FINANCIAL GLOSSARY

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

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

Collateralized Debt Obligation (CDO): A class of structured securities on which the return is linked to the performance of a diversified pool of assets, which may include synthetic securities. A synthetic security is created by combining financial instruments to mimic the properties of a conventional financial instrument, primarily through the use of derivatives. 

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

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

Earning Assets: Assets that generate interest income or dividends.

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the instrument, or if none exists, the most advantageous market.

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

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

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

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

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

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

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

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

Mortgage-Backed Security: An asset-backed security issued by a government agency or by private issuers whose cash flows are backed by the principal and interest payments of a pool of mortgage loans.

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

Net Interest Margin: The difference between interest income and interest expense, divided by average earning assets.

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

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

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

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

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

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

Residual Interest: An instrument issued or retained in connection with a securitization where the payments due to the investors are the remaining cash flows after all other investors have been paid. A residual interest has attributes very similar to common stock.

Retained Interest: Any interest (for example, security or contractual right) retained in connection with a securitization or other transfer of financial assets.

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

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

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

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

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

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

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

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

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

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