

Independent Auditors’ Report

WACHOVIA CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Wachovia Corporation

     We have audited the accompanying consolidated balance sheets of Wachovia Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wachovia Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Wachovia Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 24, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Charlotte, North Carolina
February 24, 2006

64 Wachovia Corporation 2005 Annual Report

Audited Financial Statements

WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31,
(In millions, except per share data)	2005			2004
ASSETS
Cash and due from banks	$	15,072			11,714
Interest-bearing bank balances		2,638			4,441
Federal funds sold and securities purchased under resale agreements (carrying amount of collateral held $10,639 at December 31, 2005, $1,290 repledged)		19,915			22,436
Total cash and cash equivalents		37,625			38,591
Trading account assets		42,704			45,932
Securities (amortized cost $115,404 in 2005; $108,835 in 2004)		114,889			110,597
Loans, net of unearned income ($9,260 in 2005; $9,699 in 2004)		259,015			223,840
Allowance for loan losses		(2,724	)		(2,757	)
Loans, net		256,291			221,083
Loans held for sale		6,405			12,988
Premises and equipment		4,910			5,268
Due from customers on acceptances		824			718
Goodwill		21,807			21,526
Other intangible assets		1,208			1,581
Other assets		34,092			35,040
Total assets	$	520,755			493,324
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing deposits		67,487			64,197
Interest-bearing deposits		257,407			230,856
Total deposits		324,894			295,053
Short-term borrowings		61,953			63,406
Bank acceptances outstanding		892			755
Trading account liabilities		17,598			21,709
Other liabilities		15,986			15,507
Long-term debt		48,971			46,759
Total liabilities		470,294			443,189
Minority interest in net assets of consolidated subsidiaries		2,900			2,818
STOCKHOLDERS’ EQUITY
Preferred stock, Class A, 40 million shares, no par value; 10 million shares, no par value; none issued		-			-
Dividend Equalization Preferred shares, no par value, outstanding 97 million shares in 2005 and in 2004		-			-
Common stock, $3.33-1/3 par value; authorized 3 billion shares, outstanding 1.557 billion shares in 2005; 1.588 billion shares in 2004		5,189			5,294
Paid-in capital		31,172			31,120
Retained earnings		11,973			10,178
Accumulated other comprehensive income, net		(773	)		725
Total stockholders’ equity		47,561			47,317
Total liabilities and stockholders’ equity	$	520,755			493,324

See accompanying Notes to Consolidated Financial Statements.

Wachovia Corporation 2005 Annual Report 65

Audited Financial Statements

WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
(In millions, except per share data)	2005		2004			2003
INTEREST INCOME
Interest and fees on loans	$	13,970		9,858			9,507
Interest and dividends on securities		5,783		4,639			3,828
Trading account interest		1,581		1,147			724
Other interest income		2,355		1,644			1,021
Total interest income		23,689		17,288			15,080
INTEREST EXPENSE
Interest on deposits		5,297		2,853			2,360
Interest on short-term borrowings		2,777		1,503			1,219
Interest on long-term debt		1,934		971			894
Total interest expense		10,008		5,327			4,473
Net interest income		13,681		11,961			10,607
Provision for credit losses		249		257			586
Net interest income after provision for credit losses		13,432		11,704			10,021
FEE AND OTHER INCOME
Service charges		2,151		1,978			1,731
Other banking fees		1,491		1,226			1,017
Commissions		2,411		2,601			2,318
Fiduciary and asset management fees		2,943		2,772			2,345
Advisory, underwriting and other investment banking fees		1,109		911			787
Trading account profits		245		35			110
Principal investing		401		261			(139	)
Securities gains (losses)		89		(10	)		45
Other income		1,379		1,005			1,268
Total fee and other income		12,219		10,779			9,482
NONINTEREST EXPENSE
Salaries and employee benefits		9,671		8,703			7,708
Occupancy		1,064		947			851
Equipment		1,087		1,052			1,021
Advertising		193		193			160
Communications and supplies		633		620			598
Professional and consulting fees		662		548			460
Other intangible amortization		416		431			518
Merger-related and restructuring expenses		292		444			443
Sundry expense		1,829		1,728			1,521
Total noninterest expense		15,847		14,666			13,280
Minority interest in income of consolidated subsidiaries		342		184			143
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle		9,462		7,633			6,080
Income taxes		3,033		2,419			1,833
Income from continuing operations before cumulative effect of a change in accounting principle		6,429		5,214			4,247
Discontinued operations, net of income taxes		214		-			-
Income before cumulative effect of a change in accounting principle		6,643		5,214			4,247
Cumulative effect of a change in accounting principle, net of income taxes		-		-			17
Net income		6,643		5,214			4,264
Dividends on preferred stock		-		-			5
Net income available to common stockholders	$	6,643		5,214			4,259
PER COMMON SHARE DATA
Basic
Income from continuing operations before change in accounting principle	$	4.13		3.87			3.20
Net income		4.27		3.87			3.21
Diluted
Income from continuing operations before change in accounting principle		4.05		3.81			3.17
Net income		4.19		3.81			3.18
Cash dividends	$	1.94		1.66			1.25
AVERAGE COMMON SHARES
Basic		1,556		1,346			1,325
Diluted		1,585		1,370			1,340

See accompanying Notes to Consolidated Financial Statements.

66 Wachovia Corporation 2005 Annual Report

WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Years Ended December 31, 2005, 2004 and 2003
													Accumulated
													Other
	Common Stock						Paid-in			Retained			Comprehensive
(In millions, except per share data)	Shares			Amount			Capital			Earnings			Income, Net			Total
Balance, December 31, 2002		1,357		$	4,524			18,070			7,349			2,135			32,078
Comprehensive income
Net income		-			-			-			4,264			-			4,264
Net unrealized losses, net of reclassification adjustments on
Debt and equity securities		-			-			-			-			(301	)		(301	)
Derivative financial instruments		-			-			-			-			(495	)		(495	)
Total comprehensive income		-			-			-			4,264			(796	)		3,468
Purchases of common stock		(59	)		(195	)		(799	)		(1,263	)		-			(2,257	)
Common stock issued for
Stock options and restricted stock		14			45			417			-			-			462
Gain on subsidiary issuance of stock		-			-			-			224			-			224
Deferred compensation, net		-			-			123			-			-			123
Cash dividends
Preferred shares		-			-			-			(5	)		-			(5	)
Common at $1.25 per share		-			-			-			(1,665	)		-			(1,665	)
Balance, December 31, 2003		1,312			4,374			17,811			8,904			1,339			32,428
Comprehensive income
Net income		-			-			-			5,214			-			5,214
Minimum pension liability		-			-			-			-			(65	)		(65	)
Net unrealized losses, net of reclassification adjustments on
Debt and equity securities		-			-			-			-			(245	)		(245	)
Derivative financial instruments		-			-			-			-			(304	)		(304	)
Total comprehensive income		-			-			-			5,214			(614	)		4,600
Purchases of common stock		(47	)		(159	)		(651	)		(1,547	)		-			(2,357	)
Common stock issued for
Stock options and restricted stock		25			85			890			-			-			975
Acquisitions		298			994			13,006			-			-			14,000
Deferred income taxes on subsidiary stock		-			-			-			(87	)		-			(87	)
Deferred compensation, net		-			-			64			-			-			64
Cash dividends
Common at $1.66 per share		-			-			-			(2,306	)		-			(2,306	)
Balance, December 31, 2004		1,588			5,294			31,120			10,178			725			47,317
Comprehensive income
Net income		-			-			-			6,643			-			6,643
Minimum pension liability		-			-			-			-			(19	)		(19	)
Net unrealized losses, net of reclassification adjustments on
Debt and equity securities		-			-			-			-			(1,424	)		(1,424	)
Derivative financial instruments		-			-			-			-			(55	)		(55	)
Total comprehensive income		-			-			-			6,643			(1,498	)		5,145
Purchases of common stock		(52	)		(173	)		(711	)		(1,809	)		-			(2,693	)
Common stock issued for
Stock options and restricted stock		21			68			830			-			-			898
Acquisitions		-			-			3			-			-			3
Deferred compensation, net		-			-			(70	)		-			-			(70	)
Cash dividends
Common at $1.94 per share		-			-			-			(3,039	)		-			(3,039	)
Balance, December 31, 2005		1,557		$	5,189			31,172			11,973			(773	)		47,561

See accompanying Notes to Consolidated Financial Statements.

Wachovia Corporation 2005 Annual Report 67

Audited Financial Statements

WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In millions)	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	6,643			5,214			4,264
Adjustments to reconcile net income to net cash provided (used) by operating activities
Gain on sale of discontinued operations		(214	)		-			-
Cumulative effect of a change in accounting principle		-			-			(17	)
Accretion and amortization of securities discounts and premiums, net		216			191			317
Provision for credit losses		249			257			586
Gain on securitization transactions		(210	)		(113	)		(377	)
Gain on sale of mortgage servicing rights		(26	)		(34	)		(96	)
Securities transactions		(89	)		10			(45	)
Depreciation and other amortization		1,449			1,415			1,484
Deferred income taxes		803			(1,534	)		642
Trading account assets, net		3,241			(11,071	)		(860	)
Loss on sales of premises and equipment		107			101			75
Contribution to qualified pension plan		(330	)		(279	)		(418	)
Loans held for sale, net		(5,527	)		(4,356	)		(4,943	)
Other assets, net		3,917			559			(860	)
Trading account liabilities, net		(4,111	)		2,464			(3,716	)
Minority interest acquired		-			-			300
Other liabilities, net		(412	)		(678	)		(2,094	)
Net cash provided (used) by operating activities		5,706			(7,854	)		(5,758	)
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities		54,571			55,393			22,990
Maturities of securities		40,877			29,834			29,862
Purchases of securities		(101,001	)		(89,110	)		(74,841	)
Origination of loans, net		(23,565	)		(12,236	)		(2,741	)
Sales of premises and equipment		2,155			580			812
Purchases of premises and equipment		(2,762	)		(960	)		(1,149	)
Sale of Corporate and Institutional Trust businesses		740			-			-
Goodwill and other intangible assets		(501	)		(471	)		(162	)
Purchase of bank-owned separate account life insurance		(1,791	)		(372	)		(251	)
Cash equivalents acquired, net of purchases of banking organizations		34			1,110			8,177
Net cash used by investing activities		(31,243	)		(16,232	)		(17,303	)
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net		29,841			36,727			29,707
Securities sold under repurchase agreements and other short-term borrowings, net		(2,240	)		(12,031	)		13,488
Issuances of long-term debt		10,486			8,495			2,374
Payments of long-term debt		(8,283	)		(5,079	)		(5,306	)
Issuances of common stock, net		499			716			301
Purchases of common stock		(2,693	)		(2,357	)		(2,257	)
Cash dividends paid		(3,039	)		(2,306	)		(1,670	)
Net cash provided by financing activities		24,571			24,165			36,637
Increase (decrease) in cash and cash equivalents		(966	)		79			13,576
Cash and cash equivalents, beginning of year		38,591			38,512			24,936
Cash and cash equivalents, end of year	$	37,625			38,591			38,512
CASH PAID FOR
Interest	$	9,629			5,207			4,241
Income taxes		3,032			3,954			1,055
NONCASH ITEMS
Transfer to securities from loans resulting from securitizations		931			213			-
Transfer to securities from loans held for sale resulting from securitizations		212			-			-
Transfer to loans from securities resulting from terminated securitizations		-			980			-
Transfer to loans held for sale from securities resulting from terminated securitizations		-			3,918			-
Transfer to loans from loans held for sale		12,636			8,558			248
Issuance of common stock for purchase accounting merger	$	-			14,000			-

See accompanying Notes to Consolidated Financial Statements.

68 Wachovia Corporation 2005 Annual Report

WACHOVIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

     Wachovia Corporation (the “Parent Company”) is a bank holding company whose principal wholly owned subsidiaries are Wachovia Bank, National Association (“Wachovia Bank”), a national banking association, and Wachovia Capital Markets, LLC, an institutional and investment banking company. The Company also holds a 62 percent interest in Wachovia Securities Financial Holdings, LLC, the parent company of Wachovia Securities, LLC (“Wachovia Securities”), a retail brokerage company, as well as a majority interest in Wachovia Preferred Funding Corporation, a Real Estate Investment Trust (“REIT”), which has publicly traded preferred stock outstanding. Wachovia Corporation and subsidiaries (together the “Company”) is a diversified financial services company whose operations are principally domestic.

     The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, and they conform to general practices within the applicable industries. The consolidated financial statements include the accounts of the Parent Company and all its majority-owned subsidiaries as well as variable interest entities where the Company is the primary beneficiary. In consolidation, all significant intercompany accounts and transactions are eliminated.

     Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash and due from banks, interest-bearing bank balances and federal funds sold and securities purchased under resale agreements. Generally, cash and cash equivalents have maturities of three months or less, and accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

SECURITIES PURCHASED AND SOLD AGREEMENTS

     Securities purchased under resale agreements and securities sold under repurchase agreements are generally accounted for as collateralized financing transactions and are recorded at the amount at which the securities were acquired or sold plus accrued interest. It is the Company’s policy to take possession of securities purchased under resale agreements, which are primarily U.S. Government and Government agency securities. The market value of securities purchased and sold is monitored and collateral is obtained from or returned to the counterparty when appropriate.

SECURITIES AND TRADING ACTIVITIES

     Securities are classified at the date of commitment or purchase as trading or as available for sale securities. The fair value of securities is based on quoted market prices, or if quoted market prices are not available, then the fair value is estimated using quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available. The determination of fair value includes various factors such as exchange or over-the-counter market price quotations; time value and volatility factors for options, warrants and derivatives; observed prices for equivalent or synthetic instruments; and counterparty credit quality.

Trading Account Assets and Liabilities

     Trading account assets and liabilities include primarily debt securities, securities sold short and trading derivatives, and are recorded at fair value with realized and unrealized gains and losses recorded in trading account profits (losses) in the results of operations. Trading derivatives include interest rate, commodity, currency, equity and credit default swap agreements; options, caps, and floors; and financial futures and forward contracts. Interest and dividends on trading account debt and equity securities, including securities sold short, are recorded in interest income or interest expense on an accrual basis. Interest and dividends on trading account derivatives are included in trading account profits (losses) in the results of operations. The fair value of derivatives in a gain position, as well as purchased options, are reported as trading account assets. Similarly, the fair value of derivatives in a loss position, as well as written options, are reported as trading account liabilities. The reported amounts related to trading derivatives include the effect of master netting agreements.

Securities Available for Sale

     Securities available for sale are used as part of the Company’s interest rate risk management strategy, and they may be sold in response to changes in interest rates, changes in prepayment risks and other factors. Securities available for sale are carried at fair value with unrealized gains and losses recorded net of income taxes as a component of other comprehensive income. Interest and dividends on securities are recognized in interest income on an accrual basis. Premiums and discounts on debt securities are amortized as an adjustment to yield over the contractual term of the security. If a prepayment occurs on a security, any related premium or discount is recognized as an adjustment to yield in the results of operations in the period in which the prepayment occurs. Realized gains and losses are recognized on a specific identification, trade date basis. Realized gains and losses are included in fee and other income as securities gains (losses) in the results of operations.

Wachovia Corporation 2005 Annual Report 69

Audited Financial Statements

     On a quarterly basis, the Company makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; recent events specific to the issuer or industry; and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses).

CONSOLIDATION

     The Company consolidates those entities in which it holds a controlling financial interest, which is typically measured as a majority of the outstanding common stock. However, in certain situations, a voting interest may not be indicative of control, and in those cases, control is measured by other factors. Variable interest entities (“VIEs”), certain of which are also referred to as special-purpose entities (“SPE”), are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinate financial support from other parties. A company is deemed to be the “primary beneficiary”, and thus required to consolidate a VIE, if the company has a variable interest (or combination of variable interests) that will absorb a majority of the VIE’s expected losses, that will receive a majority of the VIE’s expected residual returns, or both. A “variable interest” is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets. “Expected losses” and “expected residual returns” are measures of variability in the expected cash flows of a VIE.

SECURITIZATIONS AND BENEFICIAL INTERESTS

     In certain asset securitization transactions that meet the applicable criteria to be accounted for as a sale, assets are sold to an entity referred to as a “qualifying special purpose entity” (“QSPE”), which then issues beneficial interests in the form of senior and subordinated interests collateralized by the assets. In some cases, the Company may retain as much as 90 percent of the beneficial interests. Additionally, from time to time, the Company may also resecuritize certain assets in a new securitization transaction. The assets and liabilities sold to a QSPE are excluded from the Company’s consolidated balance sheet, subject to a quarterly evaluation to ensure the entity continues to meet the requirements to be a QSPE. When the Company’s portion of the beneficial interests exceeds 90 percent, a QSPE would no longer qualify for off-balance sheet treatment and the Company would be required to consolidate the SPE, subject to analysis. In these cases, any beneficial interests previously held by the Company are removed from the balance sheet and the underlying assets and liabilities of the SPE are recorded at fair value to the extent interests were previously held by outside parties.

     The carrying amount of the assets transferred to a QSPE is allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. A gain or loss is recorded in other fee income for the difference between the carrying amount and the fair value of the assets sold. Fair values are based on quoted market prices, quoted market prices for similar assets, or if market prices are not available, then the fair value is estimated using discounted cash flow analyses with market assumptions for credit losses, prepayments and discount rates. Retained interests from securitizations with off-balance sheet entities, including QSPEs and VIEs where the Company is not the primary beneficiary, are classified as either available for sale securities, trading account assets or loans and are accounted for as described herein.

DERIVATIVES USED FOR RISK MANAGEMENT

     The Company may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or liability or an unrecognized firm commitment (“fair value” hedge), an accounting hedge of a forecasted transaction or of the variability of future cash flows of a floating rate asset or liability (“cash flow” hedge), or a foreign currency fair value or cash flow hedge (“foreign currency” hedge). All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair values with unrealized gains and losses recorded either in other comprehensive income, net of applicable income taxes, or in the results of operations, depending on the purpose for which the derivative is held. Derivatives that do not meet the criteria for designation as a hedge at inception, or fail to meet the criteria thereafter, are included in trading account assets or liabilities. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded as other fee income in the results of operations. To the extent of the effectiveness of a hedge, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of income taxes. For all hedge relationships, ineffectiveness resulting from differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other fee income in the results of operations. Net interest settlements on derivatives designated as fair value or cash flow hedges are treated as an adjustment to the interest income or interest expense of the hedged assets or liabilities.

70 Wachovia Corporation 2005 Annual Report

     At inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. This process includes identification of the hedging instrument, hedged item, risk being hedged and the methodology for measuring ineffectiveness. In addition, the Company assesses, both at the inception of the hedge and on an ongoing quarterly basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item, and whether the derivative is expected to continue to be highly effective.

     In making the initial assessments of hedge effectiveness, the Company uses statistical analysis and comparison of the terms of the hedging instrument to those of the hedged item. For fair value hedges, the Company generally assesses effectiveness by using price sensitivity analysis of the hedging instrument relative to that of the hedged item for changes attributable to the hedged risk.

     The Company measures ongoing ineffectiveness for fair value hedges by comparing the changes in fair value of the hedging instrument to the changes in fair value of the hedged item attributable to the hedged risk. For cash flow hedges, the Company generally uses the hypothetical derivative method of measuring hedge ongoing ineffectiveness.

     The Company discontinues hedge accounting prospectively when either it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated or exercised; the derivative is de-designated because it is unlikely that a forecasted transaction will occur; or management determines designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the derivative is reclassified as a trading account asset or liability. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted as an adjustment to yield over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction are still expected to occur, unrealized gains and losses that were accumulated in other comprehensive income are included in the results of operations in the same period when the results of operations are also affected by the hedged cash flow. The unrealized gains and losses are recognized in the results of operations immediately if the cash flow hedge was discontinued because a forecasted transaction is not expected to occur.

     Commitments to purchase certain securities, loans and certain commitments to sell loans are derivatives. At inception, these commitments may be designated in a hedge relationship; otherwise, they are recorded as a freestanding derivative and classified as a trading account asset or liability. The Company enters into a contract (“host contract”) that contains a derivative that is embedded in the financial instrument. If applicable, an embedded derivative is separated from the host contract and can be designated in a hedge relationship; otherwise, the derivative is recorded as a freestanding derivative and generally classified as a trading account asset or liability. The Company enters into credit derivative agreements in connection with altering the risk profile of certain loans or pools of loans in the Company’s loan portfolio. These credit derivatives do not meet the criteria for designation as a hedge, are recorded as freestanding derivatives and are classified as a trading account asset or liability.

     The Company enters into interest rate lock commitments as part of its commercial and consumer mortgage lending activities. These loan commitments are initially recorded at fair value including the amount of consideration exchanged, if any. Subsequent adjustments in the value of the loan commitment are based only on market changes in interest rates, changes in the probability that a commitment will be exercised and the passage of time. The estimate of fair value specifically excludes the value of servicing cash flows and excess servicing.

LOANS

     Loans are recorded at the principal balance outstanding, net of unearned income. Interest income is recognized on an accrual basis. Loan origination fees and direct costs as well as premiums and discounts are amortized as an adjustment to yield over the term of the loan. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period. The Company does not have a significant amount of non-traditional loan products.

     Loans include direct financing leases that are recorded as the aggregate of lease payments receivable plus the estimated residual value of the leased property, less unearned income. Leveraged leases, which are a form of direct financing leases, are recorded net of nonrecourse debt. Unearned income on leases is amortized under a method that results in an approximate level rate of return. The net investment in leveraged leases is recalculated upon changes in important lease assumptions if the assumptions change the total estimated net income under the lease.

     A loan is considered to be impaired when based on current information, it is probable the Company will not receive all amounts due in accordance with the contractual terms of a loan agreement. The fair value is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. When the ultimate collectibility of the principal balance of an impaired loan is in doubt, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are recorded as recoveries of any amounts previously charged off, and then to interest income to the extent any interest has been forgone.

Wachovia Corporation 2005 Annual Report 71

Audited Financial Statements

 

     The accrual of interest is generally discontinued on loans and leases, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Generally, loans past due 180 days or more are placed on nonaccrual status regardless of security. Consumer loans that become 120 days past due are generally charged to the allowance for loan losses. When borrowers demonstrate over an extended period the ability to repay a loan in accordance with the contractual terms of a loan classified as nonaccrual, the loan is returned to accrual status.

ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

     The allowance for loan losses and reserve for unfunded lending commitments are maintained at levels that are adequate to absorb probable losses inherent in the loan portfolio and in unfunded commercial lending commitments, respectively, as of the date of the consolidated financial statements. The Company has developed policies and procedures for assessing the adequacy of the allowance for loan losses and reserve for unfunded lending commitments that reflect the assessment of credit risk considering all available information. Where appropriate, this assessment includes monitoring qualitative and quantitative trends including changes in the levels of past due, criticized and nonperforming loans. In developing this assessment, the Company must rely on estimates and exercise judgment in assessing credit risk. Depending on changes in circumstances, future assessments of credit risk may yield materially different results from the estimates, which may require an increase or a decrease in the allowance for loan losses and reserve for unfunded lending commitments.

     The Company employs a variety of modeling and estimation tools for measuring credit risk, which are used in developing an appropriate allowance for loan losses and reserve for unfunded lending commitments. The allowance for loan losses consists of formula-based components for both the commercial and consumer portfolios, each of which includes an adjustment for historical loss variability, a reserve for impaired commercial loans and an unallocated component. The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments do not diminish the fact that the entire allowance for loan losses and reserve for unfunded lending commitments are available to absorb losses in the loan portfolio and related commitment portfolio, respectively. The Company’s principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.

     The allowance for loan losses and reserve for unfunded lending commitments are subject to review by banking regulators. The Company’s primary bank regulators regularly conduct examinations of the allowance for loan losses and reserve for unfunded lending commitments and make assessments regarding their adequacy and the methodology employed in their determination.

LOANS HELD FOR SALE

     Loans are classified as held for sale based on management’s intent to sell or securitize the loans, either as part of a core business strategy or related to a risk mitigation strategy. Loans held for sale and any related unfunded commercial lending commitments are recorded at the lower of cost (which is the carrying amount net of deferred fees and costs and applicable allowance for loan losses and reserve for unfunded lending commitments) or market value less costs to sell. At the time of the transfer to loans held for sale, if the market value is less than cost, the difference is recorded as additional provision for credit losses in the results of operations. Market value is determined, generally in the aggregate, based on quoted market prices for the same or similar loans, outstanding investor commitments or discounted cash flow analyses using market assumptions. At December 31, 2005, market value for substantially all the loans in loans held for sale were obtained by reference to prices for the same or similar loans from recent transactions. For a relationship that includes an unfunded commercial lending commitment, the cost basis is the outstanding balance of the loan net of the allowance for loan losses and net of any reserve for unfunded lending commitments. This cost basis is compared to the market value of the entire relationship including the unfunded commercial lending commitment.

     Individual loans or pools of loans are transferred from the loan portfolio to loans held for sale when the intent to hold the loans has changed and there is a plan to sell the loans within a reasonable period of time. When the Company no longer has the intent to sell the loans, individual loans or pools of loans are transferred from loans held for sale to the loan portfolio. Loans held for sale are reviewed quarterly. Subsequent declines or recoveries of previous declines in the market value of loans held for sale are recorded in other fee income in the results of operations. Market value changes occur due to changes in interest rates, the borrower’s credit, the secondary loan market and the market for a borrower’s debt. If an unfunded commercial lending commitment expires before a sale occurs, the reserve associated with the unfunded commercial lending commitment is recognized as a credit to other fee income in the results of operations.

PREMISES AND EQUIPMENT

     Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets. Depreciation is discontinued at the time an asset is determined to be held for disposal. Premises and equipment include certain costs associated with the acquisition or development of internal-use software, leasehold improvements and capitalized leases. For leasehold improvements, the estimated useful life is the lesser of the remaining lease term or estimated useful life. For capitalized leased assets, the estimated useful life is generally the lease term.

72 Wachovia Corporation 2005 Annual Report

GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Rather they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities, identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of impairment. The Company determined that lines of business that are one level below operating segments, are its reporting units.

     Identified intangible assets that have a finite useful life are amortized over that life in a manner that approximates the estimated decline in the economic value of the identified intangible asset. Identified intangible assets that have a finite useful life are periodically reviewed to determine whether there have been any events or circumstances to indicate the recorded amount is not recoverable from projected undiscounted net operating cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value, and when appropriate, the amortization period is also reduced. Unamortized intangible assets associated with disposed assets are included in the determination of gain or loss on sale of the disposed assets.

     The Company’s impairment evaluations for the year ended December 31, 2005, indicated that none of the Company’s goodwill or identified intangible assets with an indefinite useful life are impaired.

OTHER

Principal Investments

     Principal investments are recorded at fair value in other assets on the balance sheet with realized and unrealized gains and losses included in principal investing income in the results of operations. For public equity investments, fair value is based on quoted market prices, net of applicable discounts for trading restrictions and liquidity. Investments in non-public securities are recorded at the Company’s estimate of fair value, which is generally the original cost basis unless either the investee has raised additional debt or equity capital and the Company believes the transaction, taking into consideration differences in the terms of securities, is a better indicator of fair value; or the Company believes the fair value is less than original cost. For investments in private equity funds, the Company uses information provided by the fund managers in the initial determination of estimated fair value. Valuation factors such as the age of the fund and industry concentrations are used in the final determination of estimated fair value. Gains on fund investments are recognized only when they have been realized through sales or fund distributions. Reductions in fair value of fund investments, based on this valuation process, are recorded when identified.

Equity Method Investments

     Except for investments recorded at fair value, the Company accounts for investments in which the Company has significant influence under the equity method of accounting. Equity method investments are recorded at cost adjusted to reflect the Company’s portion of income, loss or dividends of the investee. The Company recognizes gain or loss in the results of operations on transactions where a subsidiary or an equity method investee issues common stock subject to a determination that the gain is realizable and that there are no plans to reacquire the shares; otherwise, the gain or loss is recorded net of income taxes directly in stockholders’ equity.

COMMISSIONS, AND ADVISORY, UNDERWRITING AND OTHER FEES

     Revenue is recognized when the earnings process is complete and collectibility is assured. Specifically, brokerage commission fees are recognized in income on a trade-date basis. Asset management fees, measured by assets at a particular time, are accrued as earned. Advisory and underwriting fees are recognized when the transaction is complete. Commission expenses are recorded when the related revenue is recognized. Transaction-related expenses are recognized as incurred.

STOCK-BASED COMPENSATION

     The Company has stock option plans under which incentive and nonqualified stock options may be granted periodically to certain employees. The Company’s stock options typically have an exercise price equal to the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally over three years to five years.

     In 2002, the Company adopted the fair value method of accounting for stock options. Under this method, fair value is measured on the date of grant using the Black-Scholes option pricing model with market assumptions. This amount is amortized on a straight-line basis over the vesting period for all recipients including retirement-eligible employees. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates.

     The Company adopted the fair value method effective as of the beginning of the year in which the decision was made, or January 1, 2002, and only for stock option awards made in 2002 and thereafter (the “prospective method”). Prior awards continue to be accounted for under the intrinsic value method. Therefore, the expense related to stock-based compensation included in the determination of income in 2005, 2004 and 2003 is less than that which would have applied to all awards prior to 2002.

Wachovia Corporation 2005 Annual Report 73

Audited Financial Statements

 

     The effect on net income available to common stockholders and earnings per share as if the fair value method had been applied to all outstanding and unvested awards for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
(In millions, except per share data)	2005			2004			2003
Net income available to common stockholders, as reported	$	6,643			5,214			4,259
Add stock-based employee compensation expense included in reported net income, net of income taxes
Stock-based employee compensation expense		103			130			102
Income taxes		(36	)		(45	)		(36	)
Stock-based employee compensation expense, net of income taxes		67			85			66
Deduct total stock-based employee compensation expense determined under the fair value method for all awards, net of income taxes		(67	)		(119	)		(133	)
Pro forma net income available to common stockholders	$	6,643			5,180			4,192
PER COMMON SHARE DATA
Basic — as reported	$	4.27			3.87			3.21
Basic — pro forma		4.27			3.85			3.16
Diluted — as reported		4.19			3.81			3.18
Diluted — pro forma	$	4.19			3.78			3.13

     For restricted stock, which generally vests based on continued service with the Company, the deferred compensation is measured as the fair value of the shares on the date of grant, and the deferred compensation is amortized as salaries and employee benefits expense in the results of operations in accordance with the applicable vesting schedule, generally straight-line over three years to five years. See Note 12 for additional information related to compensation expense recognized for restricted stock.

EARNINGS PER SHARE

     Basic earnings per share is determined by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is determined by dividing income available to common stockholders by the weighted average number of shares adjusted to include the effect of potentially dilutive shares. In calculating diluted earnings per share, the premium component of the forward price on equity forward contracts on the Company’s own stock is subtracted in calculating income available to common stockholders. Additionally, diluted shares include the share equivalent of the excess of the forward price in the case of forward contracts on the Company’s own stock and the strike price in the case of option contracts on the Company’s own stock over the current market price of the shares.

NEW ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS

     In 2005, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — An Interpretation of SFAS No. 143”, (“FIN 47”), that requires entities to recognize legal and conditional asset retirement obligations. The implementation of FIN 47 did not have a material impact on the Company’s consolidated financial position or results of operations.

RECLASSIFICATIONS

     Certain amounts in 2004 and 2003 were reclassified to conform with the presentation in 2005. These reclassifications had no effect on the Company’s previously reported consolidated financial position or results of operations.

74 Wachovia Corporation 2005 Annual Report

NOTE 2: BUSINESS COMBINATIONS AND DISPOSITIONS

BUSINESS COMBINATIONS

     The Company employs a disciplined, deliberate and methodical process of integration for its mergers. As part of this process, detailed plans are developed and then approved by senior management prior to execution of the plans. Amounts are recorded as exit cost purchase accounting adjustments only after approval of the associated plan by senior management.

Wachovia/Westcorp

     In September 2005, the Company announced the signing of a definitive merger agreement with Westcorp (“Westcorp”) and WFS Financial Inc (“WFS”) the common stock of which 84 percent is owned by Westcorp and 16 percent is held by the public. The acquisition of this California-based auto loan originator business is expected to be completed in the first quarter of 2006. The terms of this transaction call for the Company to exchange 1.2749 shares of its common stock for each share of Westcorp common stock and 1.4661 shares of its common stock for each share of WFS common stock. Based on the Company’s average of the closing prices for a period beginning two trading days before the announcement of the merger and ending two days after the merger announcement of $49.76 ($63.44 for each share of Westcorp common stock and $72.95 for each share of WFS common stock), the transaction is valued at $3.9 billion.

Wachovia/SouthTrust

     On June 21, 2004, the Company announced the signing of a definitive merger agreement with SouthTrust Corporation (“SouthTrust”), and the merger was completed on November 1, 2004. The terms of this transaction called for the Company to exchange 0.89 shares of its common stock for each share of SouthTrust common stock. Based on the Company’s average of the closing prices for a period beginning two trading days before the announcement of the merger and ending two days after the merger announcement of $45.86 ($40.82 for each share of SouthTrust common stock), the transaction is valued at $14.0 billion.

     The Company entered into this business combination to enhance shareholder value by providing more products and services for customers in existing and key additional markets, by realizing increased economies of scale and by having greater potential for growth following the merger. The Company believes this combination creates a pre-eminent retail banking franchise in the southeastern United States and one of the nation’s leading banking organizations in commercial banking, asset and wealth management, securities brokerage and investment banking.

     Under the purchase method of accounting, the assets and liabilities of SouthTrust were recorded at their respective fair values as of November 1, 2004, and the results of operations in 2004 include only two months of SouthTrust.

     In 2005, the Company recorded certain refinements to its initial estimates of the fair value of the assets and liabilities and made final decisions and approved integration plans related to the South Trust merger. At that time, the Company recorded additional exit cost purchase accounting adjustments of $147 million, and recorded a $72 million adjustment to deferred income taxes. Together, these adjustments resulted in an increase to goodwill of $75 million. Included in total exit costs of $207 million recorded as purchase accounting adjustments were employee termination benefits of $222 million, which included severance and related benefits for 3,300 employees terminated or notified of their pending termination in connection with the combination. The terminated employees were primarily in staff and support areas.

     Based on the ending SouthTrust tangible equity of $3.9 billion, an aggregate purchase price of $14.0 billion and total purchase accounting adjustments of a net write-down of $699 million, the merger resulted in total intangible assets of $10.7 billion ($10.5 billion net of deferred income taxes). Of the total intangible assets, $662 million ($407 million net of deferred income taxes) was allocated to deposit base intangible, $73 million ($45 million net of deferred income taxes) was allocated to customer relationship intangible and $10.0 billion to goodwill. Amortization expense related to intangible assets is not deductible for income tax purposes; however, for financial reporting purposes deferred income tax liabilities were recorded on all intangible assets except goodwill. The deferred income tax liabilities will be reflected as an income tax benefit in the results of operations in proportion to and over the amortization period of the related intangible asset.

Wachovia/Prudential Financial, Inc.

     On July 1, 2003, the Company consummated the combination of its retail brokerage business with the retail brokerage business of Prudential Financial, Inc. (“Prudential Financial”). Under the terms of the agreement, Prudential Financial exchanged its retail brokerage business for a 38 percent interest in the combined entity. The Company owns 62 percent of the combined entity, which continues to be a consolidated subsidiary of the Company. The combined entity operates under the name Wachovia Securities. The combination was accounted for under the purchase method of accounting, and accordingly, the results for 2003 include six months of Wachovia’s 100 percent owned brokerage subsidiary and six months of the combined entity.

     The Company entered into this business combination to enhance shareholder value by providing more products and services for customers and more investment opportunities for clients. This combination creates the third largest retail brokerage platform based on client assets, with major national presence, excellent growth prospects and attractive financial returns.

Wachovia Corporation 2005 Annual Report 75

Audited Financial Statements

 

     Under the purchase method of accounting, the assets and liabilities of the retail brokerage business of Prudential Financial were recorded at their respective fair values as of July 1, 2003. The assets and liabilities of the Company’s retail brokerage business continue to be recorded at their pre-combination basis and were not adjusted to fair value as a result of the combination. The difference between the Company’s pre-combination basis in the net assets of its retail brokerage business and 62 percent of the net assets of the combined entity was $224 million. The terms of the agreement provide that the minority owner has the ability to require the Company to repurchase its shares after two years and that the Company has the ability to repurchase the shares after 15 years. Because of these terms, the Company concluded that subsequent reacquisition of the shares was possible, and accordingly, the Company recorded the $224 million directly to stockholders’ equity.

     The $1.1 billion purchase price for the Prudential Financial retail brokerage business was based on an independent valuation of the contributed business. The valuation uses common techniques for valuing businesses such as discounted cash flow analysis.

     In 2004, the Company recorded certain refinements to its initial estimates of the fair value of the assets and liabilities recorded in connection with the retail brokerage transaction of $74 million, recorded a net $96 million adjustment to deferred income taxes, and in the first half of 2004, the Company made final decisions related to the retail brokerage transaction, particularly related to the integration of back-office operations and to management, and to the consolidation of Prudential Securities and Wachovia Securities branches in overlapping markets, and senior management approved plans related to these final components of the integration plan. At that time, the Company recorded an additional $402 million in exit cost purchase accounting adjustments that principally included finalization of real estate requirements in New York City and employee terminations. In addition, the Company reduced certain liabilities by $5 million associated with exit cost purchase accounting adjustments, which resulted in a reduction to goodwill.

     In 2005, the Company favorably resolved certain exit cost liabilities related to the retail brokerage transaction and recorded a $61 million ($47 million net of deferred income taxes) reduction in goodwill, resulting in total intangible assets of $684 million. Of the total intangible assets, $151 million ($113 million net of deferred income taxes) was allocated to customer relationships, resulting in $533 million of goodwill. Included in total exit costs of $454 million recorded as purchase accounting adjustments were employee termination benefits of $129 million, which included severance and employee termination benefits for 2,129 employees terminated or notified of their pending termination in connection with the combination. The terminated employees were primarily in staff and support areas.

DISPOSITIONS

     In December 2005, the Company completed the sale of most of its Corporate and Institutional Trust (“CIT”) businesses in two separate transactions for $740 million, with up to an additional $80 million to be received in 2006 based on the level of business retained in the 12-month period following the completion of the transaction. This transaction resulted in a pre-tax gain of $447 million, or $214 million after tax, which has been presented as a gain on sale of discontinued operations in the results of operations, and reduced goodwill and other intangible assets by $210 million. Financial results of the CIT businesses have not been presented as discontinued operations based on materiality, but have been excluded from the Capital Management business segment and included in the Parent in Note 14 for each of the years in the three year-period ended December 31, 2005. These businesses did not have significant assets or liabilities associated with them and substantially all activities are reflected in operating cash flows on the consolidated statements of cash flows. Financial results of the CIT business included in the statements of income information for each of the years in the three year-period ended December 31, 2005, are presented below.

	Years Ended December 31,
(In millions)	2005		2004		2003
Interest income	$	6		3		-
Interest expense		36		13		4
Fee and other income		183		188		180
Noninterest expense		123		114		100
Income taxes		11		23		28
Net income	$	19		41		48

76 Wachovia Corporation 2005 Annual Report

NOTE 3: TRADING ACCOUNT ASSETS AND LIABILITIES

	December 31,
(In millions)	2005		2004
TRADING ACCOUNT ASSETS
U.S. Treasury	$	1,293		2,768
U.S. Government agencies		2,154		3,799
State, county and municipal		2,180		868
Mortgage-backed securities		2,582		7,486
Other asset-backed securities		7,486		5,600
Corporate bonds and debentures		4,932		6,920
Equity securities		5,665		4,166
Derivative financial instruments		10,010		10,658
Sundry		6,402		3,667
Total trading account assets	$	42,704		45,932	��
TRADING ACCOUNT LIABILITIES
Securities sold short		8,790		12,258
Derivative financial instruments		8,808		9,451
Total trading account liabilities	$	17,598		21,709

Wachovia Corporation 2005 Annual Report 77

Audited Financial Statements

NOTE 4: SECURITIES

	December 31, 2005
																		Average
	1 Year			1-5		5-10		After 10				Gross Unrealized				Amortized		Maturity
(In millions)	or Less			Years		Years		Years		Total		Gains		Losses		Cost		in Years
MARKET VALUE
U.S. Treasury	$	782			161		140		41		1,124		2		4		1,126		2.63
Mortgage-backed securities, principally obligations of U.S. Government agencies and sponsored entities		259			10,595		65,530		8		76,392		87		1,232		77,537		6.81
Asset-backed
Residual interests from securitizations		68			667		125		—		860		215		1		646		3.23
Retained bonds from securitizations		144			2,717		159		54		3,074		35		2		3,041		2.99
Collateralized mortgage obligations		49			6,563		1,273		—		7,885		31		92		7,946		3.82
Commercial mortgage-backed		11			3,042		3,709		7		6,769		194		65		6,640		5.49
Other		202			351		118		—		671		6		6		671		3.28
State, county and municipal		34			691		592		2,162		3,479		219		3		3,263		14.78
Sundry		1,299			5,093		3,768		4,475		14,635		150		49		14,534		7.62
Total market value	$	2,848			29,880		75,414		6,747		114,889		939		1,454		115,404		6.65
MARKET VALUE
Debt securities	$	2,848			29,880		75,414		4,213		112,355		919		1,447		112,883
Equity securities		—			—		—		2,534		2,534		20		7		2,521
Total market value	$	2,848			29,880		75,414		6,747		114,889		939		1,454		115,404
AMORTIZED COST
Debt securities	$	2,825			29,539		76,434		4,085		112,883
Equity securities		—			—		—		2,521		2,521
Total amortized cost	$	2,825			29,539		76,434		6,606		115,404
WEIGHTED AVERAGE YIELD
U.S. Treasury		3.93	%		2.01		2.59		4.95		3.52
Mortgage-backed securities, principally obligations of U.S. Government agencies and sponsored entities		5.82			4.89		5.06		5.01		5.04
Asset-backed
Residual interests from securitizations		27.23			16.46		21.52		—		18.12
Retained bonds from securitizations		4.16			5.24		8.38		4.61		5.32
Collateralized mortgage obligations		7.26			5.02		5.47		—		5.11
Commercial mortgage-backed		4.65			6.97		5.04		6.06		5.88
Other		5.99			5.30		5.78		—		5.59
State, county and municipal		8.03			8.68		8.67		6.89		7.55
Sundry		4.65			4.84		4.20		5.61		4.90
Consolidated		5.15	%		5.41		5.07		6.00		5.21

78 Wachovia Corporation 2005 Annual Report

	December 31, 2004
																		Average
	1 Year			1-5		5-10		After 10				Gross Unrealized				Amortized		Maturity
(In millions)	or Less			Years		Years		Years		Total		Gains		Losses		Cost		in Years
MARKET VALUE
U.S. Treasury	$	216			457		140		164		977		2		3		978		4.83
Mortgage-backed securities, principally obligations of U.S. Government agencies and sponsored entities		319			51,777		14,805		14		66,915		596		135		66,454		4.49
Asset-backed
Residual interests from securitizations		—			434		460		—		894		254		4		644		5.05
Retained bonds from securitizations		289			2,716		251		—		3,256		35		1		3,222		3.85
Collateralized mortgage obligations		241			4,754		615		71		5,681		56		16		5,641		3.50
Commercial mortgage-backed		33			4,291		3,949		—		8,273		486		7		7,794		5.49
Other		3,785			800		54		—		4,639		15		1		4,625		1.10
State, county and municipal		102			372		457		2,864		3,795		243		5		3,557		16.82
Sundry		526			7,483		5,111		3,047		16,167		265		18		15,920		6.82
Total market value	$	5,511			73,084		25,842		6,160		110,597		1,952		190		108,835		5.08
MARKET VALUE
Debt securities	$	5,511			73,084		25,842		4,584		109,021		1,908		184		107,297
Equity securities		—			—		—		1,576		1,576		44		6		1,538
Total market value	$	5,511			73,084		25,842		6,160		110,597		1,952		190		108,835
AMORTIZED COST
Debt securities	$	5,482			72,094		25,285		4,436		107,297
Equity securities		—			—		—		1,538		1,538
Total amortized cost	$	5,482			72,094		25,285		5,974		108,835
WEIGHTED AVERAGE YIELD
U.S. Treasury		2.16	%		2.91		4.32		2.40		2.86
Mortgage-backed securities, principally obligations of U.S. Government agencies and sponsored entities		4.87			4.97		5.11		5.22		5.00
Asset-backed
Residual interests from securitizations		—			15.25		20.21		—		17.23
Retained bonds from securitizations		7.41			3.45		3.33		—		3.79
Collateralized mortgage obligations		5.79			4.63		4.39		5.04		4.66
Commercial mortgage-backed		3.12			6.41		5.29		—		5.85
Other		3.31			6.39		3.82		—		3.84
State, county and municipal		8.63			9.36		8.95		7.12		7.58
Sundry		4.20			4.46		4.72		5.64		4.76
Consolidated		3.85	%		5.00		5.23		6.21		5.06

Wachovia Corporation 2005 Annual Report 79

Audited Financial Statements

     At December 31, 2005 and 2004, all securities not classified as trading were classified as available for sale.

     At December 31, 2005, mortgage-backed securities included Federal National Mortgage Association and Federal Home Loan Mortgage Corporation securities with an amortized cost of $56.6 billion and a market value of $55.7 billion ($51.1 billion and $51.4 billion, respectively, at December 31, 2004), and an amortized cost of $18.7 billion and a market value of $18.4 billion ($12.6 billion and $12.7 billion, respectively, at December 31, 2004), respectively.

     Also included in mortgage-backed securities are U.S. Government agency and sponsored entity securities retained from the securitization of residential mortgage loans. These securities had an amortized cost and market value of $2.1 billion at December 31, 2005 (amortized cost of $1.9 billion and a market value of $2.0 billion at December 31, 2004).

     Included in asset-backed securities are retained bonds primarily from the securitization of commercial and consumer real estate, SBA, student and auto loans. At December 31, 2005, retained bonds with an amortized cost and market value of $3.0 billion were considered investment grade based on external ratings, with $2.2 billion having credit ratings of AA and above. At December 31, 2004, retained bonds with an amortized cost and market value of $3.2 billion were considered investment grade based on external ratings, with $2.4 billion having credit ratings of AA and above.

     Securities with an aggregate amortized cost of $62.5 billion at December 31, 2005, are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements.

     Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Average maturity excludes equity securities and money market funds. Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates.

     At December 31, 2005 and 2004, there were forward commitments to purchase securities on both a regular way and non-regular way basis at a cost that approximates a market value of $5.8 billion and $2.9 billion, respectively. At December 31, 2005 and 2004, there were commitments to sell securities at a cost that approximates a market value of $3.5 billion and $1.8 billion, respectively.

     Gross gains and losses realized on the sale of debt securities in 2005 were $498 million and $471 million (including $135 million of impairment losses), respectively, and gross gains and losses realized on the sale of equity securities were $66 million and $4 million (including $3 million of impairment losses), respectively. Gross gains and losses realized on the sale of debt securities in 2004 were $275 million and $364 million (including $47 million of impairment losses), respectively, and gross gains and losses realized on the sale of equity securities were $91 million and $12 million (including $11 million of impairment losses), respectively. Gross gains and losses realized on the sale of debt securities in 2003 were $325 million and $255 million (including $173 million of impairment losses), respectively, and gross gains and losses realized on the sale of equity securities were $6 million and $31 million (including $27 million of impairment losses), respectively.

     The reference point for determining when securities are in an unrealized loss position is quarter-end. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month period. The gross unrealized losses at December 31, 2005 and 2004, were primarily caused by interest rate changes. The Company has reviewed these securities in accordance with its accounting policy for other-than-temporary impairment, which is discussed in Note 1, and does not consider them other-than-temporarily impaired. Included in sundry are $157 million and $161 million, respectively, of preferred equity securities issued by U.S. Government agencies. The gross unrealized losses on these securities were not significant at December 31, 2005 and 2004. The market value and unrealized loss on securities at December 31, 2005 and 2004, segregated by those securities that have been in an unrealized loss position for less than one year and one year or more follows.

80 Wachovia Corporation 2005 Annual Report

	December 31, 2005
	Less Than 1 Year					1 Year or More					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
(In millions)	Value		Loss			Value		Loss			Value		Loss
AAA/AA-RATED SECURITIES
U.S. Treasury	$	251		(3	)		86		(1	)		337		(4	)
U.S. Government agencies and sponsored entities		52,855		(878	)		11,954		(354	)		64,809		(1,232	)
Asset-backed		8,367		(130	)		1,248		(31	)		9,615		(161	)
State, county and municipal		—		—			112		(3	)		112		(3	)
Sundry		2,705		(24	)		59		(1	)		2,764		(25	)
Total AAA/AA-rated securities		64,178		(1,035	)		13,459		(390	)		77,637		(1,425	)
A/BBB-RATED SECURITIES
Asset-backed		167		(2	)		94		(2	)		261		(4	)
Sundry		496		(8	)		51		(5	)		547		(13	)
Total A/BBB-rated securities		663		(10	)		145		(7	)		808		(17	)
BELOW INVESTMENT GRADE OR NON-RATED SECURITIES
Asset-backed		10		(1	)		—		—			10		(1	)
Sundry		695		(9	)		42		(2	)		737		(11	)
Total below investment grade or non-rated securities		705		(10	)		42		(2	)		747		(12	)
Total	$	65,546		(1,055	)		13,646		(399	)		79,192		(1,454	)

	December 31, 2004
	Less Than 1 Year					1 Year or More					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
(In millions)	Value		Loss			Value		Loss			Value		Loss
AAA/AA-RATED SECURITIES
U.S. Treasury	$	457		(3	)		—		—			457		(3	)
U.S. Government agencies and sponsored entities		23,071		(118	)		856		(17	)		23,927		(135	)
Asset-backed		3,828		(24	)		—		—			3,828		(24	)
State, county and municipal		299		(5	)		—		—			299		(5	)
Sundry		678		(6	)		182		(6	)		860		(12	)
Total AAA/AA-rated securities		28,333		(156	)		1,038		(23	)		29,371		(179	)
A/BBB-RATED SECURITIES
Asset-backed		227		(1	)		—		—			227		(1	)
Sundry		155		(2	)		—		—			155		(2	)
Total A/BBB-rated securities		382		(3	)		—		—			382		(3	)
BELOW INVESTMENT GRADE OR NON-RATED SECURITIES
Asset-backed		174		(4	)		—		—			174		(4	)
Sundry		170		(2	)		4		(2	)		174		(4	)
Total below investment grade or non-rated securities		344		(6	)		4		(2	)		348		(8	)
Total	$	29,059		(165	)		1,042		(25	)		30,101		(190	)

Wachovia Corporation 2005 Annual Report 81

Audited Financial Statements

NOTE 5: VARIABLE INTEREST ENTITIES, SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS, AND SERVICING ASSETS

VARIABLE INTEREST ENTITIES

     The Company administers multi-seller commercial paper conduits through which it arranges financing for certain customer transactions that provide customers with access to the commercial paper market. The Company provides liquidity agreements to these multi-seller conduits that are discussed further in Note 20. These conduits are VIEs and the liquidity agreements are considered variable interests. Prior to November 2005, the Company was the primary beneficiary and consolidated these conduits. In November 2005, one of the conduits administered by the Company issued a subordinated note to an unaffiliated third party that absorbed the majority of the expected variability in the conduit. As a result, the Company is no longer the primary beneficiary of the conduit and is no longer required to consolidate the conduit. Subsequently, the deconsolidated conduit purchased assets in the other conduit administered by the Company and at December 31, 2005, the consolidated conduit did not have any assets or commercial paper outstanding. At December 31, 2005, the deconsolidated conduit administered by the Company had total assets of $9.7 billion and the Company had a maximum exposure to losses of $19.9 billion relating to its liquidity agreements. At December 31, 2004, the Company’s balance sheet included $8.8 billion of assets, representing $4.9 billion of securities and $3.9 billion of other earning assets, and $9.0 billion of short-term commercial paper borrowings related to consolidation of the two conduits.

     In March 2004, the Company deconsolidated the trusts associated with its trust preferred securities. The deconsolidation of the trusts did not have a material impact on the Company’s consolidated financial position or results of operations. More information related to the trust preferred securities is presented in Note 11.

SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS

     The Company originates, securitizes, sells and services primarily commercial and consumer real estate loans, student loans and auto loans. In certain situations, the Company also provides liquidity agreements to investors in the beneficial interests and provides credit enhancements in the form of standby letters of credit. Subordinated and residual interests for which there are no quoted market prices are valued using discounted cash flow analyses with assumptions for credit losses, prepayments and discount rates.

     Included in trading account profits were $207 million, $118 million and $121 million in 2005, 2004 and 2003, respectively, related to the securitization and sale of commercial real estate loans. The Company recognized gains of $60 million, $77 million and $115 million in 2005, 2004 and 2003, respectively, related to the securitization and sale of consumer real estate loans. The Company recognized gains of $24 million in 2005 related to the sale and securitization of student loans, and losses of $74 million and $57 million in 2005 and 2004, respectively, related to the securitization and sale of auto loans.

     At December 31, 2005, the Company had $6.4 billion of retained interests from securitization transactions. These retained interests included $2.1 billion of retained government-sponsored entities securities, $3.4 billion of senior and subordinated notes, receivables and servicing assets, and $860 million of residual interests. Of the $6.4 billion of retained interests, $3.0 billion (including the $2.1 billion of retained agency securities) were valued using quoted market prices or quoted market prices for sales of similar assets. The remaining $3.4 billion of retained interests consists of subordinated and residual interests, receivables and servicing assets for which there are no quoted market prices.

     At December 31, 2004, the Company had $6.5 billion of retained interests from securitization transactions. These retained interests included $1.9 billion of retained government-sponsored entities securities, $3.7 billion of senior and subordinated notes, receivables and servicing assets, and $894 million of residual interests. Of the $6.5 billion of retained interests, $3.0 billion (including the $1.9 billion of retained agency securities) were valued using quoted market prices or quoted market prices for sales of similar assets. The remaining $3.5 billion of retained interests consists of subordinated and residual interests for which there are no quoted market prices. In 2004, the Company purchased the beneficial interests held by third parties for certain consumer real estate and student loan securitizations, and the trusts were subsequently terminated.

     At December 31, 2003, the Company had $13.3 billion of retained interests from securitization transactions. These retained interests included $2.4 billion of retained government-sponsored entities securities, $9.8 billion of senior and subordinated notes, receivables and servicing assets, and $1.1 billion of residual interests. Of the $13.3 billion of retained interests, $4.1 billion (including the $2.4 billion of retained agency securities) were valued using quoted market prices or quoted market prices for sales of similar assets. The remaining $9.2 billion of retained interests consists of subordinated and residual interests for which there are no quoted market prices.

82 Wachovia Corporation 2005 Annual Report

     Original economic assumptions used for valuing certain retained interests in securitizations using discounted cash flow analyses and the cash flow activity from those securitizations completed in 2005, 2004 and 2003 are presented below.

	December 31,
	2005									2004						2003
	Commercial			Consumer		Auto		Student		Commercial		Consumer		Auto		Commercial		Consumer
(In millions)	Real Estate			Real Estate		Loans		Loans		Real Estate		Real Estate		Loans		Real Estate		Real Estate
ORIGINAL ECONOMIC ASSUMPTIONS (a)
Prepayment speed (CPR)		—	%		34.69		18.66		6.00		—		41.37		25.75		—		44.54
Weighted average life		—	yrs		2.33		1.91		8.58		—		4.31		2.81		—		4.15
Expected credit losses		—	%		1.39		0.95		0.17		—		0.44		1.33		—		0.40
Discount rate		—	%		11.73		10.54		11.71		—		11.00		12.00		—		11.00
CASH FLOW ACTIVITY
Proceeds from New securitizations	$	16,190			4,344		2,774		1,737		7,122		2,989		2,793		5,135		3,051
Collections used by trust to purchase new balances in revolving securitizations		—			1,661		—		—		—		1,391		—		—		1,392
Service fees received		19			8		5		—		12		6		5		9		9
Cash flow received from retained interests		—			8		4		—		—		2		12		1		17
Servicing advances, net	$	31			9		—		—		21		—		—		13		—

(a) There were no beneficial interests in commercial real estate loan securitizations retained in 2005, 2004 and 2003 that were valued using discounted cash flow analyses.

     At December 31, 2005, the Company had $2.7 billion of retained interests in consumer real estate securitizations valued using weighted average prepayment speeds of 19.66 percent to 42.26 percent and expected credit losses of 0.38 percent to 4.46 percent. Discount rates fluctuate based on the credit rating of the retained interest; AAA/AA rated securities – LIBOR plus 0.35 percent to LIBOR plus 0.55 percent (4.74 percent to 4.94 percent), A/BBB rated securities – LIBOR plus 0.75 percent (5.14 percent) to 5.96 percent, below investment grade securities – 17.33 percent and non-rated securities – 9.47 percent to 26.59 percent.

     Adverse changes of 10 percent and 20 percent in the key economic assumptions used to value the retained interests were analyzed. An adverse change of 10 percent and 20 percent in the prepayment speed would result in a decrease in value of $9 million and $13 million, respectively. An adverse change of 10 percent and 20 percent in expected credit losses would result in a decrease in value of $9 million and $16 million, respectively. An adverse change of 10 percent and 20 percent in the discount rate would result in a decrease in value of $60 million and $106 million, respectively. In addition, the Company has $733 million of retained interests in student loan, auto and small business administration loan securitizations, municipal and corporate debt securities, receivables and servicing assets for which price sensitivity is insignificant.

Wachovia Corporation 2005 Annual Report 83

Audited Financial Statements

     Managed loans at December 31, 2005 and 2004, loans past due 90 days or more and net loan losses are presented below.

	December 31,
	2005									2004
				Loans Past			Loan						Loans Past			Loan
				Due 90			Losses,						Due 90			Losses,
(In millions)	Balance			Days (a)			Net			Balance			Days (a)			Net
MANAGED LOANS
Commercial
Loans held in portfolio	$	156,854			52			36			141,226			21			79
Securitized loans (b)		1,227			5			2			1,734			14			9
Loans held for sale		3,860			—			—			2,112			—			—
Consumer
Loans held in portfolio		111,421			573			171			92,313			501			221
Securitized loans (b)		13,882			58			61			10,217			129			59
Securitized loans included in securities		5,023			42			30			5,033			47			19
Loans held for sale		2,545			2			27			10,876			12			25
Total managed loans		294,812			732			327			263,511			724			412
Less
Securitized loans (b)		(15,109	)		(63	)		(63	)		(11,951	)		(143	)		(68	)
Securitized loans included in securities		(5,023	)		(42	)		(30	)		(5,033	)		(47	)		(19	)
Loans held for sale		(6,405	)		(2	)		(27	)		(12,988	)		(12	)		(25	)
Loans held in portfolio	$	268,275			625			207			233,539			522			300

(a) Includes bankruptcies and foreclosures.

(b) Excludes securitized loans the Company continues to service but for which the Company has no other continuing involvement except market-making activities.

SERVICING ASSETS

     In connection with certain transactions where the Company securitizes and sells originated or purchased loans with servicing retained, servicing assets or liabilities are recorded based on the relative fair value of the servicing rights on the date the loans are sold. The Company also purchases certain servicing assets. Servicing assets are amortized in proportion to and over the estimated period of net servicing income. Servicing assets are periodically evaluated for impairment based on the fair value of those assets. If, by individual stratum, the carrying amount of servicing assets exceeds fair value, a valuation reserve is established. The valuation reserve is adjusted as the fair value changes. For purposes of impairment evaluation and measurement, the Company stratifies servicing assets based on predominant risk characteristics of the underlying loans, including loan type, amortization type, loan coupon rate, and in certain circumstances, period of origination. The assumptions used in evaluating servicing assets for impairment incorporate market assumptions for credit losses, prepayments and discount rates.

     At December 31, 2005 and 2004, the gross carrying amount and accumulated amortization of servicing assets were $1.6 billion and $634 million, respectively, and $1.1 billion and $373 million, respectively. In connection with certain acquisitions and transactions in 2005 and 2004, the Company recorded servicing assets of $558 million and $420 million, respectively. Servicing assets have weighted average amortization periods of 7 years in 2005 and 8 years in 2004. Amortization expense related to servicing assets in 2005, 2004 and 2003 was $292 million, $162 million and $80 million, respectively.

     Servicing assets amortization expense in each of the five years subsequent to December 31, 2005, is as follows (in millions): 2006, $233; 2007, $182; 2008, $140; 2009, $107; and 2010, $82.

84 Wachovia Corporation 2005 Annual Report

NOTE 6: LOANS, NET OF UNEARNED INCOME

	December 31,
(In millions)	2005			2004
COMMERCIAL
Commercial, financial and agricultural	$	87,327			75,095
Real estate - construction and other		13,972			12,673
Real estate - mortgage		19,966			20,742
Lease financing		25,368			25,000
Foreign		10,221			7,716
Total commercial		156,854			141,226
CONSUMER
Real estate secured		94,748			74,161
Student loans		9,922			10,468
Installment loans		6,751			7,684
Total consumer		111,421			92,313
Total loans		268,275			233,539
UNEARNED INCOME		(9,260	)		(9,699	)
Loans, net of unearned income	$	259,015			223,840

     The components of the net investment in leveraged leases at December 31, 2005 and 2004, are presented below.

	December 31,
(In millions)	2005			2004
Net rental income receivable	$	19,521			19,333
Estimated unguaranteed residual values		2,244			1,992
Unearned income		(8,939	)		(9,338	)
Investment in leveraged leases		12,826			11,987
Less related deferred income taxes		(5,904	)		(5,016	)
Net investment in leveraged leases	$	6,922			6,971

     The Company recognized income before income taxes from leveraged leases of $571 million, $598 million and $606 million in 2005, 2004 and 2003, respectively, and the related income tax expense was $220 million, $234 million and $236 million in 2005, 2004 and 2003, respectively. Future minimum lease receipts relating to direct financing leases, including leveraged leases, were $22.1 billion at December 31, 2005, with $2.5 billion receivable within the next five years. Future minimum lease receipts under noncancelable operating leases was $627 million at December 31, 2005, substantially all of which is receivable over the next five years.

     Loans to directors and executive officers of the Parent Company and their related interests did not exceed 5 percent of stockholders’ equity at December 31, 2005 and 2004. In the opinion of management, these loans do not involve more than the normal risk of collectibility, nor do they include other features unfavorable to the Company.

     At December 31, 2005 and 2004, nonaccrual and restructured loans amounted to $652 million and $1.1 billion, respectively. In 2005, 2004 and 2003, gross interest income of $71 million, $91 million and $136 million, respectively, would have been recorded if all nonaccrual and restructured loans had been performing in accordance with their original terms and if they had been outstanding throughout the entire period, or since origination if held for part of the period. Interest collected on these loans and included in interest income in 2005, 2004 and 2003 amounted to $21 million, $15 million and $16 million, respectively.

     At December 31, 2005 and 2004, impaired loans amounted to $392 million and $712 million, respectively. Included in the allowance for loan losses was $10 million related to $54 million of impaired loans at December 31, 2005, and $31 million related to $164 million of impaired loans at December 31, 2004. Included in the reserve for unfunded lending commitments was $7 million related to $13 million of impaired unfunded commercial lending commitments at December 31, 2005, and $16 million related to $51 million of impaired unfunded commercial lending commitments at December 31, 2004. In 2005, 2004 and 2003, the average recorded investment in impaired loans was $617 million, $684 million and $1.2 billion, respectively. In 2005, 2004 and 2003, $19 million, $35 million and $19 million, respectively, of interest income was recognized on loans while they were impaired. This income was recognized using the cash-basis method of accounting.

     At December 31, 2005, the Company had $3.9 billion of loans pledged as collateral for outstanding Federal Home Loan Bank borrowings and $60.2 billion of loans pledged as collateral for the contingent ability to borrow from the Federal Reserve Bank.

Wachovia Corporation 2005 Annual Report 85

Audited Financial Statements

NOTE 7: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

     The allowance for loan losses and the reserve for unfunded lending commitments for each of the years in the three-year period ended December 31, 2005, are presented below.

	Years Ended December 31,
(In millions)	2005			2004			2003
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year	$	2,757			2,348			2,604
Provision for credit losses		227			290			549
Provision for credit losses relating to loans transferred to loans held for sale or sold		18			(31	)		75
Balance of acquired entities at purchase date		—			510			—
Allowance relating to loans acquired, transferred to loans held for sale or sold		(71	)		(60	)		(228	)
Total		2,931			3,057			3,000
Loan losses		(456	)		(526	)		(885	)
Loan recoveries		249			226			233
Net charge-offs		(207	)		(300	)		(652	)
Balance, end of year	$	2,724			2,757			2,348

	Years Ended December 31,
(In millions)	2005		2004			2003
RESERVE FOR UNFUNDED LENDING COMMITMENTS
Balance, beginning of year	$	154		156			194
Provision for credit losses		4		(2	)		(38	)
Balance, end of year	$	158		154			156

86 Wachovia Corporation 2005 Annual Report

NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

     Changes in the carrying amount of goodwill related to each of the Company’s business segments for each of the years in the two-year period ended December 31, 2005, are presented below.

	December 31, 2005 and 2004
								Corporate
								and
	General		Capital			Wealth		Investment
(In millions)	Bank		Management			Management		Bank			Total
Balance, December 31, 2003	$	6,924		1,881			527		1,817			11,149
Purchase accounting adjustments		—		340			17		(5	)		352
Additions to goodwill		9,191		158			238		438			10,025
Balance, December 31, 2004		16,115		2,379			782		2,250			21,526
Purchase accounting adjustments		69		(14	)		21		(6	)		70
Dispositions		—		(177	)		—		—			(177	)
Additions to goodwill		—		—			186		202			388
Balance, December 31, 2005	$	16,184		2,188			989		2,446			21,807

     At December 31, 2005 and 2004, the Company had $90 million assigned as the carrying amount of its tradename, which based on its indefinite useful life, is not subject to amortization.

     The gross carrying amount and accumulated amortization for each of the Company’s identified intangible assets subject to amortization at December 31, 2005 and 2004, are presented below.

	December 31,
	2005				2004
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
(In millions)	Amount		Amortization		Amount		Amortization
Deposit base	$	2,782		2,077		2,782		1,734
Customer relationships		599		186		598		155
Total	$	3,381		2,263		3,380		1,889

     In connection with certain acquisitions in 2005, the Company recorded customer relationships of $117 million. This intangible asset has a weighted average amortization period of 10 years. In connection with certain acquisitions in 2004, the Company recorded deposit base intangibles of $662 million and customer relationships of $107 million. These intangible assets have a weighted average amortization period of 13 years and 9 years, respectively.

     Other intangible amortization expense related to identified intangible assets for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
(In millions)	2005		2004		2003
OTHER INTANGIBLE AMORTIZATION
Deposit base	$	343		371		468
Customer relationships		73		60		50
Total other intangible amortization	$	416		431		518

     Other intangible amortization expense related to identified intangible assets in each of the five years subsequent to December 31, 2005, is as follows (in millions): 2006, $282; 2007, $173; 2008, $138; 2009, $111; and 2010, $89.

Wachovia Corporation 2005 Annual Report 87

Audited Financial Statements

NOTE 9: OTHER ASSETS

	December 31,
(In millions)	2005		2004
Accounts receivable, including interests in receivables	$	2,555		8,328
Customer receivables, including margin loans		6,188		6,041
Interest and dividends receivable		2,979		2,702
Bank and corporate-owned life insurance		10,198		8,728
Equity method investments, including principal investing		2,437		2,408
Prepaid pension costs		2,343		2,077
Sundry assets		7,392		4,756
Total other assets	$	34,092		35,040

NOTE 10: SHORT-TERM BORROWINGS

     Short-term borrowings at December 31, 2005, 2004 and 2003, and the related maximum amounts outstanding at the end of any month in each of the three years, are presented below.

	December 31,						Maximum Outstanding
(In millions)	2005		2004		2003		2005		2004		2003
Federal funds purchased	$	2,225		1,959		4,364		5,104		5,350		7,606
Securities sold under repurchase agreements		46,561		43,441		48,434		54,834		50,141		51,112
Commercial paper		3,900		12,111		11,424		13,938		12,778		12,403
Other		9,267		5,895		7,068		9,267		7,104		9,279
Total short-term borrowings	$	61,953		63,406		71,290

	December 31,
	2005			2004		2003
WEIGHTED AVERAGE INTEREST RATES
Federal funds purchased and securities sold under repurchase agreements		3.73	%		2.05		0.78
Commercial paper		3.55	%		2.18		1.01
WEIGHTED AVERAGE MATURITIES (In days)
Federal funds purchased and securities sold under repurchase agreements		15			28		19
Commercial paper		7			11		10

88 Wachovia Corporation 2005 Annual Report

NOTE 11: LONG-TERM DEBT

	December 31,
(In millions)	2005			2004
NOTES AND DEBENTURES ISSUED BY THE PARENT COMPANY
Notes
3.50% to 6.63%, due 2006 to 2020 (par value $200 to$1,557) (a)	$	5,724			7,275
Floating rate, due 2006 to 2012 (par value $200 to $2,400) (a)		8,449			6,400
Floating rate extendible, due 2005 (b)		—			10
Equity-linked and commodity-linked, due 2006 to 2010 (a)		343			73
Subordinated notes
Floating rate, due 2015, (par value $600) (a)		600			—
4.875% to 7.50%, due 2006 to 2035 (par value $150 to $1,500) (a)		5,784			6,000
6.605%, due 2025 (par value $250) (a)		250			250
6.30%, Putable/Callable, due 2028 (par value $200)		200			200
Subordinated debentures
6.55% to 7.574%, due 2026 to 2035 (par value $250 to $300) (c)		796			795
Hedge-related basis adjustments		111			412
Total notes and debentures issued by the Parent Company		22,257			21,415
NOTES ISSUED BY SUBSIDIARIES
Notes, primarily notes issued under global bank note programs, varying rates and terms to 2040		6,235			5,124
Subordinated notes
6.75%, due 2006 (par value $200) (a) (d)		200			375
Bank, 4.60% to 7.88%, due 2006 to 2036 (par value $25 to $1,200 )		6,549			5,174
7.80% to 7.95%, due 2006 to 2007 (par value $100 to $150) (a)		250			249
Floating rate, due 2013 (par value $417) (e)		417			417
Total notes issued by subsidiaries		13,651			11,339
OTHER DEBT
Junior subordinated debentures, floating rate, due 2026 to 2029		3,114			3,106
Collateralized notes, floating rate, due 2006 to 2007		4,420			4,420
Advances from the Federal Home Loan Bank		2,519			5,001
Preferred securities issued by subsidiaries		2,352			57
Capitalized leases, rates generally ranging from 1.00% to 14.29%		39			748
Mortgage notes and other debt of subsidiaries, varying rates and terms		706			483
Hedge-related basis adjustments		(87	)		190
Total other debt		13,063			14,005
Total long-term debt	$	48,971			46,759

(a) Not redeemable prior to maturity.

(b) Redeemable in whole or in part at the option of the Parent Company only on certain specified dates.

(c) Redeemable in whole or in part at the option of the holders only on certain specified dates.

(d) Assumed by the Parent Company.

(e) Redeemable in whole or in part at the option of a nonbank subsidiary only on certain specified dates.

Wachovia Corporation 2005 Annual Report 89

Audited Financial Statements

     At December 31, 2005, floating rate notes of $8.4 billion had rates of interest ranging from 4.27 percent to 4.56 percent.

     The equity-linked and commodity-linked derivative component of the equity-linked and commodity-linked notes has been separated from the host component and is classified as a trading derivative.

     The interest rate on the floating rate subordinated notes is 4.57 percent to January 30, 2006.

     The 6.30 percent putable/callable notes are subject to mandatory redemption on April 15, 2008, and under certain specified conditions, they may be put to the Parent Company by the trustee on or after this date.

     At December 31, 2005, bank notes of $4.0 billion had floating rates of interest ranging from 3.46 percent to 4.60 percent, and $2.2 billion of the notes had fixed rates of interest ranging from 0.25 percent to 17.61 percent. Included in bank notes are $211 million and $66 million of equity-linked notes at December 31, 2005 and 2004, respectively.

     The interest rate on $417 million of floating rate notes is 5.10 percent to January 3, 2006.

     The junior subordinated debentures are included in tier 1 capital for regulatory purposes.

     The junior subordinated debentures issued by the Parent Company have interest rates ranging generally from 7.64 percent to 8.04 percent and maturities ranging from December 1, 2026, to November 15, 2029. These junior subordinated debentures are redeemable in whole or in part beginning on or after December 1, 2006, or at any time in whole but not in part from the date of issuance on the occurrence of certain events.

     Included in the $3.1 billion of junior subordinated debentures at December 31, 2005, are junior subordinated debentures issued by Wachovia Bank with a par value of $300 million and an 8 percent rate of interest, and a par value of $450 million and a LIBOR-indexed floating rate of interest. The related maturities range from December 15, 2026, to February 15, 2027. These junior subordinated debentures have terms substantially the same as the junior subordinated debentures issued by the Parent Company.

     At December 31, 2005, collateralized notes of $4.4 billion had LIBOR-indexed floating rates of interest ranging from 1.49 percent to 5.10 percent.

     At December 31, 2005, preferred securities issued by subsidiaries was $2.4 billion. Floating rate notes of $500 million and $1.0 billion had LIBOR-indexed interest rates of 4.50 percent to March 21, 2006, and March 28, 2006, respectively. Fixed rate notes of $750 million had rates of interest ranging from 4.71 percent to 4.90 percent. For $57 million in preferred units, distributions are payable to preferred unit holders on a cumulative basis until an annual return of 12.50 percent has been paid. In addition, distributions on the preferred units must be paid before the Company can declare or pay a dividend on its common stock. The Company’s subsidiary can redeem the preferred units at defined premiums beginning in September 2009. The preferred units have a mandatory redemption date of September 2012 at the stated value.

     At December 31, 2005, $19.6 billion of senior or subordinated debt securities or equity securities of the Company remained available for issuance under a shelf registration statement filed with the Securities and Exchange Commission. In addition, the Company has available for issuance up to $7.6 billion under a medium-term note program covering senior or subordinated debt securities.

     At December 31, 2005, Wachovia Bank has available a global note program for issuance up to $38.6 billion of senior or subordinated notes. Wachovia Bank has a $1.9 billion committed back-up line of credit that expires in 2010. This credit facility contains a covenant that requires a minimum level of $30 billion of adjusted total equity capital be maintained. This line of credit has not been used.

     In January 2006, the Company issued a junior subordinated note and a forward contract for the sale of noncumulative perpetual preferred stock to a trust. The $2.5 billion of securities qualify as tier 1 capital.

     The weighted average rate paid for long-term debt in 2005, 2004 and 2003 was 4.46 percent, 4.00 percent and 4.02 percent, respectively, before the impact of risk management derivatives. See Note 19 for information on interest rate swaps entered into in connection with the issuance of long-term debt.

     Long-term debt maturing in each of the five years subsequent to December 31, 2005, is as follows (in millions): 2006, $8,826; 2007, $11,139; 2008, $5,694; 2009, $2,085; and 2010, $3,252.

90 Wachovia Corporation 2005 Annual Report

NOTE 12: COMMON AND PREFERRED STOCK AND CAPITAL RATIOS

	December 31,
	2005					2004					2003
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
(Options and shares in thousands)	Number			Price (a)		Number			Price (a)		Number			Price (a)
STOCK OPTIONS
Options outstanding, beginning of year		136,736		$	36.85		124,198		$	36.71		115,018		$	36.04
Granted		12,878			50.41		15,534			44.71		20,983			37.49
Options of acquired entities		—			—		14,909			25.12		—			—
Exercised		(14,267	)		31.82		(17,148	)		31.74		(10,513	)		28.89
Expired and forfeited		(1,477	)		45.68		(757	)		45.04		(1,290	)		53.35
Options outstanding, end of year		133,870		$	38.67		136,736		$	36.85		124,198		$	36.71
Options exercisable, end of year		100,261		$	36.69		99,228		$	35.65		81,219		$	36.75
RESTRICTED STOCK
Unvested shares, beginning of year		12,270		$	40.56		11,391		$	35.56		11,531		$	35.21
Granted		8,835			52.35		5,980			46.45		4,919			36.75
Vested		(6,472	)		38.50		(4,658	)		35.92		(4,540	)		36.01
Expired and forfeited		(578	)		48.76		(443	)		40.20		(519	)		35.07
Unvested shares, end of year		14,055		$	48.59		12,270		$	40.56		11,391		$	35.56
EMPLOYEE STOCK OPTIONS
Options outstanding, beginning of year		—		$	—		19,199		$	46.75		20,758		$	46.75
Exercised		—			—		(3,818	)		46.75		—			—
Expired and forfeited		—			—		(15,381	)		46.75		(1,559	)		46.75
Options outstanding, end of year		—		$	—		—		$	—		19,199		$	46.75
Options exercisable, end of year		—		$	—		—		$	—		15,527		$	46.75

(a) The weighted-average price for stock options is the weighted-average exercise price of the options, and for restricted stock, the weighted-average fair value of the stock at the date of grant.

STOCK PLANS

     The Company has stock option plans under which incentive and nonqualified stock options may be granted periodically to certain employees. The options are granted at an exercise price equal to the fair value of the underlying shares at the date of grant, vest based on continued service with the Company for a specified period, generally three years to five years following the date of grant, and have a contractual life of ten years.

     Restricted stock may also be granted under the stock option plans. The restricted stock generally vests over three years to five years, during which time the holder receives dividends and has full voting rights. Compensation expense recognized for restricted stock was $230 million, $190 million and $177 million in 2005, 2004 and 2003, respectively. As discussed in Note 1, the Company adopted the fair value method of accounting for stock options in 2002, and as a result, $103 million, $130 million and $102 million of stock option expense was included as a component of salaries and employee benefits in the results of operations in 2005, 2004 and 2003, respectively.

     The range of exercise prices and the related number of options outstanding at December 31, 2005, are as follows (shares in thousands): $4.13-$9.46, 268 shares; $13.03-$19.77, 1,872 shares; $20.32-$29.64, 12,039 shares; $30.02-$39.72, 74,855 shares; $40.13-$48.93, 22,955 shares; $50.19-$55.12, 18,361 shares; and $60.44-$62.13, 3,520 shares. The weighted average exercise prices, remaining contractual maturities and weighted average exercise prices of options currently exercisable for each exercise price range are as follows: $9.36, 0.1 years and $9.36; $16.09, 2.8 years and $16.09; $25.49, 4.1 years and $25.49; $35.44, 5.5 years and $35.13; $44.22, 4.4 years and $43.74; $51.82, 3.6 years and $54.68; and $62.01, 2.3 years and $62.01, respectively.

     At December 31, 2005, the Company had 84 million additional shares of common stock reserved for issuance under the stock option plans.

Wachovia Corporation 2005 Annual Report 91

Audited Financial Statements

     The Company also had an employee stock option plan (the “1999 Plan”) that expired on September 30, 2004. Under the terms of the 1999 plan, 3.8 million shares of common stock were issued in 2004 and all other options related to the 1999 Plan expired unexercised. Prior to 2004, no common stock was issued under the 1999 Plan.

     The weighted average grant date fair values of options under the stock option plans were $10.03, $9.41 and $8.38 in 2005, 2004 and 2003, respectively. The more significant assumptions used in estimating the fair value of stock options in 2005, 2004 and 2003 include risk-free interest rates of 3.97 percent, 3.68 percent and 3.15 percent, respectively; dividend yields of 3.65 percent, 3.58 percent and 3.10 percent, respectively; volatility of the Company’s common stock of 25 percent in 2005, 27 percent in 2004 and 28 percent in 2003; and weighted average expected lives of the stock options of 6.0 years in each of the years in the three-year period ended December 31, 2005. Additionally, the estimated fair value of stock options is reduced by an estimate of forfeiture experience which was 8.00 percent in each of the years in the three-year period ended December 31, 2005.

     The Company recorded income tax benefits of $162 million, $70 million and $46 million in 2005, 2004 and 2003, respectively, related to employee stock option exercises.

DIVIDEND REINVESTMENT PLAN

     Under the terms of the Dividend Reinvestment Plan, a participating stockholder’s cash dividends and optional cash payments may be used to purchase the Company’s common stock. Common stock issued under the Dividend Reinvestment Plan was (in thousands): 1,673 shares, 1,358 shares and 1,247 shares in 2005, 2004 and 2003, respectively. In accordance with the terms of the Dividend Reinvestment Plan, the common stock issued in 2005, 2004 and 2003 was purchased in the open market. At December 31, 2005, the Company had 1 million additional shares of common stock reserved for issuance under the Dividend Reinvestment Plan.

TRANSACTIONS BY THE COMPANY IN ITS COMMON STOCK

     At December 31, 2005, the Company had the authority to repurchase up to 124 million shares of its common stock. In 2005, 2004 and 2003, the Company repurchased 52 million, 47 million and 35 million shares, respectively, of common stock, at a cost of $2.7 billion, $2.4 billion and $1.4 billion, respectively, in the open market or through the settlement of equity collars as noted below.

     The Company has entered into option contracts in its stock to offset potential dilution from the exercise of stock options. These option contracts involve the contemporaneous purchase of a call option and the sale of a put option to the same counterparty (“collar transactions”). In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity”, which requires that the fair value of certain financial instruments where the issuer may settle the instrument by issuing its own equity shares be classified as assets or liabilities. Subsequent changes in fair value are recorded in the results of operations. The Company’s equity collars are considered financial instruments within the scope of SFAS 150. In connection with the adoption of SFAS 150 on July 1, 2003, the Company recorded the fair value of the outstanding equity collars as an asset and recognized an after-tax gain of $17 million ($26 million before tax), which is presented in the results of operations as the cumulative effect of a change in accounting principle.

     The Company has also used forward equity sales transactions (“equity forwards”) and forward purchase contracts in connection with its stock repurchase program. These transactions are accounted for as equity. In determining diluted earnings per share, the premium component of the forward price on equity forwards is subtracted in determining income available to common stockholders. For forward purchase contracts, diluted shares include the share equivalent of the excess of the forward price over the current market price of the shares. In 2003, the Company settled the remaining forward purchase contract involving 24 million shares at a cost of $773 million.

     In 2005, 2004 and 2003, the Company recorded $(15) million, $31 million and $25 million, respectively, in net gains (losses) on equity collars in the results of operations. The cost of purchasing shares under option contracts were $365 million, $237 million and $240 million, respectively, for 8 million shares, 5 million shares and 7 million shares, respectively. At December 31, 2005, there were no collar transactions outstanding.

92 Wachovia Corporation 2005 Annual Report

SHAREHOLDER PROTECTION RIGHTS AGREEMENT

     In accordance with a Shareholder Protection Rights Agreement, the Company issued a dividend of one right for each share of the Company’s common stock outstanding as of December 28, 2000, and they continue to attach to all common stock issued thereafter. The rights will become exercisable if any person or group either commences a tender or exchange offer that would result in their becoming the beneficial owner of 10 percent or more of the Company’s common stock or acquires beneficial ownership of 10 percent or more of the Company’s common stock. Once exercisable and upon a person or group acquiring 10 percent or more of the Company’s common stock, each right (other than rights owned by such person or group) will entitle its holder to purchase, for an exercise price of $105.00, a number of shares of the Company’s common stock (or at the option of the Board of Directors, shares of participating class A preferred stock) having a market value of twice the exercise price, and under certain conditions, common stock of an acquiring company having a market value of twice the exercise price. If any person or group acquires beneficial ownership of 10 percent or more of the Company’s common stock, the Board of Directors may, at its option, exchange for each outstanding right (other than rights owned by such acquiring person or group) two shares of the Company’s common stock or participating Class A preferred stock having economic and voting terms similar to two shares of common stock. The rights are subject to adjustment if certain events occur, and they will initially expire on December 28, 2010, if not terminated sooner.

PREFERRED SHARES

     In connection with the merger of the former Wachovia, the Company issued 97 million shares of a new class of preferred stock entitled Dividend Equalization Preferred Shares (“DEPs”), which paid dividends equal to the difference between the last dividend paid by the former Wachovia of 30 cents per share and the common stock dividend declared by the Company. The Company’s total dividends for four consecutive quarters in 2003 equaled at least $1.20 per common share, and accordingly, there is no further requirement to pay dividends on the DEPs. Dividends of $5 million were paid to holders of the DEPs in 2003.

CAPITAL RATIOS

     Risk-based capital regulations require a minimum ratio of tier 1 capital to risk-weighted assets of 4 percent and a minimum ratio of total capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3 percent to 4 percent. The regulations also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board has indicated it will continue to consider a tangible tier 1 leverage ratio (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised the Company of any specific minimum leverage ratio applicable to it. Each subsidiary bank is subject to similar capital requirements. None of the Company’s subsidiary banks have been advised of any specific minimum capital ratios applicable to them.

     The regulatory agencies also have adopted regulations establishing capital tiers for banks. To be in the highest capital tier, or considered well capitalized, banks must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a total capital ratio of 10 percent.

     At December 31, 2005, the Company’s tier 1 capital ratio, total capital ratio and leverage ratio were 7.50 percent, 10.82 percent and 6.12 percent, respectively. At December 31, 2004, the Company’s tier 1 capital ratio, total capital ratio and leverage ratio were 8.01 percent, 11.11 percent and 6.38 percent, respectively. At December 31, 2005, the Company’s deposit-taking bank subsidiaries met the capital and leverage ratio requirements for well capitalized banks. The Company does not anticipate or foresee any conditions that would reduce these ratios to levels at or below minimum or that would cause its deposit-taking bank subsidiaries to be less than well capitalized.

Wachovia Corporation 2005 Annual Report 93

Audited Financial Statements

NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME, NET

     Comprehensive income is defined as the change in equity from all transactions other than those with stockholders, and it includes net income and other comprehensive income. Accumulated other comprehensive income, net, for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
	2005, 2004 and 2003
					Income Tax
		Pre-tax			(Expense)			After-tax
(In millions)		Amount			Benefit			Amount
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Accumulated other comprehensive income, net, December 31, 2002		$	3,472			(1,337	)		2,135
Unrealized net holding loss on securities			(173	)		92			(81	)
Net gain on cash flow hedge derivatives			74			(28	)		46
Reclassification adjustment for realized gains and losses on securities			(355	)		135			(220	)
Reclassification adjustment for realized gains and losses on cash flow hedge derivatives			(873	)		332			(541	)
Accumulated other comprehensive income, net, December 31, 2003			2,145			(806	)		1,339
Minimum pension liability			(105	)		40			(65	)
Unrealized net holding loss on securities			(268	)		114			(154	)
Net loss on cash flow hedge derivatives			(107	)		40			(67	)
Reclassification adjustment for realized gains and losses on securities			(147	)		56			(91	)
Reclassification adjustment for realized gains and losses on cash flow hedge derivatives			(382	)		145			(237	)
Accumulated other comprehensive income, net, December 31, 2004			1,136			(411	)		725
Minimum pension liability			(23	)		4			(19	)
Unrealized net holding loss on securities			(1,866	)		697			(1,169	)
Net gain on cash flow hedge derivatives			27			(10	)		17
Reclassification adjustment for realized gains and losses on securities			(411	)		156			(255	)
Reclassification adjustment for realized gains and losses on cash flow hedge derivatives			(116	)		44			(72	)
Accumulated other comprehensive income, net, December 31, 2005		$	(1,253	)		480			(773	)

94 Wachovia Corporation 2005 Annual Report

NOTE 14: BUSINESS SEGMENTS

     The Company has five operating segments that by virtue of exceeding certain quantitative thresholds are reportable segments. The four core business segments are the General Bank, Capital Management, Wealth Management, the Corporate and Investment Bank, plus the Parent (“Parent segment”). The Company’s Capital Management segment includes 100 percent of the combined retail brokerage entity. The 38 percent minority interest is included in the Parent. Each of these reportable segments offers a different array of products and services. Business segment earnings are presented excluding merger-related and restructuring expenses, other intangible amortization, minority interest income in consolidated subsidiaries, discontinued operations and the change in accounting principle. The Company believes that while these items apply to overall corporate operations, they are not meaningful to understanding or evaluating the performance of the Company’s individual business segments. The Company does not take these items into account as it manages business segment operations or allocates capital, and therefore, the Company’s segment presentation, which is in conformity with U.S. generally accepted accounting principles, excludes these items. Business segment earnings are the primary measure of segment profit or loss that the Company uses to assess segment performance and to allocate resources. Economic profit, risk-adjusted return on capital and efficiency ratios are additional metrics, all of which are based on and calculated directly from segment earnings, that assist management in evaluating segment results.

     The accounting policies of these reportable segments are the same as those of the Company as disclosed in Note 1, except as noted below. There are no significant reconciling items between the reportable segments and consolidated amounts. Certain amounts are not allocated to reportable segments, and as a result, they are included in the Parent segment as discussed below. Substantially all the Company’s revenues are earned from customers in the United States, and no single customer accounts for a significant amount of any reportable segment’s revenues.

     For segment reporting purposes, net interest income reflects tax-exempt interest income on a tax-equivalent basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The Company uses a management reporting model that includes methodologies for funds transfer pricing, allocation of economic capital, expected losses and cost transfers to measure business segment results. Because of the complexity of the Company, various estimates and allocation methodologies are used in preparing business segment financial information. Exposure to market risk is managed centrally within the Parent segment. In order to remove interest rate risk from each core business segment, the management reporting model employs a funds transfer pricing (“FTP”) system. The FTP system matches the duration of the funding used by each segment to the duration of the assets and liabilities contained in each segment. Matching the duration, or the effective term until an instrument can be repriced, allocates interest income and/or interest expense to each segment so its resulting net interest income is insulated from interest rate risk. A risk-based methodology is used to allocate capital based on the credit, market and operational risks associated with each business segment. In 2005, 2004 and 2003, the cost of capital was 11 percent. A provision for credit losses is allocated to each core business segment based on net charge-offs, and any difference between the total for all core segments and the consolidated provision for credit losses is recorded in the Parent segment. Intersegment revenues, or referral fees, are paid by a segment to the segment that distributes or services the product. The amount of the referral fee is based on comparable fees paid in the market or negotiated amounts that approximate the value provided by the selling segment. Cost transfers are made for services provided by one segment to another. Additionally, in 2005, fee and other income in the Corporate and Investment Bank included $94 million of fees related to certain corporate underwriting and structured products activity which was eliminated in the Parent segment. Activity-based costing studies are continually being refined to better align expenses with products and their revenues. Income tax expense or benefit is generally allocated to each core business segment based on a statutory tax rate adjusted for items unique to each business segment. Any difference between the total for all core business segments and the consolidated amount is included in the Parent segment. Income tax benefits related to the public issuance of tax deductible preferred stock in 2003 by the REIT subsidiary of the Parent Company were recorded in the Parent segment. Deposit base and other intangible amortization expense is included in the Parent segment and is not allocated to the Company’s core business segments. Affordable housing results are recorded in Corporate and Investment Bank fee and other income, net of the related income tax benefit, and the income tax benefit is eliminated in Parent fee and other income. Additionally, because merger-related and restructuring expenses are not allocated to the Company’s business segments, they are presented separately in the tables that follow.

     The Parent segment also includes certain nonrecurring revenue items; certain expenses that are not allocated to the business segments; corporate charges; and the results of businesses that have been divested or are being wound down and that are not material to be presented as discontinued operations.

     The Company continuously updates segment information for changes that occur in the management of the Company’s businesses. Additionally, in the first quarter of 2005, the Company transferred certain insurance business lines to Wealth Management from Capital Management. Also, the corporate and institutional trust businesses sold in the fourth quarter of 2005 were transferred from Capital Management and reflected as discontinued operations in the Parent segment. The impact of these and other changes to previously reported segment earnings for full year 2004 was a $10 million decrease in the General Bank, a $58 million decrease in Capital Management, an $8 million increase in Wealth Management, a $46 million decrease in the Corporate and Investment Bank, and a $106 million increase in the Parent. The impact of these changes to previously reported segment earnings for full year 2003 was a $2 million decrease in the General Bank, a $58 million decrease in Capital Management, a $4 million increase in Wealth Management, a $35 million decrease in Corporate and Investment Bank, and a $91 million increase in the Parent.

     The Company’s business segment information for each of the years in the three-year period ended December 31, 2005, follows.

Wachovia Corporation 2005 Annual Report 95

Audited Financial Statements

	Year Ended December 31, 2005
									Corporate						Merger-
									and						Related and
	General			Capital			Wealth		Investment						Restructuring
(Dollars in millions)	Bank			Management			Management		Bank			Parent			Expenses (b)			Consolidated
CONSOLIDATED
Net interest income (a)	$	9,678			633			588		2,232			769			(219	)		13,681
Fee and other income		2,876			4,595			708		3,695			345			—			12,219
Intersegment revenue		205			(45	)		7		(169	)		2			—			—
Total revenue (a)		12,759			5,183			1,303		5,758			1,116			(219	)		25,900
Provision for credit losses		277			—			6		(27	)		(7	)		—			249
Noninterest expense		6,315			4,270			893		3,042			1,035			292			15,847
Minority interest		—			—			—		—			367			(25	)		342
Income taxes (benefits)		2,221			333			148		921			(490	)		(100	)		3,033
Tax-equivalent adjustment		42			1			—		99			77			(219	)		—
Income from continuing operations		3,904			579			256		1,723			134			(167	)		6,429
Discontinued operations, net of income taxes		—			—			—		—			214			—			214
Net income available to common stockholders	$	3,904			579			256		1,723			348			(167	)		6,643
Economic profit	$	2,968			429			189		1,009			73			—			4,668
Risk adjusted return on capital		53.26	%		42.45			47.83		29.54			13.84			—			38.57
Economic capital, average	$	7,023			1,363			513		5,441			2,592			—			16,932
Cash overhead efficiency ratio (a)		49.49	%		82.37			68.53		52.83			55.50			—			57.96
Lending commitments	$	111,608			208			5,840		102,673			508			—			220,837
Average loans, net		163,549			357			13,915		38,621			11,480			—			227,922
Average core deposits	$	207,270			29,171			13,693		23,496			5,091			—			278,721
FTE employees		42,226			17,474			4,657		5,796			23,827			—			93,980

	Year Ended December 31, 2004
										Corporate						Merger-
										and						Related and
	General			Capital			Wealth			Investment						Restructuring
(Dollars in millions)	Bank			Management			Management			Bank			Parent			Expenses (b)			Consolidated
CONSOLIDATED
Net interest income (a)	$	8,007			533			497			2,387			787			(250	)		11,961
Fee and other income		2,432			4,704			590			2,925			128			—			10,779
Intersegment revenue		168			(46	)		5			(128	)		1			—			—
Total revenue (a)		10,607			5,191			1,092			5,184			916			(250	)		22,740
Provision for credit losses		314			—			(1	)		(41	)		(15	)		—			257
Noninterest expense		5,515			4,435			769			2,580			923			444			14,666
Minority interest		—			—			—			—			297			(113	)		184
Income taxes (benefits)		1,693			274			118			851			(389	)		(128	)		2,419
Tax-equivalent adjustment		41			1			—			123			85			(250	)		—
Net income available to common stockholders	$	3,044			481			206			1,671			15			(203	)		5,214
Economic profit	$	2,321			333			137			1,042			(17	)		—			3,816
Risk adjusted return on capital		53.22	%		35.81			40.86			33.62			10.26			—			37.82
Economic capital, average	$	5,497			1,344			458			4,606			2,321			—			14,226
Cash overhead efficiency ratio (a)		51.99	%		85.45			70.45			49.77			53.57			—			59.98
Lending commitments	$	93,608			119			4,711			81,461			408			—			180,307
Average loans, net		127,984			290			11,050			31,756			953			—			172,033
Average core deposits	$	172,369			25,078			11,956			18,341			3,864			—			231,608
FTE employees		43,404			18,892			3,911			4,723			25,100			—			96,030

96 Wachovia Corporation 2005 Annual Report

	Year Ended December 31, 2003
									Corporate						Merger-
									and						Related and
	General			Capital			Wealth		Investment						Restructuring
(Dollars in millions)	Bank			Management			Management		Bank			Parent			Expenses (b)			Consolidated
CONSOLIDATED
Net interest income (a)	$	7,312			232			423		2,257			639			(256	)		10,607
Fee and other income		2,193			3,956			562		2,253			518			—			9,482
Intersegment revenue		179			(66	)		6		(116	)		(3	)		—			—
Total revenue (a)		9,684			4,122			991		4,394			1,154			(256	)		20,089
Provision for credit losses		470			—			12		250			(146	)		—			586
Noninterest expense		5,336			3,526			732		2,326			917			443			13,280
Minority interest		—			—			—		—			174			(31	)		143
Income taxes (benefits)		1,376			217			91		550			(247	)		(154	)		1,833
Tax-equivalent adjustment		39			1			—		126			90			(256	)		—
Income before cumulative effect of a change in accounting principle		2,463			378			156		1,142			366			(258	)		4,247
Cumulative effect of a change in accounting principle, net of income taxes		—			—			—		—			17			—			17
Net income		2,463			378			156		1,142			383			(258	)		4,264
Dividends on preferred stock		—			—			—		—			5			—			5
Net income available to common stockholders	$	2,463			378			156		1,142			378			(258	)		4,259
Economic profit	$	1,797			270			94		530			307			—			2,998
Risk adjusted return on capital		42.80	%		38.53			32.05		20.36			24.07			—			30.87
Economic capital, average	$	5,649			980			447		5,657			2,355			—			15,088
Cash overhead efficiency ratio (a)		55.10	%		85.57			73.95		52.93			34.41			—			60.55
Lending commitments	$	65,457			61			3,951		69,728			482			—			139,679
Average loans, net		113,849			176			9,512		32,983			1,807			—			158,327
Average core deposits	$	152,727			2,591			10,111		14,529			3,164			—			183,122
FTE employees		34,595			19,633			3,842		4,314			23,730			—			86,114

(a) Tax-equivalent.

(b) See Merger-Related and Restructuring Expenses in Management’s Discussion and Analysis for more information on merger-related and restructuring expenses. Additionally, the tax-equivalent amounts included in each segment are eliminated herein in order for “Total” amounts to agree with amounts appearing in the Consolidated Statements of Income.

Wachovia Corporation 2005 Annual Report 97

Audited Financial Statements

NOTE 15: PERSONNEL EXPENSE AND RETIREMENT BENEFITS

     The Company has a savings plan under which eligible employees are permitted to make contributions to the plan of one percent to 30 percent of eligible compensation. Annually, on approval of the Human Resources and Corporate Relations Director, employee contributions may be matched up to 6 percent of the employee’s eligible compensation. A 6 percent matching level was in place for each of the periods presented. The first one percent of the Company’s matching contribution is made in the Company’s common stock. Each employee can immediately elect to liquidate the Company’s common stock credited to the employee’s account by transferring the value of the common stock to any of a number of investment options available within the savings plan. Savings plan expense in 2005, 2004 and 2003 was $228 million, $208 million and $173 million, respectively.

     Group insurance expense for active employees in 2005, 2004 and 2003 was $406 million, $351 million and $361 million, respectively.

     The Company has a noncontributory, tax-qualified defined benefit pension plan (the “Qualified Pension”) covering the majority of employees that have at least one year of service and that have reached the age of 21. The Qualified Pension benefit expense is determined by an actuarial valuation, and it is based on assumptions that are evaluated annually. Contributions are made each year to a trust in an amount that is determined by the actuary to meet the minimum requirements of ERISA and to fall at or below the maximum amount that can be deducted on the Company’s tax return. The projected unit credit valuation method was used to determine the liabilities of the Qualified Pension.

     The measurement date for the Company’s pension obligations is September 30, and at September 30, 2005, the accumulated benefit obligation was $4.6 billion, which was less than the fair market value of the Qualified Pension assets at that date of $5.4 billion. Accordingly, the Qualified Pension is over funded in relation to accumulated benefits and there is no minimum pension obligation to record. At September 30, 2004, the accumulated benefit obligation was $4.1 billion, which was less than the fair market value of the Qualified Pension assets at that date of $4.8 billion. The table that follows presents the total benefit obligation, which includes the impact of future compensation levels.

     The Company has noncontributory, nonqualified pension plans (the “Nonqualified Pension”) covering certain employees. The Nonqualified Pension benefit expense is determined annually by an actuarial valuation. At September 30, 2005 and 2004, the accumulated benefit obligation of $452 million and $437 million exceeded the accrued benefit expense. Accordingly, for each of the years a minimum pension liability was recorded as a component of other comprehensive income.

     The Company also provides certain health care and life insurance benefits for retired employees (the “Other Postretirement Benefits”). Substantially all the Company’s employees may become eligible for Other Postretirement Benefits if they reach retirement age while working for the Company.

     In May 2003, the Company amended the Qualified Pension to convert to a cash balance plan effective January 1, 2008. Until that time, benefits will continue to be earned and paid in accordance with provisions of the current Qualified Pension. At the same time, the Company amended certain provisions related to Other Postretirement Benefits effective January 1, 2008.

     As a result of certain changes in Medicare requirements, a remeasurement of the accumulated benefit obligation resulted in a reduction in both the annual postretirement benefit cost and the accumulated benefit obligation of $9 million and $93 million, respectively, in 2004.

     The actual asset allocation of the Company’s Qualified Pension, which is held by Wachovia Bank in a bank-administered trust fund, and of the Other Postretirement Benefits plans at September 30, 2005 and 2004, follows.

98 Wachovia Corporation 2005 Annual Report

						Other Postretirement
	Qualified Pension					Benefits
(Percent)	2005			2004		2005		2004
EQUITY SECURITIES
Wachovia Corporation common stock		3	%		3		—		—
Other equity securities		64			63		5		5
Total equity securities		67			66		5		5
OTHER SECURITIES
Debt securities		32			32		76		74
Real estate		—			1		—		—
Other		1			1		19		21
Total		100	%		100		100		100

     The change in benefit obligation and the change in fair value of plan assets related to each of the Qualified Pension, the Nonqualified Pension and the Other Postretirement Benefits using a September 30 measurement date for each of the years in the two-year period ended December 31, 2005, is presented below.

													Other Postretirement
	Qualified Pension						Nonqualified Pension						Benefits
(In millions)	2005			2004			2005			2004			2005			2004
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, October 1	$	4,212			3,849			455			339			934			961
Service cost		178			156			4			2			4			4
Interest cost		243			235			26			21			51			52
Retiree contributions		—			—			—			—			34			30
Plan amendments		—			—			2			—			—			—
Benefit payments		(352	)		(321	)		(48	)		(39	)		(87	)		(88	)
Business combinations		—			254			—			86			2			37
Special and/or contractual termination benefits		—			—			—			12			1			—
Actuarial (gains) losses		462			39			37			34			(18	)		(62	)
Benefit obligation, September 30		4,743			4,212			476			455			921			934
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets, October 1		4,811			4,148			—			—			98			96
Actual return on plan assets		563			467			—			—			3			2
Employer contributions		356			253			48			39			53			58
Retiree contributions		—			—			—			—			34			30
Business combinations		—			264			—			—			—			—
Benefit payments		(352	)		(321	)		(48	)		(39	)		(87	)		(88	)
Fair value of plan assets, September 30		5,378			4,811			—			—			101			98
RECONCILIATION OF FUNDED STATUS
Funded status of plans		635			599			(476	)		(455	)		(820	)		(836	)
Unrecognized prior service costs		(279	)		(305	)		2			(1	)		(16	)		(24	)
Unrecognized net losses		1,987			1,757			152			124			180			204
Employer contributions in the fourth quarter		—			26			6			6			—			—
Intangible asset		—			—			(2	)		—			—			—
Minimum pension liability		—			—			(128	)		(105	)		—			—
Prepaid (accrued) benefit expense at December 31,	$	2,343			2,077			(446	)		(431	)		(656	)		(656	)
ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS AS OF SEPTEMBER 30
Discount rate		5.50	%		6.00			5.50			6.00			5.50			6.00
Weighted average rate of increase in future compensation levels		3.50	%		3.50			3.50			3.50			3.50			3.50

Wachovia Corporation 2005 Annual Report 99

Audited Financial Statements

     The discount rate used to determine the benefit obligation is established at an amount that reflects the rate of return on a portfolio of high-quality bonds with maturities matching the projected future cash flows of the plan (commonly referred to as a yield-curve approach).

     The expected return on plan assets used in the annual evaluation is established at an amount that reflects the targeted asset allocation and expected returns for each component of the plan assets. The rate is reviewed annually and adjusted as appropriate to reflect changes in expected market performance or in targeted asset allocation ranges. The Company’s investment objective relating to Qualified Pension assets is to have a portfolio of assets adequate to support the liability associated with the Qualified Pension defined benefit obligation. The Company uses an asset allocation strategy to achieve this objective, focusing on return objectives over the long-term period associated with the benefit obligation. The current targeted range for asset allocation is 60 percent to 70 percent in equity securities and 30 percent to 40 percent in debt securities and cash. Rebalancing occurs on a periodic basis to maintain the targeted allocation, but normal market activity may result in deviations. While the investment objective is based on the long-term nature of the Qualified Pension, the Company uses certain measurements on rolling five-year periods to assess asset results and manager performance.

     Actuarial calculations are performed annually to determine the minimum required contributions and maximum contributions allowed as an income tax deduction for all benefit plans. The Company’s practice is to contribute the maximum amount allowed as an income tax deduction. With respect to the Qualified Pension, the Company estimates there will be no minimum required contribution in 2006 and that the maximum allowed contribution will be approximately $400 million. This amount is estimated based on preliminary information and the actual amounts contributed will be determined based on final actuarial calculations, plan asset performance, changes in law and other factors. In 2005, the Company contributed $330 million to the Qualified Pension. Additionally, the Company’s practice is to contribute annually to each of the Nonqualified Pension and Other Postretirement Benefits an amount equal to the benefit payments made during the year less any retiree contributions received during the year.

     The components of the retirement benefit costs included in salaries and employee benefits for each of the years in the three-year period ended December 31, 2005, are presented below. In addition to these costs, Wachovia Securities recorded $13 million of pension benefit costs and $2 million of other postretirement benefit costs in 2003 related to employees of Wachovia Securities who continued to participate in benefit plans of Prudential Financial from July 1, 2003, to December 31, 2003.

	Qualified Pension									Nonqualified Pension
	Years Ended December 31,									Years Ended December 31,
(In millions)	2005			2004			2003			2005		2004		2003
RETIREMENT BENEFIT COSTS
Service cost	$	178			156			168			4		2		2
Interest cost		243			235			237			26		21		22
Expected return on plan assets		(418	)		(386	)		(361	)		—		—		—
Amortization of prior service cost		(26	)		(26	)		(2	)		—		—		—
Amortization of actuarial losses		88			80			48			9		8		4
Special and/or contractual termination benefits		—			—			—			—		12		—
Net retirement benefit costs	$	65			59			90			39		43		28
ASSUMPTIONS USED TO DETERMINE RETIREMENT BENEFIT COSTS
Discount rate		6.00	%		6.25			6.00-6.75			6.00		6.25		6.00-6.75
Expected return on plan assets		8.50			8.50			8.50			—		—		—
Weighted average rate of increase in future compensation levels		3.50	%		3.50			3.50-3.75			3.50		3.50		3.50-3.75

100 Wachovia Corporation 2005 Annual Report

	Other Postretirement Benefits
	Years Ended December 31,
(In millions)	2005			2004			2003
RETIREMENT BENEFIT COSTS
Service cost	$	4			4			11
Interest cost		51			52			55
Expected return on plan assets		(3	)		(3	)		(6	)
Amortization of transition losses		—			—			3
Amortization of prior service cost		(8	)		(8	)		(1	)
Amortization of actuarial losses		7			8			7
Special termination benefit cost		1			—			—
Net retirement benefit costs	$	52			53			69
ASSUMPTIONS USED TO DETERMINE RETIREMENT BENEFIT COSTS
Discount rate		6.00	%		6.25			6.00-6.75
Expected return on plan assets		3.00			3.00			3.00
Weighted average rate of increase in future compensation levels		3.50	%		3.50			3.50-3.75

     Medical trend rates assumed with respect to Other Postretirement Benefits at the beginning of 2005 were 11.00 percent grading to 5.50 percent (pre-65 years of age) and 13.00 percent grading to 5.50 percent (post-65 years of age); and at the end of 2005 were 9.50 percent grading to 5.00 percent (pre-65 years of age) and 11.50 percent grading to 5.00 percent (post-65 years of age). Medical trend rates assumed with respect to Other Postretirement Benefits at the beginning of 2004 were 12.00 percent grading to 5.50 percent (pre-65 years of age) and 14.00 percent grading to 5.50 percent (post-65 years of age); and at the end of 2004 were 11.00 percent grading to 5.50 percent (pre-65 years of age) and 13.00 percent grading to 5.50 percent (post-65 years of age).

     At December 31, 2005, the effect of a one percentage point increase or decrease in the assumed health care cost trend rate on service and interest costs is a $2 million increase and a $2 million decrease, respectively, and on the accumulated postretirement benefit obligation, a $37 million increase and a $36 million decrease, respectively.

     Estimated future pension benefit payments which reflect expected future service in each of the five years subsequent to December 31, 2005, are as follows (in millions): 2006, $363; 2007, $377; 2008, $388; 2009, $405; 2010, $418; and subsequent years through 2015, $2.2 billion; and estimated payments for other benefits (in millions): 2006, $147; 2007, $113; 2008, $114; 2009, $110; 2010, $111; and subsequent years through 2015, $523.

Wachovia Corporation 2005 Annual Report 101

Audited Financial Statements

NOTE 16: MERGER-RELATED AND RESTRUCTURING EXPENSES

     The Company defines restructuring expenses as those costs related to exit or disposal activities generally incurred as part of a business combination. Specifically, restructuring expenses include costs associated with contract termination, including leases and one-time employee termination benefits in excess of ongoing severance plan benefits. To the extent an expense related to a merger does not qualify as a restructuring expense, it is classified as a merger-related expense. Merger-related expenses consist principally of integration costs related to combining operations such as system conversions, and termination benefits under an ongoing severance plan as well.

     On November 1, 2004, the Company merged with SouthTrust. Merger-related and restructuring expenses of approximately $333 million pre-tax and exit cost purchase accounting adjustments of approximately $207 million pre-tax are projected to be incurred in connection with this transaction over the anticipated 15-month integration period. The costs include primarily system conversion, personnel and employee termination benefits, and occupancy and equipment costs. In 2005, merger-related and restructuring expenses of $227 million were recorded of which $37 million was restructuring expenses. In 2004, merger-related and restructuring expenses of $41 million were recorded of which $1 million was restructuring expenses.

     On July 1, 2003, the Company consummated the combination of the retail brokerage businesses of Wachovia Securities, LLC, and Prudential Financial, Inc. Merger-related and restructuring expenses and exit cost purchase accounting adjustments of $901 million were finalized in 2005. The costs included primarily system conversion, personnel and employee termination benefits, and occupancy and equipment costs. Of the $63 million of merger-related and restructuring expenses recorded in 2005, $1 million was restructuring expenses. Of the $298 million of merger-related and restructuring expenses recorded in 2004, $22 million was restructuring expenses. No restructuring expenses were recorded in 2003 related to the retail brokerage transaction.

     The First Union and Wachovia merger was consummated in 2001, but certain merger integration activities continued through September 2004, and accordingly, the costs associated with certain of those activities are subject to the applicable accounting guidance discussed above. The merger integration activities subject to this guidance, include branch conversion and consolidation, system conversions, advertising and consolidation of other premises. The costs associated with these activities are included in merger-related and restructuring expenses in the results of operations. Of the amounts recorded in 2004 and 2003, $3 million and $16 million, respectively, were restructuring expenses. These costs are included in the previously announced estimated one-time charges related to the First Union and Wachovia merger, which was finalized in 2004 and amounted to $1.3 billion. Substantially all previously accrued liabilities were paid by December 31, 2004.

     Merger-related and restructuring expenses for each of the years in the three-year period ended December 31, 2005, follow.

102 Wachovia Corporation 2005 Annual Report

	Years Ended December 31,
(In millions)	2005			2004			2003
MERGER-RELATED AND RESTRUCTURING EXPENSES - WACHOVIA/SOUTHTRUST
Merger-related expenses
Personnel costs	$	23			24			—
Occupancy and equipment		37			—			—
Advertising		25			—			—
System conversion costs		75			10			—
Other		30			6			—
Total merger-related expenses		190			40			—
Restructuring expenses
Occupancy and equipment		33			—			—
Contract cancellations		1			—			—
Other		3			1			—
Total restructuring expenses		37			1			—
Total Wachovia/SouthTrust merger-related and restructuring expenses		227			41			—
MERGER-RELATED AND RESTRUCTURING EXPENSES - WACHOVIA SECURITIES RETAIL BROKERAGE
Merger-related expenses
Personnel costs		4			106			29
Occupancy and equipment		(1	)		11			3
Advertising		—			17			—
System conversion costs		48			118			31
Other		11			24			22
Total merger-related expenses		62			276			85
Restructuring expenses
Occupancy and equipment		1			18			—
Contract cancellations		—			4			—
Total restructuring expenses		1			22			—
Total Wachovia Securities retail brokerage merger-related and restructuring expenses		63			298			85
MERGER-RELATED AND RESTRUCTURING EXPENSES - FIRST UNION/WACHOVIA
Merger-related expenses
Personnel costs		—			25			45
Occupancy and equipment		—			32			67
Gain on regulatory-mandated branch sales		—			—			(9	)
Advertising		—			1			68
System conversion costs		—			33			131
Other		—			14			46
Total merger-related expenses		—			105			348
Restructuring expenses
Employee termination benefits		—			1			—
Occupancy and equipment		—			2			12
Contract cancellations		—			—			4
Total restructuring expenses		—			3			16
Total First Union/Wachovia merger-related and restructuring expenses		—			108			364
OTHER MERGER-RELATED AND RESTRUCTURING EXPENSES
Merger-related expenses from other mergers		2			—			—
Strategic repositioning restructuring expenses (reversals), net		—			—			(1	)
Other restructuring expenses (reversals), net		—			(3	)		(5	)
Total merger-related and restructuring expenses	$	292			444			443

Wachovia Corporation 2005 Annual Report 103

Audited Financial Statements

NOTE 17: INCOME TAXES

     The aggregate amount of income taxes included in the consolidated statements of income and in the consolidated statements of changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
(In millions)	2005			2004			2003
CONSOLIDATED STATEMENTS OF INCOME
Income taxes related to continuing operations	$	3,033			2,419			1,833
Income taxes related to discontinued operations		233			—			—
Income taxes related to the cumulative effect of a change in accounting principle		—			—			8
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Income taxes related to
Employee stock plans		(162	)		(70	)		(46	)
Unrealized gains and losses on debt and equity securities		(853	)		(170	)		(227	)
Unrealized gains and losses on derivative financial instruments		(34	)		(185	)		(304	)
Unrealized gains and losses on minimum pension liability		(4	)		(40	)		—
Total	$	2,213			1,954			1,264

     The provision for income taxes for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
(In millions)	2005			2004			2003
CURRENT INCOME TAXES
Federal	$	1,850			3,436			956
State		174			297			68
Total		2,024			3,733			1,024
Foreign		206			220			167
Total current income taxes		2,230			3,953			1,191
DEFERRED INCOME TAXES
Federal		828			(1,507	)		511
State		(25	)		(27	)		131
Total deferred income taxes		803			(1,534	)		642
Total income taxes	$	3,033			2,419			1,833

     The reconciliation of federal income tax rates and amounts to the effective income tax rates and amounts for each of the years in the three-year period ended December 31, 2005, follows.

104 Wachovia Corporation 2005 Annual Report

	Years Ended December 31,
	2005						2004						2003
				Percent of						Percent of						Percent of
				Pre-tax						Pre-tax						Pre-tax
(In millions)	Amount			Income			Amount			Income			Amount			Income
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle	$	9,462					$	7,633					$	6,080
Tax at federal income tax rate	$	3,312			35.0	%	$	2,672			35.0	%	$	2,128			35.0	%
Reasons for difference in federal income tax rate and effective income tax rate
Tax-exempt interest, net of cost to carry		(132	)		(1.4	)		(154	)		(2.0	)		(157	)		(2.5	)
State income taxes, net of federal tax benefit		97			1.0			176			2.3			129			2.1
Life insurance, increase in cash surrender value		(171	)		(1.8	)		(148	)		(1.9	)		(143	)		(2.4	)
Tax credits, net of related basis adjustments		(156	)		(1.6	)		(115	)		(1.5	)		(134	)		(2.2	)
Change in the beginning-of-the-year deferred tax assets valuation allowance		(6	)		(0.1	)		5			0.1			14			0.2
Other items, net		89			0.9			(17	)		(0.3	)		(4	)		—
Total income taxes	$	3,033			32.0	%	$	2,419			31.7	%	$	1,833			30.2	%

     Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. The sources and tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities for each of the years in the three-year period ended December 31, 2005, are presented below.

	December 31,
(In millions)	2005		2004		2003
DEFERRED INCOME TAX ASSETS
Allowance for loan losses, net	$	1,069		1,052		908
Accrued expenses, deductible when paid		1,444		1,287		1,087
Life insurance reserves		—		18		20
REMIC residual interests		235		241		80
Net operating loss carryforwards		472		109		111
Tax credit carryforwards		—		7		773
Unrealized losses on debt and equity securities, derivative financial instruments and minimum pension liability		480		—		—
Unrealized losses on investments		883		821		674
Other		336		280		450
Total deferred income tax assets		4,919		3,815		4,103
Deferred income tax assets valuation allowance		53		59		54
DEFERRED INCOME TAX LIABILITIES
Depreciation		127		134		61
Unrealized gains on debt and equity securities, derivative financial instruments and minimum pension liability		—		411		806
Intangible assets		374		520		435
Deferred income		98		64		72
Leasing activities		7,189		6,107		7,566
Life insurance reserves		299		—		—
Employee benefits		361		310		256
Other		257		226		325
Total deferred income tax liabilities		8,705		7,772		9,521
Net deferred income tax liabilities	$	3,839		4,016		5,472

Wachovia Corporation 2005 Annual Report 105

Audited Financial Statements

     A portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on debt and equity securities. The related 2005, 2004 and 2003 deferred income tax benefit of $853 million, $170 million and $227 million, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. A portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on derivative financial instruments. The related 2005, 2004 and 2003 deferred income tax benefit of $34 million, $185 million and $304 million, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. A portion of the annual change in the net deferred income tax liability relates to unrealized gains and losses on the minimum pension liability. The related 2005 and 2004 deferred income tax benefit of $4 million and $40 million, respectively, was recorded directly to stockholders’ equity as a component of accumulated other comprehensive income. Additionally, a portion of the annual change in the net deferred income tax liability relates to a deferred income tax benefit of $12 million included in income taxes related to discontinued operations. Purchase acquisitions also decreased the net deferred income tax liability by $77 million in 2005, increased the net deferred income tax liability by $473 million in 2004 and decreased the net deferred income tax liability by $26 million in 2003.

     The realization of deferred income tax assets may be based on the utilization of carrybacks to prior taxable periods, the anticipation of future taxable income in certain periods and the utilization of tax planning strategies. The Company has determined it is more likely than not that the deferred income tax assets can be supported by carrybacks to federal taxable income in the two-year federal carryback period and by expected future taxable income that will exceed amounts necessary to fully realize remaining deferred income tax assets resulting from net operating loss carryforwards and from the scheduling of temporary differences. The valuation allowance primarily relates to certain state temporary differences and to state net operating loss carryforwards.

     The operating results of the Parent Company and its eligible subsidiaries are included in a consolidated federal income tax return. Each subsidiary included in the consolidated federal income tax return pays its allocation of federal income taxes to the Parent Company or receives payment from the Parent Company to the extent income tax benefits are realized. Where federal or state income tax laws do not permit consolidated or combined income tax returns, applicable separate company federal or state income tax returns are filed, and payment, if any, is remitted directly to the federal or state governments.

     Federal income tax carryforwards at December 31, 2005, consisted of net operating loss carryforwards with related deferred income tax assets of $405 million. Utilization of these net operating losses is subject to limitations under federal income tax laws, and will expire, if not utilized, in varying amounts through 2025. Federal general business credit and alternative minimum tax credit carryforwards and related deferred income tax assets at December 31, 2003, of $400 million and $357 million, respectively, were fully utilized in 2004 pursuant to the resolution of prior year federal income tax issues as described below.

     State income tax carryforwards at December 31, 2005, consisted of net operating loss carryforwards with related deferred income tax assets of $67 million. These state income tax carryforwards were generated by certain subsidiaries in various jurisdictions and their utilization is subject to limitations under various state income tax laws. The state net operating loss carryforwards expire, if not utilized, in varying amounts through 2025.

     FASB Staff Position (“FSP”) 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” addresses the effect of the American Jobs Creation Act of 2004 (the “Act”) on the accounting for the income tax effect of the repatriation of foreign earnings. The Act provided a one-time election to claim an 85 percent dividends received deduction related to the repatriation of certain previously undistributed earnings of foreign subsidiaries to the United States. In accordance with the provisions of FSP 109-2, for the year ended December 31, 2004, the Company recorded approximately $8 million of deferred income expense related to a decision to distribute in 2005 approximately $94 million of earnings of certain foreign subsidiaries under the provisions of the Act. Upon further evaluation, the Company decided that earnings will not be distributed and has reversed, in 2005, the previously recorded $8 million of deferred income tax expense. At December 31, 2005, the Company has undistributed earnings of approximately $270 million related to foreign subsidiaries. The Company intends to reinvest these earnings indefinitely and has not recorded any related federal or state income tax expense. If these earnings are repatriated to the United States, the Company will record additional income tax expense of approximately $110 million.

     Income tax expense related to securities transactions was $85 million, $17 million and $91 million in 2005, 2004 and 2003, respectively.

     The Internal Revenue Service the (“IRS”) and the Company have settled all issues related to the Company’s federal income tax returns for 1999 and all prior years. In addition, all issues related to the federal income tax returns of the former Wachovia for years 1996 through 2001 and SouthTrust for the years 2001 and 2002 have been settled. The Company’s previously recorded income tax liabilities were sufficient to cover the resulting assessment of income taxes and interest. The IRS is currently examining the Company’s federal income tax returns for the years 2000 through 2002. The federal income tax returns of various acquired subsidiaries, including SouthTrust for the years 2003 and 2004, have been or are under review by the IRS. As of December 31, 2005, the IRS has not proposed any material adjustments related to these examinations.

106 Wachovia Corporation 2005 Annual Report

NOTE 18: BASIC AND DILUTED EARNINGS PER COMMON SHARE

     The calculation of basic and diluted earnings per common share for each of the years in the three-year period ended December 31, 2005, is presented below.

	Years Ended December 31,
(In millions, except per share data)	2005		2004		2003
Income from continuing operations available to common stockholders before cumulative effect of a change in accounting principle and dividends on preferred stock	$	6,429		5,214		4,247
Discontinued operations, net of income taxes		214		—		—
Cumulative effect of a change in accounting principle, net of income taxes		—		—		17
Dividends on preferred stock		—		—		(5	)
Income available to common stockholders	$	6,643		5,214		4,259
Basic earnings per common share
Income from continuing operations before change in accounting principle	$	4.13		3.87		3.20
Discontinued operations		0.14		—		—
Cumulative effect of a change in accounting principle		—		—		0.01
Net income	$	4.27		3.87		3.21
Diluted earnings per common share
Income from continuing operations before change in accounting principle	$	4.05		3.81		3.17
Discontinued operations		0.14		—		—
Cumulative effect of a change in accounting principle		—		—		0.01
Net income	$	4.19		3.81		3.18
Average common shares - basic		1,556		1,346		1,325
Common share equivalents, unvested restricted stock, incremental common shares from forward purchase contracts and convertible long-term debt assumed converted		29		24		15
Average common shares - diluted		1,585		1,370		1,340

Wachovia Corporation 2005 Annual Report 107

Audited Financial Statements

NOTE 19: DERIVATIVES

     The Company uses derivatives to manage exposure to interest rate risk, to generate profits from proprietary trading and to assist customers with their risk management objectives. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is not exchanged, but is used only as the basis on which interest and other payments are determined.

     For derivatives, the Company’s exposure to credit risk is measured by the current fair value of all derivatives in a gain position plus a prudent estimate of potential change in value over the life of each contract. The measurement of the potential future exposure for each credit facility derivative is based on a simulation of market rates and generally takes into account legally enforceable risk mitigating agreements for each obligor such as netting and collateral.

     The Company uses collateral arrangements, credit approvals, limits and monitoring procedures to manage credit risk on derivatives. Bilateral collateral agreements are in place for substantially all dealer counterparties. Collateral for dealer transactions is delivered by either party when the credit risk associated with a particular transaction, or group of transactions to the extent netting exists, exceeds defined thresholds of credit risk. Thresholds are determined based on the strength of the individual counterparty. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. At December 31, 2005, the total market value-related credit risk recorded on the balance sheet for derivative transactions, including derivatives used for the Company’s interest rate risk management, was $11.0 billion, and also included the effect of netting agreements. Of the $11.0 billion, $2.7 billion exceeded dealer counterparty thresholds and was delivered to the Company as collateral.

     The fair value and notional amounts for trading derivatives at December 31, 2005 and 2004, are presented below.

	December 31,
	2005					2004
	Fair			Notional		Fair			Notional
(In millions)	Value			Amount		Value			Amount
Forward and futures contracts	$	64			299,015		436			301,730
Interest rate swap agreements		1,770			1,822,344		1,047			1,230,083
Purchased options, interest rate caps, floors, collars and swaptions		6,817			691,607		8,268			560,136
Written options, interest rate caps, floors, collars and swaptions		(6,911	)		629,237		(8,232	)		676,185
Foreign currency and exchange rate swap commitments		(103	)		45,066		(5	)		44,717
Commodity and equity swaps	$	(435	)		20,679		(307	)		3,647

     Risk management derivative financial instruments represent financial instruments the Company has designated and accounted for as accounting hedges. Information related to these derivative financial instruments used for the Company’s interest rate risk management purposes at December 31, 2005 and 2004, follows.

108 Wachovia Corporation 2005 Annual Report

     Risk management derivative financial instruments at December 31, 2005 and 2004, are presented below.

	December 31, 2005
											In-			Average
	Notional		Gross Unrealized								effective-			Maturity in
(In millions)	Amount		Gains		Losses (f)			Equity (g)			ness (h)			Years (i)
ASSET HEDGES (a)
Cash flow hedges (b)
Interest rate swaps-receive fixed	$	43,294		539		(506	)		16			2			4.29
Interest rate swaps-pay fixed		1,244		—		(75	)		(47	)		—			4.69
Forward purchase commitments		3,400		2		—			1			—			0.04
Fair value hedges (c)
Interest rate swaps-pay fixed		1,975		41		(3	)		—			(4	)		15.77
Forward sale commitments		447		—		(5	)		—			(5	)		0.04
Total asset hedges	$	50,360		582		(589	)		(30	)		(7	)		4.43
LIABILITY HEDGES (a)
Cash flow hedges (d)
Interest rate swaps-pay fixed		40,936		394		(307	)		55			—			3.97
Futures		32,250		—		(2	)		(1	)		(1	)		0.25
Fair value hedges (e)
Interest rate swaps-receive fixed		17,762		58		(25	)		—			(2	)		6.77
Total liability hedges		90,948		452		(334	)		54			(3	)		3.20
Total	$	141,308		1,034		(923	)		24			(10	)		—

	December 31, 2004
											In-			Average
	Notional		Gross Unrealized								effective-			Maturity in
(In millions)	Amount		Gains		Losses (f)			Equity (g)			ness (h)			Years (i)
ASSET HEDGES (a)
Cash flow hedges (b)
Interest rate swaps-receive fixed	$	35,290		1,560		(114	)		890			4			4.56
Interest rate swaps-pay fixed		1,370		—		(130	)		(81	)		—			5.72
Interest rate options		14,000		11		(38	)		(17	)		—			1.32
Forward purchase commitments		1,220		10		—			6			(1	)		0.05
Futures		2,400		—		—			—			—			0.25
Fair value hedges (c)
Interest rate swaps-pay fixed		2,258		8		(27	)		—			(19	)		16.66
Forward sale commitments		900		—		(2	)		—			(1	)		0.04
Total asset hedges	$	57,438		1,589		(311	)		798			(17	)		3.93
LIABILITY HEDGES (a)
Cash flow hedges (d)
Interest rate swaps-pay fixed		37,769		39		(837	)		(493	)		(2	)		3.79
Interest rate options		42,700		18		(548	)		(327	)		—			3.21
Put options on Eurodollar futures		18,000		2		(3	)		—			—			0.25
Futures		42,914		48		—			29			—			0.25
Fair value hedges (e)
Interest rate swaps-receive fixed		19,930		842		(46	)		—			—			5.10
Interest rate options		4,925		—		(1	)		—			—			0.63
Total liability hedges		166,238		949		(1,435	)		(791	)		(2	)		2.41
Total	$	223,676		2,538		(1,746	)		7			(19	)		—

Wachovia Corporation 2005 Annual Report 109

Audited Financial Statements

(a) Includes only derivative financial instruments related to interest rate risk management activities that have been designated and accounted for as accounting hedges. All other derivative financial instruments are classified as trading.

(b) Receive-fixed interest rate swaps with a notional amount of $43.3 billion, of which $200 million are forward-starting, and with pay rates based on one-to-six month LIBOR are primarily designated as cash flow hedges of the variability in cash flows related to the forecasted interest rate resets of one-to-six month LIBOR-indexed loans. Pay-fixed interest rate swaps with a notional amount of $1.2 billion and with receive rates based on one-month LIBOR are designated as cash flow hedges of available for sale securities. Forward purchase commitments of $400 million and $3.0 billion are designated as cash flow hedges of the variability of the consideration to be paid on the forecasted purchase of loans and available for sale securities, respectively.

(c) Pay-fixed interest rate swaps with a notional amount of $2.0 billion and receive rates based on LIBOR are designated as fair value hedges of available for sale securities. Forward sale commitments of $447 million are designated as fair value hedges of mortgage loans in the warehouse.

(d) Derivatives with a notional amount of $62.4 billion are designated as cash flow hedges of the variability in cash flows attributable to the forecasted issuance of fixed rate short-term liabilities that are part of a rollover strategy. Of this amount, $30.1 billion are pay-fixed interest rate swaps with receive rates based on one-to-three month LIBOR, of which $7.0 billion are forward-starting, and $32.3 billion are Eurodollar futures. Pay-fixed interest rate swaps with a notional amount of $10.8 billion, of which $2.1 billion are forward starting and with rates based on one-to-six month LIBOR are designated as cash flow hedges of the variability in cash flows related to the forecasted interest rate resets of long-term debt.

(e) Receive-fixed interest rate swaps with a notional amount of $17.8 billion and with pay rates based primarily on one-to-six month LIBOR are designated as fair value hedges of fixed rate liabilities, primarily long-term debt.

(f) Represents the fair value of derivative financial instruments less accrued interest receivable or payable.

(g) At December 31, 2005, the net unrealized loss on derivatives included in accumulated other comprehensive income, which is a component of stockholders’ equity, was $378 million, net of income taxes. Of this net of tax amount, a $24 million gain represents the effective portion of the net gains (losses) on derivatives that qualify as cash flow hedges, and a $402 million loss relates to terminated and/or redesignated derivatives. At December 31, 2005, $51 million of net losses, net of income taxes, recorded in accumulated other comprehensive income, is expected to be reclassified as interest income or expense during the next twelve months. The maximum length of time over which cash flow hedges are hedging the variability in future cash flows associated with the forecasted transactions is 28.64 years. At December 31, 2004, the net unrealized loss on derivatives included in accumulated other comprehensive income, which is a component of stockholders’ equity, was $323 million, net of income taxes. Of this net-of-tax amount, a $7 million gain represents the effective portion of the net gains (losses) on derivatives that qualify as cash flow hedges, and a $330 million loss relates to terminated and/or redesignated derivatives.

(h) In 2005 and 2004, losses in the amount of $10 million and $19 million, respectively, were recognized in other fee income representing the ineffective portion of the net gains (losses) on derivatives that qualify as cash flow and fair value hedges. In addition, net interest income in 2005 and 2004, was increased by $8 million and $9 million, respectively, representing ineffectiveness of cash flow hedges caused by differences between the critical terms of the derivative and the hedged item, primarily differences in reset dates.

(i) Estimated maturity approximates average life.

110 Wachovia Corporation 2005 Annual Report

     Expected maturities of risk management derivative financial instruments at December 31, 2005 and 2004, are presented below.

	December 31, 2005
	1 Year			1-2			2-5			5-10		After 10
(In millions)	or Less			Years			Years			Years		Years			Total
CASH FLOW ASSET HEDGES
Notional amount — swaps-receive fixed	$	6,150			684			18,065			18,292		103			43,294
Notional amount — swaps-pay fixed		2			43			502			659		38			1,244
Notional amount — other	$	3,400			—			—			—		—			3,400
Weighted average receive rate (a)		3.79	%		3.68			4.61			5.16		4.66			4.71
Weighted average pay rate (a)		4.41	%		4.10			4.32			4.42		4.35			4.37
Unrealized gain (loss)	$	(29	)		(13	)		(120	)		123		(1	)		(40	)
FAIR VALUE ASSET HEDGES
Notional amount — swaps-pay fixed	$	26			5			45			459		1,440			1,975
Notional amount — other	$	447			—			—			—		—			447
Weighted average receive rate (a)		4.15	%		4.15			4.33			3.56		2.95			3.04
Weighted average pay rate (a)		2.96	%		3.25			4.31			3.90		3.78			3.81
Unrealized gain (loss)	$	(5	)		—			1			4		33			33
CASH FLOW LIABILITY HEDGES
Notional amount — swaps-pay fixed	$	2,260			16,869			7,863			11,632		2,312			40,936
Notional amount — other	$	23,000			9,250			—			—		—			32,250
Weighted average receive rate (a)		4.45	%		4.48			4.48			4.47		4.30			4.46
Weighted average pay rate (a)		3.14	%		3.98			6.53			5.77		5.87			4.78
Unrealized gain (loss)	$	(3	)		125			67			58		(162	)		85
FAIR VALUE LIABILITY HEDGES
Notional amount — swaps-receive fixed	$	2,429			735			7,185			5,199		2,214			17,762
Weighted average receive rate (a)		5.28	%		5.96			4.83			4.70		5.45			4.98
Weighted average pay rate (a)		4.47	%		4.23			4.32			4.41		4.26			4.36
Unrealized gain (loss)	$	—			(8	)		8			24		9			33

Wachovia Corporation 2005 Annual Report 111

Audited Financial Statements

	December 31, 2004
	1 Year or			1-2			2-5			5-10			After 10
(In millions)	Less			Years			Years			Years			Years			Total
CASH FLOW ASSET HEDGES
Notional amount — swaps-receive fixed	$	1,174			7,523			9,833			16,760			—			35,290
Notional amount — swaps-pay fixed		1			2			479			850			38			1,370
Notional amount — other	$	11,620			2,000			4,000			—			—			17,620
Weighted average receive rate (a)		6.64	%		4.14			4.60			5.17			1.56			4.85
Weighted average pay rate (a)		2.46	%		2.45			2.58			2.59			4.58			2.56
Unrealized gain (loss)	$	4			100			217			981			(3	)		1,299
FAIR VALUE ASSET HEDGES
Notional amount — swaps-pay fixed	$	—			26			71			490			1,671			2,258
Notional amount — other	$	900			—			—			—			—			900
Weighted average receive rate (a)		—	%		2.09			2.39			2.25			1.57			1.67
Weighted average pay rate (a)		—	%		2.96			3.76			4.54			3.74			3.90
Unrealized gain (loss)	$	(1	)		—			—			(4	)		(16	)		(21	)
CASH FLOW LIABILITY HEDGES
Notional amount — swaps-pay fixed	$	12,559			4,285			13,097			4,124			3,704			37,769
Notional amount -other	$	61,114			12,000			24,500			6,000			—			103,614
Weighted average receive rate (a)		3.15	%		2.86			2.47			2.64			2.34			2.79
Weighted average pay rate (a)		3.55	%		2.74			5.32			6.52			5.90			4.50
Unrealized gain (loss)	$	(319	)		(38	)		(354	)		(294	)		(276	)		(1,281	)
FAIR VALUE LIABILITY HEDGES
Notional amount — swaps— receive fixed	$	3,400			3,357			6,283			5,122			1,768			19,930
Notional amount — other	$	4,925			—			—			—			—			4,925
Weighted average receive rate (a)		6.98	%		6.02			5.33			5.40			5.32			5.74
Weighted average pay rate (a)		2.30	%		2.63			2.25			2.46			2.23			2.37
Unrealized gain (loss)	$	83			152			229			234			97			795

(a) Weighted average receive and pay rates include the impact of currently effective interest rate swaps only and not the impact of forward-starting interest rate swaps. All interest rate swaps have variable pay or receive rates based on one-month to six-month LIBOR, and they are the pay or receive rates in effect at December 31, 2005 and 2004.

          Activity related to risk management derivative financial instruments for each of the years in the two-year period ended December 31, 2005, is presented below.

	December 31, 2005 and 2004
	Asset			Liability
(In millions)	Hedges			Hedges			Total
Balance, December 31 , 2003	$	58,761			129,736			188,497
Additions		93,436			129,287			222,723
Maturities and amortizations		(53,665	)		(73,304	)		(126,969	)
Terminations		(27,516	)		(12,982	)		(40,498	)
Redesignations and transfers to trading account assets		(13,578	)		(6,499	)		(20,077	)
Balance, December 31, 2004		57,438			166,238			223,676
Additions		95,774			83,763			179,537
Maturities and amortizations		(43,736	)		(80,006	)		(123,742	)
Terminations		(28,327	)		(4,868	)		(33,195	)
Redesignations and transfers to trading account assets		(30,789	)		(74,179	)		(104,968	)
Balance, December 31, 2005	$	50,360			90,948			141,308

112 Wachovia Corporation 2005 Annual Report

NOTE 20: COMMITMENTS, GUARANTEES AND CONTINGENCIES

     In the normal course of business, the Company engages in a variety of transactions to meet the financing needs of its customers, to reduce its exposure to fluctuations in interest rates and to conduct lending activities. These transactions principally include lending commitments, other commitments and guarantees. These transactions involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements.

LENDING COMMITMENTS

     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and they may require payment of a fee by the counterparty. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

     Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit are issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions, and to also assist customers in obtaining long-term tax-exempt funding through municipal bond issues. In the event the bonds are sold back prior to their maturity and cannot be remarketed, in certain conditions, the Company would be obligated to provide funding to finance the repurchase of the bonds. Commercial letters of credit are issued to support international and domestic trade.

     The Company’s maximum exposure to credit loss in the event of nonperformance by the counterparty for commitments to extend credit and standby and commercial letters of credit is represented by the contract amount of those instruments. The Company holds various assets as collateral to support those commitments for which collateral is deemed necessary. The Company uses the same credit policies in entering into commitments and conditional obligations as it does for loans. Except for short-term commitments and letters of credit of $26.5 billion, commitments and letters of credit extend for more than one year, and they expire in varying amounts through 2029. See Note 21 for information related to the notional amount and fair value of lending commitments and letters of credit.

OTHER COMMITMENTS

     In the normal course of business, the Company enters into underwriting commitments. Transactions relating to these underwriting commitments that were open at December 31, 2005, and subsequently settled, had no material impact on the Company’s consolidated financial position or results of operations.

     Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to December 31, 2005, are as follows (in millions): 2006, $592; 2007, $554; 2008, $517; 2009, $478; 2010, $425; and subsequent years, $2.0 billion. Total minimum future lease receipts due from noncancelable subleases on operating leases was $464 million. Minimum lease payments under leases classified as capital leases due in each of the five years subsequent to December 31, 2005, are as follows (in millions): 2006, $3; 2007, $3; 2008, $3; 2009, $2; 2010, $2; and subsequent years, $5 million. In December 2005, the Company terminated an existing lease of railcars, including $771 million in leases that were classified as capital leases. Additionally, in December 2005, the Company entered into a sale and leaseback of $1.1 billion of railcars, which are classified as operating leases. Rental expense for all operating leases was $809 million, $697 million and $603 million, in 2005, 2004 and 2003, respectively.

     The Company has commitments to make investments as part of its Principal Investing business and as part of its involvement in low income housing partnerships. At December 31, 2005, these commitments were $472 million and $345 million, respectively.

     The Federal Reserve Board requires the Company’s bank subsidiaries to maintain reserve balances based on a percentage of certain deposits, which may be satisfied by the Company’s vault cash. At December 31, 2005, average daily reserve balances, including contractually obligated clearing balances required by the Federal Reserve Board, amounted to $439 million.

GUARANTEES

     Guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of securities lending indemnifications, standby letters of credit, liquidity agreements, recourse obligations and residual value guarantees. The carrying amount and the maximum risk of loss of the Company’s guarantees follow.

Wachovia Corporation 2005 Annual Report 113

Audited Financial Statements

 

	December 31,
	2005				2004
			Maximum				Maximum
	Carrying		Risk of		Carrying		Risk of
(In millions)	Amount		Loss		Amount		Loss
Securities and other lending indemnifications	$	—		62,597		—		48,879
Standby letters of credit		108		35,568		101		30,815
Liquidity agreements		8		27,193		1		9,568
Loans sold with recourse		47		9,322		39		5,238
Residual value guarantees		—		1,344		9		629
Written put options		133		8,337		353		6,477
Contingent consideration		—		264		—		259
Total guarantees	$	296		144,625		503		101,865

     As a securities lending agent, client securities are loaned, on a fully collateralized basis, to third party broker/dealers. The Company indemnifies its clients against broker default and supports these guarantees with collateral that is marked to market daily. The Company generally requires cash or other highly liquid collateral from the broker/dealer. At December 31, 2005, there was $63.9 billion in collateral supporting the $62.6 billion loaned. Accordingly, there is no carrying amount associated with these agreements.

     Conduits purchase assets from a variety of third parties and issue commercial paper backed by all the assets in the conduit to fund those assets. The Company provides liquidity agreements on substantially all the commercial paper issued by the conduits it administers. At the discretion of the administrator, the liquidity agreements may be drawn to require that the Company purchase assets from the conduit at par value, which may be different from the assets’ fair value. Any losses for assets purchased from a deconsolidated conduit would be after losses absorbed by the third-party holder of the subordinated note. These liquidity agreements have terms generally lasting for 364 days, and the Company renews these agreements on an annual basis. In November 2005, the Company ceased the consolidation of one of the conduits it administers, and at December 31, 2005, the remaining consolidated conduit did not have any assets or commercial paper outstanding. During the time conduits were consolidated, liquidity agreements the Company provided for these conduits were not considered liquidity agreements at December 31, 2004. Prior to the consolidation of these conduits, in 2003 the Company purchased $306 million of assets from the conduits it administered and recorded $31 million in losses.

     As part of asset securitization activities, certain beneficial interests are sold to conduits administered by others to which the Company provides liquidity agreements. Under these liquidity agreements, the Company is obligated to purchase an interest in the assets that are financed by the conduits in the event the conduits are unable to continue to issue commercial paper to finance those assets. The Company also provides liquidity agreements on debt issued by QSPEs used to securitize fixed rate municipal bonds. In the event the debt securities could not be remarketed, the Company would be required to purchase the debt securities.

     In some loan sales or securitizations, the Company provides recourse to the buyer that requires the Company to repurchase loans at par plus accrued interest upon the occurrence of certain events, which are generally credit related within a certain period of time. The maximum risk of loss represents the outstanding principal balance of the loans sold or securitized with recourse provisions but the likelihood of the repurchase of the entire balance is remote and a significant portion of the amount repurchased would be recovered from the sale of the underlying collateral. In 2005, 2004 and 2003, the Company did not repurchase a significant amount of loans associated with these agreements.

     Certain of the Company’s derivative transactions recorded as trading liabilities give the counterparty the right to sell to the Company an underlying instrument held by the counterparty at a specified price. These written put contracts generally permit net settlement and include credit default swaps, equity, currency put options and certain put options sold on the Company’s common stock. While these derivative transactions expose the Company to risk in the event the option is exercised, the Company manages this risk by entering into offsetting trades or by taking short positions in the underlying instrument. Additionally, for certain of these contracts, the Company requires the counterparty to pledge the underlying instrument as collateral for the transaction.

     Some contracts the Company enters into in the normal course of business include indemnification provisions that obligate the Company to make payments to the counterparty or others in the event certain events occur. These contingencies generally relate to changes in the value of underlying assets, liabilities or equity securities or upon the occurrence of events, such as an adverse litigation judgment or an adverse interpretation of tax law. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. In 2005, 2004 and 2003, the Company was not required to make any significant payments under indemnification clauses. Since there are no stated or notional amounts included in the indemnification clauses and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur, the Company is not able to estimate the maximum potential amount of future payments under these indemnification clauses. There are no amounts reflected on the balance sheet at December 31, 2005 and 2004, related to these indemnifications.

114 Wachovia Corporation 2005 Annual Report

     As part of the Company’s acquisition activity, the Company often negotiates terms in which a portion of the purchase price is contingent on future events, typically related to the acquired businesses meeting revenue or profitability targets. The additional consideration may be cash or stock. Contingent consideration is paid when the contingency is resolved and it is recorded as additional goodwill. At December 31, 2005, the Company had $264 million in cash and no common stock committed under such agreements that will be paid through 2011 if the contingencies are met.

CONTINGENCIES

     The Company and certain of its subsidiaries are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising from the conduct of its business activities. These proceedings include actions brought against the Company and/or its subsidiaries with respect to transactions in which the Company and/or its subsidiaries acted as banker, lender, underwriter, financial advisor or broker or in activities related thereto. In addition, the Company and its subsidiaries may be requested to provide information or otherwise cooperate with governmental authorities in the conduct of investigations of other persons or industry groups. It is the Company’s policy to cooperate in all regulatory inquiries and investigations.

     Although there can be no assurance as to the ultimate outcome, the Company and/or its subsidiaries have generally denied, or believe the Company has a meritorious defense and will deny, liability in all significant litigation pending against it, including the matters described below, and the Company intends to defend vigorously each such case. Reserves are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for those claims. In 2005, the Company recognized $196 million of expense related to litigation and regulatory proceedings.

     Securities Litigation.A number of purported class actions were filed in June 1999 through August 1999 against the Company in the United States District Courts for the Western District of North Carolina and for the Eastern District of Pennsylvania. These actions named the Company and certain executive officers as defendants and were purported to be on behalf of persons who purchased shares of the Company’s common stock from August 14, 1998, through May 24, 1999. These actions were consolidated into one case in the U.S. District Court for the Western District of North Carolina in October 1999. These complaints alleged various violations of federal securities law, including violations of Section 10(b) of the Securities Exchange Act of 1934, and that the defendants made materially misleading statements and/or material omissions which artificially inflated prices for the Company’s common stock. The complaints alleged that management failed to disclose integration problems in the CoreStates Financial Corp merger and misstated the value of the Company’s interest in certain mortgage-backed securities of The Money Store, Inc. (“TMSI”) acquired by the Company on June 30, 1998. Plaintiffs sought a judgment awarding damages and other relief. In January 2001, the U.S. District Court for the Western District of North Carolina granted the Company’s motion to dismiss the litigation for failure to state a claim upon which relief could be granted. Although the plaintiffs did not appeal this ruling, they sought, and received permission to file an amended complaint. In August 2001, plaintiffs filed an amended complaint that abandoned their previous allegations concerning the CoreStates Financial Corp merger and primarily raised new allegations of irregularities at TMSI prior to its acquisition by the Company. In October 2001, the Company filed a motion to dismiss the securities litigation consolidated in the U.S. District Court for the Western District of North Carolina. In September 2002, the court granted the motion in part, limiting any new complaint to claims regarding alleged misstatements or omissions pled in earlier complaints. The plaintiffs filed a third consolidated and amended complaint in October 2002, purportedly on behalf of a class of purchasers of the Company’s common stock during the period from March 4, 1998 to May 24, 1999. The complaint alleges, among other things, that the Company disregarded problems at TMSI and did not write down goodwill from the TMSI acquisition soon enough. In December 2003, the court denied the Company’s motion to strike portions of this complaint. In February 2004, the Company filed a motion to dismiss the amended complaint. On January 20, 2006, the court granted the Company’s motion to dismiss the amended complaint with prejudice.

     In the Matter of KPMG LLP Certain Auditor Independence Issues.The SEC has requested the Company to produce certain information concerning any agreements or understandings by which the Company referred clients to KPMG LLP during the period January 1, 1997 to November 2003 in connection with an inquiry regarding the independence of KPMG LLP as the Company’s outside auditors during such period. The Company is continuing to cooperate with the SEC in its inquiry, which is being conducted pursuant to a formal order of investigation entered by the SEC on October 21, 2003. The Company believes the SEC’s inquiry relates to certain tax services offered to the Company’s customers by KPMG LLP during the period from 1997 to early 2002, and whether these activities might have caused KPMG LLP not to be “independent” from the Company, as defined by applicable accounting and SEC regulations requiring auditors of an SEC-reporting company to be independent of the company. The Company and/or KPMG LLP received fees in connection with a small number of personal financial consulting transactions related to these services. KPMG LLP has confirmed to the Company that during all periods covered by the SEC’s inquiry, including the present, KPMG LLP was and is “independent” from the Company under applicable accounting and SEC regulations.

Wachovia Corporation 2005 Annual Report 115

Audited Financial Statements

     Mutual Fund Sales Practices.Securities regulators are currently investigating Wachovia Securities and Evergreen Investment Services, Inc. regarding practices and procedures for the offer and sale of certain mutual funds. The Company believes the regulators are reviewing the adequacy of Wachovia Securities’ disclosures regarding revenue sharing arrangements with certain investment companies and has been advised that they are investigating Wachovia Securities’ and Evergreen Investment Services’ mutual fund sales and distribution practices.

     Research Matters.Various regulators have been investigating Wachovia Capital Markets, LLC, the Company’s institutional broker-dealer subsidiary (“WCM”), related to the existence of alleged conflicts of interest between WCM’s equity research and investment banking departments. Certain of those regulators have notified WCM that they are considering instituting proceedings based upon various purported regulatory violations, including generally state securities laws and state laws regarding business practices. WCM is in discussions with these regulators about resolving these matters.

     Adelphia Litigation.Certain affiliates of the Company are defendants in an adversary proceeding pending in the United States Bankruptcy Court for the Southern District of New York related to the bankruptcy of Adelphia Communications Corporation (“Adelphia”). The Official Committee of Unsecured Creditors in that bankruptcy case has filed an adversary proceeding on behalf of Adelphia against over 300 financial services companies, including certain affiliates of the Company. The complaint asserts claims against the defendants under state law, bankruptcy law and the Bank Holding Company Act and seeks equitable relief and an unspecified amount of compensatory and punitive damages. The Official Committee of Equity Security Holders has sought leave to intervene in that complaint and sought leave to bring additional claims against certain of the financial services companies, including certain affiliates of the Company, including additional federal and state claims. On August 30, 2005, the bankruptcy court granted the creditors’ committee and the equity holders’ committee standing to proceed with their claims. The Company and other defendants have filed motions to dismiss the complaints.

     In addition, certain affiliates of the Company, together with numerous other financial services companies, have been named in several private civil actions by investors in Adelphia debt and/or equity securities, alleging among other claims, misstatements in connection with Adelphia securities offerings between 1997 and 2001. Certain affiliates of the Company acted as an underwriter in certain of those securities offerings, as agent and/or lender for certain Adelphia credit facilities, and as a provider of Adelphia’s treasury/cash management services. These complaints, which seek unspecified damages, have been consolidated in the United States District Court for the Southern District of New York. In separate orders entered in May 2005 and July 2005, the District Court dismissed a number of the securities law claims asserted against the Company, leaving some securities law claims pending. The Company still has a pending motion to dismiss with respect to these claims.

     Bluebird Partners, L.P., Litigation.On December 12, 2002, the jury in the Supreme Court of the State of New York, County of New York, returned a verdict against First Fidelity Bank, N.A. New Jersey (“First Fidelity”), a predecessor to Wachovia Bank in the case captioned “Bluebird Partners, L.P. v. First Fidelity Bank, N.A., et al”. The trial court directed a verdict in favor of CoreStates New Jersey National Bank, another predecessor of Wachovia Bank. In this action for breach of contract, breach of fiduciary duty, negligence and malpractice, plaintiff alleges that First Fidelity, while serving as indenture trustee for debt certificates issued by Continental Airlines, failed to take the necessary action to protect the value of the collateral after Continental Airlines filed for bankruptcy on December 3, 1990, and that the decline in the value of the collateral during the pendency of the bankruptcy caused plaintiff’s losses. On July 10, 2003, the trial judge granted First Fidelity’s motion to set aside the verdict, holding that the evidence was insufficient to support the verdict. Plaintiff appealed, and on October 7, 2004, the Supreme Court, Appellate Division, First Department reversed the dismissal and reinstated the verdict. On January 13, 2005, the court entered judgment against Wachovia Bank in the amount of $32.9 million plus pre- and post-judgment interest at the statutory rate from April 27, 1993. Both parties filed appeals which were argued in 2005 but which have not yet been decided. On February 15, 2006, the Company and Bluebird entered into a settlement agreement, the terms of which are confidential, which terminates the ongoing litigation and resolves any remaining disputes between the parties. Based on previously recorded reserves, the settlement will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

     Other Regulatory Matters.Governmental and self-regulatory authorities have instituted numerous ongoing investigations of various practices in the securities and mutual fund industries, including those discussed in the Company’s previous filings with the SEC and those relating to revenue sharing, market-timing, late trading and record retention. The investigations cover advisory companies to mutual funds, broker-dealers, hedge funds and others. The Company has received subpoenas and other requests for documents and testimony relating to the investigations, is endeavoring to comply with those requests, is cooperating with the investigations, and where appropriate, is engaging in discussions to resolve the investigations. The Company is continuing its own internal review of policies, practices, procedures and personnel, and is taking remedial action where appropriate.

116 Wachovia Corporation 2005 Annual Report

     In connection with one of these investigations, on July 28, 2004, the SEC staff advised the Company’s investment advisory subsidiary that the staff is considering recommending to the SEC that it institute an enforcement action against the investment advisory subsidiary, Evergreen Investment Management Company, LLC, and other Evergreen entities. The SEC staff’s proposed allegations relate to (i) an arrangement involving a former Evergreen employee and an individual broker pursuant to which the broker, on behalf of a client, made exchanges to and from a mutual fund during the period December 2000 through April 2003 in excess of the limitations set forth in the mutual fund prospectus, (ii) purchase and sale activity from September 2001 through January 2003 by a former Evergreen portfolio manager in the mutual fund he managed at the time, (iii) the sufficiency of systems for monitoring exchanges and enforcing exchange limitations stated in mutual fund prospectuses, and (iv) the adequacy of e-mail retention practices. In addition, on September 17, 2004, the SEC staff advised Wachovia Securities that the staff is considering recommending to the SEC that it institute an enforcement action against the brokerage subsidiary regarding the allegations described in (i) of the preceding sentence. The Company currently is engaged in discussions with the SEC staff regarding the matters described in (i) through (iv) above. The Company intends to make a written Wells submission, if it is unable to satisfactorily resolve these matters, explaining why the Company believes enforcement action should not be instituted.

     In addition, as previously disclosed, the Company also is cooperating with governmental and self-regulatory authorities in matters relating to the brokerage operations of Prudential Financial that were included in the Company’s retail brokerage combination with Prudential Financial. Under the terms of that transaction, the Company is indemnified by Prudential Financial for liabilities relating to those matters.

     Outlook.Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Company believes that the eventual outcome of the actions against the Company and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to the Company’s results of operations for any particular period.

Wachovia Corporation 2005 Annual Report 117

Audited Financial Statements

NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS

     Information about the fair value of on-balance sheet financial instruments at December 31, 2005 and 2004, is presented below.

	December 31,
	2005				2004
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(In millions)	Amount		Value		Amount		Value
FINANCIAL ASSETS
Cash and cash equivalents	$	37,625		37,625		38,591		38,591
Trading account assets		42,704		42,704		45,932		45,932
Securities		114,889		114,889		110,597		110,597
Loans, net of unearned income and allowance for loan losses		256,291		257,829		221,083		221,746
Loans held for sale		6,405		6,405		12,988		12,988
Other financial assets	$	24,253		24,253		22,215		22,215
FINANCIAL LIABILITIES
Deposits		324,894		287,856		295,053		277,645
Short-term borrowings		61,953		61,953		63,406		63,406
Trading account liabilities		17,598		17,598		21,709		21,709
Other financial liabilities		7,351		7,351		7,495		7,495
Long-term debt	$	48,971		50,196		46,759		48,583

     The fair values of performing loans for all portfolio loans were calculated by discounting estimated cash flows through expected maturity dates using estimated market yields that reflect the credit and interest rate risks inherent in each category of loans, and prepayment assumptions. Estimated fair values for the commercial loan portfolio were based on weighted average discount rates ranging from 5.09 percent to 9.75 percent and 4.16 percent to 9.53 percent at December 31, 2005 and 2004, respectively, and for the consumer loan portfolio from 6.47 percent to 13.98 percent and 7.30 percent to 13.74 percent, respectively. For performing residential mortgage loans, fair values were estimated using discounted cash flow analyses utilizing yields for similar mortgage-backed securities. The fair values of nonperforming loans were calculated by discounting estimated cash flows using discount rates commensurate with the risk associated with the cash flows.

     The fair values of noninterest-bearing deposits, savings and NOW accounts, and money market accounts were the amounts payable on demand at December 31, 2005 and 2004. The fair value of fixed-maturity certificates of deposit is estimated based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities and fair value approximates carrying amount. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by deposit liabilities compared with the cost of borrowing funds in the market.

     The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt with similar terms.

     Substantially all other financial assets and liabilities have maturities of three months or less, and accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

     Fair value estimates are based on existing financial instruments, as defined, without estimating the value of certain ongoing businesses, the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In the Company’s opinion, these add significant value.

118 Wachovia Corporation 2005 Annual Report

     Information about the fair value of off-balance sheet financial instruments at December 31, 2005 and 2004, is presented below.

	December 31,
	2005				2004
			Estimated				Estimated
	Notional		Fair		Notional		Fair
(In millions)	Amount		Value		Amount		Value
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Lending commitments	$	215,353		310		170,818		316
Standby letters of credit		35,568		108		30,815		101
Financial guarantees written	$	100,456		55		64,314		49

     The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties. Generally, for fixed rate loan commitments, fair value also considers the difference between the current level of interest rates and the committed rates.

     The fair value of financial guarantees written is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties.

Wachovia Corporation 2005 Annual Report 119

Audited Financial Statements

NOTE 22: WACHOVIA CORPORATION (PARENT COMPANY)

     The Parent Company serves as the primary source of funding for the activities for most of its nonbank subsidiaries.

     On December 31, 2005, the Parent Company was indebted to subsidiary banks in the amount of $143 million that, under the terms of revolving credit agreements, was collateralized by certain interest-bearing balances, securities, loans, premises and equipment, and it was payable on demand. On December 31, 2005, a subsidiary bank had loans outstanding to a Parent Company nonbank subsidiary in the amount of $280 million that, under the terms of a revolving credit agreement, were collateralized by securities and certain loans, and they were payable on demand. The Parent Company has guaranteed certain borrowings of its subsidiaries that at December 31, 2005, amounted to $100 million.

     At December 31, 2005, the Parent Company’s subsidiaries, including its bank subsidiaries, had available retained earnings of $4.0 billion for the payment of dividends to the Parent Company without regulatory or other restrictions. Subsidiary net assets of $49.5 billion were restricted from being transferred to the Parent Company at December 31, 2005, under regulatory or other restrictions.

     At December 31, 2005 and 2004, the estimated fair value of the Parent Company’s loans was $10.5 billion and $10.4 billion, respectively.

     The Parent Company’s condensed balance sheets as of December 31, 2005 and 2004, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2005, follow.

CONDENSED BALANCE SHEETS

	December 31,
(In millions)	2005		2004
ASSETS
Cash and due from banks	$	174		9
Interest-bearing balances with bank subsidiary		8,527		9,794
Total cash and cash equivalents		8,701		9,803
Trading account assets		5		34
Securities (amortized cost $843 in 2005; $585 in 2004)		862		617
Loans, net		46		30
Loans due from subsidiaries
Banks		5,266		5,231
Nonbanks		5,154		5,100
Investments in wholly owned subsidiaries
Banks		48,116		33,650
Bank holding companies		—		13,912
Nonbanks		8,227		5,437
Total		56,343		52,999
Investments arising from purchase acquisitions		1,360		1,154
Total investments in wholly owned subsidiaries		57,703		54,153
Other assets		1,101		1,786
Total assets	$	78,838		76,754
LIABILITIES AND STOCKHOLDERS’ EQUITY
Commercial paper		3,676		2,818
Other short-term borrowings with affiliates		1,297		962
Other liabilities		1,475		1,467
Long-term debt		22,457		21,818
Junior subordinated debentures		2,360		2,360
Total liabilities		31,265		29,425
Minority interest		12		12
Stockholders’ equity		47,561		47,317
Total liabilities and stockholders’ equity	$	78,838		76,754

120 Wachovia Corporation 2005 Annual Report

CONDENSED STATEMENTS OF INCOME

	Years Ended December 31,
(In millions)		2005		2004		2003
INCOME
Dividends from subsidiaries
Banks	$	—		1,672		4,142
Bank holding companies		4,000		—		—
Nonbanks		75		103		270
Interest income		760		483		483
Fee and other income		1,511		1,484		1,002
Total income		6,346		3,742		5,897
EXPENSE
Interest on short-term borrowings		141		39		25
Interest on long-term debt		949		515		447
Noninterest expense		1,495		1,405		1,063
Total expense		2,585		1,959		1,535
Income before income tax benefits, equity in undistributed net income (loss) of subsidiaries and cumulative effect of a change in accounting principle		3,761		1,783		4,362
Income tax benefits		(113	)	(1	)	(39	)
Income before equity in undistributed net income (loss) of subsidiaries and cumulative effect of a change in accounting principle		3,874		1,784		4,401
Equity in undistributed net income (loss) of subsidiaries		2,769		3,430		(154	)
Income before cumulative effect of a change in accounting principle		6,643		5,214		4,247
Cumulative effect of a change in accounting principle, net of income taxes		—		—		17
Net income		6,643		5,214		4,264
Dividends on preferred stock		—		—		5
Net income available to common stockholders	$	6,643		5,214		4,259

Wachovia Corporation 2005 Annual Report 121

Audited Financial Statements

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In millions)	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	6,643			5,214			4,264
Adjustments to reconcile net income to net cash provided (used) by operating activities
Equity in undistributed net (income) loss of subsidiaries		(2,769	)		(3,430	)		154
Cumulative effect of a change in accounting principle		—			—			(17	)
Securities transactions		(14	)		(17	)		(19	)
Accretion and amortization of securities discounts and premiums, net		1			4			—
Depreciation and other amortization		351			331			292
Deferred income taxes		(30	)		(83	)		(91	)
Trading account assets, net		29			(29	)		(5	)
Other assets, net		711			387			180
Other liabilities, net		(18	)		652			(36	)
Net cash provided by operating activities		4,904			3,029			4,722
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales and maturities of securities		386			352			691
Purchases of securities		(631	)		(274	)		(236	)
Advances to subsidiaries, net		(89	)		(1,297	)		105
Investments in subsidiaries, net		(2,240	)		(1,514	)		(1,080	)
Longer-term loans originated or acquired		(64	)		(60	)		(9	)
Principal repaid on longer-term loans		48			45			18
Purchases of premises and equipment, net		(15	)		(20	)		(33	)
Cash equivalents acquired, net of purchases of banking organizations		—			429			—
Net cash used by investing activities		(2,605	)		(2,339	)		(544	)
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Commercial paper		858			706			(428	)
Other short-term borrowings, net		335			(6	)		(21	)
Issuances of long-term debt		5,167			10,480			771
Payments of long-term debt		(4,528	)		(2,519	)		(3,152	)
Issuances of common stock		499			716			301
Purchases of common stock		(2,693	)		(2,357	)		(2,257	)
Cash dividends paid		(3,039	)		(2,306	)		(1,670	)
Net cash provided (used) by financing activities		(3,401	)		4,714			(6,456	)
Increase (decrease) in cash and cash equivalents		(1,102	)		5,404			(2,278	)
Cash and cash equivalents, beginning of year		9,803			4,399			6,677
Cash and cash equivalents, end of year	$	8,701			9,803			4,399
CASH PAID (RECEIVED) FOR
Interest	$	1,209			422			480
Income taxes		(285	)		315			174
NONCASH ITEM
Issuance of common stock for purchase accounting merger	$	—			14,000			—

122 Wachovia Corporation 2005 Annual Report

Glossary of Financial Terms

Basis Point:A measure used to quantify yields or interest rates. One basis point (or bp) equals one hundredth of a percent (0.01%).

Book Value:A company’s value as reflected on the balance sheet. Book value is determined by adding the value of all assets and subtracting the value of all liabilities. Book value of a company may have little relationship to market value.

Core Deposits:Savings and NOW accounts, money market and noninterest-bearing accounts and other consumer time deposits.

Derivative:A term used to define a broad base of financial instruments whose value is based on, or “derived” from, an underlying rate, price or index. Examples include swaps, options and futures contracts and can be based on interest rates, foreign currency, commodities or prices of other financial instruments, such as stocks and bonds.

Earning Assets:Assets that generate interest income or dividends.

FDIC-Insured Sweep Product:A product available to Wachovia Securities account holders in which the available cash balances in a customer’s brokerage account are automatically deposited or “swept” overnight into an interest-bearing bank deposit account and are eligible for federal deposit insurance in accordance with the rules of the Federal Deposit Insurance Corporation (“FDIC”).

Fee and Other Income:All income other than interest and dividend income.

Goodwill:An intangible asset recorded under the purchase method of accounting. In an acquisition, goodwill is recorded on the balance sheet of the acquirer and is the excess of the purchase price over the fair value of the net assets acquired. Goodwill is generally understood to represent the going concern value of the business and other intangible factors that are expected to contribute to earnings growth.

Hedge:An investment strategy designed to reduce the risk of future value changes by entering into a position with an offsetting risk profile. Interest rate swaps, futures, options and short sales are examples of hedging techniques. Certain hedges that meet very specific criteria are accorded special accounting treatment as described inNote 1: Summary of Significant Accounting Policies. An economic hedge is a hedge that mitigates risk, but does not qualify or is not designated as an accounting hedge.

Interest Rate Swap:A derivative in which two parties agree to exchange periodic interest payments. These payments are calculated on a “notional amount,” and no exchange of principal occurs. Interest rate swaps are commonly used to manage the asset or liability sensitivity of a balance sheet by converting fixed rate assets or liabilities to floating rates, or vice versa.

Investment Security Gain or Loss:A gain or loss resulting from the sale of an investment security at a price above or below the security’s carrying amount.

LIBOR:London Inter-Bank Offered Rate. The short-term interest rate that creditworthy international banks charge each other for loans.

Lower of Cost or Market:A method of accounting for certain assets by recording them at the lower of their historical cost or their current
market value.

Net Charge-offs:The amount of loans written off as uncollectible, net of recoveries on loans previously written off as uncollectible.

Net Interest Margin:The difference between tax-equivalent interest income

and interest expense, divided by average earning assets.

Noninterest Expense:All expenses other than the interest expense on deposits and borrowed funds and the provision for credit losses.

Nonperforming Assets:Assets on which income is not being recognized for financial reporting purposes; certain restructured loans on which interest rates or terms of repayment have been materially revised; and other real estate that has been acquired through loan foreclosures, or deeds received in lieu of loan payments.

Notional Amount:The amount of a derivative instrument on which interest or other payments are determined. The notional amount is not recorded on the balance sheet.

Overhead Efficiency Ratio:Noninterest expense divided by total revenue, which includes tax-equivalent net interest income and fee and other income.

Purchase Accounting:An accounting method that adds the fair value of tangible and intangible assets acquired and liabilities assumed, along with the resulting goodwill, to those of the acquirer at the time of the acquisition. Results of operations of the combined entity reflect the activity of the acquired entity only in the periods following consummation date; historical financial information of the acquirer is not restated.

Purchased Funds:Large denomination certificates of deposit and short-term borrowed funds.

Return on Assets (ROA):Net income available to common stockholders as a percentage of average assets.

Return on Common Equity (ROE):Net income available to common stockholders as a percentage of average common stockholders’ equity.

Securitize/Securitization:The process of aggregating similar financial instruments, such as loans or mortgages, into one or more negotiable securities. Certain securitization transactions result in a complete transfer of risk to investors, and in others, the company typically retains risk in the form of senior or subordinated notes or residual interests in the securities issued (any of which we refer to as retained interests).

Stockholders’ Equity:A balance sheet amount that represents the total investment in the corporation by holders of common stock and certain preferred stock.

Stress Testing:A process designed to measure market risk by observing the reaction of a portfolio, generally measured by changes in market value, when exposed to a variety of types of market movements.

Subordinated Notes:Debt that has a lower repayment priority than senior debt. Certain subordinated notes qualify as tier 2 capital for regulatory reporting purposes.

Tax-Equivalent Net Interest Income:Net interest income adjusted to reflect the benefit of interest-earning tax-free assets.

Tier 1 and Tier 2 Capital Ratios:Measures of the capital adequacy of a bank as determined in accordance with specific regulatory guidelines. Tier 1 ratio refers to core capital while tier 2 ratio refers to supplementary capital.

Yield Curve:A graph showing the relationship between yields and maturity dates for a portfolio of similar bonds at a given point in time. Often used to illustrate the direction of interest rates.

Wachovia Corporation 2005 Annual Report 123

General Bank Financial Centers

Northern
Banking Group

Connecticut
Branches: 81
ATMs: 114
Rank: No. 4
Share: 8.0%

Delaware
Branches: 20
ATMs: 45
Rank: No. 3
Share: 9.3%

Maryland
Branches: 78
ATMs: 111
Rank: No. 4
Share: 7.2%

New Jersey
Branches: 324
ATMs: 474
Rank: No. 2
Share: 10.4%

New York
Branches: 68
ATMs: 172
Rank: No. 14
Share: 1.5%

North Carolina
Branches: 337
ATMs: 689
Rank: No. 1
Share: 40.9%

Pennsylvania
Branches: 325
ATMs: 501
Rank: No. 2
Share: 11.7%

South Carolina
Branches: 152
ATMs: 302
Rank: No. 1
Share: 19.1%

Virginia
Branches: 301
ATMs: 469
Rank: No. 1
Share: 15.4%

Washington, D.C.
Branches: 30
ATMs: 67
Rank: No. 1
Share: 29.6%

Southern
Banking Group

Alabama
Branches: 158
ATMs: 205
Rank: No. 3
Share: 11.6%

Florida
Branches: 794
ATMs: 1,039
Rank: No. 2
Share: 18.1%

Georgia
Branches: 320
ATMs: 726
Rank: No. 2
Share: 17.3%

Mississippi
Branches: 14
ATMs: 20
Rank: No. 20
Share: 0.8%

Tennessee
Branches: 15
ATMs: 21
Rank: No. 49
Share: 0.3%

Texas
Branches: 114
ATMs: 160
Rank: No. 25
Share: 0.5%

Market share rankings based on FDIC data as of June 30,2005. Excludes credit card companies with deposits domiciled in Delaware.

International Reach

• International branches in Frankfurt, Hong Kong, London, Seoul, Shanghai, Taipei and Tokyo

• Representative offices in Europe, Africa, the Middle East, Russia, Asia, Australia, New Zealand and the Americas

• Brokerage offices in Argentina, Brazil, Chile, Paraguay, Puerto Rico and Uruguay

• International processing centers in Charlotte, Los Angeles, Miami, New York, Philadelphia and Winston-Salem, N.C.

• Foreign Exchange desks in Charlotte and London

Corporate Governance

At January 31, 2006

Board of Directors

John D. Baker II
President and Chief
Executive Officer,
Florida Rock Industries, Inc.
Jacksonville, Florida

James S. Balloun
Private Investor
Atlanta, Georgia

Robert J. Brown
Chairman and Chief
Executive Officer,
B&C Associates, Inc.
High Point, North Carolina

Peter C. Browning
Non-executive Chairman,
Nucor Corporation
Charlotte, North Carolina

John T. Casteen III
President,
University of Virginia
Charlottesville, Virginia

William H. Goodwin Jr.
Chairman, CCA
Industries, Inc.
Chairman, Chief
Executive Officer and
Chief Operating Officer,
The Riverstone Group, LLC
Richmond, Virginia

Robert A. Ingram
Vice Chairman
Pharmaceuticals,
GlaxoSmith Kline plc
Research Triangle Park,
North Carolina

Donald M. James
Chairman and Chief
Executive Officer,
Vulcan Materials
Company
Birmingham, Alabama

Mackey J. McDonald
Chairman, President and
Chief Executive Officer,
VF Corporation
Greensboro,
North Carolina

Joseph Neubauer
Chairman and Chief
Executive Officer,
ARAMARK Corporation
Philadelphia,
Pennsylvania

Lloyd U. Noland III
Chairman Emeritus,
Noland Company
Newport News,Virginia

Van L. Richey
President and Chief
Executive Officer,
American Cast Iron Pipe
Company
Birmingham, Alabama

Ruth G. Shaw
President and Chief
Executive Officer, Duke
Power Company,
Duke Energy Corporation
Charlotte, North Carolina

Lanty L. Smith
Lead Independent
Director,
Wachovia Corporation
Chairman,
Soles Brower Smith & Co.
Greensboro,
North Carolina

G. Kennedy Thompson
Chairman, President and
Chief Executive Officer,
Wachovia Corporation
Charlotte, North Carolina

John C. Whitaker Jr.
Chairman and Chief
Executive Officer,
Inmar, Inc.
Winston-Salem,
North Carolina

Dona Davis Young
Chairman, President and
Chief Executive Officer,
The Phoenix Companies, Inc.
Hartford, Connecticut

Committees of the Board of Directors

Executive
Lanty L. Smith, Chair
Peter C. Browning
William H. Goodwin Jr.
Robert A. Ingram
Joseph Neubauer
G. Kennedy Thompson
John C. Whitaker Jr.

Audit
Joseph Neubauer,
Chair
James S. Balloun
John T. Casteen III
Lloyd U. Noland III
Lanty L. Smith

Risk
Dona Davis Young,
Chair
John D. Baker II
Peter C. Browning
William H. Goodwin Jr.
Donald M. James
Van L. Richey
John C. Whitaker Jr.

Corporate
Governance &
Nominating
Robert A. Ingram,
Chair
Peter C. Browning
William H. Goodwin Jr.
Mackey J. McDonald
Joseph Neubauer
Lanty L. Smith

Management
Resources &
Compensation
Ruth G. Shaw, Chair
Robert J. Brown
Robert A. Ingram
Mackey J. McDonald

Operating Committee

G. Kennedy Thompson
Chairman, President and
Chief Executive Officer

David M. Carroll
Senior Executive Vice
President and President,
Capital Management Group

Thomas H. Coley
Executive Vice President
and Southern Banking
Group Executive,
General Bank

Stephen E. Cummings
Senior Executive Vice
President and Head of
Corporate and
Investment Bank

Jean E. Davis
Senior Executive Vice
President and Head of
Operations, Technology
and eCommerce

Reginald E. Davis
Executive Vice President
and Northern Banking
Group Executive,
General Bank

R. Glenn Eubanks
Executive Vice President
and Head of Real Estate
Financial Services,
General Bank

Benjamin P. Jenkins III
Vice Chairman and
President, General Bank

Stanhope A. Kelly
Senior Executive Vice
President and President,
Wealth Management

Daniel J. Ludeman
Executive Vice President,
President and Chief
Executive Officer,
Wachovia Securities, LLC

Shannon W. McFayden
Senior Executive Vice
President and Director of
Human Resources and
Corporate Relations

E. Frank Schmidt
Executive Vice President
and Co-Head of Merger
Integration

Cecelia S. Sutton
Executive Vice President
and Head of the Retail
Segment, General Bank

Mark C. Treanor
Senior Executive Vice
President, General
Counsel and Secretary

Donald K. Truslow
Senior Executive Vice
President and Chief
Risk Officer

Benjamin F. Williams Jr.
Managing Director,
Wachovia Capital
Markets, LLC, and Head
of Global Capital
Markets, Corporate and
Investment Bank

Thomas J. Wurtz
Senior Executive Vice
President and Chief
Financial Officer

124 Wachovia Corporation 2005 Annual Report

`

Shareholder Information

How to Contact Us
Investor Relations
Alice Lehman, Head of Investor Relations

Annual and quarterly financial information is available online at wachovia.com/investor. Request publications or speak with the shareholder relations manager through our interactive voice response system at 704-374-6782.

Transfer Agent
American Stock Transfer & Trust Company
1-800-347-1246
P.O. Box 2328
Peck Slip Station
New York, New York 10038

Shareholders seeking help with a change of address, records or information about lost certificates, dividend checks or dividend reinvestment should contact the transfer agent.

Media
Mary Eshet, Media Relations Manager
704-374-2138

Debt Ratings

Wachovia common stock is listed on The New York Stock Exchange, Inc., under the symbol “WB.”

Wachovia Corporation and Wachovia Bank, National Association, each have debt securities issued in the marketplace. The following table shows debt ratings at February 16, 2006.

Annual Meeting
Tuesday, April 18, 2006, 9:30 a.m.
Hilton Charlotte & Towers, 222 East Third Street
Charlotte, North Carolina

Corporate Headquarters
Wachovia Corporation
301 South College Street, Suite 4000
Charlotte, North Carolina 28288-0013
704-374-6161

Certifications

The chief executive officer and chief financial officer certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as exhibits to Wachovia’s 2005 Annual Report on Form 10-K.

On May 12, 2005, G. Kennedy Thompson, Wachovia’s chief executive officer, submitted to the New York Stock Exchange the CEO certification required by the NYSE’s rules certifying that he was not aware of any violations by Wachovia of the NYSE’s corporate governance listing standards.

Wachovia Corporation is an equal opportunity employer.

	Moody’s		Standard & Poor’s		Fitch Ratings
Outlook	Stable		Positive		Stable
Wachovia Corporation
Senior long-term debt		Aa3		A+		AA-
Subordinated long-term debt		A1		A		A+
Short-term debt		P-1		A-1		F1 +
Wachovia Bank, National Association
Long-term deposits		Aa2		AA-		AA
Short-term deposits		P-1		A-1 +		F1 +
Long-term debt/letters of credit		Aa2		AA-		AA-
Short-term debt/letters of credit		P-1		A-1 +		F1 +
Subordinated debt		Aa3		A+		A+

Wachovia Corporation 2005 Annual Report

Wachovia is proud to be
an uncommon financial
services company focused on
providing customer-driven products
and services that produce relative
stability and steady growth

Recent Wachovia Achievements

n	No. 1 total stock return among the 20 largest U.S. banks from year-end 2001-2005
n	Banker of the Year (American Banker) and Best Business Leader (BusinessWeek) — Ken Thompson, Wachovia chairman and CEO
n	Best Investor Relations — Financial Institutions (Institutional Investor)
n	No. 1 customer satisfaction among banks for five consecutive years (University of Michigan’s American Customer Satisfaction Index)
n	No. 1 among banks in 2005 Brandweek Customer Loyalty Awards
n	High Net Worth Leader of the Year (Private Asset Management)
n	Top 100 Best Places to Work for tenth consecutive year (Working Mother)
n	Top 50 Best Companies for Latinas to work for fifth consecutive year (LatinaStyle)
n	Top 35 Great Places to Work for Black Women for third consecutive year (Essence)
n	Top 50 Companies for Diversity for third consecutive year (DiversityInc)
n	100 best corporations in North America for developing human capital for four consecutive years (Training)
n	Top 5 corporate privacy program (TRUSTe and the Ponemon Institute)
n	No. 1 online banking site in customer experience and customer acquisition impact (Keynote Systems)
n	No. 1 Web site satisfaction (comScore Networks) and customer experience (Change Science)

Printed on 100% post-consumer
recycled and recyclable paper.

Wachovia Corporation
One Wachovia Center
Charlotte, NC 28288
wachovia.com/investor
505005