10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934 (THE “EXCHANGE ACT”)

For the Fiscal year ended December 31, 2006

Commission file number 1-31557

Wachovia Preferred Funding Corp.

(Exact name of registrant as specified in its charter)

Delaware	56-1986430
(State of incorporation)	(I.R.S. Employer Identification No.)

1620 EAST ROSEVILLE PARKWAY

ROSEVILLE, CA 95661

(Address of principal executive offices)

(Zip Code)

(877) 867-7378

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

TITLE OF EACH CLASS	NAME OF EXCHANGE ON WHICH REGISTERED
7.25% Non-cumulative Exchangeable Perpetual Series A Preferred Securities	New York Stock Exchange, Inc. (the “NYSE”)

Securities registered pursuant to Section 12(g) of the Exchange Act:

TITLE OF EACH CLASS

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨  No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨  Accelerated filer  ¨  Non-accelerated filer  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s completed second fiscal quarter: None (as of June 30, 2006, none of Wachovia Preferred Funding Corp.’s voting or nonvoting common equity was held by non-affiliates).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes  ¨  No  x

As of January 31, 2007, there were 99,999,900 shares of the registrant’s common stock outstanding.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

DOCUMENTS INCORPORATED BY REFERENCE IN FORM 10-K

Incorporated Documents	Where Incorporated in Form 10-K
Certain portions of Wachovia Preferred Funding Corp.’s Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 2007.	Part III-Items 10, 11, 12, 13 and 14.

Item 15(a) of Wachovia Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (excluding the list of exhibits incorporated therein by reference).

PART I

Forward Looking Statements

Wachovia Preferred Funding Corp. (“Wachovia Funding”) may from time to time make written or oral forward-looking statements, including statements contained in Wachovia Funding’s filings with the Securities and Exchange Commission (“SEC”) (including this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its reports to stockholders and in other Wachovia Funding communications, which are made in good faith by Wachovia Funding pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, among others, statements with respect to Wachovia Funding’s beliefs, plans, objectives, goals, guidelines, expectations, financial condition, results of operations, future performance and business of Wachovia Funding, including without limitation, (i) statements regarding certain of Wachovia Funding’s goals and expectations with respect to earnings, earnings per share, revenue, expenses and the growth rate in such items, as well as other measures of economic performance, including statements relating to estimates of credit quality trends, and (ii) statements preceded by, followed by or that include the words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan”, “projects”, “outlook” or similar expressions. These forward-looking statements involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond Wachovia Funding’s control). The following factors, among others, could cause Wachovia Funding’s financial performance to differ materially from that expressed in such forward-looking statements:

Ÿ the strength of the United States economy in general and the strength of the local economies in which Wachovia Funding owns mortgage assets and other authorized investments may be different than expected resulting in, among other things, a deterioration in credit quality of such mortgage assets and other authorized investments, including the resultant effect on Wachovia Funding’s portfolio of such mortgage assets and other authorized investments and reductions in the income generated by such assets;

Ÿ the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

Ÿ inflation, interest rate, market and monetary fluctuations;

Ÿ the impact of changes in financial services laws and regulations (including laws concerning banking, securities and insurance);

Ÿ changes in economic conditions which could negatively affect the value of the collateral securing our mortgage assets;

Ÿ unanticipated losses due to environmental liabilities of properties underlying our mortgage assets through foreclosure actions;

Ÿ unanticipated regulatory or judicial proceedings or rulings;

Ÿ the impact of changes in accounting principles;

Ÿ the impact of changes in tax laws, especially tax laws pertaining to real estate investment trusts;

Ÿ adverse changes in financial performance and/or condition of the borrowers on loans underlying Wachovia Funding’s mortgage assets which could impact repayment of such borrowers’ outstanding loans;

Ÿ the impact on Wachovia Funding’s businesses, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and

Ÿ Wachovia Funding’s success at managing the risks involved in the foregoing.

Wachovia Funding cautions that the foregoing list of important factors is not exclusive. Wachovia Funding does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of Wachovia Funding.

“Wachovia Funding”, “we”, “our” and “us” refer to Wachovia Preferred Funding Corp. “Wachovia Preferred Holding” refers to Wachovia Preferred Funding Holding Corp., the “Bank” refers to Wachovia Bank, National Association, and “Wachovia” refers to Wachovia Corporation.

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Item 1.    Business.

General

Wachovia Funding is a Delaware corporation, formed in July 2002, and the survivor of a merger with First Union Real Estate Asset Company of Connecticut, which was formed in 1996. Wachovia Funding is a direct subsidiary of Wachovia Preferred Funding Holding Corp. (“Wachovia Preferred Holding”) and Wachovia Corporation (“Wachovia”) and an indirect subsidiary of Wachovia Bank, National Association (the “Bank”). Wachovia Preferred Holding owns 99.85% of our common stock and Wachovia owns the remaining 0.15%. The Bank owns 99.95% of the common stock of Wachovia Preferred Holding and Wachovia owns the remaining 0.05%. Wachovia Preferred Holding owns 88.06% of our Series D preferred securities, while the remaining 11.94% is owned by 109 employees of Wachovia or its affiliates.

One of our subsidiaries, Wachovia Real Estate Investment Corp., was formed as a Delaware corporation in 1996 and has operated as a real estate investment trust (a “REIT”) since its formation. Of the 645 shares of Wachovia Real Estate Investment Corp. common stock outstanding, we own 644 shares or 99.84% and the remaining 1 share is owned by Wachovia. Of the 667 shares of Wachovia Real Estate Investment Corp. preferred stock outstanding, we own 532.3 shares or 79.81%, 128 shares or 19.19% are owned by employees of Wachovia or its affiliates and 6.7 shares or 1.00% are owned by Wachovia.

Our other subsidiary, Wachovia Preferred Realty, LLC (“WPR”), was formed as a Delaware limited liability company in October 2002. Under the REIT Modernization Act, which became effective on January 1, 2001, a REIT is permitted to own “taxable REIT subsidiaries” which are subject to taxation similar to corporations that do not qualify as REITs or for other special tax rules. We own 98.20% of the outstanding membership interests in WPR and the remaining 1.80% is owned by FFBIC, Inc., another subsidiary of the Bank. Our majority ownership of WPR provides us with additional flexibility by allowing us to hold assets that earn non-qualifying REIT income while maintaining our REIT status.

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Our legal and organizational structure is as follows:

Our principal business objective is to acquire, hold and manage domestic mortgage assets, and other authorized investments that will generate net income for distribution to our shareholders.

Although we have the authority to acquire interests in an unlimited number of mortgage and other assets from unaffiliated third parties, the majority of our interests in mortgage and other assets that we have acquired have been acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or its affiliate and us. The remainder of our assets was acquired directly from the Bank. The Bank either originated the mortgage assets, purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions. We may also acquire from time to time mortgage-backed securities and a limited amount of additional non-mortgage related securities. We may also acquire from time to time mortgage assets or other assets from unaffiliated third parties.

The loans in our portfolio are serviced by the Bank pursuant to the terms of participation and servicing agreements between the Bank and us. The Bank has delegated servicing responsibility of the residential mortgage loans to third parties, which are not affiliated with the Bank or us.

General Description of Mortgage Assets and Other Authorized Investments; Investment Policy

The Internal Revenue Code of 1986, as amended (the “Code”), requires us to invest at least 75% of the total value of our assets in real estate assets, which includes residential mortgage loans and commercial mortgage loans, including participation interests in residential or commercial mortgage loans, mortgage- backed securities eligible to be held by REITs, cash, cash equivalents, including receivables and government

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securities, and other real estate assets. We refer to these types of assets as “REIT Qualified Assets”. We may invest up to 25% of the value of a REIT’s total assets in non-real-estate-related securities as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”). Under the Investment Company Act, the term “security” is defined broadly to include, among other things, any note, stock, treasury stock, debenture, evidence of indebtedness, or certificate of interest or participation in any profit sharing agreement or a group or index of securities. The Code also requires that not more than 20% of the value of a REIT’s assets constitute securities issued by taxable REIT subsidiaries and that the value of any one issuer’s securities, other than those securities included in the 75% test, may not exceed 5% of the value of the total assets of the REIT. In addition, under the Code, the REIT may not own more than 10% of the voting securities or more than 10% of the value of the outstanding securities of any one issuer, other than those securities included in the 75% test, the securities of wholly-owned qualified REIT subsidiaries or taxable REIT subsidiaries. Generally, the Code designation for REIT Qualified Assets is less stringent than the Investment Company Act designation for Qualifying Interests, due to the ability under the Code to treat cash and cash equivalents as REIT Qualified Assets and a lower required ratio of REIT Qualified Assets to total assets.

REITs generally are subject to tax at the maximum corporate rate on income from foreclosure property less deductible expenses directly connected with the production of that income. Income from foreclosure property includes gain from the sale of foreclosure property and income from operating foreclosure property, but income that would be qualifying income for purposes of the 75% gross income test is not treated as income from foreclosure property. Qualifying income for purposes of the 75% gross income test includes, generally, rental income and gain from the sale of property not held as inventory or for sale in the ordinary course of a trade or business. In accordance with the terms of the commercial, commercial real estate and residential mortgage participation and servicing agreements, we maintain the authority to decide whether to foreclose on collateral that secures a loan. In the event we determine a foreclosure proceeding is appropriate, we may direct the Bank to prosecute the foreclosure on our behalf. Upon sale or other disposition of foreclosure property, the Bank will remit to us the proceeds less the cost of holding and selling the foreclosure property.

Commercial and Commercial Real Estate Loans

We own participation interests in commercial loans secured by non-real property such as industrial equipment, aircraft, livestock, furniture and fixtures, and inventory. Participation interests acquired in commercial real estate loans are secured by real property such as office buildings, multi-family properties of five units or more, industrial, warehouse and self-storage properties, office and industrial condominiums, retail space, strip shopping centers, mixed use commercial properties, mobile home parks, nursing homes, hotels and motels, churches and farms. In addition, some of our commercial loans are unsecured. Such unsecured loans are more likely than loans secured by real estate or personal property collateral to result in a loss upon default. Commercial and commercial real estate loans also may not be fully amortizing. This means that the loans may have a significant principal balance or “balloon” payment due on maturity. Additionally, there is no requirement regarding the percentage of any commercial or commercial real estate property that must be leased at the time we acquire a participation interest in a commercial or commercial real estate loan secured by such property nor are commercial loans required to have third party guarantees.

Commercial properties, particularly industrial and warehouse properties, generally are subject to relatively greater environmental risks than non-commercial properties. This gives rise to increased costs of compliance with environmental laws and regulations. We may be affected by environmental liabilities related to the underlying real property, which could exceed the value of the real property. Although the Bank has exercised and will continue to exercise due diligence to discover potential environmental liabilities prior to our acquisition of any participation in loans secured by such property, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during our ownership of the participation interests. To the extent that we acquire any participation in loans secured by such real property directly from unaffiliated third parties, we intend to exercise due diligence to discover any such potential

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environmental liabilities prior to our acquisition of such participation. Nevertheless there can be no assurance that we would not incur full recourse liability for the entire cost of any removal and clean up on a property, that the cost of removal and cleanup would not exceed the value of the property or that we could recoup any of the costs from any third party.

The credit quality of a commercial or commercial real estate loan may depend on, among other factors:

Ÿ the existence and structure of underlying leases;

Ÿ the physical condition of the property, including whether any maintenance has been deferred;

Ÿ the creditworthiness of tenants;

Ÿ the historical and anticipated level of vacancies;

Ÿ rents on the property and on other comparable properties located in the same region;

Ÿ potential or existing environmental risks;

Ÿ the availability of credit to refinance the loan at or prior to maturity; and

Ÿ the local and regional economic climate in general.

Foreclosures of defaulted commercial or commercial real estate loans generally are subject to a number of complicating factors, including environmental considerations, which are not generally present in foreclosures of residential mortgage loans.

Home Equity Loans

We own participation interests in home equity loans secured by a first, second or third mortgage which primarily is on the borrower’s residence. These loans typically are made for reasons such as home improvements, acquisition of furniture and fixtures, purchases of automobiles and debt consolidation. Generally, second and third liens are repaid on an installment basis and income is accrued based on the outstanding balance of the loan. First liens are repaid on an amortizing basis. Loans currently underlying the home equity loan participations bear interest at fixed and variable rates.

Residential Mortgage Loans

We have acquired both conforming and non-conforming residential mortgage loans from the Bank. Conforming residential mortgage loans comply with the requirements for inclusion in a loan guarantee or purchase program sponsored by either the Federal Home Loan Mortgage Corporation (“FHLMC”) or the Federal National Mortgage Association (“FNMA”). Under current regulations, the maximum principal balance allowed on conforming residential mortgage loans ranges from $417,000 for one-unit residential loans to $801,950 for four-unit residential loans. Nonconforming residential mortgage loans are residential mortgage loans that do not qualify in one or more respects for purchase by FHLMC or FNMA under their standard programs. A majority of the non-conforming residential mortgage loans acquired by us to date are non-conforming because they have original principal balances which exceeded the requirements for FHLMC or FNMA programs, the original terms are shorter than the minimum requirements for FHLMC or FNMA programs at the time of origination, the original balances are less than the minimum requirements for FHLMC or FNMA programs, or generally because they vary in certain other respects from the requirements of such programs other than the requirements relating to creditworthiness of the mortgagors.

Each residential mortgage loan is evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first lien on one-to-four family residential property. Residential real estate properties underlying residential mortgage loans consist of single-family detached units, individual condominium units, two-to-four-family dwelling units and townhouses.

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Our portfolio of residential mortgage loans currently consists of both adjustable and fixed rate mortgage loans and we may purchase additional interests in both types of residential mortgage loans in the future. Fixed rate mortgage loans currently consist of the following fixed rate product types:

Fixed Rate Mortgage Loans:    A mortgage loan that bears interest at a fixed rate for the term of the loan. Such loans generally mature in 15, 20, 25 or 30 years.

Government Fixed Rate Loans:    A fixed rate mortgage loan originated under a specific governmental agency program; for example, the Federal Housing Authority or the Veterans Administration. Such loans generally mature in 15 or 30 years and may be guaranteed by a government agency.

Balloon Mortgage Loans:    A fixed rate mortgage loan having original or modified terms to maturity for a specified period, which is typically 5, 7, 10 or 15 years, at which time the full outstanding principal balance on the loan will be due and payable. Such loans provide for level monthly payments of principal and interest based on a longer amortization schedule, generally 30 years. Some of these loans may have a conditional refinancing option at the balloon maturity, which provides that, in lieu of repayment in full, the loan may be modified to a then-current market interest rate for the remaining unamortized term. None of the residential balloon mortgage loans in the portfolio have yet reached the balloon maturity.

Adjustable rate mortgage loans, or ARMs, currently consist of the following adjustable rate product types:

Conventional:

One-year Adjustable Rate Loans:    A loan with interest adjustments in 12-month intervals. Payment frequencies may include biweekly, semimonthly or monthly. Such loans may have yearly and lifetime caps on the amount the interest rate may change at an interval. The interest rate change calculation is typically tied to a Treasury or LIBOR index rate. Typically, the interest rate is based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year plus the margin stated in the note, subject to rounding and any caps.

Various Adjustable Rate Loans:    A one-year ARM that is fixed for one of a number of various time periods which are typically between 3 and 10 years. After the initial fixed time period, the interest adjusts in 12- month intervals with caps on the initial change and each subsequent annual change and may be subject to a maximum cap on lifetime changes. Typically, the interest is based on the same Treasury security as the one-year ARM or the LIBOR index rate and is calculated using the margin and caps stated in the note.

Government:    An adjustable rate loan originated under a specific government agency program. Generally, the interest rate adjusts in 12-month intervals, and is based on specific requirements for date of index and calculations.

Dividend Policy

We currently expect to distribute annually an aggregate amount of dividends with respect to our outstanding capital stock equal to approximately 100% of our REIT taxable income, which excludes capital gains. In order to remain qualified as a REIT, we are required to distribute annually at least 90% of our REIT taxable income to our shareholders.

Dividends are authorized and declared at the discretion of our board of directors. Factors that would generally be considered by our board of directors in making this determination are our distributable funds, financial condition and capital needs, the impact of current and pending legislation and regulations, economic conditions, tax considerations and our continued qualification as a REIT. We currently expect that both our cash available for distribution and our REIT taxable income will be in excess of the amounts needed to pay dividends on all outstanding series of preferred securities, even in the event of a significant drop in interest rate levels because:

Ÿ substantially all of our mortgage assets and other authorized investments are interest-bearing;

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Ÿ while from time-to-time we may incur indebtedness, we will not incur an aggregate amount that exceeds 20% of our stockholders’ equity;

Ÿ we expect that our interest-earning assets will continue to exceed the liquidation preference of our preferred stock; and

Ÿ we anticipate that, in addition to cash flows from operations, additional cash will be available from principal payments on our loan portfolio.

Accordingly, we expect that we will, after paying the dividends on all classes of preferred securities, pay dividends to holders of shares of our common stock in an amount sufficient to comply with applicable requirements regarding qualification as a REIT.

Under certain circumstances, including any determination that the Bank’s relationship to us results in an unsafe and unsound banking practice, the Office of the Comptroller of the Currency (the “OCC”) has the authority to issue an order that restricts our ability to make dividend payments to our shareholders, including holders of the Series A preferred securities. Banking capital adequacy rules limit the total dividend payments made by a consolidated banking entity to be the sum of earnings for the current year and prior two years less dividends paid during the same periods. Any dividends paid in excess of this amount can only be made with the approval of the Bank’s regulator.

Conflicts of Interest and Related Management Policies and Programs

General.    In administering our loan portfolio and other authorized investments pursuant to the participation and servicing agreements, the Bank has a high degree of autonomy. The Bank has, however, adopted certain policies to guide the administration with respect to the acquisition and disposition of assets, use of capital and leverage, credit risk management, and certain other activities. These agreements with the Bank may be amended from time to time at the discretion of our board of directors and, in certain circumstances, subject to the approval of a majority of our Independent Directors, but without a vote of our shareholders, including holders of the Series A preferred securities.

Asset Acquisition and Disposition Policies.    It is our policy to purchase, or accept as capital contributions, loans or participation interests in loans from the Bank or its affiliates that generally are:

Ÿ performing, meaning they have no more than two payments past due, if any;

Ÿ in accrual status; and

Ÿ secured by real property such that they are REIT Qualified Assets.

We may, however, from time to time acquire loans or participation interests in loans directly from unaffiliated third parties. It is our intention that any loans or participation interests acquired directly from unaffiliated third parties will meet the same general criteria as the loans or participation interests we acquire from the Bank or its affiliates.

Our policy also allows for investment in loans or assets that are not REIT Qualified Assets up to but not exceeding the statutory limitations imposed on organizations that qualify as a REIT under the Code. In the past, we have purchased or accepted as capital contributions loans and participation interests in loans both secured and not secured by real property along with other assets. We anticipate that we will acquire, or receive as capital contributions, interests in additional real estate-secured loans from the Bank or its affiliates. We may from time to time acquire loans or loan participation interests from unaffiliated third parties. We may use any proceeds received in connection with the repayment or disposition of loan participation interests in our portfolio to acquire additional loans. Although we are not precluded from purchasing additional types of loans, loan participation interests or other assets, we anticipate that participation interests in additional

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loans acquired by us will be of the types described above under the heading “—General Description of Mortgage Assets and Other Authorized Investments; Investment Policy”. In addition, we will not invest in assets that are not REIT Qualified Assets if such investments would cause us to violate the requirements for taxation as a REIT under the Code.

We may from time to time acquire a limited amount of other authorized investments. Although we currently do not intend to acquire any mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans that are secured by single-family residential, multi-family or commercial real estate properties located throughout the United States, we are not restricted from doing so. We do not intend to acquire any interest-only or principal-only mortgage-backed securities. At December 31, 2006, we did not hold any mortgage-backed securities.

We currently anticipate that the Bank or its affiliates will continue to act as servicer of any additional commercial loans that we acquire through purchase or participation interests from the Bank or its affiliates. We anticipate that any such servicing arrangement that we enter into in the future with the Bank or its affiliates will contain fees and other terms that most likely will be substantially equivalent to but may be more favorable to us than those that would be contained in servicing arrangements entered into with unaffiliated third parties. To the extent we acquire additional loans or participation interests from unaffiliated third parties, we anticipate that such loans or participation interests may be serviced by entities other than the Bank or its affiliates. It is our policy that any servicing arrangements with unaffiliated third parties will be consistent with standard industry practices.

In accordance with the terms of the commercial, commercial real estate and residential loan participation and servicing agreements, we maintain the authority to decide whether to foreclose on collateral that secures a loan. In the event we determine a foreclosure proceeding is appropriate, we may direct the Bank to prosecute the foreclosure on our behalf. Upon sale or other disposition of foreclosure property, the Bank will remit to us the proceeds less the cost of holding and selling the foreclosure property.

Credit Risk Management Policies.    For a description of our credit risk management policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Governance and Administration”.

Conflict of Interest Policies.    Because of the nature of our relationship with the Bank or its affiliates, it is likely that conflicts of interest will arise with respect to certain transactions, including, without limitation, our acquisition of participation interests in loans from, or disposition of participation interests in loans to, the Bank, foreclosure on defaulted loans, management of the cash collateral related to the interest rate swaps and the modification of either the participation or servicing agreements. It is our policy that the terms of any financial dealings with the Bank will be consistent with those available from third parties in the lending industry.

Conflicts of interest among us and the Bank or its affiliates may also arise in connection with making decisions that bear upon the credit arrangements that the Bank or its affiliates may have with a borrower under a loan. Conflicts also could arise in connection with actions taken by us or the Bank or its affiliates. It is our intention that any agreements and transactions between us on the one hand, and the Bank or its affiliates on the other hand, including, without limitation, any loan participation agreements, be fair to all parties and consistent with market terms for such types of transactions. The requirement in our certificate of incorporation that certain of our actions be approved by a majority of our Independent Directors also is intended to ensure fair dealings among us and the Bank or its affiliates. There can be no assurance, however, that any such agreement or transaction will be on terms as favorable to us as could have been obtained from unaffiliated third parties.

Other Policies.    We intend to operate in a manner that will not subject us to regulation under the Investment Company Act. Therefore, we do not intend to:

Ÿ invest in the securities of other issuers for the purpose of exercising control over such issuers;

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Ÿ underwrite securities of other issuers;

Ÿ actively trade in loans or other investments;

Ÿ offer securities in exchange for property; or

Ÿ make loans to third parties, including our officers, directors or other affiliates.

The Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate”. We refer to these interests as “Qualifying Interests”. Under current interpretations by the staff of the SEC, in order to qualify for this exemption, we, among other things, must maintain at least 55% of our assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The provisions of the Investment Company Act therefore may limit the assets that we may acquire. We have established a policy of limiting authorized investments that are not Qualifying Interests to no more than 20% of the value of our total assets to comply with these provisions.

We currently make investments and operate our business in such a manner consistent with the requirements of the Code to qualify as a REIT. However, future economic, market, legal, tax or other considerations may cause our board of directors, subject to approval by a majority of our Independent Directors, to determine that it is in our best interest and the best interest of our shareholders to revoke our REIT status. The Code prohibits us from electing REIT status for the four taxable years following the year of such revocation. See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Servicing

The loans currently in our portfolio are serviced by the Bank or its affiliates pursuant to the terms of participation and servicing agreements between the Bank and its affiliates and us. The Bank has delegated servicing responsibility of the residential mortgage loans to third parties that are not affiliated with us or the Bank or its affiliates.

We pay the Bank a monthly loan servicing fee for its services under the terms of the loan participation and servicing agreements. The amount and terms of the fee are determined by mutual agreement of the Bank and us from time to time during the terms of the participation and servicing agreements.

Included in loan servicing costs were fees paid to the Bank for the years ended December 31, 2006 and 2005, of $54.2 million and $30.3 million, respectively. In 2006 and 2005, the monthly fee with respect to the commercial loans was equal to the total committed amount of each loan multiplied by a fee of 0.025% per annum. For home equity loans, the monthly fee was equal to the outstanding principal balance of each loan multiplied by 0.50% per annum.

The participation and servicing agreements currently in place require the Bank to service the loans in our portfolio in a manner substantially the same as for similar work performed by the Bank for transactions on its own behalf. The Bank or its affiliates collect and remit principal and interest payments, maintain perfected collateral positions, and submit and pursue insurance claims. The Bank and its affiliates also provide accounting and reporting services required by us for our participation interests and loans. We also may direct the Bank to dispose of any loans that are classified as nonperforming, are placed in a nonperforming status or are renegotiated due to the financial deterioration of the borrower. The Bank is required to pay all expenses related to the performance of its duties under the participation and servicing agreements, including any payment to its affiliates or third parties for servicing the loans.

In accordance with the terms of the commercial, commercial real estate and residential loan participation and servicing agreements currently in place, we maintain the authority to decide whether to foreclose on collateral that secures a loan. In the event we determine a foreclosure proceeding is appropriate,

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we may direct the Bank to prosecute the foreclosure on our behalf. Upon sale or other disposition of foreclosure property, the Bank will remit to us the proceeds less the cost of holding and selling the foreclosure property.

To the extent we acquire additional loans or participation interests directly from unaffiliated third parties in the future, we may also enter into servicing agreements with such unaffiliated third parties.

Competition

In order to qualify as a REIT under the Code, we can only be a passive investor in real estate loans and certain other assets. Thus, we do not originate loans. We anticipate that we will continue to possess interests in mortgage and other loans in addition to those in the current portfolio and that a majority of all of these loans will be obtained from the Bank, although we may also purchase loans from unaffiliated third parties. The Bank competes with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring and originating loans. To the extent we acquire additional loans or participation interests directly from unaffiliated third parties in the future, we will face competition similar to that which the Bank faces in acquiring such loans or participation interests.

Regulatory Considerations

Various 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 financial condition or results of operations.

As a REIT, we are subject to regulation under the Code. The Code requires us to invest at least 75% of the total value of our assets in REIT Qualified Assets. See “—General Description of Mortgage Assets and Other Authorized Investments; Investment Policy” for more detailed descriptions of the requirements of the Code applicable to us. In addition, we intend to operate in a manner that will not subject us to regulation under the Investment Company Act. See “—Conflicts of Interest and Related Management Policies and Programs—Other Policies” for a more detailed description of the requirements we have to follow in order not to be subject to regulation under the Investment Company Act.

Under certain circumstances, including any determination that the Bank’s relationship to us results in unsafe and unsound banking practices, the OCC has the authority to restrict our ability to make dividend payments to our shareholders. See “—Dividend Policy” for a more detailed description of such restrictions.

Moreover, our Series A preferred securities are automatically exchangeable for depositary shares representing Series G, Class A preferred stock of Wachovia at the direction of the OCC if any of the following events occurs:

Ÿ the Bank becomes undercapitalized under the OCC’s “prompt corrective action” regulations;

Ÿ the Bank is placed into conservatorship or receivership; or

Ÿ the OCC, in its sole discretion, anticipates that the Bank may become “undercapitalized” in the near term or takes supervisory action that limits the payment of dividends by us and in connection therewith directs an exchange.

In an exchange, holders of our Series A preferred securities would receive one depositary share representing a one-sixth interest in one share of Wachovia Series G, Class A preferred stock for each of our Series A preferred securities. The Wachovia Series G, Class A preferred stock will be non-cumulative,

10

perpetual, non-voting preferred stock of Wachovia ranking equally upon issuance with the most senior preferred stock of Wachovia then outstanding. If such an exchange occurs, holders of our Series A preferred securities would own an investment in Wachovia and not in us at a time when the Bank’s and, ultimately, Wachovia’s financial condition is deteriorating or the Bank may have been placed into conservatorship or receivership.

For more information concerning Wachovia and the Bank, please see Part IV, Item 15(a) of Wachovia’s Annual Report on Form 10-K for the year ended December 31, 2006, which is incorporated by reference herein (excluding the list of exhibits incorporated therein by reference) and Wachovia’s supplementary consolidating financial information as of December 31, 2006 and 2005, and for the three years ended December 31, 2006, which is filed herewith as Exhibit (99)(a).

Employees

We have two executive officers and approximately 16 additional non-executive officers. Our executive officers are also executive officers of Wachovia. We do not anticipate that we will require any additional employees because employees of the Bank and its affiliates are servicing the loans under the participation and servicing agreements. All of our officers are also officers or employees of Wachovia and/or the Bank. We maintain corporate records and audited financial statements that are separate from those of the Bank. Except as borrowers under home equity or residential mortgage loans, none of our officers, employees or directors will have any direct or indirect pecuniary interest in any mortgage asset to be acquired or disposed of by us or in any transaction in which we have an interest or will engage in acquiring, holding and managing mortgage assets. However, 109 employees of Wachovia or its affiliates, including certain of the executive officers and non-executive officers discussed above, own one Series D preferred security each.

Executive Offices

Our principal executive offices are located at 1620 East Roseville Parkway, Roseville, California 95661 (telephone number (877) 867-7378).

Available Information

Although Wachovia Funding does not maintain its own website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are accessible at no cost on Wachovia’s website, www.wachovia.com, as soon as reasonably practicable after those reports have been electronically filed or submitted to the SEC. These filings are also accessible on the SEC’s website, www.sec.gov.

Item 1A.    Risk Factors.

An investment in Wachovia Funding’s securities may involve risks due to the nature of the business we engage in and activities related to that business. The following are the most significant risks associated with that business:

We are effectively controlled by Wachovia and our relationship with Wachovia and/or the Bank may create potential conflicts of interest.

All of our officers and certain of our directors are also either officers or directors of Wachovia or the Bank or their affiliates. Wachovia, the Bank and Wachovia Preferred Holding control a substantial majority of our outstanding voting shares and, in effect, have the right to elect all of our directors, including independent directors, except under limited circumstances if we fail to pay dividends.

The Bank may have interests that are not identical to our interests. Wachovia, the owner of the Bank’s common stock, may have investment goals and strategies that differ from those of the holders of the Series A

11

preferred securities. Consequently, conflicts of interest between us, on one hand, and the Bank and/or Wachovia, on the other hand, may arise.

We are dependent on the officers and employees of Wachovia and the Bank for our business activities and our relationship with Wachovia and/or the Bank may create potential conflicts of interest.

Wachovia and the Bank are involved in virtually every aspect of our existence. The Bank administers our day-to-day activities under the terms of participating and servicing agreements between the Bank and us. We are dependent on the diligence and skill of the officers and employees of the Bank for the selection, structuring and monitoring of the loans in our portfolio and our other authorized investments and business opportunities. The Bank manages our cash collateral related to our interest rate swaps.

Despite our belief that the terms of the loan participation and servicing agreements between the Bank and us reflect terms consistent with those negotiated on an arms-length basis, our dependency on the Bank’s officers and employees and our close relationship with the Bank may create potential conflicts of interest. Specifically, such conflicts of interest may arise because the employees of the Bank have the power to set the amount of the service fees paid to the Bank, modify the loan participation and servicing agreements, and make business decisions with respect to servicing of the underlying loans, particularly the loans that are placed on non-accrual status or are otherwise non-performing.

The loans in our portfolio are subject to economic conditions that could negatively affect the value of the collateral securing such loans and/or the results of our operations.

The value of the collateral underlying our loans and/or the results of our operations could be affected by various conditions in the economy, such as:

Ÿ changes in interest rates;

Ÿ local and other economic conditions affecting real estate and other collateral values;

Ÿ sudden or unexpected changes in economic conditions, including changes that might result from terrorist attacks and the United States’ response to such attacks;

Ÿ the continued financial stability of a borrower and the borrower’s ability to make loan principal and interest payments, which may be adversely affected by job loss, recession, divorce, illness or personal bankruptcy;

Ÿ the ability of tenants to make lease payments;

Ÿ the ability of a property to attract and retain tenants, which may be affected by conditions such as an oversupply of space or a reduction in demand for rental space in the area, the attractiveness of properties to tenants, competition from other available space, and the ability of the owner to pay leasing commissions, provide adequate maintenance and insurance, pay tenant improvement costs, and make other tenant concessions;

Ÿ interest rate levels and the availability of credit to refinance loans at or prior to maturity; and

Ÿ increased operating costs, including energy costs, real estate taxes, and costs of compliance with environmental controls and regulations.

If we lose our exemption under the Investment Company Act it could have a material adverse effect on us.

We believe that we are not, and intend to conduct our operations so as not to become, regulated as an investment company under the Investment Company Act. Under the Investment Company Act, a non-exempt entity that is an investment company is required to register with the SEC and is subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods,

12

management, capital structure, dividends and transactions with affiliates. If a change in the laws or the interpretations of those laws were to occur we could be required to either change the manner in which we conduct our operations to avoid being required to register as an investment company or register as an investment company, either of which could have a material adverse effect on us and the price of our securities. Further, in order to ensure that we at all times continue to qualify for the exemption we may be required at times to adopt less efficient methods of financing certain of our assets than would otherwise be the case and may be precluded from acquiring certain types of assets whose yield is somewhat higher than the yield on assets that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower at times our net interest income. Finally, if we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period we were determined to be an unregistered investment company.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Wachovia Funding does not own any properties and our primary executive offices are used primarily by affiliates of Wachovia. Because we do not have any of our own employees who are not also employees of Wachovia or the Bank, we do not need office space for such employees. All officers of Wachovia Funding are also officers of Wachovia or the Bank and perform their services from office space owned or leased by Wachovia or the Bank, as applicable.

Item 3.    Legal Proceedings.

We, Wachovia and the Bank are not currently involved in nor, to our knowledge, currently threatened with any material litigation with respect to the assets included in our portfolio, other than routine litigation arising in the ordinary course of business. Based on information currently available, advice of counsel, available insurance coverage and established reserves, we believe that the eventual outcome of the litigation with respect to the assets included in our portfolio will not, in the aggregate, have a material adverse effect on our 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 our results of operations for any particular period. Although we are not a party to the inquiry described below, it does involve Wachovia and our independent auditors, KPMG LLP.

In the Matter of KPMG LLP Certain Auditor Independence Issues.    As previously reported in Wachovia Funding’s reports filed with the SEC, the SEC has requested Wachovia to produce certain information concerning any agreements or understandings by which Wachovia referred clients to KPMG LLP during the period from January 1, 1997, to November 2003 in connection with an inquiry regarding the independence of KPMG LLP as Wachovia’s outside auditors during such period. Wachovia 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. Wachovia believes the SEC’s inquiry relates to certain tax services offered to Wachovia‘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 Wachovia, as defined by applicable accounting and SEC regulations requiring auditors of an SEC-reporting company to be independent of Wachovia Funding. Wachovia 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 Wachovia that during all periods covered by the SEC’s inquiry, including the present, KPMG LLP was and is “independent” from Wachovia under applicable accounting and SEC regulations.

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Disclosure of Tax Shelter Penalties

None.

Item 4.    Submission of Matters to a Vote Of Security Holders.

Not applicable.

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PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

General

Our common stock is 99.85% owned by Wachovia Preferred Holding and 0.15% owned by Wachovia and is not listed on any securities exchange. Wachovia Funding’s Series A preferred securities have been listed on the NYSE since January 10, 2003.

In connection with a series of corporate transactions that occurred in July 2002, (i) Wachovia Funding issued and sold 913 shares of its Series D preferred securities, liquidation preference $1,000, to Wachovia Realty Management Corporation, a Delaware corporation and an affiliate of Wachovia, for a purchase price of $913,000, and (ii) 99,851,752 and 148,148 shares of Wachovia Funding common stock, par value $0.01 per share, were issued to the Bank and Wachovia, respectively, as part of the merger of First Union Real Estate Asset Company of Connecticut, a Virginia corporation and an affiliate of Wachovia, with and into Wachovia Funding in consideration of the Bank’s and Wachovia’s common stock of First Union Real Estate Asset Company of Connecticut. On July 31, 2002, Wachovia Realty Management Corporation liquidated into its parent, and the shareholders of its Series D preferred securities received the Wachovia Funding Series D preferred securities as their liquidation distribution. Each of these issuances and sales was made in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Series D preferred securities are not convertible or exchangeable into any other security and Wachovia Funding does not anticipate that the Series D preferred securities will be registered under the Securities Act. Wachovia Funding used the proceeds from the issuance and sale of the common stock and Series D preferred securities for general corporate purposes.

Prior to the December 2002 public offering of Wachovia Funding’s Series A preferred securities, Wachovia Preferred Holding acquired (i) 30,000,000 of Wachovia Funding’s Series A preferred securities, liquidation preference $25.00 per security, (ii) 40,000,000 of Wachovia Funding’s Series B preferred securities, liquidation preference $25.00 per security, and (iii) 4,233,754 of Wachovia Funding’s Series C preferred securities, liquidation preference $1,000 per security. The Series A, Series B and Series C preferred securities were acquired by Wachovia Preferred Holding in exchange for participations in commercial and commercial real estate loans with an aggregate fair value of $6.0 billion. The issuance of Wachovia Funding’s Series A, Series B and Series C preferred securities to Wachovia Preferred Holding was made in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act. The Series A and Series B preferred securities are conditionally exchangeable, upon certain regulatory events, into preferred stock (or depositary shares representing such stock) of Wachovia.

In December 2002 and June 2003, Wachovia Preferred Holding sold 18,000,000 shares and 12,000,000 shares, respectively, of our Series A preferred securities in registered public offerings. Wachovia Funding did not receive any of the proceeds from these offerings.

Dividends

For the year ended December 31, 2006, Wachovia Funding declared and paid (i) cash dividends of $1.81 per share of its Series A preferred securities, (ii) cash dividends of $1.73 per share of its Series B preferred securities, (iii) cash dividends of $59.49 per share of its Series C preferred securities, and (iv) cash dividends of $85.00 per share of its Series D preferred securities. The Series A, Series B and Series C preferred securities were issued in November 2002. Wachovia Funding also paid dividends of $6.35 per share on its common stock in 2006. Please see “—Item 1. Business–Dividend Policy” for a description of our policies regarding dividends.

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Equity Compensation Plans

Wachovia Funding does not have any equity compensation plans. Our two executive officers are also executive officers of Wachovia and receive certain equity-based compensation from Wachovia. See “Executive Compensation” in our definitive proxy statement to be filed no later than April 30, 2007, for more information on such equity-based compensation.

Recent Sales of Unregistered Securities

Not applicable.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

Item 6.    Selected Consolidated Financial Data.

The following selected consolidated financial data for the five years ended December 31, 2006, are derived from our audited consolidated financial statements. This data should be read in conjunction with the consolidated financial statements, related notes and other financial information presented elsewhere in this Annual Report on Form 10-K and Wachovia’s unaudited supplementary consolidating financial information as of December 31, 2006 and 2005, and for the three years ended December 31, 2006, which includes certain consolidated financial information for the Bank, which is filed herewith as Exhibit (99)(a).

	Years Ended December 31,
(In thousands)	2006			2005			2004		2003		2002
INCOME STATEMENT DATA
Net interest income	$	1,138,293			787,541		400,653		381,609		197,576
Provision for credit losses		(9,251	)		1,211		(3,390	)	15,278		15,215
Other income		16,070			6,959		13,914		14,288		76,130
Noninterest expense		104,039			67,641		39,882		26,846		9,869
Net income	$	1,046,154			721,522		372,419		348,477		305,800
BALANCE SHEET DATA
Cash and cash equivalents	$	1,382,021			1,484,535		970,667		926,175		851,692
Loans, net of unearned income		16,795,417			16,196,661		10,909,529		11,137,614		10,947,583
Allowance for loan losses		(81,350	)		(96,115	)	(99,932	)	(104,201	)	(104,737	)
Interest rate swaps		337,307			393,211		459,838		519,006		577,684
Total assets		18,764,618			18,289,019		12,316,637		12,511,277		12,460,564
Collateral held on interest rate swaps		336,649			392,800		458,265		519,460		575,820
Total liabilities		933,426			493,369		555,021		761,723		661,163
Total stockholders’ equity	$	17,831,192		$	17,795,650		11,761,616		11,749,554		11,799,401
SELECTED OTHER INFORMATION
Nonperforming loans	$	19,682			20,353		20,247		18,508		16,299
Nonperforming loans as a % of total loan		0.12	%		0.13		0.19		0.17		0.15
Nonperforming loans as a % of total assets		0.10			0.11		0.16		0.15		0.13
Allowance for loan losses as a % of nonperforming loans		413.32			472.24		493.56		563.01		642.60
Allowance for loan losses as a % of total loans		0.48	%		0.59		0.92		0.94		0.96

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with selected consolidated financial data, set forth in Item 6 and our audited consolidated financial statements and related notes included in this Form 10-K. In addition to historical information, the discussion in this Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors including, but not limited to, those factors set forth under “—Risk Governance and Administration” and elsewhere in this Form 10-K. See also “Forward-Looking Statements” in Part I above.

For the tax year ended December 31, 2006, we expect to be taxed as a REIT and we intend to comply with the relevant provisions of the Code to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of our earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, with the exception of the income of our taxable REIT subsidiary, WPR, we will not be subject to federal income tax on net income. We currently believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT. We continue to monitor each of these complex tests.

In the event we do not continue to qualify as a REIT, we believe there should be minimal adverse effect of that characterization to us or to our shareholders:

Ÿ From a shareholder’s perspective, the dividends we pay as a REIT are ordinary income not eligible for the dividends received deduction for corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If we were not a REIT, dividends we pay generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers.

Ÿ In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wachovia has agreed to make a capital contribution to us equal in amount to any income taxes payable by us. Therefore, a failure to qualify as a REIT would not result in any net liability to us.

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 the allowance for loan losses policy as being particularly sensitive in terms of judgments and the extent to which estimates are used. Periodically, the Audit Committee of our board of directors reviews these policies, the judgment and estimation processes involved, and related disclosures.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses and reserve for unfunded lending commitments (collectively, the “allowance for credit losses”) are maintained at levels we believe are adequate to absorb probable losses inherent in the loan portfolio and unfunded commercial 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.

As a subsidiary of Wachovia, our loans are subject to the same analysis of the adequacy of the allowance for loan losses as loans maintained in all of Wachovia’s subsidiaries including the Bank. Wachovia employs a variety of modeling and estimation tools for measuring credit risk. These tools are periodically reevaluated and refined, as appropriate.

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The following provides a description of Wachovia’s methodology.

Our model for the allowance for loan losses has four components: formula-based components for both the commercial and consumer portfolios, each including an 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 by credit grade. Average losses for each credit grade reflect the annualized historical default rate and the average losses realized for defaulted loans.

For consumer loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed by product classification. Average losses for each product class are computed using historical loss data, including analysis of delinquency patterns, origination vintage and various credit risk forecast indicators.

For both commercial and consumer loans, the formula-based 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, 2006, the formula-based components of the allowance were $40.5 million for commercial loans and $40.8 million for consumer loans compared with $55.8 million and $40.3 million, respectively, at December 31, 2005.

When applicable, specific reserves are established 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 $10.0 million. 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, 2006 and 2005, we did not have any impaired loans over $10.0 million.

The allowance for loan losses may be supplemented with an unallocated component which reflects the inherent uncertainty of our estimates. The amount of this component and its relationship to the total allowance for loan losses may change from one period to another as facts and circumstances dictate. We anticipate the unallocated component of the allowance will generally not exceed 5 percent of the total allowance for loan losses. There was no unallocated component at December 31, 2006 or 2005.

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 time of default. At December 31, 2006 and 2005, the reserve for unfunded lending commitments was $306,000 and $513,000, respectively.

The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments as described above does 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 the related commercial commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.

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Results of Operations

For purposes of this discussion, the term “loans” includes loans and loan participation interests, the term “residential loans” includes home equity loans and residential mortgages and the term “commercial loans” includes commercial and commercial real estate loans. See Table 1, Performance and Dividend Payout Ratios, following “—Accounting and Regulatory Matters” for certain performance and dividend payout ratios for the years ended December 31, 2006, 2005 and 2004.

Although we have the authority to acquire interests in an unlimited number of loans and other assets from unaffiliated third parties, the majority of our interests in loans that we have acquired have been acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or an affiliate and us. Substantially all of our assets were acquired directly from the Bank. The Bank either originated the mortgage assets, or purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions.

In each of the years in the three-year period ended in 2006, Wachovia Funding purchased loans from the Bank at fair value. In 2006, 2005, and 2004, Wachovia Funding paid $5.2 billion, $4.2 billion and $2.9 billion, respectively, for residential loans.

2006 to 2005 Comparison

On June 30, 2005, we received a contribution of assets, consisting of home equity loans and related interest receivable, having a carrying amount of approximately $6.0 billion. The contribution of these loans resulted in significant increases in interest income and loan servicing costs in 2006 when compared with 2005. See “Transactions with Related Parties” for additional information related to this contribution of assets.

Net income available to common stockholders.    We earned net income available to common stockholders of $670.5 million in 2006 and $439.8 million in 2005. This increase was driven by higher net interest income.

Interest Income.    Interest income of $1.2 billion in 2006 increased $368.7 million, or 46%, compared with 2005. This was driven by a $332.2 million increase in interest income in home equity loans to $740.7 million in 2006 which primarily reflects the impact of the $6.0 billion contribution, as well as the reinvestment of pay-downs. Average home equity loans increased $4.6 billion to $10.9 billion in 2006 compared with 2005 while average commercial loans decreased $1.4 billion to $4.3 billion in the same period due to pay-downs. Commercial loan pay-downs were reinvested in home equity loans. Average residential mortgages decreased $559.3 million to $1.2 billion in 2006 compared to the prior year due to pay-downs. We currently anticipate that we will continue to reinvest all loan pay-downs in residential loans. Interest income on cash invested in overnight Eurodollar deposits increased $40.4 million to $73.8 million in 2006 compared with 2005 due to higher cash balances during the period and the increase in short-term interest rates. See the interest rate risk management section under “Risk Governance and Administration” for more information on interest rates and interest income.

The average balances, interest income and rates related to interest-earning assets for the two years ended December 31, 2006, are presented below.

	Year Ended December 31, 2006					Year Ended December 31, 2005
(In thousands)	Average Balances		Interest Income	Interest Rates		Average Balances		Interest Income	Interest Rates
Commercial loans	$	4,332,833	289,321	6.68	%	$	5,758,032	289,408	5.03	%
Home equity loans		10,937,891	740,679	6.77			6,371,280	408,460	6.41
Residential mortgages		1,240,805	70,852	5.71			1,800,139	74,743	4.15
Interest-bearing deposits in banks and other earning assets		1,481,047	73,823	4.98			1,002,234	33,394	3.33
Total earning assets	$	17,992,576	1,174,675	6.53	%	$	14,931,685	806,005	5.40	%

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The dollar amount of change in interest income related to our interest-earning assets for the year ended December 31, 2006, is presented below.

	2006 Compared with 2005
(In thousands)	Interest Income Variance			Variance Attributable to (a)
				Rate	Volume
EARNING ASSETS
Commercial loans	$	(87	)	83,313	(83,400	)
Home equity loans		332,219		31,219	301,000
Residential mortgages		(3,891	)	23,690	(27,581	)
Interest-bearing deposits in banks and other earning assets		40,429		20,519	19,910
Total earning assets	$	368,670		158,741	209,929

(a) Changes that are not directly attributable to rate or volume are allocated to both rate and volume on an equal basis.

Interest Expense.    Interest expense increased to $36.4 million in 2006 from $18.5 million in 2005. This increase reflects borrowing on our existing line of credit with the Bank, which was incurred to fund our purchases of home equity loans. In addition, average short-term interest rates paid on the collateral held on the interest rate swaps increased in 2006 compared with the prior year. The outstandings on our line of credit with the bank totaled $500.0 million at the end of 2006.

Provision for Credit Losses.    The provision for credit losses was a benefit of $9.3 million in 2006 compared with an expense of $1.2 million in 2005. The benefit in 2006 reflects an update of the factors used in estimating the historical loss variability portion of the allowance for loan losses to reflect the changing risk profile of the overall portfolio. The portfolio’s lower risk profile reflects the continued decrease in commercial loans due to pay-downs, resulting in a larger proportion of our loan portfolio being comprised of lower risk home equity loans. Additionally, the credit quality of both the residential and commercial loans continued to improve during 2006. See “Critical Accounting Policies” for more information on the allowance for loan losses.

Gain on Interest Rate Swaps.    Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate environment. The gain on interest rate swaps was $15.9 million in 2006 compared with a gain of $6.7 million in 2005. The higher gain in 2006 compared with the prior year primarily reflects a lower magnitude of long-term interest rate increases and a higher net present value, as a result of the passage of time, compared with the same period one year ago.

Loan Servicing Costs.    Loan servicing costs increased $23.9 million to $54.2 million in 2006 compared to the prior year which reflects the impact of the $6.0 billion contribution, as well as the impact of reinvesting commercial loan pay-downs in residential loans which have a higher servicing fee. These loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loans, the monthly fee is equal to the outstanding principal balance of each loan multiplied by 0.50% per annum. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by 0.025% per annum.

Management Fees.    Management fees were $47.6 million in 2006 compared with $34.7 million in 2005 due to higher qualifying asset balances which primarily reflects the impact of the $6.0 billion contribution. Management fees represent reimbursements to Wachovia for general overhead expenses paid on our behalf. Wachovia charges the management fees to affiliates that have over $10.0 million in qualifying assets on a monthly basis. If the affiliate qualifies for an allocation, the affiliate is assessed monthly management fees based on its relative percentage of total consolidated assets and noninterest expense plus a 5% markup.

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Other Expense.    Other expense primarily consists of costs associated with foreclosures on residential properties. In 2006 and 2005, these costs were not significant.

Income Taxes.    Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $13.4 million in 2006 compared with $4.1 million in 2005. WPR holds our interest rate swaps as well as certain cash investments. The increase in income tax expense in 2006 was driven by an increase in gains on interest rate swaps as well as higher interest income on cash invested in overnight Eurodollar deposits compared with the prior year. In 2006 and 2005, WPR’s effective income tax rate was 37.85% and 30.96%, respectively.

2006 to 2005 Fourth Quarter Comparison

Net income available to common stockholders increased to $166.5 million in the fourth quarter of 2006 compared with $164.0 million in the fourth quarter of 2005. The majority of the income for both quarters was earned from interest on commercial loans, home equity loans and residential mortgages. Net interest income increased $25.7 million to $293.9 million in the fourth quarter of 2006 compared with the fourth quarter of 2005 due to the impact of a higher yielding mix of loans. Average loans of $16.3 billion in the fourth quarter of 2006 increased $131.9 million, or 1%, from the fourth quarter of 2005. This increase was driven by higher average home equity loans of $11.3 billion compared with $9.4 billion in the fourth quarter of 2005. Substantially offsetting the increase was a $1.3 billion, or 25%, decrease in commercial loans and a $420.6 million, or 27%, decrease in residential mortgages in the same period.

Provision for credit losses was an expense of $2.0 million in the fourth quarter of 2006 compared with an expense of $829,000 in the fourth quarter of 2005. The increased expense in the fourth quarter of 2006 primarily reflects growth in the loan portfolio from the fourth quarter of 2005.

Gains on interest rate swaps were $4.3 million in the fourth quarter of 2006 compared with a gain of $2.0 million in the fourth quarter of 2005. The higher gain in the fourth quarter of 2006 primarily reflects a lower magnitude of long-term interest rate increases and a higher net present value, as a result of the passage of time, compared with the fourth quarter of 2005.

Loan servicing costs increased $2.2 million to $14.1 million in the fourth quarter of 2006 compared with the fourth quarter of 2005 reflecting higher residential loan balances. Management fees of $11.3 million in the fourth quarter of 2006 increased $314,000 over the fourth quarter of 2005 due to higher balances.

Income tax expense was $6.2 million in the fourth quarter of 2006 compared with $1.3 million in the fourth quarter of 2005. The higher income tax expense in the fourth quarter of 2006 was driven by the higher gains on interest rate swaps in the fourth quarter of 2005 as noted above, as well as higher interest income on cash invested in overnight Eurodollar deposits compared with the fourth quarter of 2005.

2005 to 2004 Comparison

On June 30, 2005, we received a contribution of assets, consisting of home equity loans and related interest receivable, having a carrying amount of approximately $6.0 billion. The contribution of these loans resulted in significant increases in interest income and loan servicing costs in 2005 when compared with 2004. See “Transactions with Related Parties” for additional information related to this contribution of assets.

Net Income available to common stockholders.    We earned net income available to common stockholders of $439.8 million in 2005 and $187.1 million in 2004. This increase was driven by higher net interest income.

Interest Income.    Interest income of $806.0 million nearly doubled from the 2004 level. This was primarily driven by a $350.6 million increase in home equity loans interest income to $408.5 million in 2005, which reflects the impact of the $6.0 billion contribution, as well as purchases and the reinvestment of pay-

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downs. Additionally, interest income on commercial loans increased $26.7 million in the same period as the impact of the increasing rate environment exceeded pay-downs. Average home equity loans increased $5.5 billion to $6.4 billion in 2005 while average commercial loans decreased $2.0 billion in the same period due to pay-downs. Commercial loan pay-downs were reinvested in home equity loans, which carry a higher yield than commercial loans. Average residential mortgages decreased $397.9 million to $1.8 billion in 2005 compared with 2004. We currently anticipate we will continue to reinvest all loan pay-downs in residential loans. Interest income primarily from cash invested in overnight eurodollar deposit investments increased $18.9 million to $33.4 million in 2005 compared with 2004 due to the increase in short-term interest rates.

The average balances, interest income and rates related to interest-earning assets for the two years ended December 31, 2005, is presented below.

	Year Ended December 31, 2005					Year Ended December 31, 2004
(In thousands)	Average Balances		Interest Income	Interest Rates		Average Balances		Interest Income	Interest Rates
Commercial loans	$	5,758,032	289,408	5.03	%	$	7,791,875	262,755	3.37	%
Home equity loans		6,371,280	408,460	6.41			920,497	57,829	6.28
Residential mortgages		1,800,139	74,743	4.15			2,198,070	72,459	3.30
Interest-bearing deposits in banks and other earning assets		1,002,234	33,394	3.33			1,028,977	14,468	1.41
Total earning assets	$	14,931,685	806,005	5.40	%	$	11,939,419	407,511	3.41	%

The dollar amount of change in interest income related to our interest-earning assets for the year ended December 31, 2005, is presented below.

	2005 Compared with 2004
(In thousands)	Interest Income Variance		Variance Attributable to (a)
			Rate	Volume
EARNING ASSETS
Commercial loans	$	26,653	112,057	(85,404	)
Home equity loans		350,631	4,688	345,943
Residential mortgages		2,284	17,104	(14,820	)
Interest-bearing deposits in banks and other earning assets		18,926	19,560	(634	)
Total earning assets	$	398,494	153,409	245,085

(a) Changes that are not directly attributable to rate or volume are allocated to both rate and volume on an equal basis.

Interest Expense.    Interest expense increased to $18.5 million in 2005 from $6.9 million in 2004. This increase reflects borrowing on our existing line of credit with the Bank, which was incurred in relation to our purchases of loans, and was paid in full during 2005. In addition, average short-term interest rates paid on the collateral held on the interest rate swaps increased in 2005 compared with 2004.

Provision for Credit Losses.    The provision for credit losses was an expense of $1.2 million in 2005 compared with a benefit of $3.4 million in 2004. The benefit in 2004 included the impact of a refined methodology for the allowance for credit losses. Although our loan portfolio increased significantly in 2005 including the $6.0 billion contribution of home equity loans on June 30, 2005, the portfolio has a larger component of residential loans, which reflect a lower risk profile.

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Gain on Interest Rate Swaps.    Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate environment. The gain on interest rate swaps was $6.7 million in 2005 compared with a gain of $13.8 million in 2004. The lower gain in 2005 compared with 2004 reflects the increasing rate environment in 2005. See “Interest Rate Risk Management” for additional information related to unrealized and realized gains and losses on interest rate swaps.

Loan Servicing Costs.     Loan servicing costs increased $25.6 million to $30.3 million in 2005 and reflects the impact of the $6.0 billion contribution, as well as the impact of reinvesting commercial loan pay-downs in residential loans which have a higher servicing fee. Average home equity loans increased $5.5 billion while average commercial loans decreased $2.0 billion. These loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loans, the monthly fee is equal to the outstanding principal balance of each loan multiplied by 0.50% per annum. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by 0.025% per annum.

Management Fees.    Management fees were $34.7 million in 2005 compared with $33.8 million in 2004. Management fees represent reimbursements to Wachovia for general overhead expenses paid on our behalf. Wachovia charges the management fee to affiliates that have over $10.0 million in qualifying assets on a monthly basis. If the affiliate qualifies for an allocation, the affiliate is assessed monthly management fees based on its relative percentage of total consolidated assets and noninterest expense plus a 5% markup.

Other Expense.    Other expense primarily consists of costs associated with foreclosures on residential properties. In 2005 and 2004, these costs were not significant.

Income Taxes.    Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $4.1 million in 2005 compared with $5.7 million in 2004. WPR holds our interest rate swaps and its pre-tax income in both periods which reflects the gain on interest rate swaps noted above. In 2005 and 2004, WPR’s effective income tax rate was 30.96% and 35.33%, respectively.

Balance Sheet Analysis

December 31, 2006 to December 31, 2005

Total Assets.    Our assets primarily consist of commercial and residential loans, although we have the authority to hold assets other than loans. At December 31, 2006, and December 31, 2005, total assets were $18.8 billion and $18.3 billion, respectively. Net loans were 90% and 89% of total assets at December 31, 2006 and December 31, 2005, respectively.

Loans.    Net loans increased $598.8 million to $16.8 billion at December 31, 2006, compared with December 31, 2005, primarily reflecting an increase in home equity loans resulting from $5.2 billion in reinvestments offset by pay-downs across the entire portfolio. At December 31, 2006 and December 31, 2005, home equity loans comprised 71% and 61% of loans, respectively, and commercial loans comprised 23% and 31%, respectively. See the “Allowance for Loan Losses” section of “Critical Accounting Policies” and Table 2, Loan Losses and Recoveries of Past Due Loans, following “—Accounting and Regulatory Matters” for additional information related to loans.

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Commercial loan maturities for the years ended December 31, 2006 and 2005, is presented below.

	Commercial and Commercial Real Estate
	December 31,
(In thousands)	2006		2005
FIXED RATE
1 year or less	$	11,090	25,413
1-5 years		70,062	73,280
After 5 years		123,733	127,404
Total fixed rate		204,885	226,097
ADJUSTABLE RATE
1 year or less		700,003	1,006,642
1-5 years		1,681,105	2,072,041
After 5 years		1,194,118	1,654,246
Total adjustable rate		3,575,226	4,732,929
Total	$	3,780,111	4,959,026

Allowance for Loan Losses.    The allowance for loan losses decreased $14.8 million from December 31, 2005, to $81.4 million at December 31, 2006. The allowance to loans ratio decreased to 0.48% at December 31, 2006, compared with 0.59% at December 31, 2005, reflecting overall credit quality improvement and changes in the composition of our loan portfolio to a greater percentage of home equity loans, which have a lower risk profile. See Table 2, Loan Losses and Recoveries and Past Due Loans, following “—Accounting and Regulatory Matters” for additional information.

The reserve for unfunded lending commitments, which is included in other liabilities, was $306,000 at December 31, 2006, compared with $513,000 at December 31, 2005. The decline related to declining outstanding commitments in our commercial loan portfolio.

Interest Rate Swaps.    Interest rate swaps decreased to $337.3 million at December 31, 2006, from $393.2 million at December 31, 2005, which represents the fair value of our net position in interest rate swaps. The fair value decreases during a rising interest rate environment and as cash is received.

Accounts Receivable—Affiliates, Net.    Accounts receivable from affiliates, net was $233.5 million at December 31, 2006, compared with $224.2 million at December 31, 2005, as a result of intercompany cash transactions related to net loan paydowns, interest receipts and funding with the Bank.

Collateral Held on Interest Rate Swaps.    Collateral held on interest rate swaps decreased to $336.6 million at December 31, 2006, from $392.8 million at December 31, 2005, reflecting the decrease in the fair value of the interest rate swaps.

Commitments

Our commercial loan relationships include unfunded loan commitments that are provided in the normal course of business. For commercial borrowers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For lending commitments, the contractual amount of a commitment represents the maximum potential credit risk if the entire commitment is funded and the borrower does not perform according to the terms of the contract. A large majority of these

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commitments expire without being funded, and accordingly, total contractual amounts are not representative of our actual future credit exposure or liquidity requirements. The “—Risk Governance and Administration—Credit Risk Management” section describes how Wachovia, as owner of the Bank which originates and services the loans, manages credit risk when extending credit.

Loan commitments create credit risk in the event that the counterparty draws on the commitment and subsequently fails to perform under the terms of the lending agreement. This risk is incorporated into an overall evaluation of credit risk and to the extent necessary, reserves are recorded on these commitments. Uncertainties around the timing and amount of funding under these commitments may create liquidity risk. The “—Risk Governance and Administration—Liquidity Risk Management” section describes the way we manage liquidity and fund these commitments, to the extent funding is required. At December 31, 2006 and 2005, unfunded commitments to extend credit were $814.7 million and $709.2 million, respectively. The increase in unfunded commitments was largely due to the timing of pay-downs and the expiration of commitments on commercial loans.

Liquidity and Capital Resources

Our internal sources of liquidity are primarily cash generated from interest and principal payments on loans in our portfolio. Our primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or prepay, and pay dividends. We expect to distribute annually an aggregate amount of dividends with respect to our outstanding capital stock equal to approximately 100 percent of our REIT taxable income, which primarily results from interest income on our loan portfolio. Proceeds received from pay-downs of loans are typically sufficient to fund existing lending commitments and loan purchases. Depending upon the timing of the loan purchases, we may draw on the line of credit we have with the Bank as a short-term liquidity source. Generally, we repay these borrowings within several months as we receive cash on loan pay-downs from our loan portfolio. Under the terms of that facility, we can borrow up to $2.0 billion under a revolving demand note at a rate equal to the federal funds rate. At December 31, 2006, borrowings on our line of credit with the Bank totaled $500 million. Should a longer-term liquidity need arise, we could issue additional common or preferred stock, subject to any pre-approval rights of our shareholders. We do not have and do not anticipate having any material capital expenditures in the foreseeable future. We believe our existing sources of liquidity are sufficient to meet our funding needs.

Risk Governance and Administration

Credit Risk Management

Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms. We incur credit risk by investing in lending and lending-related assets. The nature and amount of credit risk depends on the types of transaction, the structure of that transaction and the parties involved. Credit risk is central to the profit strategy in lending. Since our assets are currently primarily loans originated by the Bank, which is a subsidiary of Wachovia, the following is a discussion of Wachovia’s credit risk management strategies.

Credit risk is managed through a combination of policies and procedures and authorities that are tracked and regularly updated in a centralized database. Wachovia’s 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

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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.

Wachovia’s 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 Wachovia’s board of directors.

Retail Credit.    In 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.

Commercial Credit.    All 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 Risk Adjusted Return on Capital (“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.

Wachovia’s 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 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. Wachovia’s 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 Wachovia’s 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. Wachovia has 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.

To the extent that we acquire loans or participation interests in loans from unaffiliated third parties in the future, we intend to follow substantially similar credit risk management strategies as Wachovia.

Concentration of Credit Risk

Concentration of credit risk generally arises with respect to our loans when a significant number of underlying loans have borrowers that engage in similar business activities or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of performance to both

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positive and negative developments affecting a particular industry. By the nature of Wachovia Funding’s status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, New Jersey, Pennsylvania and North Carolina.

Interest Rate Risk Management

Interest rate risk is the sensitivity of earnings to changes in interest rates. Our loan portfolio was comprised of approximately 31% of variable rate loans at December 31, 2006. In a declining rate environment, we may experience a reduction in interest income on our loan portfolio and a corresponding decrease in funds available to be distributed to our shareholders. The reduction in interest income may result from downward adjustment of the indices upon which the interest rates on loans are based and from prepayments of loans with fixed interest rates, resulting in reinvestment of the proceeds in lower yielding assets. In December 2001, the Bank contributed received-fixed interest rate swaps to us in exchange for common stock. Subsequent to the contribution, we entered into pay-fixed interest rate swaps that serve as an economic hedge to the received-fixed interest rate swaps. Currently, we do not expect to enter into additional derivative transactions, although we may enter into such transactions in the future.

At December 31, 2006, approximately 69% of the loans in our portfolio had fixed interest rates. Such loans tend to increase our interest rate risk. We monitor the rate sensitivity of assets acquired. Our methods for evaluating interest rate risk include an analysis of interest-rate sensitivity “gap”, which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets.

During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution is perfectly matched in each maturity category.

At December 31, 2006, $6.5 billion, or 35% of our assets, had variable interest rates and could be expected to reprice with changes in interest rates. At December 31, 2006, our liabilities were $933.4 million, or 5% of our assets, while stockholders’ equity was $17.8 billion, or 95% of our assets. This positive gap between our assets and liabilities indicates that an increase in interest rates would result in an increase in net interest income and a decrease in interest rates would result in a decrease in net interest income.

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Our rate-sensitive assets and liabilities at December 31, 2006, are presented below. Assets that immediately reprice are placed in the overnight column. The allowance for loan losses is not included in loans. The fair value of $11.6 billion of fixed rate loans and loan participations was approximately $11.5 billion and the fair value of $5.2 billion of variable rate loans approximated their carrying amounts at December 31, 2006.

	December 31, 2006
(In thousands)	Overnight		Within One Year	One to Three Years	Three to Five Years	Over Five Years	Total
RATE-SENSITIVE ASSETS
Interest-bearing deposits in banks	$	1,282,729	300	—	—	—	1,283,029
Loans and loan participations
Fixed rate		—	224,709	674,143	541,288	10,148,505	11,588,645
Variable rate		—	704,896	932,748	830,172	2,771,089	5,238,905
Total rate-sensitive assets	$	1,282,729	929,905	1,606,891	1,371,460	12,919,594	18,110,579
Total rate-sensitive liabilities	$	—	836,649	—	—	—	836,649

We account for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as subsequently amended by SFAS 137, SFAS 138 and SFAS 149, which establishes accounting and reporting standards for derivatives and hedging activities. Under SFAS 133, all our derivatives (currently consisting of interest rate swaps) are recorded at fair value in the balance sheets. When we have more than one transaction with a counterparty and there is a legally enforceable master netting agreement between the parties, the net of the gain and loss positions are recorded as an asset or a liability on our consolidated balance sheets. Realized and unrealized gains and losses are recorded as a net gain or loss on interest rate swaps on our consolidated statements of income.

In 2001, the Bank contributed receive-fixed interest rate swaps with a notional amount of $4.25 billion and a fair value of $673.0 million to us in exchange for common stock. The unaffiliated counterparty to the receive-fixed interest rate swaps provided cash collateral to us. We pay interest to the counterparty on the collateral at a short-term interest rate. Shortly after the contribution of the receive-fixed interest rate swaps, we entered into pay-fixed interest rate swaps with a notional amount of $4.25 billion that serve as an economic hedge of the contributed swaps. All interest rate swaps are transacted with the same unaffiliated third party.

At December 31, 2006, our position in interest rate swaps was an asset of $455.7 million and a liability of $118.4 million, which is recorded net on our consolidated balance sheet at fair value. The following table presents interest rate swap maturities.

	December 31, 2006
(In thousands)	1 Year or Less			1-2 Years	2-5 Years	5-10 Years	After 10 Years	Total
INTEREST RATE SWAP ASSETS
Notional amount	$	—		—	—	4,100,000	—	4,100,000
Weighted average receive rate (a)		—	%	—	—	7.45	—	7.45
Weighted average pay rate (a)		—	%	—	—	5.36	—	5.36
INTEREST RATE SWAP LIABILITIES
Notional amount	$	—		—	—	4,100,000	—	4,100,000
Weighted average receive rate (a)		—	%	—	—	5.36	—	5.36
Weighted average pay rate (a)		—	%	—	—	5.72	—	5.72

(a) All the interest rate swaps have variable pay or receive rates based on three-month LIBOR, and they are the pay or receive rates in effect at December 31, 2006.

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Market Risk Management

Market risk is the risk of loss from adverse changes in market prices and interest rates. Market risk arises primarily from interest rate risk inherent in lending, investment in derivative financial instruments and borrowing activities.

At December 31, 2006, our receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 5.47 years, weighted average receive rate of 7.45% and weighted average pay rate of 5.36%. Our pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 5.47 years, weighted average receive rate of 5.36% and weighted average pay rate of 5.72% at December 31, 2006. All the interest rate swaps have variable pay or receive rates based on three- or six-month LIBOR, and they are the pay or receive rates in effect at December 31, 2006.

Due to the difference in fixed rates in our interest rate swaps, volatility is expected given certain interest rate fluctuations. If market rates were to decrease 100 basis points or 200 basis points, we would recognize short-term net gains on our interest rate swaps of $9.8 million or $20.0 million, respectively. If market rates were to increase 100 basis points or 200 basis points, we would recognize short-term net losses on our interest rate swaps of $9.4 million or $18.5 million, respectively. These short-term fluctuations will eventually offset over the life of the interest rate swaps when held to maturity, with no change in cash flow occurring for the net positions. The changes in value of the net swap positions were calculated under the assumption there was a parallel shift in the LIBOR curve using 100 basis point and 200 basis point shifts, respectively.

Operational Risk Management

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Our assets are primarily loans originated by the Bank, and since we rely on servicing, which includes delegating servicing to third parties in some circumstances, and administrative services from Wachovia or its affiliates, the following is a discussion of Wachovia’s operational risk management strategies. This risk is inherent in all of Wachovia’s businesses.

Operational risk is managed through a Wachovia 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, Wachovia devotes 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 process. Additionally, Wachovia focuses 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. Wachovia believes 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 Wachovia’s compliance group, which works within the business lines but reports centrally to the risk management group under the leadership of Wachovia’s chief compliance officer, who reports to the chief executive officer of Wachovia. This structure allows compliance risk management to consult with the business unit as policies and procedures are developed, and it enables close monitoring of daily activities. As part of Wachovia’s compliance program, Wachovia devotes 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. Wachovia uses 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,

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training, customer communication, compliance, vendors, corporate real estate, technology infrastructure, application systems, operational support and reconcilement. Wachovia pays close attention to the overall organizational capacity and interdependencies, and to our ability to execute.

Wachovia also focuses 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 inherent in the financial services industry. Wachovia links business performance measurements to operational risk through risk profiles, quality of the internal controls and capital allocation.

Liquidity Risk Management

Liquidity 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. Liquidity planning and management are necessary to ensure we maintain the ability to fund operations cost-effectively and to meet current and future potential obligations. In managing liquidity, we take into account various legal limitations placed on us.

Our primary liquidity needs are to pay operating expenses, fund our lending commitments, purchase loans as the underlying loans mature or repay, and pay dividends. Operating expenses and dividends are expected to be funded through cash generated by operations, while funding commitments and the acquisition of additional participation interests in loans is intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers. We do not have and do not anticipate having any material capital expenditures in the foreseeable future.

To the extent that our board of directors determines that additional funding is required, we may raise funds through additional equity offerings, debt financings, retention of cash flow or a combination of these methods. However, any cash flow retention must be consistent with the provisions of the Code requiring the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income. In addition, any necessary liquidity could be obtained by drawing on the line of credit that we have with the Bank. Under the terms of that facility, we can borrow up to $2.0 billion under a revolving demand note at a rate of interest equal to the federal funds rate. During 2006, we made various draws which totaled $2.4 billion under our line of credit with the Bank with a maximum of $1.1 billion outstanding at any point in time. The outstandings on the line of credit with the Bank totaled $500.0 million at the end of 2006.

At December 31, 2006, our liabilities principally consist of cash collateral held on the interest rate swaps. Our certificate of incorporation does not contain any limitation on the amount or percentage of debt, funded or otherwise, we may incur, except the incurrence of debt for borrowed money or our guarantee of debt for borrowed money in excess of amounts borrowed or guaranteed. However, as part of issuing our Series A preferred securities, we have a covenant in which we agree not to incur indebtedness over 20% of our stockholders’ equity unless approved by two-thirds of the Series A preferred securities, voting as a separate class.

Financial Disclosure

As a subsidiary of Wachovia, we are a part of Wachovia’s internal control procedures that include internal controls over financial reporting, which generally includes those controls relating to the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. The following is a discussion of Wachovia’s process of maintaining and evaluating internal controls over financial reporting. Wachovia’s general process of maintaining and evaluating internal controls over financial reporting also includes maintaining and evaluating internal controls over the financial reporting of Wachovia Funding. Wachovia is subject to the internal control reporting and attestation requirements of the Federal Deposit Insurance Corporation Improvement Act, and therefore, it is very familiar with the process of maintaining

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and evaluating its internal controls over financial reporting. Wachovia’s management, including certain of its executive officers who are also executive officers of Wachovia Funding (see “Item I. Business—Employees “), are also focused on “disclosure controls and procedures,” which as defined by the SEC, are generally those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in 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 Wachovia’s chief executive officer and chief financial officer, who are also the chief executive officer and chief financial officer of Wachovia Funding, respectively, as appropriate, to allow timely decisions regarding required disclosure. Additionally, as a part of maintaining and evaluating our internal controls over financial reporting, Wachovia Funding has a stand-alone disclosure committee, which is described in more detail following the discussion below of Wachovia’s disclosure committee.

Wachovia’s disclosure committee, which includes senior representatives of Wachovia from its treasury, risk, legal, accounting and investor relations departments, as well as its four core business segments, the General Bank, Capital Management, Wealth Management, and the Corporate and Investment Bank, assists its senior management in the oversight of the accuracy and timeliness of the disclosures, as well as implementing and evaluating the overall disclosure process. As part of Wachovia’s disclosure process, accounting representatives of its finance division and representatives from its 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 Wachovia’s finance division also conduct further reviews with the senior management team, other appropriate personnel involved in the disclosure process, including Wachovia’s Disclosure Committee and Wachovia’s internal audit, and Wachovia’s independent auditors, who are also our independent auditors, and counsel, as appropriate. Similar reviews are undertaken with respect to our disclosure process. Wachovia’s financial results and other financial information are also reviewed with the Audit Committee of Wachovia’s board of directors on a quarterly basis. Our financial results and other financial information are also reviewed with the Audit & Compliance Committee of our board of directors on a quarterly basis. In addition, accounting representatives of Wachovia’s finance division meet with representatives of the primary federal banking regulators on a quarterly basis to review, among other things, Wachovia’s 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 Wachovia’s representatives. Wachovia’s chief executive officer and chief financial officer also meet with the federal banking regulators on a semiannual basis. As required by applicable regulatory law, Wachovia’s chief executive officer and the chief financial officer, who are also the chief executive officer and the chief financial officer of Wachovia Funding, respectively, review and make various certifications regarding the accuracy of Wachovia’s and Wachovia Funding’s periodic public reports filed with the SEC and Wachovia’s and Wachovia Funding’s disclosure controls and procedures and internal controls over financial reporting. With the assistance of its disclosure committee, Wachovia will continue to assess and monitor the disclosure controls and procedures of Wachovia and Wachovia Funding and will make refinements as necessary.

Wachovia Funding’s disclosure committee, which includes senior representatives from Wachovia’s treasury, legal and accounting departments, assists senior management in the oversight of the accuracy and timeliness of our disclosures, as well as implementing and evaluating the overall disclosure process. As part of Wachovia Funding’s disclosure process, accounting representatives from Wachovia’s finance division prepare and review quarterly and annual financial reports, which are reviewed by our senior management. Accounting representatives in Wachovia’s finance division also conduct further reviews with the senior management team and other appropriate personnel involved in the disclosure process, including Wachovia Funding’s disclosure committee, Wachovia’s internal auditors, and Wachovia Funding’s external auditors, who are also Wachovia’s external auditors, and counsel, as appropriate.

31

Transactions with Related Parties

We are subject to certain income and expense allocations from affiliated parties for various services received. In addition, we enter into transactions with affiliated parties in the normal course of business. The nature of the transactions with affiliated parties is discussed below. Further information, including amounts involved, is presented in Note 6 to Notes to Consolidated Financial Statements.

The Bank services our loans on our behalf, which includes delegating servicing to third parties in the case of residential mortgages. We pay the Bank a 0.025% per annum fee for this service on commercial loans and a 0.50% per annum fee on home equity loans. Servicing fees related to residential mortgages are negotiated when the Bank purchases loans from unrelated third parties, and are based on the purchase price of the loans. Additionally, we are subject to Wachovia’s management fee policy and are allocated a monthly fee from Wachovia for general overhead expenses paid on our behalf if we meet these criteria. We met these criteria in 2006 and 2005 and we expect to continue to meet these criteria in the future, and therefore, we expect we will continue to incur management fee expense. We also have a swap servicing and fee arrangement with the Bank, whereby the Bank provides operations, back office, book entry, record keeping and valuation services related to our interest rate swaps, for which we pay a fee to the Bank as discussed in “Results of Operations”.

Eurodollar deposits with the Bank are our primary cash management vehicle. In each of the years in the three-year period ended in 2006, we have also entered into certain loan participations with affiliates and are allocated a portion of all income associated with these loans.

On June 30, 2005, we received a contribution of assets, comprised of home equity loans, having a carrying amount of approximately $6.0 billion from Wachovia Preferred Holding, our parent corporation. Immediately prior to the contribution, Wachovia Preferred Holding received a contribution of the same assets from the Bank. We did not pay Wachovia Preferred Holding for these contributed assets and they were recorded as an increase to loans and to paid-in capital.

In 2006, we paid the Bank $5.2 billion in cash for home equity loans, which reflected fair value purchase prices. In conjunction with these purchases, we borrowed $2.4 billion under our existing line of credit with the Bank and incurred $17.5 million in interest expense owed to the Bank in 2006. The interest accrued under this line of credit at a rate equal to the federal funds rate. Our existing borrowings on our line of credit with the Bank totaled $500.0 million at December 31, 2006. The Notes to Consolidated Financial Statements has information about the accounting treatment of these loan purchases.

The Bank acts as our collateral custodian in connection with collateral pledged to us related to our interest rate swaps. For this service, we pay the Bank a fee based on the value of the collateral. In addition, the Bank is permitted to rehypothecate and use as its own the collateral held by the Bank as our custodian. The Bank pays us a fee based on the value of the collateral involved for this right. The Bank also provides a guaranty of our obligations under the interest rate swaps when the swaps are in a net payable position, for which we pay a monthly fee based on the absolute value of the net notional amount of the interest rate swaps.

32

Accounting and Regulatory Matters

Various 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 condition or results of operations.

Table 1    PERFORMANCE AND DIVIDEND PAYOUT RATIOS

	Years Ended December 31,
	2006			2005		2004
RATIOS
Return on average assets		5.59	%	4.64		3.02
Return on average stockholders’ equity		5.84		4.86		3.16
Average stockholders’ equity to average assets		95.57		95.52		95.38
Dividend payout ratio		96.60	%	90.18		96.76
Table 2    LOAN LOSSES AND RECOVERIES AND PAST DUE LOANS
	Years Ended December 31,
(In thousands)	2006			2005		2004
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year	$	96,115		99,932		104,201
Provision for credit losses		(9,044	)	1,426		(1,290	)
Allowance relating to loans sold		(1,635	)	(1,526	)	(543	)
Allowance related to loans contributed by the Bank		—		2,057		—
Net charge-offs		(4,086	)	(5,774	)	(2,436	)
Balance, end of year	$	81,350		96,115		99,932
LOAN LOSSES
Commercial and commercial real estate loans	$	148		1,976		437
Residential mortgages		418		56		308
Home equity		4,186		4,614		4,496
Total loan losses		4,752		6,646		5,241
LOAN RECOVERIES
Commercial and commercial real estate loans		12		454		2,242
Residential mortgages		125		—		—
Home equity		529		418		563
Total loan recoveries		666		872		2,805
Net charge-offs	$	4,086		5,774		2,436
Total net charge-offs as % of average loans, net		0.02	%	0.04		0.02
Accruing loans past due 90 days	$	9,772		7,954		4,749
Table 3    RESERVE FOR UNFUNDED LENDING COMMITMENTS
	Years Ended December 31,
(In thousands)	2006			2005		2004
Balance, beginning of year	$	513		728		2,828
Provision for credit losses		(207	)	(215	)	(2,100	)
Balance, end of year	$	306		513		728

33

Table 4    ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31,
	2006				2005				2004				2003				2002
(In thousands)	Amt.		Loans % of Total Loans		Amt.		Loans % of Total Loans		Amt.		Loans % of Total Loans		Amt.		Loans % of Total Loans		Amt.		Loans % of Total Loans
Commercial loans	$	40,518	22	%	$	55,785	31	%	$	83,621	61	%	$	56,901	79	%	$	69,322	90	%
Residential mortgages		2,164	7			6,112	9			4,162	19			6,835	17			395	1
Home equity loans		38,668	71			34,218	60			12,149	20			1,637	4			1,969	9
Unallocated		—	—			—	—			—	—			38,828	—			33,051	—
Total	$	81,350	100	%	$	96,115	100	%	$	99,932	100	%	$	104,201	100	%	$	104,737	100	%

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Information required by this Item 7A is set forth in Item 7 under the caption “Risk Governance and Administration”.

Item 8.    Financial Statements and Supplementary Data.

The following consolidated financial statements of Wachovia Funding and its subsidiaries at December 31, 2006, are included in this report at the pages indicated:

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Changes in Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

Item 9.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.    Controls and Procedures.

As of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, Wachovia Funding’s management, including Wachovia Funding’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, Wachovia Funding’s Chief Executive Officer and Chief Financial Officer each concluded that as of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, Wachovia Funding maintained effective disclosure controls and procedures. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, Wachovia Funding’s internal control over financial reporting.

34

Item 9B. Other Information

Not applicable.

35

PART III

Information to be reported under this Part III of Form 10-K is incorporated by reference to our definitive proxy statement to be filed no later than April 30, 2007, in accordance with General Instruction 6(3) to Form 10-K.

36

PART IV

Item 15.    Exhibits, Financial Statement Schedules.

The following consolidated financial statements of Wachovia Funding and its subsidiaries at December 31, 2006, are included in this report at the pages indicated.

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Changes in Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

A list of the exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference. All financial statement schedules are omitted since the required information is either not applicable, is immaterial or is included in our consolidated financial statements and notes thereto.

37

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2006, 2005 and 2004

(With Report of Independent Registered Public Accounting Firm Thereon)

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Wachovia Preferred Funding Corp.

We have audited the accompanying consolidated balance sheets of Wachovia Preferred Funding Corp., an indirect subsidiary of Wachovia Corporation, and subsidiaries as of December 31, 2006 and 2005, 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, 2006. These consolidated financial statements are the responsibility of Wachovia Preferred Funding Corp.’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 Preferred Funding Corp. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

/s/    KPMG LLP

Charlotte, North Carolina

March 28, 2007

F-2

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

(In thousands, except share data)	2006			2005
ASSETS
Cash and cash equivalents	$	1,382,021		1,484,535
Loans, net of unearned income		16,795,417		16,196,661
Allowance for loan losses		(81,350	)	(96,115	)
Loans, net		16,714,067		16,100,546
Interest rate swaps		337,307		393,211
Accounts receivable—affiliates, net		233,459		224,247
Other assets		97,764		86,480
Total assets	$	18,764,618		18,289,019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Line of credit with affiliate		500,000		—
Collateral held on interest rate swaps		336,649		392,800
Deferred income tax liabilities		73,734		80,858
Dividends payable to affiliates		131		—
Other liabilities		22,912		19,711
Total liabilities		933,426		493,369
Stockholders’ equity
Preferred stock
Series A preferred securities, $0.01 par value per share, $750 million liquidation preference, non-cumulative and conditionally exchangeable, 30,000,000 shares authorized, issued and outstanding in 2006 and 2005		300		300
Series B preferred securities, $0.01 par value per share, $1.0 billion liquidation preference, non-cumulative and conditionally exchangeable, 40,000,000 shares authorized, issued and outstanding in 2006 and 2005		400		400
Series C preferred securities, $0.01 par value per share, $4.2 billion liquidation preference, cumulative, 5,000,000 shares authorized, 4,233,754 shares issued and outstanding in 2006 and 2005		43		43
Series D preferred securities, $0.01 par value per share, $913,000 liquidation preference, non-cumulative, 913 shares authorized, issued and outstanding in 2006 and 2005		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized, 99,999,900 shares issued and outstanding in 2006 and 2005		1,000		1,000
Paid-in capital		17,467,786		17,467,786
Retained earnings		361,663		326,121
Total stockholders’ equity		17,831,192		17,795,650
Total liabilities and stockholders’ equity	$	18,764,618		18,289,019

See accompanying notes to consolidated financial statements.

F-3

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2006, 2005 and 2004

(In thousands, except per share data and average shares)	2006			2005	2004
INTEREST INCOME	$	1,174,675		806,005	407,511
INTEREST EXPENSE		36,382		18,464	6,858
Net interest income		1,138,293		787,541	400,653
Provision for credit losses		(9,251	)	1,211	(3,390	)
Net interest income after provision for credit losses		1,147,544		786,330	404,043
OTHER INCOME
Gain on interest rate swaps		15,897		6,718	13,781
Other income		173		241	133
Total other income		16,070		6,959	13,914
NONINTEREST EXPENSE
Loan servicing costs		54,199		30,288	4,666
Management fees		47,594		34,716	33,835
Other expense		2,246		2,637	1,381
Total noninterest expense		104,039		67,641	39,882
Income before income taxes		1,059,575		725,648	378,075
Income taxes		13,421		4,126	5,656
Net income		1,046,154		721,522	372,419
Dividends on preferred stock		375,612		281,699	185,357
Net income available to common stockholders	$	670,542		439,823	187,062
PER COMMON SHARE DATA
Basic earnings	$	6.71		4.40	1.87
Diluted earnings	$	6.71		4.40	1.87
AVERAGE SHARES
Basic		99,999,900		99,999,900	99,999,900
Diluted		99,999,900		99,999,900	99,999,900

See accompanying notes to consolidated financial statements.

F-4

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2006, 2005 and 2004

(In thousands, except per share data)	Preferred Stock		Common Stock	Paid-in Capital	Retained Earnings		Total
Balance, December 31, 2003	$	743	1,000	11,504,575	243,236		11,749,554
Net income		—	—	—	372,419		372,419
Cash dividends
Series A preferred securities at $1.81 per share		—	—	—	(54,375	)	(54,375	)
Series B preferred securities at $0.82 per share		—	—	—	(32,939	)	(32,939	)
Series C preferred securities at $23.14 per share		—	—	—	(97,965	)	(97,965	)
Series D preferred securities at $85.00 per share		—	—	—	(78	)	(78	)
Common stock at $1.75 per share		—	—	—	(175,000	)	(175,000	)
Balance, December 31, 2004		743	1,000	11,504,575	255,298		11,761,616
Net income		—	—	—	721,522		721,522
Capital contribution		—	—	5,963,211	—		5,963,211
Cash dividends
Series A preferred securities at $1.81 per share		—	—	—	(54,375	)	(54,375	)
Series B preferred securities at $1.28 per share		—	—	—	(51,347	)	(51,347	)
Series C preferred securities at $41.55 per share		—	—	—	(175,899	)	(175,899	)
Series D preferred securities at $85.00 per share		—	—	—	(78	)	(78	)
Common stock at $3.69 per share		—	—	—	(369,000	)	(369,000	)
Balance, December 31, 2005		743	1,000	17,467,786	326,121		17,795,650
Net income		—	—	—	1,046,154		1,046,154
Cash dividends
Series A preferred securities at $1.81 per share		—	—	—	(54,375	)	(54,375	)
Series B preferred securities at $1.73 per share		—	—	—	(69,291	)	(69,291	)
Series C preferred securities at $59.49 per share		—	—	—	(251,868	)	(251,868	)
Series D preferred securities at $85.00 per share		—	—	—	(78	)	(78	)
Common stock at $6.35 per share		—	—	—	(635,000	)	(635,000	)
Balance, December 31, 2006	$	743	1,000	17,467,786	361,663		17,831,192

See accompanying notes to consolidated financial statements.

F-5

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

(In thousands)	2006			2005		2004
OPERATING ACTIVITIES
Net income	$	1,046,154		721,522		372,419
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for credit losses		(9,251	)	1,211		(3,390	)
Deferred income tax expense (benefit)		(7,124	)	2,807		5,677
Gain on interest rate swaps		(15,897	)	(6,718	)	(13,781	)
Accounts receivable/payable—affiliates, net		273		2,391		(30,904	)
Other assets and other liabilities, net		(7,876	)	(28,637	)	(3,864	)
Net cash provided by operating activities		1,006,279		692,576		326,157
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Loans, net		(613,962	)	464,111		66,938
Interest rate swaps		71,801		73,345		72,949
Net cash provided (used) by investing activities		(542,161	)	537,456		139,887
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Line of credit with affiliate		500,000		—		—
Collateral held on interest rate swaps		(56,151	)	(65,465	)	(61,195	)
Cash dividends paid		(1,010,481	)	(650,699	)	(360,357	)
Net cash used by financing activities		(566,632	)	(716,164	)	(421,552	)
Increase (decrease) in cash and cash equivalents		(102,514	)	513,868		44,492
Cash and cash equivalents, beginning of year		1,484,535		970,667		926,175
Cash and cash equivalents, end of year	$	1,382,021		1,484,535		970,667
CASH PAID FOR
Interest	$	36,382		18,464		6,858
Income taxes	$	17,521		320		—
NONCASH ITEMS
Contribution of loans, net		—		5,943,255		—
Loan payments, net, settled through accounts receivable payable—affiliates, net		(9,485	)	(186,769	)	(158,168	)
Contribution of other assets		—		19,956		—
Contribution of paid-in capital	$	—		(5,963,211	)	—

See accompanying notes to consolidated financial statements.

F-6

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE 1:    SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

GENERAL

Wachovia Preferred Funding Corp. and its subsidiaries (“Wachovia Funding”) is a subsidiary of its parent company, Wachovia Preferred Funding Holding Corp. (“Wachovia Preferred Holding”), which owns 99.85%, or 99,851,752 shares, of the common stock. Wachovia Corporation (“Wachovia”) owns the remaining 148,148 shares, or 0.15%, of Wachovia Funding. Wachovia Preferred Holding is a subsidiary of Wachovia Bank, National Association (the “Bank”), which owns 99.95%, or 4,368 shares, of Wachovia Preferred Holding’s common stock. Wachovia owns the remaining 0.05%, or 2 shares, of Wachovia Preferred Holding’s common stock. The Bank is a wholly-owned subsidiary of Wachovia.

One of Wachovia Funding’s subsidiaries, Wachovia Real Estate Investment Corp. (“WREIC”), a Delaware corporation, has operated as a real estate investment trust (“REIT”) since its formation in 1996. Of the 645 shares of WREIC common shares outstanding, Wachovia Funding owns 644 shares, or 99.84%, and the remaining 1 share is owned by Wachovia. Of the 667 shares of preferred stock outstanding, Wachovia Funding owns 532.3 shares, 128 shares are owned by employees of Wachovia or its affiliates and 6.7 shares are owned by Wachovia.

Wachovia Funding’s other subsidiary is Wachovia Preferred Realty, LLC (“WPR”), a Delaware limited liability company. Under the REIT Modernization Act, a REIT is permitted to own “taxable REIT subsidiaries,” which are subject to taxation similar to corporations that do not qualify as REITs or for other special tax rules. WPR is a taxable REIT subsidiary that holds assets that earn non-qualifying REIT income. WPR holds interest-rate swaps and related cash collateral, including those described below. Wachovia Funding owns 98.20% of the outstanding member interests in WPR and the remaining 1.80% is owned by FFBIC, Inc., another subsidiary of the Bank.

The accounting and reporting policies of Wachovia Funding are in accordance with U.S. generally accepted accounting principles. The more significant of these policies used in preparing the consolidated financial statements are described in this summary. Management of Wachovia Funding 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.

CONSOLIDATION

The consolidated financial statements include the accounts of Wachovia Funding and its subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and due from banks and interest-bearing bank balances. 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.

LOANS

Loans include assets Wachovia Funding purchases from the Bank at fair value. While these transfers represent legal sales by the Bank, the Bank may not record the transfers as sales for GAAP accounting

F-7

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

purposes because of its direct and indirect ownership interest in Wachovia Funding. Accordingly, Wachovia Funding’s assets represent non-recourse receivables from the Bank which are fully collateralized by the underlying loans. The assets continue to be classified as loans in Wachovia Funding’s financial statements because the returns on and recoverability of these non-recourse receivables are entirely dependent on the performance of the underlying loans. At December 31, 2006, the outstanding balance of these loans purchased from the Bank amounted to $9.5 billion.

Wachovia Funding’s principal business objective is to acquire, hold and manage domestic mortgage assets and other authorized investments that will generate income for distribution to Wachovia Funding’s stockholders. These loans are recorded at the principal balance outstanding, net of applicable premium or discount. Interest income is recognized on an accrual basis. Premiums and discounts are amortized as an adjustment to the yield over the term of the loan. If a prepayment occurs on a loan, 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.

A loan is considered to be impaired when based on current information, it is probable Wachovia Funding will not receive all amounts due in accordance with the contractual terms of a loan agreement. The fair value of an impaired loan 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 applied to interest income, to the extent any interest has been foregone.

The accrual of interest is generally discontinued on commercial loans that become 90 days past due as to principal or interest, or where reasonable doubt exists as to collection, unless well secured and in the process of collection. Consumer real estate loans that become 180 days past due are placed on nonaccrual status. Generally, consumer loans that become 180 days past due are charged off. 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 (collectively, the “allowance for credit losses”) 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. Wachovia Funding 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, Wachovia Funding 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 credit losses.

F-8

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

As a subsidiary of Wachovia, Wachovia Funding loans are subject to the same analysis of the adequacy of the allowance for loan losses as loans maintained in all of Wachovia’s subsidiaries including the Bank. Wachovia employs a variety of modeling and estimation tools for measuring credit risk. These tools are periodically reevaluated and refined, as appropriate.

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. Wachovia Funding’s principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.

COMPREHENSIVE INCOME

Wachovia Funding has no comprehensive income other than net income.

DERIVATIVE FINANCIAL INSTRUMENTS

All derivatives (currently consisting of interest rate swaps) are recorded at fair value on the balance sheet. Realized and unrealized gains and losses are included as a gain (loss) on interest rate swaps.

At December 31, 2006, receive-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 5.47 years, weighted average receive rate of 7.45% and weighted average pay rate of 5.36%. Pay-fixed interest rate swaps with a notional amount of $4.1 billion had a weighted average maturity of 5.47 years, weighted average receive rate of 5.36% and weighted average pay rate of 5.72% at December 31, 2006. All of the interest rate swaps have variable pay or receive rates based on three- or six-month LIBOR, and they are the pay or receive rates in effect at December 31, 2006.

COLLATERAL

Amounts recorded as collateral held on interest rate swaps represent cash pledged to Wachovia Funding by an unaffiliated counterparty to the interest rate swaps. Interest is paid at a market rate and is accounted for on an accrual basis.

INCOME TAXES

Wachovia Funding and WREIC are taxed as REITs under sections 856-860 of the Internal Revenue Code (the “Code”). A REIT is generally not subject to federal income tax to the extent it complies with the relevant provisions of the Code, including distributing the majority of its taxable earnings to shareholders and as long as certain asset, income and stock ownership tests are met. For the tax year ended December 31, 2006, Wachovia Funding and WREIC have complied with these provisions and with the exception of WPR, are not subject to federal income tax. Wachovia Funding and WREIC will file and have filed their own separate federal income tax returns for the tax years ended December 31, 2006, 2005 and 2004, respectively, and they have not been included in Wachovia’s federal consolidated income tax return or subject to Wachovia’s allocation of federal income tax liability (benefit) to its subsidiaries. In addition, Wachovia Funding and WREIC file as a part of unitary state income tax returns along with other subsidiaries of Wachovia.

F-9

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

For the year ended December 31, 2006, Wachovia Funding expects to be taxed as a REIT, and Wachovia Funding intends to comply with the relevant provisions of the Code to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent those provisions are met, with the exception of the income of the taxable REIT subsidiary, (WPR), Wachovia Funding will not be subject to federal income tax on net income. Wachovia Funding currently believes that it continues to satisfy each of these requirements and therefore continues to qualify as a REIT. Wachovia Funding continues to monitor each of these complex tests.

In the event Wachovia Funding does not continue to qualify as a REIT, it is believed there should be minimal adverse effect of that characterization to Wachovia Funding or to its shareholders:

Ÿ From a shareholder’s perspective, the dividends paid as a REIT are ordinary income not eligible for the dividends received deduction for corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If Wachovia Funding were not a REIT, dividends generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers.

Ÿ In addition, Wachovia Funding would no longer be eligible for the dividends paid deduction, thereby creating a tax liability. Wachovia has agreed to make a capital contribution to Wachovia Funding equal in amount to any income taxes payable by Wachovia Funding. Therefore, a failure to qualify as a REIT would not result in any net liability to Wachovia Funding.

WPR has elected to be taxed as a corporation and a taxable REIT subsidiary. WPR files its own separate federal income tax return, and current federal income taxes, if any, for WPR are separately calculated and paid. In addition, WPR files as part of unitary state income tax returns along with other subsidiaries of Wachovia.

Deferred income tax assets and liabilities are established for WPR to recognize the expected future tax consequences attributable to temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted 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 of a change in tax rates on deferred income tax assets and liabilities is recognized in income during the period that includes the enactment date.

EARNINGS PER SHARE

Basic earnings per share is computed 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 computed by dividing income available to common stockholders by the sum of the weighted average number of shares adjusted to include the effect of potentially dilutive shares.

NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires the use of both an income statement approach and a balance sheet approach when evaluating whether an error is material to an entity’s financial statements, based on all relevant quantitative and

F-10

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

qualitative factors. The SEC issued SAB 108 to address what the SEC identified as diversity in practice whereby entities were using either an income statement approach or a balance sheet approach, but not both. Wachovia Funding consistently used the income statement approach in prior periods. SAB 108 became effective December 31, 2006, and any material adjustments arising from the adoption of SAB 108 were required to be recorded as a cumulative effect adjustment to beginning retained earnings. In the fourth quarter of 2006, Wachovia Funding completed its analysis in accordance with SAB 108 using both the income statement approach and the balance sheet approach and concluded Wachovia Funding had no prior year misstatements that were material to its consolidated financial statements.

The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) to clarify the criteria for recognition and measurement of income tax benefits in accordance with SFAS No. 109, Accounting for Income Taxes. Under FIN 48, evaluation of tax benefits is a two-step process. First, tax benefits can be recognized in financial statements for a tax position only if it is considered “more likely than not” as defined in SFAS No. 5, Accounting for Contingencies, of being sustained on audit based solely on the technical merits of the tax position. Second, if the recognition criteria is met, the amount of tax benefits to be recognized is measured based on the largest benefit that is more than 50 percent likely to be realized upon ultimate resolution of the tax position. FIN 48 is effective on January 1, 2007, and any amounts recorded upon implementation will result in a one-time adjustment to beginning retained earnings as a cumulative effect of a change in accounting principle. We do not expect the implementation of FIN 48 to have a material impact on our consolidated financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, which establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and also expands disclosures about fair value measurement. SFAS 157 does not establish any new fair value measurements itself, but applies to other accounting standards that require the use of fair value for recognition or disclosure. In particular, the framework in SFAS 157 will be required for financial instruments for which a fair value option is elected, under the newly-issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. Application of the framework in SFAS 157 or SFAS 159 may lead to changes in the measurement of fair value. Both SFAS 157 and SFAS 159 are effective January 1, 2008, with earlier adoption allowed on January 1, 2007, provided financial statements for any period in 2007 have not yet been issued. Wachovia Funding is currently assessing the impact of SFAS 157 and SFAS 159 on the consolidated financial position and results of operations, and anticipates a January 1, 2008, adoption date.

RECLASSIFICATIONS

Certain amounts in 2005 and 2004 were reclassified to conform with the presentation in 2006. These reclassifications had no effect on Wachovia Funding’s previously reported consolidated financial position or results of operations.

F-11

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE 2:    LOANS

On June 30, 2005, Wachovia Funding received a contribution of assets, consisting of home equity loans, having a carrying amount of approximately $6.0 billion from Wachovia Preferred Holding, its parent corporation. Immediately prior to the contribution, Wachovia Preferred Holding received a contribution of the same assets from the Bank. Wachovia Funding did not pay Wachovia Preferred Holding for these contributed assets and they are recorded as an increase to loans and to paid-in-capital.

Wachovia Funding obtains from the Bank participation interests in loans originated or purchased by the Bank. By the nature of Wachovia Funding’s status as a REIT, the composition of the loans underlying the participation interests are highly concentrated in real estate. Underlying loans are concentrated primarily in Florida, New Jersey, Pennsylvania and North Carolina. These markets include approximately 63% and 62% of Wachovia Funding’s total loan balance at December 31, 2006 and 2005, respectively.

(In thousands)	2006		2005
COMMERCIAL
Commercial and commercial real estate	$	3,780,111	4,959,026
CONSUMER
Residential mortgages		1,104,171	1,470,385
Home equity loans		11,943,268	9,813,712
Total loans		16,827,550	16,243,123
Unearned income		32,133	46,462
Total loans, net of unearned income	$	16,795,417	16,196,661

At December 31, 2006 and 2005, nonaccrual loans amounted to $19.7 million and $20.4 million, respectively. In 2006, 2005 and 2004, $3.9 million, $4.6 million and $2.2 million, respectively, in gross interest income 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 2006, 2005 and 2004 amounted to $3.4 million, $3.6 million and $1.4 million, respectively. Wachovia Funding defines impaired loans as nonaccrual loans and individually reviews any impaired loans with a minimum total exposure of $10.0 million. At December 31, 2006 and 2005, Wachovia Funding did not have any impaired loans over $10.0 million.

F-12

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE  3: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS

The allowance for loan losses for each of the years in the three-year period ended December 31, 2006, is presented below.

(In thousands)	2006			2005		2004
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year	$	96,115		99,932		104,201
Provision for credit losses		(9,044	)	1,426		(1,290	)
Allowance related to loans sold		(1,635	)	(1,526	)	(543	)
Allowance related to loans contributed from the Bank		—		2,057		—
Total		85,436		101,889		102,368
Loan losses		(4,752	)	(6,646	)	(5,241	)
Loan recoveries		666		872		2,805
Loan losses, net		(4,086	)	(5,774	)	(2,436	)
Balance, end of year	$	81,350		96,115		99,932

The reserve for unfunded lending commitments for each of the years in the three-year period ended December 31, 2006, is presented below.

	Years Ended December 31,
(In thousands)	2006			2005		2004
RESERVE FOR UNFUNDED LENDING COMMITMENTS
Balance, beginning of year	$	513		728		2,828
Provision for credit losses		(207	)	(215	)	(2,100	)
Balance, end of year	$	306		513		728

NOTE 4:    STOCKHOLDERS’ EQUITY

Wachovia Funding has authorized preferred and common stock. The preferred securities consist of Series A, Series B, Series C and Series D. Series A, Series B and Series D preferred securities are non- cumulative and only receive dividends when declared by the board of directors. If declared, Series A, Series B and Series D holders will receive 7.25%, three-month LIBOR plus 1.83% and 8.5% per security, respectively. Series C preferred securities have cumulative dividend rights in which holders are entitled to dividends at the rate equal to three-month LIBOR plus 0.85% per annum per security for the first seven years after issuance after which the dividend will increase to three-month LIBOR plus 2.25% per annum per security. In order to remain qualified as a REIT, Wachovia Funding must distribute annually at least 90% of taxable earnings.

In the event that Wachovia Funding is liquidated or dissolved, the holders of the preferred securities will be entitled to a liquidation preference for each security plus any authorized, declared and unpaid dividends that will be paid prior to any payments to common stockholders or general unsecured creditors. The liquidation preference is $25.00 for Series A and Series B preferred securities, and $1,000 for Series C and

F-13

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

Series D preferred securities. With respect to the payment of dividends and liquidation preference, the Series A preferred securities rank on parity with Series B and Series D preferred securities and senior to the common stock and Series C preferred securities. In the unlikely event that a supervisory event occurs in which the Bank is placed into conservatorship or receivership, the Series A and Series B preferred securities are convertible into certain preferred stock of Wachovia.

NOTE 5:    INCOME TAXES

The provision for income taxes for each of the years in the three-year period ended December 31, 2006, is presented below.

(In thousands)	2006			2005		2004
CURRENT INCOME TAX EXPENSE (BENEFIT)
Federal	$	17,330		1,280		(128	)
State		3,215		39		107
Total current income tax expense (benefit)		20,545		1,319		(21	)
DEFERRED INCOME TAX EXPENSE (BENEFIT)
Federal		(8,029	)	3,675		5,704
State		905		(868	)	(27	)
Total deferred income tax expense (benefit)		(7,124	)	2,807		5,677
Total income taxes	$	13,421		4,126		5,656

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, 2006, is presented below.

	2006					2005					2004
(In thousands)	Amount			% of Pre-tax Income		Amount			% of Pre-tax Income		Amount			% of Pre-tax Income
Income before income taxes	$	1,059,575				$	725,648				$	378,075
Tax at federal income tax rate	$	370,851		35.0	%	$	253,977		35.0	%	$	132,326		35.0	%
Reasons for differences in federal income tax rate and effective tax rate
REIT income not subject to Federal taxation		(361,123	)	(34.1	)		(249,312	)	(34.4	)		(126,722	)	(33.5	)
State income taxes, net		3,693		0.4			(539	)	—			52		—
Other		—		—			—		—			—		—
Total	$	13,421		1.3	%	$	4,126		0.6	%	$	5,656		1.5	%

In 2006, 2005 and 2004, income before income taxes of $1.1 billion, $725.6 million and $378.1 million, respectively, includes $1.0 billion, $712.3 million and $362.1 million, respectively, of REIT income not subject to federal taxation. The remaining income before income taxes of $27.8 million, $13.3 million and $16.0 million in 2006, 2005 and 2004, respectively, is income before income taxes of WPR.

F-14

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

The sources and tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities for each of the years in the three-year period ended December 31, 2006, are presented below.

(In thousands)	2006			2005		2004
DEFERRED INCOME TAX ASSETS
Net operating loss carryforwards	$	—		—		12,568
Total deferred income tax assets		—		—		12,568
DEFERRED INCOME TAX LIABILITIES
Interest rate swap contracts		73,734		80,858		90,619
Total deferred income tax liabilities		73,734		80,858		90,619
Net deferred income tax liabilities	$	(73,734	)	(80,858	)	(78,051	)

The realization of net deferred income tax assets may be based on utilization of carrybacks to prior taxable periods, anticipation of future taxable income in certain periods and the utilization of tax planning strategies. Wachovia Funding has determined that it is more likely than not that the deferred income tax asset can be supported by expected future taxable income which will exceed amounts necessary to fully realize remaining deferred income tax assets resulting from the scheduling of temporary differences.

At December 31, 2006, WPR had no federal net operating loss carryforwards.

The Internal Revenue Service (the “IRS”) is currently examining Wachovia’s federal income tax returns for the years 2000 through 2002. As of December 31, 2006, the IRS has not proposed any material adjustments related to this examination in regard to Wachovia Funding.

NOTE 6:    TRANSACTIONS WITH AFFILIATED PARTIES

Wachovia Funding, as a subsidiary, is subject to certain income and expense allocations from affiliated parties for various services received. In addition, Wachovia Funding enters into transactions with affiliated parties in the normal course of business. The principal items related to transactions with affiliated parties included in the accompanying consolidated balance sheets and consolidated statements of income are described below. Due to the nature of common ownership of Wachovia Funding and the affiliated parties by Wachovia, the following transactions could differ from those conducted with unaffiliated parties.

Included in loan servicing costs are fees paid to affiliates of $54.2 million in 2006, $30.3 million in 2005 and $4.6 million in 2004. Wachovia Funding is subject to Wachovia’s management fee policy and therefore reimburses Wachovia for general overhead expenses paid on behalf of Wachovia Funding by Wachovia. Affiliates with greater than $10.0 million in qualifying assets are assessed a monthly management fee; if an affiliate does not meet this criteria during the month, no management fee is allocated. If an affiliate qualifies for an allocation, the affiliate is assessed management fees based on its relative percentage of total consolidated assets and noninterest expense plus a 5% markup. Wachovia Funding believes this allocation method represents a reasonable basis for allocating general overhead expenses. These expenses amounted to $47.6 million in 2006, $34.7 million in 2005 and $33.8 million in 2004.

At December 31, 2006 and 2005, eurodollar deposit investments due from the Bank included in cash and cash equivalents were $1.3 billion and $1.5 billion, respectively, and the related interest receivable was $543,000 and $330,000, respectively. Interest income earned on eurodollar deposit investments included in interest income was $73.8 million in 2006, $33.4 million in 2005 and $14.5 million in 2004.

F-15

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

As part of its investment activities, Wachovia Funding obtains loans and/or 100% interests in loan participations (which are both reflected as loans in the accompanying consolidated financial statements). As of December 31, 2006 and 2005, substantially all of Wachovia Funding’s loans are in the form of loan participation interests. Although Wachovia Funding may purchase loans from third parties, Wachovia Funding has historically purchased from the Bank loan participation interests in loans originated or purchased by the Bank.

Wachovia Funding has a swap servicing and fee agreement with the Bank whereby the Bank provides operational, back office, book entry, record keeping and valuation services related to Wachovia Funding’s interest rate swaps. In consideration of these services, Wachovia Funding pays the Bank 0.015% multiplied by the net amount actually paid under the interest rate swaps on the swaps’ payment date. Amounts paid under this agreement were $11,000 in 2006, 2005 and 2004, and were included in loan servicing costs.

The Bank acts as collateral custodian for Wachovia Funding in connection with collateral pledged to Wachovia Funding related to the interest rate swaps. For this service, Wachovia Funding pays the Bank a fee equal to the sum of 0.05% multiplied by the fair value of noncash collateral and 0.05% multiplied by the amount of cash collateral. Amounts paid under this agreement were $191,000 in 2006, $223,000 in 2005 and $258,000 in 2004. In addition, the Bank is permitted to rehypothecate and use as its own the collateral held by the Bank as custodian for Wachovia Funding. The Bank pays Wachovia Funding a fee equal to the sum of 0.05% multiplied by the fair value of the noncash collateral the Bank holds as custodian and the amount of cash collateral held multiplied by a market rate of interest. The collateral agreement with the counterparty allows Wachovia Funding to repledge the collateral free of any right of redemption or other right of the counterparty in such collateral without any obligation on Wachovia Funding’s part to maintain possession or control of equivalent collateral. Pursuant to the rehypothecation agreement, Wachovia Funding had invested $336.6 million, $392.8 million and $458.3 million of cash collateral in interest-bearing investments with the Bank or other Wachovia subsidiaries at December 31, 2006, 2005 and 2004, respectively. Amounts received under this agreement were $33.2 million in 2006, $21.7 million in 2005 and $9.4 million in 2004, and were included in interest income on eurodollar investments noted above.

The Bank also provides a guaranty of Wachovia Funding’s obligations under the interest rate swaps when the swaps are in a net payable position. In consideration, Wachovia Funding pays the Bank a monthly fee in arrears equal to 0.03% multiplied by the absolute value of the net notional amount of the interest rate swaps. No amount was paid under this agreement in 2006, 2005 and 2004.

Wachovia Funding has a line of credit with the Bank. Under the terms of that facility, Wachovia Funding can borrow up to $2.0 billion under a revolving demand note at a rate of interest equal to the average federal funds rate. At December 31, 2006, Wachovia Funding had $500.0 million outstanding under this facility compared with no outstandings at December 31, 2005.

NOTE 7:    COMMITMENTS, GUARANTEES AND OTHER MATTERS

Wachovia Funding’s commercial loan portfolio includes unfunded loan commitments that are provided in the normal course of business. For commercial borrowers, loan commitments generally take the form of revolving credit arrangements to finance customers’ working capital requirements. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. For lending commitments, the contractual amount of a commitment represents the maximum potential credit risk if the entire commitment is funded and the borrower does not perform according to the terms of the contract. A large majority of these commitments expire without being funded, and accordingly, total contractual amounts are not representative of actual future credit exposure or liquidity requirements.

F-16

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

Loan commitments create credit risk in the event that the counterparty draws on the commitment and subsequently fails to perform under the terms of the lending agreement. This risk is incorporated into an overall evaluation of credit risk, and to the extent necessary, reserves are recorded on these commitments. Uncertainties around the timing and amount of funding under these commitments may create liquidity risk for Wachovia Funding.

The estimated fair value of commitments to extend credit at December 31, 2006, was $1.5 million. The contract or notional amount of commitments to extend credit at December 31, 2006, was $814.7 million. The fair value of commitments to extend 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.

As part of the loan participation agreements with the Bank, Wachovia Funding provides an indemnification to the Bank if certain events occur. These contingencies generally relate to claims or judgments arising out of participated loans that are not the result of gross negligence or intentional misconduct by the Bank. Wachovia Funding has not been required to make payments under the indemnification clauses in 2006, 2005 or 2004. 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, Wachovia Funding is not able to estimate the maximum amount of future payments under the indemnification clauses. There are no amounts reflected on the consolidated balance sheet at December 31, 2006, related to these indemnifications.

Wachovia Funding and its subsidiaries are not the subject of any litigation. Neither Wachovia Funding and its subsidiaries nor the Bank are currently involved in nor, to Wachovia Funding’s knowledge, currently threatened with any material litigation with respect to the assets included in Wachovia Funding’s portfolio, other than routine litigation arising in the ordinary course of business.

NOTE 8:    CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Information about the fair value of on-balance sheet financial instruments at December 31, 2006 and 2005, is presented below.

	2006			2005
(In thousands)	Carrying Amount		Estimated Fair Value	Carrying Amount	Estimated Fair Value
FINANCIAL ASSETS
Cash and cash equivalents	$	1,382,021	1,382,021	1,484,535	1,484,535
Loans, net of unearned income and allowance for loan losses		16,714,067	16,543,814	16,100,546	16,046,469
Interest rate swaps		337,307	337,307	393,211	393,211
Accounts receivable—affiliates, net		233,459	233,459	224,247	224,247
Other financial assets	$	92,629	92,629	81,446	81,446
FINANCIAL LIABILITIES
Line of credit with affiliate		500,000	500,000	—	—
Collateral held on interest rate swaps		336,649	336,649	392,800	392,800
Other financial liabilities	$	18,077	18,077	18,179	18,179

F-17

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

The fair values of loans are 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. The fair values of commercial loans were based on expected market execution under a securitization or whole loan sale methodology in which the required spreads, credit support, and structure used in determining the loan values were based on what a typical investor may require if purchasing commercial loans. Estimated fair values for the commercial loan portfolio were based on weighted average discount rates ranging from 5.57% to 17.61% (with the overall weighted average discount rate equal to 6.89% at December 31, 2006), and 3.00% to 18.02% (with the overall weighted average discount rate equal to 6.70% at December 31, 2005). Estimated fair values for the consumer portfolio were primarily based on discounted cash flows based on weighted average discount rates ranging from 5.98% to 6.57% and 5.89% to 6.65%, at December 31, 2006 and 2005, respectively.

Wachovia Funding’s interest rate swaps are recorded at fair value. The fair value of interest rate swaps is estimated using discounted cash flow analyses based on observable market data. Substantially all the 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.

NOTE 9: WACHOVIA PREFERRED FUNDING CORP. (CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT)

On December 31, 2006, Wachovia Preferred Funding Corp. (the “Registrant”) was indebted to the Bank in the amount of $500.0 million that, under the terms of revolving credit agreement, can borrow up to $1.0 billion at a rate of interest equal to the federal funds rate.

At December 31, 2006 and 2005, the estimated fair value of the Registrant's loans was $12.8 billion and $12.4 billion, respectively.

F-18

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

The Registrant's condensed balance sheets as of December 31, 2006 and 2005, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2006, follow.

CONDENSED BALANCE SHEETS

	December 31,
(In thousands, except share data)	2006			2005
ASSETS
Cash and cash equivalents	$	120,730		541,263
Loans, net of unearned income		12,900,116		12,509,051
Allowance for loan losses		(60,118	)	(74,089	)
Loans, net		12,839,998		12,434,962
Investments in wholly owned subsidiaries		5,103,507		5,085,720
Accounts receivable—affiliates, net		194,594		206,314
Other assets		73,707		66,467
Total assets	$	18,332,536		18,334,726
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Line of credit with affiliate		500,000		537,562
Other liabilities		1,344		1,514
Total liabilities		501,344		539,076
Stockholders’ equity
Preferred stock
Series A preferred securities, $0.01 par value per share, $750 million liquidation preference, non-cumulative and conditionally exchangeable, 30,000,000 shares authorized, issued and outstanding in 2006 and 2005		300		300
Series B preferred securities, $0.01 par value per share, $1.0 billion liquidation preference, non-cumulative and conditionally exchangeable, 40,000,000 shares authorized, issued and outstanding in 2006 and 2005		400		400
Series C preferred securities, $0.01 par value per share, $4.2 billion liquidation preference, cumulative, 5,000,000 shares authorized, 4,233,754 shares issued and outstanding in 2006 and 2005		43		43
Series D preferred securities, $0.01 par value per share, $913,000 liquidation preference, non-cumulative, 913 shares authorized, issued and outstanding in 2006 and 2005		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized, 99,999,900 shares issued and outstanding in 2006 and 2005		1,000		1,000
Paid-in capital		17,467,786		17,467,786
Retained earnings		361,663		326,121
Total stockholders' equity		17,831,192		17,795,650
Total liabilities and stockholders' equity	$	18,332,536		18,334,726

F-19

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

CONDENSED STATEMENTS OF INCOME

	Years Ended December 31,
(In thousands, except per share data and average shares)	2006			2005	2004
INTEREST INCOME	$	850,065		576,062	271,346
INTEREST EXPENSE		12,344		19,756	9,426
Net interest income		837,721		556,306	261,920
Provision for credit losses		(9,792	)	5,007	(3,496	)
Net interest income after provision for credit losses		847,513		551,299	265,416
OTHER INCOME
Other income		—		—	11
Total other income		—		—	11
NONINTEREST EXPENSE
Loan servicing costs		43,493		24,243	2,189
Management fees		33,531		23,400	21,178
Other expense		1,005		1,388	751
Total noninterest expense		78,029		49,031	24,118
Income before income taxes and equity in undistributed net income of subsidiaries		769,484		502,268	241,309
Income taxes		745		—	—
Income before equity in undistributed net income of subsidiaries		768,739		502,268	241,309
Equity in undistributed net income of subsidiaries		277,415		219,254	131,110
Net income		1,046,154		721,522	372,419
Dividends on preferred stock		375,612		281,699	185,357
Net income available to common stockholders	$	670,542		439,823	187,062

F-20

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
(In thousands)	2006			2005		2004
OPERATING ACTIVITIES
Net income	$	1,046,154		721,522		372,419
Adjustments to reconcile net income to net cash provided (used) by operating activities
Equity in undistributed net income of subsidiaries		(277,415	)	(219,254	)	(131,110	)
Provision for credit losses		(9,792	)	5,007		(3,496	)
Accounts receivable/payable—affiliates, net		260		2,122		(5,202	)
Other assets and other liabilities, net		(7,541	)	(23,042	)	(2,662	)
Net cash provided by operating activities		751,666		486,355		229,949
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Investment in subsidiaries		259,628		201,718		110,868
Loans, net		(383,784	)	319,266		(100,884	)
Net cash provided (used) by investing activities		(124,156	)	520,984		9,984
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Line of credit with affiliate		(37,562	)	—		(250,000	)
Cash dividends paid		(1,010,481	)	(650,699	)	(360,357	)
Net cash used by financing activities		(1,048,043	)	(650,699	)	(610,357	)
Increase (decrease) in cash and cash equivalents		(420,533	)	356,640		(370,424	)
Cash and cash equivalents, beginning of year		541,263		184,623		555,047
Cash and cash equivalents, end of year		120,730		541,263		184,623
CASH PAID FOR
Interest	$	12,344		19,756		9,426
Taxes		432		248		—
NONCASH ITEMS
Loan payments, net, settled through accounts receivable/payable—affiliate, net		11,460		(177,206	)	(40,132	)
Contribution of loans, net		—		5,943,255		—
Contribution of other assets		—		19,956		—
Contribution of paid in capital	$	—		5,963,211		—

F-21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

WACHOVIA PREFERRED FUNDING CORP.
By:	/s/    PETER M. CARLSON
	Peter M. Carlson Senior Vice President

Date: March 28, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.

Signature	Capacity
G. KENNEDY THOMPSON* G. Kennedy Thompson	President, Chief Executive Officer and Director
THOMAS J. WURTZ* Thomas J. Wurtz	Senior Executive Vice President and Chief Financial Officer
PETER M. CARLSON * Peter M. Carlson	Senior Vice President and Corporate Controller (Principal Accounting Officer)
JAMES E. ALWARD* James E. Alward	Director
JOEL J. GRIFFIN* Joel J. Griffin	Director
CHARLES F. JONES* Charles F. Jones	Director
* By Ross E. Jeffries, Jr., Attorney-in-Fact
/S/    ROSS E. JEFFRIES, JR. Ross E. Jeffries, Jr.

Date: March 28, 2007

EX-12.A

Exhibit (12)(a)

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES

	Years Ended December 31,
(In thousands)	2006		2005	2004	2003	2002
Income before income taxes	$	1,059,575	725,648	378,075	353,773	248,622
Fixed charges, excluding capitalized interest		36,382	18,464	6,858	6,460	10,546
Earnings (A)		1,095,957	744,112	384,933	360,233	259,168
Interest	$	36,382	18,464	6,858	6,460	10,546
One-third of rents		—	—	—	—	—
Capitalized interest		—	—	—	—	—
Fixed charges (B)	$	36,382	18,464	6,858	6,460	10,546
Consolidated ratios of earnings to fixed charges (A)/(B)		30.12X	40.30	56.13	55.76	24.58

EX-12.B

Exhibit (12)(b)

WACHOVIA PREFERRED FUNDING CORP.

AND SUBSIDIARIES

COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

	Years Ended December 31,
(In thousands)	2006		2005	2004	2003	2002
Income before income taxes	$	1,059,575	725,648	378,075	353,773	248,622
Fixed charges, excluding preferred stock dividends and capitalized interest		36,382	18,464	6,858	6,460	10,546
Earnings (A)	$	1,095,957	744,112	384,933	360,233	259,168
Interest	$	36,382	18,464	6,858	6,460	10,546
One-third of rents		—	—	—	—	—
Preferred stock dividends		375,612	281,699	185,357	171,937	18,350
Capitalized interest		—	—	—	—	—
Fixed charges (B)	$	411,994	300,163	192,215	178,397	28,896
Consolidated ratios of earnings to fixed charges (A)/(B)		2.66X	2.48	2.00	2.02	8.97

EX-21

Exhibit (21)

WACHOVIA PREFERRED FUNDING CORP.

LIST OF SUBSIDIARIES AS OF DECEMBER 31, 2006

WACHOVIA PREFERRED REALTY, LLC

WACHOVIA REAL ESTATE INVESTMENT CORP.

EX-24

Exhibit (24)

WACHOVIA PREFERRED FUNDING CORP.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers of WACHOVIA PREFERRED FUNDING CORP. (the “Corporation”) hereby constitute and appoint Mark C. Treanor, Ross E. Jeffries, Jr. and Anthony R. Augliera, and each of them severally, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one of them, to sign for the undersigned and in their respective names as directors and officers of the Corporation, the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, to be filed with the Securities and Exchange Commission, and to sign any and all amendments to such Annual Report.

Signature	Capacity
/S/    G. KENNEDY THOMPSON         G. Kennedy Thompson	President, Chief Executive Officer and Director
/S/    THOMAS J. WURTZ         Thomas J. Wurtz	Senior Executive Vice President and Chief Financial Officer
/S/    PETER M. CARLSON         Peter M. Carlson	Senior Vice President and Corporate Controller (Principal Accounting Officer)
/S/    JAMES E. ALWARD         James E. Alward	Director
/S/    JOEL J. GRIFFIN         Joel J. Griffin	Director
/S/    CHARLES F. JONES         Charles F. Jones	Director

March 28, 2007

Charlotte, North Carolina

EX-31.A

Exhibit (31)(a)

WACHOVIA PREFERRED FUNDING CORP.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, G. Kennedy Thompson, certify that:

1.    I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Wachovia Preferred Funding Corp.;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and

c)  disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    G. KENNEDY THOMPSON

G. Kennedy Thompson

Chief Executive Officer

Date: March 28, 2007

EX-31.B

Exhibit (31)(b)

WACHOVIA PREFERRED FUNDING CORP.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Thomas J. Wurtz, certify that:

1.    I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Wachovia Preferred Funding Corp.;

2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and

c)  disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    THOMAS J. WURTZ

Thomas J. Wurtz

Chief Financial Officer

Date: March 28, 2007

EX-32.A

Exhibit (32)(a)

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Wachovia Preferred Funding Corp. (“Wachovia Funding”) for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Kennedy Thompson, Chief Executive Officer of Wachovia Funding, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of Wachovia Funding.

/s/    G. KENNEDY THOMPSON

G. Kennedy Thompson

Chief Executive Officer

March 28, 2007

EX-32.B

Exhibit (32)(b)

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Wachovia Preferred Funding Corp. (“Wachovia Funding”) for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Wurtz, Chief Financial Officer of Wachovia Funding, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of Wachovia Funding.

/s/    THOMAS J. WURTZ

Thomas J. Wurtz

Chief Financial Officer

March 28, 2007

EX-99.A

Exhibit (99)(a)

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Financial Information

As of December 31, 2006 and 2005, and

For the Three Years Ended December 31, 2006

The “Bank” as noted herein refers to Wachovia Bank, National Association.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTARY

CONSOLIDATING FINANCIAL INFORMATION

The Board of Directors

Wachovia Corporation

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Wachovia Corporation and subsidiaries as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, and have issued our unqualified reports dated February 23, 2007, with respect to the consolidated balance sheets of Wachovia Corporation and subsidiaries as of December 31, 2006 and 2005, 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, 2006, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006.

Our audits were made for the purpose of forming an opinion on the consolidated financial statements of Wachovia Corporation and subsidiaries taken as a whole. The accompanying supplementary consolidating financial information as of December 31, 2006 and 2005, and for each of years in the three-year period ended December 31, 2006, is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies. The supplementary consolidating financial information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

/s/    KPMG LLP

Charlotte, North Carolina

March 28, 2007

2

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Balance Sheet Information

	December 31, 2006
(In millions)	The Bank		World Savings Bank		Other Subsidiaries and Eliminations		Wachovia Consolidated
ASSETS
Cash and due from banks	$	15,509	464		(147	)	15,826
Interest-bearing bank balances		1,033	—		1,134		2,167
Federal funds sold and securities purchased under resale agreements		8,061	1,497		7,365		16,923
Total cash and cash equivalents		24,603	1,961		8,352		34,916
Trading account assets		33,784	—		11,745		45,529
Securities		102,560	133		5,926		108,619
Loans, net of unearned income		290,193	125,357		4,608		420,158
Allowance for loan losses		(3,031)	(279	)	(50	)	(3,360	)
Loans, net		287,162	125,078		4,558		416,798
Loans held for sale		12,571	—		(3	)	12,568
Premises and equipment		3,998	497		1,646		6,141
Due from customers on acceptances		855	—		—		855
Goodwill		21,351	15,220		1,808		38,379
Other intangible assets		2,152	17		(534	)	1,635
Other assets		29,087	3,355		9,239		41,681
Total assets	$	518,123	146,261		42,737		707,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing deposits		67,893	166		(1,487	)	66,572
Interest-bearing deposits		285,341	69,438		(13,893	)	340,886
Total deposits		353,234	69,604		(15,380	)	407,458
Short-term borrowings		26,075	2,399		20,683		49,157
Bank acceptances outstanding		863	—		—		863
Trading account liabilities		14,150	—		4,078		18,228
Other liabilities		12,871	1,135		5,998		20,004
Long-term debt		55,848	48,377		34,369		138,594
Total liabilities		463,041	121,515		49,748		634,304
Minority interest in net assets of consolidated subsidiaries		1,808	—		1,293		3,101
STOCKHOLDERS’ EQUITY
Preferred stock		—	—		—		—
Common stock		455	—		5,892		6,347
Paid-in capital		37,356	16,750		(2,360	)	51,746
Retained earnings		16,453	7,996		(10,726	)	13,723
Accumulated other comprehensive income, net		(990)	—		(1,110	)	(2,100	)
Total stockholders’ equity		53,274	24,746		(8,304	)	69,716
Total liabilities and stockholders’ equity	$	518,123	146,261		42,737		707,121

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

3

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Balance Sheet Information

	December 31, 2005
(In millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
ASSETS
Cash and due from banks	$	15,106		(34	)	15,072
Interest-bearing bank balances		1,394		1,244		2,638
Federal funds sold and securities purchased under resale agreements		6,567		13,348		19,915
Total cash and cash equivalents		23,067		14,558		37,625
Trading account assets		31,472		11,232		42,704
Securities		108,334		5,364		113,698
Loans, net of unearned income		255,941		3,074		259,015
Allowance for loan losses		(2,629	)	(95	)	(2,724	)
Loans, net		253,312		2,979		256,291
Loans held for sale		6,232		173		6,405
Premises and equipment		3,722		1,188		4,910
Due from customers on acceptances		824		—		824
Goodwill		19,645		2,162		21,807
Other intangible assets		1,963		(755	)	1,208
Other assets		23,572		11,711		35,283
Total assets	$	472,143		48,612		520,755
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing deposits		68,921		(1,434	)	67,487
Interest-bearing deposits		264,859		(7,452	)	257,407
Total deposits		333,780		(8,886	)	324,894
Short-term borrowings		37,978		23,975		61,953
Bank acceptances outstanding		892		—		892
Trading account liabilities		12,640		4,958		17,598
Other liabilities		10,759		5,227		15,986
Long-term debt		26,991		21,980		48,971
Total liabilities		423,040		47,254		470,294
Minority interest in net assets of consolidated subsidiaries		1,729		1,171		2,900
STOCKHOLDERS’ EQUITY
Preferred stock		—		—		—
Common stock		455		4,734		5,189
Paid-in capital		34,604		(3,432	)	31,172
Retained earnings		12,974		(1,001	)	11,973
Accumulated other comprehensive income, net		(659	)	(114	)	(773	)
Total stockholders’ equity		47,374		187		47,561
Total liabilities and stockholders’ equity	$	472,143		48,612		520,755

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

4

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Income Statement Information

	Year Ended December 31, 2006
(In millions)	The Bank		World Savings Bank (a)		Other Subsidiaries and Eliminations		Wachovia Consolidated
INTEREST INCOME
Interest and fees on loans	$	19,881	2,488		(393	)	21,976
Interest and dividends on securities		6,129	27		277		6,433
Trading account interest		1,054	—		521		1,575
Other interest income		590	28		1,663		2,281
Total interest income		27,654	2,543		2,068		32,265
INTEREST EXPENSE
Interest on deposits		8,880	772		(533	)	9,119
Interest on borrowings		4,632	712		2,553		7,897
Total interest expense		13,512	1,484		2,020		17,016
Net interest income		14,142	1,059		48		15,249
Provision for credit losses		504	(23	)	(47	)	434
Net interest income after provision for credit losses		13,638	1,082		95		14,815
FEE AND OTHER INCOME
Service charges and fees		2,703	26		1,507		4,236
Commissions		576	—		1,830		2,406
Fiduciary and asset management fees		708	—		2,540		3,248
Principal investing		—	—		525		525
Other income		5,622	(1	)	(1,491	)	4,130
Total fee and other income		9,609	25		4,911		14,545
NONINTEREST EXPENSE
Salaries and employee benefits		6,120	208		4,575		10,903
Occupancy and equipment		1,840	37		480		2,357
Other intangible amortization		331	74		18		423
Sundry expense		5,677	50		(1,934	)	3,793
Total noninterest expense		13,968	369		3,139		17,476
Minority interest in income of consolidated subsidiaries		—	—		414		414
Income from continuing operations before income taxes		9,279	738		1,453		11,470
Income taxes		2,969	271		485		3,725
Income from continuing operations		6,310	467		968		7,745
Discontinued operations, net of income taxes		46	—		—		46
Net income	$	6,356	467		968		7,791

(a) Information is for the three months ended December 31, 2006. Golden West Financial Corporation and its subsidiaries were acquired on October 1, 2006.

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

5

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Income Statement Information

	Year Ended December 31, 2005
(In millions)	The Bank		Other Subsidiaries and Eliminations		Wachovia Consolidated
INTEREST INCOME
Interest and fees on loans	$	14,680	(710	)	13,970
Interest and dividends on securities		5,590	193		5,783
Trading account interest		973	608		1,581
Other interest income		530	1,825		2,355
Total interest income		21,773	1,916		23,689
INTEREST EXPENSE
Interest on deposits		5,503	(206	)	5,297
Interest on borrowings		2,919	1,792		4,711
Total interest expense		8,422	1,586		10,008
Net interest income		13,351	330		13,681
Provision for credit losses		182	67		249
Net interest income after provision for credit losses		13,169	263		13,432
FEE AND OTHER INCOME
Service charges and fees		2,352	1,290		3,642
Commissions		602	1,741		2,343
Fiduciary and asset management fees		814	2,197		3,011
Principal investing		2	399		401
Other income		3,068	(246	)	2,822
Total fee and other income		6,838	5,381		12,219
NONINTEREST EXPENSE
Salaries and employee benefits		5,440	4,231		9,671
Occupancy and equipment		1,726	425		2,151
Other intangible amortization		384	32		416
Sundry expense		4,006	(397	)	3,609
Total noninterest expense		11,556	4,291		15,847
Minority interest in income of consolidated subsidiaries		—	342		342
Income from continuing operations before income taxes		8,451	1,011		9,462
Income taxes		2,630	403		3,033
Income from continuing operations		5,821	608		6,429
Discontinued operations, net of income taxes		214	—		214
Net income	$	6,035	608		6,643

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

6

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Income Statement Information

	Year Ended December 31, 2004
(in millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
INTEREST INCOME
Interest and fees on loans	$	10,113		(255	)	9,858
Interest and dividends on securities		4,472		167		4,639
Trading account interest		585		562		1,147
Other interest income		463		1,181		1,644
Total interest income		15,633		1,655		17,288
INTEREST EXPENSE
Interest on deposits		2,887		(34	)	2,853
Interest on borrowings		1,575		899		2,474
Total interest expense		4,462		865		5,327
Net interest income		11,171		790		11,961
Provision for credit losses		215		42		257
Net interest income after provision for credit losses		10,956		748		11,704
FEE AND OTHER INCOME
Service charges and fees		2,071		1,133		3,204
Commissions		645		1,909		2,554
Fiduciary and asset management fees		748		2,071		2,819
Principal investing		(74	)	335		261
Other income		2,544		(603	)	1,941
Total fee and other income		5,934		4,845		10,779
NONINTEREST EXPENSE
Salaries and employee benefits		4,660		4,043		8,703
Occupancy and equipment		1,518		481		1,999
Other intangible amortization		388		43		431
Sundry expense		3,680		(147	)	3,533
Total noninterest expense		10,246		4,420		14,666
Minority interest in income of consolidated subsidiaries		—		184		184
Income before income taxes		6,644		989		7,633
Income taxes		1,937		482		2,419
Net income	$	4,707		507		5,214

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

7

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Changes in Stockholders’ Equity Information

	Year Ended December 31, 2006
(In millions)	The Bank			World Savings Bank	Other Subsidiaries and Eliminations		Wachovia Consolidated
COMMON STOCK
Balance December 31, 2005	$	455		—	4,734		5,189
Purchases of common stock		—		—	(274	)	(274	)
Common stock issued for
Stock options and restricted stock		—		—	83		83
Acquisitions		—		—	1,349		1,349
Balance, December 31, 2006		455		—	5,892		6,347
PAID-IN CAPITAL
Balance, December 31, 2005		34,604		2,187	(5,619	)	31,172
Purchases of common stock		—		—	(1,746	)	(1,746	)
Common stock issued for
Stock options and restricted stock		—		—	1,037		1,037
Acquisitions		2,752			18,346		21,098
Changes incident to business combinations		—		14,563	(14,563	)	—
Deferred compensation, net		—		—	185		185
Balance, December 31, 2006		37,356		16,750	(2,360	)	51,746
RETAINED EARNINGS
Balance, December 31, 2005		12,974		7,529	(8,530	)	11,973
Cumulative effect of an accounting change, net of income taxes		41		—	—		41
Purchases of common stock		—		—	(2,493	)	(2,493	)
Net income		6,356		467	968		7,791
Acquisitions		832		—	(832	)	—
Cash dividends		(3,750	)	—	161		(3,589	)
Balance, December 31, 2006		16,453		7,996	(10,726	)	13,723
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Balance, December 31, 2005		(659	)	—	(114	)	(773	)
Minimum pension liability		—		—	29		29
Adjustment to initially apply SFAS 158, net of income losses		—		—	(1,086	)	(1,086	)
Net unrealized losses on debt and equity securities and on derivative financial instruments		(331	)	—	61		(270	)
Balance, December 31, 2006		(990	)	—	(1,110	)	(2,100	)
Total stockholders’ equity, December 31, 2006	$	53,274		24,746	(8,304	)	69,716

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

8

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Changes in Stockholders’ Equity Information

	Year Ended December 31, 2005
(In millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
COMMON STOCK
Balance, December 31, 2004	$	455		4,839		5,294
Purchases of common stock		—		(173	)	(173	)
Common stock issued for
Stock options and restricted stock		—		68		68
Balance, December 31, 2005		455		4,734		5,189
PAID-IN CAPITAL
Balance, December 31, 2004		24,214		6,906		31,120
Purchases of common stock		—		(711	)	(711	)
Common stock issued for
Stock options and restricted stock		—		830		830
Acquisitions		12,900		(12,897	)	3
Excess capital returned to Parent Company		(2,510	)	2,510		—
Deferred compensation, net		—		(70	)	(70	)
Balance, December 31, 2005		34,604		(3,432	)	31,172
RETAINED EARNINGS
Balance, December 31, 2004		7,472		2,706		10,178
Purchases of common stock		—		(1,809	)	(1,809	)
Net income		6,035		608		6,643
Acquisitions		967		(967	)	—
Cash dividends		(1,500	)	(1,539	)	(3,039	)
Balance, December 31, 2005		12,974		(1,001	)	11,973
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Balance, December 31, 2004		778		(53	)	725
Minimum pension liability		—		(19	)	(19	)
Net unrealized losses on debt and equity securities and on derivative financial instruments		(1,445	)	(34	)	(1,479	)
Acquisitions		8		(8	)	—
Balance, December 31, 2005		(659	)	(114	)	(773	)
Total stockholders’ equity, December 31, 2005	$	47,374		187		47,561

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

9

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Changes in Stockholders’ Equity Information

	Year Ended December 31, 2004
(In millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
COMMON STOCK
Balance, December 31, 2003	$	455		3,919		4,374
Purchases of common stock		—		(159	)	(159	)
Common stock issued for
Stock options and restricted stock		—		85		85
Acquisitions				994		994
Balance, December 31, 2004		455		4,839		5,294
PAID-IN CAPITAL
Balance, December 31, 2003		24,216		(6,405	)	17,811
Purchases of common stock		—		(651	)	(651	)
Common stock issued for
Stock options and restricted stock		—		890		890
Acquisitions		(2	)	13,008		13,006
Deferred compensation, net		—		64		64
Balance, December 31, 2004		24,214		6,906		31,120
RETAINED EARNINGS
Balance, December 31, 2003		4,415		4,489		8,904
Net income		4,707		507		5,214
Purchases of common stock		—		(1,547	)	(1,547	)
Deferred income taxes on subsidiary stock		—		(87	)	(87	)
Cash dividends		(1,650	)	(656	)	(2,306	)
Balance, December 31, 2004		7,472		2,706		10,178
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Balance, December 31, 2003		1,303		36		1,339
Minimum pension liability		—		(65	)	(65	)
Net unrealized losses on debt and equity securities and on derivative financial instruments		(525	)	(24	)	(549	)
Balance, December 31, 2004		778		(53	)	725
Total stockholders’ equity, December 31, 2004	$	32,919		14,398		47,317

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

10

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Cash Flows Information

	Year Ended December 31, 2006
(In millions)	The Bank			World Savings Bank		Other Subsidiaries and Eliminations		Wachovia Consolidated
OPERATING ACTIVITIES
Net income	$	6,356		467		968		7,791
Adjustments to reconcile net income to net cash provided (used) by operating activities
Gain on sale of discontinued operations		(46	)	—		—		(46	)
Accretion and amortization of securities discounts and premiums, net		(36	)	—		(1	)	(37	)
Provision for credit losses		504		(23	)	(47	)	434
Gain on securitization transactions		(185	)	—		(93	)	(278	)
Gain on sale of mortgage servicing rights		(29	)	—		—		(29	)
Securities transactions		(82	)	2		(38	)	(118	)
Depreciation and other amortization		1,014		74		598		1,686
Deferred income taxes		628		—		(98	)	530
Trading account assets, net		(2,312	)	—		(513	)	(2,825	)
(Gain) loss on sales of premises and equipment		(3	)	—		2		(1	)
Contribution to qualified pension plan		(600	)	—		—		(600	)
Excess income tax benefits from share-based payment arrangements		—		—		(152	)	(152	)
Loans held for sale, net		(6,708	)	193		176		(6,339	)
Deferred interest on certain loans		—		(362	)	—		(362	)
Other assets, net		(227	)	(677	)	(1,646	)	(2,550	)
Trading account liabilities, net		1,510		—		(880	)	630
Other liabilities, net		1,341		441		2,427		4,209
Net cash used by operating activities		1,125		115		703		1,943
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities		27,894		130		3,571		31,595
Maturities of securities		17,021		—		1,827		18,848
Purchases of securities		(34,368	)	—		(5,836	)	(40,204	)
Origination of loans, net		(24,071	)	(1,022	)	(419	)	(25,512	)
Sales of premises and equipment		178		7		107		292
Purchases of premises and equipment		(1,069	)	—		(687	)	(1,756	)
Goodwill and other intangible assets		(1,767	)	(33	)	1,700		(100	)
Purchase of bank-owned separate account life insurance		(2,544	)	—		—		(2,544	)
Cash equivalents acquired, net of purchases of banking organizations		1,146		—		(3,678	)	(2,532	)
Net cash used by investing activities		(17,580	)	(918	)	(3,415	)	(21,913	)
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net		16,975		2,549		(6,256	)	13,268
Securities sold under repurchase agreements and other short-term borrowings, net		(12,118	)	(2,051	)	(3,077	)	(17,246	)
Issuances of long-term debt		25,715		—		16,714		42,429
Payments of long-term debt		(8,831	)	—		(5,073	)	(13,904	)
Issuances of common stock, net		—		—		664		664
Purchases of common stock		—		—		(4,513	)	(4,513	)
Changes incident to business combinations		—		5,795		(5,795	)	—
Excess income tax benefits from share-based payment arrangements		—		—		152		152
Cash dividends paid		(3,750	)	—		161		(3,589	)
Net cash provided (used) by financing activities		17,991		6,293		(7,023	)	17,261
Increase (decrease) in cash and cash equivalents		1,536		5,490		(9,735	)	(2,709	)
Cash and cash equivalents, beginning of year		23,067		(3,529	)	18,087		37,625
Cash and cash equivalents, end of year	$	24,603		1,961		8,352		34,916
CASH PAID FOR
Interest	$	13,323		1,184		1,872		16,379
Income taxes		2,803		—		(332	)	2,471
NONCASH ITEMS
Transfer to securities from loans resulting from securitizations		2,422		—		—		2,422
Transfer to securities from loans held for sale resulting from securitizations		60		—		—		60
Transfer to loans from loans held for sale		335		—		—		335
Cumulative effect of an accounting change, net of income taxes		41		—		—		41
Issuance of common stock for purchase accounting acquisitions		—		—		22,447		22,447

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

11

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Cash Flows Information

	Year Ended December 31, 2005
(In millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
OPERATING ACTIVITIES
Net income	$	6,035		608		6,643
Adjustments to reconcile net income to net cash provided (used) by operating activities
Gain on sale of discontinued operations		—		(214	)	(214	)
Accretion and amortization of securities discounts and premiums, net		214		2		216
Provision for credit losses		182		67		249
Gain on securitization transactions		(125	)	(85	)	(210	)
Gain on sale of mortgage servicing rights		(26	)	—		(26	)
Securities transactions		(18	)	(71	)	(89	)
Depreciation and other amortization		1,013		436		1,449
Deferred income taxes		833		(30	)	803
Trading account assets, net		(3,129	)	6,370		3,241
Loss on sales of premises and equipment		45		62		107
Contribution to qualified pension plan		(284	)	(46	)	(330	)
Excess income tax benefits from share-based payment arrangements		—		(162	)	(162	)
Loans held for sale, net		(5,414	)	(113	)	(5,527	)
Other assets, net		4,996		(1,079	)	3,917
Trading account liabilities, net		(1,025	)	(3,086	)	(4,111	)
Other liabilities, net		(872	)	622		(250	)
Net cash provided by operating activities		2,425		3,281		5,706
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities		47,795		6,776		54,571
Maturities of securities		37,116		3,761		40,877
Purchases of securities		(87,029	)	(13,972	)	(101,001	)
Origination of loans, net		(21,279	)	(2,286	)	(23,565	)
Sales of premises and equipment		564		1,591		2,155
Purchases of premises and equipment		(723	)	(2,039	)	(2,762	)
Divestiture of Corporate and Institutional Trust businesses		—		740		740
Goodwill and other intangible assets		(332	)	(169	)	(501	)
Purchase of bank-owned separate account life insurance		(1,791	)	—		(1,791	)
Cash equivalents acquired, net of purchases of banking organizations		3,466		(3,432	)	34
Net cash used by investing activities		(22,213	)	(9,030	)	(31,243	)
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net		28,328		1,513		29,841
Securities sold under repurchase agreements and other short-term borrowings, net		(4,454	)	2,214		(2,240	)
Issuances of long-term debt		5,468		5,018		10,486
Payments of long-term debt		(7,414	)	(869	)	(8,283	)
Issuances of common stock, net		—		337		337
Purchases of common stock		—		(2,693	)	(2,693	)
Excess capital returned to Parent Company		(2,510	)	2,672		162
Cash dividends paid		(1,500	)	(1,539	)	(3,039	)
Net cash provided by financing activities		17,918		6,653		24,571
Increase (decrease) in cash and cash equivalents		(1,870	)	904		(966	)
Cash and cash equivalents, beginning of year		24,937		13,654		38,591
Cash and cash equivalents, end of year	$	23,067		14,558		37,625
CASH PAID FOR
Interest	$	8,029		1,600		9,629
Income taxes		3,317		(285	)	3,032
NONCASH ITEMS
Transfer to securities from loans resulting from securitizations		931		—		931
Transfer to securities from loans held for sale resulting from securitizations		212		—		212
Transfer to loans from loans held for sale	$	12,636		—		12,636

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

12

WACHOVIA CORPORATION AND SUBSIDIARIES

Supplementary Consolidating Statement of Cash Flows Information

	Year Ended December 31, 2004
(In millions)	The Bank			Other Subsidiaries and Eliminations		Wachovia Consolidated
OPERATING ACTIVITIES
Net income	$	4,707		507		5,214
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net		180		11		191
Provision for credit losses		215		42		257
Gain on securitization transactions		(113	)	—		(113	)
Gain on sale of mortgage servicing rights		(34	)	—		(34	)
Securities transactions		21		(11	)	10
Depreciation and other amortization		957		458		1,415
Deferred income taxes		(1,451	)	(83	)	(1,534	)
Trading account assets, net		(3,456	)	(7,615	)	(11,071	)
Loss on sales of premises and equipment		92		9		101
Excess income tax benefits from share-based payment arrangements		—		(70	)	(70	)
Loans held for sale, net		(3,176	)	(1,180	)	(4,356	)
Contribution to qualified pension plan		(253	)	(26	)	(279	)
Other assets, net		741		(182	)	559
Trading account liabilities, net		(1,459	)	3,923		2,464
Other liabilities, net		(1,595	)	987		(608	)
Net cash used by operating activities		(4,624	)	(3,230	)	(7,854	)
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities		48,073		7,320		55,393
Maturities of securities		28,457		1,377		29,834
Purchases of securities		(85,437	)	(3,673	)	(89,110	)
Origination of loans, net		(15,601	)	3,365		(12,236	)
Sales of premises and equipment		464		116		580
Purchases of premises and equipment		(677	)	(283	)	(960	)
Goodwill and other intangible assets		(311	)	(160	)	(471	)
Purchase of bank-owned separate account life insurance		(257	)	(115	)	(372	)
Cash equivalents acquired, net of purchases of banking organizations		—		1,110		1,110
Net cash provided (used) by investing activities		(25,289	)	9,057		(16,232	)
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Increase in deposits, net		47,392		(10,665	)	36,727
Securities sold under repurchase agreements and other short-term borrowings, net		(7,297	)	(4,734	)	(12,031	)
Issuances of long-term debt		1,340		7,155		8,495
Payments of long-term debt		(2,863	)	(2,216	)	(5,079	)
Issuances of common stock, net		—		646		646
Purchases of common stock		—		(2,357	)	(2,357	)
Excess income tax benefits from share-based arrangements		—		70		70
Cash dividends paid		(1,650	)	(656	)	(2,306	)
Net cash provided (used) by financing activities		36,922		(12,757	)	24,165
Increase (decrease) in cash and cash equivalents		7,009		(6,930	)	79
Cash and cash equivalents, beginning of year		17,928		20,584		38,512
Cash and cash equivalents, end of period	$	24,937		13,654		38,591
CASH PAID FOR
Interest	$	4,433		774		5,207
Income taxes		3,639		315		3,954
NONCASH ITEMS
Transfer to securities from loans resulting from securitizations		213		—		213
Transfer to loans from securities resulting from terminated securitizations		980		—		980
Transfer to loans held for sale from securities resulting from terminated securitizations		3,918		—		3,918
Transfer to loans from loans held for sale		8,558				8,558
Issuance of common stock for purchase accounting merger	$	—		14,000		14,000

See accompanying Report of Independent Registered Public Accounting Firm on Supplementary Consolidating Financial Information.

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