ML20238F625

Security Pacific Corp,1986 Annual Rept

ML20238F625
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1986
From:	Flamson R, Moody G SECURITY PACIFIC CORP.
To:
Shared Package
ML20238F529	List: ML20238F528 ML20238F530 ML20238F543 ML20238F555 ML20238F585 ML20238F625 ML20238F651 ML20238F662 ML20238F711
References
NUDOCS 8709160247
Download: ML20238F625 (193)

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2 Se:v.tyDa:1f-: Cf;ra:.0c i i o M 4 ~ a e;o" The Office of the Chairman l l f x, 4, s i e 's i T J f. y t 6-b e ~ Y e 9 b .s r d 4 0 0 W .s l 4 1 i

Letter to Stockholders

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• el C -W :e ycer George F Ucccy

• ee c' ~a'. cas ran us e 5 - 7e Ch Mr ' a Ea"w; a"

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Pres cewc Cn'e! E, s:e- *~e = ~rc a Se' :es S,5:+~ ra re Cic'!a Va~e:s 5,.'=~ - ia:" ::~* ::+: cae anr; Ofw 3:: ~e 7: : :::: e ea"- ;s '956 s:ryg -Men H S@tn. . 3 :.:c- : me ::r?,:c; s!?a:eg es :t:~ese in'ee siste ~s Se::'. =a: ':, ea-v ee cna rman owe B a' ~ t a e: r -te's:a'e crag stra*eg! Ove':re ren severa,erz se r *: ::~ ~.-. wramF Fra vce

ese oc m s.: are;y s: t~at acc t 25 ce' e~t at Sec ty Pact.: s er~ ~;s re c ca =.:

i Cracan anc Rav D '~:u;~ rie's:a:e cav"g a::v :es Our gaa 's to ra e ourinree :: e~t cr r, c.. m l Hanmen vme Cranan sy s:e~s r: c: "tersta:e caveg actu les eacr c'cauce a c r:e' f c: er rg: :. 990s m =e sce :~es *956 ceginn>ng on cage 7 ca'<te' state ca~ ~g 3: are;<

se sse: ~ ore u v EARMNCS' STRENGTH Ou '965 ernirgs s!'engtn :s ca'ticu arty accre~ r a.~c:?:vt r

meass'es of cer'ormance retam on com? on eauty anc retarn on assets s ~ :~ :.e a 15 5 cercent anc 0 71 cercent rescect,eiy re~aining a: tre n:gr iese:s of 'e:e":. a e , ear ena s::cknoicers eaa:ti na.nc'easea 16 cercent to $2.575 mon !:r a c c. 8 e l l ce'sna'e of $33 25 tvet ecorce for ine yea' aas $385 9 mahon. an inc. ease of 20 percent over :~e 5322 5 mdlicr recor:ec tot 1985 On a cer common share cas:s eam:ngs 'eacnec $4 56 to? '955 a 12 cercent ecrease over tne 54 35 recor:ec for 1985 i j Oar strong growtn in non-?nterestincarce continuea through 1956 Non-inte'est inco've i totatea $1405 6 mdhon tar :ne year camcared to $1023 8 mahon for 1985 Aimcst a" ca'e. i gcnes of ron" rte?estincome reg:sterea increases. including ga:ns on saies at eouity se:: ties comaray as a ?esult of vertare cacita: ga'ns. loan fees pnmardy cue to n,g~er rea: esta:e loan or:g na: On: and encreasea Dusiness loan and commitment fees anc service cnarges :<' cecosrt accounts Dunng tre year se sucstant ay strengthened our reserve for crea:t losses. tonowrg c: consistently conservative St'ategy ?n tnat regarc The reserve amounted to 171 percent c' totai toans ana > ease financ:ng at Decemoer 31.1986. comcarea to 150 percent a year er'e' For 1986, the prov:sion for c'eo t losses totaiea 5502 9 mdhon comcarea to $379 4 ~non r

Syngw, s 1995 yo,_pg&,, myg y -ggges as a pe<:ent :,1.ag,ogos yy segges gn,o g 7:; a cercert from 3 06 percent at December 31 '985 ACQUISm0NS Last Octocer Ae compieted the acowsit.on of Anzona Bancwest Carocrat.on and <!s eamseys a e inctuaec en the Corporation s results for the last quarter of tne year 1 1986 % a'P w se nos nase a strong and growing maruet presence in Anzona one of tne fastest growing ) econom,es in the count'y Last year se a!so reached Ln agreement to purchase Orbanco Financial Services 1 Corporation. the Oregon bank hoiding company with assets of accroximately $ 1 bilhon 11 acorovea that acquisition shous ce completed by mia-1987 Completea tast year aas the acquisition of Harbor Secunty Bank. based near Olympia. Washington to give us a srnan factholdin tne state of Wasnington. l 1 we aiso conciuced an agreement to acquire Nevaca National Bancorporation with assets of more than $640 melhon the parent company of Nevada National Bank. the thira largest n tne state 11 approved, that transaction would be effective after January 1,1989. when Nevaca 1 state law allows Cahfornia banks to enter Nevada l In 1986. as part of our clan to expand our retailbranch network in Northern Califomia we reached an agreement to acquire Diablo Bank. heaaquarteredin Danville Tnis three-branch bank has assets of more than $130 mtlhon We expect to finahze this BCQu sition in ea% GS7 and we are cont nuing to seek ways to build our strength throughout Cahtomia. the cnos market for Secunty Pacanc. l in February 1987. we reachea an ag'eement to acquire Parnier Bancorporation the l Seattle based multi-bank holding company witn assets of more than $9 bilhon The trans-action is expected to be completedin the third quarter of 1987. We willprovice you w:th more j information on this major event in the near future. LOOKING FORWARD The hnancial services industry is growing and diversifying. ana S?cunty Pacific is property positionea to continue our strong growth within the industry. Since the earty 1970s. Our diversification of products and semces, as well as our geographic diversthcation. l have been successful strategies for us, anc we are committed to those vital strategies going ahead. Diverse. well-baianced sources of earnings and a high rate ofintemalcapital generation have enabled the Corporation to continue to expand and to benefit our vackholaers. There are. however severalbasic nnancialservice sectors in which banks and bank holding companies are not allowea to participate freely. such as the insurance. secunties. and real estate businesses The pubhc interest, and enhghtened national pohcy, require that CompelH 1 tion in all hnancial mark ets be opened to quahbed part!Cipants, and we are worming to bnng I

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~re e ras teve a g' eat cer of ae'eguianon in tne tast oecaoe a,trougn on a, e,e avs a c+:e en caps ne w e-tre *emai ing camers snou;a tallin tne mierest of free !a e

? cet.:cr ya most :r-'conant'y to the tene!.t of all customers tar tranc:a? serv ces we

' ^ r ;'n;e,:u ?; 'E d2 Ie'SDect ves 1986 for a rerek of our Dnor t'es 3a s!'bfeg es 'or it/e g<cain BOARD OF DIRECTORS Durmg 1956 Lakrer ce O Kdchen Dann B MJer Don 5 T:5r,~ y Bert Get: ana James R L;8?opina aere e:e: tea D; rectors of Secunta Pa,f: Co cora:,o a : Secur.ti Pa:.t.c Napana! Bank Mr Ktchen is Chairman of the Boara ana Ch:e!E : t,e Cncer ati. csheea Corporavon Mr Mdieris a partnerin the laa !,rm of O Me%e, L U,e's Mr Tastenraa is Cha rman of the Boara anc Chief Executive Off.cer of An:ana Sa c ac Corcorapon a a The Ar::ana Bar+ Mr Get :s Presicent of Globe Corcoraban r: Mr Garacina :s Presiaent of Pac:!:c Lignung Corporation Their counse::s a set:oe e aa:: r to Security pacdic. ana they bnng even broacer expenence anc cive's, to t~e n:a-s tne Corporaban anc the Bank Socmng for tne Detectors tne management. anc the staff of Secst! Pa: pc ae ucc +: are tne interest toyatry. anc oeascapon of the stockhotoers of Secur,ty P3::!'c 7 e..:c - !ne niestors in th:s Corporapon conunues to be one atits important strengins 4 I I l 4;;' :: l[ s l l R:charc J F:amson ill Charan o' me Bw] arc Ch e? Ecut we OtNer 1 l l I i I George F Moody P'e cent anc Cre' 3e ann; O!! w 1 i l i 1 _________..___J

5 Sex ty Pa:tc C0 poranen N 1988 Antca: Report the California. Customer l '~ ~ f,,7 i i 1 g I / ) 4 ~ - / N/ '/ I (/ - 7,. g ,/ / t a--'

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Perspectives -1986 Se:,,-,o ; ;::~:>a : :~ '.e ' % s :- *e ' a c a: reecs o' is : 5:c~+'s r:~~: r e s~ e ::ta Da:es as s+ ' as - "re' a:c avame:S c:c s :, :a' /, e : s:c e's oc 'c Sec r!

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knar B Den. Chef

arcrct;#::.2.a y,ces at cc-cer ?.e c'<es r crame ma9e s Custome's a eac-pam,nsstrane Othcer for the per ra,e : e -

• ee:s y : rew'e e :s a a ae ana ranc'ea f na c a'se', ces Coumy of !.05 ate \\es orov:cea c) c'veslo a's '.,", ec4 espeaa e cTcse "ar e:S ana croaucts sncan allef! 'n the County s ln tum Secu ty PacJ c '"ust c ov ce 'ra c a se oces a"tn Ine Oc'"cet tve eage :"a a>e Hall of Just\\Ce As one at

,.,se'u! a a mea-g',.i' '" s eCi!C ~a'e:S Ya :na! a'e DrOf>IaC'e to :ne CorDo'a'cn Secunty Pac 6c s 2 S m\\thon Each of Secur t, Pac:f c s or a y busir,ess sistems - tre Canto'n a Ba*ng a-: =+a retaa bamung customers m Estate inaust'es S<s:em t"e i nanc:a Services Sys:em. anctne Cao.ta Va'kets S,ste - ~ Cantorrua ne uses the Bann s continues to focus on ca':, cura' customers anc markets Secunty Paci'ic ras a so ce.e :ce: crea<t cara anc home tarkir\\g an inte's:a:e bankmg strategy :o reacn cawg cus:or"ers in :ne wes:e - states a-, l serv <ces As one of Secunty comoietea tne !:rst concrete steps in 1966 PacAc s mstitut onal FOC 1 ON INTERSTATE BANKING le the aosence of Feoecal ceregJat.on 0: <nters: ate ca g f customers. the County uses a rest'ect.ons inardua!S:ates sucn as Anzona :00" the ieadin allowg cam ac:a :c s r wrae range of services-out of state ca'ws 'n:s trena oce-ed many occor: unit es for Secur.:i PacJc c ew l tonc uncerwntmg. customer case <n tre aestem states l reanagement. anc crest l ast Octocer Secunty Pac 6c co~otetec:ne acqu?s t:on of Anzona Ba caes' C:'c:a :- enhancement prog'ams sith assets of more tran Sa coon W:ona Banchest the carent comca"' o?e :nra e';e i trustee and custoa al cann n tne state kth 702 crancnes nas reportea 24 consecut:ve years o'ean',gs ;msm serv \\ces cash management. Totalassets grew 14 percentin 1986 to S4 S calion at year ena In 1986. comca'ea to a,er oatapacessmg and eartier loans were ac 17 percent anc cecos:ts increased 14 cercent compd.t smort. fcan This accuisitson grves Secunt; Paci!c an exceitent position in a grow ng econo? y Se:r, ongmat:on. tetter at crect. Pacif:c toovs forsa?d to pro + ding a fuit range of existing and new ba@ng services to : ese are otrer wkmg serv \\ces-new custor"ers in Mrc,a antie ta"ing aavantage of the efficiencies of sca e presentea c/ crov\\ced by spectansts the increased scoce of i:s overall ccerations ac: css the Carparahan Contruing to focus on its inte' state canking stra:egy in the western states in Novemce' Secunty Pac.fic acautrea Harbor Secur:ty Bank in the state of Washir.gton Harcor Securs with inree offices anc S10 trilhon :n asse:s has been rena'ned The Washing:On Bann in acamon to these two camcie:ea t ansact ons. Secunty Pacific on 1986 announcea ag re-ments to accuire tavs in both Oregon anc Nevaaa These transactions g:ve Secur ty Pac

• c a network to ex,cana :s ca'm"g activ :es in eacn ofinese valuabie markets FOCUS ON CAUFORNIA Cauomia one of the strongest econom<es in the sorld. continues to te a ononty for Secunty Pac 1:c's continvea gros in

0 5acart, Pac L: ;y;73w i + 1906 Arnur ec" The East Coast Customet n b ~ ' ~ i s,rEas N*N e -..__ tanwe ,,.%.~- ,,-w. ,., e e t ' % : 2~ ~,- .?, ~' -** ~ ,.g; A I i I w

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i. Cauey Boox5 Jr D.rs : coe me 5C 9ea orr:"es tre state omr "e nex!three vers pregent ut Shon brWs A in more t"Y : C N"C" L We' '"C40ut T? State Secunty PSCAC s !CCL.E rg ;

aracarg a a:Je 'a ge c' Cor'pe' ny-CrCea Cavng sernces to tre V sceCtrr c' tuy; at DAes miema: cna: n tapan near ha mngton Cavarma ame?s mese :ncuae treamora Crea:t ana cecos:tproauca as sen as :ve 1 0 C tes.ae a Stor:s 360 nesest state-ct-ine-art services a,rpiace l'ying uncer ne for exampie. at a time shen the Cons "er Creait '"a'ket sas aseng for IC+er "! res: Tes untec E pressDann More Secury r3C:!:C NationalBank ceveCpea a tre'ea system at Crea:t Cara mierest : a 2.1: w

nan $ 3 mahon m lease to as low as 46 percent for some Custo% s. baseo on tre nur-ber of quahtpng c ao ~g serwCes they use Th:s strategy encou ages strong. long-term relat,onsn:cs in tms +,

tranong torn Security r ract:c nas neipe: Snort Cosumer market by recuC:ng the Cost of Creait to those Customers sith tre Cm sest :.es. Bro!ners trmg the,f U K - SeCunty pac C M manufactfed 3 rwitt to IeChnoiogy i *,1 Cormnvea to be a uey ! actor ir '966 Focus.ng cr's ays to Crns.. aithries inrQughout Ine U S teyen e5 genera:ea througn Els Da?kng othCes statemae SeCunty PaCSC anno:Ce:: u SeCuhty PaCthC also prow 3es to Dnng a new generation of Danmng technology to the Cahtom>a Consurrer.n :re a ~ \\ e;u Dment hnanctg ot*ef 6'anCh of tne Future" project Currert'y in the oitot cnase to vahoate the pro C:cr.+ tTes Ct crct. anc fa'e!gn sottkare and ha' aware as sett as bolh Consumer ana employee BCCep:ance.5 a o'a*c' eCarGe serytCes to Snoct automation syS tem using state-of-the-a't persona; Com, outer, interact:Ve Viato a'SF Y : Bla B'3ne'5 m the Un.ted Communications : technologies Ug:0m in th:s major aavance of bank;ng !?Cnnology. hnanC;al services will be aehverea ic Customers economtCa!!y ana convenient'y th!augh !6fminals that talk. use graph C S'a,e-aC!non vtaeo images to provice user-friena'y informat>0n ana guiae CLstomers ih'ougn "e sleds neecea to Complete their !!ansactions Bank tellers and branch office's wl!!Use advancea d:sDiay termtrats to speea transacitons personahze ser/tce Customize 00Cs ments, ana enhance the e!!tCiency of ?etail Canking transactions The loan approva! anc VC Ing process will be faster anc more ef!!C:ent This new p'oject wdl bnng automanon into SeCunty Pacific offices, where Customers j t benefit airect'y anc hignhghts :ne ootent al for bnnging more procuCts ana services to Cahtomia Consumers tnrough a Cynamic aes ery system - the bankeng othCe nemorv l The Cahtom.a Commercial Group manages SeCunty Pacific's banking relationsn.cs s :v the Cantomia business Commun,ty One at tne top tenaers to this smportant anc grosieg marketotaCe. the group provides Coorainatea access to the tuli range of traaitiona! Crea! l i .....m i

'C Sen' y hof.c Cyprat,cn N e 1988 Arrua, Recrt The Australia Customer ~. / ' = ,a ^ . y .y .#^ A u l ~ j } f.? g p s g fl .\\. 4 t . 1, J ' Ilk. c $e. y4 8, ~ I s n /4 g I f b 4 9

s.,

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I proauc s ar'a setects aM coe'3"cns SiDo?! rorl*e ent re ge::7 of tne Cadomia bass n ness maraet Comr~e'cral'eal estate customers in Cahtomia and across the U S are the focus of the Real Estate /nd :st? es Group wnich provides commercra!rea: estate knancing for resident at hous-At left, Yennein Jarrett, ing ceveicoments retad Snooping centers oni1ustnalbuidings and office Complexes nation. Daector at Elcers IXL ano aide ??>e g< cup's portfaho rebects a good baiance geographica!!y and byprotect type Managmg Daector or EIcers Cat,fomia s business community continue: to be the focus of attention throughout Secunty Fmance Group, m the Pacihc. Whde m:dd'e-market commercial banking services are provroed by the Cantomia company's Melbourne Banking and RealEstate Industnes System. a wide range of speciahzed financial services is brewery wnsch pr00uces provided to customers, not only in Cahtornia. but across the country and around the world Fosters Lager Witnsn througn the Financia! Services System and the Capital Markets S stem i Austraha. Security factic FOCUS ON FINANCIAL SERVICES Secunty Pacihc has long beheved that certain speciahrea provices Eiders with nnancialservices can be dehvered to customers emciently, and prontably,11provraed by corporate tmance and svDsidianes staffed by professionals with industry expertise in those helds i tankmg services, such as Venture caprtal, leasing, consumer and commercia' hnancing, automotive and man-credit and teasmg hnes ufactured housing retad and dealer inventory hnt.ncing. discount brokerage. and insurance are nnancialservices proviaed by Secunty r inc in markets throughout the U S and around an0 money market accounts. ac and nas atten caIIeo on the world Each business is a stand alone profit center and is measured by the earnings Secunty Pachc's expertise pe'formance standards of its own industry around the worlo wnen tmancsal The Financial Services System wdl continue to pursue its strategy of aiversthcation. servces sucn as swaps and balance. and prontabihty, wnde adding to its market share both in the U S. ana overseas. Imes of creast are neede01or In Europe. for example, the Financial Services System is expanaing its asset based Etcers' actwi\\es n otner commercial hnance activities which have long been prohtleaders in the U S. market Last I i countrtes Hoare Govett October, Secunty Pacanc completed the acquisition of Angio Factonng Services Ltd Head-Um\\te0 and other Secunty qua'tered in Bngnton. England. Anglo Factonng Services offers a full range of factonng and PacIhc umts worke0 closety receivables hnancing services through sales othces in six major industnal areas it,roughout j w'In EIcers on \\nett the United Kingdom. From this base. Secunty Pactbc plans to oevelop a factonng network in acquisit\\on at Courage. the France, Germany. Salg um, and the Netherlands s;xth largest brewer n tne U K. Insurance is another market targeted for future growtn While Secunty Pacshc has an exten-sive insurance operation in the United States. it is hmited in the areas avadable for expansion by regulatory restnctions The United Kingdom offers new opportunities for future growth Last May. Secunty Pacchc received authonzation from the UK. Department of Trade and Industry to i unaeiwnte. in the United Kingdom, certain classes of hfe insurance and certain generalinsur-ance products.

'2 ip'4 % + i 1 i 1906 ; r W M. The United Kingdom Customer 9 / s. o a '\\ ) 1 a Os $ N y. I s e .= a O <t g \\ t 1 ,./ 3 eD 4 5 I ) l i l i l I M 1

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,-4' g3vemmerit recersiv Onerea mss a a ar r;e : c a : a c 0 :, Ie: pa < :a- + the C0rapany s shpeS for sate 3, " ' C a se, "' ~ p y er!3 ', g i ' c,,' c " "c'a pr,3 to the DLDhc IN5 was the FOCUS ON CAPITAL MARKETS Se ' r 1a e a a5 re m m'e ::r c e u taqtSt @ thal pubhC offenng "g :"ype ? e3:" :ve r u m3l, "3 a"c,a a + e:S 're n'erna'lr3 3 evet Uncertanen m the U k !3 " h'* e. S Le "g B::+- ~'3:eJ. =cereasB:Cr:*+r! 5', d.fcve A: , - ~ -, arc ta sec E5 4 tuon t"an; y :ecters ;m, re pre:r 5: ares t aos.n "e croCess EeCu!!i PhD!': 35 '" Ode 3 (O !&+ e ' k B3v&n:hge C1l'ie C"ong*':q Cr'cu'*5thr:vs G D :.? : 5 ne':"D ta% ng 5l'b:ep, s'nD.e5 lhe CD'Dora :Or D pr:vae ct e? *:n 'e' 3 CDf"DFEMt'"Sm e Se'i% &E TO SCI "4 'E F5 'ta!,0?'B' ment $ A hO CDe'B e m 'D A C?.: 5 :.. '3 '"e'F e!5 Dvt d'S: :: S&:: d PH: ?,C S re!hd CuS:D"e?S !"?DJQn ??e une Det.4ee" nm.. Cf Ce3 ~GB"5 dnJ !*e Sr:L' t U 'na'*e! 'fB2.l OnB* Ch*hng an3 Crea.? tar:!'c r5 nri ": asgee: nte ?re.e esiment Dre;; ca: cnnes of secunies unaew.img ara :ea,e; s

B:e 't'anCe Tien'Ch Y3 eDI 5!'3!&gy SUv'SO', Df +e' age. una vn' tov 5 DT eSS og

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• U S ~'easury secur !!es Noh 1986 % a % %

'9::gn:e y a 5 y ~ cyy a'-et ta't:C C3"' < :!n a r*3'or :3mmament to tre ceDaa! 're s y-ca2+s gase'nr ent 9 cunt es throug' a re!Acrk o'Q"cei r a ve!7 3T. a ~e ., 'V rn Lcs Ange es %es : r-uar:On ~.io anu S?rgaoore Pr: mary aeaiers are the key imk.n v r o q tne C Str' Cut On or *ea:J'; he:Jr t es !: C'okers andinveStors in key CaDita!marvets a'ound W K,. the wond anc rhe Ea~ o ars !O g eaty expana as alreacy estabbshea t' acing ana a str cv- .) Por' caDaQdet,- y, *d Secur:ty pad!'c :s a'so focuserg on CanVing ODDortunares Aahin the cor"estic Ya5ets of l'l, Certar countr es Por exampie Austraba Continues to be a kev ma' vet, w'th Secunty Pac:t c i providing a Arce range at !>nanc:al services wanin the country as helt as access to the s or'd s capital ma'k ets Secur tv Pacif>c Austrana Limaed has rapidly cecome a mapr l actor.n as i l Secanty Pacshc Plaza. worto mar ~et. bu,iamg a s!'org and,o'olaabie customer base and ooerating globallv througn ( neacquaners of Secunty SecuttiPa:?c s Mercrant Back Dunng the year. a s.mda? mercr: ant tanking st?ucture aas Paahc Corporation, nn estact:shea in re reg on.utn tne format:on of Secunty Pacaic New Zealand Lmned 1 \\ Los tone es. Cahtornia The Bank of Canton continues to provice profitabie:nd,genous oacking ser ces n th:n Hong Kong ana ~3ry courtres m the Gar East ana en 1986 reached an agreement to a: Cu re Cantorn,a Pac,fic Eanx n Cantomia to more tulty serve the comestic As,an community m 556 i Secunty Pacdic Bann Cana ua cocstea its cresence.n that country through the acauis:t on c! \\ Morguard Bank of Canaca san combined assets of CS500 mditon and off.ces in Vancouver. Calgary. Toronto ana Mnntreat FOCUS ON BALANCE Secunty Pacit.c continues to beneve that the strength of the organizavon comes from a ba:anced group of dsers:!,ed eamings sou.ces By focusing on the inc:vidual strateg'es of the Cahtomia Banking and Rea! Estate inaustr,es System, the Financia! Services System and the CaccalMarkets System. as wellas the Corporation s eterstate banking strategy ca'anceis achieved The diversity of eamings ( streams ana the strategy of the Corporation that balances that aiversay, is clearly in focus The abdai to cnocse from a vanett of financia' services heios Secunty Pacilc's customers to c?eate bnancia:pacnages tanorea to fit tneirindividualneeas The abihty to offer anincreas-ing vanety of unanc a: servces in a a:versay of gioba' markets has been the key to Secuntt Pacific 2 oe'rormance auong the last aczen years The Corporation was canunue to focus on as strategy of ba accea g'ou'n in the futu'e cont:nuing to bund sohd sharenotaer value r

f g acmcCuatcr p 5, 1 l Financis! Review l l l GENERAL INFORMATION INDEX TO FINANCIAL PEVIEW l Securdy Pac 6c Corocrapon 's a trca:tecased financial sereces fGHUGHTS ~ ~~~~ 3' "ornoacy otrenng a sce range ct financia! sereces to a diverse "~~ EARNINGS PERFORMANCE m customer case wth,n tr e framescru ofits wonance structure The ~~ Corporaten s tne sw largest U S canx noiding company in te'ms Net Interest income 9 ~ of assets utn aver 7200 ottices around the wond Non Interestincome 2: The Corocraten :s organ:zec into three onmary operabng Prowsen for Credt Losses 22 roups The Caldom:a Banking and RealEstate incustnes System. 1 Statt Excense 2 i e Cao.ra Ma'rets System, ana the Financial Serwces System. These three line organizatcns are succorted by Secunty Pacdic Other Expense 23 Automavon Company and other staf* groups. Most of the income-Income Taxes n producing act:v, ties of Secunty Pacd>c Naponal Bank the princ: pal }, } subsidia'y of the Corporahon, are conducted by tne Caldomia Ba+ng and Real Estate Incusines System and the Caoital BALANCE SHEET ANALYSIS s Ma+ets System through more than 590 banking branches in its Sources ana uses of Funas Trenas 25 home state of Cat tomia and more than 40 offices on foreign countnes-Liqucity and Interest Rate Sensitiwty Management The Caidomia Barmng and Real Estate inaustnes System Capitaland Divicenas 29 pro +0es coth consumer 3na commercial banking and knancial serwces in Caidam a anc administers the Corporaton's commer. Credit Risk Management ~ ~ 3C cat reat estate actvrties concucted throughout tne united States COMMITMENTS AND CONTINGENCIES 3: Tre System s maae uo of the Caldomia Branch Banking Group, SELECTED QuhRTERLY DATA 3E \\ tre Caidornia Commercial Group, the Bann Re ated Business Orson anc the Real Estate inausti:es Group Banking serwces inc!uce ce'sorat anc commercial checking accounts. interesti in leasing consumer and commercial hnancing, mort;ags c r. cheving accounts sarngs and bme cecosit accounts: consumer, ing, manufactured housing hnancing. venture capitat. a'scart rea! estate ana basiness 1 cans mcney transfer services, and safe brokerage and creait insurance activities The Financ a? Sences ceccsit tacnit es The System aiso administers and provides trust System provraes services to customers through more inan SCO l acc estate aannist'aton. income tax precaraton anc onvestment othces throughout the vneted States and overseas. acasory 3erwces Secunty Pacdic Automaban Companyis resconsbe for tre The Cao. tat Mamers System administers the worldwice actiwties deveiooment of advanced technology systems for the Corocra-of tre Corpoispon anc the Bank in the areas of wholesale banking, ton's woricmae activities ana the aaministraten of data pro-cao,tawamets. nestments and secunties The System is cessing functions. Achvities include transacton processing te e- =moosea of t~e Mercnaet Banmng Group and the Internronal communications adosory services and software aevecoment Baevng ana Mvestments G'oup in addition to proviaing banking As part ofits amerstate banking strategy. the Corporatcn seteces tnroag~out the Vnited States and intematonally to busi-acquired Anzona Bancwest Corporaton (ABC1 and a sma!' ca~ r nesses goverrrcents ama otherirst1utons, the actiwties of tne Washington in 1986 and has announced agreements to acquire Syste'~ rnciuce ena.ng adwsing, secunties related acowties such bank holding companies in Nevada and Oregon ABC o"e's as c?at:rg troie' age andprocessing, and other stand-alone consumer arJ commercial banking and related hnancial serwces oroaucts ano serwces to customers in Anzona andin selected regonalanc nabonal The Frnancia! Serwces System is maae up of the Consumer markets The Anzona Bank, whichis the pnnccalsubsc.a'; of Sevces Grovo the CommercialFinance and Leasing Group and ABC. is the thirdlargest bank in Anzona in terms of assets. anc the ventu e Capaa! Grouo The Financial Sereces System engages operates over 100 banking off ces Many sections of the Financial Renew prowae separate cata anddscussionregardingintemationaloperations Intematcra! operations incluce intematonal actiwties of the Caoital Mar ets System, the Financial Serwces System, and ABC The intemavocal acovites of the Capital Markets System incluae operanons conductedin certain corporate subsidanes and a' filiates as A e" as the Bank's overseas branches, cffices, Eage Act subsida':es. Intomabonal Banking Facilibes locatedin the United States a"a intemational operatons in Cahtomia.

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• J 35

- 2 39 3 3 9E 3 3E1 5 3 27 5 2 9J .i l

,x 1 445 0 135 10

• 3'

.'n '95

• C9

9e

. 5s5 f SOURCES AND USES OF i FUNDS GPCATH l m g j ~ -s i - $60 074 $9 976 20 5: :95 .. EE? '3 !aa E:9 53E J55 23E 3J3 532 EE2 a

• a >

SO686 7.768 18 J2 9'S J 5:' '2 35337 32 694 3: DJ 7

':J?

v 2

19 893 4.291 2B '5 EC2 .E' 'J :J 1 '3 J'9 'CJE9 9'*5 ' ^ ' -w .+- 3.038 728 32

3'^

EEJ 32 ' 'J E 552 J': J3

• ~ :a:

1 665 581 54

EJ 39J 5'

59: 3J2 J53 557 r 2.861 479 20

3E:

J33 22 9a? 1 'E8

• 4 7J 3*J CAP!1AL FAiiOS 6 C9% (0 31)% -

~X%

TE % -

6 2J% 5 E9% J 9'% J E3 S 41 0 46 ' 95 . de ' :7 6 46 6 23 6 47 CFfDi1 LOSSES AND AESERVE =. 7a' 7 $ 203 37 "J .= .=J 7 > ~.. =43 5 .W. i .t c"..^ s . :t " J 1 71 % 0 21% -

• 50%

2:7% - s57% ' 19%

• '3%

0 97% \\ $ 336 5 $ (16 6) (51 3 353'

'J31 c5 3 2':C 3 1153

$ 97 0 $ aa 2 l s-0 B9% (0 151% - ' CJ%

• 33% -

0 71 % 3 43 % G 4:% 0:'% 33 l 1 $ 1.198 $ 64 6 i 134 i 5 *123 $ BES $ 676 $ 333 e } 2 70 % (0 36)% - 3 25 %

JJ *- -

~ 40% 3 C2% 2 56 % 14E% i I ~ r 3 l 4 ~e $ 1165 $ 74 7 i 'C9 * '2i 5 ?23 C $ 74 6 $ 74 B $ 25 3 x i "+* 3 $ 0 75 $ 01 1 5 07

^*:.

• 2>

5 : 5J 5 0 51 $ 0 52 $ ce - _.. ' -. - -. _33% i ~ - . n aamaws d'^* l i i i J l i I ~l

s. 1 ( .~ pgure 2: Earnings Summary w a me >: ev >u w. 3. c vg w

y y#

~ n g m: ~ $J 659 3 $ 63 5 1 la 5 5 = J

J J:53 53 '6C i 54X72 13EJ3a J'

m w :e'se 28607 < JJ 3) 21 2 K5 : Yi 2 925 t I J2J 3 2 BE 7 5 2 E7' t y ~ee e::~e 17986 1078 6 ' 69G 8 2 'a

• J79 7

' 336 6 '25 ' V9E '? .cre.?' r re ? JO5 6 361 8 37 ' C23 5 J7 '3 909 ? 623 0 546 9 J L.

~

-, n s y v erec4 m 502 9 123 5 33 379a

S 3r 21

??? 7 155 9 '52 a '3

• J'

. _.. e.

y. m ?e y

.c m e ya" v:erse 1.06J 6 157 J 17 9072 12J 3 16 752 9 689 : 6'C 3 539 3 ^ e?v e'se 1.0J9 2 198 8 23 550 J !53 7 22 696 7 601O JS5 0 JY 9 Ya 2.113 8 356 2 20 ' 75' 6 278 0 19 ' a 796 1290 C

• C95 3 9J3 J y yr,e,rcye

.a.es 587.5 99 2 5776 56 1 11 521 5 513 7 J1J 9 T59 a s - s ms.~ ens ' 88 2 55 7 B2 7 '76 27 65 1 61 0 63 1 55 2 9 en r^:Lejah 113 J (58 7) f3J> ' 72 ' 67 J 65 J 168 J !77 5

• 2J ~

-c r e $ 385 9 $ 631 20 5 3228 $ 31 S '1 $ 2910 S 26J 3 $ 23J3 $ 2M 5 m r ris f; Nert rohtaia e eco e paNy secy t'es mcre !0 a f#v fanie e::wea eN Ns.5 and it add Pe pre-tas e0wva'ent o! 6 esp"ent !as :N 's r w r.; L ,,,, ye / ms C ecn was related to +veraged seases Aca:tior' ally. the Figure 3: Distribution of 1986 Net income by Organization gry.s on 'Cr Crea:t losses Kas increasec to streng:nen significant!Y e 'eseqe *or c'ed:t losses at year-ena ( 4e ratcs chey income ana excense categones to average en 3sseis a'e snahn in Figure J natatorma Wnkmq anr1 p,v g ,uc .c Oct:cer !ne Corcorafoon 8: Quired AnZona BanChest Co'cora n

ce. ABCi or Cash IC.tating aco'cximate!y $480 milhon Ints Aas f

a::Cu"!ea!",?as acurCnase transE*: ton. ABC's results AereinCluaed ( ~

r a ce-o/e cas:s for tne first time in :ne fourin cuarter y

e Co ocra:an s eanngs growth re!!ected a s:'ong increase "" " " * "" Y n l r " e re: "ca~e O!:ne Caorta: Markets System as wellas an c~ ~ este n :re F ranc:a! Serwces Sys:em netincome Earnings of c: ve :a Jana Ba"wng ana Rea' Estate industr:es System were s+ :a', an:na gea between years The contnoutian ot each to un.. s.._ v. s. rew

movaa:e3 et ircome is illustrated in Figure 3

'e Co'cora:cn s strong eam:ngs growth in 1986 resulted in mea np retums or co:n assets and common stocknotaers' a % - 10 e ey measu'es at:ne performance of a financialinst:tu- " %e e:um on assets was 0 71 cercentin 1986. the return on As in the cast several years. the 1986 rncrease sas pr: manly at:r v ~c e wtv sas *5 E percent utable to loan growth, with international and real esta:e toans E ana cv Dece~ber averages excluding ABC, total eaming hanng the highest growth rates Trading account assets, fecera: Lies se'e up 'Coercentin 1986 including ABC. totat eaming tunas sold ana secunt es uncer tesate agreernents. and onvest q " n:' ease: 18 cer:ent compared to a 12 percent increase in ment secuntres were increased signihcantly re!;ectmg e< cans on c' % B*a a heyear compound annual growth rate of 13 percent capitalmarkets related activities Net core aecosits grew 12 cercent in 1986 based on Dece, ce' averages ex tuaing ABC Including ABC. net core aecosits increased 2S oercent. This comoares la an 11 percent increase 1985 and a 17 percent average rate ofincrease over the last tse years All core cecosit categones. except Insured Money Marwt Accounts. sere aoove 1955 levels with the highest ycath rates r-sawgs deposits and in:erest. checking deposits l l i humm

2 S w,cacte cycnt e s l I Figure 4: Ratios to Average Assets Figure 5: Primary and Total Capital Ratios ' a 96 9e5 99 19 0 92 ~ Net inte'est inco~e ' 3 31 % 36n 3 6 n. 3 61% 3 24 % + a Nor ste?estincre 2 59 2 19 2 22 1 E6 1 57 e Less o'av sco 'c' c'est 'o:ses 0 93 2 ?? O 95 0 42 0 46 Les s otter non. s werest eroense Sta4e cerse 1 96 ? Da t 91 1 86 1 76 Otver e cense 1 93 1 82 1 70 1 62 1 40 Tatar 3 59 3 76 3 61 3 46 3 16 trco~e cefore incar e taues ' 1 G8 ! 23 127 1 39 1 19 2 Net incorre 0 71 % 069% o71% o 71% 067% m Fu9 tact.e ema=em tass _v The Corporat on's favorabie ear nings performance resulted in a o'*' C*Dd^' high rate ofinternalCapitalgeneration The rate ofintemalcommon C7 7 95 9v equit/ growth was 10 9 percentin 1986. consistent with the levels of recent years (Frg 7). Tota! stockholders' equity averaged $2.861 8 Primary Canaal d 97 5 69 62' W 6G milhon in December 1986, an increase of $479 mdlion from a year ago In addition to internal capital generation, the increase in stock-m Basec on asustes toutm quarter average assets holaers' equity resulted from the issuance of $150 million of preferrea stock The Corporation's pnmary capita! ratio o'6 69 percent was above both the regulators

• minimum capital aceauacy target of Fi9ure 6: Credit Loss Ratles 5 50 percent ana the Corporation's in:ema! minimum target of 6 50 percent (Fig 5)

The ratio of the reserve for credit losses to totalloans and lease 'SC nnanc:ng aas 171 percent at December 31.1986. up from 150 percent a year ago IF1g 6) The increase in the ratio reflected a ~ ,.9 m genera! strengthening of the reserve Net credit losses totaled L $336 5 mill,on. or O 89 percent of average credit outstanding, for tne y ear down ' rom $3531 r"ilhon. or 104 percent. in 1985 Non-per'orming loans and leases totaiea $ 1.198 milhon at Dece"ber 31 1986. compa?ca to $ U34 mdhon a year ago Non-CC per! arming loans andleases as a percent of tota! loans andleases 'ett to 2 70 cercent from 3 06 percent at December 3t 1985. ~, y Another key aspect of overall hnancial condition is liqudty. Hos ever for a hnancialinst tution there are no easily quantifiable measures of hautaity because the most important element is the aoxy to ra Se funas in vanous money markets throughout the woria The Corporation s hqudty ic #scussed in the Liqu@ty and E Rese've to Loa'is em Leases trear ew ' '3 9 ' S' ' 50 interest Rate Sensit vey Management sect'on beginning on Dage 27. E IVe! Losses to Average Lca~s andLeases 0 40 0 43 0 77 G4 D && Figure 7: Key Performance Measures " 1986 1985 GM 1983 '982 Asseis to common eqwty 22 4 22 6 22 0 22 6 25 0 Return on assets (% 0 71 0 69 0 71 0 71 0 67 Pe: urn on common eqwly (%) 15 5 15 5 15 6 16 1 16 8 Interra! common eouity growin (% 10 9 10 9 10 9 11 4 12 1 m Ease:: cr amage tala,ces i i I I l- .]

-__ 'F ' l g Earnings Performance i .gf WiEREST INCOME Figure 9: fleduction of Net Interest income Due to l &c,e eauva ent netinterestincome tota'ea 517:18 6 mvl10n uo Non Pertonning Loans and Lesses g, cent trcm W5 at below tre GS5 g'owtn we $g S/ ke was < - e s ,c3se resuitea f om a 14 percent growth in ave' age eaming -eaMe's'a'e rcu ls) '966 USS 'S r Q gs 7e ?:et ?terest ma' gin at 3 99 ce'ce"t sas ceiow ine Domestic $ 99 6 $1012 $1004 0,.,.y ev e! % #egatve imcact of "on-cerfor~ing 'oans ara intemat:ona 16 9 79 23 2 &ls on consolicatea net interest income tota ea $116 5 m.iiton Ja' $116 5 $ ' 09 ' = &O I ., c3 ec to 51091 N!?on in G65 (Fig 9) per come'or s~a e. after ta<es $ 0 75 $ 0 74 5 054 %e Ta r Worm Act at '986 resu tedin a receter nenavon of

== .ncome on the 'everaged lease port' oho Tnis causea a non- ,yng 'eauct on to lease income. wnich.5 incluaea in interest - cene and a non recumng reduct,on to income tax expense The a:.,stment to net interest income totaled approximately $47 mahon. Domestic o,nerations were tesconsibie for the growin of total net ws eaucnon aoes not recresent a permanentloss oflease interest income in 1986. as intemational net interest income <: cme. rairer it represents a celay in income recognition as the oechned between years. A cetaded analysis of domestic ana inter. 5: mdhon wel be recognizedin future penoas Excluding the national net interest income appears on pages 54 and 55 A more l everagea iease ac;ustment, net interest income increased ceta.!ed discussion of the trends of major eaming assets and 1

oercent The net interest marg >ns have teen ca culatea exclud-sources at funas appears on pages 26 and 27 Page 32 contains rg tre severageo iease adjustment a further discussion of non-performing assets Figure 8

Analysis of Net interest income "

~~ increase increase 10 cease) r0eceasel grw* 9 86 AM00n1 1985 Amcf! ( '99 DCVESDC OPERADONS < v <re en mc:~e $ 1.590 4 $1301 9 $1460 3 $ 150 4 11 $ 3:9 9 .: e 3;e ea~ r; assets $ 36 014 $4 292 14 $ 31.722 $4117 s5 $275% %e ~e'es ? ~a'p " 4 50 % (010)% 4 60 % (0 15)% 4~% M%Ah0NAL CPE900NS w "fe'est ~;;~e $ 208 2 $ (22 3) (10) $ 230 5 $ 60 7 36 $ =E9 ; W3 ge er~; asse:S $ 10 296 $1481 17 $ 0815 $1,264 17 $ 5 3 ' %e' te'es ~rge 2 20 % (0 411% 2 61 % 0 36 % 2;% TAL ~e'es' #c:'"e $1,798 6 $107 8 6 $ 1690 8 $211 1 14 $1 r? 7 m;e erv; assets 5 46.310 $5 773 14 $ 40 537 $5 401 15 $ 35136 ' e ~eces* ma?gr' 3 99 % to 18)% 4 17% to 04>% 4 2< x . < wr e t d e"!:as s I)0"estic Net inte'est intorne X~estic ret inte est income totaled $1.590 4 mahon up 9 percent The most important negat:ve e'fect on the comest:c net interest ":~ 555 anc shgety Detow the poor year growth rate. Domestic margin was a reduction in the reted.: et interest margin This was et te'est income sas reauced $29 mahon by the redetermination causedonmanly by a slower and smaller dechne in the rates para eccme on tre te,eragedlease portforto but this was ottset by the on retad core deposits than short-term market rates and earning 03~est.c net inte'est income contnbuted by ABC. The increase asset yields (Fig 11) Eaming asset yields were negatively ^as me ?eswt of a 14 percent growth in eaming assets. as tne net impacted by early payoffs of otaer, higher yielding consumer and rte'est marg:n Aas beiow a year ago (Fig 10) Eaming asset reat estate loans A!so negatively a!!ecting the margin was a higner n'; sin,s c.scussecin the Sources anc Uses of Funds Trenas bect on on cage 26 The comestic netinterest ma'grn was 4 50 Dercentin 1986.

^ m from 4 60 pe' cent a year ago As in onor years, a number of

'Clars infbencea tre change in the comestic net interest margin l l l l 1 l

r s Dr:c:r:c : :5c 'T ~3'- l5 'e r+ : + 3 - ;L 'L

.:h as: ic " ..

'~ ~ ~+' '. rg3::: ::Sii :55~:*+2+'3 n :. ; ~ - ~:._ ~~+ - is:v + "C 5:' ;' 2:'"+ i :: C e:r"'  ; 9 3 c,, ;n --.,9.y. ._ g, g. 7 . a g ;. ;.., g 39.:i. : : 3 ;4: ~~ 35: y : 9 ;.; 3.. i e", c a :Mou ;- - ya r gc 3: -.. r~ :+ : - '"+ ~y; ::~: d'

* : + '.'. e+ ~

'~;, - s

4. c Figure 10: Domestic Net Interest Margin Figure 11: Prime. Federal Funds and IMMA Rates l _ [-

1 i i _. I i \\ N ?? E

rv

- a.:" s n s E==1 E-5-.. - c.:. E. +.: . '.'r "=n Figure 12: Average Domestic Earning Assets by Type Figure 13: Average Domestic Investable Funds by Source i 4 l ,4 ?.L-Vik wm M n u n n u E. \\?'

• Le
• 3'~ 0U t i t-~. e.

E.. E 6; j E. s E '~e:~: . : r2 :.e { E ;- E e :e.- r- .c 8 s. E E3.~,;: ci-s . 7.e. 2 : ;,, E t E v+

4-a E -' e -. ; s

s >

l i h

' lf s I nerr$0rg Net Interest Income Figure 14: Average International Earning Assets by Type j ,..,2.,t.e... 3,- ,i i .e

r' a v3 2-i r.:-.,;

- - ~.. 3.3 . ;w - : +i: - : - y ..,,. :a ; + 3. - r ; : -.

:.;; ~ ~ -.

NCN-INTEREST INCOME i- ~ ; ;- - m e., y.. z = ; n 4;;,.,. u.+ r:.e a. . 't ; ~ :' +41 '. i i 3 Ir ': -y.,.. .: :.-..n.-

.c~...,.

t .t i J c ~ m + < ~;93 54 - '% ^ '/: :

• e r: =.n =

9:

-.;. a.., -., . ~- rce

a.,a.

.a. c.. -.. ~ y.. ~ r -i : y. : : : --. ~ ~.; ~;,. 3 .,._.a. u. 2-a.. .a. ::.-,, r -.-,:. r.-.a. ;,, ., ej.'. ._ce . ~,.; s <;n v.. 1 ._..~a.... .c... 9.c.--2 e.s --.:, -1 :;.., as~.,.:.-- ~ --..~,_.:.. s ~ .J a-1 : y 3;:. e s '~ + 5 +-:. -. ;s - e3:v:

3 *..

-. e ni s ' < Mi :+: ? il - e e.e "+ e i - + =, a: _ ~ : :.m -

w:

.:c' : ' ~ . = *.. ;. .e : 3 3 7 ;, y, 9 ; _ :.9 9 >. ~,-: y ~ n. .- -- 3 ;.~..; 9-* --.3 c c r - -a . ;.3 3 3 +; r. us a -c ..c... a.,. ..a..-,..- 7 y = +,, ;. 7 ;-.. - - 3; 3. 5+ w: .g3 m...,,, -..... - .m. m. ~- c ......a r a. ....u- -,..n,1.n.- . m.. - .n. . _. _... =.. . - ~ v ':s 'irr! +b!e:::.les ~; n ;: e

rL.,.eu

-

3 ! ;5 -:

+::~e a c c ~y, 253 e' y v i 3 2.e -

i-

. + =

'r- .- ~. ~. : h +5 4::e e s:e:': -+ '-i n-

c r :

.3 ., = s 'a u 3'er +. Figure 15: Analysis of increase in Non-Interest incorne $ 224 8 5 55 8 33 b 51 9 47 1 981 61 0 39 2 160

J

~e 1098 36 7 50

• J.

ei 99 2 25 2 34 ^:. C: .r i 197 2 24 0 14

• *2 :

~ 73 8 23 6 47 195 2 30 2 ' ?; : .t' < 53 ~2' 392 7 1272 48 ..'E

2 ~

$1405 6 $3818 37 . :) B

• • J'

9.] Q :_ 7 s 8 t Service cna' pes on secosa accou a crea3e ;.: 727! Figure 16: Net Credit losses ard Provision for Credit Losses or r"aray as a resu!!of reprcng e"ar's %s a&5 sc:p -; 7 ce' cent.ncrease r '995 cu:ceios re ?se,ea gycy-y y,a p

oun 'aie at 18 ce'ceat ine loser gros m yes v ~e 3s

ao ea's se e aue :n < se':nhanonar; c:esues n-a

' ' ~ ?yge :3rg ee':*.y" *ees <rc e&39;. 323 ( -

,3g

~, . ~carea to an nc tase arii 9 ~ y n *9si cre 926 g ca.re i sa crra~; aue to r crease:n ict ~e l Secur.tes re:a:ea:ra-saa:an 'ees g ea sgr:9 :n <g55 y:ge

'easmg 565 7 mm

on in 1985 T~e ycser g os:r.c <956

? +=::ea the saie of RMJ Securt.es Coro :n theIrs z.r:er Tre w U !"cse f es sas criset cy the !:st '.me :"chs,an at i+c::es. i 3 rea :ransacron tees generatea b; Hoa'e Go,et:L '"::e a i l The remain:ng categar es :n F:gure 15 ncreasea $127 2 mtpcr,n l '956 a~a 532 7 reniton in 1985 inctucea n the *986 :otal sere o'"- w ga rs of $3a 7 mnon ana $'8 4 malion rescect.,ei c~ :ne sa e G? PMJ Secur:t es Coro ama on the sa!e of toe me;ce ti c':~e ~~ ~_....__._e' ~ use:s of Secss PaMc Mcrtgage Corcorar:an n '.e ,. n. A sa year ara ys's of non-nte'est 'ncome accea's on cage 56 ~ q r; n-a=

:n. n

-3 337 - PROVISION FOR CREDIT LOSSES 're croes:Or for crea,t !csses tota:e3 $5C2 9 '"auce c 5'23 5 man ?'om 1985 (F?g 16 The provision s3s :ncre3 sea to

eng ~en !"e rese've 'or creast losses Ne crea :.osses :cta ea Figure 17: Growth of Components of Staff Expense 3336 5 m01:on orO E9 ce'ce": of average crea.t outs'anrg ax.?n yr 5353 : manco cr 1 Ca e<cen: in <925 !~e '956 cro, sion

.s, c ceecea net crea:icsses cy $'66 4 mahan reswg m e n: ease :n tre reser<e for crea;t losses :o 5757 von at Decem-w 31 '956 a >ea' ena :~e rat:0 ofine eser,e ro? : e t esses to 73's 3"a eaies outstaa rg Aas ! 71 Derce": LD *rDrn

• 50
• l r

agc 13 ment a ea'i on tre ese.e for crea,: csses ama me: wea::

"er aeta

.~

s s 5%se on cages 30 ana 31

.Y .. ' Wh. sI<, s .ys .. ~.,. ~.m ='. 4 ~ l STVF EXPENSE

2 a_'

i br* e> cense nc'easea 17 percent :o $ ! 064 6 moon in '986 l.' -ca ea to a '6 cercert <ncrease in 1955 and an average rare or ~ r' ' n~ p' n y 'a .c ~

• m '5 ce? cent 'or :ne cast %e years. Ine groMn,n sta" y

nDe"se 'e' ec:s :"? e < Dan 5 on of the Cac:ta! Marvets S> stem ana

• 'm'

~ E = # 5'a" c, cr'm.ea g'oA:P r tre 7"3nc;3! Services $yslem a+ere staff .:._.___ _ i g <rn ~'" ncreasea 5. gr:'y more than 40 percent ana 20 percent a Ve;~a~_a y w y er*En cae e n'^ e:!r ei !*e C3Morna Saniung and Peal Estate inaustries

e H

i; 't . s'e'" r#a !ne nc* ease in statt expense to 3 Dercent hierage V

• e ea. cia er s:a" nCreasea 7percentin 1986 cor~carea to 6

e'" a y e3r b;o Aserage annuals:a"exper'se per ermp;cyeg he C Cercent ? '956 sh>Ch IS cio5e lo :t'e rate of g' Oath iss!

."Y Fgu *e 17 Ns:'aies the Changes In ine Cor#Dore"ts cf staH l cense for the ast L e p ers The tacie on page 56 contains aca,- l

a aetae on 5: aft expense i

l l

1f s , SER EXPENSE K..e,ceese ec<easea 23 cercent :v '9% '.. : s- = =+3 Es:a:e m -:5,, w se5?ru:~cse '.'a na '. 33g toa :: / ! ^: ea h " '955 ~r+.r: e3ie - ~

3'e ;:' es

"e! e <De' e :.e'e acc, e, e3' 9;o e.= s ' ~ '

l: w e' 5::e a a " a" g':s !" 'a!? ^ **+ C3D 'a ' ' - ; S. i:e" Y.jn : ~:'eai?5*g*!;" ea "cg 'e's ai<iera"h.-. * ~ <. - ., 5, _ e c r 4 rerac:, n ,r+; c ~+ ~e'exc ~se hcc-rs o"ca;v E6 ., - 3 Se'. ~;+5. ^ Y : c a ' : Y'

• • e a. ~ 3 En * ;

ppre 18: Analysis ofincrease in Other Expense .,+ s-ay , c ~m $ '70 4 5 384 29 z'3: ,. w : -cm~ses 206 1 2B 5 16

• ~d

^:- .:y:

"r;;- e ce se 34 6 17 8 106

• 65

-: :y n 73 1 12 3 20 39 .... -.. r: :. c c e s 43 5 63 16 37' JE J.

/. 3 < ; :3:+;:r es 521 5 95 6 23 J25

3 L

3

$1 GJ9 2 $ 198 8 23 555: J s'53 7 .== - = INCCME TAXES e '956 lax ct:nsion rehects a cecrease :n the e"ecM tai 'a:e adchea to ceaarticamcsses aniy aner ec:..' ea 5:= n

22 7 ce':e"t f'om 3J B cercent ir '955 Net aa;us '*ents :esit-estacasning resenes for creat! tc5ses 'or (3 c. 'cc e g ? m tre 'ax Pe+orm Act of 1986 crin:ca'ty t~e > eve agea ' ease tre :mng ct tawes ce ce< ar aserseas ea'r?gs a i:

1 a:.is' ee: <eascea incc ~e tax excerse acc'cn~a:e, 591 3:ea Cra ges ra set a"ect:ne ecsowie s+< y ra, war ' us eauang:ne e"e twe tax rate Mou !~e ea+s:~er:s sc'uce ceaeges x me Corco anon s aowl, ::

=,

ewe: se tax rate acuia raa e cee" accromma:e'y 37 J cerce-:

eea ts eMavor at amrieres: aecuc: con *ce :an.,:

ar vire< ae:ad <egarcirg r: cme ta aes see Note 10 of tio:es :o e?e~ct secur: es 3'a eimravon of tre ir.es:me- - c co-waa ea ra ca! Sta:e~erts on page 48 agatcc cre tax rate am cacaar gars,ya,,rress, c 'e 'a Re'cr~ Act at GE6 vaae ecens:ve cra~ges !a : e tc 34 cercent a ~a tre cas:c corccrate ta< 'aie., x a s:e;:av as '"e :na~ges 3."e ! coin ~e :~:rg !tav J6 perce-to J3 cer:e-n 1987 ana 3J ce<:act - w= \\ ca, ~e~s :: :~e ;o.er~re~t as s ed as tre acsotu:e les ei:!:a,es eacec:ea tra: rre camc,rea e ec:of a'i: ese :ra ;= u ~: ~ e ~ccr:am :ra ge y econg :re inc; ct taa ca,~ eros s s~ajcenetaa!cca:t on recor:eare,v ce g a r;e can ma.rg :0~ car'es suc? as :~e Corcorat or s n ce ORGAN 2ATl0NAL EMN!NGS ~ cv. u w:::v : re c ava Devew a scussea tre "re corcora:ce s earn:rgs gecsin ref ecrea a st cr; . C ::F+ 2 vs !s of :~e C::cora:an *e curcose of inis section t~e ne:'"cor"e of tre Cao ta' Manets Srste~ as se a Y . : v j "! .::a :r tre ce ?"ance C' "e Corporaban s a,or ecrease n :ne Fnanoa' Ser+ces System met mcome Er- - lc+'a:rg g'a.,ci C" Jam:h: onal!E'sVis a'e c'esen:ed for the !?e Casom:a BanVg ana Rea! Estate Inassl? es S, s'+" :.+ :

a'Y aSa% "gd'aGea Estate inaustr.es Sys:em :~e Cac;;a!

essent3y u changea cepseen years Eacr Systen ~t,y n r -.

1. 3 : ~e C"ancial SerDCes Sys em DJr rg 1956 a acc?:Wate? One-:Cira of tre Corcoranon s co'e ea'~ ;s

';a";3' 3" mc. e3 "e Ca!+fornia Com~eraa! Grc c ":r" 're 5gs 20 ama 221

3c 13' Va%e:s S, Me" to ime CaWornia Bawm; a a *ea: Estate

' <" es Sg em "re to,lowing ara!y sis re'!ects his organ Za-

• ^'a i!s e for c th '986 amd :985 anc a)?ers !?om trat a n:n t

a M 'ecc ea. *?e !? : mee months of 1986 I s

J } r- ~~ _. e 're Ca 'Orn.3 Sawg 3"C r y Es d'e - fj 3, e-re. Figure 19: Financial Services System-e Ome fC a eC 3 'J5 0 '"<00n eS5e"l 3;.;" y;eg 's~ 93: Percentage Contribution to Net income 9: ',S ec& Se m a ::'"r c ton 2 x pe':e c': ._ ;579 ; net r::r-a 3Org y': rrCr.#:es. C:~ a y ; ; y e n rg39 -.:. < 3 5 '._ rn-

e g 3 ~, r,, 3

.3. g 3.g.; y ~. _ _ -.., .; n. u.; 9 y ;.3 : ~ ; - .he"- . y. 4, r,/ 9 %e e_' j 'y .,.)ri P, r' .e.,. p .a -~..-9...r.,, -,. m g,,,y > n s ^rM* ' a::::, 3": : ~ C+ ' 5 ': " r '".n " *ee s EF" ng ac,

• J':.r a a 5 <- 5 0.:" 3 r. "' = " ~ va se.n re' r:+'es!

'";p ?? ~+N

c

^:: ~t hi '?? "e r:e'eS: ~a'g ".:e' :eQ :9:s e?". e r? Ine s

• e "e: ~ e'?Sl ~3 ; r

.as C3293 ct"3'. c; 3 Scae'

• $ g.

h: n. 3 _., ;j . > } fy y: 5 m < Je:ro e :"e <3:e5 ca :On waa Care ae:CS :s inac o 7: :.re ~ ~ar>+: 'a:e5 ura ea'":g ASS =t,:e:CS Ea'r ~d' 3550! ?,, ' i e C: e * "ega!'ve% ~Ca: Tea Cj er!i Da!O!! f S C O Ce' Wg"e' ? . \\. , ear::rS The crCy S y t:? Cre ?t!CSSe$ re?? lS DCfn an Q[ s PC'eaIe r et Cr? ! JOSSES 800 an nc' ease,n tre 'eSeric. lOr q d C'e:( CSies lO SvCCOrt Can ;;'Coln ?? CC'eBSe 'CSSeS sere y 82 83 64 n CGS "eSS i:Ar5 h5 "?t ConSre'!OSSeS 2eCoreO S ;*:,1 10l3' Cr **e'eS esDerSe irCreaSea Ony 5 percenl Nitt tne j'Owth Or 22 28 34 C H l'a!' e <Ce"Se a: 3 De'Cen! We S~aHCC'eB5 ? ir Cta' nonnnie'eSt ?':erSe 'e'e: S e5Se" a'l/ "C n:' ease in !re CCS! O SEYCe5 f crCr:eC D/ SeCJr N PadC Au:O'"3:iOr COOa"y a"C C:rer e!!:':S Mr !re major contr.bution Coming frOm ine ConSur"ee SerwCe5 O'erDe*Se C:r rOI GrouD AniCn incluCes the gain On lhe Sale Of tne ma)Cr:!y Cf ine '"e Cac<fa! MaC:S SyS e re!:nCOme in:reaSe: '50 Derce?! assets Of SeCunty PacinC Mortgage Corporation Tre increase n ': $ V6 3 ~ FOn :n 1906 anC CCr:r.C teC 30 DetCen! Or CCrSoliCatea the Ve"ture CaDital GrouD reSuited from targer CaDita! gains Cr O "ei nCCre !re 'C' ease Aa5 cr ~3'!j ire 'eSJl Gl S!*Org Q'C A!" Ce:a lOla:!itt eS Mhin tne SySiem See Fgure 2L

7. ry ; arczere 3"a 3,Ce n' cr:t:S Cr ?Cr crea!!OSSeS v

F r DurDCSES Of more Clea'ly 'eDortirg the underyng ea'r:n;5 O Ca':3 % 75e: C/ a^ rCre359.r C!re'"Cr-:'e'eS!e< Dense Net trenCS O?ine inree Dnmary ODerating Systems the e!'ect of ine "l9'eS' "::"^e Aa5 ESSE'l a N ur'ChangeC GeMe+" y ea'S Noru leverageC lease aCiuS! ment t$ reported in tne "Ot~er Categor,- c'e'eS' ?:0~e g'Cs'n reSJ:e2 Om increases in !Can tees inteSt. $fCe ABC rad a SmatiimDact On the CorDorat:On S 966 resitS ""' i+C: ' e S ;a "S ra:"ga::CJr: crc! ': ??e'"a!:C*a! fee $

S 3 50 fClJaed in the "Ott'er" Category It is Manage ~e-!. ?'e -

l'*:: C:"e' ^::"e a"J !"e ga " !C?" :Pe Ra e O! MA.I $eC.;n :ES lion in Subsequent years 10 break Out a IQur:n Seg'"ert ; %:" s W 2 c % e n P r

• 5 7 C'eJ t DSSei 'ef;eC:eJ a JeC' ease in reOOrt ir:grS:3te canking aCtYt:6S A DoriOC Of tne D'OwS;Cn !Or M: &:?.5:5 A " :' r%:e5 3 Cetire pf accrox;r a!ely$75 C?egit !OSSes nat aag increaSeg!: Strengthen the reSer,e "as m r * +"e';, M: :'?: ? CSSeS 3"3 a OeC! ease in OOr'eslic been ! Cent, feed to a SDeciftC ODetal:ng SVSle'1 a*C :Me'e' Ore * 'S

ri ' e g' a'r " :tne'"Or >rie'eS: esDe"Se ref eC!S a inCluaed in "OtnE r "

-!Y : e

• Car; Cr ^ 1CrOfeSS Ora: S:3'i '3:+t eS anC SySter"S

e:"" '., :3 CaDa:' des 'r ~a Or f ranC al CerlerS. :nCluC:ng

- ? y-n >: rc:x _y:7 VJ 'Onyc ~~NY: y Se'a "es S, S:em ret.n:Ome increase 3 8 DerCent .: 'J ' : '- :*

• V c:r" c u ?a 38 Cer:ent Of ConSOhdated net

~~ %- g., *n Or:s ee,e3rS ret ectS increases rn all grouCS 1

l l l l l 4 -1

f __b Figure 20: Distribution of Net income by Organization +

., 37

e., -,,.

._f"w-Ae't;e L., 33-- 'pr 'Mi .Q A 33. 2 5 ar "; y : =n E re - $1J5 0 . 'aJ 5 38 % J!. 087%

W

n,a V r ': ;s >

116 3 Ji c 30 'd 0 53 ^ :J -r: 3 Se'< :es 3, y <47 2 16 5 38 J2 1.58 3

-e (22 6; 38i (6) 1

9

$385 9 322 8 100 % ':0% 0 71 % iM ,- n- .u - swg..<,.- y Figure 21: F6nancial Services System - Net income _ 33-- yare? Ce's ces G'c c $ 517

J-

-e': a: ~" rce 5 Leaseg G cuc 77 1

.rt

• Cae :s G :ec 45 8 J:

73s Jea co'ccrate e<cerse ' (274) ~= l $147 2 .: '3-- I c naa :a 5 l l l l Figure 22: Organizational Data l ~.1 ' a Br* r; rAaBn

c ta Vrwas

• *an a Se~v ces

. _ a,y -. 5 <ss-5a:r 5,s:em Cra a .J,, ,p n rs n - vs .et M5 E 955 uM 45 M 'e. e'ss:mcore excysei $9581 592: 6 $3110 $3094 $531.1 $461 1 $ (16) 5.: $17966 %e: r %:.-re os' co m 469 2 40J 2 651 4 JJJ 5 2790 2C8 9 (14 0) ,33 6> 14056 es 5 c':< s :" 'T :!ea ! c5ses 176 7 39 6 83 7 ?76 0 136 8

• CJ 2 105 7

J 5:29

' ~e' :' -:e es: e we'se 972 8 9273 679 8 5:D 7 390 5 334 ? 70 7 ?J ! 21138 . - ~e c e're ?a.i s 297 8 298 1 198 9 672 2828 23 ' (192 Os ?J 5875 l I ',w -: - e $1J5 0 $1JJ 5 $116 3 $ J5 6 $147 2 3:36 5 $ t22 6) i<35- $ 385 9. -- - -. cay ,ne.y 9 3 - 33< 73 ..~ -,,, p s

r

.c eases $ 1J 3 3 125 $ 12 5 5 i18 $ 8.9 $ 76 $ 63 3 42 $ J2 0 : 's

r. :!i 17 1 JB 23 3 19 9 96 86 10 1 69 60 1 V yc~

19 0 '69 81 82 0.1 01 52 30 32 4 e3 3"c:3 t :y,e-- ao: e ccre y ~r y secces mcre tc a % !ao: e e.. va emas.s arma a:me re-tas e:veem of e.essemaceits y v; ad, ' a. c e l t t l

2s 5e.n a w : :n: g Balance Sheet Analysis SOURCES AND USES OF FUNDS TRENDS Changes un the ta'ancs sheet rettect a f<nancia!:nstitution s aunng a year ratner than a companson of annua! averages. whicn 'espo"se to me geve'a! econom c environment as weitas its may concea!trenas or year-end ca ances which may be d:startea resconse to cnarges sitn!n the f.nancial services manet Uncer-ty syn.f. cant one cay !!uctuations. stanng cnangea u *e Da'ance sneet reautres an exammation ot Totat eaming assets grew 10 percent from December 1985 to ccrges :n the se va ccmcasaion af tne Coroorat:an's eaming December 1956. fonowing a 12 percent increase in 1985 Tracing asse's a~a Sources of tunas ine discussionin this section focuses acccunt assets teceral funds sold and secunt:es uncer resaie

n cranges between Decemte' ave' age ca'ances in 1986 ano agreements andinvestment secunt,es grew at a higner rate than

?985 e<civa na tne effect oi ABC s g 23; Tne figure also shows aid Icans. However. tne cr: mary use of funas continued to te to Decemcen t.. ages inctua ng ABC 4 companson of December meet toan demana antage7 gwes a cleare' p>c!we of cranges in the balance sheet Figure 23: Sources and Uses of Funds Trends Ce:a' wages Erceg cease gj mc* ease Decemer Crear ABC December N'" Derce' 2 d'S

• 5 ' W M6 M*:U"!

GB5 Arount W EAPNING ASSETS Ke om ca n ~rteren cea~rg $ 2.263 $ (479) (17) (17) $ 2.742 $ (16) (t) $ 2 758 s mest~ert te:u !es 3.197

• 2F5 65 38 1932 21 1

.M i r ira: "g accour' a ssets 1 551 580 60 59 971 625 181 3M %cet ?/ s sc-2 ara secu 1es scer r resa e a;'ee~e't 1.666 497 43 42 L iE9 (131 (1) ' '52 Oc-est.c' cars B.,s 'ess : cars 16 937 2.046 14 1 14 891 1 010 7 '3 581 l Rea esia'e 'ca's 6.622 L388 2' 16 5 234 209 4 5 C25 Ocrsa~e' Cars 8.791 1.116 15 7 7675 1500 24 6 '75 !"te'^5? ra c ans 6.851 1.100 19 18 5 751 715 14 5 035 l

• :a' aam 39 201 5.650 17 8

33.551 3 434 11 3C ' ' ' l Lease " avg 2 808 255 10 9 2.553 470 23 2 053

• ta ea~ ng asse!

$50 686 $7.768 18 10 $42 918 $4121 12 533 39' c SOURCES OF FJNCS FOR EAAMNG AS$ETS Net :m cec:,, is Cew: mcs 2 $ 5208 $ 1.016 24 12 $ 4192 $ 580 16 $ 3 6?2 ~+ e s ' :" ' ; :ec:: !s 2.724 848 45 33 1 876 313 20 563 m e: ~ ne,, e:a:cQur 's 5.200 976 23 (1) 4 224 393 10 3 631 5h %s ucs is 2.635 774 42 35 1 861 157 9 s ~04 ' ~ Ju a is -

e' i'00 000 4.126 677 20 2

3 449 118 4 3 33

• e3 ~ ' ::'e :ecos is 19.893 4 291 28 12 15 602 1561
• 1 14 041

?c ' e cu'c"a se: '/cs V: ve ceccs s - 5'C0 0C0 a a cier 4 268 59 1 4209 (177) <4) J 386 ,o ~m!'cr3 cecca " Je~ana a* !-"e) 6.912 321 5 5 6 591 589 10 6 002 %n vas c c aie:an socs!es unoer ':::*3searee~e~ 4.953 L317 36 28 3 636 (808) (18) 4444 C: me': a cace' 3 458 686 25 25 2.772 70 7 34 2 C65

~e's ~c r~ ' n bo"ose:

2 615 290 12 11 2 325 751 48 ' 5 74

• Csa

ve~ cs: ased funas 22.206 2.673 14 8

19 533 1 062 6 15 47 ~w~e: We'e" :+t1 a 0 cecos ts 4 295 169 4 4 4 126 1.117 37 3OC9

sew str I665 581 54 49 1.084 394 57 693 e

!n 2 627 54 2

2.573 387 18 2.'86 3:a sca :es ci's:s $50 686 $7. 768 18 10 $42 918 $4 521 12 $38 397

E. _ - _ _ _. _ _ 3 Totaitoans sere uo S percentin 1986 folich'rg an 11 oeTent unCoangedin 1985 !nuestn'ent secunt:es wereinCreased 38

ncreasein 1985 wah allloan categor'es above 1985 seieis The cercentin 1986 atte' remmning essentially 1:at in 1985 The n,gnest growin ' ate occurred in intemationalloans wmcn :ncreased inc' ease was onma'ily in intemationalinvestment secunties

.g percent comca'ed to a 14 percent increase a year ago Acotoxi. The Corporation renes onmanly on core aeoosits anc snort term a:ety 89 cercent of the g'owin occur'ecin the Corcorat on s inter-ourchasec funas to supoortits ea'ning assets Net core deocs,ts -g.ona' trance sucscary and m incigenous cans in Austrana increased 12 percen!.n 1986 following an 11 percentincrease in yac3 ana Hong fong Pea' estate icans grew 16 percent 1985 Allcore deDosit categorres exceptInsured Money Mamet cycarea to 4 pe' cent :n 1985 The increase resuitea from higner Accounts were above 1985 levels Demana cecosits grew 12 .gy estate loan ongirat:an !es eis re'ated to ncreasea refmanc:ngs. percent comparea to a 16 percent increase a year ago #thm the as se I as osannea increases rn nes loans intenoea for resaie in the interest-bea'ing cecosit category there was a shJr to savings seconca'y market Many of theseloan sales we'e ce!ayec. aecosits from insurea Money 1'arvet Accounts HMMAI as the ecsever u tuiea'ty 1987 Consumer toan grow [n was moaerate at IMMA rate le!! below ine savings aeoosit rate Savmgs aeposas n ^'ce' cent. !allosmg a 24 percentincrease in 1985 business loans increased 35 percent compared to a 9 percent increase in 1985 sere essentia!!y l'at. reflecting an emphasis on loan sales IMMAs dechned 1 percent a'ter increasing 10 percent a year ago The growin in lease hnancing slowea to 9 cercent in 1986 The slow growlliin time aeposits - uncer $100 000 a!so retectec comDa'ea to a 23 Dercen! increase a year ago The sloser growtn the shdt to savings cecosits as customers kept their investments 1 y 1986 was due. in part. to uncerta>nty with resoect to changes in short term l t*e tax taw In born years the increases were broadly based and Short-term purchased funds inc' eased 8 percent corroa ea to i ,ncluced business lease hnancing. both comestica!!y and 6 percentin 1985. Feaerat funds purchasea and secunt:es u"cer .ntemationalty repurchase agreements and commercialpacer sere tne o"a', Racing account assets feaeral funas sola ano secunt.es under contnbutors to the 1986 increase resaie agreements. and investment secunt:es were increased in in 1986 intermediate-term debt and deposits and !ongnem l 1986. rehecimg expansion of cacitalmarkets-related activitres debt increased $702 milhon compared to a $ 1511 milhan increase i Tracing account a ss ets increased 59 percent in 1986 after atmost in 1985 Most of the growtn in botn years was usec to fmanc. "cn-inchng in 1985 Feaeral funas sold and secunties unoer resale canving and ina?genous banking activmes agreements increased 42 percent a!!er rs maining essentially UQUIDITY AND INTEREST RATE SENSTMTY MANAGEMENT A funaamentat asoect of the asset'hacMy management strategy of stable f naing base The growtn rate of core oeposits Exceecea u a nancia! mstrt:on is adequate hqudty - the abihty to meet the that of eam:ng assets in 1986 In addition the haucty 00s:c u5 n l recurrernents of customers for loans and ceposit witharasa's in the further enhancea by a $580 milhon increa se in intermea.a te-te'm most economical reanner Some hqucty is ensured by maintaining debt and a $564 milhon increase in tong-term oeot As a resua *r e assets which may <mmea: ate!y be converted into cash at minimal Corporation arc notincrease its rehance on snort-term ourcnasea cost for most franc:ai.nst.tutions. nowever. tne most manageable funas. a!tnough they remained a signincant funaing source sources of liaucty are corncosea of habihties. with the pomary Management of these snort term funds. including time cecosits - ! acus of1,aucts "anagement being on the abMy to obta:n funds $100.000 and over, commercial paper and feceral funas pur-r +or vanous terms in a vanett of comestic and international! money chased involves not only maintenance of an accropr; ate matur ty '"3rkets This is accomplished by consistently maintaining a pres-distnbution but also aiversohcation of sources tnrough money ence rn woriasice lnancial r a'*ets. markets wor!ctwide. ine overa!! haucty cosihon of the Corporation is enhanced by a The Corporation's mostimmed, ate source of asset haucty s saabie concentration of core aepos.ts wn:ch provice a relatively marketable investment securities. particularly those matunng s thin one year. At De: ember 31.1986, secunties matunng within one year amounted to $861 mdhon (Fig. 24) This represents 27 cercent of the investment seGunties port'aho compared to 34 percent a year ago. Other potential sources of asset hqu@ty a'e placer"erts trading account assets. feaeral funds sold and secunties unce' resaie agreements and matur.ng loans Due from banks -interest cea'ing, which consists pnmanly ofintemational placements. totated $1959 mahon at December 31.1986. down 28 percent from 1

3 5e...4:4 ;. -. ~- Figure 24: Analysis of Investment Securities Portfolio keme'. ' a o'3-s,d a n*- Afy

a" fry

- my .g3 ~rs an me 3 y,, 4.. e r: <eJ var et v t. < ~- 3, Aq Aq va y . ^ h m's $341 6 63 $ 935 6 34 $ 1.276 6 42 $1271 26

~ ;3 ne~e :

8 90 127 9 64 128 9 64 132 5a Ne f: ~ 7: ca 48 9 46 132 9 46 196 10 99 158 9 21 534 9 95 509 91 2w car:: :\\ u ra Je w m 471 7 55 306 13 J3 13 9 12 14 7 89 804 9 62 799 2 =m:e 3 %n',e 5m ra

~e.

447 4 74 3:a $861 7 30 $1373 8 22 $209 10 BB $299 9 34 $3.189 7 10 $ 3.185 31T c, 'ac

• aa a 99 tas, EdM v 3 TC5 :e ~~e dr tre ' C prav 5: / Ten!

"% -d 'e'] Ae;e'<e irs YO Wr n.cx s Ine C60r ea' erd Tracing account assets tota ec $1426 m,/ hon Figure 25: Loan Maturity Analysis ' f esse"I'3;iy unChangea ' rom a year ago feaera' funaS S0id and ece~er y qs6 nn aa Secuct es u"cer reSa-e agreements amountea to $1455 m !uon uo wrs r ~ vs ' vear 1-5 vers

m 58 Dercent frar" DeCer"cer 3L 1955 AS Show":n Fgure 25 Comeu ces 521155 mihon or an average of $1763 mili<on :n loans per month Bus ess cams

$ 12.828 $4 087 $ 2 323

'9 23b S SCneduled to r"a ure in 1987 Loan SaieS are anoiner Source of Pea estate toa's 181 461 5.970 6 612 aS5e! hau a:ty in 1986 reat estate loan Saies to:a'ea $1229 milhon Ccr %"er :ca's 2.892 2.871 3 ?O2 9 siE Car"c3'ea to $1069 m,inon in 1985 Sates of business ioanS were ke'"am'a* 'Ca^s 5.254 921 654 i e29 aisc 3" "Doriant Sou ce c' asset !!awa ty in 1986 r

• :ai

$21,155 $8,343 $12 c49 fr 5aa 'crereS: SerS::vty 'S re atea to tratty because each S affectea

1. ent mr s7.ecaej recta: re;ayments Cy "3:d "2 aSSe?S a ia sources Cf fJnaS Interest ra:e Se15 (vly Ta" age"e": nC Ae4er IS 3lSO COnCerr'ed Mh :ne Do:ent a'!!uC-

a:Sn f rei<nfe'eS: TCC'"? CauSea by ?"C s er?'en!S in interest ra:e5 DeCauSe (* e rec? C:rg O! aSSe:S r"at r t ce ' cent Cal to tha! Of ShovIS an excess OfIn:ereSt SenS:tive hauii;f eS ove' r:Yei 3G,: e5 ~e CC:eC -ue 0 n:ereS! fa!e SenS

• vty '"a"ag?r"en!!S !O

ve aSSe:S &!!h;n a One year t'me Ce&cd Howe.'er exC+'-

-- ~ "3 *T3 " a" aCCrCC' 3:e Ca ance Defhee" Slan'e gr:A th CfinCor'e 1986 t'3S Deen ine reverse, and!!IS an!CD&!ea :na: V'Y Y J !"e ' U S 3S 50C.a!?2 A (1 ?"a vmsng ;"Come througn interest ceChneS in tr'tereSt ra:e5 NOuld reduce the net <r!?!?S ? "Yy E"5

• A '"Da aC? S fur:ner IntS OCCURS teCaJSe IOAerintereSt ra!? eve'5 'eE *"-i~

e 26 GrCwS ine inlE'eSt !aie SenSit

v.ly gad COS;!On at Day-Offs O higher rate Consumer and real eSiale DarS a~a f

E eDe' 31 '986 DaSed on ine CQr'traCluaitime Of rectcng of DeCause the interest rates On vanous retad Core CeDCS'!S n R e MS is a~a hacceS MS ana9S:S Suggests that the net interest general!y ceCreaSed more Slowly and to a Smatier aegree tra~

~ a y r s ou a cere't ?rCm a aeC:sne in interest rates DecauSe it C:her Short term money market ra:eS. Figure 26: Interest Rate SensitWty Analysis ' Ce-cer 31 186

cerre' _ -

ne'es Se s I <tv Per cd irte'em Sem *, na ^ ' cts 0-30 Pc r-25 W nn Over un y Oays

s<s Ca.s 1 my i vear btat 1 rer va a

s D - ; n' ' $ 21 1 $47 $6 5 $ 32 3 $201 $524 $28 0 5'62 i: ~w:n :' ws ' ' weg assets 24 9 66 39 35 4 17 0 52 4 29 7 '45 ~re s: es t s ;a $ (3 8) $(19) $2 6 $ (3 1) $ 31 $ (171 - - - - = = = = = -

==-._=r__=====-- _.===_- 8" '# eN '[O hhdC3 ' N,,M U l l

if p _.... ~.. .s CAPITAL AND DMDENDS 1'3i3' 5 oC?OFCe's e: : '.' "Cre3Seu id]G ~: or - *B cer:e": '3:t:r5 "CU *g &55e! lao!r @ C ty st3tmig ot e3'"trgS Cr:gr"l l gj'y 950:D ?: ?' lr3!,e3 ~~3.Fq 27 %e ec??35e eg CC"ct' ' ?? 'orceS 3*C eCor:mic COna..Cr'S n P3'h e:S Ee'.? 3 r 35 Fe 'e5 J! a' ^!e'"i :ac-?3' " Y3:On y:c' ee:S?r lre v'J 5!?e*g:M o!"3"39?'"e"? Pegu:alory L:ror t eS n3,e e5*ac. sr3 asy%',.. Y ~ .'EQ ~ ~,' c'e'e ~e: 5:: y 5"eJ v "" " 23D :3' 5 25C 3:y y Jevnes C? $ 50 Cer:Y! '- y y- .cy.

c. ye q <w; 3nman gg 3rn y,333,73, c 355eg5 3ey $ gg gg,3gv( q,;g 3;33(,,3, 3 yea ~ s 3 5 *Q } C+ ': t "l

'256 Le r 3'ge cy::: a ;ont ".ea 355el5 'ne CorDora: On 5 >"te'"3i '"ir ~;" C3Deta' 3Ce% 5 % _,,,og ey g c,;. r p 3 5,93 3_ e3 7 we ~_,m on gyge $ 3 9 f $C pe' cent 19: cntr3ry cac 131lc 3 yte', 3,we3;e ca~~Cr 5:3C&O'Je'5 e: .' i i:= :er! 33 5e!% W'O 7 00 De'Cen' 'or :ofa! C3cif3' ?: :s ar:e'</ 3te'3;e The Lbr:e* JY2e"3 A 35 ":'eMe3 *Q ce':ee: : 50 37Cet 35 Sets Tre Corocra:,oo s r3!c C'crear: C30a !: *o

" as y:

y ~cr srye ?n se:c"3 L y:y 5yt g.c 3 lcq :Q56 a +. 3ye"3ge 3$3e:S 016 69 cercent s35 aco;e ??;e r"nt~ r :.;c 13 35"a :? 5 *.!a5 ce' ::~~cr s nye CO"3yey lc f 13 cer 5t'3'e tr' 33e%3Cy lyg6 is an: Ce Oh tre prror ye3r '3' O ;F q 25 79'&? 4985 0,e' *e c3 5:.e.ers :3s" ayaenas ce' cc~r"on Sra'e r3!:0 a 95 :r!'aieQ ty !"anc:rg trat has comcde:!.n %5 *: ~ "3se r'CleaiVC 3!3 ?C ce':6! 3<e'32e r3:e 3"d Paae CCr'5:Sier'I!? ABC aCCJ$ har a!IrOUQh :"e aC3V5:1Cr 2 0 ro! C::.;."* ~& ec'ese"'ea 3Dcr:w3*en, 30 cer:ert.,! net r:or"e 3 conc 3c:e to 'ou'm carie' of 1986 The Corcorat.on r3:o ct ::?a^ :3c 13 ~ s ccmr"On 5:QCk Man 3ge'"a": 5 )Ca: $ :C ma r!3 o l"e arraena ' cur:" qua'te'ade' age 3S5ets Cf 8 41 ce'Ce! has 3ca,e C:~ ~.; casaut r3:0 C!D5e :D ine e e? O! n-Ce":,eys 7r 5 sou!Jpe""it gjashnes as6rea Dy tne regu!a:Or5 ama tre pr.or jey 5 3:. 3+CenCS i: 'rC' ease 35 eYn'"g5 '" Crease Infla!'on and Changes in onC?S have M32 an R~ ate'3 i"- Tre a5 Ee55"e"? o' C3D,tal a3?2.ia:V Cede"35 00 a vriety Cf tre Corcorat on s resuits Figure 27: Analysis of Stockholders

• Equity

ars ' - rs m

' a mm; 95 1 85

+ l 2a rce srwi $2 439 0 $ 1962 3 $17616 51 J89 4 %+ ': ~e 385 9 322 8 29

• C

54 3 C ~ ' : r eecs (111 3) 56 ? t S76)

T 3: l n 'e"e:: v ae":s (9 7) ?!9> e C n euor 'L::. a:e;;ere w r3 3x:e :r :c-c,:c: ~e:: 20 3 66 7

9 s s.,rce e' c'e'e ~e 3

:= M 1476

?47 J Wi~easo s :' "rsa: Or3 72 ?73 t 7J O! l Y'.3 ^ 5 h: : n : 5 7'+i (4 5) [3

9 0!

33 Ea 3 m:e :a:e~: e 3' $2 874 5 i' J39 0 51 962 9 y 7v 6 2;: +.) ue ce? :n: ie sur e, $ 33 25

29 90

$ 26 87

:s 20 L ::e":s :. - ~:

r+ 1445

31

• p5 c9 h~c~ :. ce :: ai a ce'

. ' v v: 3:c :ht u e c'. 30% 30 % 3C% 29% Figure 28: Capital Adequacy Measures 4 a..s 9M 16 9 54 M3 m :< cc, l 5:::#c w s e L ' $2.875 $2 439 51963 317E2 =e s e' '-

e:*e sn 729 533 573 338

.i V e:r ', :e'es 9 a 1 35 %C :' "a'e': ~ 5D l3 "C!eS 468 469 250 = ~a'. :ac ia 4.081 3465 2 727 21E5 ...% f2 'OQ'e~ Jet!-...- - -___ 5 ? 467 36._1. 1.0 29J .: r: '."a :ac :a $5.132 $3 932 53 CEB 52 4 9 Pa'as i: w n a,a~e' a, age assets 5?O:* *D Ue'5 E3do 4 71 % J 93'o 4 49% 4 7)% J lr P'r^ary cac ta 6 69 7 00 6 24 5 69 JY % cao ta' 8 41 7 95 7 07 6 46 t :3 Cat as !O e" c' ce':: e sm Sw-+0 e's e:.:1, 4 54 % 4 51% 42s% a 35%

a N "as :acfa' 6 44 6 47 5 65 5 29 J?

W cac:a 8 10 7 26 6 62 6 C1 Q t 1 61593 7 dJ SM W t b - iJ**, 3 ' ] s

f 3C Som % ^nne s CREDIT RISK MANAGEMENT A cegree of risk takingis inherentin the extension ct c east 'eauce the overSII nSN DY minimizing the adverse ir pact of any Management has inst.tuted stnngent credit polic:es oesignea to sing:e event or set of occurrences minimize the lesels of fosses and non-performing assets 7tese Figures 29 and 34 orovice several different breakdowns of the policies reQwre exte"sv ? evaluation of neh Crea t requests anc Corporation s loans. which Continue to reflect broad amersibcaban cant.nu ng rewen cf ecsting crearts in croer to toent.fy eeny monn in coin the comestic andintemat,onalcorttohos Mthin the aorces-1 tor ama avant ty any evaence of aetenoraron of cuauty or potent m vc busiress loan portfoho. accroximately 64 percent were catego-l ' ass The Corporanon sinves to cool ana asersJy r sk mn the n ed as comme cialancindustnal(Fig 29r Theseloans are oo,ective of achieving nign rates o!?etum anc m,nm:ing osses for oroaai diversihed by incustry. with the only concentration oeing t the cenett of stockholders ana :r'e protection of aecositors Diver-accroximately $10 billion in energy relatealoans whicn represents s,ticapon ct the toa, corttoua cy type at ioan inaustry concentra. 2 cercent of the totalloan portfaho At December 371985 ene'gy-tion geographic crstr.bucon and trce of borroser atso tenas to relatedloans totaled $15 bdison and represented 4 oercent nf tne totalloan portfolio 1 i Figure 29: Analysis of Loan Portfolio De".emer 39 W '985 '984 ?993 4 .,{a;sgrgs ece! tce! Amcu1 Amount Au 20merc : cans l Ba scess ica ns l Cor"merc:a! ana >nwsinai cans $12 229 30 $ 9837 29 3 9419 31 $ 7 807 30 $ ' J:0 30 Cons t'uc'Do ' ors 2 903 7 1 652 5 1 342 4 1 267 5 1 '69 5 Loans tor cur:nas rg ar ca?rying securt'es L643 4 2 059 6 1 513 5 916 3 653 3 !.oans ta hvanc.anns :tatrons 1.010 2 557 1 722 2 731 2 608 2 O!ner cas?ess ioars 1453 4 1605 5 1437 5 1600 6

• 520 e

':fa' tus ness ica's 19 238 47 15 710 J6 14 433 47 12 32 46 ?? 350 J6 nea' es! ale cans 1 4 a~sy es aent ar crocert es 4788 12 3 915 11 3 969 13 3 869 !J 3 9J5

• 6

\\ Cre' er eswe ica s 1824 4 1306 J 1 073 3 670 3 69' 3 l ~ W3 rea esta:e aans 6 612 16 5.221 15 5 042 16 4 539 17 J 6J2 3 Consee' ca s neaw %ier Acccan: ?yge

3~1 ca's 1 010 2

914 2 849 3 690 3 6'2 3 W ;7sre' ':ans 7 855 19 6.653 20 5 491 18 4 687 17 3J 'J w Wa :orste' cars 8 865 21 7 767 22 6340 21 5 377 20 J 3 '6 %a ac~est c ica s 34 715 84 2S 698 83 25 815 S4 22 237 83 20 55 52 ~eny ya van Ga e~em amo"catinst!A ons 1622 4 1 360 4 1455 5 1382 5 1.'18 J l Brws a J cMranc at os! '. ' c es 2.267 5 1 689 5 1.386 4 1 410 5 ' 484 6 ye* cer v yness 2 940 7 2.735 8 2 228 7 L906 7 2 00 8 l 7:a c:e~at cea' ws 6.829 16 5 784 17 5 069 16 4 698 17 4603

• 8 l

'*3 $41544 100 $34 482 100 $30.884 100 $26 935 100 $24 911 0 -m vs senio f m -M; ages or me ensen Reserve br CreM Losses ?ne reser e for credit ! asses, against which loans and leases are tic consumer loans, 4 percent to Ready ReservAccount cnarge v chargea ott sas $757 milhon at year-end 1986. up from $554 ca rd loans, 30 percent to intemationalloans, and 9 cerc ent to ntnan a year ago (Fig 30) The ratio of the reserve to totalloans lease financing No significant allowance is made forlosses on and ; eases outstanding sas 171 percent at December 31,1986 uo perrranent real estate loans A portion of the reserve allocatea to from 150 percent at year-end 1985 Excluaing permanent real intemanonalloans has not been reflected in internationalnet estate loans secu'ea by one to four family resicences on which income ano, therefore, is not incluaed in the intemational rese?ve iosses continued to be insignificant. the ratio of the reserve for for credit losses reported in Note 7 of Notes tn Consahaated losses to loans andleases outstanding was 191 percent at Financial $tatements on page 46 DecemDer 31.1986. uo from 167 percent a year ago Baseo on an esaluapon ofincividualcred,ts histanca! creait l iosses ana soricArae economic concitions. Management has esto l matea that acoroximately 40 percent of the reserve for crecit

csses is re:ateo to comesuc business loans.17 oercent to comes-

Figure 30: Analysis of Reserve for Credit Losses wars c"Y3 W 95 G83 A 53acu. 'e y.v y cerca $ 554 4 3519 8 3339 5 $297 5 32;; 3 mov s cn 'or csses :ma*gea twcense 502 9 379 4 387 7 155 9 1624 Ot~e 36 0 83 26 1J 9S Suc 'c:a 10933 90'5 729 8 454 8 3945 .> vt 7a';ec c" 1416 4) 433 61 (262 61 i175 91 '29 6- =e?c<eres 79 9 50 5 52 6 60 6 32 6 ?.e!c'ea t asses (336 5) 1353fi 12!0 0) < ' 15 31

97 I Ba a ce e-a ct cer ca

$ 756 8 5554 4 $519 8 $339 5 $2975 Ex ce' ca eser e ror cre:rt.csses as cercent ct. 'aacan anc iease f.na-cing 1 71 % 1 50 % 1 57% 1 19 % Aavstea tota ~oans anc ease +nancing. 1 91 1 67 1 79 1 38 33 ^C 05 !M PteCf d 3CUS t cr$ issgs.t$rs and !cre7 ' >"eati FY3 aNr 3:L5t~ ens s ECJe5 CeaFert 'ea eSt3!e icd"3 Se% fed by 1 4 faNy 'es:ceat.a U:Ce" es Credd lesses Net crest !csses in 1956 cecreased to $336.5 mdhon from $3531 Figure 32: Credit Losses er,tison in 1985 figs 31 and 32) The ratio of net crest iosses to ~ average totalloans and lease nnancing was 0 89 percent in 1986 cosn from 104 percentin 1985. The cecrease in net credit losses between years was in the ~, comestic business loan category Net creditlosses on comestic ousiness loans sere $176 3 mi: hon. casn $JO 7 maison from 1985 _~ The net crestioss ratio for comestic business loans ses 117 percent 'n 1986 comcarea to 153 percent in 1985. The cecrease sas essent ally en energy re!ated cred:ts. shere nel creditlosses tota'ed aporommate'y $45 mt! hon in 1986. cosn from accroximately 5120 trdhon a yea' ago The net credit loss ratio on other cor'sumer ioans was 117 percent comca'ec to 107 oercentin 1985 Although me loss rat,o on Peady ReseriAccount charge card loans sas 3 50 cercent vo ' rom 315 percent a year ago the ra!'o has cechned throug"out tre year Tne toss ratio was 4 53 cercent in the hrst cuarter ama ten to 3 01 percent in tne fourth auarter of 1986 Inter-wars mmns 92 53 e4 e5 56 national met crest losses s ere $ 19 2 milhon in 1986 comoared to amecneres $171 mkon in 1985 32 E Eo 6 E2 6 CS n9 E Cha';ees 129 6

• 75 9 2E2 6 433 6 4'E 4 Figure 31: Analysis of Nat Credit lessis W

985 W 1983 '932 rws r

• Ors Amoum A9 Cunt Amcart Arcuet

& cunt Ocmes: c Dars 8vs+ress ica s $ 176.3 1 17 $2170 1 53 $1115 0 91 $ 601 0 54 $47 0 0 46 ceacy nesera cccant.

ra*ge cara icans 31 6 3 50 27 6 3 15 15 4 2 05 12 2 2 02 15 0 2 57 Ome' consu~er icans 83 6 1 17 65 7 1 07 61 5 1 24 34 6 0 83 27 4 0 52 Rear esia'e 'ca s :

09 0 02 05 0 01

0. 7 0 01 02 03 0 C1 intereattna' ! cans 19 2 0 30 17.1 0 32 17.0 0 35 31 0 07 08 0 C2

'c:a net can csses 311.6 0 89 327.9 1 04 206 1 0 74 110 2 0 44 90 5

5b Lesse hanc.ng 24 9 0 90 25 2 1 08 39 0 21 51 0 33 65 0 57 Tota: net crea t icsses

$336 5 0 89 $3531 1 04 $210 0 0 71 $115 3 0 43 $97 0 0 43 o Ne e ed i ;essas as :e':eq ave'a;e a ut odstarc.rg 'or eacn categyy

2) Pe*d"e"t cdas 58.Je3 OVLr5!"' Ort;dge5 # 19e e n3.ent 1

4

i If l r knN< m~ i Non-Perfonwng loans and Leases: Omer Problem Assets Loans and i+ases are Cons cerea non certormng a een :s 3,g 0:nr cac err ane:S prranty rea estate aCautrea as a reswt p:3:e3 on ver-aC Crua! statas or cen tney a e res:,C:u ea at a C re.sra:out ot czo em :oan slat < ors. a'"cuntea to 5 '6 ? mn on t c teichs"au ! rate of:Cierest it <s Ma"agemen; s ocu:y to 2scon. at Dece~cer 31 ne6 Comcar+0 to $144 muiron at DeCe'"ce? 31 e bruelhe aCC'uaicf ?:eres:on Dusinass loa"s aea ease 5 ane" 1955 $3 es of a:"er eal es 3te toge:ner ytr wr,teaowns gyr:rg lpe Te'e a a reason 3C 3Cac!as to Coue :Cu ;r*evs;arrua s on gear 'eswt+ rnlosses of accrox:ma:ety $10 6 milhon m 1986 3na ou 5:ress iCa"s a'e "or'"al'y a scont:"uea gene., er ;ne ca,-"en; ct $5 3 "w on :n 1985 \\ ?:e'est or cr "C:ca!'s 90 cais cast aue cr 30 ie' anen Cona t o~s l aa" ant rO4ever ine aCCoa' f nteres* an so re casiness :Caos Figure 33: Analysis of %tFPerformingloans and Leases j '"as Conp"ve even mougn tres a'e enore tvan 90 a3vs cas: aae J { n~w1

ne loans d'e heti seCated :n lhe Dracess ofCoi'e:Vor 3"a l

Management aeems it accroor.aie The aCCrua! Cf, rte?est on " y; =-'- q w i m -~= '~ j 'MT 00% a% EdWS Co~sume? a"d rea'e5?a:e 'oans cs nCima!!y not 3:sCont:nuea at 90 f \\ a3ys as these loans 5'e not w3"ed for a lor'g Der'od of (:r"e cefore Roa oe te re area bus ness $ 163 ~% a n ~ ~^a ~ ~~ l being Ct'argea Cff Wr.enever he aCCrualof Cterestis stoCoel rror,i 3a~c; .aa \\e,l,la ~,. 134 ,Q~ .~, Dreviously accrued but uncoi eClea it terest is reversed and l .s nCome is recogn:Zea on!l aren receveG 9 7g, gum,,nyn,5,,gg3, y; 3,9 tion per'cfming loans and leases tota'ea $ 1798 mihton at m:erv37py 227

<9

,3 DeCerrte' 3! 1986 up from $113J ?+:! ion a year ago As a cercent ~r"On ac:?Jat: cans ara ' eases 1,490 967 Ota of TCta!iCans ana r, eases non-Ce'*orming Cred'!s fell to 2 70 Re s % Ca,'ea rCans ara ieases cer:ent from 3 06 percent at December 31, 585 tF:q 33L Energy acng5y Credits snich here ua $151 milhon teoresentea tne targest ma: estate re area cas:r ess 53 <nCrease Rest'uCturedloans and! eases aeCreasea 5159 milhon. O:nerion ara, cus: ness) 8 74 a l pr,many as a resuit of a toan that aas renegotiate to a market rate mie' car cra: of interest Tcta' restructure:icans ana eases 8 '67 Non-oerformrg loans and leases reaChea their highest ;evet of To:3) rcn.::ycemng icans gea egses $1 198 2s*34 $1 w, $1319 millor 3t June 3u,,1985 knCe that cate non-performmq

= = = = = = =. = = = = = =

= Caiances naae genera:ly Deen cecining Tre'? Aas hohtee' one M"-ceOr~"rg Cans aM 'ea$eS !O TC!a! creak or : hat trend at June 30. GS6 Anen non-cerforming loans ~ ~ ~ ~ ~ " ' ~ ~ ~ ~ ' ~ ~~ ~ '~ ~~ oa"s ama : eases 2 70 % 3 C6 % 2.. ana le&Ses *nC?easeQ onrrardy as a result of 3n increase in energy RCr-cerforvg Crea.!s AntCh was CaJsed Cy d Crop in oilpr'Ces in ea'i 1986 Wematonai Len@g We Co'ocrai:On s:nv es l0 'eauce the risM 'nheren!in the extension !!on S intema!!Onal Dankers ana economts s IcCa:ea ihroupou !ne of vierna! ora' Crea!! Cy dwershing the CreCi! Dortfoho by type of horld. Short run anc ionger-term assessments of the !GtJre of a C i:Cr"er troe ) crea t and geogr3cnic a:stncubon As cart of the Country s economy are ceveloped y t aetervratCe C an acc?cona!P geograchic otstnbut>on of ntema. F:gure 29 on page 30 presents intemat:cna!!aans by tyce of wa' Cren :re Corcorat:an a~atyzes the worldwiae economic Customer Figute 25 on page 28 shows a matunty ana'ys:s of irte'- l a~a conca' 'aCtars a niCn cear uoan the quanty of a nation s nanonalloans At December 31.1986. approximately 77 cercent or e:anorm: cecemance Basea on stua es maae t; the Corcora-these toans haa matunties within one year Figure 34: Geographic Distribution of Selectedinternational Assets Decene 31 G86 Decemer P 985 trs rd Sensas Faced Lrs and Oexs ts P'acea I n-- m 4: emes arBas btt Accesances at Barns ) as c am: N & ': $3.102 $ 995 $4.097 $2 723 $ 436 $3 49 l Esrxe 1.611 532 2.143 1624 994 2Eb O n Merca 1.714 35 1.749 L687 23 1 O riea sta es a'a Ca"aca 968 265 1.233 623 1 039 1 562 Vase East an ?!nCa 293 293 341 5 3aE 1 '::a' $ 7.688 $1827 $9 515 $6 999 $2 497 59 J95 I 1 i

o. 33 7.____..____.______ 1 + \\ { snahn in Figure 34 Wtn tne exceDDon ofloans and acceptances ~ ) The geographic c>str.buton of selected entemat'onal assets is Figure 35: Cross Border Outstanding Over.75% of Total Assets n eweems ower } at the Co corat:an s into natona:!."ance sucsoa y ana unaige-an one a: Prean 1 nous Dans in Hong Kong. Canada and Austraoa niemanonal n a's ms 'sms sans eas'ess ! cans ana acceptances are substant a 'y crcss Dorcer asks The Dece~cer 3L ?986 cla> of @ans acce:!ances and cecosas 0:acea win banks were sacan $ 33 $851 $ 62 $946 essenta 'y unchangeo ttom a year ago. out tne mix d a cnange An B a:l 319 285 1 005 'f' Cf f U0 rcreasein toans ana acceptances Aas concentrateain As:a ana 30 re Pac:hc. and Undea States and Canaca A accre3se in ceposits Diacea w:tn canks sas concentrated in tre Un: tea States and Decevoer 31 1985 Canaaa ana Euroce. Cartia!!y C s?! by an increase on Asia and the .iacan $ 29 $84J $ 70 $943 H pac'!>C Brazd 274 314 2 590

• Qure 35 aelWs by !vDe of customer those Countr es in which Mexico 214 101 205 529 omt3na ngs exceedea C 75 percent of tC'talassets Of the coun.

Undeo Kingoom 9 353 123 499

• "C
• 55 362 2!

t >es hStea in Figure 35. Only Me nco and Braza nave had dect servic:ng crootems due to economic uncertainties and related Decemcer 31.1984 foreign exanange hautaly problems Figure 36 shows changes in Jacan $ 23 $622 5'35 $750 the agg'egate outstanaings to those countnes. Braid 232 347 6 555 l Total outstarcnas to Mexico at December 31.1986. were $573 Mex,co 224 103 223 550 l md!!an of wnich $388 mdhon were to the pubhc sector. shoch VC'e R2 328 55 'EE l incluaes canyS and $185 mdhon were to the onvate sector. Interest U"A*U N"2#C* '3 'O ,{d 352 Canaca 4 e43 34) Cayments on pubhc sector debt were generally current Non- ..u a~ _- -- cerforming Mexican pnvate-sector loans totaiea $ 10 mahon at Cecember 31.19S6 Figure 36: Outstanding in Countries Experiencing Liquidity Problems Mex:co and its Cred: tor banks reached the basis for an agree- 'Q, g ment on a 1,nancing pacVage provong for 3coroximately $6 bdhon ? n new loans for Mexico S 1956-1987 f.nancial requirements. of Aggregate outstanoings at 12 3685 M+ M20 which acorcximately $750 mahon uit be guaranteed by the Wond ,,,,,g, Bank in acoit:on. Mexico's creaitor canks are to provice uo to ,,,,,,,, ggg,ugg 5g 3y $17 cahon in cont ngency g'owth and investment succort facihties Collect'ons of 'he cred tcr canks' contabution is cart of an overall $12 bdhon Pnnc: cal inancia: package soonsorea by the Intemational Monetary Fund. Interest a 3t me World Bann. maior centra! banks. and other othciallenders. Otner changes .L Tre Corcorat<on's share of these new loans couta accroximate Aggregate outstanc<ngs at 12 31 86 $W5 15'3 $7G mdnon, aeoenaing on a vanett of facte s The $6 bdhon in nes r

cans wouid ce paid over 12 years. Artn only interest due the hrst m $53 mon cWe wease m Vex can oJs:awcs s Le e ne acusw M 1,e years in aca tion approximately $44 bdhon in aebt owing to tre creactor Canus which hac been restructured over 14 years.

Figure 37:1986 Debt Restructuring in Countries Experiencing soula ce reca a over 20 years. w:tn only interest oue for the hrst Lleuidity Froblems seven yea's Contractual spreads for the hnancialpackage would canars m moes scan wG~ av erage 1316 of one percentage coint above the London Interbank Amount restructure $316 $2[ ^ I Oi!erea Rate (LIBOP) or comestic cost of funds. The agreement steighted average year of matunty s suo ect to hna! acorovai from Mexico s creditor banks. Detad Pre-restructunng 1985 1998 of the cre anc pcst-restructunng repayment terms aDpearin Post restructunng 1968 2006 Vgure 37 Weighted average interest rate. Pre restructunng Pnme + 175% L:bar + 575 % Postsestructuring L:bor + 1'25% voor - 8'25% 1 i l l )

t 34 sem, 4m Mr : __ _ t Totaloutstanair gs to Brazd at Dece~cer 31 ges ag,g 36c5 a-a ocst.'estructunng repayment terms is cetanea in F:gure 37 mdhon suCstant:ady allof which were to govemr g-;; yy 9,3e 3? og ge7 g;g3;gg 7p3; 9,3 0 w,7j ggg,p peggg;3 pong,n 7937,779 estitut:cns Non-cerforrmng Bra:than loans ^ere 510 mon at e'c a ca%s on a new hnancialpackage which is expecrea a December 31 1986 = incuce a request for new toans Dar?g tre 1956 tmra cuarte' Brav ana ts ; eace cy s Tre ccrooration has supponea Treasury Secreta'i Bak er s init:a-cor O:etea tne sigvg at!~e 1985-t956 h a c a cauage ancn ! ue *ar re 'ev:tanzation of aeveioping countnes economies Nhae Aas accrovecoy Bra::landits Banx Acuo y Grouc t??g tee economic improvement has been accomptsnea cy r"any coun-f:st avaner of 1956 The ter~s of the #985 1986 6nanc:aicac age mes in cooperation with commercialbank g'oucs and the mu!!!- orowae !ar a S31 bahon aeot 'e'mancing oacnage a v.w result .atera' aeveicament backs. the " ~omic situation in may coun-m tre Corocrat:an rehnanc:rg accroxir"ately $316 mat,an of current ' es continues to require constamttention as crogress :s maae outstanaings The agreement rescreaules 1985 matur:t es for a As ca't of managing the Corporation s crecit process Manage-cenad of seven years wah cont' actual screacs set at L!BOR clus vert has a:so cegun to seek attematives to the cebt at sor e coun-r-cercent comoared to tne onor screaa of floating anme otus n

• ?res anere the economic outlook is consiae'ea to ce weak in inis ce'ce"t Tre agreement also costoones 1986 pnncicat matunties regard Management has explored the exchange of certam ccantry for a cenoa of one year and extenas trace ana mtercane crecit aeot 'or more prefe'rea country creasts anc consicerea fmanc a ty-r (mes for aoout one year Furtner snformapon cescnomg the ore-re!atea investments in exchange for country aeot Commitments and Contingencies The Corporation makes commitments and assumes cort.ngent r teign exchange nsk ongmates from the abihty of counterca~

o haotht:es in the normat course of business to meet the nnancing t es to meet the terms of the foreign exchange contracts ana :re neecs of as customers ano to reauce its own exposure to !!uctua-maruet nsk associated with trading a votatae commoa:ty The tions in <nterest ana fore'gn exchange rates Tnese commitments Gorocration monitors transactions against precetermmec hm:ts to ana cont:ngencies inctuae among otheritems commaments to ensure mammum prontabinty with reasonable nsx takmg Commt-enena creca commaments to ourchase ano se't fore gn ments to ourcuse foreign currencies tota'ec $17 5 0,! hon at exchange stanacy letters of crect ana foreign once gua'antees Decemt.er 31.1986, anc commitments to se!! foreign currences otner r tters of crea:t. forward ana futures contracts ano m!erest totauc an eaual amo int. e rate saaos Tre Corporation unkies the same sinngent creait poh-Stanaby letters of crecit and foreign once guarantees are com-c es,n ~amng commaments and assuming conongent bacihties as m:tments issuea by vanous ent t:es within the Corporat.cn guar-it aoes in tne enension at creait anteeing the performance of a customer to a thira party inese A cor-ma' ent to extena c'ea t is a legally Donaing agreement to guarantees are pnmanly issued to support pubhc anc prsate end to a customer ana :s usually or a speci!>ea interest rate and corrowing arrangements incluaing commercialpacer bond f Du'oo5e Coment"ents nate Ued exDirabon dates anc genera'ly hnancing and similar transaCDons The nsk involvea in isswng 'easire 7e cavment of a fee on tre unused oort:on of the commit-stanaby letters of cre@ tis essenna'If the same as the crea:t r:sv ~ent The enension of these comm:Iments occurs m the normal ,nvolved in extencing loan faciht:es to customers These nsks a'e i cause of cus' ness and is sub;ect to the Corporabon s sinngent tanen into account ahen determining the adequacy of the os erail c'+1! cot:c es in aca+on the Corcoranon minimizes as exoosure resenw e for cremt losses aithough a separate reserve for stanacy to css u ae? mese commarrents cy requinng that customers meet 'etters of creait is not maintained Stanaby letters of cred t ana n

erta n cenapcns oncr to a:sou s:ng funas At December 31 1986.

foreign ofhce guarantees, ret of part:cipanons sola to others, r tre Ccrocrat on naa unarasn comm.tments to extend cred:t totaiea $6 3 bdhon at December 31.1986 a~ cunt ng to $26 3 0 !!on Forwara and futures contracts are contracts for ce!ayed ceitvery of secu ties or money market instruments in which the buyer n ag'ees to purchase and the seiler agrees to make aehvery at a specihed future aate. of a specified instrument. at a soec:t e3 once ory:eic. nsk onginates from the abihty of countercarties to meet the ter~s of their contracts and from the market movements in secur.! es values and mterest rates At December 31.1986. comn!. ments to ourchase unoer futures and forward contracts a ere $1.9 bdhon Commaments to self unoer futures ano forward ccntracts aere $31 odhon at the end of 1986 These are notional amounts anc ao not represent the actual cre@t or market exposure which rs 1 signincantly less andis currently estimated to be apprommate:y 5 percent of the notionalamount-l 1 1 1 1 I l m m

II i 4 i l Interest rate S A aD fransacpons gene'aHy trvah e tne Contractual rete As Cn :ts 5 AaD custorrers and mnmtZes its eXDosure to :ne l exchange of f xed ana floabng rate inie'est Davment oC),g3 bons .nie'est rate sk Inne'ent in intermeasafea skaCs by entenng.r Mnout I"e es:nay? O' 7e uraenpng ynnc cat a'"Cun!s Tre C?fselt.ng so aD Dosinons that essent ally Counlertaiance eacn CorDorabon acls a5 an interTed:d'/ :n aanging mie'est r5*: a van olner or other nedg'ng techniques to minimtie rtSk At Dece'rcer tra"Sa: tion 5 As a" riermearary :ne Co'Dorabon tecorres 9 D'n. 31 7966 ine Corporanon naa interest ra:e swacs outstanding m 1 c casin :~e e1:RarQ+ of nierest Day'"e!$ Detheen the 5,_:t e. an aCCron'"a!e nobonalDrtnc!Oaiof $15 5 bdhon As d:SCUS5ea ara t*'e'?' ore is resCons D-e for Gayr'e"! oChgaDcns snCVd one of above. the not'ona' amount coes not represent the aClua' C'ec t or e cart es ae%'t A icss ~av occur -f :~e ete'est rate ewronment rnarket exposure The actuat exposure for a gwen Ssao,s cur'e"l1 n3s changea su:n tra a s cs!! :e pr! acuta not accect the est:matea to be tetaeen 5 ana 22 percent of the not ona amourt or gra: terms of :ne ssao The Cort :3:'on performs torrna: crea t uecena:ng 0" the terms of tne scec:nc sa ac transa:non 1 1 Selected Quarterly Data F gu e 38 contains the resuits of operations on a cuarterly basis for stock excnanges (market symbat SPC) i 1956 and 1985 as seilas quarte'ty a:viaenas per snare and stocx For informanon on civicend restnchons see Note 13 of No:es : 1 cr:ce data The common stock of Secunty Pac:fic Corpora! on is Consolicatec Financ:alStatements on page 50 Page 56 ccr:an isted on tne New York. Pac:f:c international l(Loncon), ana Tokyo aetaas on the number of stocxhotaers. Figure 38: 0uarterly Results of Operations 'M6 25 n es a - wrs exc. ear w en ms ha e03 3dCu PcCn ts!OU 'da; &Qte 3@ _e henrie'est mo "e $ 1710 4 $432 5 $437.9 $4221 $417 9 $1608 t $4415 $4C2 3 53V r Nance:e est ecome 1.405 6 4158 363 1 332 7 2940 10238 296t 256 6 . Ja a P':s s y tr creo t icsses (502 9) (199 6) (98 01 (89 1} (116 21 t 379 4)

149 7>

+ 83 01 67 ?- Ot'e' "ow:e'e5: e n cense (2.113 8) (611 2) (531 6) <503 9) (46711 77576) ,466 2) 'J49 Bi J3^ ) , ::me tas evcene. terent (113 41 67.1 171 5) ,68 3) (JO 7) (172 1) i35 6i J21 a -: ? O b' b bOS b IO b 00 ' b 0' O b ~ ~ ?? Ne' nome aco' :ac e to

"c' c ;v

$ 376 2 $ 1016 $ 96 9 $ 918 $859 5 3209 $842 $ 6J O ~~ i eg. :. w yye e $ 4 66 $ 131 $ 125 $ 1 19 $ 111 $ J 35 $

• 13

$

• 1J

$ ' :s

, w :3 1 J45 0 37 0 37 0 37 0335 1 31 0335 0335 23 -

5:::< ce :e ~r $ 37% $ 37", $ 40u $ 383 $ 31 % $ 31, 3 3: .:A 33% 32 % 35 27% 25 4 25n 2c &'2o'ce 11 34 % 33 % 36h 38 % 31 % 25 s 33 3 l h- , ;: m v cr rres n e: Tea or re Carxsae face are psred m me Westem Emr of !re W Sneeucu a. r i i l u I 1 3 t . a

WyfM f % W I b SecurNy Pacdic Corporabon and Subsidees beencialReports .o MANAGEMENT STATEMENT INDEX TO FINANCIAL REPORTS Yhe accompanying financialstatements were prepared bY REPORT OF INDEPENDENT CERTIRED PUBLIC ACCOUNTAWS 37 Management, which is responsible for the integrity and ob ectivity l SECURITY PACIFIC CORPORATION AND SUBSIDIARIES of the data presented. inclu@ng amounts that must necessanly be based onjudgments and estima!es. The financial statements were Consohdated Balance Sheet 38 prepared in conformity with generally accepted accounting pnnci-Consolidated Statement of Eamings 39 ples, and in situations where acceptable attemative accounting Consohdated Statement of Changesin pnnciples exist, Management selected the method that was most Stockholders' Equity 40 appropnate in the circumstances. Financialinformation apoeanng throughout this AnnualReportis consistent with the financial Consolidated Statermnt of Changes in FinancalPostwn 41 statements. Management depends upon the Corporation's system otintemal SECURITY F%CIFIC NATIONAL BANK AND SUBSIDIARIES controis in meeting its responsibihties for rehable financial state-Consohdated Statement of Condition 42 l ments. This system is designed to provide reasonable assurance NOTES TO CONSOUlATED FINANCIAL STATEMENTS 43 that assets are safeguarded and that transactions are properly i gg,yggg pygyg;gg guyyggggg recorded and executed in accordance with Management's authori-zation. Judgments are required to assess and balance the relative Consolidated Average Balance Sheet cost and expected benefits of these controls. As an integralcart of and Related Yields and Rates 52 the system ofintemal controls, the Corporation maintains a profes-Analysis of Domestic andIntemational stonal statf ofintemal au@ tors who conduct operational, financial, NetInterestincome 54 and special audits and co'"dinate au@t coverage with the inde-ConsolidatedSix Year Analysis of pendent certified public accountants. Non-Interest income and Expense and Other Statistics 56 ) The financial statements have been audited by our independent Consolidated Six Yeer Balance Sheet, Eamings j certified pubhc accountants. Peat. Marwick, Mitchell & Co., who Rabos and Common Stock Data 57 \\ render an independent professional opinion on Management's financial statements. The Au@t Committee of the Corporation's Boardof Directors and the Examining Committee of the Bank's Board of Directors, composed solely of outside directors. meet peno@cally with the independent certihed public accountants, Management and inter-nal au@ tors to review the work of each and ensure that each is properly @scharging its tesponsibthties. The intemal audtors and the independent certihedpublic accountants have free access to the Committees. without Management present to discuss the results of their au@t work and their evaluations of the adequacy of onternal controls and the quahty of financial reporting. l l l l a ( ( n' m W. - l 8 x-l_ r \\ .lG $W Y 'E t ^ f lM i i "CidrI l d 4

• jed l

g,, v.q s ;- l ~.+ , ', qNf PN,,;b ( l n'y g

• w

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lI .ee..- -m-+**" --*-= = " -wp Report uf Independent Certified Public Accountants par P at Mrer, M teen i ca MARWKK C**ed PLbhc Ac;0#ris 725 Sc A F,guerca 5:reet Los Angeres Catfor.a 900" 'c tne Stoc haiaers ana ire Boarc of Directors Security pac:1c Corocraton Me hate examine tre conschasted ba'ance sneet of Secunty Pacihc Corcorat:on ana subsidiar<es as of December 31.1986 and 1985 and the related consokaated statemeets at eamings cnanges in stockhcicers' eavity and changes in hnancialcos,tson for eacn of the years,n the three year penca enaea December 31.1986, and tne consolicatea statement c!cona< tion of Secunty Pacif c National ecnk and sucsicianes as of Dece -oer 31.1986 ana 1985 Our examinations were maae in accordance with genera!!y acceotea aud: ting standaras and, accordingly, incluced such tests of the account.'ng reccras and such other auditing crocedures as se consiaered necessary in the circumstances in our opinion. the aforementioned consohdated hnancial statements cresent r ina y!?e f.nanciai pas. tion of Secunty Pactf:c Corporation and suoscanes at December 3 t 1986 and 1985 and the results of their operations and changes in their bnancialposman for each of the years in the three yeargenod enaed December 31.1986, ana the f"a ::s position of Seconty Paci!:c National Bank and subscanes at December 31,1986 and 1985. in conformity sith generally accepted accounting pnnciples acchea on a consistent basis. ^f7& G. i January 23 1987 l i l 1

l a sete, Pr:t::,::w r : s r s-...... _.... _ _. _ _ _ _ Consolidated Balance Sheet De:eme r m saron means 9 66 Se5 icecease. AS$US Cash ana c.ie from canes Due from ca~ks -irterest cearina ~ ~ ' ~ ~ ' ' ~ $ 5.380 $ 5.279 $ 101 1.959 2i30 (7ii) in_ve__ste__nt sec._u_r es. 3.189 2 004 1 185 7'aag accou"t assets __ 1.426 1 457 (31) Peoera!!unas solo ano secuntres _uncer resa:e ageements 1,455 921 534 Loans 41 544 34 482 7 062 Lease 6rancing 2 799 2.582 21i 7 _ctalloans anc lease 6ca ncing__ 44 343 37 064 7.279 Less reserve for creart losses 757 554 255 Net tcans and lease !>nancing_ Premises ana equicment 43.586 36 510 7076 906 689 217 Customers' acceptance liabit,ty 955 1.218 _ (265) Eamed ince'est receivable 450 459 (9) Realestate ownea 161 144 17 l Other assets 3.139 2 092 1 047 Total assets $62 606 $53.503__---..3 59 10 Demana aeDosits in comestic c" ices $10.473 $ 7849 $[55 Interestichecmng aecosits in comestic othces 3,450 2.299 1 151 lnsured money market accou ts in comestic othces 5425 4.244 1 181 n Sanngs aecosits in comestic othces 2.767 1.8 72 895 Time aecosits in comestic o!' ices -unaer $ 100.000 4.115 3 465 650 7s' e aecosits in comestic otsces -$100.000 anc over 5 554 6,111 (557) Tota! cecosits in comestic othces 31.784 25.840 5 ga4 Decosits in foregn brancnes anc international sucsta. anes 6.624 7033 No Tatat cecosits_ 38.408 32 873 5 535 Feae.r_al f na._s c._urcnasea ara secur: ties unaer recu'cnase aareements 5.330 4 689 _ _6_41 u_ Comge'ciar cacer 3 414 2 687 727 Otre.r snc..et.-t.e'm funas corrowea 3.010 2.856 154 !rtermea; ate-term aect - 2.986 2 405 ~ 550 Lorg'erm 3EDt 1.167 603 564 Subora ' a[c5550tes 500 500 f 4ccectances outstana rg 955 1.341 }86) Accruea mterest taxes anc other encense 1.403 1.334 69 YF5acilmes 2 558 1.775 7 53 'ctai nacilit es 59.731 51 064 8 667 STOCKHOLDERS' EQUITY PSerrea stock-irthcJt car value 300 150 150 Sna es autnonzea 1956 and 1985-5.000.000 _. Snares _:ss_uea '986-600: 1985 - 300 Common stock-510 car value 775 768 7 Sna es asthorizea 1986 anct 1985-200.000.000 Sha'es issuea 1986 - 77.436.557;1985 - 76.788 579 Su.<ptus 529 519 10 Linamaea cronts 1.271 1.007 264 2,875 2.444 431 Eess common stock in treasury. at cost. 5 (5) 1985 -240 945 sha'es 70 tai stockhoiaers' eauty 2.875 2.439 436 70ta!liacint?es ano stockholders' equity $62.606 $53.503 $9.103 See acarmyng rces te cansacrec %c r swemems i I

Y , n: '

rc m : :-

n T Consolidated Statement of Earnings Ver Enceo Cer.eSe' ; r au e ~ rs e'am:e'ere m 86 9e5 a INTEREST INCOME $3.810 0 53.748 8 $3 629 5 Lo.ans.- - - ... - - - ~ -. -27J6 Due 'rc" ca"ks,- rterest ceargg, 20.9__ 180 2 274 1 State ana ~vncca,- :l~e"t sec;.e ses 18 7 20 4 C ~e~niestment sec:ies 196 6 149 9 1J7 5 acrg account a ssets 118 9 48 4 31 J Lease tra#c?g 244 5 273 2 2368 Tctai.nterest incor~e 4 57I 1 45131 J 3JC 2 INiEEST EXPENSE Cecos.ts 1.716 4 19286 7C73 9 reae'a' faras _cu'crased ano secunt,es unaer recurchase aareements 257.4 283 J 316_2 Ccmmerc.a, pacer 206 8 225 7 . 189 7 Otner short-term tunas corrgsed 2610 1568 1C3 0 iD intermeccate-term aebt Gng term aect ~ 291.1 219.9 B 128 0 9d 6

• 9 J l

70 tai r!erest excense 2.860.7 2.905 0 29256 l NET ".fERf ST INCOME 1.710 4 1 608 ! '56 P'iOVl510t, FOR CREDIT LOSSES 502.9 379J 287 ~ Net ~torest incarne tess orc +sion for credit losses 1.207.5 1.228 7 ! 020 9 Nhtb5IEUSf15NCOME ~~~ ^ ~ Lcan fees 224 8 1690~~ 130 Sernce cha'ges on cecosst accounts 197.2 173 2 '6 ' 2 SecuS!;es retatea transact:on fees 195 2 1925~ '2d 5 truerrationa! 'ees and otver income 109 8 73 1 59 i Gain on_ sale of eau.ty secunt.es 99 2 74 0 l ~ 20 ~ E*CUEB_'t a"S[leSl~e2t 3anagement fees 970 BJ 5_ _ r5 Charge _cara mercnant fees 73.8 50 2 JJ : Traa.ng account crof ts 61 0 2ii

• a mestment secunt,es ca ns 51 9 J8'

~~ '5 1aIn on sayy neaaguarters cuna "gs '53 Otmerinco? e 295 7 1810 e5 3 Totai non nterest scorre 1.405 6 1.023 8 ~ I+:9i CTHER NON-lNTEREST EXPENSE Sta_'f e_ xc._e s.e.._. _. _ 1.064 6 907 2 752 9 Net oc. c.u. ca.ncy._o_re.mises 206.1 177 6 !J5 ' F:".lx'e ana eauiDr'ert exoense 170.4 132 0 ~ '~I i58 Te ecomm nicat ons exce~se 73 1 60 8 50 9 u Otner ccerating excense 599.6 480 0 381 9 'otai ctrer non nierest excense 2.113.8 1.7576 14796 !NCOME BEFORE INC0VE TAXES 499 3 494 9 456 J ._ncome taxes 113 4 172 1 165 J N,E.T iNCOM. E $.385 9 $ 322 8 5 2910-i 1 Net rcome accvc< ce to common stock $ 376.2 5 320.9 $ 2910 [ET It56. U.5FEiiUOMMON.S. HARE $ 4.86 3 4 35 s35 he' age common srares ano snare eauwa!ents (mations) 77.5 73 9 3 5 W ammr, roses e vrsa::ae F rr l l

ifk c sa tv a:n t :n / n : u n consolidated Statement of Changes in Stockholders' Equity d>a's m Wh0rs

n n,x e

N,, - Ofs 3'D s luiANCE. DECEMBER 31 G83 3 33682 5e33 7 $ 579 7 ( U 7e ' 6 i. t Net income 2910--.-. .---. 291 3 i C...o. mmon om.- aenas -. .~ - -...-.- - - -....6>- -. -...' I2 0)..-. - --.- - < s j r87 N. el t.'eaSJ..r/ stoc_k t.'&nsactionS.- -.-. f12) ' 'J Ci Issaance of common stoc* -.- -.05

9 04 T ans stion aclustments 19 01 9 ;_

BALANCE. DECEMBER 31.1984 3 Net,rcome _- _ _ $366 6 $534 2__,_ _ 3,_ 772 9___ f 12 6.> $ 7 py2 0 3228 Pisterred awcends . - _ _ (96 1T_' ~ - ^ ~ ?:? 5 C. ommon amcenas ~ ~ ~ ~ ~ ~ ~~~ T'~~-~~ ~~ 95. Stock dmoend-common _ _.... _ ... -.. _ ~. (1 9)..-. ?9 Net treasury stock t'ansactions _. ._. _ _3_68_6.-. _(368 6) .. - _ _ _.3]_ __ -..... issaance of preferrec stock _52 ['9 _..__ __.. _ _. 5_0 0 (2 61 1 1J7 J lssuance of common stock 30 7 55 5 05 ?!

• 7 tans! anon aciastments 53 jj 1

BALANCE. DECEMBER 31.1985 $150 0 $767 9 $518.5 $1.007 2 $f6) $2 439 0 j Net income 385 9 3E5 9 \\ Common amaenos (111 3) (11: 31 Pre'errea amcenas (9 7) < 9 7; 1 Net treasury stocl< transactions 26 46_ 72 1 issuance of creferred stock 150 0 (2 4) 147 6 !ssuance of common stock 65 12 9 0.9 ^~~ 7'anstanon a3:ustments 20 3 (4 5) ___ '4 5 r BALANCE. DECEMBER 3i 1966 $300 0 $774 4 $529 0 $ 1.271 1 $2 574 E 1 l See a=7aryt; Nctes to Cors>0ated F ra%a 5:ateme" s i i i i { l 1 I ^ 1 l I 4 1 I l l l k I s 1

Consolidated Stateme t of ChanDes in Financial Position %V Y, Y.?N Yi ' " " P( 'n ' H.! FINANC:AL PESOURCES WEPE PROVIDED BY ! APPLjD TO) de<a::es ~ % ' ': m 5 3E5 9 5 3228 5 2913 C v* " 2 Je, l111 ?) 196 1) e7 Si = '+ '+ % :.:.,cs ~2 19 7) i19 > L. ;c ?rces 26J 9 22 8 203 J 3 cc :, :5 c :v e !ma~c: ; a: .~...._. _. -. -..........4 e67 *. = ^ . ec: 5.534 8 3153 a s~..e -. gg cc,r,,ea 1,522 9 3;cg 5

7? 2

r

e~r: n. +~ Ject u"a icey m =ect 1.144 6 10528 517E a,,a":-

t cor-ma" stocv met, 20 3 e6 7 c9 Lssa ce o'overrea stocv inet> 147 6 147 J tJe!' eau, stccv ransact,ons 72 11 9 _f Ic'a.:ecos;!s ama a:ner Vanc:rg actrt.es B.377 4 63754 Orre'a:.y es ._.C...e. s n a o aue ! o.m ca n s.-.. _. _.-- (101 2) U_440 8_..).. '?? !- 7"ans at or acustreets - ,..53 n: (4 5) O!ner "e!

542.3)

(330 e) J9E. .7 Ma a:ner a :wtes (648 01 n.772 31 2:6 + i 3ta vanc 31 resources arceaed 57 994 3 346279 SE C95 7 1 INCAEASE tDECREASE1IN EARMNG ASSETS Dj **c~ rani interest ceannq 5 (771D) 5 62 5:JB r.eu~er: securses a% aa.na accourt assets 1.155 2 Se9 6 ~~

ea Orcs sc-a arc se r.!es unae'resa e agreemerts 534 9 86 21 20 *

%+:'ca's no: +3se wanc?g 7076.1 40183 J:3'6 ~ n .%..".e a_s _e_.:n e a '":'.".F.-. s e. is... __ -. -...- _____. 57 994 3 5J e27 9 ~

as-

~E'C~ ._.4. . ~. _ [ i. h6 [' .33 [bd 3 If '3 i I l l

l e s.u m...x m e, r: a, _ Conenlidated Statement of Condiflon o -16m' fe* G mm wneum m n.m De: we 45._ SETS _. _ -. _..._..._. .-_.5.. 5 383 _.._5._4 8. 2.. 5..... 5 558 C.. ash r a ase 'ro~ DJ r> s..-. . _ - _ _... _.. _ _... ~...._. _.1. 7 6_9._ - 2 397 _.. D e trar cae e s sterest teanng. -. ~. <E2e; Inwst~o te~.;'s es U $ *e33a yseca'res 1.029

• S4

.tE51 r Ot~er U S governrrect secunt es 22 9 !3 i State una r"unic' oar secar t es 281 315 (34i Omer tecuntics 805 271 534 Tota.nwestment secant e3 2.137 < 779 353 Traa3 accoant assets 1.261 1258

27 feaera

'anas sola ana secunties uncer resa.e a9'eements 1 430 1.882

!452;

l. u3rs 31 074 28 066 3 OCS Lease f nancino 2.113 2 062 31 Totai toans ana tease knancina 33.187 30 148 3 :39

!.ess 'nsm e for creanossh 511 431 EO Net icans and tease haancing 32 676 29.717 P_ rem.s+s_ano e.;u.:ome_.n..t.__.. 631 600 _ _2_9l9 .... 3...? Custarre:s acceotance f.soaty 916 1 218 (302, Eameo inte est rece:vabie 354 42 8..-.... 7J RW e.st.a.t.e necd 118 119 r 0:ner assets 827 559 26a l Totai assets $47.502 544 812 52590 UABiUTIES s l Devana aeocs is in comest c othces 5 9266 i1438 5 7828 irterest cnecnng aeocs.ts m dcmest<c oinces 3 178 2.296 S82 ms._u'.e..c monev_"".ame! accounts in comest: ottces 4.360 4 241 '9 .-.x Sa.' nas cec _cs.is.._in comes' ; of6ces 2 618 187' T 7.?re. a_c_cos '_s n.c..o..rcestr.ottces -uncer 5 t00 000 3523 3.5___ _ _. ~_5.. 0.. We aecos:ts :n ao'"ess c?ces -5100 000 anc over 4 973 6129 i'156; i ' ta acca3 's in comest c ofnces 27 918 25828 2 C30 l Decos 's :n 'aregn orancnes and internet onanucsta anes 6 656 7 C56 t:QCi I

• ta aeocs,!s 34 574 32 864 1 C90 o

'eae'a bras ou':naseo ana secu'tes unaer recurchase agreements 5 007 4 696 3T1 Saco'arateaiong term notes cavaore to parer comoany 197 197 Suto'_a? u?a caoJa' note cavabie to carent comoanL 399 398 ~ l Cree' Gnas ocrima___. 2 459 1 804 655 ' C C EC :3 ' C h.% '5.'a '.0."? 916 1 341 M25 ' l Keainte en ' ares ano crer excense 1 113 1 124 /7* 1

0. 7_e.r ' aow!+.,

185 494 291 l .... :t?..-..a._u_t e.3_... _ 45.450 42.938 2_.5_12 STD. CKHOLUFS ECU..lry_.. _....... Co~ man suck -510 Dat due 550 550 ... SRB'qs agnoggea anc outstanding 1986 and 1985-55 000.000 1 S u's., 553 550 _.3 Dn vaez_qro' s 949 774 175 Torai stocco:cer s eau'tv 2 052 1 874 Tf5 Tota!ii.<bn es una stoc+holaer s eautty $47.502 544 812 52 690 =.=.==-.==w - -- w- - - " fddC'O Yf yb4Nf$$ b M C D{fNhG M b &n@d5 ~ I l l M m

I wnh am n m Notes to Consolidated Financial Statements s 1/ Summary of Significant Accounting Policies: 5"ans'y "or" cine' sources anc m lever 3;ealeases ahe e a The account:rg ana "eoarting poisc+s of Secarty Pac?c Corcora. ssosty:a portion of the !mancingis provicea Dy aebt w no von ra ::s sats '1Y es Trb"" A * ;+re'a'y 9ccec ea accour!- 'esou'se lo Ihe eaftf Da't:C Dant Income t'om lea5es :n Ine %l ng Dr ncpes it'e tonoA:rg G a sum'"a% of tYe 3 gv ft D%c.es CafeQorv 'S 'ecogni:ta on a Dasis snich ge" era'!v DroCuces a

1. # f *# 0"

• "*"' #'"# 2 "*I '*CC'"O UIP Ud!3 'C' '"C C"* "O'"

A BAS lS OF PAESEMAiiCN W3 'e*?'agea ' eases is recogT:ea over the ie?ms of the leases L3Ma vJ,sc,03'ea !.nanC'h' s:a!eme"!s c! &c;;; ea: ' c woroc'3! Or JDon:Fe un?eccie'ea eQV:t/ irNes!'"ent. $uch Pcome is 'eam-e aa.u.S a aes,,Carocrat:ani rc'uae tre s=wis ct Secur.?y manea ana a3ustea cur'ent!y Aheneber a rets on to an RDorta"t v3c1c Co'cora:on <Pa'evt,: eri ra n cc soinarea 35su ".on abtn resCeC! to teveragea reases. suc? as a cra"*"? n r a_..ounts of a:,l signw,c3nt ""a;or lg os%a suos a.a';es nc% air'g nCome !as rates changes the estimalea net nccme l'a " '%-- becun.,; Part c,,Japona:, Banx,9ane > me c.oroor3!.or S pt,nc.ca! e3ses 5sCYJa's intercor"Cary accoun 5 va !'rsac!:ons d'e uoa 'i ana lease franCing iCsses a'e chargea i: !"e 'ew a

• y,,,,

C!ecit losses and recovenes are creas(ea tc tr+* rey 'v Pm* ~ %,esiments representing betheen 20 percent ya 90 cercent of for crea t losses are Cha'gea to e> Dense 3n0 30aea to "e 'w * a ne indes tees eQuit are accountea 'ar unaer the eaJ4 melhoa / ON# 2 ~ All Cthe' eauit/ invest? rents D'e carr<ea al cast eDsorb k nown ana 'nherent ?>sks in the loan and iense * "V~" m Susiness corroir'apons accourrea !ar as,cu cna5es are - ~ Dort'oncs l or'cluaea from the resDective cates of acquisition Tne excess of n M aM% C a27 T Mb !*e Du chase Dnce over ??ie net assets acquirea 's amort:ec on a r eanes5 a'e reCorced at the loAer of estimatec !3:r val o' s-~ ~' st'a gnte:ne basis over the cencas eshmatec to be cenet:ea not a'nount. ana any cMerence Cets een th:s arc ine cCa" a W egee3ng.JQ years trea:ec as a toan loss Gains ancicsses tram the sa:e a' w B /1NVESTMENT SECURITIES AND TRADING ACCOUNT ASSETS s. ate 4 assets as 4ellas any suosecuent wrte cowns are cuaea investment secur: pes are carnea at cost inc easea ty tre accre-non" rte'est income von of c scou ts ano cecreasea Di Pe amort: anon of opum n D / PPEWSES AND EQUIPMENT 5ee Note 6 I Accretea a scounts ana amorts:ea premiums are incia aed in inter. \\ Prem,ses na eau:cment ownea are carr'ea 3' TS! -eL L estincome Gams analosses rea"cea t'am tre sa e of:nvest~ent tarea ceprec:apon P'ocerty uncer cBDita!' eases s W N - 3ecunt es a'e aetermirea us:rg tre SDecMC icenfMCa! on 't etma paara arount secur ties bna oi"e'I'BC rd assels '"C0'"9 tower of the present value of future rentalcar"eTs ? 1 ' 7 manc:aItata es ana forsa?a contrac:s eterest rate soaCs and tre :nceobon of the lease 'ess accumulated a'Cr cn' ' - r cruction costs. iriclaaing remccenngs, improve'"e is r N v cotiors Jsea in i'aaf 9 actet es are camea at ?"arket ya'ue Ga:nS at!Jnas to !. nance major projects a'e captal:ea & ^'( ya icsses ' eat;;ea trom the sa:e of traarg assets ar unrean:ea 3cc,gpg,,s are cna'gea to exDense na,et vaise aa;ustments a'e "civaea

• tra3ng Dr0?Is Depre a!'on :s chargea to expense over tre es:ra:ea 7 b C +WANc AND LEASE FlhANCING, RESERVE FOR CRED!T LCSccS **

uves of:ne asse!$ (Dunaings-2 tc 45 yea's eas C"'em - l ~ l Lcrs a'e ge" ya'!y carnea at ar"OJn!s adiancea tess Da *,O I., gars) n Creciatton on budangs is c_omDuteC ush,, ~,m.r ;,,3-- e ' ~ v r b cyes ea wr: gage loans ne:c tor 'esaie by r"or'932e Ca*% gy y (g,vp _ s.,Cs0 artes a'e carr ea at the lOwer of ccst or agg'egate mareet cor"CGtea on a stra:Qht line Casis Leasehola ?"c'o.e" em n v awe ecn mctuaes :re resu!:s of the varuanon of relatec commit-amort::ea over the terms of the respectae ' eases or Ine a: 1a wen:s to ouy ana sen toans ana toraara ciacement ana tut.. as usefui s es at tne improvements. whicnever is snorter contrac:s urea'nea a scou t on c:scoun:ea tws is ceaucted n E INTERNATIONAL OPERATIONS see hac ' nm avs anc s recognizea mncome using r"etnoas ahich Assets and Labmt:es aenominatedin torergn cu'rencies gere'a. v ywa, croauce a ever wa on :ne uncaidloan ba!ance On are vanslatea to U S cot!ars using current rates at exchyge r I non tscountealors rie'est 's accruea as eu'nea In:e'est me ca ance sheet cate The latment of translation gams ra a=was 7 busmess tcans are normany a.scontinuea whenever ~' tosses is casec on a aeterminativ of the pnmacy ocerasog " e ca rm at.nt~st or anncipans 90 cays past aue or sooner currency ttunctional currency)ot eace 'nre>gn argan.:3!.cn a n m wra n s Labons u~aer such cana:t ons previously accruea but tanctiona. currency is other than the U S. s.ar. trans a' o~., a.aw-. cocecrea interest income is reversec and interest mcorne is a e ~ents reiatedheaging resuits ano aconcaor acome tam-recogn :ea nnty shen receivea Loan tees ana !: nance charges ancn a'e eaxva'ent to inte'est are normally aeterrea ana amor-nzea.nto inte'est ecome over the terms of Pe IGans Loan comm+ vent 'ees ana stanaboet:er of crea:t fees are mctuaedin non-

nte'esnncome over tne venoa sevce is orovicea 0:rer toan rees l

a e recogn :ea m nonante?esoncor"e snen recevea Lease 1,nancing is camed net of uneamea income ana unamon t,:ea :nves: men: tax crea:ts on ?everagea teases Leases to customers *ainnio tso categor es (1) fullcayout 3 rect knancing teases wnere the assets seasea a'e acau?rea wanout antonal 1u_.

1! u smewumWm 9_._._ _._ I i accumulated in stockhoicers' eaurt,,vnen fore,gn,r,estments a e li MORTGAGE LOAN SEPVICING. INSURANCE PREMlUMS EARNED said orIsu.aated tne re'ated accumutatea t'a stat on aa,us:~ent wa~ sewc.ng fees are cased on a st.cuiatea cercentage at t~e ca'a ce is tra c!er'ea to naveteree come ana acoucac,e wstacagg ioae p tec.ca ta:ances ceing servicea and are l urcor e tawes c!aaea:n 'ncome as relatea toan cay ~ents from ~ortgagars a'e 1 income ara esceese amounts are tws area tasea a aser. covecrea Cost associa:ea sitn tne accu:s:t on of icae se'ocrg age o' a:es creia nog ourng:ne ? ear scrwg eca ge; aamy zgn:s :n?cugn tne curcnase of servicing contracts or cas 10an cos:t.ons a e valuea montet atc'nauirg rates o' ecunge a a cu anases a e ae'e"ea anc amort:ec ove'tre !wes or:ca s ce?g r tre ress:s a'e mctuaea e manne:e es: ecome se?ocea e crccor:>on to me est mate neticar seroc?g rcome

os racce prem ums rece vea,e aceance a'e mcwaea m F / CLASSiFiCAT10N OF BORACA,ED FUNDS ms e m i

rcome over tne hes of the re'atea contracts m crocortcr to t~e Long term aeut AC'uaes corrohea 'unas and CPer oDngattors amov t cf:rsurance n force e a !n an of gira!"atur:ty of sevE'n years of more peof w::" or gm3' Ta! r'!es o' or'e year or more Dut :ess than seven yee's is recor:ea J i NET INCCME PER COMMON SHARE as irtermea:3?e-!erm aett. wnde amounts with ongrar ma:un!.es of fie!'nCome Der Comma Snare is compu!Ed casea on :~e

esS than or e year a'e Consiae'ea Shor!-lerm Subordina!ec Cacita

aergn:ca average numcer of shares of common s:cck c ts ara eg Notes *epresent aeo;tha! avah!.es as primary cap,talunaer current cunng each pertoa The Aergntea average nur* Der at sta'es 'egiations of the feaerai peserve Boara s eth respect to tne inciuces the aaaitionalcommon share eauive.eets t'cr-me Co'coranon ana Comptralier at the Cur'ency a.:n respect to the assumea eserc:se of astutive ucck ootions ana incense cc Ba'4 DeDt instruments anich conta n early reaemCt on ofweges aAaras Kso for the purDose ofInts comDGratcn ne: mccr'e, l exercisaDie at the oCf on of the seCu? ty holaer d'e class.!ea ba5ed ceCreased Dy the amount of Dreferred stock a!vrae^as i on :re earnest ooss#e reaempt:on care K / FINANClAL FUTURES CONTRACTS. INTEREST RATE SWAPS G ! INCOME TAXES %e we t Ga:ns ana tosses on hnancia' futures cont'ac:s ana (ne ' w u : 1 Amounts cravocea tor mcome tax e< Dense a'e based on income interest rate snaps s asignated as heages a'e reccgni:ea ce *e l l 'ecorted for nnancial statement purposes ano ao not necessanty Me of the neaged asset or aabt!tv as an aaius tment !c me 'eTeJ ren'esent amou ts currently pagac.e unaer tax !ars Deferred <nterestincome or expense Gains andlosses inc!va "g anrEa :ea n

axes wnscn ar:se onncca4 from t: ming a:"erences Detseen the manet value adjust'nents. on futures contrac:s ana "%: est 'a:e penoa in anecn cer:ain 'ncome ana excenses are recogn:ea for saacs usecin traa<ng actwtres are recogn:ea curre"% m hnancial acccunt:rg curcoses anc :ne Denoa in whicn they a"ect non-inte?estincome ta x able mcome are inciucea in the amounts oroviaed for income taxes Cur'e~t ana aeferrea cor"porents of the total tax crov:sion 2lPreferred Stock; a'e 'eaetermeea each year when tax retums a'e bied wnich resuits At December 3L 1986 ana 1985. the Corporat on naa vx

'n a resia'e~ent at tne creviousy recorrea cor"conents The provo-Ma%et Cuma:ative P?e*errea Stock outstanang lctarg M por tar income :an es incluaes an accrua: for taxes on the una:s-milhon and $150 milhon. rescectweiy The arv cena Te s a+7 'D~:ea eam,rgs of nes:~entc whicn are accountea for nce'tne minea penoaically casea ucon an axbon cica rg procen ~ e eaJ fr ~e:r oa 3*a on t~e una st'Du!ea eamings of foreign Dreferrea shures rank CrDr to tne Common S!ack A ? 'esce~ ' src ar es ecect in instances anere eamings of such suosra:- awaenas and hautaation ana genera;i han no votag ? g~i >+ y a' es a'e aeterwea to be macho:te!y re'nves:ed shares s ere sold for $500 000 each anci may De reaee~ea a: ~e

m. es:~ent !a crea ts a e ae'e"ed and recogn::ed as a recuc-option of the Corporatcn at onces ranging from 55B 000 to ror c.t me c wson *ar mcome taxes over the hes of asse:S gwng 5505 000 cer share for the f rst inree years at:e' ss acce era tc' ie (c ~e c'ea ls

$500 000 per sha'e therea'ter The sha'es a:so tray be recee~ ea

• e Corcora:cn tves corsancarea feaeral and where accroon.

tar 5500 000 per share any time toe d:v:aena rate easa s cr we comamea sta?e #come tax retums Accordingly amounts exceeas the 60-aay "AA" Composite Commerc>a' Pacer Rax ca.3 ta tax cenents at : nose companies haeng taxable losses or The weign:ca average awaena rate on prete? red stoce a as c'eu !s d'e s'rD: sea cy other companies which incur tax 4 44% tot 1986 and 5 50% for 1985 3c::es f H < EVPLOYEE BENEAT AND !NCENTNE PLANS he ues n n Q l 'r;e Corcorarcn pro +aes a vanety of benefit and mcen' ve comoe"sanc>n 0:ans for chg ble employees Provisions for the cos:s l O' ?vese peans are accruea and chargea to expense onciuaing charges o' crea:!s for s!Ocv options granted eth stock aDorecia- !cn ngnis O

I s 45 3 / Acquisitions / Dispositions: 5 / Loans and Lease Financing; Reserve for Credit Losses: In October 1986, Anzona Bancwest Corporation (ABC). a tank The tohowng is a summary of tne major categones of loans and holaing company heaoquarteredin Phoenix with assets of approxu lease financing mateiy $4 bilhon. was acavited for cash totakng approximately Dece :er 31 ~ $480 milhon The acquisit:on has been treated as a purchase for wa's m oors 19Be '9e accounhng purposes and goodwdl tota 4ng approximately Do~estic ioans $210 milhon is being amcrtized over 25 years. Business toans $19 238 $ 15 7 v) In Apol1986. tne Corporavonincreasedits ownership mierestin near esrate scans 6 612 5 22: Pfoare Govett Limited. a London-based stock 0%r, from 29 9% to Consumer toans B E65 7767 BDproximately 83% for cash and cn#rnon stock totahng aDproxi-Total oomestic roans 34 715 29 698 frately $56 mdhon GoocV.3llof approxima!ely $41 mdhon resulting internaponar toans 6 829 5 75a tram this transactsn is being amortized over 25 years-Tota toans $41544 $3fih r In Decemoer 1986. the Corporation agreed to acautre Orbanco --=== Francial Services Corporation a Portland. Oregon-cased bank Lease f.nancing O"';' I 2A ' 5 ' 939 holding company with assets totahng approximately $1 bdhon. tor *'"9 'o 6' cash and common stock totahng approximately $47 mdhon. The acquisition is suoject to the approvalof regulatory authonties. 70taiicase financing $ 2,799 _$ 2 5s2 In March 1986. RMJ Secunties Corp. a New York-based U S. ~ ~~ govemment secunties broker, was sold for cash totahng aoproxi. Business loans include construction loans of $2 903 mahton in '986 mately $54 mahon. The sa'e resulted in a pre-tax gain of approxi-and $1.652 mdhon in 1985 Loans, carned at $1.377 mdhon at mately $35 mdhon_ Deccmber 31.1986, were pledged to secure trust funds. cubhc In November 1986, substantially all the assets and mortgage aeposits and for other purposes required or permitted by tan loan servicing porttoho of Secunty Pacinc Mortgage Corporation The followir'g is a summary of transactions on tne reserve for basedin Denver, Colorado. were sold for cash totahng accrox,. creditlosces' mately $233 mahon The sale resu!! edin a pre-tax gain of approxi-aavars m oons ,gos '9e5 90 mateiy $18 mdhon ga gnce janya,, y, 3 $34 a 35,9 g f3[5 Provusuon charged to expense 502 9 379 4 39' ' 4 / Investment Securities: Otne" 36 0 B3 20 The tahowing is a surnmary of data for the major categones of Suo-total 10933 9075 33 investment secunties Amount cnarge0 0ft '416 41 1433 6i 2C i Decemte 31 mie'est Carrymg vaaei Recovenes 79 9 8] 5 53 6 wa"s.n msons focome veiue Vawe ng,c,gg,,ingggg 7335 5, ,353 [ 3,3 ; Ba'ance. Decerroer 31, * $ 756 8 $554 4 5'95 7'easu y secunbes 5 942 $1276 $ t.271 r Omer U S govemment secunt es 23 0 128 ?32 m mciuces me ettect of acauistors oiscos,tions and fregn cur'ency vactat on ausr n State aca m nic/ par secu Des 20 9 534 509 (2) includes $2B 2 mean m 19861213 m@on m 1985 anc $7 2 moon m 9M s ocaec u r C:*er secur:t:es 79 4 1.251 1.273 Transfer Rs Reserve bra' $217 5 $3189 $3185 The foHowing is a summary of non-performing loans and leases ,995 and related interest foregone-V S 7reasu y secu t.es $1171 $1.195 $ 1.211 Dece" Der 31 r n Or er u S pces once budaing Ine sa:e of tne Decene' 31 %6 reagauarte's Dudaing resultea in a pre tax gain of approximate!y P?emses ecgg ar2 $190 5 mdhon of whiCh aDDrox1mately 5115 3 mdhon sas recog-W $ H6 $ 457 ?100 $357 m ed at the t '"e of tne saie and the remainaer s being amct! ea E ume?" 753 353 400 ov er the inmat ten yea? term of the rease as a reauct:on of Le35eho a :nD%eme~s 207

• 8 s49 l

~ rentai excense $ >.417 $511 3906 h[Mr,9[5 ~ ~ ~ ~~ 7 / international 0perations: I Prem ses orctorg ana The Corporation s intemationaloperations incluae acov+t.es o'570 $ 31s $ 7e $2ao conauctedinrough corporate subscanes ano altsates as sen as Eo eent 589 270 319 tne Bank s overseas cranches off>ces Eage Act sucs.aianes. Leasenoworo w e~e~s 176 46 r30 Intemahonal Banking racdities tocated in the Unded States ana intemationaloperations locatedin Cantornia Tne intemat: anal Tota! $1 cs3 $394 $6eg banking business conducted in the Unded States rs suostant a", Georecianon ana a'rort: anon excense was $ 135 3 mahon in 1986 with customers comicded overseas. Out incluaes immater a ' act, $90 9 motion in 1985 a"c $79 6 mahon in 1984 Net rental car "ents tes associated w in domestic customers The nature of a f nanc.3' r on ocerating ieases a ere $ 146 3 mahon in 1986. $ 136 7 mahan in institution s coetanons makes a precise aeterminanon at ntema-i 1985 and $100 8 r"dhon on 1984 These amounts are net of tional prontabd:ty 11ficult and necessardy unvolves the use at subaease incc~e of $3 8 manon in 1986 $2 7 muuan in 1985 and certain arb trary a40 cat ons Generany funas corrowea ana loanea $3 0 mahan in 1984 between comestic and intemaponal operations are at manet rter-l The tuture minimum renta!commaments pomariy representing est rates International!cperations also recewes an atiocat>on of i l non-canceiabie coerating leases of premises, were as follows at eautty capital funas on an interest-free basis A portion of the total l December 31 1986 reserve for creaa losses is allocatec to intemahonalloans and tease hnancing and a provision for creast losses is chargea ana ummm wars x maons penta commeen,s acded to this portion of the reserve Overheaa exoenses are aeten mined based uDon internal ahocanons accropnate to the inasauat 19e 7 g,,, act:vities income tax expenseis allocated to intemationai ana i 1988 p,2 1989 1og comestic operations casea upon their respectwe cont *,bunons to '990 104 income tax I,abiht es Substantially all aeposits in fore:gn cranches 1991 93 anc international subscartes are interest beanng Ane'1991 1.121 The following is a summary of consohdatea comesuc anc inter-

icta,

$ 1,660 nabonal operations. _.-...= r = =. _ _. ~ - 30har5 in milhonS 20meshc mie at Ora! toa... Mangd expects that in the normal course of business, leases 1986 Inat exDire wd! be renewed or ts Diccea by other leases. Coerahng incorne' ~ }'"7{ } & $2 684 4 $ 4316 $3 ? 16 0 A r"ajon!y of t"e leases provrae for the payment of taxes, marnte-g zy3 nance insutRoCe ana Certa'n other expe*ses aDphcable 10 the - - - - - - - - = = = = l Ieasea Dremises May of the teBSes Contain extension DroVJons. Net uncome .$ 310 4 $ 75 5 $ 365 9 esCatation Clauses and Durchase options. There are no restrictions ~ pggg,g,gg,gny g 49 y97 $33 4,9 $ gg 59( On Daying civacends incurring aaditional aebt or ne.gotiating addi-

=

tional teases under the terms of the Diesent lease agreements. 1985 l Oce'ating oncome * $2 3214 $ 310 5 $2 6319 = = = = = -. Income before taxes $ 3800 $ 114 9 $ 4^4 9 Net uncome $ 2551 $ 67 7 5 322 e l Assets. year ena $ 41652 $11651 $ 53 503 1984 Operating income $2 087 g $ 235a $2.323 7 o income before tases $ 3915 5 64 9 $ 456 4 Net income $ 254 9 $ 36 1 $ 29IO Assets vear ena $ 36 SS6 $ 9 531 $ 46117

0) Incides net irterest mcome and non-mferest mCome

cl g s* International operating income incines foreign exct'ange gains of alDther Short Term Funds Borrowed: $32 6 mdhan in 1986, $17 8 minion in 1985 and $16 5 maihon in 1984 The toHowingis a summary of the major categones of other short-Transiavon of certain fore,gn currency assets ana haotht:es resulted term funds borrosed l in losses of $0 7 mahon in 1986 $0 7 mahan in 1985 and $0 2 mahon cecercer y 1 in 1984. wnich were included in international! operating incorre wars m mors ms 95 i The toHowing is a summary of the fore gn currency translation Term feoerai runas ourchasec $ 48 Balustments included un undivided profits Cemand notes Uue to U S Treasu y 311 300 l r cea's e msuns mt 95 99a Other can'estic bottomngs 992 1 351 j W ob0no%C"0 % S 'O W Ba ance January 1 $r14 2) $;19 5) $(10 5) l Trans:at'on ga:n (toss) 15 4 10 B (14 0; Tota! $3 010 $2S56 l } ="

== Heay:ng ga:n (! Css) i21 6) 16 4) 13 App 0caoie (taxesi tenefits

• 7 to 31 37 At December 31,1986 and 1985. the Parent Company haa knes of Dsocsitions 32 Credit. on which commitment fees are paid. Mth vanous foreign Net cr ange (4 5) 53 (9 0) and domestic banks. allof which were unused. totating Ba ance December 31

$t1B 7) $r!4 2) $(19 5) $8U midion and $888 moutom respectively The Parent Company guaranteed knes of credit for certain The fonowing is a summary of transactions in the reserve for credit consohdated foreign subsidiaries, totahng $3,500 mahon at losses related to intemationa! operations. This reserve is incluoed December 3t 1986, of which approximately $1.518 mahon aas 'D US6 in the consohdated reserve for credit losses (see Note 5) The Summary contains only the reserve aenved from expense provi-sions charged to intemationaloperations. As a result. the ending g intermediate Tetm Dekt; Long Term Debt; Subordinated Capitsl Notes: reserve does not represent the total reserve avadabie for intema-tionalcredets For further information on the reserve aHocatect to The lohowing is a summary of the major categones ofinterr~emate. intemational credits see page 30 of this report term ebu ng-te'm debt andsubordinated caodalnoty __ _ mars m meons H6 95 94 3 g Baiance ;anuary 1 $115 5 $106 5 $ 92 6 g,, Provis on cnargea to expense 41 691 s66 Zero Coupon Notes due 1986 ano 1987 O* 9' A8 E] (ettective yie>0 0113%% to 13 9%) $ te9 3 343 Sub-totai 166 7 140 4 123 5 6%% to 15 3% Notes Que 1986 to 1999 3e3 4L Amount cha'ged oft (34 B) (33 1) (19 4) S%% to 11% Guaranteed Notes Reccveres 14 2 82 24 ave 1968 to 199V 3 75 354 Net crea.!icsses (2?61 (24 9) (17 0) Ficating Rate Notes ave 1989 to 19912 666 7% to 122 % btendibie Notes due 1996 to Ba;ance December 31 $1461 $ 115 5 $106 5 200; 335 33 m mcees tre ee:t of acawseors espostors and tore gn canency trans; anon acetments Other comestic bortomngs 492 494 Otherintemationa! oorromngs $41 4'i The 1986.1985 and 1984 provisions charged to expense include 7,, g, 99( q $6 9 mahon. $141 mdhon and $5 2 mdbon, respectively. to increase T=== the Attocated Transfer Risk Reserve which totaled $28 2 mahon at Long-term aebt. December 31 1986 12% Guaranteed Notes due 1992" $ 100 $ 100 Floating Rate Notes ave 1992 to 1996 Y 442

23 8%% to 11%% Notes Que 1993 to 1996 396 99 Other comestic bottomngs t47

• 20 Other internat.onal bottomngs 80 64 Total

$1 167 $ 503 Subordinated CaDita! Notes Floating Rate Subordinated Capta! Notes due 1996 and 1997 $ 500 $ 50,0 1 (1) 00kgations of fore +gn sacsdanes l 2 inctuces hec rate notes mat nawe effectmeiy been turnec me fccatmg rate notes mrougn tne Use Of mterest rate $ wag $ i l l ____.___.____.____________a

t 48 seep Pace Cocoram at Sesea es h 4 l All Notes are either unsecured obhgabons of or guaranteed cy 10lIncorne Taxest the Parent Company and. unless noted otherwise. may not be Tne provisions for income taxes in the consondated statement of receemedpnar to matur:tj earnings incluae the tonowing amounts The Zero Coupon Notes due in 1987 mai be recee' ea by the u m m ovs Crem Dete<<e:: Ua' Corporation at their matunty value of $200 mdhon at any time Float- ,935 ing Rate Notes due 1989 totahng $375 mdhon ma; be receemed at feaeral $ 32 0 $ 74 $ 39 4 the option of the noteholder in ecua! quarterly insta'Iments of Sea:e ana to:ae 47 9 t1 B) 46 1 approximate!y $31 mdhon over the three year term Faea Pate foreign 27 9 279 11 %% Notes due 1993 totaung $99 mdhon may be receemed by ~

7aga,

$107 a 5 56 $ 113 4 the Corporation at their matunty value of $100 mahon on or after ~ ~- July 15 1990 Faed Rate 8%% Notes due 1996 totahng $150 mahon 19 5 may be reaeemed by the Corporation at their matunty value of $150 F 2*'B' E S 92 9 IG mahon on or after March 1,1993 l*, 'g"* " j 3 The Extendible Notes due 1996 to 1999 totahng $185 milhon may be redeemed on certain cates beginning October 1.1987 at the IO!a' 5# 0 5 ?.5 !_ ? ? option of the Corporation or the noteholaers The $150 mahan ,9st 6tendible Notes due 2001 may be redeemed on certain aates feaerai $ 25 4 5 646 $ 90 0 beginning Apnl 1,1989. at the option of the Corporaban or the state andlocai 46 3 47 5' G noteholders if tne Notes are not receemed, their maturity wdl be Forergn 24 4 24 a extended for a penod of one to hve years at an interest rate not Totat 5 961 5 693 V55 4 lower than 101% of the " Apphcable Treasury Rate." as defined i = ~ = = = = = = The Floating Rate Subordinated Capital Notes due 1996 may be The fouonng is a hsting of the tentatwe elements of the 1986 ta x l receemed by tne Corporation at their matunty value of $250 mahon deferrals ana the restated 1985 and 1984 deferrats based on the beginning August 15.1988, for capita! secunties and'or cash unde' tax retums as ided certain circumstances The floating Rate Subord,nated Capital ,9gs ,9g g Notes due 1997 may be reaeemed by the Corporation beginning I February 15.1986. for cash only from the sale of capital secunties ,'he,[,9 Uncer current regulations of the Feaeral Reserve Board the Capita! e,,,,u,,,,n, ,(93 g, g _ 3 _ y,, ,g9 g ,59 o ,e3 9 Notes ouaidy as pnmary capitalof the Corporation p,c,,,,on for creca losses (47.5) a3 21 E' D The interest rates on floating rate notes are aetermined penodi-pg ge, g,, cog,,,on, yo ,3 p yy cally by formulas based on certain money market rates or. wnen Investment tax crecit (4 3) (36 51 J5 2 appropnate, by minimum or maximum interest rates svecified in State ana local taxes 09 H3 31

• i the agreements covenng the respect:ve issues The ettective inter-Loan fees and interest 16 4 10 1

-J L est rates on floating rate notes rangea from 5 69% to 9 55% at AH other - net 23 58 '99 December 31.1986 The weigntea average interest rate was 6 54% Tota! $ 56 $1251 3 G3 ana 815% at December 31.1986 and 1985 respective'y The troentures under which au the Notes were issued prohibit in October 1986, the Tax Reform Act of 19b6 (Act) s as signed into the Corporation tram selhng, or paying drvicends in. shares of law. The effect of the Act on 1986 results was to lower the provision stock of the 3ank unless the Bank unconditionany guarantees for income taxes by approximately $91 mdhon. This reduction was payment of pnncipaland interest on the Notes. pnmanly attnbutable to leverage lease activities and aas recorced The aggregate intermed' ale-term long term and Subordinated in the fourth Quarter of 1986, es required by generady acceptea capitalnotes matunties for tne hve years 1987 through 1991 are as accounting onnciples, together with a related, and partiauy offset-tonows $673 mahc n $809 mahon, $596 mahon, $338 mdhon and ting. reduction in pre-tax lease income of approximately $47 $264 mdhon mdhon Net deferred taxes totaled $833.7 mdlion and $8281 mdhon at December 31,1986 and 1985, respectively There were unamortized aeferred investment tax credits of $89 9 mahon at December 31,1986 and $905 mdhon at December 37 1985 In l 1986,1985 and 1984, amortizedinvestment tax credits of $13 5 \\ mdhon, $351 mdhon. and $23 9 milhon, respectively, were inclucea in the computation of the provision forincome taxes f The provisions forincome taxes resultedin ef'ective tax rates that were less than the statutory federalencome tax rate for the following reasons - t

9 1 s 49 986 485 184 EW n " TS Statutory rate 46 0 % 4C 0% 45 0 % Act.a'a:present va've of cenef f ochqat:an Lease hnancing i14 3)- Accu'miatea teneht ocupapon,nciaamg vestea tenents Net sta*e and local <ncor'e tan 50 54 60 of $322 7 Si359 Bi Tax exemct ncome 14 9) is 21 14 41 W * '*

1. 9# " "'O' " C * * * " '

E'd8 3' Investment tax crea:t i4 f) 17 1) ,52

1. ^*

• O'

'OA WOW *] 5"S ## # Fore >gn suts:: ary ea'nings 42 41 (2 C) 11 1) Caortai ga ns a 6) 12 7) t5 6)

• ~~'"9 V* "" ~* 2*
• D S* C #

C Y 'a#0' 0#~ AliOmer-net 20 04 05 E/'ect:ve tax rate 22 7% 34 8 % 36 2 %

• 0+mmeM wgam m ews Man anew---.

0 (11 7) Unrecognite3 neticss 43 0 m Pred of Pe fan Reform Ad of 986 Ur'a"' ort les transit on asset cem; recogn red over ?5 pers 126 81 Listed below are the comestic and foreign components ofincome before income taxes-beca a cens<on mst $ 15

• onars m moons 9 66 G85 4 84 Net cension cost for '966 mcluced ice lo!/ comp exce"se Dorrestic

$4551 $435 7 $406 4 imarn) cor"wents ? l forerga 44 2 59 2 50 0 Serm cost-oenents earned currng me nroc $ 19 4 Tora! 'nterest cost on c*otecte benefit 001:2a! on 38 3 ~ $499 3 $494 9 $456 4 Actuat return on cian assets

58 31 Net amort::at<on anc ceterral 24 4 Taxes related to gains on the sale ofinvestment secunties were

~ ,,,,g, $26.4 mdhon in 1986, $1.7 mahon on 1985 and $10 mahon in 1984 g 11/ Retirement Plan; Other Postretirement Benefits: The sergnted average discount rate and rete ofincrease e !.u+ The Corporanon maintains a funced non-contnoutory trusteed compensation levels usedio determining the actua-a!o ernt I retirement income plan for substantially all domestic employees value of the projected benefit obhgation at Decemter 31 1956.e'e wno are emoloyed on a full-time or part time basis. as dehnedin 8 5*o and 5 5*k respectively The expecrea long ter~ rate vt et: on plan assets was 10% Ine pian Ihe benahts are based on the emotoyee's years of cred-ited service. average annual sa'ary and pnma'y social secunty yn y995, pgng,gn g,pgng,,gg gg,g,,,gg u,,c,7 g, 7,, ; ge benet.t. as aehnedin the plan Tne funding pohcy is to contnbute actuanalcost"metnod The actuana!present value c! accu se: annua:Iy the amount necessary to satisfy the funding standaras of plan benehts as of January 1.1985 was approxir~atey ?2!8 ~ the Intemar Revenue Service inclua.ng vested benents of approximately $221 marion % _ E"?ctive January 1.1986 the Corporabon a000ted Statement of assumea rate of rerum on investments sas 9 258 Net aue's mnaacia! Accounting Stancards No 87. Employers' Accounting avariaoie for plan benctots as of January 1 1985 sere acor.w for Pensions " As a result.1986 pension expense was reducedby mately $345 mdhon acoroximately $8 6 mdhon Pension expense was $13.8. $19 6. and The Corporation also provices certain heaith care a^d n'e $ 18 6 tar 1986.19e5 and 1984 respectvery insurance benet,ts for retired et"oloyees Sucstant,ay an t me c As of January 1 1986 the p'an assets were $4212 mdhon, the Dro-Corporation's comestic employees become chgibie for these tected bene'.t cbhgat:on sas $392 5 mdhon and the accumulated benefits 11 they have been e'"pioyed for five cor'secupve years benet:t obhgabon sas $295 9 mahon The following table sets forth the immedia!ely pnot to retirement. The cost of these benef!s is i oian s fu ced status ano ambunts recognizedin the Corporation's charged to eamings when paid ana amounted to $3 7 mahon l n conso!idatea financia! statements at December 3t 1986 $3 6 mahon and $2 9 mahon in 1986.1985 and 1984 resoectwe, 12/ Stock Option Plan: The Corporapon has a stock option plan which provides that oct ons to purchase an aggregate of va to 4 500 000 snares of re Corporation's common stock may be granted pnar to December 3!.1989 Options are granted at pnces at least equa! to the fa:t ma'ket value at the bme of the grant and are exercisable over j penoas of up to ten years The plan provides for the issuance at incentive stock options and permits stacir acoreciation nghts to oe granted concurrently with any option granted unaer the plan i i I i l

I I 50 seWamc apu an Ms e a> es s Genera!Iy, a stock appreciation nght permits a holoer to receive in 14 Contingencies: heu of exercising the op'on, an amount equal to the excess of the In the normai course of Dusiness there are outstanding various l aggregate fair ma'ket value of the Corporation's common stock on comm,t~ents anc contingent habihties which are not re?'ectedin the exercise cate over tr,e aggregate option once of tne numcer of the accompanying hnancialstatements Management does not snares covere by the ngnt with such a~ount hmitea to the aggre-antic,cate any matenalloss as a result of these transactions The gate cot.on once o!ine surrenceren oct:cn to:lowng is a summary of commitments and contingent habiht.es at Tt'e followmg is a summary of the transactions under tne stock Decer"ber 31 1986 option plan ms m sc"s MS Comm:: vents to edena cred?t 526 253 \\ vcer Nner Camemt'reets to ov cnase torergn enchange '7 532 r Gres on he of Srves ow Ne S?anacv :et:ers of creait ana fore.gn Co:ons ci'ce gua'antees 6 325 outstanamg Other :e!!ers of crea:t 445 .ian ay 1 1 559 149 $ 7 62-30 75 1766 098 $ 7 62-26 00 forward ana utu es contracts r r u Granted 609 271 32 63-38 13 265 092 2700-30 75 Corrm:!~ents to pu cnase e73 r E>erpsea r339 366) 7 62-30 25 1405 653> 7 62-26 00 Commitments to seit 3 069 Cancened 156 059) 20 31-36 38 (66 t88) 14 11-30 25 '= ~ Oct ons As of December 371986. approximately 50 percent of stanaby outstana,ng letters of credit haa matunties ofless than two years ana approxu Decer-ce' 37 1 772 995 $ 1146-3913 1559149 $ 7 62-30 75 mately 75 percent had ma! unties of seven years or less A s:gni!,- cant portion of stanaby letters of credit represent financial support i At December 37 1966. non-cuahned and incentive stock options of a var:ety of pubhc and povate borrowing arrangements These covenng 262.656 and 534.846 shares, respectively of the enctuae commerc:al paper backup knes, bond financings an0 simo Corporat:on's common stock sete exercisable. includ ng 572.633 lar transactions. pnmanly to the finance. utility and real estate shares with stock appreciation nghts At Decemoer 371986 ana industi,es The nsks assoceted with standby letters of creast are 1985.1136 795 and 677.840 sna'es respectively. were avaiiacie for taken into account when determining the aceauacy of the overall l l future grants Reserve for Credit Losses although a separate reserve for stanacy letters of crecitis not maintained 13 I Availability of Funds from subsidiaries; interest rate swap transactions. which are not reflected in tne Restrictions on Cash Balances; table above. generally involve the contractualexchange of hxea The majonly of the lunas for the payment of diviaenas by the and floating rate interest payment obhgations based on a notionai Parent Company have been obta:ned from the Banx There are onncipa! amount as cefined in the agreements The notional onnce legal!.mitat ons on the abihty of the Bank to proviae funas to the pa! amount of outstanding contracts approximated $15 520 maf on i Pa'ent Cor~oany at December 3L 1986 under reaerai barking taw c:videnas aeclarea by the Bann in Because of the nature of their activities. the Corporation andits any ca:enaat year may not. w;tncut the approval of the Comptroner subscanes are at all times subject to numerous penaing and of t"e Carrency esceedits netincome as oehned !or that year threatenea legal actions which anse out of the normal course of ccmcinea wth its retainec net uncome for tne precearng two years their business in the opinion of Management, based upon opin-A! Decer'ter 371986 the Bank cou!c have oeclarea civiaends of ions oflegal counsel. the disposition of allsuits will not have a uo tc accrosimaiety 5600 milhon without the approvalof the Comp-matenal etfact on the conschaated financialposition. l tratier 70e Comotrolier also has the authonty to further hmit the Bane s ca,r'ent at civiaenas under certain circumstances Feoeral canmng ias a'so restncts tre Bank from extending crecit to the l pa'ent Company in excess of 10% of the caortalstock ana surotus, as aefined at tne Bann or approximately $313 mahon at December 31 *986 My such e<!ensions of credit are subject to stoct cohat-e'ai Tgue'ements Feaers Re>+r e Board regulations require that the Corporat>on's v cane subsic ar es ma:ntain certain minimum reserve balances Cash caiances maintainea to meet reserve requirements are not avadable for use by the Corporation's bank subs @ anes or the Corporation Dunng 1956 reserve balances averaged approxn mately $1019 milhon l l

t I ~U \\ ~ _.. - - - -.. ~ ~. _ 15 / Parent Company Financial Statements: Condensed statement of Changes in Financial Position - Concensea financialstatements of the Parent Comoany onty w

necene3, follow' M C95 1986

'985 1984 Condensed Balance Sheet Manc a! resources we'e provcea ggy 33 DylaCDhe0to) Coerat' ors M s t m 4 cts 19 % q Net ar'come $ 385 9 $ 3228 $ 2910 pg Eavay in uno stnbuec income Cash e tark sucsic anes 2 $ - of g g,ang, 7,39 3, ,,,7 7, p g, 9, Short-term meestments - at cost smc" accromates Common awaenas i111 31 96 s> ,876i manet vaiue 332 284 p,,,gg,,g,,,,,,, ,9 7, , 9, M, vances to sucscanes 5 587 4 610 \\ investmentin snoily owned suoscanes Totatccerat:ons 34 6 t2 9; 2< 5 } Sank subscanes 2 621 1 931 Other nnancing acevit.es Non cann sucsdanes 967 78g Advances from non-Cank Other assets 116 88 subscanes ~ Q1 < 718 S ort-term funas corrowed 4211 452 3 760 2 1 Totaiassets $9C25 $7102 intermearate-term ceDI 1 baoubt:es andiong term debt LC24 5 5914 5675 1 i 40vances from non cank subs # anes $ 270 $ 270 Issuance of common stock (net) 20 3 86 7 09 Commercia! pacer 3075 2.584 issuance of preferred stocn (net) 1476 147.I Other short term tunas borrosea 70 Net treasury stocn transactions 72 1r 9 ? 4 0, Intermecoate term ce0t 1 932 1 426 Totalother financing actwt es 16207 12998 & 64 I iong term debt 855 337 Other actvties Subordinate cacaat notes 500 500 Cash (1 41 03 m~ Other habiht es 118 76 Transtat on ac:ustments (4 5) 53 hc Tota! habu,t es 6150 5 263 Otner. net 13 0 3 5 o 70 a!stoc"noiaers' equity 2 875 2 439 r ra!nyng,ac;,7gg 7, 37 c Totat babd+es ano stocknotaers' ecuay $9 625 $ 7.702 ictar bnanc.a' resources provucea $ t 662 4 $1295 6 : m7 Condensed Statement of Earnings [ncrease toecreas e!'n eaming ~ vee kea ce:enw 31 assets and mvestments mes e ears 1986 1985 1984 m sucscanes l Short-term onvest'ents 5 476 $ a t661, 5 4:

incom, Dwaenas Hom subscanes Amances to Suossanes 9772 13394 s Jy n

( Investmenn in sutsdan 63 6 ?22 3 w: l Banu sacs a ar es $122 4 si t0 6 $1016 Non tan subscanes 79 8 28 4 45 2 Tatarincrease on earning assets mterest ana tees rece'vea ttom ana investmerlis in sucscaes 408 3 378 7 256 9 subscanes $ 1662 4 $1295 6 $1509 ~ Otner income 20 7 25 5 44 4 T !at <ncome 6312 543 2 4481 3 mterest Excense 16/ Proposed Acquisition (oneudited): Aa.ances trom non-can, in February 1987, the Boaras of Directors of the Corocrapon and sacscanes 32 3 3t 8 29 3 Rainier Bancorporation (* Rainier"), a bank holaing company head-Cominerc at pacer 184 1 215 9 168 5 quarteredin Seattle. Washington, approved a cetinitive agreement Otner short term t ncs corrowed 19 59 14 for the Coiooranon to acquire Rain,er The agreement requires tne a intermea:a re-te*r-cect 179 0 t39 8 118 1 Corporation to issue 13 shares of common stock for each Rainier Lcngnerm cect 91 6 62 3 33 4 common share and has a provision permitting possible termina!<on Otner enoense 28 7 24 7 16 1 cependent on the Corporation's stock price The transaction w!! ce Tatar expense 517 6 480 4 366 8 accounted for as a pooling-of-interests and is subject to approval Income cetore income taxes by the sharen laers f both corporations and regulatory autnant es ano eauay in unaistnbutec income it is voected the acquisition will be consummated in the third ofsubstaar<es 113 6 62 8 81 3 quarter of 1987 and that approximately 28 7 million shares of the 'l Allocatea ancome tax Deneht 42 0 32 3 278 Corporavon's common stock willbe issued At December 3L 1986 income before equay in uncistmoutea Rainter had assets of approximately $9 billion. income of subscares 155 6 95 1 109 1 Eavity m uncistnbutec oncome ot subsc anes \\ Bank subsca'res 182 7 144 7 151 7 l Non cans sucsoanes 476 83 0 30 2 Net ncome $385 9 $3228 $291.0

1 fl 52 Sep'tv Pofu:Cowats are 5ctsia: ares Consolidated Average Balance Sheet and Related Yields and Rates t .~ ] ?986 1985 1984 00hars in mill!Or5 At Ount Amount An0 ant ASSETS + 1 Eaming assets: h, i Due from canks -interest Deanng $ 2.421 45 $ 2.981 64 $ 2.443

6Oh, State ano municca! fnvestment secunt'es 401 07 373 0.8 410 10

) Other investment secunt'es 2.338 43 1.543 33 1.505 37 ~, i Totannvestment secunties 2.739 50 1 916 4.1 1,915 47 p Trading account assets 1.576 29 547 12 307 0 7 > Federalfunds sola 1 693 31 1,114 24 949 23 ^, I Domestic loans Business loans 15,118 278 14.146 30.2 12.309 30 1 Realestate loans 5.621 10 4 5.177 11 0 4.739 11 6 Ready ReservAccount! charge card loans 904 1.7 877 1.9 751 18 Other consumerloans 7.177 13 2 6.157 13 1 4.974 121 ~ l Totaldomestic loans 28.820 53 1 26.357 56 2 22.773 55 6 ~{ l Inte nationalloans l Business loans 5.576 10 3 4.838 10 3 4.595 11 2 j Consumerloans 726 1.3 453 1.0 303 07~' Totalintemationalloans 6 302 11 6 5.291 11 3 Totalloans 35.122 64.7 31.648 675 ~ 4898 11 9 ~I l ~ 27.671 67.5 l Lease financing 2.759 5.1 2.331 5.0 1.851 45 } _ ess reserve for creditlosses 602 11 525 1.1 388 09 }} __ Net loans andlease financing 37.279 68.7 33.454 71.4 29.134 71 1 ia&leaming assets + M 310 85 3 40.537 86 6 35.136 85 7 ~} j l Cash ana due from banns 3.827 7.0 3.237 6.9 2.889 7.1 i } Other non.eaming assets 4.780 88 3.593 76 3,320 81 ~ \\ Totalassets $54 315 1000 $46.842 1000 $40 957 1000 UABlUTIES AND STOCKHOLDERS' EQUITY Non interest beanng aeoosits' ^ Domestic cemand oecosits $ 7.206 13 3 $ 6 065 13 0 $ 5.548 13 5 ~ International aeoosits ~ 237 04 256 0.5 226 06 l l Totalnon interest beanng aecosits 7.443 13.7 6.321 13 5 5.774 14 1 Interest Deanng aeoosits interest:cnecxing aeoosits 2.630 48 2.047 43 1,781 43 ' ' ~ ' Insured money market cecosits 4.631 85 4.241 9.1 3.895 95 _ Savings deposits 2.149 40 1.790 38 1.785 44 Time aecosits-unaer $100 000 3.711 6.8 3.455

7. 4 3.193 78 l

Time deposits-$100 000 ana over 5.792 10.7 6.025 12.9 5.007 12.2 Intemational oecosits 6.747 12 4 6.469 13 8 6.336 15 5 Totalinterest beanng deoosits 25.660 472 24.027 51 3 21,997 53 7 (( ~ Tcta!cecosits 33.103 60 9 30,348 64 8 27.771 678 Feaerat funds purcrasec 4.058 7.5 3.596

7. 7 3.121 76 Commercialcacer 2.791 51 2.558 5.5 1.784 44 Other short term funas corrowed 2.958 55 1,904 40 1.243 30 Sermediate-term aebt 2.825 52 1.873 40 1.505 3.7

~ Long term aebt 1.429 26 909 1.9 527 13 Totalinterest beanng aeoosits ana liabil:tres 39.721 73.1 34 867 74 4 30.177 73 7 l Other liabihties 4 512 83 3.544 76 3.146

7. 7 Preferred stock 218 04 34 0.1 Common equity 2.421 4.5 2.076 44 1,860 45 Stockholders' equity 2.639 49 2.110 45 1.860 45 ll Totalliabilit<es and stockholders' equity

$54 315 1000 $46.842 1000 $40.957 100.0 m ho tana0ie ewva'ent tas,s w (2) Before dedut! ton Of fe$e've 10f CreOlt 10$Se5

A 53 GB3 1982

ge1

%eds and Rates (% ' Amount Am0urJ MCurt Ge6 G85 1984 G83 G82 1983 ~ $ 2.092 57 $ 2.337 68 $ 2 007 6.6 7 44 9 19 11 24 9 98 14 87 16 56 } 445 12 461 1.3 497 1.7 10.07 9.75 9 61 9 60 9 17 8 99 1 461 39 1 378 40 1.586 52 8 41 9 72 9 80 9 68 10 13 9 40 ~ 1 906 51 1 839 53 2 083 69 8 66 9.72 9 76 9 66 9 89 9 30 235 0.6 277 06 180 06 8 10 981 11 49 10 22 13 02 15 92 451 1.2 386 11 157 ~05 6 08 8 03 10 42 9 36 10 28 16 03 ~ 11.106 30 0 10.135 29 2 8 332 274 8 54 9 92 12 05 10.89 14.28 17 52 ~ 4 671 12 6 4.526 13.0 4.355 14.3 10.46 10.91 1085 10 66 10 86 10.57 ~ 603 16 585 1.7 568 1.9 18 66 19.03 18.76 18 55 1763 17 49 [ 4.168 11.3 3.323 96 3.030 99 14 04 15.16 15.78 16.77 16 68 15 54 20.548 55.5 18.569 53 5 16.285 53 5 10.60 11 64 12.83 12 26 13.98 15 29 l ', C 4 406 11.9 3.946 11.4 3.325 10.9 10.18 10 94 12.18 11.36 14 93 17.71 215 06 220 06 189 0.7 12 68 15 71 17.34 15 50 17 28 18 29 4 621 12.5 4.166 12.0 3 514 11 6 10 47 11.35 12.50 11.55 15 05 17 74 T 25 169 68.0 22.735 65.5 19 799 65.1 10.58 11 59 12.77 12 13 14 18 15 73 1.544 42 1.271 3.7 1.062 3.5 12.47 _14.04 14 84 14 33 14 07 14 06 317 08 236 0.7 206 0.7 [ 26.396 71 4 23 770 68 5 20.655 67 9 10 89 11 94 13 08 12 40 14 32 15 80 31.397 84 8 28.845 83 0 25.288 b3.2 10.17 11.34 12.54 11 98 13 89 15 19 ~ 2 657 7.2 2.488 7.2 2 539 83 ~ 3.276 88 3 644 10 5 2.7'84 92 $37.013 100 0 $34 741 100.0 $30.401 100 0 $ 5.286 14 3 ? 4984 14 3 $ 5 058 16 6 - ~ ~T 226 06 244 07 324 1.1 5 512 14 9 5.228 15 0 5.382 17.7 1 563 42 1 315 3.8 1.065 35 4 85 5 30 5.63 5 63 5 25 5 25 3'816 10.3 58 0.2 5.28 6.55 8.50 8 42 21 83 1929 52 2.353 68 2.419 80 5.19 5.38 5 41 5.16 5.16 5 16 2 582 70 3 123 9.0 2.413 79 8 03 9.62 10.62 10.56 12.43 12 45 5207 14 1 7.054 20.3 6.271 20 6 7.63 9.03 10.55 9.60 12 81 15 62 5.287 14 3 5,014 14 4 4.2 78 14 1 7.31 8 81 10.71 9 64 13 48 15 76 20 384 55.1 18 917 54 5 16 446 54.1 6.69 8.03 9 43 8.78 11 47 12 98 l _ 25 896 70 0 24.145 69 5 21.828 71 8 5.18 6.35 7.47 6.92 8 99 9 78 2 582 70 2.571 74 2.280 7.5 6 34 7.88 10.13 9.01 12 02 16 21 1467 40 1.411 4.1 1.155 38 7.41 8 82 10.63 9 20 12.58 16 60 973 26 986 28 698 2.3 10 41 10 01 9.08 10.21 11.81 14 60 1.048 28 561 16 302 10 10.31 11.74 12.18 12 20 12.32 10 92 367 10 456 1.3 461 1.5 8.96 9.97 11.26 10 64 10 84 9 13 26.821 72 5 24 902 71.7 21.342 70.2 7.26 8.33 9 69 9.04 11.56 13 46 3.041 82 3 220 93 2.437 8.0 l [ 1 639 44 1.391 40 1.240 41 l 1 639 44 1.391 40 1 240 4.1 l $37.013 100 0 $34 741 100 0 $30.401 100.0 i l l l D

o 54 secwtv hc tc Cnrav rc Sas : y es g - - ~ - - - - - ~ ~ ~ - ' ~ Analysis of Domestic and international Net interest income w mie est Aerage me est Aeze a,qr37 YCOme: Rate he'W "Cre! 00f.afs ift '%0f's Ed dnce EGeese Bd doce EC056 DOMESTIC OPERATIONS ' Loans ~ ~T T' _ Lease 1,nancing ~ ~ $28 820 $3.054 9 10 60 $26.357 $3 068 0 1 C 2.003 217 3 12 30 1 794 25 3 13 7[N Investment securtes 2.193 1730 789 1.764 170 9 969 ' ' Feaeral tunas 5010 1693 1030 6 08 1.114 86 2 803 . Trading account assets 1.034 78 5 759 367 33 6 9 15 Due tram bank s -interest ceanng 271 19 4 7 15 326 25 3 7 76 Total eaming assets 36.014 36461 10.21 31 722 36313 !1 SD tLet sources of tunas 2 ) ~~' Demana aecosits 4.636 3 849 Inte'est'chechung aecosits 2.203 127.7 5 80 1.711 108 6 "555., Insurea money ma'ket accounts 4 498 244 7 5 44 4.126 27?6 55~ Sanngs deoosits 2.147 111 5 5 19 1.789 96 3 555~. Tome aecosits -unaer $100.000 3.711 298 1 8 03 3.456 332 5 9 62~ Total core deposits 17.195 7820 4 55 14 931 815 0 5 46 ~ Time cecosits -$100 000 and over 5,706 441 6 7.74 5.927 543 9 9 *8 1 Borrowea funas 11.261 807.2 7 17 9 180 783 2 8 53 Funds sucoliea by or (to)intemational operations (52) 24 9 43 28 9 ~~ l Total net aeoosits and borrosed tunas 34 110 2.055 7 6 03 30.081 2.171 0 7._22_ _ ~ Att other sources of funas 1.904 1641 Totalsources of tunas $36 014 '7 5 71 $31.722 21710 58V Domesc netinterest income and margin _ 5' 00 4 4 50 INTERNAT10NAL OPERATIONS ' _-... $1.460 3 j'5U} Ea'n3 assets Loans $ 6 302 $ 659 7 10 47 $ 5.291 5 6003 _ _ _ _ 1' 35 Due from ban ~s -unterest Deanng 2.150 160 8 7 48 2 655 248 8 9Y Lease 1,nanc,ng 756 79 4 12 87 537 79 9

4 59

• 1 Traa,ng account assets 542 49 2 9 07 180 2CT 11 *5 Investment securses 546 64 1 11 74 152 15 4 10 15 Totar eaming assets 10.296 1.013 2 10 02 8 815 964 5 10 94

,t Net sources of tunas ' Non-interest teanng aecosits 166 188 t interest Deanng aecosits ~5arronea +unas ~ 6.742 492.8 7 31 6.462 569 7 8 82__ 4 i ) ~ 2.800 337 1 12 04 1.660 193 2 11 65 l _ Funas suconed by or (to) comestic operations 52 (24 9) (43) 128 9) ] Tota; net cecosits and borrowea tunas 9.760 805 0 8 25 P 267 7340 8 87 kiothe. r_sou ces of f ncs 536 548 4 r J _-Tota! sources of tunas $10.296 805.0 7 82 $ 8.815 $ 734 0 8 33 Intemational net,nterest income and margin $ 208.2 2 20 $ 230 5 2 61 } TOTAL DOMESTIC AND MERNATIONAL DPERATIONS ' Earntng assets $46 310 $4 659.3 10 17 $40 537 $4 595 8 !15I Sources at tunas $46.310 2.860.7 6 18 $40 537 29050 7 17 iotal netinterest income anc margin $1.798 6 3 99 $1690 8 4 17.. l (1) Inctuaes natustments as follows To convert non-taxabre income to fully taxable eauivalent 5 40 0 $ 32 5 Pre-tax eautva'ent ofinvestment tax creaits on leasing activities 48 2* 50 2 __ 4 Total 5 88 2 5 82 7 G After ceductmg fioal and.ep reser es v @ Am.nl encM:es me consecLrtrg :m;act cf Aestment tax credd adu,stmects 'esulmg fram me las Refarm Act of 1986 ) i 1 I a

.i f5 -m .m__ ~ _... _ _ _. _ - - _.., _.., e $n 92-9 81 mteres! Aeage meed A,eoge med Aeage mrerest /. eye f Aca;e mc:ce/ Pa e Average rme. Fa:e AwaJe

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Rare Aes;e ~ *cn r :e a Bataxe Ecrse Ba:ance Nene Swce Ecene Ba ance feease Y $22.773 $2.922 8 12 83 $20 548 $2 518 4 12 26 $ 18.569 $2.595 8 13 98 $16.285 $2.490.5 15 29 '^ 1474 212 5 14 41 1 219 175 7 14 07 1.080 154 2 14 28 905 127.3 14 06 1 819 ' 179 9 9 89 1.831 177 8 9 71 1,781 176 6 9 92. 2.020 188 2 9 32 949 98 9 10 42 451 40 1 9 36 386 39.7 10 28 157 25 2 1653 192 22 3 11 61 180 173 9 67 277 36 1 13 02 180 28 6 15 92 398 41.9 10 52 226 49 5 9 28 99 16.1 12.91 66 11 9 18 01 ' ~ if6 5~ 3.478 3 12 60 24 485 2 G78 8 12 16 22.192 3.018 5 13 60 19.613 28717 14 64 ' 3 473 3.229 3 008 3.047 1 490 100.3 6 73 1.329 88 0 6.62 1.149 69 4 6.01 953 55 9 587 l 3.796 3311 8 72 3.724 321 3 8 63 55 12.8 23 13 ~ 1.782 96 5 5 42 1.915 99 5 5 20 2.318 120 3 5 20 2.362 124 8 - 5 28 ^ 3.191 3390 10 62 2.562 272 6 10.64 3.072 388.2 12 64 2.363 300 4 12 71' 13.732 666 9 6.31 12.759 781.4 6.12 9 602 590 7 6 15 8.725 481 1 55i 4 941 528 2 10.69 5.095 499 7 9 81 6 872 903 5 13 15 6 094 9559 [05 ~ 7.062 721 6 10 22 5.592 542 1 9 69 !'6 6218 11 70 4 471 6779 15 '6. 435 51.7 (195) (5 6) ($37) - (72.5) 1517) . t B7 iI~ 26,170 21684 8 29 23 251 1.817.6 7 83 21 253 2.043 5 9 61 18 773 2.051 2 ?C 93 1.435 1234 939 840 $27.605 21684 7.85 $24.485 1.817 6 7 42 $22.192 2.043 5 9 21 $19 613 ib5I 'O 46 ^ ' _... _..__ $ 1. 309 9_.... _.. _. _. _$ 975 0_ _ _ _ _.. _ 4.75 - $11612 4 74 4 39 T~ $ 85 5 4 *5 ~ ,... ~.. _. i $ 4 898 $ 6121 12.5C $ 4 621 $ 533 7 11.55 $ 4166 $ 627.1 15 05 $ 3 514 5 6233 7 74 ~ 2.045 232 7 11.38 1.866 189 8 10 17 2 237 331.7 14 83 1.941 320_6_ 'd 52 ~ 377 62 2 16 50 295 45 6 15 45 191 24 6 12 87 157 23 1

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[ 115 13 0 11 30 55 67 12 03 96 70 7 32 75 63 8.43 59 53 8 96 63 55 __ 8 77 } _' 531 9270 12 31 6.912 782.1 11 32 6.653 988.7 14 86 5.675 9715_ 17'2 172 163 193 209 6 310 6787 10 76 5.256 509 4 9 64 5 012 6760 13 49 4 277 674 3 ' f5?? i _ 1 11_8 130 2 11 65 845 91 7 9 49 669 89 5 13 09 425 60 4 14 21 (435) (51 7) 195 5.6 537 72.5 517 87 7 7 165 7572 10 57 6.489 606 7 9 36 6 411 8380 13 04 5.428 822 4 15T5 . 30?_.. .~ ~ 423 ~ 242 ~ ~ 247 ~ ~~ ._.5 531 -_$ 7572 10 06 $ 6.912 606.7 8 78 $ 6 653 8380 12 57 $ 5.675 822 4 14 49 _.L _j69 8_ 2 25 $ 175 4 2.54 $ 150.7 kJ $ 1491 ~N 63 =.., $35.136 $4 405 3 12 54 $31.397 $3.760 9 11.98 $28.845 $4.007 2 13 89 $25 288 $3 843 2 15 I5 $35136 $2.925 6 8 33 $31.397 2.424 3 7.72 $28.845 2.881.5 9.98 $25 288 2.873 6 11 56 $1479 7 4 21 $1.336.6 4 26 $1.125 7 3 91 $ 969 6 5E3 .:.=.=.;..=-- $ 30.3 $ 31 4 $ 32 2 5 33 6 34 8 29 6 30 9 24 6~~ $ 65 1 $ 61.0 $ 63.1 5 58.2 u.__,._..._ 7: ;; 1

f 56 Sp past Crwance r: Sas : a, l Consolidated Six Year Analysis of Non interest income and Expense and Other Statistics sas w ms gge gg 9 84 ne) 9 92 $33 NON4NTEREST INCOME 1 Domestic loan fees ~ 00 8 $ 81 0 $ 69 8 $ 64 5 $ 54 5 B.isiness $ 124 6 $ ~ 17 0 14 9 12 4 55 75 Rea! estate 374 Consumer 46 2 41 9 32 4 29 2 19 7 25 5 lete'na! onalloan 'ees 16 6 94 85 52 75 68 i Totalloan fees 224 8 169 0 1368 116 6 972 94 i Service charges on cecosit accounts 197 2 173 2 161 2 136 0 113 7 84 9 Secunties re atea transaction fees 195 2 192 2 126 5 75 1 32 5 _6j international fees anc otmer incor~e Fore gn exchange gains 32 6 17 8 16 5 to 2 33 20'3 All other 77 2 55 3 42 6 36 3 31 5 28 0 Gains on sa'es of eauitt secunt:es 99 2 74 0 20 2 23 2 12 3 to 2 Rauciary ana investment management fees 97 0 84 5 675 570 476 Q5'5 Charge cara merchant fees 73 8 50.2 44 3 39 0 45 3 ~ii} Trading acccunt profits 61 0 21 8 11 4 88 18 3 _'12 Investment secunties ga.ns nosses) 51 9 48 15 15 04 i1j: { Gain on sa'e of hea3auarters builcings

• 115 3 50 5 All other 295.7 181 0 165 3 119 3 94 3 94 3 Total

$1.405 6 $1023 8 $ 9091 $ 623 0 $ 546 9 $ 4321 STAFF EXPENSE Sajar es anc other comcensat:on $ 908 0 $ 774 6 5 6655 $ 589 6 5 5173 $ 454 7 Pension and otner cenet:ts 156 6 132 6 1174 99 4 93 0 555 Total $1.064 6 $ 907.2 $ 782 9 $ 689.0 $ 610 3 $ 539 3 Avera_ge full time eawearent sta't Annual 32.520 30,358 28.613 27 527 27058 2 December 35.095 30.901 29 805 28.157 26859 27443 Average annua! sta" excense per emcC ee $ 32.749 5 29 883 $27 363 $25.030 $22.555 $20 397 t OTHER EXPENSE i tiet c:cucance-cremises $ 2061 $ 1776 $ 1451 $ 118 9 $ 56 0 $ 73 l Furniture and easicment 170 4 132 0 118 8 96 9 78 7 61 4 7eiecommunicagons 73 1 60 8 50.9 375 33 5 24 7 Postage and celwer; 44 9 40.5 36 6 34 5 32 7 28 5 Stationery and sucches 43 5 37.5 33 0 35 5 28 4 271 i Travei 39 3 34 3 28 4 21 7 18.1 17 5 A vertising ana cromotion 37.7 36 4 33 8 32 9 26 1 55} Cha?ge cara interchange escense 34 6 16 8 13 8 12 6 13 4 ~iT3 M other 399 6 314.5 236 3 210 5 168 1 1328 _ Tota, $1.049 2 $ B50 4 5 6967 5 6010 $ 4850 $ 400 9 OTHER STATISTICS ed Cenod) I tJamber of stocknoiaers 28 603 28 281 27248 28.627 29 050 31 133 \\ Namber of Ca:.tamia canmnr locations 595 599 612 627 622 612 tJumcer of Anzona ba%ng locations 102 tJumber of Washington bankinq locations 3 Numoer at financial seroces system locations 519 548 540 531 470 411 j m mauces gam or sa e s Bra s es ege es neam:uane 2 4 WJ C : 23i :r 70 Sh : y e5 y hansolidated Six Yept Salance Sheet, Earnings Ratlos and Common Stock Data Decrter 31 czys m %),crs '966 '985 1984 1983 '982 19 ASSETS Qag an1 ave tram banes $ 5 380 $ 5 279 $ 3 832 $ 3.099 $ 2 433 $ 2 639 Da roin banks _onterest beanng_ 1.959 2.730 2.724 2.199 1.915 2 245 investment secunbes 3.189 2.004 1.859 2.166 1920 1 772 7'aagg accountiss~ets ~~' 1.426 1457 712 334 486 85 Feaerat funas sola 1.455 921 1.007 745 319 132 Domest:c icans 34.715 28 698 25 815 22.237 20.308 f f55 Inte na!!analloans 6.829 5.784 5.069 4.698 4 603 3 859 Lease 9,nanc:ng 2,799 2.582 2.127 1.658 1465 1.195 Tota! toans ana lease financing 44.343 37,064 33 011 28.593 26.376 22 937 Less reserve for creditlosses 757 554 520 340 297 222 __ hiet loans and lease financing 43.586 36.510 32 491 28.253 26.079 22 715 Premises and eau:ctnent 906 689 601 652 598 643 Realestate ownea 161 144 140 139 140 96 Other assets 4.544 3.769 2 751 2.795 3 101 2 672 Totalassets . - _62.606 $53.503 $46.117 $40.382 $36.991 $32 999 5 UAB!UTIES AND STOCKHOLDERS' EQUITY Comestic cemand deoostts $10=473 $ 7.849 $ 6.633 $ 5.931 $ 5.225 5 5394 Domestic savings and time aeposits 21.311 17.991 16.999 15.262 15 699 15348 Intemational aeoosits 6.624 7.033 7.3 74 6 550 4924 if04 Totat oeccsits 38.408 32.873 31 006 27.843 25 848 23f46 Feaeral funds purchased 5.330 4.689 2.831 2.770 2 134 _2 C82 Commerciat oacer 3.414 2.687 2.2'70 1.846 1.521 _ 1 226 Other short-term funds borrowea 3.010 2.856 1921 1.235 1.191 573 Intermediate-term debt 2,986 2.406 1.760 1.282 _863_ } d'5 \\ Lona-term dect 1.167 603 446 355 453 587 S bord,natedcacita! notes 500 500 250 Ot~e' hacihtees 4916 4 450 3 670 3 269 3 492 _3 C44 5tocenoice's' eauity 2.875 2 439 1.963 1.782 1489 1 323 Tora! naasties ano stockholders' equity $62.606 $53 503 $46.117 $40.382 $36 991 $32 999 INTERNATIONAL OPERATIONS AS A PERCENT OF TOTAL Assets 21 4 % 22.2 % 20 7% 22 9 % 24 8 % 26 Oh L:Soares 21 6 22 4 23 4 25.5 23.1 21 T EARN!NGS RATIOS I Nkeo of net ncome to avera;;e common eautty 15 5 % 15 5 % 15 6 % 16 1 % 16 8 % 16 6 % Pato at net income to average total eau >ty 14.6 15 3 15 6 16.1 16.8 16 6 Rabo of net income to ave' age assets 0 71 0 69 0 71 0.71 0 67 C 68 l l COMMON STOCK DATA Stock coce ) ? ngh $40% 5 31% $ 26% $ 27% $ 18% $ 18 5 l _ Low 27% 25 h 19% 15 1C% 14b Enc ot penoa 34 % 31% 25 % 25h 15'!r 17 Pnce-to-earnings ratio 7.12x 7 33x 6 50x 7.05x 4 72x 5 78x_ Divroend reic 4 17% 4 11 % 4 64 % 4 27% 6 35 % 5 28 % i l I

I I 58 se:n oc c Cmam 3-Foreign Locations l I i ARGENT lNA 3;g3ApgqE Peoresentat:ve Othce Buenos Aires 5 ngacore Branch Singaoore i AUSTRA:tA ~~ Secut!y Pacihc As'a Futures Mc Singapore Secu'ty Pacif:c Austra'ta Dmited Svaney Secur.ty Pac:hc Bann As,a Dmitec Singapore Peoresentanve Ot'ce- - - - __ _ _ _ _Siane, Secunty Pac?bc Leasing Corporation Singapore =- 7 e Ba, o, c,n7on u, 3,,ggpo,, Haare Goven(F rEastiua Singacore Secury Pac <hc EuroFrance inc venna BAHAMAS SPA:N Secu ty Pac:hc Trust (Bahamas!L r" tea Nassau Secur.ty Pacinc Creait. S A Barceiona r BELGtVM -~~ Secunty Pacinc Leasing. S A. Barceiona Se.cu. r tv.Paci6c Eurofenance. I": B'ussets SMT?ERLAND . ~.-.- Secur,ty Pacihc Bank S A Geneva 0"#N Secunty Pacinc (Switzerland) S A Geneva P aresentatwe Obce Sao Pauto 7 TAlWAN CANADA Taicei Branc,, Taicer Secunty Pacif,c Bank Canaaa Vancouver l Torontu THAlLAND l Calgary Representative Omce Bangwon 1 Montrea! The Bank of Carton Ltd. Banakok l gy UNITED KINGDDM Lonaon Branch London Secu ty Pac +c Chae S A Santiago n Secunty Pacihc Eurofinance. Inc Lonaan mANCE Secunty Pacihc Business Finance (Euroce} Ltd engnton Secur,ty Pacific EuroFqance, Inc Pans Secunty Pacthc Hoare Govett Lim > tea Lonaan Secunts Pac;hc Trace ninance. !nc Pa'is GERMAN 1 Secunty Pacific Trade Finance Ltd London Secunty Pacinc Trust Dmited Reading C'an turt B'anch Frankfurt Hoare Govett Dmitec (majonty owned) Loncon Baur e ster Krea:tbank GmbH Frankfurt Hoare Govett Market Makers Lonoon Pacinc Bank GmcH Ottenoach FinancialCleanng and Services Lonaan Pan inkasso Offenbach Hoenig Financial Services Lonaco Assecuranc a Of#enoacn URUGUAY Secu'.tj_ Pac:[c turoF ancefc Munich Secunty Pacinc Trust (Banamas) Ua Monteviaeo HONG KONG Hon; Yonq Branch Hong Kong 0 he Back of Ca" ton Ua Hong Kong Sec:ti Paat c Caoita:Mavets (H K I Ua Hong Kong CarlE Hartnack Secu ry Paahc Crea:t unong Kongi umited Hong Kong r Cnairman l Sec:!! Paale Leas;ng Corporation Hong Kong l ma'e Go.eniFa'Easti Ltc Hong Kong Abdul Aziz Al Ouraishi l m Managing Director. Ah Zaid A!Ouratsni & Brothers-Saudi Arab,a ^ ^ ~ ^~ peo'esevtat ve Cmce~~ ~ Rome SirJ D Alun-Jones ~' Managing Director and Chief Executive Othcer, Ferranti alc- 'cuo Branc n Tokyo U"#*" E"d' "0 SDC necresentatre O".ce Tokyo Paulo Ayres, F l uacan Sec:fy Pac <hc =rance Company Dmded Tokyo Presicent. L!niversal. Consultores Associados SIC LTDA - l Secu':ty Paat:c Caoca' Varkets Ltd Tokyo Sao Paulo. SP Brazd Secur:ty Paaf:c Leas.rg Corporation Tokyo Sir Ronald S Ethott maa'e GovettiFa._'Eas ; ua.-- Toryo Diractor Brambles Industnes. Ltd & Associated Companies. Chairma n (Austrahan Board) International Commodities Seou! B'anch Seout Clearinghouse ud, and formerly Managing Director. l gg Commonwealth Banking Coro - Austraba Tne Banx of Canton Ua Macao Ichiro Hattart l President and Chief Erecutive Omcer. Seko Instruments & C""'CS^U0 ~ 0# O d Du" i Y The Bank of Canton Ltd Kuala Lumpur Dr Allen E Puckett MExiC0 h irm n i e Board and Chief Executive Oncer. \\ Reoresentatwe Othce MercoCtv Hughes Aircra't Company-El Segundo. Cahtomsa NEW ZEALAND Rogeho Saca Secunty Paahc New Zea!anc Lim,ted Auckland Intemational Consultant and Pnvate Investor-Monterrey. Mewco PHtLtPP\\NES EdtredL Shannon.Jr Manda B'anch (Ottshore Bannna Unit) Manila Chairman of the Boarc and Chief Executive Oncer. Santa Fe IntemanonalCorooration-Alhambra Cahtomia

3m'4 paw 270'aMn Principal Addresses ~ ~ g J SECUR;TY PAClFIC CORPORATION 333 Soutn nope Street, Los Angeles. California 90071 SECURITY PACaF\\C NATIONAL BANK 333 South Hope Street. Los Angeles. Canfornia 9007t SECuR TY PANIC NAT;CNAL BANK Normem Caldomia Headquarters One Embarcacerc Center, San Francisco Cah!amia 9411 Rote't B Philipo Executive Vice Presiaent SECUR TY PAC:F'C 1%'EFNAT\\0NAL BANK An Eage Act Corporation. 333 South Hope Street. Los Angeles Caldomia 90071, Robert Manneimer Presiaent and CEO SECUR,TY PACIFIC STATE EANK 14222 Culver Dave. frvine, Caldomia 92714 AR.?CNA BANCwEST CCRDORATt0N 101 North First Avenue. Pnoenix. Antona 85003 PACIFIC CENTURY ADVISERS 1200 Third Avenue. Suite 1800 San Drego Caldornia 92101, JoelSwanson. Pres > cent ana CEO SECUkTY PACifJC AU$TRAUA UMiTED 255 George Street, Syaney NSW. 2000 Austraha. Fred C Kempson. Manag:ng Director SECUR TY PAC;FIC AUTOMDB1LE FlNANCE GROUP 2660 Townsgate Road, Suite 400, Westlake Vdlage, Caldomia 91361 Dennis D Lamont. Presiaent ana CEO { SECURITY PACiFtC BROKERS. INC 155 Nortn Lake Avenue Pasadena. Caldomia 91109. James R Quandt, Presiaent SECURITY PACIFIC BUS: NESS CREDIT. INC 140 East 45th Street. New York, New York 10017. Martin J Kelly, President and CEO SECURITY PACIFTC CAPITAL VARKETS LTD ARK Mon Building.12 32 Akasaka 1-Chome. Minato Ku, Tokyo 107, Japan, Tacashi Kano. Managing Director SECURITY PAClFIC EUROFaNANCE. ;NC The Acelchi, John Acam Street. Lonaan WC2N 6HP England, Lynn L. Fettertv, Presiaent and CEO SECURlTY PACIFIC FINANCE CORP 10089 Wdiow Creek Road. San Diego, Cahtomia 92131. James A. Konrath. Presiaent and CEO SECUR:TY PAC;FIC HCARE GOVETT UM;TED Secunty Pacinc House. 4 Broaagate. Lonoon EC2M 7LE, Dean t. Lunoell. Managing Director and CEO SECURlTY PAC \\FIC HOUS;NG SEi ACES. lNC 10680 Treena Street, Sune 500 San Diego. Caldomia 92131, John Wheeler President ana CEO SECURITY PACIFIC INTERNATt0NAL F: NANCE. INC 10089 Wdiow Creek Road. San Diego, Cahfomia 92131, Robert A Prentice Presicent ana CEO SECURITY PACIFIC INVESTMENT MANAGERS INC 300 South Grana Avenue. Sune 2200, Los Angeles. Cahtomia 90071, UOyd Mc Adams. Chairman. Presiaent and CEO SECURITY PAClF(C INTERNATIONAL ARK Mon Budaing.12-32 Akasaka 1-Chome, Monato-Ku, Tokyo 107, Jacan. S Lacnlan Hough. MERCnANT BANK Senior Vice Prestaent SECUR;TY PACIFIC LEASING CORPORATION Four Embarcadero Center. Sui:e 1200, Sar, Francisco. Cahtomia 94111. Norman L Chaoman Chairman and President SECUR;TY PAC;F\\C MORTGAGE AND 37017th Street, Suite 4100, Denver, Colorado 80202. Richard Hall, Presiaent anc CEO AEAL ESTATE SERV!CES !NC. SECURITY PAC:FiC REALTY ADV!SCRY SERVICES 100 Park Avenue. New York. New York 10017, Rvbert W. Barclay. President SECuR TY PACtFiC VENTURE CAPITAL GROUP 650 Town Center Dnve, Costa Mesa. Cahtomia 92626 Timothy Hay. Chairman and CEO SP NSuPANCE SERVICES iNC 10089 Wdiow Creek Roao Sune 2019. San Diego, Cahtornia 92131, Robert R Morlan, Presiaent ana CEO SPC SECUR,T1ES SEPVICES CORP 127 Jonn Street, New York. New York 10038 Michael V Caggiano, Chairman I l l l l 1 l i i

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OFFICERS OF SECURITY PAC!FIC CORPORATION 'RichardJ Fiamsor ill Cta r~an of tre Boa'a ar a Cn.e! becut we O*cer ' George F Moocy Pres Jent ana Cnie! One'anng O*ce' ' Robert H Smitn Vice Cna.rmae nf tre Sca'a anc Aamn-strator. Cacitat Markets System "Niiham F Fora Vce Cra r?'an Israncia' Se'nCes System ' Pot D r4'!~a"n ce Cra r~an Cadom a Ba'wng ara Pea! Estate indust'ies System s George H Bente' J' beca ae Vice Pres: cent anc Ch.e! Crea!! Othcer ticho!as B BMey Execa ve Vice P'es cent Comr~ercia Finance ana Leasing Group vvaler S F srer. Jr Executive Vice F?esiaent ana Aua: tor Passe!I A F'er"an Execxve vce P'esiaent ana Generat Counsei John N Mancock becut ve Vice Presicert Real Esta!e Industnes GrouD Ricna'a L He'ir~an becu! ve V ce P"esiaent Consumer Ser ces Group u S.arey tea #tanian becupve Vice Presiaent. Resicentza!Rea! Estate Group sonn F Kooren Execurve Vice Presiaent ena Chief Financia! Ofhcer Cava R Lovejoy becutwe Vice P'esiaent. Merchant Saving Group treng Margot becut ye Vice P esiaen anc Personnel Director John P Sing'eton Execut ve Vice Presicent Chairman. Secunty Pacinc Automacon Company Rcnara A Viarner becut:ye Vice Presicent. Corcorate Relanons Group Linda Juca Foss Senior Vice Presicent and Secretary Teme he 'ne ?a mar EXECUTNE COMMITTEES OF THE BOARDS CF DIRECTORS OF SECURITY PACIFIC CORPORATION AND SECURITY PACIFIC CarlE Hartracm Cha'iman P<charaJ Fiamson III George F Mooat. Vice Chair ~an Camica C F? cst James G Boshel!Il Robert H Smith ava ao H Bumsiae Don B Tastenruc Ear'Cark Jacaues S Yeager i,mm F Cru!! MANAGEVENT COMMITTEE OF SECURITY PACIFfC hATIONAL BANK Rcha'a J F a~ son ut Chairman of the Boarc George F Moocy Presiaent ana Chief becutive Othcer Robe tH Sm:n Vice Chairman of tne Boarc anc Cn,ef Ocerat:ng Othcer 'V:i:a m i F 'a C Vice Cna;rrnan, Financial Services System Ro1 O ea'imann Vice Cha'rman. Catitomia Banmng anc ealEstate incustnes System c J Mce Ba<e' becutive Voce P"esiaent. Cat!!omia Branch Banmng Group Gearge M Be"!e' Jr becut ve Vice Presicent anc Chief Crecit Othcer N cno:as B Buey becuive Vice Presiaent. Commerc:alFinance and Leasing Group M crael V Cagg ano becutive Vice Presicent ana Manageng Director Domeshc Secunties Group Pccen C Conesat becutive Vice Presiaent. Scecial Assets Decartment JDr" J C2y becutive Vice Presicent. Staff Sucoort Gtoup wa.ter S *sner Jr becutive Vice President ana General Auditor Passeit A Freema" becutive Vice Presiaent ana Genera! Counsel scen C Get:eran becutve Vice Presicent. InternationalBanking anc investi"ents Group sorn M Mancock becurve Vice Pres:aent. PealEstate inaustnes Group acna'a L Heaman becut:ve Vice Presiaent. Consumer Services Group Sra"ev !cantar<an becutive Vice Presiaent. Residential Real Estate Group Jerr,5 Jonnstcn Executve Vice Pres? cent. Aaministrat:ve Services Jonn F foc*en becutive Vice P'esiaent anc Chief Financia! Othcer Davia R Lovejoy becut:ye Vrce Presicent. Mercnant Banking Group DeanI Lunaeit becutive Vice Presiaent anc Managing Director, Intemationa! Merchant Bank Irving Margot becutive Vice Presiaent, Management Services Group Raben L Matthess Presicent ana Chief Operating Othcer The Anzona Bank R Br ce Owen Executve Vice P'esiaent. California Commercial Group a Roce't B Phingo becut:ve Vice Presicent. Northem Cahtomia Headquarters Jonn P Seg<eton becurve Vice Presiaent. Chairman, Secunty Pacihc Automation Company Oooert L Tna:er becutive Vice Presiaent, Planning anc Marketing Group W.it>am 5 Thomas Jr becutive Vice Presiaent anc Managing Director Domestic Merchant Bank Freaenck T Wa'aeck becutve Vice Presiaent anc Managing Director. Domestic Merchant Bank R;cnara A Namer becutve Vice Presiaent Corporate Relations Group

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's i c t' ' O 6; h C 2 -lfC \\ ,s, + .O, .rhv.s f E5 :, AOg * *tg A \\ b U f;,9 3 ly% / SECURITIES AND EXCHANGE COMMISSION 'g Washington, D.C. 20549 N w c. ~ <;s,.. J., w-4 s,, FORM lo-Q M'- J-Quarterly Report Under Section 13 or 15(d) JP b of the Securities Exchange Act of 1934 S H_ ei 'a E For Quarter Ended June 30, 1987 Commission File No. 1-7393 a-2 --@J f VE-' SECURITY PACIFIC CORPORATION g (Extet name of registrant as specified in its charter) c 9,h*( DELAWARE 95-2741988 C A (State or other jurisdiction of (I.R.S. Esployer j g. Incorporation or organization) Identification No.) ~ -Q { !.h g 333 SOUTH HOPE STREET La 90071 th6 IAS ANGELES, CALIFORNIA (Zip Code) -%y {. (Address of principal executive offices) %uk S f [ M.h Registrant's telephone number, including area codes (213) 345-4540 4.y W '$$ $5& [ L Indicate by check mark whether the registrant (1) has filed all repor+s required to be filed by Section 13 or 15(d) of the Securities k ' 5.at i- 'C Exchange Act of 1934 during the preceding 12 months (or for such shorter -43 ' Sg, period that the registrant was required to file such reports), and (2) ., i f has been subject to such filing requirements for the past 90 days. -/t ., q ,'q Yes E. No_. fyp a y. 4.w Approximate number of shares outstanding of the registrant's common

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i.& [ 3.( stock, as of August 3, 1987. _.ft,y k O.$ gj [ !Y ?E ,,[- i'd 3 [ t-COMMON STOCK $10.00 PAR VALUE (TITLE OF CIASS) 79,745,312 (. (SHARES OUTSTANDING) A 5 rw i y.. y: l fh 8' ' i i

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..e ] @l-l(J .',Qq PART I. FINANCIAL INFORMATION T { 's J{G-k- Item 1. Financial Statssents, 2: gg H;. Certain of the unaudited consolidated financial statements for ty

1 the Registrant and its subsidiaries required by this Item are set g

P: forth at Pages 8, 9, 10, and 14 of the Security Pacific y;, b Corporation Quarterly Report for the quarter ended June 30, b l (the " Quarterly Report"), and are incorporated herein by [ 1987 l t. reference. The Consolidated Statement of Changes in Financial l 1 Position for the six months ended June 30, r 1987 and June 30, 1986, and additional Notes to the consolidated Financial Statener,ts, are set forth at Pages 2 and 3 of this Form 10-Q. ^g_ 3 i, W O u. ,d6 g-hkhF >n %) llff h,*K s% a% r$ a a .g 5. gg; y t%. Mf vb agm{, =. p*. %.;n_- 7,1v '. " ~ ?y -:. S - r g

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CONSOLIDATED STATDE2rr OF CHANGES IN FINANCIAL POSITIai a \\ (Unaudited) (In Millions) R' J, 6 Months ___1987 1986 Ended June 30 !iw. 4.Tf Financial Resources Were Provided by (Applied to): Operations: b', n,4 Net income (loss)................. $ (73.8) $ 181.4 <g Cormon dividends b (64.6) (54.2) P.h Preferred dividends................ (6.9) (3.7 ................ TIT 5 7) 'D U ) W 7dtal operations Deposits and other finandng activities: s, Deposits d 381.9 (393.1) Short-term funds borrowed (1)........... 1,894.0 (1,125.7) 7 Intermediate-term debt and long-term debt (2)... 172.9 912.9 q Cormon at ek issued (net).... 4 72.3 9.0 G[ Net treasury stock transactions........ 7.4 2 Total deposits and other financial activities.. T,TII"I "T5FT) PM Other activities: c >>f Cash and due from banks............ 584.7 712.4 Q + K Translation adjustments............ 9'4 Other, net 0.1 0.3 543.8 25.2 g Total other activities m: 41.0 ~~T37 F ~~ Total financial resources provided.......$ g $R w4 Increase (Decrease) in Earning Assets: Rf.' Duefrombanks-interestbearing..........$ 69.5 $ (394.4) k Investment securities and trading account assets 784.5 437.0 (in Federal funds sold and securities under yM resale agreements.............. 895.9 227.4 2 -E,- Net loans and lease financing........... 666.9 1.9 'Ibtal increase in earning assets........$ M $2 r:. 3 M L.11 @0 (1) Includes federal funds purchased and securities under repurchase 4W agreements, cornercial paper and other short-term funds borrowed. ,j (2) Includes subordinated capital notes. 3.! Tr

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L l -l.) j; NOTES TO C0!!SOLIDATED FINANCIAL STATEMENTS ht 1. l 'Q: In the opinion of mant.gement, the unaudited consolidated financial statements of Security Pacific Corporation and .l l its subsidiaries as of June 30, 1987 and 1986, and for the 't six months then ended, reflect all adjustments (which t .s consist only of normal recurring adjustments) J 4 a fair presentation. necessary for [ p [ i -y 2. Issuance of Long-tarn Debt. ~ In May, 1987, the Registrant issued $250 million of 9 3/4% .k Subordinated Capital Notes (" Notes") due May 15, 1999. The Notes were issued at 99.55% of par and are not redeemable 7-prior to maturity. Proceds from the sale of common or preferred stock or other forms of primary capital securities (F must be deposited periodically into a fund and will be used to retire the Notes at maturity. The Notes qualify as p primary capital of the Registrant under current regulations k of the Federal Reserve Board. p ag. W-Item 2. / Management's Discussion and Analysis of Financial d{ Condition and Results of Operation. 'I Q~ 4, t4 The information for the Registrant end its subsidiaries $F23 required by this Item is set forth at Pages 4 through 7 gie y of the Quarterly Report and is incorporated herein by LlW,4 ${k reference. , @ TIM f ?MD:: n $hh c.s: n:n wah !h un n.n pg Ib5

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PART II. OTHER INFORMATION r_ Item 4. Submission of Matters to a Vote of Security Holders. yee - b '* (a) A special meeting of stockholders of the Registrant Vas held on June 16, ~^ 1987 and was adjourned until July 14, 1987, to afford said stockholders sufficient time to consider the recent developments 41 described in the Notice and Information Statement, ~ dated June 4, 1987, submitted to the stockholders of 1 Registrant and Rainier Bancorporation (" Rainier"). Said Information Statement is Exhibit 23 to this l Form 10-Q and is incorporated herein by reference. g '~{, L' (c) At the meeting of July 14, 1987, the stockholders g $, 1 approved the merger of Rainier into SPC/RAB Acquisition Corp., a subsidiary of Registrant, by an w-affirmative vote of 60,398,185 votes with 4,140,400 f. votes against the proposal. q .c. Iteu 5. Other Information. ,.1_" s N

1. "'#1 I

On February 24, 1987, Registrant and Rainier entered into an Agreement and Plan of Reorganization dated as of February 23, 1987, providing for the acquisition of 'p g Rainier by Registrant through the merger of Rainier with ga and into SPC/RAB Acquisition Corp., a wholly owned w-if subsidiary of Registrant. d h '(-- on July 20, 1987 the Board of Governors of the Federal % J-Reserve System approved the merger. The expected closing h N. date is August 31, 1987. Set forth below is certain unaudited pro forma financial information, as of June 30, ME!' 1987 giving effect to the merger. M i [f.4 f7 s.yt h y; % W W d k,4

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V-i l 1 g ; b ' y r '- [ SECURITY PACITIC CORPORATION AND SUBSIDIARIES PRO TORMA CONDENSED COMBINED TINANCIAL STATEMENTS Q 'e (UNAUDITED) ~ 7 b,'; The following unaudited Pro Forma Condensed Combined Tinancial kJ Sttkamens,5 give effect to the mergiar of Registrant and Rainier under the poling-of-interests method of accounting based upon the Mf = exchange of,'. 30 shares of Registrant's Common Stock for each T h share of Rainier Common Stock. ht.1 ccabined Balance Sheet as of JuneThe unaudited Pro Torna Condensed 30, 1987, and the unaudited Pro I.C Torna condensed Combined Statement of Earnings for the six months ended June 30, 1987 and 1986, are based upon the respective ^ unaudited consolidated financial statements of Registrant and -r Rainier, included in Exhibit 20, pages 8 and 9, and Exhibit 28, = pages 3 and 4 by re:erence., The pro forma statements should be read into this report on Form 10-0 and i

4. 5, e Notes to Pro Torna condensed Combined Financial Statements. conjunction with

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y J The pro forma financial statements are provided for comparative 45 purposes only. The pro forma results do not purport to be s j?ji-indicative of the results that would actually have been obtained f t +d if the merger had been effected on the date or dates indicated or g 9 the results that may be obtained in the future. h. a g 4 .M: [ ..x .N ( a MIh u..o w na n ), aT i f .d..fW% Yl l$$ 1 w -s-h ,3 / i,i a v -[ a ' 'b N r. 2N l pm x mw. (c m. 4 w% w !f 7 r .m 4 x v 1.= n k.. ~ a ~~ ..a r ^

= k(G%', i SECURITY PACIFIC CORPORATION AND SUBSIDIARIES 5i.i PRO FORMA CONDE.WSED CONBINED BALANCE SHEET A'NE 30,1987 C (Unaudited) M '-r tr - k p tW m.- PRO FORMA PRO FORMA ,.7 4 f SECURITY RAINIER ADA'SWENTS S ECURITY (In Millions) u, ff ,4 PACIFIC -(NOT2 3) (NOTE t) PActFIC D y 3 )4 ASSETS ~ Cash and Due from Banks 8 4.795 8 635 3 5,430 a Due from Banks - Interest Bearing 2,028 264 r 2.292 j Investment Securities 3,438 1,069 W Trading Account Assets 1,962 18 g 4,507 Federal Funds Sold and Securities 1,980 ( Under Resale Agreements 2,351 60 F k., 2,411 / 8 Loans and Laass Financing 45,516 6,702 /, Less Reserve for Credit Losses 1.263 134 52,218 f,.3 id Net Loans and Lassa Financing 44,253 0.568 1.397 gg 50,821 (gu? li r,tj - Premises and Equipment 1,002 126 1,128 ac le ,;g Customers' Acceptance Liability 804 524 1,328 4 Other Assets 4,081 326 _.4.407 ?<. Total Assets $64,714 g $74.304

7 C-*

LIABILITIES ( Deposits >,y*,6 T: $38,790 $6,986 p$ h.i %sh y Short-Term Borrowings 13,650 1,127 $45,776 $ T 4 ^g. Long Tors Borrowings 4,825 250 14,777 M N' 1 Ef 'W 5.a75 4T0. - Acceptances Outstanding 804 524 D Other Liabilities 3.844 110 3.954 ' f 3M 1,328 ?% Total Liabilities 61,911 8,997 i,d,M, d y&- STOCKHOLDERS' EQUITY N'? 10,910 3/ Proferred Stock f 300 300 1{- Common Stock 797 56 89 1.086 5 Surplus 574 197 (233) 538 N,) j-Retained Earnings R 340 , g y@ , 'g Total Stockholders' Equity 2,801 59)

3. ~i94 7sf 1.4.70 1i; Total Liabilities and C,,.gp g

Stockholders' Equity $64,714 QJ,,9,0, t 0 $74,304

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?N' SECL'RITY PACITIC CORPORATION AND $L'asIDIARIES FR010RMA CON *EN$c CCMBINED STATEMDT CF EARNINGS ( L'naudited) + l sir Marras - A1er 30 (In Millions. Escept Per Share Data) 1967 g Interest Income - Loans and 14ase financing $2.533.8 $1,363.0 Due from Sanks - Interest Bearing 17.F 101.9 -s Investment Securities 114.4 123.2 T-Trading Account Assets 64.9 52.6 jg Total Interest Incoes 2.533.1 2,623.7 'd Interest Krpense

• Depeetts 991.5 1,070.2 F

Short Ters horrowinge $13.2 350.3 i Long-Tern Sorrowings 't:. 5 Total Internet Espense im5o.0 4 Not Interest Incune 1 '+'7 rA treetston for Credit Losses R 220.0 -f., Not Interest Incess taas Provision 7 for Credit Leeses 339.A 769.7 g Non+ Interest Incess 913.9 70s 7 y;. Other Non Interest Espense 4 y f Income (Lese) before Incaos fases t .) 4.-) 'i,'; Incess Tas Espense (Emestit) ) 6.6 g; Not Incess (Loss) 4 ) 1. Less Proferred Itock Diridende J 1.7 g (. Not !aceae (Lose) Applicable to Ceemse Stock g) f. Not Incoes (Lass) Por Ceeman Share g) g 'j 7, Average Ceaume Shares Outstanding M g I s94< .c L E x se. -Ti n.se. c. re. r e-Ceau es rt e=t.t state sets. r3 7 ,5 y

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{ \\ a T NOTES TO PRO TORMA CONDENSED COMBINED FINANCIAL STATDtENTS c.v f ~ .L \\ g p 1. Pro Forma Adjustments y The principal pro forma adjustment is to reflect the l issuance of approximately 28.9 million shares of A' Registrant's Common Stock in exchange for approximately d 22.2 million shares of Rainier Common Stock in connection c with the merger, Additionally, loan fees included in interest income by Rainier have been included in a i 1 non-interest income to conform with the Registrent's 4 presentation. Such loan faes amounted to less than three ei per cent of pro forma non-interest income in each of the i periods presented. Following the serger, there may be kr other reclassifications or adjustments to conform certain Rainier reporting or accounting practices to those of r 'A Rogistrant. +/y 1 2. Net income (Lessi per common share 4 The pro forma not income (Icss) per common share was g. computed by dividing p io forma not income (loss; applicable to common stock by the historical weighted average number 4kq <b i of shares of Registrant's Connon Stock outstanding for each 't 4 f period, adjusted to give effect to the new shares assumed I'}6.fkA p g to be issued at the beginning of each period presented, -Ek ; based on an exchange ratio of 1.30 shazes of Registrant's n Common Stock for each outstanding share of Rainier Common yi The shares used include the appropriate equivalent Stock. of Rainier commen Stock issued in the acquisition of United f Bank (See Note 3 below). {l J on a historical basis, Registrant reported a not loss of , i.? $1.02 per common share for the six months ended June 30, j,

1. V, 3 d 1987, compared to not income of $2.30 per common share for 4

CQ, I the r,ix months ended June 30, 1986. f 3. United Bank ,.i &l In March 1987, Rainier completed the acquisition of United Bank, a Tacoma, Washington based savings bank, in exchange e for approximately 1.3 million sharea of Rainier Common u.< a Stock. The acquisition has been accounted for as a pooling-of-interests and, accordingly Rainier data for y; 6 prior periods, including the average n, umber of common yd h shares outstanding, have been restated to reflect the h; acquisition. j '/ y s j M n. M1 1< 5 e 5 ~ N"g x s 1 yf - m% yh ' ~ .j y*^ g( f m 39Wg 1 4 u m!. m. % g ; m up g n 5 - w, sM3

[. I, [ p) g h Fecent and Pendine security Paef fic Accruisitions ,7 In October, 1986, Registrant completed the acquisition of Arizona Bancwest Corporation ("ABC"), a Phoenix based bank holding company. The transaction was treated as a purchase for accounting purposes and ABO has been included in f Registrant's results from tho'date of acquisition. i [ V On April 15, 1987, Registrant completed the acquisition of Orbanco Financial Services Corporation (0FS"), a Portland, Oregon based bank holding company. 4 The transaction was treated as a purchase for accounting purposes and 0FS has been included in Registrant's results from the date of 4 acquisition. 3 .a VO The accompanying Pro Forma condensed Financial Statements '"p ( do not include ABC a.'.d CTS for periods prior to the dates h of each such acquisition, nor do the statements include 5* other recent or pending acquisitions because the amounts el t kr involved, individually and combined, would not have a {/ b significant effect on the information as presented. >v 4 S. Mercer cents. ,N ...,w. Costs of the mergar, which are expected to be immaterial f Ek 7 to the pro forma results of Registrant, will be expensed 5 as incurred. g;s: $ h.M w y a;h2 y R.' 20 b e. M g. y w 5h ...y 4 S%. s. .t. hf p V..nl y p' m,

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Agreement'and Plan of Reorganization dated as of February 23, 1987, among ' j Registrant, Rainier and SPC/RAB 4 N Acquisition Corp. providing for the s l N acquisition of Rainier by Registrant through the merger of Rainier with W_ \\ [> ' and into SPC/RAB Acquisition Corp. Previously filed as Exhibit 2.01 of Registrant's Registration Statement on ,, m ? .) Form S-4 (File No. 33-13749) and incorporated herein by reference. $~ (11) Computation of Consolidated Earnings Per Common Share. 3 (12) Computation of Ratio of Earnings to Fixed 13 Charges. (20) Q4f Security Pacific Corporation Quarterly Report for the quarter ended June 30, 1987. (23) Q Notice and Information Statement Submitted to the Stockholders of Security Pacific g% Corporation and Rainier Sancorporation 3 g,gjg_ dated June 4, 1987. gp e jg e i hj (28) Rainier Bancorporation Quarterly Report c s ta for the quarter ended June 30, 1987. OA.y (b) Reports on Forn 8-K. S l h g j Dur! g the quarter ended June 30, 1987, the Registrant 4' ) %! Tu, h NT filed the following Current Reports on Form 8-K e 1. Report dated April 21, 1987, stating under Item 5 1 M ;N that: (a) As of March 31, 1987, Registrant placed n Wic= 7" $401 million of its medium-and long-term loans to i l Q ( D;'s Brasil and $73 million of its medium-and long-tara loans to Ecuador on non-accmal status; g.: f April 15, 1987, Registrant announced not income of and (b) On t - ' O q P $98.6 million for the first quarter of 1987. s L L-The following financial statements were contained in said TT# 3(j(y r 6 ^ announcement and incorporated by reference into said

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i) Review of Certain Financial Informatient ? ii) Earnings Summary of Registrant and + Subsidiaries for the three months ended I + March 31,1987 arid 1986; and iii) Balance Sheet Summary of Registrant and c k# Fart Subsidiaries for the three months ended March 31, 1987 cad 1986. "Q' lJg'~ 2. Report dated April 22 1987, stating under Item 5 r, that, Management determinsd it would be useful if g' g additional analytic data was presented with respect to y Figures 20 and 22 of Registrant's 1986 Annual Report, reflecting a $102 million increase in reserve for credit losses and a one-time leveraged lease adjustment due to passage of the Tax Reform Act of ,f 1986. 3. Report dated May 20, 1t87, stating under Item 5 that, 4,-- on May 14, 1987, Registrant agreed to sell its 9 3/44 MS Subordinated Capital Notes Due May 15, 1999, in the f, aggregate principal amount of $250,000,000. y c; 4. Report dated June 4, 1987, stating und4r Item 5 that, M-- on June 1, 1987 Registrant announced that during the . <j[$ second quarter of 1987 Registrant would add an 3fM additional $500 million provision to its reserve for credit losses reflecting the Registrant's assessment gg of significant changes in the developing county debt ,13 A environment created by recent similar action by other 3,p.S gIj SW major Amerleen banks. ~ n 5. Report dated June 12, 1987, stating under Ites 5 that, 4 3.. g' on June 8, 1987, Registrant entered into Agency sh' %r Agreements withs (1) The First Boston Corporation, i i+*hc N."% (ii) Goldman, Sachs & Co. and (iii) Shearson Lehman k*- a Brothers Inc., relating to the sale of Registrant's $/h* i~~* Medium Term Notes - Series A. h jQ" L%g ' 6. Report datted June 29, 1987, stating under Iten 5 that, N on June 22, 1987, Registrant agreed to sell its 8 3/8% ' [f[E g /' .'] Notes due July 1,1991 in the aggregate principal .s ' g amount of $200,000,000. .{%g,,, 'n + y 31 ,O4 y m a g $3: ~ .'*a 3 ) ~*i 1 ..n ?: f:S? k .,jfh 1 4 N W ,; '%y. f d' .g. C) [$ Mi m(h NT s 3 \\g q% sw 6S&WfW; g W y' 'e ' ~ f . p p i.. y$@y W g j @ N

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Pursuant to the requirements of the Securities Exchange Act 9 l '!h of 1934, the Registrant has duly caused this report to be signed l 7 M-on its behalf by the undersigned thereunto duly authorized, on the c 12th day of August, 1987. f h 'f ~ ~y

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A "w Y SECURITY PACIFIC CORPORATION [ (Registrant) v* ~ _ - By 'W W ,7AHN F. KOOKEN A g Vice theirman and Chief s = g, Financial Officer ,ft f1 (Principal Financial and i Accounting Officer) rr T , A,k . $t By' 'bE50 RAH A. WASSERMAN h' Add 4:4. ,' 9 Assistant Secretary 4 ,f'yjp (Authorised officer) .c * -1 \\ A[ .s. -(, "h j e \\ c.. ff*hj .f f

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f. o.>- k INDEX TO EXHIBITS E[g(j t e6,4 / V; (h 1 h;4 Ert.ibit sequentially No. Numbered Description _. Pacre ~ ii.$ QII@ 02 Agreement and Plan of Reorganization dated pcji$ February 23, 1987, among Registrant, Rainier j j e'i and SPC/RAB Acquisition Corp. Providing for the acquisition of Rainier by Registrant l through the merger of Rainier with and into "' /* i' 4 E',PC/RAB Acquisition Corp. (1) e: % ((.UA 11 /r Computation of Consolidated Earnings Per , p,,4 Common Share, '4 jj 12 4A Computation of Ratio of Earnings to Fixed Charges. s'h h'. n 20 h-g Security Pacific Corporation Quarterly i Report for the Quarter ended June 30, of-bd l! M" Notice and Information Statement submitted { 23 D.k}s.D $ 5)j to the stockholders of security Pacific !}M;,. E 7,, Corporation and Rainier Bancorporation '~'s dated June 4, 1987. 4'j 47n,& Jit 28 Rainier Bancorporation Quarterly Report fh g for the Quarter ended June 30, 1987. .h /,. JO, -l n:*ra 4 e y.a 1g N;.g}d E 1 ) (1) Previously filed as Exhibit 2.01 of Registrant's Registration ,If2 <f Statement on Form S-4 (File No. 33-13749) and incorporated herein by 43gp;6 reference. .h p;g M:,f.6$g^ w i 3,." 13 ' t, 1.a Q.., d'Y:i.' 2

1. ' -)nx

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,-.---v.. - -, ---r.,----.--,-,---.--,--r-------.w-- '5 $f f' ?bU Nffe_&kV O Y -Sk 1& Y., fN{h,O Wh$ $d 'f, { hr 1 i 4 l i i l l 1 1 /,/ p.#

V lJ... -, v??!% x 5 'Whl' gQlhQQ WNf Nl f' %,1 .\\ \\ erg \\- ~ %7 - ) g ( Y a . /, F SECURITIES AND EXCHANGE COMMISSION \\ i Westungton, D.C. 20549 b Form 10-Q @,;,r OY Mi Quartetty Report Under Sectoi 13 or 15(d) Y of the Secunties Exchange Act of 1934 4& For Quarter Ended June 30,1987 Commesseon File Number 1-2313 -f t,_t, 56, SOUTHERN CALIFORNIA EDISON COMPANY

d (Emes name of resetram as speahed m as crenari

.X. CAUFORNIA 95-1240335 T.h,k (siste or omer vindston of (1.R.S~ Ergsover gn hoorporoton or organusson) N 8804 Q'$q n FI@7/ 2244 Walnut Grove Avenue M47 (P.O. Box 800) , ' ~,. ffp;. - 1 Adeems of prmape# e omnes, hoksens ap codel >"4,c[: X"' Rosemoed, Califomie 91770 y, I 818-302 1212 N, N ..RgU in., e,e.,,,on.,ww % .oe., l;W e~j , l6hi ^ Oi)}h inc$cete by check mark whether the registrant (1) has flied a8 reports required to be filed by T. lic /d Seenon 13 or 15(d) of the Securtoes Exchange Act of 1934 dunng the proceding 12 months (or for such shorter period that the regtstrant was required to file such reports), and (2) has been aut$ pct .}pd... p,?27P'- r, f,' & *l) ~

• 8

,d to such filing requirements for the past 90 ders. Yes se No e e y,[.h trEBeets the number of sherse outstandmg of each of the lasuer's clas6es of Common Stock, as

1. J

.Qll# of the lotest precucable date: ggp-Common Stock, $4% par value ei

a. % -,.or 218,968.078 nw 5

m y ,,f '? r.m $p: ; \\ nk y y i e, /,"IM a !?. gb,,., , m--s .:.w s x, 7 i '"~ i w m ,n em. .h 'M

• Y 9

P ~' g'* 0 a* . h.. g w 4 y ff g. f' p y $[ .sl y w ye 3 hhyy]k L h h.-

~... \\ g -s 2 t SOUTHERN CALIFORNIA EDISON COMPANY .. - 5 y e o!A%_

a. ?

INDEX

'.wg m

Feen s , e, .!m. p. ih6 Part I. Financist information: jg i .y Hoport of Independent Public Accountants. 2 w.r 7 ttom 1. Financal Statements " f-id_ L 3 Statements of income - Three. Six and Twetvo Months Ended June 30,1987 and M g 1986. 3 [(d Balance Sheets-June 30,1987 December 31,1986 and June 30,1986.. 4 'I < - - = g k V Statements of Sources of Funds Used for Construction Expenditures-Three. Six [, C j and Twetve Months Ended June 30,1987 and 1986. 6 J. Statements of Common Shareholders' Equity-Three. Six and Twelve Months Ended g - 4' June 30.1967 and 1986........... 7

4..

Statements of Cavtaltzstion -June 30.1987. December 31.1986 and June 30,1986 8 +*g g l (g Notes to Financial Statements.., 10 -;g ttom 2. Management's Discusskm and Analysis of Restrts of Operations and Financis' a - Condluon........................................ 24 ?. _ _ = .3[ Part II. Other ;<Jo... Li. [_ leem 1. Legal Promedings........... 28 .y item 5. Othu information... + ............................ 26 l '4 item 6. ExhibMs and Reports on Form 8-K.. ....................... 29 h E { .[,?.. , vri, y ~ ** e w M,w w $N *' i Ned

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o e i . a. L g:.," PART 1 - FINANCIAL INFORMATION .I REPORT OF INDEPENDENT PUBUC ACCOUNTANTS k To Southern Califomia Edison Company: Y We have examined the balance sheets and statements of capitalization of Southern California ..g Edison Company (a Cahfornia corporation, hereinafter referred to as the " Company") as of June 30.1987. Decemoor 31. 36 and June 30,1986 and the related statements of encome common shareholders' equity arc Tes of funds used for construccon expend:tures for tne three., six., 3 ) f@ l y and twelve. month pe90ds ended June 30,1987 and 1986. Our examinations were maae in k accordance with gers' ally accepted auditing standards and. accordingly, included such tests o' l 1, b-- ++ accounting records a4 wch other auditing procedures as we considered necessary in the 4 7';.' 3 circumstances. In our opinion, the financial statements referred to above present fairty the financial position of y the Company as of June 30,1987 December 31,1986 and June 30,1986 and the resutts of its opp *'atsons and the sources of its funds used for construction expenditures for each of the three., g,g six.,.r.;; *ceive month perxxis ended June 30,1987 and 1986, in conformfty with generally y- ' ~ accepted accounting pnnesples which, except for the change, with wNch we concur, in accounting for unbilled revenues as discussed in Note 1 to the financial statements, were applied on a consistent basse. [* ARTHUR ANDERSEN & CO. } Los Angeles, California, 4 August 7.1987. Q d ,f f.ef 7 s -T a. ffR ~ {,k \\ f.2-f 1 y ~ d-u +. ..3 +My c y b e-w a 9 'g,; fhe [3 f: N 2 f 'fd ? 1, 2 q, ^1 a[ ag: s [ 1,. f l r.: Qf.. 4 mm 1 4 W ' ~ A T. J N , f. 4.st W (. M j g f A,L i e t s.. [' N n.. p - %e

&We

(,, W

p zgy.,

jf~v% ' 4 4, / s

i 1 ) 0 FINANCIAL. STATEME!CS SOUTHEMN CAUFORNIA EDISON COMPANY STATEMENTS OP INCOME 4leonese Enseg 12 Monete Ended 3 geom,ete Enese .m. so. June 3o. June 30. ~ gggy igee 19tF 19ee Star 19ee c g on 7heunenmes 1P Operseg Revenuse: Seles (Noses f em! 2).................... 81.324.527 $1.212.518 $2.598.990 $2.451.799 86.422.739 $$.169.496 ~ Ovier..... 7.C29 (1 f 52) 16.264 (944) 53.392 5.545 .j.A Totel opereeng rovenues 1.331.556 _ 1.210.866 2.e '5254 2.450 855 5.476.131 5.175.043 opere, a.enese: m m'" Fuel (Nose 2).................... 253.512 177.272 502.989 404.824 976.206 1.295.754 l Purtheaed pomer (Note 8). 169.702 183.356 332.087 375.448 732.463 793.549 y+ j Prtmeions for reguietary ecluetment cseuses - 1 not (Nofe f).. 9 #74 8.660 53.481 (39.406) 229.751 (327.443) c-a ' 'g.h. oc Omer exponese (Notes 7 enct #)..... 200.262 196.253 398,407 383.104 825.301 780.457 i Identenatico ( f).................. 84.878 97.394 171.494 190.307 333.884 366.170 / { Despostemon (Nees f )....................... 138.198 124.275 270.775 246.000 530.467 473.732 ,i."y%* ^ l moorne taxes (Nose d )........................ 173.908 154.548 310.390 336.000 707.663 896226 Property end omer 1same..........,............ 42.207 34,234 64.000 71.128 156238 131.375 Tonel opereeng empensee............... 1.069.740 975.983 2.124.712 1.965.473 4.491.951 4.211.820 j$ Operateng ineeese............................. 261.816 234.883 490.542 445.382 984,100 963.223 ge Queer leiseses epid Oesucsoner Lose reassed to nucseer p6ent dieetowance h" (137.377) (173.218) (Nase 2)................................... Income taxes reseted to riuc6eer plant lose T1.442 - 92.271 3 (Nore4)................................... ?7 Amowence fnr souMy funde used during ccn= etrucean (> Jose f)....................... 19.164 28.048 37.219 57.319 86.644 122.186 4*g 18.917 30.305 40.148 S8,188 81.387 100.103 'N 1( Taxes on non.coeroting income (hore 4)... 333 (6,766) 179 interest mcome. A 11.831 12.754 4.341 $3.539) 26.632 58.362 a 3; j .m Other income enc ocome 490ucsone - not. 4.160 29.023 19.102 ' i. Tosef outer income (M anme)........ 42.564 78.608 30.710 148.213 125.470 254.992 'd ] N ineeste Defers irNorest Chargee... 304.380 313.481 521252 ~~6'333E t.109.650 1.248.215 I internes Charges: U trnerest on long. term deDt and amortitstion

1. [

(Note f)................ 99.527 111.358 200.141 225.218 407.534 440.518 'A [ Otner Interest energes................. 18266 15.874 29.419 31.446 48.221 66.278 "p,- Totallneerset es................... 116.793 127.233 229,800 2S6.861 465.755 506.796 ~ Allowence for Dorrowse used : luring con. ,, / g g$ struonon (Nore f).. (11.201) (7.818) (71.786) (15.979) (35.266) (34.381) - 4W Not internet charges.......... 104 592 119.415 207.795 240.682 420.490 472.415 NN t 1. l, y inessee Sefere Cumumeeve Effect of a Change in ^ ^ r 4 Prinasse............... 199,788 194.078 313.467 382.913 689.160 775.800 Curnuteove effect on pnar years (to December 31 O e 1986) of eccrumo urMed revenue-not of (1%- y 63.044 9 e 6,., Income taxes of 558.752.000 (Norse f em! 4).. 6a044 8est inseme.................................... 199.786 194.076 381.501 392.913 757204 775.600 9 Dmeende on Cumuleeve Prsferred and P.sterence ,7' Q, $toch.. 12.579 12.961 2Sf68 29.107 50 843 64.719 f A.h Remings Avellette for Commen and Or6ginsi ' {- 7 Premnoe stoces.... 3 187.200 $ 181.115 8 356 235 $ 363 806 8 736.361 S 711.081 Y p$ weionmaaverer sneros of common and Onas. .g ne: Premtred atoce Outstandmg (000).. 217.903 217.690 217.889 217.67f 217.834 217.153 h-t w:. Earnings Per Shere: 1. 7 g Before cumuleeve effect of a change in account. 47 mg pnrictose.................. 1.06 S.83 $1.32 $1 $7 $2.93 13.27 3"

M Cumuleeve effect of a Change in accounting

. pf)( 39 31 4l pnnciple (Note f). 4 Totef................ 5.86 5 83 51 63 $167 53.24 $3.27 N h-Ofi4dence Declared Per Common Shere. $.59W S.57 51.16W $1.11 $2.30W $2.19 .g 4 (*. f pX The accompanymg notes are an integral part of these financal statements. j M 3 g#' i w'p i to ~ a . @3R- " $ > k Psd. f. y O y- &y&q&:{p' ,. fe f. Y h s l. r ~l 5 &4 w 3;, rsy v k s,[. }. j 1 (' ' g,.$,lh f $'y - 'j,. r

N I s SOUTHERN CAUFORNIA EDISON COMPANY BALANCE SHEETS ASSETS June 30 Deesmber 31 June 30 1987 1ses toes j tin Thousande) j OtSty Plant: l pt Utletty plant, at onginal cost (Notes f and 6)...... $14.050.958 513.676.746 $12.723.560 5 l 3, v Less - Accumulated depreciation (Notes f and 6).. 3.793 930 3.586.080 3.359 593 j , %[y 10.257.028 10.090.066 9.363.967 e 2 I, Construction work in progress (Notes f and 6).... 1,414.616 1.342.169 1.742.623 -g NutDar fuel, et amortized cost (Notes f, 3. and 7). 572.512 619.343 643.362 12.244.156 12.052.178 11,749.952 Lees - Property-roisted accumulated deferred A income taxes (Notes f ed 4)............. 774.502 708.436 619.676 Total uttery plant.. 11.489.654 11,343,742 11,130.276 1 Other Property and Investments. h, N Nonutility property and other investments, at j k cost -less accumulated depreciation. 51.830 45,546 47,701 Irwestments in and advances to subedaries .y (Note f)... 209.492 207,282 195,283 Total other property and investments. 261.322 252.828 242.984 / 'y Ng Current Assete:

b...

Cash and equivalents (Note 3).. 106.775 33.603 58.757 i i Cash investments - financing subsidiary (Note f).. 32,993 65,545 112.374

k f

Receivables, including unbilled revenues. tess reserves of $12.080.000. $11.874.000 and Y.. 59.722.000 for uncollecebie accounts at respective g - A oeies (Note f)... 600.034 364.39s 3s3.774 Fuel stock (Note 7). 117,994 233.528 277.216 i py Metedals and supplies, at everage cost...... 121.889 123.480 115.954 ..t Regulatory balancing accounts-not P (Notes f and 2).. 582.095 739.050 888.173 A.* "f Prepayments and other... 23.873 72.808 44.781 h Total current assets... 1.585.653 1.632.410 1.881.029 y a 3 1 Debated Chargee: ? Unamortized debt issuance and reacquierton i expense (Note f) 299.995 303.599 205,101 ( y Rate phase.in plan (Note 2).... 164.006 90.650 y Other deferred charges (Note 8) 154.635 145.439 130.546 ,'T Total deferred charges.. 618,636 539.688 335 647 $,y Total Assets... $13.935.265 $13.768.668 $13.589 936 3 .g.y The accompanying notes are an integral part of these financial statements. 7, ,y3 ..N 4 ~ e ., f p {. [D-l .c [k { hn ', ~ 7,. %} f*. g; m e a 4 71 ~ 11 pf tg 9 r7

Q. g

~w ^^ y e ~ . A.1.. w 4 l p v (

w.x N 4 i f: SOUTHERN CAUFORNIA EDISON COMPANY t j t 8ALANCE SHEETS 5 CAPITAUZATION AND UABILfTIES I' _I Jiste 20, Deoember a1 June 30 1987 16ee 1ste .,l 2 fQ (in Thousande)

• b Capitalization:

Tf'l Common stock, at par value. 216,956.326, kh, 216.908.527 and 216.736.732 shares outstanding p j p2 ggq at respective dates..... 3 903.985 & 903.777 8 903,070 i pg Additional pad.in capital.. 1.547,004 1.546.541 1.544.315 r-i 7 ph Earnings reinvested in the business.. 2.446.349 2.343,E57 2.242.180 J. N d Common shareholders' equity.......... 4,897.338 4,794.275 4.689.565 4 4 1 h Preferred and preference stock without mandatory ,7 redempeon requirements. 365,332 365,654 365,987 i q'.,..fsh. Preferred and preference stock wtth mandatory .h M redempoon requeroments...................... 282.338 299.049 305,049 '4, 3 Long. term debt (Note 7)......... 4.502.605 4.667.891 4.715.230 .f Total capitalizabon., 10,047.013 10.126.869 10.075,831 y Long. Term Obligettone. J .c v

d*

3 Nuclear fuel otWigabon - financing subsidiary L $ 7 (Notes f. 3 and 7). 371.443 410,487 422.590 .s Q. Accumulated provissons for penssons, insurance and ,,9 ' v 4, otner (Nete 5) 96,521 95.680 93,964 5 l Gi.d Totat iong. term obligations........... 467.964 506.167 516,554 7 [3 j ,Q \\ g, 5d Currertt Utbilities* 9 '. Preferred and preference stock to be redeemed ,. y, 4 a r wiman one year. 21.713 14.213 18.213 9(.y. t.

• %%.'y Long term debt due within one year....

129.425 103.315 111.210 M pr fi. -N Short. term borrowings (Note 3).. 520,277 328.000 317.500 .:'+"-- f..M-Short term borrowings - financing subsidiance [} A (Notes f,3 and 7).. 179,687 162.029 216.112 [ E; s 't,W Accounts payable. 421.171 415.118 386.590 . D,. ? W Accrued taxes (Note 4). 438.151 460.171 344.358 M Accrued interest. 109.345 109.034 105.759 r.R w y/ 4;;;-Q Dividends payable. 133.231 127.783 127,769 t,y.q Accumulated deferred income taxes - not (Note 4) 284.534 340,952 445.754 ~% m, y(gy Other... 250.781 134.174 85.948 q Total current liabilities. 2.488.315 2.198.789 2.159.2_1_3 ,Q [ ] Deferred Credits: Ii..h4 W % Accumulated deferred investment tax credits ip 2 k ' '. (Note 4). W Accumulated deferred income taxes - not (Nore 4). 534.319 544.866 519.807 151.403 121,943 60.878 7' i X{ ) Customer advances and other deferred credits. 245.651 270.034 257.653 b* d Total deferred credits.. 931.373 936.843 838.338 h[' Commitments end Contingencies 1 M'm Y (Notes 2, 7, 8 and 9) \\ s! ~,\\ Total Capitalization and Uabilities. $13.935.265 $13.768.668 313.589.936 d 49A The accompanying notes are an integral part of these f'nancial statements. n, % 'E ,M.'l 5 P .;t (.,,. - .y y,0 j ..e W 4 g-p~@::dv. 'O Ay, - ~ - a ^ .e I; eg nt. wd j .).. ' t!.Th 'k .. Q*$ p'# M ce .4 u r t &,^ # [ E - ~* Wim 'W .f B~ > [a n,+'. M 2 cg 4 y . E.. <... ~ p e. ;.e , a..j N, - .,d,$.M@ dk .Nt d g, y .E d m %ep w 4 w. 2 1 'd 5,u , ;'l ' i., 4. ~ ~

• i f

Y, .. 2 T2 h y7 Es2 he& x s

\\ SOUTHERN CAUFORNIA EDISON COMPANY STATEMENTS OF SOURCES OF FUNOS USED FOR CONSTRUCTION EXPENDITURES s N ^ 3 44enthe Ended 6 Reenthe Ended 12 84enthe Ended June 30. June 30. aune 30. '.h[*.' 1887 toes 1ee? 1ees toe 7 itse (in 7he.asence) PUNDS MtOVID8D BY-h. Operemens: g* - - Net mcorne....... -... 8 199.788 5194.C76 8 381.501 5 392.913 3 757.204 $ 775.600 j ) nome in nenncomo not eneeung womme ~- er capital - w d Deprecanon.............. 136.196 124.275 270.775 245.009 530.467 473.732 h'- y Amortisecon of nuclear fuel. 38.305 18.146 62.619 36.820 119.738 76.131 y 4/' AAowance for eQurty and borrowed funde f.@( used cunng construenon. (30.355) (35.864) (58.964) (73.298) (120.909) (156.567) ~v4 Rete pnese-m plan... (35.402) (73.356) (164.006) Deterred inco;ne taxes........ 78.811 62.187 95.526 110.746 245.351 198.250 g Do8 erred investment tem credit - not. (6.097) 18.796 (10.547) 34.193 14.512 79.403 W b Omer-not.. 5.343 2.763 (3.910) 2.295 13.690 3 892 (C .f [I Total funds provided by opersoone. 386.589 384.381 663.624 754.678 1.396.047 1.450.641 Cividende (142.229) (137.019) (279.109) (270.418) (552.973) (540.691) h I., Teesi funde geov6ded by operseene x i p -reenweeted. 244.360 247.3g2 384.515 484.260 843.074 909.650 M.l.-%.aW ./ ojk Long Term Pineneing: + Sedes of secunnes-

• "2 M"!/

M" e. y Common stock.... 362 326 671 633 3.542 47.334 m. e Lon9-term doet................. 286 396.859 3.002 905.408 524.620 1,665.909 a# Incrosse m nucseer fuel oce60etion....... 9,446 7.772 18.990 28.200 57.498 - 63.779 4 , hc@., x-Recuenon for preferred and preference stock .v .' *Mp(H-- ..? .T to be redeemed wimm one year. (4.013) (1.313) (13.149) (13.713) (17.649) (18.213) Conversion of preference stock......... (96) (159) (321) (513) (653) (936) .J m /t .Roduccon for long-term debt due vnthan one m 4)y*%g PI.4 year................................. (65,815) (51.759) (78.356) (102.255) (79.426) (110.366) orse year.......... ( 29.418 ) (38.305) (58.034) (62.618) (106.645) (119,737) ~j%.W W-Te* P Reduction in nucteer fuel obi 6geuon due witnm - *7 Refundog s'id certy recrement of proforted stock and long term doet - not. (95,912) (723.483) (96.316) (1.055.829) (773.575) (1.43C.776) i ?. 'r/J 'u WK fotsf funde provided (uesd) by len9-term 1

1. _ 6, 9,g anenein9 (185.960) __(410.042) 1225.523)

(300.487) (394.288) 96.994 - '9 my 'stel funde prov6ded (used). 58.400._(162.680) 158.992 143.773 448.786 1.006.944 g iN* OTHER SOURCES (USES) OF PUNDS- $W ' wortan9 capitet enen9ee: f i &y,'.f.

• I M.3 Caen and equivaiente end cash investments 12.958 386.389 (40.620) 30.605 31.363 70.063

..Qr'; 3 %4* Recorvebles - not............... (50.210) (39.034) (235.638) (32.679) (218.260) (31.553) ' ? 4./ A Fuel stock, matensis and supplies.. 19.955 (10.6211 117.125 (31.484) 153.287 34.712

• g,!F 7.1

$6 Regulatory belencmg eccounte-net.... 181.793 (31.339) 158.955 (96,162) 300.078 (483.733) Q Accumulated deferred ecome texee-net.. (44.834) 14.491 (56.418) 53.973 (161.220) 246.371 ~ 331-d Preferred and preference stock and long. W% .y term debt due untnin one year. 17.556 16.051 29.610 63.850 21.715 5.960 "E @h y'.. Short term borrowinge. 166.527 74.608 209.935 275.823 166.352 124.531 J, Accounte payeele. (2.796) 24.932 6.053 (14.899) 34.581 (38.704) 4V J s

/..

Accrue 1 texes........... (9.640) 35.646 (22.020) 110.636 93.793 214.095

• ~IM "

~% N ,'/% Deterred ut. billed revenue..... 19.097 4 117.163 117,163 Other cnenges in working capitet. (114.889) (15.597) 54.138 36.377 77.626 40.736 i EN l I Not decrosse m wortung caprtal. 195.315 457.526 336.283 396.040 624.478 182.496

• M.

C ', Other - net.. (8.280). (3.725) (15.369) (2.910) (13.877)

1. 21.716)

Total other eeurces of funde. 187.035 453 601 320 914 393.130 610.601 160.782 MQ Pende Unod for Cenetruceen Expend 6turee $ 245 435 $ 291.121 1 479 906 5 576 903 $ 1059 387 $ 1.157.776 3 l 1i Th8 accompanying note are en integrei part of inese nnenew statemente. 9 x0'.4 l ,.M f.( m., O i l Tw JMM \\ x- .-w Q.4 Y,C J' Y p .n., a g-kg w y' "f y;9(' %, #., M E 3 ,,( .m n_. =. k&,incJ nbh YW ?

/

hlh i . ~m$&yp x s9 wm N Q R wh. x y QQ d A MW I g W,.mung% g . g i

---

y e

SOUTHERN CAUPORNIA EDtSON COMPANY STATEMEN78 OF COMR40N SHAREHOLDERS' EQUr t 4 p saseme.n amens enemmes ann.s in neense amens y. m sa.

== so, an= m a igy sees 1987 1900 M7 1980 i.' -' m (h h) 'E Canmen Sesek-per veive 84',.

h. >

por share. 280.000.000 eneros authortred. 218.958.326 and c de ( ....... 8 903.985 8 903.070 8 903.985 8 903E70 8 903.985 8 903.070 Ask8eenal poisHn Capient: Yl y?[9 7; Selance et beginnm0 of period... 81.548.789 81.544.078 81.548.541 81,543.933 81.544,315 81.500.090 Premium received on sale of Common Stock and secunty ,a R conversions ( s)............... 256 243 483 418 2.729 38.310 g - Capitei stock enpenes........... (20) (4) (M) (38) (40) (88) 9 Salence at and of period......... g 31.544.315 31.547.004 31.544.315 31.547.004 81.544.315 + 1 Balance at beginneng of period... 82.388.790 $2.185.123 82.343.957 52.128,648 82.242.180 82.018.032 I - A.p ' Add: / Not income................. 199.788 194.078 381.501 392.913 757.204 775.800 L.g $M 2.588.578 2.379.199 2.725.458 2.521.559 _2.999,384 2.791.832 y0 Q rg i.ees: g' g R.+)' OMdende declared on cap 6tal J Stoeg [ Common................. 129.103 123.540 252.748 240.581 400.900 474.191 g~.w,h mi<h y Original Preferred..... 547 518 1.096 1.038 2.189 2.073 }pl/ Cumulettve Preferred..... 12.015 12.233 24,029 27.202 48.138 80.885 ~ f, ng.; @Q 1,813 2.888 3.542 Preference.. 564 720 1.237 @ d* ' yM';rgy pf 142.22t 137,019 279.109 270.418 552.973 540.691 ,j .oss on reecquired capital Sd'N 4p stock............. 8N1 82 8.981 4 *"i 6 l Balance at end of penod(b).... 82.448.349 12.242.180 32.448.349 12.242.1_80 $2.448.349 42.242.180 d[.

k. p Total Commen Shoreheiders' Eguny et End er Period........

s4.897.338 s4 889.585 s4.897.338 s4.889.585 s4.897.338 s4.s89.58* y3 pg nm. [ . $. 3J (a) At June 30. tSe7. eheres or Corronen Stock reserved for medence were se losese: w theres Carwerenen el Proforwice Stock. 8JO% Corwergtne Series. 143.862 Y Corweresen of 12% cornerstne Secrenesed Oscernures. Due 1907. neued tsy Souunern Cae8crrue Echeon FManos m... @4 s Coseny N.V., 48e.132 8ench snacnese piene. .,~. 2 4.238.575* .,.3 Toesi.. 4 ess.aos h.e

• these onene incnam tra Danoeno norw enen ene sioes renese men. sioen sennoe mus men ene einpioyee sioen o.norene men.

t, Conenen esoca rooma var rw piens are pronose irregn coen merset panesee. rn$r 3; j (e) Mauase _a_ someos or unconsoaoceo outmaienes av s27 eminna ena sooroonsted renweema ser=nge remise io cenen $[9. ~ - .[g* - s. ^ , ~-. hydrosectnc protects of 64.274.000et June 30.1987. 7y ' q ig The accompanying notes are an integral part of these financial statements. l ff V .r 7 'f f: -g"5% .' ~. 4. 1 i . A&u ' h<4^ o n4h ; 5%f g % "y~ h@%y?. k ar %D$ M l s \\ w a v ~ f,';y x, gl,llf' h ..: b Q.3, ; i u no ~ r.a l?' 5.,. a. ^ pf* }' w -,g . _. m$a) @ff a P

e t SOUTHERN CAUFORNIA EDISON COMPANY STATEMENTS OF CAPITAUZATION Jww 30. tes? D theres Acessnesen June 30. Decemeer 31 J.ane 30 J. ? Pnce test 19ee toes t' (in 7housensel g. Cenomen hieruheeders' Sedly deceded on peGe 7. 21' #A2 - S 4 097.338 $ 4 794.275 8 4 689.565 Q N presened and Posessenes Seese -weiheut inumewry essempeon i ? vessemanest e HD): Orignimi Preserved - 9% Np. cumwesene parecese!nt, not 4.000 4.000' 4.000 e ressemense, per veces er enere. 480.000 Cwm.se.e preewred-per e e SEE per ehere 4Jeg Serine,, 1.000.000 8 25.50 25.000 ' 25.000 26.000 g 4Je%3snes.... 1.200.000 26.80 30.000 30.000 30.000 y' 4J2% Senes... 1.463.420 28.75 41.338 41.336 41.338 4.79E Series... 1.208.700 25.00 32.419 32.419 32.410 9 0.80% Sereso.. 2J00.000 2126 SL000 86.000 84.000

1. w.

3100 Cwnueneve Freeerred-per venue M eiOO mar anwu T.mm Se,ise..... 700.000 10im n000 n000 n000 egy S.70% Series.. 800.0W 104.00 80.000 80.000 50.000 c L30% Sense.... 800.000 104.00 40.00r 30.000 50.000 L20% Conversees preserence-per vense $25 per eheru Seems..,. 105JS7 28.00 2.877 2J00 3.232 $100 Preserenos per vense $100 per enere.. .q Teeni Prosoned and Preference Stone oricheus 'f }- enenessary recompeen reeeremones... 306J32 306.884 306.007 g f preesssed and Preewones Seeuk. unin mendseyy redempeon g reeaomeneste Hel: 8100 Cwmdenve Preterred-per venus q l 8100 per enere 7J20% Senee.. 030.000 104.04 03.006 83.000 06.000 %~' 7.30 % Sense.. $24.905 110.00 62.500 52.500 54.500 tU.j 1 8.44 % SsFee.... 837.5fC 108.86 63.700 64.000 06.000 W L70 % Senos A.. 484J74 110.00 46.937 48.582 4L582 If7 3 12J1 % Sense.. 800.000 106J3 80.000 50.000 $0.000 ~* t, Preserosos -par venae $26 per ehere. 7.379% Senes.. 1.154.548 28.00 28.884 37.200 37.200 N.o 'Y 304.061 317.292 323JE2 W Presurred ena Preference Sext to be redeemed wenn one year. (21.713) (18.213) (10.2f 3) e@? ] 9 T. P,eeened an. Pro,e,ence - ess, -,e.e,npeen,s.orene,... m33.

30...

e %7erm oset = inesses, - h Rres ud Asfurustif 8 dor 1940s Sonde (dHe): da' '1@ % l Due 1987 swough 1991 dw%. th 642.000 648.000 644.000 h[y g Due 1982 sirough 1996 64%. 0%% 966.000 966.000 865.000 -M Due 1907 virougn 2001 71e%. See% S00.000 500.000 500.000 Dec 2002 Inrou0n 2006 Ste%. 9.90% 400.000 414.250 414.250 ye Oue 2007 setugn 2019 Sten 13% __1.cas 413 1.101 612 1493 att a,W " 3.481.413 3.564,862 3.00s.078 ( Poewtoft ConrelIndentednese(f): Due test grough 2018 7%.10es% and E 'J:-' venenee 857.730 457.730 087.730 .4f 4 Deconswee and Promseecry ,M ecosse(DH e H0) Oue 1990 evough 1987 10H% = 13% 200.638 354.100 366.516 'P Other Long-earm Dece(s):h):. 10J7% 25.793 26.797 27 751 c-Peneel AmaJnes OutstandW10.... 4.665.58B 4.799.494 4.863.073 ' ' 'h +. ~.. Long-earm oseI Duo mrun one Year-no4el. (129.425) (103.315) (111J10) Unemermoed Dent Prerruurn or (Discouru) -ret. (15JBet) (17 069) (10.807) ?y. Secunese Head By Truseme4(f). (7 ede) (11.223) (15 R26) MA s y Total Long term Doet.. 4 $02.005 4 667 891 4 715.230

h. e f

Tetel Capsteeseelen 310.047 413 510 126 969 S10 07$ 831

j M

~S Notes to Statements of Capta!Itation are on page 9. } j g The accompanying notes are an integral part of thesa financsal statements. j 8 1 M .g .() y. L.3 ^ Q W. f $&y, T A b' V.* $ e& y s j 's 3 v .A l [

4 SOUTHERN CAUFORNIA EDirON COMPANY Motes to Statemerits of Captahation-e) As of June 30.1987, authartzed anares for the protoned. 825 Cumumeve Prewned. $100 CumJetrvo Preferred 125 )' ersa and $100 Preteremos seoce were 480.000,24 000.12.000.000.10.000.000, and 2.000.000 shores. respec:rvesv as senes of Curmaneve preferred 4100 Ctmmeews Pronorred and Preference Stock are receomeces at the opeon of tne Company. The 130.000 anaree of $100 Curnusseve Preterres Sech 12.31% Seres. are not suosect en sucm feoemonon unts 64ey 1.1992. The venous sense of 4100 Curmaseve Pre; erred $4cck. and ete Preserence $mcm. 7.373% be%s, are suDrect to certem festnceons on redempaore for refunceng I P"'8'*** Ia"; (b) As of Jme 30. 1987 tre corwereon price of the Preterence Stadt. 5.20% Con.orebes Sense wee $15 75 per shore. The TWi, A Conwerece $@ordmeend Decenases due 1997 maued by Soutnern Censorme Edison Frame Cormany NY. (Fnence). are corwer% Die ["* 4 ' meo Company Common 6socr a* ano conversson pnce of $16.1676 por enere. g )- (c) For Preestfod and prefererce $ tor:a wth mandesary redemonon reoaraments. the aggregese mandatory redempaan recuremems for A'. vos nus 1....

4. penose suneessent to June 30. I967 are as loopme:

h of tf teense Eneed June 36. ~ senses canonomelng 1980 test 198,0 1991 1982 Cismesswo (In Theesseds) 723e%... 30.000 ft31/83 8 3.000 8 3.000 8 3.000 8 3.000 $ 3.000 y, 7.80%..... 15.000* 11/30/03 1.500 1.800 1.800 1.800 1.400 4Ae%... 22.500** 8/30tes 2.200 2.250 2.2- { v E70%A. 13.125 8/30/88 1213 1.313 1.31 3 1.313 1.3u y 12.31%.. 36.000 " ' 4/30/08 3.800 3.500 3.375 3.375 3,373 P Preserence v.. 7270%.. 406.000 2/01/06 12.400 12.400 4.003 g $_2,,J213 t,,131 Sig 8g g 3

• Increases to 18.000 shares begmnmg in November 1948.

" 48.000 sharee reisen0 to 1944 and 1980 have been ecomred INrtagh open merset purchases. y "* Decrosses to 33,750 shares bogswuna m Apre 1990. fg gf (d) SJietensesy as of the prwsons of the CorWy are subsect to the tens of Tr ast indennses. [' y (e) Maturmes and omkeg L M recurements of tong.W ones for the eve - penods assequent to Juns 30.1987 are as Tootse beenehe genesig Pund .g ' }* Ensed Jurne 30 tenswedes Assureemente Tesef a. (heThousense) fTM 1988. $124.175 86.250 8125.426 N 'A 4 1988. 82.414 5260 $7.86.

• b.

"M 1990. 74.000 5.250 79.930 '4 [D $g 1991. 177.974 5.725 281.600 ise2. ui.30s s 230 2n.ssi g,, h m nra end aefurono won,ege Bond. and einer mdee >.e. hev. ce'en.ud io gov.mmer.1 f onc.e m eschance nor = 'N gG frorn the usuance or Poeumon Control Revenue Bonae end Pouvean Creirol Revenue Asfundmg Benos. The geocesos have J,. J ce0cened with Trustees and are beng vehzed to correy the conseuceon arm other specshed costs of ponuson control facPhbes and C fourernent of matunng esues. Such Acnos ma{De redeemed at Fe saecean of Ihe Bond hoteert The Company has greeted smo (2' 8Foefftenu e40 securify desaors which provide sur the mereseng or ghschase of Wie Bonds unen sucft eeoceans are made, j (g) Promescry Notes payable to Fmance have been ineued M en for proceeds from the issuanoe of Debeneures by Finance. As of ' = -[ Jme 30.1967 payment of the pancsced and misrest on 375.000. arv1 SS 633.000 J amounts of tne Debentures erere, i. anteed on a suDororwed beast Dy N . The Subordmoted Decensures are j' b (h) Pureuent to the Nucteer Weste Poacy Act of 1982, espoesi of spani nuacer vu ior ine sen onofre Nuc.t.h,e Company he.t entered eito a contreet mth the U S. Deparsnent of Energy for F}.

n.,.

con.c.eng s tort a, h 'S$ 2 l- &:~ Ih s.

d M

fM7 a y% l Ty M;. , ; (f.E [-i l ft g%a@@m@g **, %y g et x ?gd w ry i e ,h,%qgd e m +%,# p,' ,M..,h..;., s > %..Q - k., mpg i g , l, AD L. 63$ LE5W Abch 5. Y. u J

s t ?" j \\ = SOUTHERN CAUFORNIA EDtSON COMPANY { r NOTES TO FINANCIAL STATEMENTS (; a j N NOTE 1 -Summary of Significant Accounting Policies g 2 i 1 - f-m - The Company is regulated by the Califomia Public Util! tees Commission (CPUC) and the ( [y fiWJM Federal Energy Regulatory Commission (FERC). Accountng records are maintained in accordance wtth the Uniform System of Accounts prescribed by the FEAC and adopted by the CPUC. The s ',e financial statements reflect the fatemaking policies of these commissions in conformity with generally accepted accounung prinopies applicacio to rate-regulated enterpnses. M L-l M u mfy n -a - 7 The cost of addibons, including replacements of unrts of property and betterments, is caprtal-N E trod and incluoed in utility plant. Costs include contracted work, direct matenat and labor, construc-tion overhood, and an allowana for funds used during construction ^ h Maintenance, repairs, and minor replacements of and addibons to property are charged to S maintenance expense. The cost of property replaced, renewed, or otherwise reared, plus removal or 4 {'(,. tuapaaat costs, less salvage, is charged to accumulated depreciation. M Proswrty redated accumulatewafarred income taxes are deducted from utility plant in conform. Ity with the retomaking method used to determine rate base. r 5W Anserence fur Funds Ueed During Construction (AFUDC) - a .;5 p AFUDC represents the cost of debt and equity funds that finance the construchon of new faciltties. AFUDC capitallred is also reported in the Statements of income as a reductiori of interest e charges for the borrowed funds component and as other income for the equity funds component. / Although AFUDC increasee not income, it ooos not represent cash earrungs. The cash recovery of [ [" g AFUDC, as well as other construccon costs, occurs when completed projects are placed into p . f J,, commercial operation and related depreciabon is authorized to be recovered through rates. l h .[ The Tax Reform Act of 1986 tequires interest costs on debt related to certain plant construcuon [ t it. ,f M to be capitalized for determining depreciable tax basis. As a result, commencing in 1987, the debt

1. [:;yb swdW of AFUDC is computed using interest expense which has not been adjusted for 4,".

'S d ,i applicable income taxes. Pnor to 1987, interest was included in the AFUDC calculation not of the tax ( N' ~ y q,y. pkg somlannual compounding, is 11.57% for 1987 under the gross rnethod and was 10.53% for 1986 h,. benefit realized from deducbog such amounts from taxable income. The AFUDC rate, which reflects i p? M(.wFh4 under the not-of-tax method. These retes were calculated in accordance with a presenbod FERC Q. f4 formula =?; LD" >,h" Deprochetion-f'gt,.[h"( For financial reporting purposes, depreciation of utility plant, other than nuclear fuel. Is 3 3 computed on a straight-line, roma ning trfe basis using the composite service irves by classes of 4?? - @g deproctable property. I! M Nuclear generating station decommissuning costs of $328 million are being recovered in rates i g through an annual allowance and charged to depreciauon expense. 4; f' Nuc6eer Fuel-The cost of owned and leased nuclest fuel, including its disposal, is amortized on the unets of N .g productk'in mett od on the basis of generation over Rs service life. Nuclear fuel costs are recovered g g, 7, '*estr

1. M

h-10 k r 0 4 j i, 0 72 k, f } j; < v L f TS k i y ?. m.u%4mm ~... -

M 's .s.. n.. SOUTHERN CALIFORNIA EDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 1-Summary of Signmcent Accounting Poincies (continued) through regulatory balancing account mechanisms. Leased nuclear fuel is discussed further in Note 7. neeeerch and C.. _ ;- - l (RLD) ~ R&D costs are expensed as incurred if they are of a general nature. R&D costs relating to specific protects an advance of construction are capitalized until a determination is made as to whether such protects wJi result in the construenon of electnc plant. If the construction of electnc e d plant dose not u+omately result, the costs are charged to expense. 'J 3scenessAndee 6 Meness Ended 12 Mensho Ented Jiano 30, Jises 30, Jesso 30, 1N7 1M 1957 itM 1W 100s (hi themsenes) g Ra0 cases charged to expones.. S 9.Ob8 8 9.737 817,741 818.121 $46.842 550.000 7g. R&D cosso essenedicapnessed 2.410 (100) _ sJe7 (33) 7,31s d17 + Total RAD empendesses gggg g M ,1 o Tesee== Deferred income taxes are provided for certain benefits realized from depreciation deductions " a utilized for tax purposes, regulatory balancing accounts, debt reacquisition expenses, and certain other specific items, income tax accounting policies are discussed further in Note 4 Q, - Weemorttred Debt Issuance and neocquisition Esponee - Q' 7 Debt premium, discount, and related issuance expenses are amorttzed over the lives of the t p issues to which they pertain. Debt reacquisition expenses are amortized over the remaining #ves of ' $[d!d i] the retired indebtedness when reacquired without refund 6ng and over the lives of the new debt ,;i issues when reacquired with refunding. m"g 'My .e neeenvee - .] f,; 1 Change in Accounting Princip6e - w r "p.. .p.g' V. Pr6or to 1967, revenues were recorded based on cycle bilengs rendered to customers. Effective lh',g ,2, January 1,1987, the Company began accrukig eenmated unbelled revenues for electncity delivered g*Y, W g to customers subsequent to cycle billing dates through the end of e.ch month. The accounting 3rh6 fp change conforms to provisens of the Tax Reform Act of 1986 requinng utilities to include unbilled ?. 3,:: revenues in taxable income commencing in 1987 and provides a better matching of revenues and Tf M f Q expenses. ..yg. I*.h bl ^ 4 The after tax offect of this accounting change increased not income by $10.193,000 for the "11 *e' M three months ended June 30,1987 due to seasonst varianone in sales levels. For the six and twelve ,i k-months ended June 30,1987 the after. tax effect of this accounang change increased not incorre by '*i'.k'V 't 868.535,000 including the cumutsovo effect of accruing unbened revenue not of appheable income Q taxes as of December 31,1986, which amounted to $68.044,000. o 0: h ,4 l% f.is $$y ~ ?. dh ky g ,t r* 4.gg W 1,gy v n. a i m =@u %g + MAP.o a g @ g. +h 4. x ~ em b y A,q.: w q. w+;. +m p s. m gs q qp w4a 4 e M~ mS% v n ,k h hk M-k p, ' s, 1

_= i a w o SOUTNERN CAUFORNIA EDitON Con 4PANY NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 1-Summary of Signmcent Accoundng Poincies (continued) i s N r The table below provides pro forma Not income and Eamings Per Share as if the new method c 1 Y had been in GRect prior to the income statement periode presented. The 1987 pro forma smounts in .lW { the table are adjusted to remove the cumulative effect of the change in accounting method. l As Aspened _ Pee Perne pp-s. ,e, ,.e. ,e, toenmas Shere incesse Shore ~ (to M Ezcept pe, r 6 Shao Amoume) .hme 'A iset ,i- 'neen mant9s ended. $1sd.c76 8.83 8207.371 8.80 j i -. gis maneis ended..... 332.913 1.67 396.s00 1.00 Tunese monte ended. Tr$.800 327 708.807 324 a June St.1s07 Tlene mones amend.. ...... 3tes.70s 8.es $190.780 8.30 aas mortne ended..... 301.s01 1.e3 313.467 1.32 Twehe encruhe ended.. 757.204 3J4 001 A70 2.90 l i h'a,, nes.w.y s% Accouna- ) Opereune nevenuee - i Q The CPUC has authortzed an Electric Revenue Adjustment Mechanism that removes the effect s g; on eamings of fluctuations in tulowatt-hour sales to retail customers. Under th6s mechanism. .g". differences between authortzed and recorded base rate revenues are accrued in a regulatory 4 balancing account. ,*d3 / t. Energy Cests- ? 4 An Energy Cost Adjustment Clause (ECAC) belancing account ad}usta results of operations for ..T;j y" vertations between the recorded fuel and purchased power costs and revenues collected to recover jg such costs. Differences are accumulated in the balancing account untu they are recovered from or fy refunded to customers through future rate adjustments. Cw. c rs.r.ii in 1986. the ECAC belancing ' h,3 \\ + j, account includes a fusi oil carrymg charge based on short term interest rates. In pr6or periods. such g% ggg carry 6ng charges were based on the rate of retum earned on rate base. 3 Commencing in 1987, the CPUC suthortzed a one-time wrtte40wn of the cost of fuel oil if @ inventory to market prices and the subsequent use of the last-in, first.out method for measuring the z$p y, recoverable cost of fuel oil consumption. The one4me wrtte-down, aggregatmg $96.5 million, has fj *r w ,, g been recorded in the ECAC balancmg account pending future rate recovery fme ,M The CPUC has established performance incentive mechanisms for San Onofre Nucteer Untts 2 gm, w %. ,y.7 Ay and 3 and the Palo Verde Nuclear Generating Station wNch set forth a targeted range of generation ['? P N'h* leve6s. Fuet savings or costs attnbutable to generst6cri levels above or below the target range are \\

c -

dMded equally between shareholders and customers. p q y M g' j

• ^

Helor Pfant AMtions - i v

i. Ag Ws T,'$j 4 Major Additions. pstment Clause (MAAC) balanemg account mechanisms have been estab-17 q

Nehed to account for the differences between revenues specifically authonzed to provide recovery of ). / _ i g Sea Onotre Units 2 and 3 and Palo Verde Units 1 and 2 ownership costs and those actually incurred. '~ j M 42 .g% v. e j E h ng ' m,a N ' l.,F m% Jbs a.h [ -- - N r. -5 y 4 g 4' ~ q Tff d a N,, f, p M, c s .? ?! ~, r.e y g l ok ,l & f k- -v ..n@itN W ^ 4 Ts 4 w s - 1 + .y n. s 3'l u A. +- "M. 1 M 3 r E 4, a m k+n,y.g y T ;.Q n r, .3.w. n. nw n a. w

p Q A '. 6 4 l l SOUTHERN CALIFORNIA EDISON COMPANY j NOTYS TO FINANCIAL STATEMENTS (ContMuod) NOTE 1-Summay of $3 ntftcant Accounting Policies (contMued) 9 Meareet and Taxes-Interset on regulatory balancing secounts is accrued at the rnost recent three-month prime commercial paper rate as published by the Federal Reserve. The weghted everage interest rates a were 6.47%, 6.22%. and 6.12% for the three, six, and twelve months ended June 30, 1987, n / ~~ < rearwHvely, and were 6.61%,7.25%. and 7.45% for the three, sm, and twetve months ended June 30,1996, respectively. The income tax effects of the charges in the regulatory balancing accounts }<g? ..Q are deferred. e ,u e,.,,,,e _ trweetments in unconsolidated subsidary companies are accounted for by the equity method except ama4e engaged in E.rodebenture and nuclear fuel financings. For these subsidiaries, cash Irwoetments, short term borrowings, and the long-term portion of the nuclear fuel obligation j are presented separateey on the Salence Sheets. Nuclear fuel owned by the subsidary is included with erectly owned nuclear fusi. Other subsidiertos are not considered significant for financial d reporting purposes. ,/ y nesteemmente - Salance Sheets prior to June 30,1967 have been restated to reflect leased nuclear fuel and the related obligadons in accordance wrth amended esciosure requirements for rate-regulated enter. g. prtsee. For a further discueston of the effects of this rootstement refer to Note 7. N,,,,a,,,a,,ans _ Certain items have been reclasalflod in prior periods to conform them to the financial statement g presentations at June 30,1967, NOTE 2-Regulatory Matters fl?** k Nuoener Genero6ng FacnNee J Pode Verde Unite f,2 ane 3-Q; seueme am 7rseenent ane on.anowance - { T Pelo Verde Units 1 and 2 have been in commercial operation for ratomaking purposet since h February 1, and Septomter 19,1966, respecttve#y. Unit 3 is scheduled for commercal operation in -l.6 s iets 1967. On May 31,1965, an application was flied wtth the CPUC for rate recovery of Unit 1 ( operating and ownership costs on the basis of tradtbonal retomaking prac5ces commercng when A the unst acnewed commercal coernoon. ') in. response to a Commission directive and to avoid the protracted heartngs and substantial (( expense that a formal reasonableness review might have entailed, the Company and the Public Staff f 91 negotiated an agreement on Paio Verde ratemoung issues and, on June 25, 1986. filed a joint i stiputebon with the CPUC. The stipulanon, approved by the CPUC on October 1,1986, provxles for: + + A disallowance of the Company's Palo Verde investment for ratomaking purposes based on 19.33% of the amount disallowed in the San Onofre Unets 2 and 3 reasonableness revow. N h[

• A 10 year rate phase-in plan, which provides for the deferral dunng the first four years of opersoons of $200 million of investment related revenue for each of the three units y

comm.ncing on in.w commere.i opersoon dm. R.v.nu. deferred for.acn un,t under = 13 4"

• yi, t

vhI ~ $k b* M:6 y* Q-l % b. W =* m. w

l SOUTI 'ORNIA EDISON COMPANY NOTES 70

t. STATEMENTS (Continued)

NOTE 2-Regulatory Metters (continued) \\ plan for fears 1 through 4 is $80 milhon $60 milhon. $40 milhon and $20 milhon, respectwely, r i Such deferrals and related interest are to be recovered on a straight-hne basis during the final six years of the phase.in plan. 4

• A target capacity factor operating performance incentive mechanism substantially identical to the procedure in effect for San Onofre Units 2 and 3.

Because Palo Verde Units 1 and 2 were placed in commercial operaton before the investigation '*i of afterP've ratemaking methods could be completed, the CPUC authonzed the implementaten of an intenm balancing account procedure for the costs of owning and operating Units 1 and 2. With CPUC approval of the stipulation, a reclassificaten from the interim balancing account to a tieferred asset account was made dunng 1986 to record the intbal phase-in plan deferrals for Unrts 1 and 2. e Additional deferrels are continuing pursuant to the phase-en plan. The deferred asset balance 5 aggregatee $164 million, including interest, as of June 30.1967. [ The Financial Accounting Standards Board is considering the appropnate accounting treatment p* for rate ph see in plans and is expected to tasue an accounting standard for such plans during 1987. The effect of recent CPUC decisons on recovery of the Compariy's investment in Palo Verde is discussed below in connection with the San Onofra Unrts 2 and 3 disallowance. San Onotre UnMe 2 and 3-neee treatment- / ~. When San Onofre Units 2 and 3 were placed in commercial operation in 1963 and 1984 / h respectively, the CPUC did not authonze recovery of the full cost of these units through customer 1 Q$% rates. Instead, the CPUC authonzod the recovery of a portion of costs and directed the accrual. In a Y MAAC balancing account, of the porton of revenues not 6ncluded in rates. These accrued revenues [ h have been included in reported earnings without benefiting cash flow. D 3 Since January 1,1985, the total authonzed customer rates for San Onofre Units 2 and 3 have y. i g _,g approximated investment-related costs. 3,,,,

m

• y CPUC OlesNowance -

f% The CPUC has concluded its review of $3.4 billion of the Company's investment in San Onofre (h.- Units 2 and 3 to determine the reasonableness of construction costs for rate recovery purposes. n Q On October 24,1986. the Administrative Law Judge ( ALJ) who presided over the reasonable-N 7 ness review proceedings isped his recommended decison in this case. The ALJ's decision , $ ' b. Q recommended that none of the San Onofre Units 2 and 3 investment costs be d.sallowed for gjp,. l ..i"*g ratemaking purposes. r gD On October 29.1986, the CPUC issued its initsal decision in this proceeding which, based on the 6 j 'j* s Company's 75.05% ownership Interest, disallowed for ratemaking purposes $258.6 milhon of the 'St .(ON l $3.4 bilhon investment in San Onotre Units 2 and 3 under review. Under the Palo Verde stipulaton discussed above $50 rnithon of the Company's estimated $1.5 billion Palo Verde investment was h"gg.gs ---

• j

' j.; also disallowed for ratemaking purposes. j < Since the CPUC's inrtial decison, the following regulatory actions have taken pace: ,", i

• On December 8.1986. the Company filed an apphcation for rehaanng on $213.4 milhon of the Q

%Q $258 6 million San Onofre disallowance with the CPUC. The uncontested $45.2 milton of San a.Ww 7 Onofre investment disallowance was increased by 19.33% in comphance with the stipulated

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', ~. ratemaking agreement for Palo Verde investment costs, bnnging the total uncontested ?G " M.. ib.. [ disonowance to $54 milhon. s. 'd j( Q3 f... j*'fh. p[ jf 4 ? .g/" n ~ n.; ' c w. }}pS' yg rg, y e.% w a.. x

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g g. 4 2 s_ is SOUTHERN CALIFORNIA EDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) +- ? [ mr., h NOTE 2 - Regulatory Matters (continued) N i . On March 17,1987, the CPUC agreed to rehear $74 million of the $213.4 million of the San 4 Onofre disallowance petitioned for r6 hearing. The 5133.4 million cf investment disallowance which was not reheard equates to $168.3 mdhon after including the stipulated 19.33% Palo T,J [ Verde disallowance of $26.9 million, p h

• On July 29,1987, the CPUC disallowed $14.3 million of the 874 million investment disallow-b D2 ance granted reheanng which equates to a total of $17 milleon after including the stipulated

( 19.33% or 82.7 million disallowance relating to Palo Verde. 4 4 To reverse previously recorded revenues associated with the San Onofre and Palo Verde j. ~f disallowances, the Company wrote-off $15 million after income taxes in the fourth quarter of 1988 2 for the portion of disallowance the Company decided not to appeal. The Company wrote <>ff $66 million after income taxes in the first quarter of 1987 for the porbon of the disallowance which the 'Y Company appealed but which was denied rehearing by the CPUC. The CPUC's final decision will not algnificantly impact samings and concludes the wnto-off to current sammgs for thes matter. In December 1986, the Financial Accounung Standards Board adopted a new accounting i A standard requinng the write-off of construcDon costs disallowed and excluded from rate base. The new accounting standard, which becomes effective for the Company on January 1,1988, provides J

• a,'

for the restatement of pnor penod financial statements for cost disallowances occurring pnor to the p oflective date of the new standard. f [' f.I. According1y, 6n 1988 financial statement presentations including 1986 and 1987 financial f statements, the disallowance wdl result in a one time restatement of the 1986 financial statements. y/ k[,. in its 1988 financial statement presentations, the Company wdl record an after tax charge against 1986 eamings in the amount of approximately $176 million or 80 cents per share to reflect the one-4p' time rate base adjustment. The related restatement of Shareholders' equity wdl be reflected in the WK 1988 presentation of 1986 and 1987 financial statements, f@ rb:',*? (w w Fuel Supply Contract Sett6emame end Propoeed DiseNowance - cc $,p During 1985, an agreement was reached with a major fuel oil suppher to set 6e litigation ansing M, 7 .d from the termination of a fuel supply contract. In accordance with the agreement.1350 million was 51y 7 paid to the suppher and a ten-year option agreement for the purchase of low sulfur fuel od was %y, entered into. Under the terms of the option agreement, 59 mdlion is paid asuually for the suppher's Ng

• j.

commitrnent to deliver fuel oil on reisevely short notice at current market pnces. On June 15.1987 W the CPUC authonted recovery of $344.6 rndlion of the $350 million setoement payment plus 90% of h L. L)j tt.e annuai commitmont fee. Such re:overy is to be comp 6eted by the end of 1989 and includes d interest since the payment date. 2d )Q)j. .s The Company has entered into two uranium supply contract termination agreements which l ) ., f, q required payments totaling 882,1 mdl6on. The reasonableness of these agreements is being / '3 addressed as part of a Commission investigation en uranium procurement pracaces for which { i / j haanngs were completed in February 1987. f -u, Q sre reasonable and in the best interest of the Company and its ratepayers. Although unable to ~- The Company beheves that the terms and conditions of these uranium termination agreements f determine whether the CPUC wdl allow recovery of costs incurred pursuant to the termination i agreements, the Company beheves that such costs are a proper item for rate recoveg and does not e k ~. ggs N [ h.I. Ef hp 4 f, fl4%{} $ c / w - gsg q y l l s.t h@ W. ud+ l & &., O d %ilc h Y,a h. %CJ >1 1 l

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, s t j SOUTHERN CALIFORNIA EDISON COMPANY k& NOTES TO FINA' CIAL STATEMENTS (Continued) N r9 NOTE 2 - Regulatory Mettere (continued) M expect that it wGl be denied recovery of amounts that win have a matenal adverse effect on its -* e. Anancial condition. The pornon of fuel supply and uranium contract setuement costs almbutable to wholesale customers was included in resale rates effecDve March 7,1986. Set 6ement payments for fuel oil and uranium contracts have been recorded in a regulatory-balancing account and will be arnortized in accordance wrth CPUC decisions regarding rate d. ' j Tannwo,- - j As explained more fupy in Note 4, the CPUC is investtgoting the regulatory impact of the Tax Reform Act of 1966. Commencing January 1,1987, revenue designed to recover federstincome tax expense le being conected subject to refund pending the outcome of the inveedgatrot i ei t messie noems-i In accordares with FERC procedures, resale rate increases are sub ect to refund e interest to the extent that they are subsequently disallowed by the FERC. As of June 30,19EF, revenues M t subject to refund aggregated approximately $822 rnillion. The Company believes that the amount of b,,., 7, refunds, if any, likery to result from the outstan(.ng pM is would not have a matenol effect on a the results of opersoons. e D s [ NOTE 3 - Short Term sorrowinge , h. Unrestricted deposits aggregating approximately $7 milDon are maintained at comraercial banks D- [3 In order to continue lines of credit. The lines of credit are available to support commercial paper 7'.. J, borrowings to finance general cash requirements, fuel oil inventory artd, g,, a. % in 1987 g '.y, /' vanous regulatory balancmg so:ounts. p.s f Commerctal paper, supported by separato unos of credit. is issued by a istiop owned h y k subsidlary and used for the capitalizanon of an affiliate ent,tged in Eurodebenture tierrowings. N . r. w' J Effecove June 11.1987, commercial paper supported by the Company's lines of cree was also hdy ,i y?ifig ~ tesued to finance an offiliate engaged in leasing nuclear fuel to the Compar;y. The subsidiary's g[j,; commercial paper has been guaranteed by the Company and is presented on the Company's il.$ fig satance sheet. c. Q Amounts outstanding and weighted everage interest rates are as follows: b,'

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sC. 31 Assa 84 p o. y w f Toimi Urms o, credit. t t.127 0 g $ sss4 p Pe Amoura cuismaae oen.ral Purpcee. 3 11s.0 s S&a seaanom0 Accotate and Fuel Ou. $20J 213.0 2etJ j g. i5 8' **=*=y s51 1' 48 8 saA [ i (.c Totals. s 1.0117 s 376 e a dis.s {#j. woe a r , i n.e. 7.m em 3 y. e w r.a.E.i a.-,aYi.n.os.ev.- to s. e tea a Issa in." ban term be st who long term oc*g. w sa. p.p 2 is W. .3 ti ^o k f Ql Y p m3 ,, e g O[f [ t' wl[f

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SOUTHERN CALIFOPNIA EDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 4-Income Taxes m Current and Deterred Taxes - 7 The current and deferred components of income tax expense are as follows: - 1 3teenois Eneed 4 neonthe Eneed 12le nese Ended o June 30. June 30 June 30. j i; le87 J9_e6 1987 1est 1987 1964 im Thousenas3 g

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8117.800 $ 53.492 $200.720 8 98.532 $435 921 8115.842 f' 146.61,4 75.074 265 872 139.277 850 019 177.202 Stees. 27.896 21.582 56 152 40.746 123 697 01.360 ? <a Deterred.- Fedarol and state: p_ tweerneit les credito - not.,.......... (4.480) ta.71e (8.900) 34.103 18.643 7s403 t_ Aconteroned cost recovery erstem property 37.s74 62.387 e0.o10 96.556 15U102 171.703 Reguietary tienence'0 accounee. (17.830) 20.877 (36.942) 64.648 (104.414) 241.379 osot t-m=Wi empenses. 336 17.a96 (990) 29.499 s1.47s 40.420 4 Fuel coneraci esmorrsnte.... 18.213 2.450 17.216 5242 20.002 13.317 (s2.271) b (71.442) Cumuissve enact of accoweng change........... 64.752 6s,752 orier.. _[2;966) J23.287) (6.064) _ (22.164) (S.931) _(29.633) u 27.878 88.241 31.649 197.614 101.762 Sf 6 683 Totel Mcome tam expense., s t r3.578 s163.31s s297.521 s336.891 so61.340 sos 3.886 5, /r Closernceton ofincome Taxes: enesuase m operstmg expersee.. $173,909 8164.54s $310.390 8336 2 ' $707.683 $698.22e -L bcusso m emar moome........ (333; 4.7e5 (179) r,s (12.754) (4,341) -j Pt (71.442) (s2.271) % @. i Lose rotated to nucseer pient seasowance d. T,';.'"""*"~' - .m om teiel enoome tem empense.. sira s7e si63.3ts s297.s21 L33e3 seat.3a0 ese31.aa t r%,g Total income tax expense includes the current tax liability generated from operations and ^N b .h deferred income taxes prov6ded on certain items of income and expense whsch are reported in %g*Ygh dtfleront periods for tax and fsnancial reporung purposes. Consistent wrth current ratomaking [k M Q procedures, the major fterns for wh6ch deferred income taxes are provided include regulatory M4k balancing account provisions, pheseats plan deferrals, accelerated depractanon under the provi-tj;,. My sions of the Accelerated Cost Recovery System, and debt reacquistoon costs. j. f'ursuant to the Tax Reform Act (Act) of 1986, the cumulabve effect of accruing unbilled i Jg/ revenues is includod in taxable income over a period of four years beginning on.f anuary 1,1987, i3 Defer 7ed income taxes have been provided on the portion of unbilled revenues which have been

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Q,g reported for financial reportng purposes but not yet included an taxable income l j flF' For ratomatung purposes. property.related accumulated deferred federal income taxes are h; deducted from rate base and amortzed or otherwise appteed as a reducDon (or increase ) in federal gh E I e income tax expense in future years. Accumulated deferred investment tax credits (lTC) are i.+ r ? I amortred over the lives of the related properDes. Prior to 1987, tax deducuons relating to ~, .~ construccon overheads such as interest pension provisions and taxes charged to construction ,.l were accounted for as current reducbons in income tax provtsions. i 7 ? N Te Commericing in 1987, the Act requires the capitahrstion of construction overhead and financing costs for determining the depreciable basis of certain pesertes for tax purposes. Thrs change has Qy.p-Increased taxable income and has reduced the differences etween construebon costs for tax and g financial accounang purposes. ( y i }g Deferred income taxes for construcuon overhaads and tax depreciation pnot to 1981 have not J f .,,p been provided because the tax effects of such bming difference reversals are not allowed for retail g t 4n ,?' dg4 17 i _:.c 4.@-s s .3 1r l'yW -Q,4, 4p. - C A 4 -Q sa/J.W< k <?l g i.,. m,..e L %.y c %. 7g p. s o. e .s . w1 M %,%..~d, e QAy % v##- W 1 5 psg 3 ,'s b !$m x$g bh h.s'M NM s hNYb ,a f h @m :QQn 'rf c'. ^ .m % y& WF QGeh 9.Q Q NL ~. %: y 3 c p ff f k w h..c v +a, s. m n #pw a s v s. m.e gna g " ^* *. :. _.m_MdeMMEP b MidCeldM22M vh i

3.y~ ~w r-e SOUTHEAN CAUFORNIA EDISON COMPANY NOTES TO FINANC1AL STATEMENTS (Continued) NOTE 4 -Income Tames (continued) reto maMng purposes until the taxes become payable. The cumulative not arnounts o' eiese timiz differences were $2.266 mmon 6t June 30,1987, $2.196 mAon at December 31,1986, and $1.992 micon at June 30.1986. The fonowmg table renects the differences between state and federal income tamos reported and the tax amount determmed on income before taxes by applying the federal statutory tax rate. The federal and the compoorte feoeral and state statutory mcorre tax rates are 49% and 51.184%, respectively, for penods preeented pnor to January 1,1987, and 40% and 46.330%. roepectively, for y 73,C U s sames a anese et g easse 9.. top tese see7 sees teor seen . #4 ' (as thoussees) D i,, 'I $14e.346 3144.400 8r11.800 8335.710 8 Sgt.ar 8 e76.086 haremos ) M income tes eseenes

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g (SAat) (10Arr) (13.800) (33.717) (41.sel) (72.021) Federni sseuamon lar senes tenss on moome.. (13Jte8) (1122e) (22.023) (24.711) (Staer) (81Aat) Deeremoton emmg enerenos not assened. 34.es3 27A00

44. Set 50.401 SS,0st of.873 game tem prtMeson 3L237 24A0s 96.087 53.720 121 # 4 112.088 g

As oster eMeerences (13.e43) (26.174) (40.tes) (44.812) (7 SAN)_ (48J32) Toep hooms tem essense.,. s173.574 8143.318 8257.621 sS38.ast 8 estJW 8 es3.se$ \\ Pnnes sioome.. . s*73.3e4 E"seI se7s.oa2 s72e soa si.4se.nes st Aee.ees - i E) I* as.es 7s ges den _ 473% Tes Ashrm-i /. y. In addition to the changes discussed above, the Act retroactively repealed ITC lor property placed into serv 6ce after December 31,1985, except for property then under constructlan for which e" there tre various transtoonal ru6es. However, the Act recures a 100% reduction in deproctable basis .Y for any transtoonal ITC. Because the Company defers the recogneton of ITC, its eilmmason has not v;f signtAcantly impacted earnings. The Act siso reduced federal income tax rates to 40% in 1967 and 34% in 1980 and later years. - Q.;Q The provtsions of the Act are not expected to adversely affect not income Under present accounting standards, deferred income tax belances are not ediusted to reflect J 'd changes in income tax law or rates. However, an amendment to present accountmg requirements has been proposed which would requre adjustment of defe* red tax balances to renect the enects of such changes K,.;.u is.g in 1968. -:, kweedpotion - The CPUC has initiated an investiganon to determine the effects of tax reform on retomaMng precoces. The inveengonon may consa:Ser whether and to what extent reductions in certain non-property reisted deferred tax balances should be conveyed to customers through reduced rates. Any refunde ufumetety required by the CPUC should not adversety affect samengs Out would prevent .t the retencon of the trenefits of the tax rate reducuons tr/ the Company. 18 \\ c .3 s: ,5' v W g ?.. c - I_ b ?.}gW w . d 2.1 9 /

,s -m y SOUTHERN CAUFORNIA EDISON COMPANY h NOTES TO FtNANCIAL STATEMENTS (Continued) p NOTE 5-Employee Renom Plane Peneden paen-The Company memtains a trusteed, non-contritnitory pension plan which covere substanne9y 4 as employees. Sonente paid to reuroes are based upon age et renrement. years of credsted sorwce, and everage semenge. Annual contnbutone to the plan are determ:ned on a level prem6um actuanal funding rnethod. Prior service costs reestmg to 1982 and 1986 pian amendments are being funded over 30-year penode. Pension costs amounted to $13.1 milhon. 529.4 mulion, and $49.0 mmon for the three, etx. and twetvo monthe ended June 30.1987, respectively; and 512.7 million. 828.9 mmon. and 866.3 miston for tne three, six and twetve months ended June 30.1986, respectively. aume-v $. toSte) 1e5 Assames present ush5 er encumuassed plan honesis: Womand... ......... Oss8.tle sees.3s0 eten sosted.. suet deAeo E E i e sessi, i.,,. =n.e ....................m gaps iel Laesse avessene seen. b Actuartel rete of retum assumpeone used in determ6ning the present value of accumulated plan \\ y-- benents were 8% and 7.8% as of January 1.1986 and 1986, respectively \\ Commencing in 1987, a new pension accounung standard for denned benefit piene requires the use of a standardized actuarted rnethod for measuring the Company's annual pension obugemon. Under current regulatory procedures, authertred revenues sor recovery of pension expense are based on annual pension plan contribunons. In order to match revenue and expenses. utiitties receiv6ng such retomaking treatment are permitted to contmus to expones pensson contribunone insteed of pension expense as computed under the new accounung standard. However, an asset or ( lietely must te recognized to the extent that cumulative pension contribueons are above or below the legi determined under pension accounting methods. For 1987, the difference between the 4 funang level and accounung expones is evW to be insignefloant. impdeyse Stocar Mene-g An Employee Stock Ownership Plan (ESOP) and a Stock Savings Plus Plan ($$PP) are {-C 3 maintained m suppeement employees' recrement income. Contribunone to the ESOP are funded primertly by federal income tax benefits and contritwbone made by participathig employees. { Contribucons to the SSPP amounted to $4.4 million. 88.3 mullon. and 8 t 6.1 million for the three, six. and twelve months ended June 30,1987. respecevely and were $4 mitiion 87.6 milhon and $14.5 mielon for the three, six, and twelve months onded June 30,1986. respecovely Omer PeeHbedroment Sanome - Certain health care and life insurance benents are prov6ded for reared emp6oyees and their dependents. Group Bfe insurance benefits are prcmded through an insurance company. Health care m% benefits are provided through a comtunation of Company facthties and insurance programs. The cost of prov6 ding these benefits to retirees was $4 6 million. 58.8 million and $16 mulion for the three, air, and twelve monthe ended June 30,1987. respecavely and was $3.9 million 87.8 mitilon, and p $14.9 mmon for the three, atz, and twetve mor ths ended June 30,1986, respecovely. 19 y.

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l SOUTHEAN CAUFORNLA EDISON COMPANY NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 8-Jointly Owned utstify Projects The Company owns und;vided interests in several jointty ovmod generating stauons and transmisso;i systems for which each paracapant must provide sts own financing. The proportionate j i share of expenses pertaining to such protects is incluced in the approonate ategory of operating ~ expenses m the Statements of income. The amounts in the tat 6e below represent the investment an j i each suen protect sa reported on the Balance Sheet as of June 30,1987. piens an Assumussend ownereke g seemee ompeenseen e.eeress wusrest (in thessames; 5 Dereen Tc_ Bretam. 21,sse 8 7.064 S 72 00.00Ns) Four cornero coni Osnareeng siston - unes 4 and 8. 380.307 atJe0 1.191 4a.00 idense coal Genweeig senton... 228.806 al.308 719 90.00 Pasno oestge De im . Srstam.... il1A74 31.000 SJ46 90.00 puis verse %sener oenerset0 $ston.. 803A3s 2SJ74 642 Ass 15.80 aan onese masser osnerseng samort undt t.......... 801.0s7 124.474 23.8e5 00.00 pas 8 and 3.. 1A44.704 383.272 14,001 76AB Conenon Faccess -Urne 2 and 3.. 81sA02 7sJe4 7.920 75.06 Comenon Feedens - Uruts 1,2 and 4 174A05 30.143 3J04 76a7 Soest one Gansreeng seton......,, ta,072 17.270 80.00 Vwns Ame Comemed Cycae Osnersen0 6 tenon. 12,300 SJ57 a3JO d cessorrue@egon 600 KV Trer.anuseson We.. 4.2ee 18.71 Totas.. ,D8117.240 se66.630 sco6 s9t f j,, (a) nearemones e compoeme rois.

• w f

NOTE 7-Leesse j ') The Company obtains a portion of its nuclear fuel requirements under a capthi lease, Under the .[. h [d p j (,"e terme of the lease agreement, cuarterty payments are based upon consumpoon of nuclear fusi and 5 a,. - to,etu,n the accu,nuisteovestment nu.a,,- and a snanong charge on 4 unrecovered costs to the lessor. In accordarm with an accountng standard appicable to rate $.N'g' regulated enterpnses, the Company began recordir'g the asset and obhgation associated with the ~p i; nuclear fust lease m 1987. All Balance Sheets and Statements of Sources of Funds Used For t Construebon Expenditures presented for periods pnor to 1987 have been restated to reflect the y' capttalizason of leased nuclear fuel The effect of this restatement increased nuclear fuel and the 3 3 related obhgations at June 30,1968 and December 31,1986 in the amount of $542.3 million and ~ ,.[ $523.7 mullon. respectively. This change did not impact revenues. not income, or retained eamings. i N On June 10.1987, a wholly-owned subsidiary of the Company purchased the nuclear fuel 2 leasing company. The cost of the acquist:'on, whch approximated $521,2 niillion, was financed I r, primarity by the assumpton of the lease company's commercial paper obhgatos. The Company ( has presented leased nuclear fuelindebtedness on its Balance Sheets. - y Rental payments represencng interest and amorttzanon under the nuclear fuel les so which were 5 J charged to operstng expenses were 543.2 million. 571.5 milhon, and 5 t 37.4 milhon for the three, six. g. I? and twelve months ended June 30.1987. respecovely, and $21.7 milhon. 544.1 malkon, and $90.6 WT i i, milhon for the tnroe. six, and twelve months ended June 30,1986. respectively. Such payments are [ph 4, .,1 ; recoverat9e through balancing account procedures. Future minimum lease payments under the yb..y@ [.t nuclear fust lease cannot be reasonably esumated due to vanations in the consumphon of nuclear T. 3,ht 20 o k. Y =

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[ 's y e e SOUTHERN CALIFORNIA EDtSON COMPANY }' NOTES TO F1MANCtAL STATEMENTS (Continued) NOTE 7 ~ Leeees (continued) fust. Leased nuclear fuel, not of occumutsited amortaation, totals $480.1 millson,8523.7 million, and 1 $642.3 milhon at June 30,1987, December 31,1986. and June 30,1986. respeenvoly. The Company also leases automotive, computer, omce, tr.c miscellaneous equipment through operating rental agreeme'nts. These leases news varying terms, proves.oras, and expersuon dates. At June 30.1967, estimated rental commitments for noncancetaD6e operaung leases consisted of the fo460 wing J g j ves, anese one nee, si, gas 1,ieumenesp ~ 'I s,11.se8 ,as7,,.. ,. = , set. ,ess.. ,sAs. n-g: g........... g.m g c For portaran eiereerter.... 14218 7y Total Fumas sental C_ _ - a.. g p j NOTE 8-Cear.maneerA L Cenetruct6en 9tsgram and fuel supply - f Significartt purchase commitments exist in connection wth the contkiuing constructiori pro. ^ + 4 gram. As of July 16.1987, budgeted construccon expenditures are estimated at $1.022.8 millbon for ,.y 1 1967, $869.1 milhon for '988 and $858.5 million for 1989. M6nimum long.torm commennents of approximately $1.670 milhon, excbolve of the amounts required by the contract setne 7tonts wtth major fuel suppieers discussed in Note 2. existed on June 30.1967 under fuel suppey transportenon ) 4 I, T4:.,. Q Nuc6eer l8' ente Posicy Act ~ s'_ j e Pursuant to the Nuclear Waste Pci:cy Act of 1982, contracts have been entered into with the { -j-U.S. Department of Energy (DOE) for dispose

• wit nuclear fuel Under contract terms, a go,.

(6 quarterty fee of one mill per kinowatt hour la pa#d * : se' 007 tor nuclear generanon on and after Apre y,m <; $ 7,1983. For generanon prior to Apr# 7.1983,! y es v'r a one. time fee equhraient to one mdi per w I "i kilowatt. hour plus cccrued intsrest le required..: ; rv e-brne fee has been recorded as a deferred g t '4[8 charge pending future rate recovery and. incktding sarved interest. approximated $25.1 milhon at [ June 30.1987. The obugenon tot sAis one. time fee is tung discharged by equal payments over 40 t quarters. Such payments comenonced during 1985. The anvnnts charged to income for current 4 }gl s generation were $4 5 million 87.3 million. and 13.9 million for the three, six, and twaws months T. F L] and twelve months ended June 30,1986, re'spectivety. Expenses assoewted with dis;,osal of spent f ended June 30,1987, respecovely, and $2.2 milhon. $4.2 rnallion, and $C 6 mdlion for tre three. six, nuclear fuel are recovered through the ECAC procedure. ..py, WTerm Purcheeed Power and Trenamtselon Contracts - l$ f Under firm contracts. the Company has agreed to purchase portions of 'he generating output of f i Q Certain facilities and to purchase firm transmission seroce where appropnate. Although there is no } N M envestment in such facidaes, these contracts provide for t'io payment of certain minemum amounts f i (wtuch are based in part on the debt service requirements of the provider) whether or not the facility l }p,.y. i y y or transmission las is operating. None of these power contracts provides, or is expected to provide. Lp.1 .ei b)h g 21 g ) n i

,d,',4 ' ' ' ' X^ Y 4 SOUTHERN CALIFORNIA EDISON COMPANY HUT'E8 TO FINANCIAL STATEMENTS (Continued) y peoTE a-Commitments (continued) b excess of 5% of current or estimated future operatag capacity. The cost of power end firm transmission service obtasnod under these contracts, including payments made when a facility or transmission line is not operating, is included in Purchased Power and Other Opeirsang Expenses. T" respectively en the Statements of income. Purchased power costs are generally recoveraDne through the ECAC belancing account procedure. Se6ected enformatxwi as of June 30, 1987 p.nams to puren. d - contracts is.ummanr.d in in. fonowing t.bi.: g 2, there of toscove opersang r ar**ey- 'h Y. "l '

• cos a

c:%e,,,e,e,0:n.e,ra, m s % e w e m w sur - g q h g 4 a rw a u w sess q. '"i g n r i (s) Amoures home been reduced from those ruW prevenuefy the to the a-** of a coruirect Wuch is no tanger long. 9 a' (It) g of a certain coneract, vie conpany e share of energy ousput from the conirected feasty Addit 6onelinformation as of June 30.1987 pertaining to both purchased power and transmission service contracts is summertzed in ne followtng tabie: pensertap .__ ss, wee osene of Espresan..... p, 1980 1990 201s W cf tt) ihr,p J 1 s:.. .. c: '!L. 'stai =4%P W c un !Si WV n*'r m:.- AG n d '7A. Toess......... e 139.50s 133 c36

• g,,,, ;.,*p taae Amount hepresenung incesset e Reaszs total to Present Value.

,jEPE) ,j99R) y. Tceal et Presene Venue. g (g .g 987 9 27.81s 8 2.241 tes 29.a30 2.941 ter?.. 8 64.s7s 8 s.006 .uir Y m'T M' mME s0 ites. 119,4a3 12.03s g g te) have been v=*w fram inose reponed prevenuesy due e the esesusen of a contract eewch is no longer sang-p 7., (e) The venenes components or eartesi contre-te are bened on a pro reen ehere of aciusi opersong, meineenence. and fusa ee'*4 cosas or on ene u.8. Govemment cost et earwoe. M NOTE 9-Contingencise At.esy W@W mcseanne,,ane. -. q The Pnce Anderson Act currently limits the pubuc hability claims that could anse from a nuclear y hc6derit to a maximum amount of $710 miition for each hcansed nuclear facility. Pnvate insurance for g)e, thle exposure has been purchased by the participants en San Onofre and Palo Verde in the maximum w y 'g available amount, presentty $160 million, with the balance to be provided by secondary financial y protection required by the Nuclear Regulatory Commission (NRC). Uncer the agreement with the 4,, {, y, q Y.- vw f f'M 9 f, j 4.. s~,. yes i n ,}... u,' ,aa (... a " w .w I e. g y r. ammyr n b,, ' 4 %g%gs. e _,A 3 r--- y,. t n~ .wa Y o.s. [g ..n

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N + c 4 SOUTHERN CALIFORNIA EDISON COMPANY p NOTES TO FINANCIAL STATEMENTS (Continued) N37E 9-Cn ; _ : (continued) NRC, retrospective pror.16um adjustments of up to $27.7 million per year could be assessed in the event of nuensar 6ncuents invo vmg any licensed reactor m the Unned States. The Pnce Andcrron Act is schedu6ed to expere in 1987; however, Congress is considenng proposals to amend and extend the act. Me Property camego coverage is provided for losses up to $500 milison at San Onofre and Palo Vorde. Decontameneson liabiltry and property damage naurance en excess of se pnmary $500 mmon layer has also been purchased. Insurance to cover a porton of the addeonal expense of replacement power resumng from an acendent rotated outage of a nuclear unit is sono provided. A measnum 'veeldy indemnity in the amount of $3.1 mimon for a single unit for 52 weeks commences after the first 26 weeks of such an outage. An addisonal $1.5 mialon per week is provided for the next 52 weeks. These poicise are primarily provided through mutual insurance companies owned by utiless weh nuclear facilit6es, if losses at any nuclear factitty covered by the arrangement were to exceed the accumulated funde availab6e for tnese insurance programs, the Cosepany could be 1 assessed retrospective premium ediustments of up to $69.7 mmon por year. Inewance premiums M are charged to Operating Egenees-envernment usenses-The terms and provisions of Iloonses granted by the United Stence cover the Company's major h and certain minor Mw.cinc piants, with a total effective operating capacity of M3 megawatts. g T,,hese floonses also cover certain storage and regulating resentoirs and reisted transmission g i ~ The above incenses expire at vanous amos between 1987 and 2000. Ths Econtes contah numerous restricsons and obliganone on the pert of the Company, including the rt@t of the Uruted States to acquire Company properties or, under certain a motbons, the FERC to leeue a incones to a new licensee upon the payment to the Company of speerflod compensat!on. Appecations for the teilconsing of certain hydroetectne plants referred to above with aggregate easctive operating capacity of 61 megawatts are pending. Any new licenses received are expected to be issued under w terms and condmons less favorabie than those of the expired liconees. ~ in March 1976, five retole customers flied a suit in federal court alleging vtalet6on of certain m m M;c antitrust Lews. The complaint seeks monetary damages, a trobilnD of sJch da negos and certain Injunctive reilet. The complaint alleges that the Company (1) is engaging in ant 6cornpoettve behavior g by charging more for electricity soid to the fossie customers than is charged to certain classes of its retall customers (" poco squeeze"), and (ii) has taken act60n alone and in concert wtth other utilities to prevent or limit such resale customers from obtening t ulk power suppAes from other e sources to reduce or replace the rosate customers' purchases from the Company (" foreclosure"), The plainafts estimated their actual damages for alleged pnoe squeeze, before trebrag at approx 6-matety $22.7 mWon and foreclosure damages stemmmg from alleged loss of energy and capacity at approximately $76.8 milhon before trebung, for the penod Februa y 1.1978 to December 31,1985. The thal began on July 8.1986, and concluded on September 26,1986. Findmos of Fact and Conclusions of Law were filed by the Company wtth the Court co Iovember 21.1986. No date has p g althou0h the Company is unable to prodct their final outcome, et has categoncally dened the r been given for the cecision. The foregenng proceeding 6nvolves co.eplax issues of low and fact and, e. f aneganone of these rossie customers. k g ng \\ l ~ l D.. W g ~\\ q%.. C m '? y$ e. N N y. 8 g ..m., .~

w.p + ,, N s MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERAT10NS AND FINANCtAL CONDmON W p j Results of Operegone EermnpsSeemnery ,2 Eamings por share for the second quarter of 1987 were 864 compared with 83e for the same W Q portod last year. For the six and t.hm6s ended June 30,1987, eamings por share were

4, " O 81.63 and 8324 compared with $1.67 and $3.27, respectnrety, in 1986 The moderato improvement j

$h for the quarty is pnmartty attributable to increased sales vusume and was achieved even tnough the a. 4 authortzed rata of return on common equity was adjusted downward from 14.6% tot 1986 to 13.9% } i for 1987, [ Eamings for the six and tweeve. months ended June 30,1987 enclude the adoption of an ^ l accounung change in the first quarter of 1967 to include revenues from electricity whsch has been desvered to cuesomers but for which bille have not yet been sent. charges rotated to the disanowed '( g a, numeer piant investment costs, and a provision for the cost of adottional retirement benents and ,j severance payments reisted tc an earty renroment program. Reduchone in interest expones and O Uffh; proierred d6vidende for all penode ended June 30,1967 are the result of the Company's rennancing 3 t - and w,intereei rases. N y opersemy aseenues and seine e, For the twelve-months ended June 30,1967, approximately 97% of the Company's revenues hE from sales were subject to the Junedicoon of the CPUC. The rema ning 3% represents sales to 8'r .i M7) wholesais customers whech are regulated by the Federal Energy Regulatory Commisseon (FERC), d3' The decline in FERC regulated seios le expected to continue as the whoissaie customers receive W;. g more power from sources outsede the Company's system. A Electric operstmo revenues for the three, six, and twofve-months ended June 30, 1967, r I, E increased from comparabie periods in 1986 by 10.0% 6.7% and 5.8% respeceve8y. This renected, In addmon to the not effect of changes in rates, an incrosse in kilowatthour sales of 2.9% for the

~ -

quarter and 2.8% for the six month periods. Due to mind temperatures during the last half of 1986 and reduced sales to resale and industrial customers who are obtaining more of their power from g*g outside the system or from self generation, kilowatthour sales for the twelve-months onded June 30 g( 1987 decreased by approximately 0.1% from the twetve-months ended June 30,1986. k .P T The not offect of changes in rates, including the effect of accruing unbilled tvvenue, was to

1. @urE<

Incrosse the overall revenue per kilowatthour by 6.2% 3.1% and 5.0% for the three, six, and twove 8 months ended June 30,1987, respectively, when compared to the same penods in 1986. The table boiow shows the changes in major components of operahng revenues which '4 contributed to the overall vansbon from the same periods in 1986. 1# ") ,,.4 gg) Amo 30.1087 a an nee e sa en.a7s I-q i.e.= t L asse rete changes.. s st.7 s 2s.e s es2 " ?. 7 aansnema account reis ensapos. % IT s e aci. cn.a,.e - R.w... g" 2A as.7 tas.s ri.s tir.s $4u Sales vowie changes - Rosaae.. ks (24 4) (372) l t17.s) Oiher... 37 17 2 47 s %o foest. sg sg sao ,,s. &h g4 ,- j 6,R!j f [ c ~ h%4 s 4 hkl; ~

l %yn O Revenues conected in 1987 for the recovery of federalincome tax expense are subpect to refund pending the outcome of a CPUC investiganon of the effects of the Tax Reform Act of 1986 on customer rates. Operating Esponees Fuel expenses increased by $76.2 million and $98.2 rnililon for the quaner and six months s ended June 30, 1967 reflecung 6ncreased use of Company-owned generating facebes which became more economical and replaced economy power purchases. Fuel expenses decreased $319.5 mittion for the twetve months ended June 30,1987 when compared to the same penod a year 9 ep due to reduced natural gas pnces and increased use of lower cost nucisar and coal genersbon. The effect on camrngs of fluctuabons in the Company's fuel and purchased power expenses is mWmized by regulatory adjustment clauses established by the CPUC and the FERC. Y Incrosses h other operaung and deprecianon expenses consnue to be influenced by system 4 growth, induding the commercial operanon of Paio verde Nucteer Generating Stanon Unit 1 on February 1,1906 and Unit 2 on September 19.1906. These trends are expected to corunnue as the costs of operaung Palo Verde Uneta 1 and 2 are reflected in future periods and when Unit 3 is placed hoo commercial operation, which is scheduled for inter this year. Due to a reduccon in the level of required maintenance actMties, maintenanos expense decreased for the three, six., and twelve-months ended.,une 30,1987 when compared to the same pertoca in 1906 by 312.5 million, $18.8 mili6an, and $32.3 meilion, respectively Recovery of depreciation expense attributable to San Onofre Units 2 and 3 and Psio Verde C Units 1 and 2 is authortred through Major Addisons Adjustment Clauses. For these units, increases in depreciabon expense exceeding amounts currentty bemg recovered in rates are seco*ded in [ beisncing accounts pending future ra's recovery and, therefore, do not affect samenge. The 319.4 million increase in operating income tax expense for the quarter ended June 30. 1967. when comparoJ to the same period in 1988. is due to increased pre-tax income and deferred --4s hcome tax provtsions which are only parnacy offset by the lower corporate tax rate. f As explained fnors fulfy in Ne's 4 of " Notes to Financial Statements," the dedine in the .f q corporate tax rate under the Tat Reform Act of 1986 reduces federalincome tax experue in 1987 a and future years. This reduchon win be aww-; by a reduction in customer rates and thus is .? expected to have alttie or no impact on net incorne Any refunds which may result from the CPUC's investigeoon to determine the essets of tax Y 1 reform on ratemaktng practices are not expected to significantly affect not income but would prevent i the Company from tstaning the benefits of reduced deferred tax balances resutting from decitnes in c =g*.g, cxprporate income tax rates, g ~ f ym s x Utinues are permitted to capitalize the cost of debt and equity funds used to hnance the M Qt ~ construction of utility piant. This is accomphshed through the.'u n-cash Anowances for Funds Used Durtng Construenon ( AFUDC). The Tax Reform Act of 1986 requires interest on doet related to 1-certain piant construcDon to be capitalized for determining depreciable tax basis. As a result, g commencing in 1987, the Company has not reduced the debt component of AFUDC for the related /,, deterred taxes. Accordmgty, the related tax beneftt is no longer required to be recorded as a ["1 reduction of non operstng income tax expense. The overall effect is to increase AFUDC and / F bcrease non-operating income tax expense without affecung not income. ,e N f,/ The dochne in AFUDC for the three, six, and twelve-months ended June 30,1987 resulted ,,s> from a 19% or $328 million decrease in Construccon Work in Progress, due primanly to the transfer 1? QM of Palo Verde Units 1 and 2 to Utility Plant dunng 1986. ,M r fiQih e-- U' 7l 5 q g 'N (g[y .m d.- W,

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3 ti s g l R c } r Mr.[kh) by ,t' 5 ' i W sy. ..; n: i + M$h.' n .w p5 y m A..& n b. .^ jf g-6". y' ' ' t Q R e v.s=OM gr'y' MT. g ,y c 't x

1r ~, internet income decreased by $11,4 million, $t9,0 mnon. and 818.7 mnon for the three, six, end tweeve-months ended June 30,1987 compared to the same penods of sne preceding year ,T refleceng a decline in cash investments and reduced balancing account undercollectons. Ptnancial Condition keemmet Generenen of hade - j During the past three years, the Company has Cbtained the majortty of its r64uired working capital from operamons. ) %. h_ Approximately 85% of the Company's caprtal requirements for the twe4ve montne ended June fg, 30.1967 were provided by intomally generated funds, which compares to 68% for the same period g %' p esm last year The incrossed Avel of funds generated entemally as pnmarpy attributable to placing p / comptoled nucieer factiebes into rate base, the tax benefits resuthng from growth in the Company's investment in plant assets, anc the reduction in balancmg account undermnamvis. 1

• z During the twofve-months ended June 30,1987, the intomal generstion of funds has been positively affected by a $306 mnon reduedon in not belancing account nederconectons which was pernemy offset by $164 muon of revenue deferred pursuant to the Pato Verde Phaeo in Plan. The y

CPUC hee authortrod recovery, by the end of 1989, of $302 mmon of fusi supply contract settlement ( costs which we beneftt the intomal genersoon of funde during the recovery penod. The Tax Reform Act of 1986 is having a negst#ve effect on the Company's intomal generat6on of funds. The negsove impact results from the retroactive repeal of the investmortt tax credit and reduced allowable deductions for depreciacon. Any refund of prior years' deferred tax balances ultimately required by the CPUC to reflect corporate tax rate reductions resulting from the Act would have a further negative impact on intomary generated funds. / The Company's cash flow and liquidity we also be Jffected by revenues deferred to future roter') eking perlode pursuant to the Palo Verde Phase-in Plan and manaWs on belancmg account We idEp _ undercoPections. The bming and amount of revenue deferred under the phase-in pian are discussed .p Q;.g$[ y in Note 2 of " Notes to Financial Statements." ( e 1 D'f[; unney and Coonalneeeurcee ..w In conformity with the CPUC's energy cost ratemaking policy, the Company utilizes short term i borrowtngs to finance fusi oil inventory. Effecove in t967, the Company sieo commenced financiang 4 l balancing account undercollections with short-term borrowings. The $202.8 milhon increase in ,p r e short-term borrovnngs from June 30, 1986 to June 30, 1967 is attributable primarity to such hp a financtng.1he cost of these borrowings le recovered through balancing account procedures. Details .Af ~-p# of the Company's hnes of credit and related short-term borrowings are discussed in Note 3 of " Notes to Finarcal Staternents " f ' in addition to the short term financings discussed above, the Company's liquidity is affected by ~ the construccon program and other capital requirements including debt and capital stock mtturtties, ?f The capital resources availabee to meet those requirements enclude funds from intemal generanon a' and extemal financing, intomalty generated funds depend upon economic conditions and the adequacy of timely rate relief. Extemal financing through short term borrowings and secunty n .,y T .t laauances is influenced by market conditions and other factors including hmatations emposed by the f A]m Company's Arbelos of incorporation and Trust indenture. At June 30.1987, the Company could issue approximately $3.6 buon of additonal First and Refunding Mortgage Bonds or $4.2 billion of %gyWT; y M preferred stock at current mterest and dividend rates. !w Ap~ /t VV e h $f - ) 26 l % $w 3,j t h g ] 'c%. ,? y .n f, aL "=., rf'i# ! St .,g g,+ 5 - A v -?. - j. t 5 i e / p 3, e. c3 f m e-1 f 5f;.D yo W:: } , f._, .x w ] ~ [ { ' f h, tY. Ah $h y , &v 7 9 O n

. yw CapNat ", -.. = The fonowbg table presents the Comparry's projected capital requirements for 1987 through 1991: m Consrucean Esosndarse 81.fd3 5860 5659 8 799 8 772 a ~ *"' ~ nesewisse of Lonp. term Dent. 1Co 80 to 281 172 g m,, y Asesmpaans of Prow and Preference Sanck. t8 22 24 12 12 .c Casunni h - ---. gggSg$g carner semesa, The compeys song term goal is to maintan a capreal structure wnh approximate 4 equal wk ~ ~ amounts of debt and equny. Tne company's capetal structure as of June 30,1987 is reflected in the table below" M saoe.,. ~

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w i PART 11 OTHER INFORMATION leem 1, Logel Proceedings Asse Metters Oeneral R.nte Ceee On December 26.1986, the Company filed an application wtth the Califomia Public Utilities Commesseon ("CPUC") for a general rate increase. On March 20,1987, the Company submrtted revteed cost of capttal toenmony n whch the requested rate of retum on common equrry was reduced from 14.75% to 13.75%. The ernpact of this change, plus a revision to the Cornpany's requested energy management program funding level, loworod tne Company's request by $89 mHlion. Anowing for transfer of certain costs from proposed base rates and other revenue requirement odlustments, the Company's current rate request for the test year is approximately $154 million. Hearings were concluded on June 25,1987, and a docesion is expected in late 1987 " General Rete Case" was prov6ously reae"aaart in Form to-K for the year onded December 31, 1986. 4 Major Mditione Mjustment Clause ("MAAC") Ys The information on MAAC set forth in Part 1, Note 2 of the Financist Statements le w,~,.;.4 .e herein by ini. ref.rence. "MAAC' was prev 6ously discussed in Form 10 K for the year ended December 31,1986 and in Form 10-0 for the quarter ended March 31,1967. AntNruet Netters The information concoming the antitrust littgetton which commenced on March 2,1978 is set forth in Part 1, Note 9. of the Notes to Financtal Statements and is moorporated herein by this reference "Antttrust Matters" were previounty discussed in Form 10 K for the year ended December 31, 1986 and in Form 10-0 for the quarter ended March 31,1987, 9 leem 5. Ogier Inknnotion [ '*h NeMing Company Formet6ers.", 'ui Approval Sought ,, ff On April 16,1987, the Company announced it will seek approval from the CPUC to croats a 4 A!i y holding cort")any. The CPUC appiscate was flied May 6,1987 with beanngs scheduled for FA September, A decision by the CPUC is antxtpated by the end of the year. The Company also filed a ,,j requtit for a ruling from the intemal Reverwe Service ("lRS") determmeng that the reorganizanon is a tax tree event for the Company and las shareholders. A ruhng by the IRS is antopstod in earty a fall, f;{.,, On August 6,1967, an application was filed with the Federal Energy Regulatory Commission w (FERC") for an order granong authorization for the proposed corporate reorganizata, in addite 'N to obtaining the approval of the CPUC and FERC, the Company will seek from the Secunties and l Exchange Commission an exempts from the provts60ns of the Public Uclity Holding Company Act .k.[r of 1935 ("Act") as an intrastate holding company under Seenon 3(a)(1) of the Act. Shareholder 4.g approval of the holding company wd! be sought in AprH 1988. j in anucipation of formanon of the holding company, H. Frederick Chr1sne wul resign as j y President and Director of the Company effecove September 1,1987. As of that date he win become 9g L O as 4 ...e Y .m e. e s-nn w ,f ~,b} (- 4 1 c .o "i t' w. f, e

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e y_ Prooident of the Mission Group, a California corpoistion. The Mlssion Group will become a amnary of the ho6deng company and will engage in non-regulated businesses. Holding Company Formation" was previously discussed in Form 10-Q for the quarter ended 4 March 31,1987. Corsetruction Program arut Capital Espendituree / Coneiruction expendnures for the 1987 1991 penod are settmated (as of July 16.1987, the e date of the Comparty a latest approved budget) as fonows:

1. I g

a meeee ow-eeno s ned sist stas same itse si.aos .";Y Eleceic a _- . eres and subetsaune.. 15 204.2tB 134 se fee a Rheaetc eseinwoon anno and substatone. 420 die 30s 302 412 2J31 ceter emeeneswee 144 W 77 74 7e ato Tees senseussen essamte 1.133 eas ese ese ett 4.382 Laos espuence ter funes used ourtna conseveson 110 _40 _40 _40 J 270 Fwidu remdred tar coneeucean espeN J e6.. 21.023 sees seet $7se e772 84 2 Approximatofy 2% of the " Total construction additione" for years 1 99 reissed to the construccon of nucteer virts at Paio Verde. The Company's share of sie total cost of construcson and startg testing of these untte was budgeted, se of July 18,1987, at 81.5 biison, of which approximately 81,462 mimon had been expended through June 30,1987. As of June 30,1987, construction of the Psio Verde Unite were substantially completed. Approximately 10% of the " Total construccon addisons" for the years $987 through 1991 are reisted e capetal expenditures to be made at San Onofre Units 1. 2 and 3. < 4# leem 8. Eshehets and Reporte on Fntm 8-K (e) Exhibite

=

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~ 84GNATURES Pursuent to the requirements of the Securtties Exchange Act of 1934, the registrant has duty caused this repet to be signed on its behalf by the undersgned thereunto duty authonzod. SOUTHERN CAUFORNIA EDISON COMPANY t I l (Repstrant) By 'r M. t., Noel Vloe ProskWt and Treasurer 4 By R. K. Bushey V Vice Preeksent and August 11,1967 6 e Nier Iw so A, n I i u j E t; d 1, s .ww-- v

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{ <?*?5 ..lff' .l EXHerT INDEX s.aa.m.mer ~ 11. Computanon of Prtmary and Funy Deuted Earr*gs Per Shart,, y u. con or iw put*e =t.ni.............

• e 0

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f 1, )f s EXHtBIT 11 SOUTHERN CAUFORNtA EDISON COMPANY ?- Computation of Primary and FuEy Diiuted Earnings Por Shere smaenee samme e sannois samme 12 ansame eness .m.as an, s='s 30. Jew *L !y 4 m 1987 19e0 1987 teos 1987 1988 / j7 on Thoumeaan, ames per saem oeisp g _2 Not income 8 199.788 5 1G4.076 5 381.501 3 392.913 $ 757.204 3 775.800 er . Late Preferred and Prefer. orme Devidend Reqwre. ments.. 13.126 13.479 26.361 30.143 53.032 66,792 -g. g Add - Preferred DM-donc ements...., 547 518 1.095 1,036 2.189 2.073 Earnings AV'Wish for Com-n--:en and Ortynel Preferred 8tock........... 187.209 181.115 354.235 363.806 706.361 711.081 u Add 5.20% Convertbe Prof. erence divuond requere-m J monts................ 32 42 69 88 147 186 Add Interest on 12W% Con-vertntWe Debentures..... 204 296 419 600 922 1.442 Lass Tax Effect of Interest on 12W% Convertib6e De-bontures( A)..... 94 152 194 307 427 738 Aqueted Eamings Avaliabie. S 187.351 5 181.301 8 356,329 8 384.185 $ 707.003 8 711.971 Weightend Averaps Shares: Original Pres rred... 960.000 960.000 960.000 960.000 960.000 960.000 e Common Stock... 216.943.479 216.730.243 .928,578 216,715.824 216,873.867 216.193.402 Primary Weighted Average 5' I Shares.. 217 903.479 217.690.243 217 888.578 217.675.824 217.833,867 217.153.402 J* 4m. Weighted Average Sharse Ad- ~#. q 6.V justed ( B)......... 217.916.326 217.696.732 217.916.326 217.696.732 217,916.326 217.696,7*2 Common Shares Reserved for 4 Conversson of-. .jQ 124% Convertoe Deben-tures.............. 347.985 826.088 347,905 526.088 347.986 526.088 8m/; Preference Stock 5.20% 183.652 205.790 163.852 205,190 163.652 205,190 g age Shares.. 218 427.963 218.428.010 218.427.963 218.428.010 218.427.963 218.428 010 p { Prtmary Earnings Per Share. 80.86 $0.83 $1.63 81.67 $3.24 $3.27 4' g s4 Fguted Earnings Per (C) $0.86 80.83 81.63 81.67 $3.24 53.26 ( A) Compoefes Is* rete used 63 de.339% tur 19e7 and 51.1s4% for 1906. T ~ {B) Common eneres mausd due to Co# worsen durmg the persoos are adpasted as if they were outstandmg at the Dogwinmg of each pertod. (C) Opruun is because a resurts e o.luton of less tnan 2%71ve caecusanon a sutwmtted n accordance ein Reguiseen 84 nom 801(DH 11) althougn not r NS ~ - o i / f. ..S/ M g' i ,, 4'rA. h ;,, ~ I f Q y; l'" % ? b,?fb .,a 0.

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r v e p. _y EXHistT 24 CONSENT OF INDEPENDENT PUSUC ACCOU*(fANTS As independent public accountants, we hereby consent to the incorporat.'on by reference of our report appeanng in thes quarteny report on Form 10 0 for the Quarter ended June 30,1967 of 0,0 *wrn Cahfomia Mason Company in the Aegestracon Statement for SCE Capital Company, a whooly+ w subsediary of Soutnem Cantomia Edison Cornpany, on Form S-3 wh6ch became erective JW 11,1987 (Feie No. 33-14785). m the Registronon Statement on Form S 3 meech oecame enocovo August 20.1966 (File No 33-8027), et Post-Effective Amendment No. 2 to the Registranon Statement on Form S-8 which became offective Augeot 8,1986 (File No. 2-94809),in the Regretronon Statement on Form S 3 which became effective Mar @ 11,1986 (File No. 33 3778), in the Registration Statement on Form S-3 whk:h became effective hovember 7,1985 (FMe No. 33 e 972), m Post-Effectfve Arr r45,6i No. I to the Registranon Statement on Form S 8 which became effective July 6,1964 (F66e No. 2 82092), and in the Registrabon Statement on Form S-3 which became enectrve September 10,1982 (Flie No. 2 78940). AA LC. ARTHUR ANDERSEN & CO. Los Angeies, confom.a. August 11.1967. e e f G END e Jc 4r' e J l l x :4. ' US.4 - g 1

A AR/S n-314 SovranFinancialCorxration 1986AnnualReponand hn104 l 3 p s.5C-y. SAR I O 1 T. C0% TEN 15...._. _. ___ _.. _I_ d N 4""~2. _. _ _ -.. _.. _ _ _ _ _.. -. ~ 3 - _. -. - -.. _. -. W ""9 p y-5 ComparaneIMormance Raw - 12 M*NY' D"***"._*M A.N~ 3.3 I

• • • "" 33 N__? I Y1**37 Report of Audnor.-46 FinancalComparwons-47

.. -.-. _. lL""??' 34.. -.. oom,r.ana oewr.-36 ..._pma ns-60 B=md*c'- M 1

Managernent's Dmeundon and Anahsis d Financial Condition and Resuhs d Opersions S res,'Mi t=o menese meram dwvy 1986: ' ' ' ' ~ ~ ' ' ' ~ ' ~ ~ ~ ~ " - - ' ' ' ' " - ' ' - ' ~ " ~ " " ^ ~ ' ' ' " " " DC Namns) BenCorp Inc. IDCNB) en Warch 10. 1986-N,,in,mr d i!48.0 h si 1986 aos,19.2% eer DOB merper een ama(nord kr an aand Subwban Bencvrp Suburben) on W veh 31.1986. The 1985. M rrone smased 15.5% m 1983 ewe 1984. The ,,,,,rd remnip si bash par, bendsed b pesarr r> Gnarial sammen ad adwr des pre.pwther. iherdre. de m,,mme p nenart! b tubesanmalpanth m the swrapr ned hevem. dud" DCNB's amm, hablars and rd d operworn imm de 9aiume, d m m lacmmes m net surmi swear and der d arryer. Dr Subwban nwrre men ammred kr uns W n,,,wieme rw enabird Sarran e absorb a 13.3% rue e de paabydm awthod. 4medmph. de finervial ,,,,n,m,, spen,r and en 18.5% emsme m the prmuson merence sul ashre fmannel das prar e the serper her k, inen knees dunng 1986 and mR rissuam erhamnual nrt bmi maset' Mdmonial edrmaron regardry thiv n*7"prome po th. Tahir i pments summan emps ydrm+ a nummed e Nor B on papr 08. inn and oder Gnannal das kr each d de is, car, ended Dember 31.1961 through 1986. t.we I wee f memei farpornme av %sawesewe

• • • ed Fmeermi Pee FaeSee

(__ ) Immind Dec e6ee 31 besse 8ee le ehr Iow 69 6 491LS 191b4 let.) 19182 6984 19Bb lef t ele shenessen e vp peeehem eme> toe,see sm o r $l.341.55 ? $140 0*a 0:018 1'2 8 H4 491 HN2am s '6A 212 10 ft % werere se us, 191 ami Neweee he has basen e64.132 401971 1*4 491 3 A29* 2n4 91i 12 9 47A38 40 lah 26 673 68 GR* 66.376 tuym in 7 %.emme sirene 347,196 2(2 66A 178 412 148 10' t16.113 lot 621 195 %=ewsee nerse, %53338 448 )dri 430 024 405 3a0 343 448 fv2 0"2 13 6 V ee,or 147.9 % l26 t?6

• • • 503 88 3v?
• $.553 64 ?sn 18 0 N essemos eher 3 44 2 9a 2 67 2 32 2 04 1 ?.

64 a theated 4, te,ed se,,eseo eert N e,esseen ehee 1.1. ell 46 423 33 a&S 31 M2 JS 9?4 23 1!! la o 1.22 1 20 t on 98 8* t2 0 4eesser lesee.=e its i 4ew. 8 13.744.3 8 la nas a 0 96*89 81.4645 8 i *?$ 4 066438 15 6 % isee, es,e 11.390.5 10 4h i s.$so 4 ? Sie 6 6!O L 5.742 6 16 6 lene. 9.414.6

• 816 5 6J054 518? $

4 $12 5 39281 19 I noweene enrere 3.143 4 1 75 ? I i es54 0 I eno 0 1.121 R !.2e4 4 11 3 f>yos. 19.344 9 8 n;m 4 ? 575 3

• 135
• 6 OM 4 5.325 6 14 2 W,,

herews se Set t 14? ? 10 3 10J O 116 9 121 9 18 3 w e, pan Sl? 4 ?12 9 h29 ? 53h I (?) A 42e 4 li e Amen nema, es seepe sawe 3.09% 1 D*% t 11%

1. 8%

9?% 9?% Areers a penvr e9ses 1S 59 46 W l! ID 1ft 49 45 95 15 19 % $ ear ee seeres $ 99 5 25 5 31 5 61 & ?O 5 *$ (k.et as posee seen m remme shee 81 98 40 p2 39 in 42 24 42 M 42 3* toerspa rymme arte > merepp emel em., 90 15 $9 99 As il AA 01 Ah 74 to 4* bereer 6 *ipam eiscener law anso 8 98 6 St 6 30 6 03 6 00 6 4J tsare era d aerosed armer bei e peen 8 61 9 3A 10 t3 (? 11 39 $0 to te 7 90 a 32 a 30 t 51

• ?*

3 DI W cheyd> m accesa les= 48esen a pr edW teme .34 21 25 26 12 l 15 4 44 I ti I 14 1 21 1 21 feewis new een wee essend = pere er seenmed seae any' ee %n toww,e tie a h aw %

• lrre se te eeue4r des eart gets e the hans ele Webb eart Wreksel Sw Ogise !),,s e e. e a een pes.1 '2 4 p. eso

,, _ %.com imewiel fand pe eks. ese low 6me meneed en per __ e hoeswW 4em i

I mn.,e.er '. d af ArmW d rnianemi c=imon mi huh d opermon.

1. C.amed DCNB v===

t hoe npurchen el die Campesy's stieres TnWe I nauhed m a alomer tune e enrage e9 sty wiuch had a w r w(am.== w pose.e cans on & labway able daylme she Comysm's -.I% inn ki-m} gg y he ted,d D=.m 31 1986 '945 1984_ br (aded D= e.,31 pgge eges P9a4

w..,

seeJe art to srs n i aos ie s i ils irer i. ua ts.a8 si on no os . ms, 16Jis ims imt N.-= he w w I 18 m ,f n, is.nes le ** I? los 1 p 4.e l h Il.3e 10 to 9 S* (s..ps A,q d 68 90% to a it es i44 hw sJ2 & of 4 46 n.a(,l(,,,, IiJ7% i Jet 3: Jag s pr, 13.48 19 63 io ?4 n='=='* - = Thr fulo.vg inble summarmes the avsnbueurs e net $7,,,,T,, s] ruune bv the vanma %vran h m 3m .0, 2 ._a 8M M' tu,3 s, rw c,, .e Earnegs per comnum share d $3 48 in 1986 mcreased 7LT 18 4% when compared wsh those camed m 1985. Ptv share esmop d $2.94 m 1985 npnsereed a 10.1% menase mer 1964. TaMr 2 pnmdes an armhms d avunburmru a) cammp % u.,,,. per share be mayn rrane and espense annooners ,s Reewn on sempe aseen M inessures how diecowh a w s se a ga.:at es.es coempem utiham a aseem m produce rwt exane. The bBo ,, s uw ss.ese ate my able pnnden an annhss d R(M. s, s % sm to b' W h 3' % s ac w a.e4 as w,,,, ibeny.gr C rp 7.75 : 1.3 gone less tend w L,.n (,,,, 3J09 8.9 6*'" " "sofen sr s L, C.rp 8J SJ 3,,,,, c,4, t, __ 3,3,ee 3 33 re=, s.e9% $ 25% & Sl% 1., l,e h be 4 4. tJh a soi in si,w, a.ase J g.34e a 38i 6 3li w Iit.48 h M %s teda,, t2.47) (2 641 42 93 4147.964 -get w gn .ine 2i' n, i se i i+ i is t NET l%TEREST l\\COME ",7." " ' FuDy inn qumiers net usewn ene inesed ee is a s3 a ti e n, i.aes i ots .n. 15.2% m 1986 over 1985 and 15.8% e 1985 mer 1984. Anacher inquerely used rate whrh measum camme per-Sewral besors ma, cause a change m net verrest exane. brmance a the neurn on everage equey (ROEL PE memuns meludmg changes in eumpe ekmus, aux and ruse smetmn the anzus dexane camed m relanon e the taal eque d eaming asum and onerest beanns WA market ruews capsel snessed m a company. N Company's ROE raim rose run and the amours d nonumeres besnns funds which earnmg una corenuoudy from 1981 to 1984 bw dedned eaghdy m 1985. in 1986, the ROE ramo maessed e the highem newt reponed the 1984 m 1986 penod, the Cornpam mnessenth devg the iam su was Throughow 1980, sham were acqueedexpenennd wrong powth in the everage volume dboth earnmg e the open market Int the Company's dmdend reewarmers ance and un res branns bebdam Higher volume.dewrape and empimee bends plarm, and for use e connernon wah the earneg aseet produwd addioonalinsenet vrome, vluch men perna!h dwt by peas r re ne expense penerused in mensmed volumes d everage unens beenng talilnee, 14 l l

l en.no M4 wens Fanureel Grporense and F Gespuesw Opreeney Due Fe Inse6dr i+saarm noe iDenne e ihmmmielu lawweer IDrewers b..mW [be, mar, il War PWho eine IMS ker IMS some i964 1996 1980 19k4 t owsme Pr= =*e 4eew bres leeress arusse (mem 8 l.960.79) 8 the 18 8 K32 713 8 er. na*4 10 og 8131 es, 1; n 6essmances arvrere 234.649 2'm IPe4 14H 9tWi 31 #55 6% 5 7. d4 36 bar= ewerewarmeerem 56,436 ?$ was ?n ?iP siv i W. s25 2 42Jies

1. 28 l

Iosel enerwar sener 4.1%&.476 f.246.2?% i 104.31i ilW M 88 4.16 W (23 larwe eueror Diesen $64.134 549 44A idw Rol 14 INN 2? 3v645 ?8 %weerrbee==a, 139 669 114 591t iIw fai 5 n*1 1a is $13 12 4 Imeteen ternenc 94.495 14 bun 6 *>an 5UM at 3

• R44 000 0+

1eep serwe repres, 724302 648 546 63h 199 25 wie 3? 62 34? 98 b es>weer.or 631.174 54? ?29 4'3 112 &3 44) 15 2 74 6l? (58 heresse he eser heaere 47.h30 to ith 2e 6?8

• 444 la 5 13 50R 50 6

% sows awwar she presse in hi e heere 543.544 50? 543 446 434 76 tel 15 n 6i iog 13 ? %emeurws owneer cremis, errwwce pne auf ihassau 134.919 2W I44 (*8 023 29 ?16 14 2 31 160 I" 5 wwero penw ouf lesescu 4.386 1 h54 40? 4 632 100 0

• 3 24?

400 0* 7eem 367.496 212 n4A 17s 432 34 144 16 1 14 416 19 3 %essesres pnpener &&S.1&S 44A Ann 430 n24 64 9 % 43 3 5A 356 13 6 ter eere., eenero 277.482 222 pll les E42 45391 19 6 3? 16v 19 i Aseerahar aseene sears 21.327 24 638 16.20fi i3.311e el3 4. a 43A 52 I h eepasere Laense 42.744 3! 244 2* U20 5 ann i4 e 19.2r,4 3A n emnerere 64.974 4' 503 43 Ami 19 5*i 43 0 1623 3? Oise, mese m $$1 460 239 e 109, i2e er l*l il 5 % emeent 8 147.956 8 124 1 *n 8 10! 50.1 4 23 ?lk) t#2% 8 666?3 IS S% Durvy 1986. market uncrew rmes dechned 6harph. in. b W Use chehng a 160 beim pws decreane m Smran's swrage prune rue. N e6ns d dechnuy pekk on carning eno wm mon-m than dher b the urreased uncrew income prtdml bs penser serage wJuan The c6ca d dechrury emes on useres bearung habdare dunng the permd had a posuw m unpaa on voerem esperne and nearly eqwird the eflea d hyher caperw due to increased swrige wAumeh a 48 in 1985. urreann! vrome from pearr mlumes d emi. m sg aswo truwe than dbet the addioonal npenne enJtav L nn anaeased wJumes d uncres branry habdita Hu+ 1 -. ews. kwr yrids redumd income more than the bene 6 thm was denwd imm k=er rates pad on useres beanng Lahdm k, al M = ei e e ' w a. s.e, hU O%ggeql p 15

w,6.ma rw w-a% noma-a Eammy aart are euppomi in both vermi trenng behd-d these nonserne beenng fwwh de: heil m a peammmer are and nonseres tranns funds The benci*n denwd fan d cerang amo des permd. The h d the nonmeers teenry funde dern Seed as the veld on earn. these two inesori no a dednic m lhe na serres ing more derbnedimm 1984101966 in addioon. the wAume awpn fan 1964 to lM;. LW5 huwen Feewisi Capersman med - % humwe larwar Aashem Fed. IsssWe teniere ton. 4 6 ver hensaw e eh. ser er eer e summandai R 47 eenr. 4-enqr teed he. f986 69R5 Ique 1906 iw

• 1984 M 488

lease are af emeweed erwer 2.*74.3 8 25474 8 i 720 3 9.22% 60 $*% 12Se% f 999 9 748 3 490 ? le ?? 12 21 le 28 Are - 1.7949 14?43 1 439 I II.86 12 (m 12 12 R,d easy.aw 1.238 6 I 9*8 I l.599 3 13.13 13 23 14 0? I 5t81 518 4 441 4 16 e0 16 on 15 9: noen ce,d $414 l*65 123 I 9 73 ll 20 ll Se liner tunnerug 38J 30 0 40 9 939 10 e0 13 07 Famon 6774 5(13 350 6 12 96 14 44 16 00 Taanwegs 9.414 6 7J16 5 6J05 4 11.36 12 34 13 41 laus seene la-semas errweire 834J 834 0

• 48 9 8 96 10 6:

II il I and sure femen 171J 106 2 128 2 8 14 10 78 il 8* Fedevil ayerve 1.113.3 ??6 3 749 9 12J9 13 Os 12 64 %spo sad amenrel embe isi e. 644 40 a 27 0 8.42 10 11 12 to Ouwe 1.188.4 115 I I 654 0 le 98 II 73 12 03 Lui muumwe av.rieve Feewei funds ased ad erwswo 387.3 213 4 32! 8 7.03 a 54 10 54 perderdsadn asweerema nee 8 348.1 445 1 349 9 7.74 9 27 llim Dw ben beau-meme heereg flJ l18 93 SAS 10 50 13 01 Temesg evoss ee were 131.3 112 2 $4 4 6 74 4 38 10 61

One, 811J90J 810 42e 1 88 Mio 8 10 44 11 95 12 93 fedim 4segn larme is was imbdere larwe beweg dayeen 8 718.4 0 565 6 8 49? 0 5 i!

5 24 5 25 lems etwrum, RJD63 4 I 49s 6 I 101 8 6 08 ? 35 8 15 Mena,6aevows 911.a 842 8 8*60 $ 43 5 43 5 39 h,pels, 1.963 4 2 ?26 9 2.3% R 8 34 9 si 10 h 1 , revedran, l.22 3 J 1.095 6 852 8 7 78 9m to no (,vede see et de,.esk $100.000 er new 92 54 I 11 5 6 96 e 144 6 en for'isa 7.997.3 6.783 6 5 !al 9

• 06 8 to 8 89 feem ow*e b aries de,.esm Iedreel funds purrhased med errwese 1.343 8 I I to ?

769 5 6 63 a 10 10 11 sa6d make sur emeen a epartme 730 1 5?94 4.8 ? 6 54

• ?l 9 Wi utlin amarecem earvery Ses I l4?
• L13 9 48 9 82

? 46 4 lane, m ben==mp 814.321.8 8 86214 8_? 003 4 7 02 8 10 9 tm finallere's Greras h 5** 52w 5 51% % larvesu.psA.ime 16

trerffs trireme arMWatfd dWP b h N M An a neuh d beer martet rears dunng 1966. ywe carred Ican gmwth arrourned be lhe gresarm penmar dilu-en mon eseporre deermng am m dedved when mmpered rwwase m uncrew moose, with lhe W leal eneste weh ywh esmed m 1985. Ho rw.r. Mb insable equn*ve and mnnumer emesm produnns r brym runn's e li.. ins e.i 9ss. ew %sr.ra. ithrerses l rbpew Iw.. e 'Ib.we.r. N. Q la N e. Ih.w.1. 1986 1983

1. w n.h.,

ft., 6, R., $ 274J74 8 244 124 8 246 43' $ 40 620 8 de rei 8 Ja 250 8 *0 p hi 8 618 h43, 8 3498? It W e 91 389

• 00*1 th ew ill ?l?i 15241 32 619 all Weie 2iJI A 197.39$

l'8.22* I?4 '95 27.3th sa 028r 19.3hli 4.24' t ili 3A32 271A15 261 7?l 225 0*4 nu tAl itB 62?> 32164 io ?*H . l a n?).

36. 6e*

94J99 83.26' 'O 4?2 82.020 112 42 112 12..hm 42? 12.*95 32.SM 19 !** 14 619 & 602 52 R$b 2*b 6 026 .enAs $ 15a 1.674 31&3 & &44 a l 29. ileth

Wm i l.2n ?,

lNn, 62.561.

$*.764 ?5 649 56 OR? 1* 9h5 .A 648, as ll? 23,2? ) d wlI 22M i A64.794 414 It? 41".203 1th 174 4w $?O. wh nne 2U2 82* i'D 843 131 964 ?S.984 09 001 L3 %3 +4p*h il e tNsi e ll ish ". 4 214 i4 3 ?ni 3 &38 lA9M iI 454 85.224 & ?Ah 53.s 's 24M 24i2 il 318e i3 ??0s 144.758 101.337 96As 64 *42 s i 4' 4 4.1.2 48 1 419 1 ?90 3.229 &J92 4 102 3 405 2 Oh8 i ?8t _ I 7'5 I h) 4

• 4dse 64*

SMA49 206 Ps4 198.Guo 4 ?.2*? il5.322 Il 953 12 l** 4 ugl3

• ges M 908 24 115 34.133 12?

>4237i il vios 43o3 ,e i 10 ile 413, 33.298 el164 38 818 ilt Gali 6 obb it? we. e40 I A40 lj34 IJ10 6 .192i e l en. 2M $2$ei 24 i* ps!. 2 42m 11.185 9 401 3 64 ? 4 w3 52 leii 2 nha a s *n ,9 l n, $ ?sa 4.3&&,476 I J46J'$ 1 100.311 220 wl0 11113Mr lieu enil 224 hbi il6M anns lh eted $4.72) 29 619 26 10? ? lk% i?4*i

• 10 1 l %2 db 3.111 825.440 110 156 9?.6u0 w wm

i213oi, i5 29-al unn sin als.

12 651 58297 45.779 47.221 4 v45 l!! 6MR e l m+ %2 el 44** 344.348 259.364 247 ?81 21.274 i:12 2??, ill esel. 3J a24 i21.22b 19 603 10r1A13 99.626 90 42h 18 824 its w. 1 22* 23.2w il4 emib eJoe 438 4 890 ?ha d 329. 40236 _4 252, 3 'h2 3no 4 122 ~ I I 98,921 99 (M6

• 79?9 19 435 el* writh I 4?',

24 ?w e l

• M2 *i Ii uh*

47.748 44 6$2 elEl 10 498 a ? 402: 1 inh I l ?id .lH emij, g R$l _ 38.495 14.500 4 616 14W 45 \\ wi a M4 l ILW ? ane 714.S$2 6411.546 636 194 12b $?D iHus hl 4 Ji 9% 1 h M4 _$. 681.174 8 547 729 8 4*3112 8 600 54% $.i? limii 8 ni 44; 8 w" *n t 8 !) inn, 8 ?4 a t ?

• 1 *ti?

.. h2 34? 6 %, e,.

e.. w w i

6. n

.a. i.e 4... .,., w n, ne.ive.,.. .*a 6 ..s w.-.,....i - -4 m 6.. 6 j ep er e of er >.e.s b 17

i N Managenwru's Denammon and Analyan d Finannel Condson and iklm 40persoons amena teams nreme innn unmn. a,vurnes ak vmand m in 1996, eneal enemw espense smesed only 3.7% drupar 1986, pnmenh due e uv=me carned on tu rsemp abbge. e 191% wease e the smeer solumme dsense beerng base d nurs and poberal subdnworm N Compam w;k habaars h smanal emene in seem sprior men a ashenance of femrab&r swu <endamnn in weressang a duvo resuk d b=cr nom pad in ebeer hemk dwmg 1996

6. Mags d tbse serwars e leer 1985. Nrc6n the 1986 when compared wsh 1985. N aserspr rar pad on some enn apaneirm ywid on taxermp wwemmes occunure we beenng habibirs decised 108 tems poem when compared ahman equel to tk 1985 ywkl.

wah 1985. %eerire swetmee hew short swuntra and.hrn N 9.8% smane in 1985 warres apense owr 1984 reimenard dunns perab dderknug rases, generath reauk

== ano e5nsed in derkning rues 51mir sierspe voluneen l m iomer ywh ln 1%. the Compam reduced a exwn. dinarres beny babanes pen. de ruuksy arresse m market sweterrvet Conergmah. inerns unime from rnore. npense leveh== partalh c5 met in a 98 bene pose drehne insrhet swetamm derbew<lin im due a> the combinaoon in the merage rene pad on these habibers 4 mes and k=re owne Wunw.' Durmg 1985, addammal un rem uwome em proded tn PROVISIO\\ FUR ID4% (D35ES N m"*"* b I *a k"ws, the charyr e carmnp in sneer earmns amre valuenes pnmanh kers Ho-ws. the P warns raar derbar dunng 1985 produced a % bem pous Puennal kans ammard wah lendug amnnes smard decise m the nerage yr6d on carmns amico =kn coen. 18.5% m 1986 compared weh 1965 and 50 6% m 1985 pared wah 1984 N tenefs derned imm arreaned W wah 1984. N sgrufrars kan gn=th aperwneed volumns dearmng aineen wm partalh dimet tn the dechne durvy the peu three wars a wg = incseaned charedis e vwide. C*'unbued e the arrease in the prvnnon in aD wars under evmpanum. For addennal udormanon regardry the pm-bO Sure deprme are the Cony 4m a pnman funduy sounv. vwon for kan kanea. re(cr to the documnon. Ioans and the de soluar, m weD = prring d depunits pim an imponan 41;n,wy b loan tonnes bepaning on page 22. mir e surres apense. 4 a market leader. Smran nerci,,, \\0\\l%TERf>T 1\\COME emnanderabir care e b. y a orpons pering ansture. 4 sh,=n m Tahir 6. notunneren vrome screerd 161% islung ph ACIDust verknas Mirmalls*>rt the can a6ed the m 1986. Compared wah 1985. Dunng 1966, the (papsm Compem's competane pumaton N Compem's cost and mwd a depons nervxt ire schedules e align charges a a abary e swa these funds pminabh an aho <wrmdersonne, subudan bank. the 9enne wahm the naar marfra wea. m deerrmuung the prrug struaure. N wrvur charpe mwon, along wah verrased bunness w 6 i..< h.- N ,so w sw me. e' o N 1_ se

m. t

"? 8.*____ w i G Je >7 l is 4 D' 4e NJ 4% h b a

',.

,:. r-44

Tabir 6 w. r nwcm, 4sa.,4 Y sw, (Desen o e dw lm==., (Demswa be fad,4 !)erembre 31 kr 19a6 onw 1935 her 1985 Osw rese its4 iSR5 6%4 Ameias hsegue ameus hunne Tans eu.ar l Sww dwe= es de,ans m=*we $ 32A97 8 28 812 8 2t.h$$ $ 4 085 14 2 % $ 2.257 8.6% b ame ebeyam aw=ee and 6 s 8 7.40 r 49.$40 41 003 7.467 15 9 8.537 20 a lent awW bee herigsgr eausg bue 61.087 $7 970 5o 922 3.067 53 7.048 13 8 Cens en ashe er arel canaw 34.854 22.012 19 o4a f le6 97 2 964 16 6 h 9113 e.223 Treasg enosu prare and swemmews 47293 45.049 3? arve 2J43 SO 7.1$l 18 0 a.996 S.all 2.5M Lon$ la f 3J12 100 0. 'wwwere amms and bones en Sla 910 209 194 178 025 29.716 le 2 Rie9 17.5 tMs erewswa leur, eseware 1.641 2.197 340 3 49e 100 0 + 1.a5) 100 0 + 2.593 1 457 6 y 78 0 1.396 100 0+ 8 247.196 8 212 sea $ l*t 432 ,8,,3,4,,S,ea, 16 1 % 8 34 416 19 3% utwm cornnbuied to the highei lewi of eenxt charges on deposit amuna Trum income for 1986 ak pew cormder. a6 had a pomove c6co on norunteres income m 1985 abh. pnmanl> due io urre9ses in the volume of as. cts under when compared wnh 1984. management. Total trum aucts under managemeni as NONINTEREST EXPENSE hmber 31.1986 cre 851 tam.compami wah $4.3 tsllum Smm's management a firmly commined to the contain. m kmber 31.1985 Addamnally.the Compam unplemeniedmem of conuollable nonmierra expense. Management he vanous See changes rel.ied k) personal trum wnm iaken wwrahmponant stepa kmard the goal. In 1986, the in 1986. the Compam realard 89.2 million m nonrecur. Compan3 diered an early reurement plan nns real esse pum esulung from sales of bank premm off'eca refuwd a mern mcresa pmgram,to wieral wruor and reemphasued Tkse gauw were uned to offset the c#ects dcertain nonre. cumns expenws also incurred dunng 1986.

• P'ogram of alk=mg increawd noru neres espenses only Net pas on secuntre tranaations, m well u trading ac.

cours pnins and commmuons cornnbuted to the increased g,,,,,,,i,,,.. nonumeres income. Dunng 1986, the G>mpain took advan. tage of favorable market condioons b reahac gaum on nases of both equiry a d dets secuntn Nonumeres mcome wm up 19.3% in 1985 over 1984. The 1985 meresne m nonumeres mcome was pnneipally a rr.uk of peser income from deponst acmurii nervxt chargeL h addroona! bank card fees and other senre fee income. The merece in wruce charges on deposn amunts resuhed {, pnmardy from a new ice structure implemented a Sman Bank S. A. m 19R5. The powth in bank card Ice mcome FN[ [,, E1 E E

== pnnnpally due to the unplemernauon of a tem bank card fee dunng the fourth quarter of 1984. Nonrecumns income REE E in the other category appnnimmed $4.2 milhon in 1985. ELE B The nuntecumng un>me== pnmanh due io a pm on the sale of mongage.ememp nghe and additenal meome from I i underwnnng and letiers of credit Ices increamed norunieres =J - 2 l uwwne from trading acmum actmoes and ecunnes pmn m.% '/,,.! ';',,,yn,- r - 19

Nahapernent*$ R arKf Andyin d nn==1 conanon and Resuka d 0 persons ICasinnedi TaMr 7 wr= Faserw C,pam.m d km.a.orm. %sn'as Larrwe tDeepe e amusene lorseer (Derwere her imed fue,mber 31 h 19an Our 1985 ber 19a5 our rese~ 19a6 IW5 1964 4meus Neuw 4 mains heese betarse mW emp6=.se bew6m 8 297.4 il 8 159.114 8 231.506 8 As.297 14 $% $ 27 606 ll 8% %n errioenn emprwr $3.067 29 452 26.737 3445 L21 2.7 t b 10 2 Fewurr eml egugmeem esprner SaJ44 W 34? 45.313 f 9el 15 7 5.034 Il l 4dweesug 10.376 9 643 10.787 733

• 6 11.144.

Il0 6 4:_ _. af susarter ensam iS.M5

• 772
• '36 4 761 61 3 36 5

Some reed aprese, 21.819 '6 917 24.563 4!.Jese 65 2: 2.354 96 f sawn 13.330 4 758 13.!?S 41 428, 9 "i 1.5a3 12 0 Phaser mui shepag 84.390 a 1.79I I I.0h4 2.$99 22 0

• 2?

66 'hW 11.443 11384 8 910 451 40 24?4 2* 8 - and mesmers 14.129 11.806 to 037 L2O 19 1 1.a29 18 2 Other al.492 55 *16 40 len 1 I5o 12 9 15 140 377 8 a13.113 8 488 38o 3 430 024 8 64 958 13 3% 8 58.356 13 6% ensamese when supported b+ wreamed trKume priershon or ulDmme cost benc6th to earh retirements and rea.gnabons ander emph meri: com trik1A [.isgung shdf haw assumed the dutre of the pasamn9 %numeres apenne wremed 13 346 m 1986 owr 1985 vacated Additonalh.1986 included approumasch $5.6 nul. Conenbutors to this wreame were apennes for salanes and hon in npenne for the salanes and bene 6a d Sovran BanL/ cmp 6ce bene 6m. mupann. furnitur, and equipment. DC Nanonalemploveca Swe the DCNB mern wm amouned amuidunon ofiruanpble meets. and other npenac related for a a purcha.c.1985 ed not include ape vs for these lo wreased busineas actmn in an c6 ort to sared and retain a quahn staff. 5mran 08ers emp6een incremes wre anno apenernd m insuram, pmua an entiers mmpensaron and benefita pacLap. Salanes and tues and penamn apense. While penamn apense wiessed in 1986 camped mth 1985 the Compam's adopoon of FASB empbec bene 6m. the pnman mmponeni of noruntered n. 5arernent M 87 "Emplovers' Accounung for Pensens" re-pense, wre up 14.8% in 1986. 8 fiectng this increaw== 6ced 1986 pension expense tw apprournasch $2.2 nulbon. t approumasely $6.5 mabon of nonrecumng npenne related Iahic 8 presers informaoon relsong to personnel apense nor Tabir 8 'wnran FeienrW Gmpormaan and %be. dane. 4-rege Anne i JTune (empenemme JMan e ihmmench eurep per empen e dosi aerem has r- ) as Iaded Imremhre 31 km i9eo ther 1985 km luss(he, lea 4 19a6 19e

19. 4 Ammon pwm 4.

pm % serve $ 247.999 821e 529 619. 3?3 831 4?0 14 5 % 825 156 13 1% ispenwe mMe 49.412 42 545 40 133 6 R2* 16 0 2 452 6i Lian amerwe end emphace nMe $297 411 81 % 44 5231 50o lu 29' 14 0 42? aan Li *

===seamma

====a

mesman amamme 4*tese annum mmpen.maa pr, empemw 3 27.0a4 $_ 25 nm 8 W 54 8 10 I s .e, ,#,. e.... em,i.- ker+eid 10.968 in,3is 9 wi t47 63 323 32 l 4.eep, 10 981 10 e 9 921 993 89% 16* I?% 20 2

the three. war prnod ended Dmmber 31.1986. Heform Art of 1986 wiu nu how a mmenal r$nt on the Dunng 1986, cupann npena row duno wreued Compam *. future annual resuha of opersons. fmannel pom-rera npene mhde n>mputer eqmpment purchan d in ime inn. and bquidin. e 1985 mntnbuted k> hgher deprension charps wluded m Dunng 1986 the finannal Acmunung Standards Board furnnure and eqwpmem apene in 1986. The Compan/a e oed an nposure drafi on acmunung for income taes ths 1986 merger artmn. m well e incremed bunmeu actmn aluded a change m the method of anourem, fee deferred rnuhed m additonal namnierem npenic. Amortamon d income sames, if enamed m 1987 an propo ed. the anwunt iraanpble anwth npenw== up in 1986. due in part to the ing change a npened to her an imn.menal but feorable purthaw of DCNR increewd busmens stun cauwd hgher impan on **nran's annual rnulta d operamns and finarm ud npennes m such nema a pnrnung fec6 FDIC mourance. po ston and other nemn ihm are dirmh maansed wnh the iulume of stnn. YIN A.NCI AL CONDrI10N In 1985, nonmarrem npenw man up 13 6% mer 1984. 4 IS*"C'"I **du'*n'8 Pninan mouren d mwn.ic am The pnnnpal wrnnbuiors to ihm men ane =cre malann and pnnmed bs na earmng sunn. *W na marn nirnan am empknee tenefa furnnure and eqmpment, and other non. pnaduced in the fundmg of thew auets with srarres beanng iracrem expen* hich meludn smaller esegones d n-habstr. Effectne manarment of a company a nourm and pen c. The merra*d 1985 npene in salann and empkner unes of funda o enta al m obtaimns maumurr pm6tabihn tenefna..n due to rwmal ment menaws, higher mcentne "nh a mmimum amouni d n*L The foDoming darusuon e compensmen. increawd salanes for partaime empknec6 pnao ed to ammi m an anahim 4the Conmam o fmancial and approumseh 84 0 mdimn amansed unh the nern,, condamn. of sur k apprecianon nghts in ceruun eenior Subarban em. E4R\\lw esEd pknen Thew mock apprenanon nghia terame e crcu.abl" m a rnuh of the SmtanSuburban merpr. The mannn of Dunng the past three scars. aserage carmng aaeta haw the wreaw m furniture and equipment open, resuhed npenenced ignifwant path The few9 ear compound imm increaed operarmg npensn a weu a deprmatmn ph raie d e rage carmns amets mm 16 6%. loans the for nem data pn=1ising equipmem acqwred in the laner part (ompam' pnnapal carnmp aset and imesiment accunte. of 1984. The pnncipal reaen for ihr mi reane m other mm-her aho.n the largni increaw dunng the three tears under inierem npenw ma. higher npenw amonmed with pearer rompanwn. Moneumarket imesments decreawd in 1986 busmru a$nn Al* meluded m thm carron in 1983 mu mer 1985 but mcrea ed between 1984 and 1985. an npense of appmummels 82.0 mdhon related to a p omo. txm I campiugn designed to enla se Smran Bank. NEs cus. 4 n.,, t,,m., w amier bene, as weD an a prmsion of appmumach $2.2 mil-bon relmed to the termman of a contran for the procrump of Mrtain bank card trRnha(tonn. APPLICABLE l%COME T4\\ES + lacume tan npenne== $21.327 mdhon for the scar ended Decemler 31.1986. reprnenung a decreaw of 13.4% com. pared.nh 19f.5. Hgher lewin of tax.ncmpi mcome and the ra effect of the Tax Reiorm An d 1986 acmunted for the mapnts of the decreme. The enanment of the Tu Reform An of 1986 and the relmed change in maumed future tax rmea required a recomputauon of prorned incrard lease mcome. Thin rnuhed in a net benefi ki tax expenar of $1328 mdbon. 4ddamnalh. income tan npenw man m. ~n a reaaed in $1117 mdbon due to the repeal of mwsment tax rwds for addiuonal mformaton. refer so %r I. on par 44 In the fun:- the pnnven of the Tu Reform An of 1986 =dl a5en the m ome tax tremment of main aspenn of Nnran-bumncu.tuti,s. How,wr. it i antenpmed that the Tas p ';* ~ a-luma

r%sGawa - s ope,.0,. et s,.re TeMr9 he rm K.ry oc Sunesrv d Laens ha di enerwd torense_ An ednaan ~ Dansmem St. Been 1983 14a4 19a3 sta2 Duanumer r 88.De8 4 $2302 7 $2 090 7 fl A23 2 $1M2 Reef eesse-

t. ease 643 3 626 8 386 6 343 4 heel %

l.731.8 1.5M S IJet s 1.410 2 IJ72 4 n tenh eard 1.138 4 i 146 6 l.74 1 1W4 1.152 4 a4 8.1 $96 0 Sit e 430 9 3 72.3 tseer immenr*6 i l Taw 544 0 229.3 140 0 107 4 et 2 \\ tal.1 . asc o 520 a 321 2 _mje ma unn e sat s.cu 4 sm, don e se e le s ru as i 44 9

1. e.oll.e as ssa 7 srmi s as ?3: 0 g

loam aidMhk loorilaa h Company agrewwly pursued expansen d the bn emnome mndamnk Dunng the three-year permd ended porthbo dunng both 1986 ud 1985. A corsnbunng factor Dmmber 31.1986. the alkmarxv br bn kanes was a to the puwth in the luan portble is the heahby econorm in new thm ames the amount d net c5A AddamnaDv whrh the Comparn ope N Compam's market ma the aBoway be bn knaes am a kan Sw nme, the amours d nonperbrnung bns be each dthe ihm wari pnmdes lxah dreriny and relauw stabibry thereby creatngended December 31,1984 thmugh 1986. Tabk 13 on page 24 an esceBent powth emwrunera. Thde loan growth he been presero a summary dthe a00waruv for loan krees and ,ubstanual dunng the lad three years, the Company has mam-scirned bn km sansucs br the past 6w weart tamrd high cmda standards an order to obain ry loank Sov sn, like other finannal instautaonk has czperwnced in-In confuncton wah a lening actnh the mamuuns an alk=we be bn knees which is anlable io creaang kwes m the consumer lenaing area. Rising icwk d pany absorb paternal future kienes The bases for judpng the ade.perumal bankrupters and consumer debt hew coraribuwd quacy d thas aDowarx? (onsadern the Company's past charp-to the industry-=xie increased charpe<dliin 1986. As a resah dthese higher charplik Sovran ha taken ecton to od erperence, k'wl d nonperformmg bns, and cIrma! minimiw a future loanek Strps taken urlude increamrq Dutisvam d Leem in T,pr d Bommerr Dearbuon d tamm 19814=rreses N Type d Bormwr 1986 Aseriore g .m it j

Tabir 10 % man Famew L, and = & amen of Aussen in (men tas re tunnen o eh fammare 31 lese pat 5 IUR4 g Igs3 1982 lasse em of unceriwd senes, Camaned wecum,edenn 86 980 9 69 9% 85.821 I es 0% 44133 6 66 8 % 83883 3 67 7% $3 4716 70 3% 33344 23.8 2 len 6 25 I I 843 3 26 0 1.423 6 24 4 40074 22 2 Senh reed-- &$ 1. 7

• e

$96 0 69 512 0 72 430 9 75 372 3 7$ $9.9110 400.0 % $8 558 7 100 0 $ 7 6418 100 0% $$ 73a 0 100 0% $4 9410 100 0% &asse d aan eme is, no ' ien. susum ensemann seusr saammans smamm meinesen mu aumammes suuse f 4 ed emar and ahn 4 Sol 82 6 821 6 416 8 418 0 l-18 9 tl2 80 77 as Ben 6 rard 90 $3 68 46 44 I naam spei 54 6 59

• 4i ;

36 6 28 7 8133.5 $9? a 8 '9 i ses ; g.$e 9

==

=

=

m pnmdes mformatmn on nonperformmg awth and loans Table 11 contrar1ually pant due nmets dan or more int the yeen

• '= bard G<r====a aad N'='d ---

1982 through 1986. "'" * *d

• '*d'"***

Dann; 1986. iruerem income recograed on kans thm ""'"'d'"' .ere on nonaccrual asun or had been reaructured a December 31.1986 was 8.844 milhon. Had these kans been performmg m acrordance with their onpnal eernu. '{,',','"' $2.503 mdhon would have been carned. The Company had , t,,, r, w.,. u,.,. w no mmenal commumenia no pnmde additonal funds on such one n. s2.e96 i e atte s 2:7 s ss.302 4 lodn> m December 31.1986. n,d ceamwien f 41.7 260.0 66 9 1.068 6 brymp 124.1 130.2 416 8 66l l Tabk 12 82.961 9 08.199.2 8 7718 64 932 8

• • • ' *** 4 ' "'P"*** *ad %W

ar**=r** 8 %mpr%,emms 4.* end luen.berertwalh Fas Dur Ford ear 8 8M 7 g , g,,g,,,,,,,gi,,,, Muhi, rar S 928.5 8 603.4 kar ineed tweenhn 3: .vilettxm and recosen staffs meruduamg a new credit punt 1906 19n$ 1984 1983 1982 acoruig mnem and contanump an miensne trammg program for kan obrs. ,g ,,3, i, %nperforming (aaets %m..s 17.3 12 1 12 3 12 9 24 $ hv 1982. satal nonper6 rming asaet, hase decreawd ' " * ' " ' ~ ' il 0% in $28 9 mdimn m December 3L 1986 This reduc- " *'""*'""'"' *"'* T E D D D ton har, occurred =hur funran's loan portfobo han pomn ign/icanth. Th> imprtwed awi quahrs u, mdicarne of con-t'*",*** ** *

• n m 3.g 33g 5,.3,,,...,,i..,,..,

tmued monisonng of the Compam's credit p.bcies and rare. .29 2e, u 63 we ful esalummn of its credit r-1 R hile loans Iast due nmets deu or nore base ruen mer the past three scars. tnes repre. a...io.u. i e rh, 83* 9 su 7 :m eio e oss 3 nerned 40% of luarm a Decemter 31.1986 Tah!c 12 i '-e i- ~ ~ d' - ~'~ 6-

• a - -

i.,. a.

m .n

m. ~., ~n i6

m..

Management'8 Duesamon and Ardyne d financial Conditon and fic uhe d Opervens it n-+ Taber 13 two. re.nnm,,en . 4 %,6 4,, Summan of Alb=me, kn Lase lauwe and towned teen tow % mere tDebsri a dweends: 1,er Imded Dri 31 39ae 39r5 l934 1983 89a2 4awesw far mac 6mem a hepasne d,,, S 97,764 3*9 M3 kJ 676 $$4 M8 852

• 7 Aa==www of pwrhand banas a der, of ar:

p, ammtwhenhope

3. ale 400 2W 47A30 en ten 26.678 18 0e7 46.176 149J3a 189 239

_ 92.354 ] _613

• l39?

lasms charyd of (,.m,,rw n,w,,,,.r.nsn,n,m, 15466 13.11* 8473 5 462 5J43 Real evuor-monsay, 41 2 434 1.192 r 4 241 46 1.064 183 sen6 cerd 15.390 9 no$ 6.803 9 570

• Jeo

(,ew 6nesww 12 978 8224 7.784 6.252 $331 541 tai 89 592 108 helcherra 64.8 72 31 413 Rarewewe d hasn. emush rherrd a# y 23.3e9 19 4I7 (,s amesnal Rrei ens..<, wsrunma 3.547 5.516 3 4e9 3 9L4 2.213 W, mar-emrvae, 149 50 1 904 746 92 (-- 24 15 27 100 132 a.nhryd 3.181 2 ?$4 2 792 39?O 3 453 t,an haam ms 1,7 *$ l.509 I 873 1 ano 1 489 ?? 12 31 18 189 h, we.we a.ase gn hene rgeryd e# 9 958 totwo 10 610 7.568 15.?!6 214$$ .3.301 12.?$9 11 :44 Aussom s ker men hen s wers d e $ 117.512 g gt g6 _859 % 8 teens e d vararned erwme ousmanding a seerand 4*reer 89 9l1.032 8' $58 ?d' 8?.091 Sit 85 '38.064 S4 41.048

• 424.594 f.816.542 a.205 412

$ 187 465 4.512 444 Am. Mla e, m nere=4 =.an. Recomwe ei chargodio 3.15 % 1 14 % l i tt 114% l.21% % chary *4 = seter kime 19 87 31 70 43 15 43 40 3a 46 Lasp hae roweer' .Sa 27 2l 25 26 Aas ence = w charr4 ancear $441 8 64 % 11 28% 1011 A Sinn Pouveme hir haan kenes m-S til 4 56 54 5 lb 5 06 M etery.4 4mer h 1.83 187 2 0L I 42 1.38 .5i% 5t% 43% 35 % 36 % , e _..m _

6. -

m.4 -,.w,.a. forep OutsandmP As shown m Table 14, forep ouisandmp haw dechnedprobkms an being mammned on depossi in those muntrn synsfranth m the pas three yeart Of the total furep loans Manarmeni betrws the three outmandmp wdl not how ountandmg, les8 than $1 milbon mere on nonaccrual maim a a mmenal adwric imp =1 on the Compam's resulm of Demmber 31.198e. N Compem has mmimal foreip out. opersons mandmp m countrn ihm are npenencmg economx and Dunng 1986, the Compam wrai off a remammg $1.5 mil. bguedm problems. The tenns of ceruun of thene outsumdmp bon eque immtment in Mbed Banmrp internanonahMbedh have been modifed ur me be m the pnm of rencrotr an Edge 'n Corporean The Compam na prendes furdag men. Currench, the Compam has no commitments to lendto Mbed m the form ofleans and 8 norunierem beanns depoes addeonal funds no those munines npenenemg liquide of appnnimmeh $6 8 milbon and $7.5 milbon respecow4 problems. Repa> ments of pnnnpal and imeres on the out. a Dm mber 31.1986. Manarmers bebews the e currers mandmp of some countnre the are expenencing bguido and pombic future support of Mbed will not how 8 masenal impat on result of operamns. 24 I

lA 4wgr4rmag M nainauwmW M bem av m. _ eem ei ao

• • L L

se. -=-n Di sa, m 4'o g. e ~ a4 si ei s. a, e e4 er si e. as e a. 6 e be so. c we t s h==am L m .= e w ame s.u. awase T =agr m T4bk 14 wn femaw t.,pi,mam and %n.nhan,. hurer mamandme elame e f>.vowe.11 im (=- mtre 31 Igni lucemwe 3) Ime LA,eaw IN,Ime Banke-Dw f me hana - torece Bonha-barow loan. 6*mam a. Sraney W lesen. 4.* caw = *. Branns b leans' 4womanroe Senney hel is,ws I. mpe1dmedir Lastansde l anw Lase. 825 0 825 0 %esMand 8150 1 81$01 12.3 11 2 $200 0 $200 0 le 25 0 25 0 4 80 50 lawe $ 5 .2 ? 8 5 8 25 40 ? 43 ? 8 5 8 I8 to 5 62 8 .5 82 17.3 43 0 5 25 215 8 218 e 5 lB 200 5 2478 %=an tenfw Jann 15 0 15 0 Ouna 5 5 e e 6 .5 15 0 15 5 e 6 %=m Anwew Aamb an 6 6 kaname 6 20 0 to o tam emerus 102 0 102 0 92 0 92 0 Brud l6 Odr 16 16 le 16 le 16 i

4. eu to 24 24 Is 4 j

11 Mar. 27 28 24 16 9 18 8 28 28 Wwie 35 ? It 4 in a 35 ? 17 0 20 9 3? # j 28 44 44 45 45 45 s 28 0 18 8 46 8 28 2 18 8 47 0 28 3 20 9 49 2 45 bal aumiamimo 829 0 824 0 8*23 $!?f ? 829 3 821 1 8117 8 8%A4 $29 4 822 ? 8112 5 &Ma4 6 ammans amma es=== ====#

=

==== emme

==

meus

===== anunnem las mamandne e e m et ens am,e>

849, 2 s2%

==

3 use. y m.,... m emm

Marlegefnefit's Artd Andvnis d re-al condamn.nd u aopernor. fCamuemir er - T We 15 t=== w (r, e.s-b=.amre b Mene Dueemen and 4=ney had iDunen o m&enne h 31. lese 488'EF W Smet kehn Namn 4=ese kame %ame le %n 1e* 4 A 1mesun onwnee W ehm ene ner 8 168.1 8 IM.3 4 948% A6n ear he enhe 6. wee 547.3 $48.5 3,1 7 64 Teasi L'.1 henen eerwene 744 3 162.5 14 7 98 8'eaal aparen herpy herned wwere Ahnwe men 2J 3.8 84 9 7.77 m Haw ar. sr 38 4 28.s 4 saa An-.ar 6

h. 6..

ss e ase 9 29 72: W esenelarense 349 4 351 4 IA 7.48 (% s ..e,.n..l w.s. S ahm ear seer 1069 104 I .4 84.68 Ahn one bis >ske f= won 837 6 She t 82 IS 44 Aan s. hs. ne ve ell e 64 8.7 f.o Isfa Ahn ee wan met e til.0 17.7 1441 Ind ear and pateral addmana. w.r l.8W 9 4.il I.7 7J 13.e4 haert Wihr fedevel liserew Senk 56 .4 Othre maree sul bande ??. i 16.4 1.=6.*- news.= sa t an.s laul======.-wen. gejs st.an e 4.s lo sis o w.. na. e h a, m Imamwnt Secunt.a N Compam ucreased its hold np in inwamem nerun. Table 16 i tre between 1984 and 1986. favorabir market conditions*="" W W "d*

• nele it edwaarom for the Compam so hold obbgens of

"""""""*'d'****d""*"""" mars and pobucal subdnwons W uiwames pordoho con. """""* 7 unues to be d evyllem quahn. vnh 714% of the munopal iceura s rued AA or bener. As a nauh of the Tax Refonn As of 1986, the Compam unends to pursue shernarne tax. T able umames opporturunes future acquaiterm of tan. esempi secuntre will be mode = ben the relmed yield a equal a g, ui to or pearr than an aherrumw taxable awsmem. for adde

• s.1 4.s as ses e at e innal ardurmmon pertaming so inwames accunock refer to 4'

387 8 88 8 Tables 15 and 16. "8 } ui Mov>Makt imeumenu y* in i,86. m, y.ne.e,nem, dwonea o,c, ] i. .i the 198W1. W pnncipal dechne in 1986 man m Eun> 8* 8 dollar rernfraci of deposit and commernal paper Due to the useres eenmovvy d ahese inveemem6 the Company con- ,,[.* d i temrssed on invemmg na funda m higher yriding annes a*

==

~ .m

n-e Tab 6 17 hs ven Fasanal Carpermeas and Subehen Away % and twees, 10.aem a ee'msw 1966 1983 los4 %d %d %d A mouns Taal Ameww Tae.l Am we Taal Deyness.< b-r-f tarve *pa.m. 4 2.84f.6 18.3% 8 2.0248 19 De 81.443 4 20.8% le tra.sg depass later, tweking T1f.9 5.1 565 6 63 497 0 56 Mar.e anvao 2.063 4 16.3 I 498 6 14 I t.40t 6 12 5 bows, eenne 922.5 7.3 642 8 79 876 0 99 r- . emtre 3.962.4 23 4 2.726 9 25 6 2.392 8 27 I (mfram d depeena $100 000 m swee !J21.8 10.4 1.o95 6 10 3 652 8 96 Fery 9.2 .I 54 1 11 $ 1 1 seal seves besaw depem 7.997.3 63.2 6.783 6 63 7 57319 64 8 W dye== l 10.364.9 81.7 a 808 4 82 7 1.575.3 85 6 $henere beeve=vy i FM funde pwrow and evenue. j ased wup,.sewom e e pwenaar 1.345.8 le 9 4.I10 7 to 4 769 5 67 Lamar eenpre 41.5 .3 35 6 4 15 1 2 Other anartwee ber==w, 6at.6 5.5 543 4 54 403 6 46 %enl eb4+em bwve up 2.115.6 E 76790 3 1.188.2 E Lan#+em borw *p 90s.1 16 147

• I4 a3 3 9

$ 13.668.6 100 0% $10 hoo 2 100 0% $8 846 8 300 0% nummma

==

amms / bish r3aes declined in N86. Aertge mone) marh irtwel-nens increased betwee.1984 and 1985 since the Compam wn abk to take advantage of famrable spreads beween shoruerm mestments and borrmnnp in 1985. IW. REST BEARING L14BILmE5 - krige interest beanng labibtes the pnmar* nourte of funds thm support cariang annets, were up m all three vean a-under compannon. As a percentage of total earnkg asects irneres heanng Labibtre hsw increawd shghth each year ~ dung ins penod. Table 17 presenu data pertairung to owrnge vv.-res branng habihtes for 1984 through 1986. Orlu* Owr the pas three years there hase been sanous shdu between depoast csegorn Todsn deposinon a more a cognnars of funds management techniques and a consant. h seebng to meresse returns on their funds N cunomer swareness and the compecoon among financialir>mnurwns for depwas has resuhed in a higher cow of funds for the Compam owr the pad three years Awrage total deposits mercaned 17.4% in 1986 owr 1985 and 16.3%,.1985 owr 1984. well at<w the 14 2% com-s 's-pound gm.th raie owr the paw Sw iran in both vears I '.~L'.'.'*. nx* cegones showed stmng growth. Dunng 1986 in an a 07sl'

Management's n and Anahiis d Financial Condioon and Results d Opersoons ICormav 4 e6 ort to expand its deposit base and to conunue to attract new cuneomers, the Compam dewloped a nem semcc pro. Table 18 nding for cunomers to plan depose in out of stme

• ".'."."u"'.d*"d*

ne. s o.-- r.- %.r % 800.000 m u e g GAer huerest Beanng habilmes t-,mnet u i9an Aerage bonowed funds were up 26.4% in 1986 compared 3 m

h.., w 6 591.7 wah 1985 and up 44.5% in 1985 owr 1984. Favorable short-

• • 3=amh<aue 6==h.

887 7 n term rues dunng 1986 resulted in an increase m shorucrm "' 6 """'h' 'h'ou,* is m.,,s.

• se 5 bormnp as a funding source. h serage volumes of federal funds purchmed and secuntrs sold under resale agreements.

a well a other shorwerm bormwing row ngnifranth in

• n~e== Ji i* N = a.m, e. a.*w $ a mm. m.,

1986 owr 1985. Aerage lonperm bonominp in 1986 =cre aficcied bi the issuance of $125 milhon 9.25% notes and the msunn of $30 mlon 8.875% notes. Affecong the =L In additon. appmumaich.9 mLon shares =cre increase in 1985 owr 1984 mas the issuance in januars 1985 mued in conneston with dmdend reinvestment and em. of $75 milbon floaung rat ~ notes. phwee benent plans. Another lactor afic<tmg the increaw m shareholders equits me the re'enuon ofincome after SH4REHOLDERF EQliTY the pasmein of dnidend.s N 11.5% growth in serage shareholders equits in 1986 NePoned coh dnidends per share represent the hutoncal

== shghdv below the factear compound gna.th raic of cash dmdend on the common ad of Soiran Enancial 13.9%. Dunng 1986. the growth m nerage shareholders Caporaron. Ar Decemkr 31.1986. Sonan a annualed equirs was slowed bs the repurthee of the Compam's dnidend per common share man $1.36. Dnidends declared sharn lpon consummanon of the DC.%R merger. the Com. P" c mm n share in 1986 were up 10.0% mer 198a. pam issued approumaich 1.9 milbon shares of common o lommg ar mrreaw of 13.2% in 198a o6er 1984. Table ! Table 19 %,en Fmanrial Cormirene and whani.are. %mmar, d %an Term Someww. iDdere in malhanas 19a6 IvM 1964 4 *ouns Ree* 4 moum Roe 4 mous Rase 4r ecerW Fe&al fundo purchseed 8 396 I 919% 8 7442 10!4% $ ?51 l 9 nt% w wns ease under as**meo au epunhaw 632 ? 11.51li 690 3

• 70 als 5 9 Sn Meer ame.

323 1 10.00 251 2 7 80 219 9 s 03 Commemmi pape, 35.3 ? 04 39 8 7 82 li ! 8 16 (hhee 502 4 ? 67 4i22 ? 82 217 l 8 49 Temi 81.939 6 9.55 82 13? ! A 52 II ovi ? 0 02 W N fiW8 tear summense usuunna s freresilumle purhased 4 7590 6 80 $ 7318 8 23 $ 4?0 ? 10 34 Wurses neuf unrice acermee tu *purrhase 626 5 6 44 3"59 ? 84 298 8 9 81 Maner noen. 288 9 5 68 227 8 69! I?97 9 45 (ammen mal papre 41.5 6 73 35 o a 2? 15 I 9 74 (4het 399 7 6 94 316 o 8 l* 223 9 10 A bd $2.115 6 klassme emuh*mi benner 660% $ 1 e40 I ?*% $1 i48 2 10 re% musemos ammm federal Ivada purenard $l.058 3 $ 744 2 8 7511

• ireuran omf under er.en-> n. semer<ha-fl9 7

?!8 8 635 5 Masre *** 356 3 259 6 22e 8 (emmewW paw 85 3 4I i 19 0 (Rim Taal 502 5 412.2 29s 0 26034 16901 1.840 7 28

TaMr 20 5 r w %.a s.6 6, Sekund

• f Lpen rme (Desen a meinees mer, per eher, deep t er faded P

. 31. tea 6 1985 1954 1983 19a2 EJ J ogue, m v ered S 664.3 $1631 4695 0 8579 i $506.5 bhmeteldm'egum and hms. arm here wmp a weed best emnw pre esamen ehare 1.119.4 919 7 776 6 664 4 621 1 Gamalgreve e.r' 20.$3 18 31 16.59 14 91 LS 56 Dmerede deamed e a preces d ne anroen 13.36% 9 aC% hl02% le 34% 12 14% 36.10 33 89 13 a6 36 62 35 33 iread shareheWm' egun m e penne d weed Asese Leone see af unterend s==ar 8.7a 5 s5 6 18 5 91 & (3 Depsen 8 12 8 92 9 a0 10 00 10 $ 7.64 7 a5 8 28 7.59 7,21 Sheehennes' eque and lemere. Wmp inwene capaal greensus 17.21 82 % 89 49 8716 41.54 flemurs en savupe more Muhpard be 1.09% 1 07% i 11 % 0 99% 0 9*% 4=napr essen a meras, seeni equen 16All 15 a4X la 39X le $7X 16 42X Anurn en sweser smal eque Muhphed be 18 19% 16 94 % 17 10% 16 49% 15 95% f.anage vuesmed' ire eur w - r., L49% M4 J% 66 63 38% _64 67% n s7% gos g% g% g% em a on page 13 prwxico dmdend informanon for each of the sa Refer to N<xe j on page 42 for informanon regarding the years ended Denmber 31.1981 through 1986. The common mock dSmran Financial Corporsoon s traded Compam's wnmarnem and conungencies in the mer<he<ourner market and is quased on the Namnal Dunng 1986. the Compam began mnarucuon dan o5ce Aneonanon d Secunta Dealers Aalommed Quotauon buildmg to be added to na Feadquaners complex in Norfolk. Svmem (NASMQ) under the embol 50W On Januan 31.1987, Compleuon of the buikhng is expected in cady 1989, at a there were 30.174 holders dthe Compsmi common mock. Table 21 on page 30 prescre quanerh common mock das for the years ended Denmber 31.1985 and 1986. The Company i Senes A $2.37 cumulaove convernble preferred mock a quoied on N UDAQ under the symbol 50VNP. Dunng both 1985 and 1986 the Company declared regular quanedy ys dmdends d 8.5925 per share on a preferred mock. Federal regulsory agencies irnpose certain remixtens on the pc mers d dmdends extensaons dcreds and transfer of an.ca hm wbe dianes a bank holdmg mmparues Haion. calh. these ratnetons hee had no impact on Smran's dm. ia dend poln and n a anocipsied ihm thes mill not have am impaa m the future. For addioonalinfonnsen on thene re. arxsons see Name N on page 45. In addamn to dmdend rearxtonn. carnal requiremerus are also affecsed in o&balann sheci nnk. Ths meludes sa.i meen as mandb and aber letters of creda. comnutmee io extend creda, and varmus useres rue futures and hedges. $Zb. umms 29 I

Managernent's n and Analma d Finannal Condinon and Resuha d Operarmns f(organuedl taw 21 %ran fmannel Corporama and Waharwm S,mwh(mmmonwertDen 1986 1985 4en 3rd 2nd im eth 3rd 2nd la Waner (,l. saner Shaarwr Warw (Anarw Searw Saarw Saarw Per anar, (aeh da nkosa dm lared 8 .34 f .34 8 .32 8.32 8.32 8 32 8 28 8 28 Buoh satur 30 43 19 84 19 45 19.38 18 34 18 04 i! 59 l' 03 Warse pe=, - Hh 36 7$ 42 63 44.50 36 25 32 88 31 25 31 38 28 25 lo. 32 63 33 00 34 75 32.25 23 88 23 38 26 38 25 38 haudof 33 75 33 38 41.88 34 is 32 25 23 63 29 63 26 13 %are. eusmand ns pio, hwicad 42.192 42.147 42.277 42.962 414a2 41 647 27 940 2?.824 %,We-d e ree, 42.365 42.382 43.155 41.875 41 838 42 001 4210e 41.993 Trehns iohem om 5.783 5.227 7.316 5.964 54% 2.763 2.331 2ow

• • ar h.adra 30.220 31.643 31.785 30.064 29 8a 28 sh 29 646 30 723 Waru rapanhas.a imde 86.424 81.491 81.771 81.493 8819 lol2 8769 8674 P i %hiple 9 701 10 951 18.301 11.361 9 214 6 954 9 01%

8 09% Waru M 16320% 178 33% 215 32 % !?9 31% 150 33 % 111 94% 143 ??% 130 45% n,,, ,a. r t.,,.. m%.. a.. e e.

m. n m3 a a..,

.,a, r m, %...a,,. m.a.

r. a. a m

,a.,,a, . an, ,,,,e, s.aw.r., s . a.a com d appmaimaich $28 mdimn. fr. addioon. the Compam evellent pnman and total capital retum of 6.994 and purchard 170 acm dland in Hennco Counn. Virpnia for 7.97%. regr<1ncl. ai Decen.ocr 3L 1986 Both dthese 3 the development d an operanons center complet ratam are well atxnc the the federal Resenci requsd N" minimum ratxm d 5.5% for pnman capital and 6.0% for Dunng the pas five scars Sosran ha3 expenenced out>. iotal capital. %ie inuances in txxh 1986 and 1985 affected the rapita ratos. mith the 1986 wance d $125 malmn manual gn=th whde mamtaining its atrong. sound capital quahfung a3.crondan capital and the 1985 uuance of $75 ponauon. Tha captud strength is endenced ln the Compan',* mdbon quahf ing as pnman capital. 3 taw 22 %=een fmannel Co parsam and wheaderw-tM kdNW aDolian e miurman Dyreet pr Il 1966 19R5 1984 19R3 1962 1981 Pnman (.apn.1 % sharehoedes egws 8 664.3 $?a31 $ovs o 85?9 ! Siob 5 6431 6 emanr. 6,r k a.== II3.5 97 ll ?90 63 6 59 9 53 0 laws commamen ma,. 75 0

• 3 o Pnman capaal 41.052 8 8935 9 8??40 8644 7 8566 4 8MM6

=

smnuma means .umsus ammes M Paw ransai 81.012.8 8935 9 $ **4 o $644 ? 85ee 4 8504 6 i unaber k,ripere dem lea l %0 5? 0 5? 9 ?? 4 ao s l W iapaal 81.200 9 $WI9 SR3 0 8?O26 $M38 85a5 l samme see.as samen mamme esme= I&im6 W Pruman 6 99% i2% e n4% 653% 6 36 % 6?3% b 7 97 'M ? 14 ? 12 7 23 7 81 30

TeMe 23 sm. resnsic,p.,m a #s

a. ann i n 5 e aan.

Dmenn 31.19ne tD.am a adbeans temuh. o um duve Om e s 1 shm sh.ough dwowgh duousn Te.at %n. on, the,, ou vuehe Ow bar b n.dne b.el 8-m e u. L,en. leewarm eerurem 84705 85?O $ Soo 8 752 8 6.527 4 3.3a4 8 9 9i L u m..w p .,m. 34 69 139 319 1.826 2.143 og? Loo 79 4.176 1 876 kai campig m S ??9 ?De 048 891 8 022 _ 5.210 13232 lance Branns lmhan Depa 312h 720 93e t41 5 423 3.232 8.655 h benowsp 1373 7e 81 6 1.938 2 I too t,- 6,,, 25s 2ss T el uwwe kanns 1.shdan 49% ?tMi I 01 M*

• 36l 3 489

_ 10.850 % buneme Brenne Lahdan Demand depoen e <=wa6 nei er ca.m o,,,, 8.791 1.?91 hai nr. eenuene beenne hebdam 59i sei laeveu %inspoire Cep 2 382 2.342 4 " (~ i 8 !.2 '2 4 8 12 !.2 n, ar ~ ~ " ' * " " * * * .22 2 2 a'2 2 m. UQUIDITY INTEREST SENSmVITY bgwdry a the abihty e saudy demands for exienmons d ereda, depose wahdrawals or other corporme needs Uquide interes senuoves maragement albwi for the maummenon ey a generalh pnmded from invemmera, loan repe mern. d net uncres income bv manapng imerem ree nsk. through depose and the Comparn's abibry e obtain funds e e planrung and controlhng the mix and matarp s d assem and reasonable prre. The Company's hquiday posmon r, moni. Labibtn The Compara monnors is irneren ensitivrv ered by the anwthbibry commnice under guidelmes pouton owr varymg nme irnervals. vhile anwinns changes enabbnhed by managemers. m external factors whrh mi#n eSect the tarred ma and Net purchmed funds, the relanonship dcore deposit powth maunnes d uncts and liabihtn N Company may une a wt g vwth etal ewrige loans e etal average vanery of iechruques e schrve its deired irneres nennaivry to averrt asects, anu a company's abilny to obtain funds a a reason. poution, such a the purchase and sale dneeunues and the able mer are all measures da 6nancialinmituoon's liquidity enabbshmers of appropnaie raws on mrmumer depouts. pouuon. Suxe 1984. Sovran has incremindy used short. hun presenbed hmm. the Company also mav ene fmancul { term bornwd funds as a funding source. N une d thew inarumees such a uncrew raie e aps and Gnancial futures funds has enabled the Company to take advantage drme to control o uncrem senutivny pouuon. Tahle 23 prewra en irwerem wnuovay anahim as d spreads when they hee maned. In 1986, everage net December 31.1986 N anahm duplavs a matic vww dthe chased funds e average asses.= 19.47%. mm wnh 17.22% in 1985 and 13.85% in 1984, interen wnuovity poubon. As acch the analysm does not take irno mnuderacon external factors wiuch crugs a5eo the 31 [

Managemenl's Discus 6 ion and Analves d financial Condition and Resuha d 0 persons cm actatmry d anacts and habihtn nor does il consder the from those of compenses that hee squu6 cars umstmeras in hmmed e5ed d finaneW instrumenm. such a innerem ra:e facd an. cts or inveniorn Managemers belsem lhat the masi swap or GnancW futures. Therefore, the a alms should te wgmfrant imped on im Gnancial resulm is the Companis used 4 mnjunamn with the other financial data found in abats to read lo changes in irnerem rues ruher than changes the report. in the generallevel d pnces IMP 4CT OF IN FIATION OD CH OGING PRICES Ql 4RTERLY DATA The magnes 4 the an cts r.nd lab & tic, of a financW in. T.ble 24 pre. eras quanerly resuhs d opersions d:he ststuton are monean in naure and therefore daer greatly Company for the cars ended December 31.1985 and 1986. Table 24 howen Fmannel(orp-anea and kbedww. Qwyrk kweme %wama Dan lla M nrep per eharr aman 19a6 1985 h Wmun. I.aded h Lao. Ended Warh June !*p Der March jene Sep Dre 31 30 2 31 31 3n 30 31 inven womr 8310.391 8315.331 8312.395 8309.240 8 276.529 8 288 348 8 294.856 1 302.645 larme espraer 185.427 583.370 160.691 174.414 169 991 173.250 Jg 179 641 % mrws wome 184,764 131.961 131.*04 134.626 106.538 115.5a6 119 192 123.204 Pnamem be kee h= 9.h4 10.900 13 103 14.050 84*4 9.653 a.363 13096 % varme anew alw pman be hun h=.e. 115.195 121.053 118.60s 120.576 98.004 105 945 114 829 109 50s % nwerms preme encWding areww. pasu mui nue-.i $4 629 $ 7.735 37.710 68.a36 44 199 51.143 50.526 59.326 !wevruwe peau and ih=er # 1.154 2.763 2.957 1.40s 1.042 2.3 73 246 th %sneamwe nseas, IS0J46 140.112 139.007 143.153 112 876 188 651 119.517 137.3h lareer br6m wrouw men 40.734 41.019 4a.261 47J67 14 429 40.810 42.084 31 491 Apparahir er.sw man 6.410 4.164 2 967 7.766 5 049 8.292 8 659 2.M8 %aurene 8 S4.12e 4 36. ASS 8 37.294 4 39.481 8 29.3a0 8 32.518 8 33 423 8 28 :53 % mrwar per shaw 8.83 8.a5 8 88 8 93 8 70 8 76 8 to 8 68 12 1

Consolidated Balance Sheet Smran finamuLrpormmn and Subnidanes ith.u %,.eia i,..w d. Wmber 31. 1996 1985 1984 Assees Ca.h and due in m bank,_ %ae j $ l.164.624 8 926.986 8 810.267 Wncemarkei unewmem. Federal fund. wid and crunir. pun ha cd ..nder aan.cn cm,. i.. m.cIl 715.007 422.548 485.523 Due inim bank.-imerew trann, 336.418 473.064 575.!!0 Tradmg en oune.erunise. 32.465 23.153 20,716 t hher 91.861 107.754 50.206 T.a.1 monco.markei smewmem. 1.175.751 1.026.519 1.131.555 Imewmem.cruritic smarker ialue 1986-82 22H.978 1985-82.or>6.641.1984-81.652.232> %ar C 2.145.498 2.053.622 1.697.425 te.an. inee of onearned mn.mc..( 1996-8281 046 1985-8311.408.1984-8284.7W-%ar D 9.911.032 8.558.748 7.091.816 Allemam e for k an i. c.-%ar F ti 13.512,

1. 97.784:

a79.053: \\ei loan. 9.797.520 8.460.964 7.0:2.763 Premi.e. and cyuipmem % > 295.477 270.753 249.038 Due fn m ruwamen on.r eiun. e. 40.733 29.581 21959 t hher a..et. 332,553 272.936 310.341 T.aal 4..et 814.952.156 813.041.363 811.237.348 Liabihin. Des = a. %nmi. re. b. ann, 8 2.955.333 8 2.320.8C5 8 2. I i 1.057 Imenwbearm, 8.655.366 7.395.526 6.279.500 Total dep.-a. %a, i. I l.610.599 9.716.33I 8.390.557 whonacrm borr. mg. Federal fund. purcha.ed and.ci urar. wid under.igreemens. in repun ha e 1.028.798 1.414.514 1.386.547 t hher honacem burm.mg. 910.823 703.178 454 172 j T.ul.hnnacrm borr..mg. %+ H 1.939.621 2.137.692 1.840.719 lemsaerm born.ing %ae 1 255.087 156.565 81.639 4n epian, c. out iandmg 40.733 29.581 25.959 (nher hab.ht.c. 241.781 238 069 203.483 l inial laabihine. 14.087.821 12.278.238 10.542.357 %rebelden' Equars Gemn amrnt. and corums. n v-%+. i arvi j .%hareholderi equas-%ae. l. b.. M a ~f \\ l're( rred w.= k-par salue 82; 00 n r.han-i iNet of di.coum of 19Mh-897h.,985-81.W L s us4-82.20 ? 2.277 3.718 5.134 b.mmon w.= k-p.r salur li on ger. hare 210.960 210.484 138.656 w rplu. 21.840 4.876 71.582 u Hetamed rarmng. 626.258 561.711 479 619 Trea.un w.u k 17.6646 Tinal %hareholderi f.pnn 864.335 763.125 694N91 T.nal I.iabihir. ard sharchnideri F yoin 8I4.952.156 813 041.363 8 l 1.237.348 Pre (cered w.= k % err. 4 82 3 7. umube. nmemhl - share. authunned 5.000.000 5.0003:00 $ #0AN) share. ued 130.110 212.493 293.402 tomm..n w.. k where. auth..nred 100.000.000 Iml.000.000 50 000.0(0 wh re.i ued 42.191,929 42 046.824 27.731.350 wham oiawand ng 42.191.929 41.482.22R 27.731.350 w....,,....,w..nn,..s...

Consolidated Statement ofIncome Smran Finannal Corynon and 5ubsidane* Var Ended Dember 31. 1986 1985 1984 lutmas locoasr loan. meludmg lee. $ 1.018.047 8 926.903 8 805.183 inw.wns.erunnes-Tanable 91.6(5 104.198 102.408 Taiempi 81.370 56.393 52.612

• aal mweimens eranir*

I72.975 I60.591 155.020 Mones. market m eumenu Federal fumi.old and eerunne-purrhased under agmement in re ell 20.205 24.115 34..,33 Due from bank -mieres branna 23.298 41.244 38.818 Tradmg errount acurine, 839 998 97i Oiher 12.193 9.227 3.647 Taal mones market imeumenu. 56.535 75.584 ??.969 Taal lniercu larome .1.247.557 1.163.07H 1.038.172 leierv.: Espesee Depo.iu-% 0 564.338 549.448 509 803 Shon.orrm borna.mp Federal funds purchaned and runne-sold under agmememe to repun ha c 91.921 89 946 77.979 Other shorMerm torn =mp 47 748 44.652 41.801 Tmal honacrm borna mg. I39.669 134.598 119.780 lensacrm born =ms-20.495 14.5m 6.616 TotalIniereu bpen e 724.502 698.546 636.199 Nei laam.: laceme % imeres ini me 523.055 464.532 401.973 Prm m on for kan I. e*- %e F 47.636 40.186 26.678 Nei Imereu ini nme Afwr Pnn.on for loan to,- 475.425 424.346 375.295 %.masema: Imenne Tru.i mcome 32.897 28.812 26.555 'i.enre charge un dern arcoom. 57.407 49.540 41.003 Sen re charge. fee.. ami.wher mi <one 141.710 125.031 107.868 Tredmg arroum prnre and commn m-6.896 5.811 2.599 wunne p,n and ikme i 8.286 3.654 407 Total %ommere i ln.ome 247.196 212.848 178.432 %emmermt Expen.c Manes and empimee benefs %e A 297.4i1 259.!l4 231.506 Net occupancs ripen e 33.067 29.452 26.737 Farnnure and equipmem ey en,.e 58.248 50.347 45.313 Other 164.612 149.467 126.468 Total %n meteu E scen e 553.338 488.9 430.024 %ct iscome inenme Refore Irrome Ta. - 169.283 148.814 123.703 Apptwabic mrome tame -br 1 21.327 24.638 16.200 Set laceme 8 147.956 8 124.176 8 107.503 Set laceme Per %are-Note M $3.48 82 94

82. 67

. u hee e et.sppen..ng nee, he faham.3l quaree *M. W 54

t Consolidated Statement of Changes in Financial Position Swan Finanos) Corporax,n and Sulmdares j w.we kar Ended December 31. 1986 1985 1984 Fund. Pmided Operson. c Appined Nei mcome 8 147.956 8 124.176 8 107.503 %na sah charges. Pu en for Wn k - 47.630 40.186 26.678 Deprenaien and amonaation. deferred saie, and other 61.193 46.092 39 903 tuna charged on na of termerr-(35.716) (21.455, s13.301 Ca h dnidende decland (53.409) 142.084i 136.399: 167.654 146.915 124.384 Depi.e and Oiher Finannns 4innic-Lalnine e qued ihmugh a quu nme 427.644 Nomnieres heanns depac 539.703 209.748 107.770 Inscw branns depe=+ 929.574 1.116.026 589.312 %n.wem immm me (200.724i 296 973 547.065 tons.icem bornmme 98.522 74.926 13.652: Purcha.ed and acquired common win k (87.521) Puerha ed and acqund ima un += L louance o(enmmon o.L for fr. Nil i31953:

1. 1 f.F 02i 69.030 (hher um c. of common um L 25.263 20.107 503s20 f h en le u of fra,1 onal hare.

1109 tit 2i _ 1.80).382 1.o83.715 1.345.313 (hher Artndie. (hher net m quirmiihmosh m qui nu n (4 h and due imm bank. 144.037) 1200,861)

116.719 28.999i Premi e and equipmens. nr.

t hher. net 462.182) 454.948i 146.0596 464.857: 54.488 124.593i 4371.9376 t i l2.179: t99 65 h Tusal Fund. Pna ried i Apple J. 81.597 099 8 1.718.451 8 1.370.046 Fund. Applied (.hanse in Earnms 4 et-iPmided Earmns a. et. acqued ihn<,sh a qui aion 8 4I3.946 8 8 h.m marLes imeument-133.232 a105.028: I l.583 Imewmens e unte-I8.773 357.482 3.739 Ima nei of unearned mn me 1.031.148 1.465.997 1.352.724 T,el F und AppW Pnaidedi w...,...,....J.n em. 6!.597.099 81.718.4Ti 81.370.046

Consolidated Statement of Changes in Shareholders' Equity 5mran finandal CogwWaon and bulmsdiann Piedm.d %,6 ( e % isch besc $ise6 %sm 4me no %m Am mme N-4 f_ _ here. Case 1 sed FDS TW TIAS DIDED Drivnumra sg.1964: Am.. e teswi=ms.4.,a, m4 imit si 629 Ji un o!" 8 l N 1". 8 il I w $ 4'm 31% e192407: 8 e619?i 8 $?9 Uh4 % w=ie, lhiverm6. ea ter d on 107.303 In?.303 taman..,s.stiv.,m.h, Pa>=d 6.8217 re.n, ell eak i33 hnb fr.on t i:14 i!!4 Peakmed Win.d en . 6 uiv....*

• ell! <ssi, elu R27,.

il0 A21. ued pur

m. d.,1,mt

.J9184 i9". i9!!. e..,=. 6 pua h w,mpe... ihnn ami.. k. pua. ! u 4 6n 1 i* Ii ev m il* vnei i! 9ei.i l' 2nI w r ,d up. ,n. a .d. .nibe p,, ,s. 6 .lu ensi. . t a,.. l i na e,, x-wit 34 %u a.ord am 6. w,.d 4 .. k la en e go.a h n6 i ili ei s t i ewe it:u 19 310 km... w.d., rn mz s' s u

• ii t.

e i m ni eis' s i e.ew _ s . s ne4 wi IVS THE if.AR L%DED p(IIMBER 31.1983. kam, a nrsma.as os -, 29 i s"J 8i i J ! u rio f i in e. '.,

1. -l wf g :

p, lb nwn,s da ia,*d.a 120 l** . 3 . 3,,94 wi IJJ l7A e,.mm..a.. h.s : Jo i-,.n, PW.a 6. 8! l'sn haa u af t. is: 421 T* ue. 6 .' e l.

• • uh l e P a b 4+nedihn.sh. 6 se..a,en

.*I ix1 i 11 isii. ill ml. Sha,*. e pil g.s,.ud.w h. du hel 4x nin. .I wi!. el vil. pin.,.smaru ie.. a pop h.w,mps.a. shnn and. 6.,se..a p..n. O i iu. t ; in .IU i*w 4,.9 Ii sm. Jn n ? w ,a,........ u .d. om, eu,,,reer d. 6 .no w asi . a D 6. e.i ea i i n. ,i, in 94n

ani l

4 mmo,...o erb, L6 1. 6.p6n i t we 94; .. u 2 i a 1943 112 B.anre e d.d.,ar

i; ret i.t m, it.an. eija s f oi ao # 6cn 3 w. n i

... i s we., s.i t rie 4 8 76.l123 FOR THE iEAR E% DED Darvisart 31.19ee: kaa, s iesiamas ed.,4, 212.493 83 718 42.04n.82 4 8210444 8 1876 8361.711 e614.396> $si f.%4: 8763.123 h ie.d. ..n im~.e.e =. . hac m L usin., i 4.hr. h, e J n.y..I ivar.

1. 614.396e

.3 073, ell.39fi 614.396 17.u4 fr.ao,..d u ,,t,cmne....on.i.. 30 000 ilo.900 ins ame... ;,,.p.. I4? 936 14 f.936 8,mm. . 6.s t IJ r,.he. P w.d. 6. gf V -.e. i33.013e i33.else %am. pun hswd

i394, 42.19e.992i ilu 983 473.107:

i394. % m..eun i inn..s*. 6 eH.092i ..ie..a,wn.w i87.31 As a 61Ai i2 991e %,. o.,,.s p.m.un-da.d,mt a3.429e mimattse,.s.e 6 #ws. how,mpi.e., ihnsi 4,Wf. 6 e.ges.sli p4das U4.30tO 4.3 $ l

20. )9

%,.,,#..n..,=,.. $h.k63 ad...,nihr ee,w e.-d. 6 482.383s al. 541s 162.383 813 628 %e.,.-.ed.n .., n .n.d la ut 1.930.098 9 630 39.380 f e.m en er .d tee t..n4..ha,. 64.030 43 032 415 e# 4, a109s km., m are,d ie, 130 110 $ 2.2 77 42.194.929 8210.0 0 $2:~ 355 Se3n,23A 0 m-soums - 8

• 8 8'me.de. Ing.wge, s. Perige.,.g ggr e,w.,s.

moseme== 6464.333

Notes to financial Statements NOTE A-ACCOLNmG POUCIES The Compam dowerwmues the accrualofinscrest on ban. The amunima and reporung pola in, d 5nran finannal b ed on debnqueno statua, an evalusuon of the relssed G>rpurnium and wubnediane. inn ran or the G,mparn i fou,m n>Useral and the fmannaj suength dihe borrower. Imns generalh areped swuntmg pnrwiple and praire mithm (eher shari nuUment and crede cards are generaDy placed the fmannal werun mdumn. The folkming a umman d on non*rrual atatu. hen the collectabibrv dirmerem is the more,(uni polaw uncertam. Income m-ogmacd on inanHmers and credd card Principles of Consobdadon k'*"'. duurumued and the loans enarged off after a debn. The nmwbued fmannal emement melude the amont, .;uenn pen d 4 90 and 90 to 120 dm, respectneh. When of Nnran Fmannal G rpiremn and it utmdurr. Pntre. """"" * *""I' d"*""l*"'d i"'" Cdd'd ' """** pal uh duine of the Gimpam me lude Nnrun Nnk. M in ihe runent scar > resened and irwerem myrued m pnor and nn ub ediane. 4Na ran Nnki. and Nn ran Nek Tian. sean, e charged to the allowance for Wn kwes. Land and na aubudianc Nnran Nnk Tfanlandl. all of O 'Af'I"'k888 mbwh are = hnih im rwd 40 mgmfwant mien umpam balam e-The ad slum i d the a&mance for loan k~.e a herd and trarNutenn hasr Iren ebmmaled m run ululmion. upon the gnmih and compaiton of she man portinln the MonepMarket Imestments I'"*Pd"

• P*' I"an lo esp 11en.e art maluaixin of the M mcomarket imewmenb. m ath the n.rplum d tradmg l"d"U""",h""d

1. " "'# I"d *""I 8"d '**"*E*"'

4 miuunt,, uriises am rarn,,l al nmi. whu h ap;mnimale-mith n%p 1 lo n ononui nendnu ns market Trading awuni =runsw am rarrwd at mark,4 Premiace and F+dpmcas (.asn= or l. c% resulting from = ale and ad uwment i.. Premne= and eqmpment are rarned a coM. Iru arumu-f market are arrluded m mmmtereia moome. laned deprenainn and amonammn For fmannal reporung

• mn6e.

purpme. the Gimparn pnnnpalh uses the entroghi.bne imewment n unine are i arrril ai nmi. adju icd for am..r. method d deprension and amonaation for buddmgs iuainm ne premium and an retam of dnauuni. The admed I"""'"" "l"'P**"' '"d I'h Id 'mprmemenia. .od of a penfw n unis old i-u<d to compuir g.un nr lo - Laintal lear am recorded a: the k=cr d the prement ialue on the ale of thm n unis "I minimum leas pas ment > m the bepnnmg of the leme Finaarial Futures and inacreet Rate Swape tenn or the for n ai salue of the leased propern as ihm Fmannal futures and inierec rue map are salued ai dar. The i ap.tal lea r a ei a amortued on the straarhobne market escept for those ervarumenia thai functon a* hedg"' method user the lea e irrm. and the arnoctuaten a included Both realued and unrralued gam,, and kmc are in<luded m

• d trading airouni n%enue Gam and keen related io rmannd O'*"

futurce and the irrmmmon d mierew rse swap ihm fun.tson l"' I"d"I * "' h"' **'" '"dl" iale held for resk shwh an hedge, are deferred and refinied as an adjusment to m.

• P"""P"U' "";mmd ihn," ugh fon,In ure and > rarned a irrent rewnue or npenac. Pin mera, made or retened under the lower of nmi or e nmaini nei reabzable salue. Am snic.

mieres rate sway ihm func1mn rc 6dges and offactimg m. down at de daic of anquneinin am chargni1o the alki m terem rue maps arranged a the e." of cuniorm are '"' I"d" I"'*' I 'P'"'"' "' """d

• C""""1mn w ith om ner-ren gnued as mened

'h'p of the pnq rrir ub nquent unte.d.mn and gam and to c upm Je a e wwluded m oiher espen e. r 1,ian are arned a the pnn< spal amount outwandmg net h m. luded m. sher e,1 are intanphic av eta. mhwh of une arned iru ume Iriser,w on loan arwl amortiLainn of eu lude miingas,. en wmg a qunamn nab. depwt in. unearned meume a computed in method m hu h generath W. M ih, m c= d M m vn m m m d n%uh m imel rate d return un pnnnpal amoura ouwoul. emnd ukden % w w.% Qew n+ mg Equipment leced in uiber n generalh a rounted for are am.. w..d in pnipirtion lo the ewimated uw nme net of u eng the din,1 (mam ing m,1hml for (mam ial repirims ,,bie.d cy. % de nmi fnim e g We n laird mw. purpme-I..en b. o muS.le n pm,, ni du n,t p..,.nl W d i A 37 t

bes to Finarcal Staiemenes tConunuedi the future income streams reimed to assets and babiboes aquued through merpers and are amorcard on an areler. transactions wah Suburban and folkwd submanuaDy the same arounung practxu sa d bases over lives ranpng generaDv from 3 to 20 veart for the thrw mornho ended March 31.1966. Suburban N euess of com :wcr equnty in net assets of acquued sub-had net irecres income and net inmme d 831.417 mhn reance is amortued on the straaghohne method over penods and $7.63] milbon. respettrvely. A reconcilmhon of net ranpng from 6 to 25Sars. N components of net iruanpble irnerem income and net inmme as previously reported and easets are as Iollows (in millsonst as restmed foDows lin thousaridsh Deceman 31. ),er W bbn 31 leen 1965 1984 leas lead %lorigapr eremns wquenmaa ra. $ Sa.0 $2a 1 824 3 % imeww income Depoem e 12 4 25 4 29 I %rsa $345.140 8W45l E areen af rem see, egne aS.O 45 44 Nhurban ise 392 44.522 $103 4 $$a o 8x % Ptmied Wen $46s.532 Geol 973 amenen e=am

===: ammanum g y,,,, w isa 8& S %.a6. When incorne end expenses are remgnued m dderent Nbertwa 3: 500 26 penods for financ d reporung purposes than for meome in N. % 8:24 ne siouo3 purpones, deferreJ taxes are provided in recognition of these ummg ddierences. On March 10.1986, the Company acquued D C. Nanonal Insentment tax credits pnerated from lening acusars are BanCorp. Inc. (DCNBl. a bank Sioidmg company mih con. recogruzed on the deferral method. Other msestment tax sobdeed aucts of $457 mhn. in exchang for 1.930.098 credits are recognued m the ycar the asset is acquired. shares of the Compam's previousiv reacquued common The Company fdes a consobdaird federal mcome tax siock. N total cost of the acquissuon== $70.3 mhn. return. Provmons for current income taxes are allocated tu h merpr.as accounied for as a purchase and, accord. the members of the mnsobdaied group on the base of the ingy, the results of operanons of DCNB have been meluded effect of their respecove operauons on consohdaied income. since the daar of acquasauon. The ayuasanon of DCNB in. Provmons for deferred inmme taxes are alloemed on the cluded intanpble assets of apprournaiely $44 mhn. which I basas of the related ummg ddierences. ein be amortued over their esummed hves of 6 to 25 years. Reclawineations The followmg unaudited pro forma informmion summarues Certam previoush reported amounw hase been reclamfied the effect of the merer on the Companv's restmed resuke of to conform to current presentauon. operanons. assumuy consummauon on Januarv 1.1985. and meludes the e6etts of smoruzabon ofintanpble anacts. These pro forma resuhs are not representante of the anual resuks NOTE B-MERGERS AND ACQUISITIONS thm would have occurred or mav occur in the future if the On Matta 31.1986. the Company merged with Suburban transacoms had been in eint a the dme indsemed im thmsands. Bancorp (Suburbant, a bank holding company with con. except per share data): sobdmed assets of $3.150 billion. The Comparn maued 15.846.695 shares of common exk in enchang for all of the outmandmg shares d Suburban common mock. The s., taa.s are=6-si nose ions merpr wu acrounted for as a poobng4mtereas transation and. acconhngh. all fmancial das has been remmed. The g,,,,,,,,,,,,,,,,, esn3as His ps vi - Compam did not have am prmous mmenal mierrompam 165.22: I20.63 '=e*'"**" s 4: 2 a6 t

NUIT C-ISTESTMES T SECERfDES Imesment aerunhet are summarued as follows hn thouunda Daember 31. 1966 1 9185 3954 (kg se, e hrha nalue ikd % sue %lertse bedw and value Marta beaur i nead %>. Tr e.uri 8 748.299 8 762.484 8 A.18 274 8 853.127 8 822.630 8 833.541 lawai arm e 249.550 212.$61 64.2R2 65 412

06 m o 105.735

% and im4ne si *vlwina m. 1.064.907 1.131.699 i vani iei 1.093 374 740.860 682 992 ( Rher 42.742 82.234 52 873 $4 728 2* 135 2* 964 82.143.498 82.228.978 8 2 053 622 8 2 %e 64I 8 1.697 425 8_l.652MJ 1memmen ecunori wah assrepe bmA salue of appruumseh 14. The carrimg salue of underlung necunue.hsch haw $617.0. 8519.5. and 8474 2 mdbon as December 31.1986. been nold under agreements so repurchanc =as approumaicly 1985 and 1984. respedach, were pledged e.. < cure pubbr depo ru., trust depmiu, and.or other purpme a required in $650.5. 8 712.3 and $632.4 moon as December 31.1986, 1985 and 1984. rnpeoneh. NUTE D-LOW NET OF l SEARSED !%COME for comparable loans to wher cum Thne loans did na Taialloana nei of unearned me ome are summan2ed a. follo.3 un thousande imohe more than normal ru L of ci,Jecubdits. Loans to thne related partie,in neru of $60.000 had outstanding balances of $90.4 mdbon. 877.6 mdbon and $47.7 mdbon at December 31.1986,1985 and 1984. respeanwh Dunng o,,,,,,,,,,3, 1986.8250.1 mdbon of new loans were made and repau i, ,v,n ment. imaled 8237.3 mdbon. bemra isi 83.202.4 t ? 82.io2 677 82 0%,a's has, a=me . mew m 1.068.642 n412619 62r.111 S(FTE E--ALLOWASCE FOR IDAN LDSSES Trannanions in the allomance for loan losses are summar. (.a.u 3 9 2 en 1 8.a6. sed 65).712 'iw v'n 512 912 12ed as Iollo*5 lin thousandal; Inw f.anarms 24 f.966 229 352 160 uun Tewmpi 661.H5 we v'2 52ts 751 Tam damaea kien. 9.842.014 8 529 4 tn T on2 421 Inwwn 29.018 29 33o 29 39i 1986 1985 1984 49 911.032 88 558 '4a 8? 0u1 sin Bimare si trennes ehear 4 97.?S4 879 053 465.676 Wa=sare of punhamed baan The effed> on income of nonarrrua} and reWrudured loans. an well aA their outAlanding balance 9 mere not dd*' Q"" j'0 ~ ,, ~ ( g M rharpad all 144.572) 131.413> (23.3973 matenal The Compam did na hase am maienal com. Aa- -

• k>.ae E.ts*

99s8 to oe6 i mitments to proude addeuonal fund, on auch loan

• as h i-herre 631.786 428 455a einon i

December 31.1986 t-of prm - ma am loan transadson mith duedori. neruuve ofGrcrx and ,4 11.914 18 ?s t aan their annorialen were made in the normal courv of busme, a.'.,.n mi w a. $ 113.512 pt?s4 879 0s3 on nulmaanhalb the *ame terms as thoae presading as the um4 39

e Notes to Financial %atemerita ibnumure MTTE F-PREMISES AND EQUIPMENT ianectlable and nonrarmvuable operating leases amounied to Premme and equipment im4ude the folkuing im thounainjal 814 A mdlion in 1986. 813.3 eriillon in 1%5 and 816.2 millon m 1984 gm,,,,,, ii Mvml of the operstmg leane> proside that the Iresee pas lagen, mdmienurkv. ensurance, and certam other operalmg g,g, ,,g ; ,yg4 cyrne applm able to the leaned annek. 1.=1 s 30.9 2 saw2 s 24 6:n llum6ma, and mpaarm,=.- 207.034 189 oil ini.tum The futur minimum leame put menta under rapital leam le,mauwsad y..pm,= 23?.336 liv n,in imi nu and rioru anccUsble operstmg lesimes with remaining term

• 493.349 4 b4 #NJ

.tMa vil in rsrew OIt ne scar at Deremher31.1986, are a* folkm. f ew e. vouis, i ndepm.m.." un Asu=dnd l: .a l s*hWMme= 202.640 i,w 440 lai nst 292.co9 Jr *.it 24 i wai Pai,-mvad,,. u I w s.0 a 2ni i1.349

i. s ut,,,m, fu I,....m

.m..nu..a 34.3;9 s ini wi ),, 4,. 1,- ...mm.,,,,, 2.Sha i I"I .l *4M i gn ? 8l144 $ l a R AM $ 11 $842 ste3.4 : sro?u snv oin inna i <ae. 11 % 11 % "88MK

14Mt, Mal 4 fi fe 88 M dh The Compani orrupic. renam fanlase and u e. wnam i w,,

in nau a <*i1 i.,, ci 99-i o?2 equipment under sanou ranccU4ble and nononcellabir

u.,,,

iu is 2ui it m lea e arrangement.s. Tho e lese h4s mg tonere iual ai-io....... i...,, m

ea2m s i in2 rnbute, nort ajh awriated sth purt h.wed pn, pens are

~ e apitalaed and are irwluded m the table abuse. Rent es. 4,n.,,n,,,,.,,,,,,,,,,,.. -2.in i p,,,,,,,,_,,,,,,,,,,,,,,,,,,,. pene net of subicase rental meome appbe able to in,th ..un.- e,,a. ai, sg MTT'E G-DEPO 5m beptmila OULhldnding di Det er.ilrr 31.19ht). 1983 and PM $ and ihr n'idied infer,'*l eyw'n=,' Iur the scars fo[hmt Im Wiusand.t l986 ign1 i9M s 4

• m'8 i,,* a=

4 m..uns t u a. 4 a. t s.,,.. \\**=r** i-enas 4 2.933.233 0 3 ' ijii nni 3 g j iii iig? g larmu hranus 1,w*,w. s== kms 917.04) 36.721 J* hin i ng t At 2h lut i n Me m,hes... uni-2.301.733 123.448 l i r,o s i. lit i liv *i t v.vni Heru ocme-1.046.J2 7 30.297 Mu uni I; *:9 x 6 L V1 4? 216 i em.ume..ende e-. 2 939 934 248.381

Ce. 6hi Jiy ix4

/ u? wnM J4! *ni linife me. 4,i,p,n $limi sees..e m. l.409 638 102.833 l.lin i'J w hJo 1 oks 119 wo 4Jn D o,eign 20.98A 638 14 JM t aww in *nt "w N iner** iranns 8.633.366 6 364.338 ? 40 iJn 3 uv 6 6n e J:u iis. i um not 8l1.610.394 9 w ?i,. Iii $n.tw ut l 40

NOTE H-SHORT. TERM BORROWISGS Art eerm burm=mp are summarued as (o16 Im The 7 30% un ei ured rapnal exdn duc Om>ber 1.19%. thounandst: .cre i wed bs a vimedian bank and are subordmased us depo a and e rn.un inher habiLin Thes are redeemable a' the bank' n;niori as pnre, derbnmg from 103 9% so 100% ul pnnopal The 9 2%, un crured n,4e of the Parens Compant 3,,,,,,,,3, du. June li 2000 mere u ued on June 24.1986. Iruerre ,,,,n i pasable em.annu.Ws on June 15 and Deiernleer 15 p y. a sw s3s s ru2n s si"'* a The uwi un.d kng re. ubordmaied tunes innued in e me+ e.*paher 632.663 ago 2 w n.n 6al Januars 1985 hs ibe Parent L mparn require the creatum of lem h + rel fund. pun hen. 244.1,33 i?r. Ivn i i1 n. her eina. a n.ae lurut lo qualsh the ne*

• as pnman i apital for bank 323.0 6 zil em eig nim a..mmea ial onen 55.275 3v me

!! 11: fum.ad e n ih, "'Fdd'"" P"fP"< ; hemeser. the nede fund m dl rx4 nerute 2 ihr neac and n..se holders will base no right thereta.% rho d', T-==a iv),2g ina Qi ha agreed ihas a mill cIl or o ue i apital m amount 3 ouf. I #"' '" *dk" P'"' si.esusi si i e ave ai w nv "P"'"' '"'" the noie fund. Thn, ugh ihr u e of.in miere a rate wap agreement. ihe ehtne wran mamtamn bne of creda for commernal paper dppneuniasch H 3 e"se ma,. romene"'T" '"d "" 'h" ". through Januan d to a 6 sed rate of b L.up and general operstmg purpo en. on a hrh rate = 31 1992. genera 1h approumate pnme lendmg rate, si the time of "ngage indeldednm i un i acil of note erured in deed, borrowmg. I nu ed bnes amounied to approumaich 8 77.8 "I "" "" P""'< m ah i ans ing salue of $2(U men.n. mmon at December 31.1986 Mran'. 6nannns arrange. 82" " *E'"n and b e,, nubonin 1986.198a, and 1984. ment. require mamirnance of rompen. aims balani e which "*O mere not material at December 31.1986. R nhdra..d of U"' ""#"'8' *d'""e and inLng fund &quimment> of the rompen atmg balanoc mere not legath re ini1cd b'"# "T"' I"'"""'ng.s I remirr31.1986are ummanzed a f..'llo. on thou and e NOT6; l-1.mG. TERM HORHOR I%GS I Astig DTm imarn.%mg an ummarireal a Ioll#Hn- (ut h thou aruhr , ng ! g yg, , wn., l'ami I WW F ehre g,, . u,,, i,w v ne. 2 n,o in suo la.. i., o i....,a.a, a 3. w. s

e. o.

3. *n sv 4 ei s i sm s!n ?!2 ive is.

roi

s.,s,

~ I m 4 ncrnent, em. s....a In r. nne non = nh n-born m mg. Ihr G>mparn ha ag&cd . ua., e,n.

1. 20.3 i 8 to u t s2.eu e$,N.,'.ll,Ii,[.5

,,,,,.en n. trui...i deahng mith. among other ihmp the ~ ' * "' 'aud"< r "I

• dP'tdl I'a L of evnam i.ub idiane the

a. n,..... u e, -

! sam o... prionn ni Irn a -. iased with it mdelardne and leae a n w.. a.

s...

ivm. iin.o

i. o..

...mnurmeni h i not aniripard that the e rNrvin.n m di 220.31i in ui .o u ' w.n..,..m. o. h.n,.im..H..o ein ihr b.mpanC current operaims peluw

12. f s9 s o. i2 i s i."

i,.s e e n.a.i.s.s.+ #6. ..as e' n.. \\. 6 3 887 6 ils . ui t i n,, i., *... h.o. u. I s. I 30 _ i i eros iome-s231 ca; s .ar.m. m i 'w..v.i sai.. e, m 41

ben to Rnancial Statement > duumurde NOTE h COMMTTME.VI5 AND CONT 1NCE.Yr ewuine retamera plans nrenne two separme poupa d LIABillnES ofin er*. Tle e nonquabred plarm pnn xle certain ofrae r..ith In the normal murse dbuamen, there are ouintanding ianou, denned en.on tene6m m circa d bmm impened bs federal t commsmeras and ronungens habanen, nuch a guaranscen. Ids lam Addamnall. the Compam sponsors an unfunded nur. 3 mmmamenen to emiend creda and iruerew rue =ap tranamaso, snmg.inuw plan that pnaide bermets en rertam retirees. Generally ampied enountmg pnnriple. recognue che,c Nw plan, are referred so a. the t nfunded Plana. trannartens as ronungens babibtro and. anordmgh. thes an. In 1986. the Compam adoped F458 Sumemers b 87 rwa reacitrsiin the mrumbdmed Gnarrial simernents %nagement "Emeiaaer ' &neunimg for Pennem." WASB 8L. =hrh i-rondurta regular res emi dshe,.e Gnancial mairu ment,. and de,s appb. able to the Plan and she I nfunded Plan. The efint of was arnanpac ans masenal knera an a re uh d na rurren, ths a neuntmg rhange ma in redure 1986 net genodr pen wm outiaandmgs. A summan of the c commumeni3 and nmimgent C"as bs appn simarch $2.2 mdhon. Penneon esprne for 1985 habdmes a the dme aidicmed follom. tin thousand, t and 1984 ha neir levn regruan inch rentaird. Plan change-cifedne jarnian 1.1986. re uhed m an mcreae in espen e "f appnnematch 81.6 mdlion. During 19W). the Compam al. a, .,,u u nen.

n. w.d. ~4.

a s.,s s e79.es2

• 1. "'E"'F'*'"""'* *"'"'"f#""

4 a re uit of the rarh retirement program. the Gnpam m,, %.a <,,da 27.2 1 n.n = =,...,*.a., i. o i-. n. coa h, a' is 2mes.;u un urn sl a one orne charge 9. nei penudr pen son n, r 4 approsimatch $2 2. mdbon. see evs v sa.sas 4 amman of she nimpmente of 1986 nei penodr penamn s,3,ys;sss n, i for ihr Plan and the I nfunded Plans moludmg the 1986 w i..-.a ,,,.,...e. s sa2. ass "In ial charge. and pen,.in eyen e for 1985 and 1984 101).. an thou and t in mnnenmn msih no mortgage bankmg min strs, the Gmpam une, a sanm of interent rme n*L management see hnutue. meluding put and rall opion and pun ha c and male n mmet-Im a wa t i.a menas The Cornpam' nei p+iten so purther or r!! mortum - .,,t.,,,,,,i,,, y,, g m3 i. - 4 i -. *ai ~io....n.,.. io.sto reimed anarts are recorded as market salue Re ulung unreditad u"is " '- a 9'ea *- + Mh kmacs, if am. are meluded m income. .n,, i *w I s.;46 Reatrktione on Cash and Duc Frern Bank Accounta ,,, g,3 Sovran's subsidian banks mamta;n re ene balance e requurd in the Federal Resene Bank. Ascrase requed re ene-k um i,.n u ed m atrunung for the Plan and the t niunded dunng 1986.cre $324 8 mdbon of whu h $1587 mdbon Plan m 1986 a of N ember 31. were: me samfed bi sauh eanh. Prnding litiption u,,,,,,,,,,,,,,,,,,,,,,,, . 3g IWa ed.*rr.<inramp,am.r.wwh Sus ran a a defendaril in sanoun law.u't> generalh irredenial to 5 73 "d'""'"'** na bummen. hnagemeni a d the opmmn that Na rar6 6 nan-nal posawn mill nor te mmenalh affened in the ulumale re olu-N follo mg table ci forth the funded niatu of the Plan tum d bugson pendmg or thrensened as December 31.1986 .md amouni recogmzed m ihe con obdaird balance.heet si Nvmier 11 im thou arxht MTE K-EMP1BYEE BENEF1T PLAM Penion Vlaan nas sens Th Compan ha.a nonconinbuion dc6ned benc6f prn mn u, c.m,.- s w r w... plan the Plantemenng substanaudh allempknee =hoquahh %,,,,a v.,,,..,ia.. w= Miam **a

a. a sitz w.'

as to. ige and length of menre. N Plan has e umed the penaun obbsmon. dpredecewir pian m ronnedon

• nF r '".,.',nw'",r'..'t.i...'".'."r"po'i 8' "s *f.a s'ei
• d
• 3*

d 5' ' "'N ii it i1.2sii ru. , i., %. sannua h..rgers Benc68 under the Plan are ba ed on the em-I 56.9s i i40 su n....... rno n.ee to tan pknee's tear. d menre. age a entrement. and pen mnable iamac* " L632 earnmp dunng empim ment The G.mpam' furuhng poirs ]"",,",',',';,*,"**"*'"d"""" la lo e ontnbule annualh she masimum arnouni that t an ir ga deduded for Iederal encome tan purim e* n,,, .c.,,a,w ,i n.a..pi. i d H 8 ft? aa' ai **"* M.M il2M The Compam abio aponnors t.o unfunded supplemental u -. "* 6 isata s se ees ) Pans 42

The nei pen on ammet d $15.8 mihin ron.We, of prepaid The plan alkswed emploveen. after one so thr

• years d ser.

pension wo of $16.7 milhon lev. accrued penamn ri, t of s re lo make permdr coninbuuons d ur no certain pentrangen 8.9 muon u hach are aluded m usher annna and other lwhihir. of de6ned n,tnpeneannon. The Compo.nv manched a0 or part of respntneh. As December 31.1%. appn>umarch 24% of the she., contnbutere and made additional coninbutions br ihr plan sanets were imewed m puoled funds. 23% m equin beneGi of partripaung employees, based upon inmrne d the wrunues 22% in curporme dets obbgmmna,19% m gmernmera Compam. Efferine Januan I,1987 the combmed plan's and agenn obligmion and 12% m mones. market imewmens. ebpbtbry requirements ofihree vears, mayhmg bmitatens Agregated accumulmed plan benc6: nformalen and plan of 6%. and other feature were conformed. nn amte of the prederew>r plan. as the aduanal sa'uason dwe dJanuan 1. and Jah 1. =cre (m thou and,.i: The Compens ab,o sponnors a relmed dermed roninbuuon plan. Cert.un empknen of an acquired subwdian partriper m eparase dermed tonenbution plana. The effei1 of these other de6ned runtnbuuo, plan,i not mmenal. n,,n i.,,, i w,,a o,,n.wo,,a M Op h ...,,ni,w-s ia, h, a. The 6mpam pon or a w k Opmn Plan..ha h al. nd s x2 rii sw ,,,mi,,, #,, g,ppn.,,,,,,n nghi, e,4 Li to quah6ed offrers. 5 " '" The iioi k Opu.n Plan al o admimwers sarniu +rk opinn- "'2"' and MR gramed under ianou maine plan of predere* w e.u,i, i., n s, ei u v2 i sini vii ,,,, g,,, n,y,,n, The a~.umed rme dreiurn u ed m driermmmg the.ictuarial The w k opmn Plan pna ule ihas incenine or non. pre ent salve of arrumulaird plan lanc6t> in 1983 and 1984 opw a p w. h. J ihr hp *==qualtied M for the predeces or plan mere. %% to 9%. and ihe pniferted aM % e b-e d h, L,.s offrers and cmpkneen. 40 unei creda and enin age. normal ro.d fundmg meth.=l were used. inn and M S are granted al market salue at dme d grani The aggregme pn.fnted benc6i obbganum of she i nfunded .md arr eu n i able.ner genod of imo to sen scars. MS Plana man appnaimaich $12.3 mdhon as Dn ember 31.1% ennele ihr hol.lcr i., rn ene pe meni equal to the irrreaar m Approummeh 85 8 mt! bon of the obbgarmn, = hn h pnmar.h or mrb.t ialue of the Compam ' i ommon woi L from ihr dme reprnents the adjuwed unrecognized nei ohhgaism as adop'"" of grant to ihe lase of the ev nw i4R mas ir granted unh of FA5B 8.. i* *ub ni no leer amom2 anon. The n mainin# in tandern with opmn. and orn e opimri are granied. ML in i 86.5 mdbon i, mduded m other habihnc. iandem mas he addrd as am hme ihn, ugh npiranon. 54R-I und..de. i L Opu.n Plan me he paid m iash or the Mt Plan

• e.

The Compam pon ored r.ntuninbuion thrifi plan thas men-Gmpam' corr. mon += L. as the einimn dihe holder. Certam menbmed on Dm mber 31.1986. The plans allowed J.lanualh MR v.oed under an matne plan of a prednw. or organizatum all empkneen to pamripme after natn.fstion of the,enn e m,n t, nyn,,,,.d unk m the..n urrence of irofied nento. requiremere of cas h plan. The Compam ' ihrifi plan eyen. lh. remaming opium out tandmg unwier inasine plan

• hase mas $12.0 milhon. 811.3 mdhon and 810 6 mdhon m Iwei.,uhaannah idenin al term,i.. iho c dihe w L Opmn Plan.

1985 and 1984. rnpetinch The foN= mr - 4 umman..Ithe iran,,,rton m ihe % L opi.,n Plan. in,ludmg iho e.J marine en L opmn plan.; n.,,, e n.e 6 n .n n... r bny. 4 %,'O f.lf Bb y gg h 333 lM Pl$libf*f i H.c i.- ris8e iwni ign4 8.uiensading a heginneng,d,, se 46d nica.o 990.839 I Iter. i!! i.??ll 444 bee,und f., f SJ xi. 133.722 !!! Jan we hil w,ised p,,,, ..n.f.i. o n a..w ro,. a. t.,,,o n. t urn e ed i;.u

o. r i205.904 et,i e ii; sui!.

I t ie ed hv. n.s .o d i; *> e W 1397.!!21 e lJJ u*J ri$do ?i b Huassanding e and d nest deb w

ni Mo 433 mai n av i inir, iJ2 4.e, age pre e p** ehe*

I erpioPd auring she "d> Hweaseadata e rad 'd w s' $1 ? 60 Si litI $1113 28 60 l ' M* 1% 4? Hr***

• ra i sha a

295.049 4?w liu6 M2 ti.) eier*. eaasur sur luto** rm. 389 667 124 402 ri20 65 $ ime + =a mw ei,+ am an.=s,,,n. s o.-6... 4sa.. Al k.d, 31. 5 Ab had been,.ued in tandem = nh 428.3Nanihng oprmrw in 19H6. 504738 :n 1985: and 538 652 m 1 -- uuums 43

%es to Financial Satemenin iG numesh The fouommg u a summan of non undem 54H iran. Other Poetretirement Benensa tona of mmine plan.: The Company provules certam heakh care and life insurante benc6:a to aruve and recred employees. Substanually a!! of w,. t a, %. 6 s, x,, the Compan3's employees may bemme ehpble for the retired ,g.,,,..,, ernploiees heahh care and hfe insorstre bene 6ts (thes reach e.,,, r,... w, e aa nu.,.ni... u normal reuremeni age.htle workmg for the Compans.1ife Hi,h 4 19ae t wM '. i9M 3 insurarre benchia are pronded through an insuranr? pokM4 o,,,,,a,,,, mamtamed bs the Compam. The row of pros edmg ihas benera i.,ca .a., si.045 m Wi 35 m .a recognized bs expensing the mourance premiuma =hrh 'dd *d** approumated 31.1 mdbon m txwh 1986 and 1985. and $ 857 mdbon m 1984. The row of proudmg hfe insurance for e-a sc + sw e. 43.s4 n...* w.. . i 2* na. the l.020. 971: and 974 partr4aung reurres in 1986.1985 n+ adas ,ad and 19M. reapertncis, e run separable fmm the run of prmiding 'd" .!3,.af 2, .'.L',.". ths,lenr6 forthe 10.4% 9.930. and 9.662 parunpaung atne 4'"se **ma'* cmphnen. The Compain i self.maured for it heahh care h... s14 03 8i66#. sii ii b"""bl* eutpi for that ponion omcred bs healih mamle.eance o.aw,ho,,... a organizaimns The n, i of proudmg the benc6 > remgnized bs .a i,n i$ is aw .) espenNng chum > and admirugratne mila as mrurred Such min o. v.,.. 43.ao4 M no n a s.o approumaird $ 133. 810.9 and 810.0 mdbon m 1986.1985 An of December 3!.1986. there *ere 182.422 54ft" and l484. rnpewnch The n.i of pnniding heahh rare beneGi> ciercinable under which pasment eveld be made m the nir 978. 923. arid 825 parunpaung reuren m 1986.1985 and Compem commmi. <= L These opuoi and -(H. c'P" 1981. re perinch. i. md ecparable from the runs of prtnidmg on iarmun daie, through Januan 1990 54a. cymn'" 6.ub W h un ' m; W um pa pq aw man 810. 84 6 and 81.6 mdbon for the sear ei. led emplosw Tle m 43 pnen ahme for pnnwhng ladh lafe innuranw Decembrr 31.1986.1985 and 1984, rne, vine. and heahh i are bene 6t> are isfore am alla aion d run. inbuison..r. alan redminbunon fn.m arine emphnerv MTE l-l%COME T4XE% The n.mp.orm...I ias cyrn. d n.e an. -uninian,..d I"II. mg rmenue ami cyrn c arm. for mn.mc us purp.. -- a f..llom un ih..m.and.t in I. runl-.hfferent than for 6newial repenmg purp. e-im thousand t s... >..a... n.. o nu s. e a a 1.,. o,, n s ie.:2 7

• ;.. i i.

u..... s noo ei. i........... s a.ess suvu sui,

• s2ua:

e n.. m 5 -* ~' e.m_.. n.'..".,.'.... '3 733' " g"i t ' i ','d ' a.s s, i 2 2s Tase* rnuliing In.. i ruritie iran arison nu luded m i..,.~. i ti. o...,a ,a t i. i n, ..a.u....,-..,mo.i.. menme ianes amnumniio un eqen e nf $1 M i milhon. "'*-**i.om-3'8' I ' d ** S ' l ""a ' $1.528 mdbon and 8188 mdbon for ihr searsended ,l [.S ' ['.'. Ih ember 31.198rs.1985 and 1984. r~pn inch ik.ferred tase ilwnc6tas re uhn! fnim n.n,gnaion of ihr

a,oo

,.n,,, T be raien of applu aleir m. ome usn i. m...m.1.rt..n m...nr use..l.H..n.d in.m i'r unoor lederal nw ome las rair of ifN 'llr n a..n-lot ib.htler. n... an.) ihrer rHre i..... sh. Le mpam '. rffninr us rai, an. 4. Infl.. id..llar. m uion.and. s i..a. a n...m.. n 19 %

r..

v.n i b-_ s.. s n.one s l.,,..m .y ,,i4,. $ *? Jg 70 ge u% p ee i' g ge...'g $

• s..a. t g,,.,-

n 4.. i. :. i..... in i pus .. o a Js 4 iMi. i(J J. i s i. s. .pe n. . 9. f q. ipe e. 3+ h

4. a.

il :tj l. ej H, . l > ns. ,L, . l stiji , g 6, !.3hk N 4 i '. [ ji . lid . {t 8 2i 3J: 12 h% _$. i ei m t,h t.4 s efi pu. _ _iti%

SUIT. M-PREFERRED STOCK. COMMON $7DCK. AND NET INCOME PEH COMMON MMRE SUTE S-PARENT COMPAST FLNANCIAL IVORMATION Pwsemd %ek Dunns 1986. the Pareni Compam obiamed direct ownership Each hare of the noneng Senen A $2.37 rumulain, of'wnran Bank' Delaware through a $25 mdbon non<esh mnwruble preferred work a romenable mio 1.974 share of dnxiend imm Nnran BarCMaryland. Wr naDv. dava owner. mmmon stock and became redermable at the option of the ship of renam of Naran Bank. N.A?s direct subnedianes was fempam at pnm derbnmg from $27.25 on juh I.1986 to obtained through a non<anh dmdend of 817.2 mdhon. Con. 825 00 on Januan !. 2003. and thereafter. Holders of the d" nard Imannal informauon for &n ran Finannal Corporsoon iWerved stark are enmied to a rumulauw rash dnedend of IParem Compam onh i a sa follown im thousandal: $2.37 per share before am dnidend* me be paid in holders of the Compam's common mark. o,i,os N, si

• • 18 Common M "5

Eur%uant to ai'hange m \\ ir)nnia lau efIertne januan l. l9M. 4M trva un harv are no longer deemed in cu o crordmgk [*"j' ';';"','[,,,,,,,, 8 4 3,'$8 ","j$ 8, "$'g' harr hvid at Dwember31.1985. her hern reila ified tam m, 116.539 21* 162 seinaia a a reduisNin of nu ued common += L All e egui nion of i=~=-'a = baa ~wi'---

1. 41257 N Vi

^M 4 M han of the Compam' rommon += k me e Januan 1.14%. ' * [""' "j' ' "j""' '" "" arr treafed A det'reame m i'ummon +m k i Hed y.55 4av (121 l)unng 19%. a tran ler of $30 milhon ma made (n m im, weinou a i.en6,, av.i ww% nsa ned i arnms-si3a6 Jt2av i t 14) h4al hcenolders,to urpla. The tran fer had no effeo on t',d ',;", ', " ","d ;, '","',',,. equin. 2s4 m m o n.. ss 6;4 n;N io un ?

• ..sran' fk,cd of Dircrior deilan.d a ihn e.for.no. phi os t u g..,.

n rornmon += k eff, erd m the hirm of a 50'*. += k dne 81.312.;23 si inv s4i sv *4: dend paid on Augu,8 23.1985 bghird errage hse and i n,y, m, m per hare amouns hoc been rewaard to gne eficit so ihr H 4NiHollat M lyl IT)

• '"**'.**-*s.

6 40s.172 s 191 ora 8241.215 +w k pht Share

• out undmg pnor to the efic.1ac d.ur of

' 2',*,','*,,[""* "'s. 2 ihr += k phi. m ha h are prew ni,.d on ihr Halan. esheet and w.n., n.4,i,,, 2, m the *gaiement of thange en %harrholeicri f qmn. her nid me. aw.sss at 12s e,'+4 me n L... i.ea, ..a4 heen re+ued. '*** h"* h e*. 81.512.!23 e i inv til s9a e4-Net income Per Common Share Net menme per rummon hare n haw.d upon ihr errage numhet of i. hare of rom.mm += k our.4anehng and iommon ..,,#,,,i,y,..,,,,,,,,,,,i,,,,,,,, ),, t -ime wear, si .P,=t.ine.~mo aese e wx s iva4 += k equnalens of dduinc + k onnon The ("II..mg iabic .iet forth the number of hare, and the ri,.i mcome u ed to n, om 5.a. da.i,-w i,. e driermme carning per haic for ihr apphi ahlc war on k " '*"i-fhoiriamld N'ah me t.ub.m v. s 59.366 s n un s u n'i4 4.060 1,2m l iin r,,,,,,,,,,,,,,,,,,,,,,,, . owl er. 19 40 19 an; 22iNu umre sa,n b, 6.+.1 i s..

1. ,. u l 7.378

(* 1?i ! a49 ,,,g g30 I Jias i !rin h If,,..a hh 4 skj f i. IN

4., e.x,.

..a.9.ao., 42.190 s i .1 N su t I*W t u,...a. - +.. 6 +., 257 f io lik .'*.,,,,,,s, me... i, n,ui. 3?.053 la,, ew a, .., m t a.,, r.. #....h.o -,eto,e 42.44' u.m e so o u 12.414 . me, ei wi nin,, W m..a= 61.223 in olii

• \\in s l 4 7.936 f i J i l s.

snr

a. 5 I'* I

n. eir e.'.'.',

',",,", o m. wi.. se i a...f. i,. p...- ! m. 6 394 ,,e. i i6 o 62.690 m alt in 9m -a,,pg. g. 6 'tah

• n* lad"la.*'l '* "**

a .p.g. g.,, nemot 8.v' s l lI.$62 $ i j i ". i ', $he si. %,,',i.'aa. live 35.684 M flil M )Hl ..., u, -,o 9eu , u,,, wn ] i,..,.,i...,...4.,a,i .m ome u..nw, v e. 4$.628 So f ?] t

• r *9 6.pov :r n t...a.wil

..m. ol...i dic Nah. 96.464# INi ?l t e 7 4ii Nna u tos.. 5.362 144 1 911 V ii.+. 3147.956 8114 l n s in' vi.1 aussemuse

a h Finannal ****** Report of Ernst & Whinney ,u.ai independent Auditors i-w a =u ,..s g= '{ *" i' Mun NMn and M d De P Nnran Hnannal Cor}xirmion us.~. w s 14; no sis ira sin w L hase rumined the conaolximed balarn hret d ' 'l' "iN= '."""' a 02.32e, ini m. .- ni4 Nnran Hnarrial Cnrixirmlun and subnwliarw a d sm< ma. 2.t ee nu nan number 31.1986.1985, and 1984. and the related ea a.i

4. 6,i is3.ae,i 42 =4,

. w.. aw. n n.lutani sarnwnindirrunv.charve*in harrhaleri ,,,%g,,,.. njusts. and 4 hangesiin finanrd pusutk>n for the,5 cars wneem t. enema. l a f.sae av mai .in all thrn erxled. (Jur cuminatsuna narre made in amirdarwy PY [..I,,,f.. mith gerrrath awpid audliing <andard, and. amirdingh, m.6 .e.s2ti includal i.urh ic+ d the arn untity rernrd, and uch edher audstr.1g pnswfun** a= w n>rWdered nettama.) in ii) vui rii wrf, i ..d n== 6 kn fu \\li 64.030 the ren'um4:rwes. ins. .an.m m.6 25.263 in in % n2" ln our i'Iinmon. the finark tal alalemerits rd'rrWj lo e s s i .d ie.i..i.hge. fie9 . i ili Jim P p %f nl airh thf' run=f>lidJf'<l [inark'i4l [hp.itiori 2f e.3:6 liti 1M nJ wJi a phre 4sn..r. of Nnran Anancial Cur}stralsun arul aufwdsanes al Ps me *.nd,. pus.m m 111.464, ii2 4, dann bwm:n r 31.1986.1985. arul 1984 and the nen,.olidaird a etw, ses 30.026 a heli ill 942, if o!rrdion* and thanges in their finarrnal n wu 18.622 i s ' nae il t i641 tw I i, e,mu ai, a s 229.a23 son in s > n2i P"'inon for ih. srar,. then ended. in nenformiti afth ,,,,,,i,,,,,.,,,,,,,,u, gervralh awperd a neunting pnrriple appbed on a i J aer e e., s ns,i. r..nsi Jertt lusta. la n ers in h.n6 we twe 8 9.018 8 it in:1 8 iviai Imaews m la.nh vr pd \\.ir6d, \\ ir)DfHa eg, / = r i me. 18.873 a 'tus s isui h,=.d..,,-9**. g -##' M g ggg-m w==i. 44.030 imemmes e v,.e s., h .a.a.n,. 1101.0,23 w'8 244 4 i' fil5i iss.0 6, i 4a i.. h 6 im.a.6 e 34e.s i e an sin. .* n n t ilead. 4ps.ed IPn.b4 8 229.323 fie ali s a"InJi s r== Regulsion aperuw impo.c resinctann on the traru.fer of an. eta and retained carmnp from nulmidianca in the Pareni Compam. At Derember 31.1986. net a, et, re.incied from trarder b* subsidiane to the Parent Compem amounied fn $338 7 milbon. Dmdend. of 8142.3 mdl.on plun 1987 profita mas he paad to the Parent Compam bs sin naisunal banka under apphrable regulanons. Addioonalh. the Compans ataic rhartered banks mas pas dnidend. m the amount of 8*3 3 mdbon to the Paren Compani. l 1 f 46

y. g>' CC#v SECURITIES AND EXCHANCE COMMISSION / Washington, D.C. 20549 8 ,,I FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) 0F THE SECURITIES EXCHANGE ACT OF 1934 For Quirter Ended June 30, 1987 Commission file number 0 6500. SOVRAN FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0898250 (State or other jurisdt.: tion of (1.R.S. Employer Identification No.) ^w incorporation or organization) One Corrimercial Place. Norfolk. Virginia 23510 /' ( Address of principal executive offices) (Zip Code) H04)441-4n00 yy (Registrant's telephone number, including area code) " " *x None / 6 Former name, address and former fiscal year, if changed since last report nu "[ Indicate by check mark whether the registrant (1) has filed all reports 1 required to be filed by Section 13 or 15(d) of the Securities ExchanCe Act h@, of 1934 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 f, such fill:.g requirements for the past 90 days. l'es X. No "7p Indicate the number of shares outstanding of each of the issuer's classes ,NA .[ of common stock, as of July 31, 1987.

e..-

Coeraon Stock. $5.00 par value A2.474.107 shares .us, [6.9 8

w a

t /.,..,.[, h s ~c fC,-+ y g, ~ l./q,. ',... AUG 12387 J!oJ wy. .' ~.\\ je c f hy '. =, g

s. m

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s o l SOVRAN FINANCIAL CORPORATION Table of Contents t Jay Of., E3L2 PART I - FINANCIAL INFORMATION I tem 1. - Financial Statemen ts.................................... Item 2. - Management's Discussion and Analysis of Q *. Finanetal Condition and Results of Operations.......... 3 PART II - OTHER INFORMATION I tem 5. - Other Inform 1t i on....................................... Item 6. - Exhibits and Ileports on Form 8-K..................... 4-5 SIGNATURE......................................................... .. 6 t. 7:.% 2-

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_..,y 9. uffy SOVRAN FINANCIAL CORPORATION PART I. FINANCIAL INFORMATION M Nsf - Item 1, Financial Statements 1 .l6) - T The following financial statements required hereunder are incorporated p4 by reference from the Registrant's Quart,erly Report to Shareholders for the m 's period tnced June 30, 1987 (attached hereto as Exhibit 20), from the O respective pages indicated: [ @g; ' 104f;i Item Page Reference in hh Quarterly Report y Consolidated Balance Sheet (Unaudited) ~ 11 .i Consolidated Statement of Income (Unaudited) 12 t / @g

• Consolidated Statement of Changes in Financial I

Fosition (Unaudited) [ s f ~j ~ 13 i d Consolidated Statement of Changes in Shareholders' ~ Equity (Unaudited) f*( ill I-gg. Notes to Financial Statements [ f 15-17 L;( ph.... The accounting policies followed are set forth in Note A to the h ' ' q' f ' g* Registrant's financial statements in the 1986 Annual Report to Shareholders f Q1 which is incorporated by reference into the Registrant's Annual Report on 7% E'c - Form 10.K for the year ended December 31, 1986. di.- pr:e 1 Item 2. Management's Discussion and Analysis of Financial Condition and b.h [j Results of Operations t M

r. %u The information required hereunder is set forth on pages la - 10, IG o

inclusive, of the Registrant's Quarterly Report to Shareholders for the t; y period ended June ",0,1987 and is incorporated herein by reference. f% BL-s y, - 7.

• 1

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.ir I-r l i Part !!. OTHER INFORMATION e Item 5. Other Information m (a) On April 27, 1987, Sovran Financial Corporation (the "Reglstrant" k, or SFC) entered into an Agreement of Reorganization (the ' Reorganization Agreement") and a Stock Option Agreement (th.e " Stock Option Agreement") with Cornmerce Union Corporation (" Commerce Union"), a registered bank holding company based in Nashville, Tennessee. Pursuant to the Reorganization Agreement, a 4 ' wholly owned subsidiary of the ReFistrant will merge with and into 4 Commerce Union, and Commerce, Union thereby will become a wholly % Jg owned subsidiary of the Registrant (the " Merger"). The merger is subject to approval by regulators and Commerce Union's 4 shareholders at a special meeting to be held on August 25, 1987. L h Pro forma financial information giving effect to the proposed Merger including the Pro Forma Combined Condensed Balance Sheet as of June 30, 1987 and the related Pro forma Combined Condensed EO { Statements of Income for the three sonths and six months ended June 30, 1987 and 1986 and related notes thereto, is set forth in .y7-Exhibit 28.1, which Exhibit is incorporated herein by reference. Pro Forma financial data as March 31, 1987 and for the five years L, ended December 31, 1986, 1985, 1984, Qf. reported in the Registrant's March 31, 1987 report on Form 10-0. 1983, and 1982 was previously ,g p '-i l (b) W Puring 1987, the Financial Acccunting Standarda Board issued a final statement entitled " Accounting for Wonrefundable Fees and ? %pM Costs Associated with Originating or Acquiring Loans and Initial v " h d-Direct Costs of Leases" (FAS 91).

• p' j g fiscal years beginning after DecemberThe statement is effective for

>M 15, 1987. The Registrant will adopt the statement for the year beginning January 1, 1988.

aWp

-Ogg Preliminary estimates indicate the adoption of the statement will

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'r" not have a material impact upon future results of operations. I, gik Item 6. Exhibits and Reports of form 8-K hp h (a) Exhibit 11 - ,. h*4 Statement Be Computation of Per Share Earnings, [ Wh filed herewith, "Y {y Peport Furnished to Security Holders for the period g] 20 - .N ended June 30, 1987, filed herewith, 3h,$. p [.Y h p&

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e s 28.1 - Pro Forma Financial Statements of Sovrat; Financial y P Corporation giving effect to the merger with s Commerce Union Corporation. 4 pf yr/' Pro Forma combined Condensed Balance Sheet as of June 30, 1987, Pro Forma Combinea Condensed Statement of Income for the three month and six month periods ending June 30, 1987 and 1986 and + related notes, filed herewith. g 28.2 Unaudited Cormnerce Union Corporation and p+< fr subsidiaries consolidated balance sheets as of June 30,1987 and 1986, and consolidated statements of income, changes in coernon stockholders' equicy, and changes in financial position for the three s months and six months ended June 30, 1987 and 1986 and related notes thereto, filed herewith. x 4f. (b) No reports on Form 8-K were filed during the three months j.g ended June 30, 1987. f

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~ 4-i a t 'A Pursuant to the requirements or the Securities Exchange Act of 1934, the / Registrant has duly caused this report to be signed on its behalf by the / g undersigned thereunto duly authorized, p)f SOVRAW FINANCIAL CORPORATION (Registrant) w ~ .h Date: August 7 1997 , N. Donald R. Fisher, Jr., Cnief~ Accounting Officer and Treasurer 9O ~ 4-F (* m. ) I 1 .y hfb 5 W g,$" 3 $;t iT k' ng-h ('dy[ *- f[ Mg}9q w +. .~ C Y 8%f W 6

i e.- r h) Exhibit (11) Sovran Financial Corporation Earnings Per Share (Dollars in thousands) Three Months Ended Sis Months Ended June 30 June 30, 1987 1986 1987 1986 q Average shares outstanding 42,330 42,828 42,278 42,209 Effect of stock options 155 327 167 J Primary aversgo shares outstanding 42.485 43,155 42,485 42.521 set income $ 40,128 4 36,655 $76,613 $71,181 Dividends on preferred stock (72) (109) (148) (234) Net income applicable to primary earnings per share $ 40.056 $ 36,746 $78,465 370,947 f M Primary earnings per share Q Q g $Q -p: k' '[ Average shares outstanding 42,330 42,828 42,278 42,209 f Effect of: ~N stock options 155 342 167 363 .!1 l Conversion of preferred Wi t.. stock 245 335 248 J f%' . ;. ? _ 42,730 __43,505 42,693 g g". j Vg Net income, assuming full k.'.. j[/ dilution $ 40,128 $ 36,855 $ 18,613 $11.181 f.~1.![N; e-Fully diluted earnings per 67 ('ip share $.94 $.85 $1.84 $1.66 ? fS1 re,y,. 3.v nL. g Z ('?.,k. ' ' @y-N- f' 4 9@D f.Q

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J c Pro Forma Combined Condensed Financial State 9ents g (Unaudited) g The following unaudited pro ferma combined condensed balance srf sheet as of June 30, 1987 gives effect to the Merger 6:ing the I' pooling-of-intereste method of accounting as if it had occurred hf$ h on June 30, 1987. The pro forma combined condensed statements of 7 income fer the three months and six months ended June 30, 1937 and 1986 give effect to the Merger as if it had been in effect throughout the periods presented. n a The information shown is based upon historical data and is L k not necessarily indicative of the results of future operations of 7@ the combined entity or the actual results that would have G@M occurred had the Merger been consumr.ated during the periods indicated. These statements and reli.ted notes should be read in conjunction with the related coabelidated financial statements of g^ SFC and Commerce Union and the notes thereto. In Per share data have been adjusted to reflect the Commerce h q, Union two-for-one stock split in the form of a 100% stock x. y' dividend effect;ve May 1, 1936. n I @a, W 1 @w.. +$ $h-t h' w# ~ m' 4aa v$ %e a w'yd fi[ gy iW1 g Me cv

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w C ~e NURNI FDWCIAI 03P3Wo"D A@ SLESDIARES B0 m CCMBDED CDEMD AM2 SE22 .s .kme 30, 1987 (thousited) (,g. h SO/RAN 009D2 RO N ~ y rDwcxAt. tw a .h.fQ'- P (g, pa) as( f?. Cash m2 eas fras hada $998,177 8289,294 II*I87*'II Of.. peurtsaus loans hald for renale D,696 0 204, W Nh trading e-mant amatrities 1,00 421 1,

• C.T Mawy martet imasuecas 1,862,447 321,701 2.184,148 Ch,

1mestment seasrities 2,595,346 766,076 3,361,422 4 laans, met of emerned inname 10,206,147 2,624,631 12,828,778 m A11mme for laED lasses (118,942) (32,813) (151,755)

1. il 12,677,023 Het loss 10,085,205 2,591,818 Predass and equipumut 309,622 67.209 376,831 g4 4

Other assets 386,496 123,894 $10,390 gq $20,6(D,465 'i l Deal Asants $16,443,052 A.,160,413 gn. P'J k.* uAsturns i 8mposits: s mainterest nearing $2,650,567 3567,801 83.218,368 f 1starost heartag 10,337,882 3,37,983 13,365,865 g.J.l [ [y. 16,584,233 ttal deposits 12,988,449 3,995.784 Short-cars bomvirgp 1,903,669 155,191 2,058,860 g,j p .4. l!<,g i, long-term horrowines 353,059 26,443 379,502 ,g. Other liabilities 278,359 84,845 30, 2 hr, p sg Deal umbilitime 15,523.536 3,862,20 19,385,m h.- M 9?jg. m, y - ~. preferred stack 2,1y, 0 2,154 y w S osman om 211,852 118,218 80,683 (A) y

V,, %g, 4 #a 7 (118,218)(A) 292,535 f.71; asplam 29,543 50,231 37,535 (A) 117,309

? assained earni p 675, % 7 129,701 105,668 7 3, j. weat Sher.t.at.e,'squiry 919,516 2s8.150 1,217,666 p.-

p. n1 e

p gJ~ " heal umbilities and 7 4 jh am Wolders' Equity $16,443,052 $4,160,413 $20,603,465 1 e.. 3, e he totas to pro fermin Stand cordened inlarice shast.

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~ ~~ 9 ~ 41 ).' NOTES TO PROIORMA COMBINED CONDENSED BALANCE SHEET s (Unaudited) g 4 r. Note A [ To record, in conjunction with the Commerce Union Merger, the e,, .1 exchange of 17,732,637 shares of Commerce Union Common Stock , ~ ~ ' ' *NT oustanding on June 30, 1987 for 16,136,699 shares of Src Common '7, h - the outstanding shares of Comtterce Union common stock are wp $ { Stock. The Pro forma financial information assumes that all of h5 p Ji w Y converted into shares of STC common stock and that there are no wG, il. dissenting shareholders. 4c

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~ [ There were no significant intercompany balances as of [ F June 30, 1987. ( Note C p'%#,,# Data presented in the Proforma Combined Condensed Balance [M

MW Sheet has not been adjusted for the pending acquisition of The L3,

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s. w. RMAN FDWCIAI. GEPGLA1'10N MO QMMZ INDI IRO P(m% 00SDED QNm@ DO3E Stn2pgxt Chasiltad) f three Months anded sta maths nsind D .nma 30, .nson 30, 1987 1986 1987 1986 4,.7 s c. (In tinM, except per share data) h I*'**'*

• 1****

1 1ame, <nr1 Ming fees $315.050 $314,692 9617,876 9624,94 dif, - 1mesament seewitias 57,931 57,091 111,433 113,432 9 mrtgage lams ha.ld for renale 7,558 7,537 14,507 14,401 7 Dedizg accast seawities 195 208 368 497 Tr 3. hasyeerket invastamenta 28,261 18,998 46,855 39,243 f'h .*i. total Incarest Income 408,995 398,426 791,039 792,517 Interest Squase I Duposita 187.637 187.751 359,289 373,140 w Siort-tem terradre 33,333 38,866 64,865 83,977 3 W bc,rtadres 6,799 4,908 13,636 10,135 ,4 ~ 1btal Interest hpanne 227.769 231,525 437,790 467,2 2 b ht Int.erest Incoms' 181,226 166,901 353,249 325,265 -( Provision for loan Insmes 19,659 14,% 8 32,216 28,920 .n 2Mp$- h t Intarost income After Frwision for loan tana a 161,567 152,333 321,033 296,345 ?$ 91+ kninterest Inecue ,,i. 4 securitias gains and (lasses) 1,111 2.599 2,282 3,220 f other 79,326 68,461 151,689 133,789 ia 1btal k ninterest Income 80.437 71,060 153,971 137, @ 9 o s p kninterest repana*= $c. 8slarias and suployee ,,*g [ w aries 93,373 92,541 188,802 176,150 1,., ' - Het acopancy==p=== 11.813 10,411 23,195 20,846 Furnitwe and equipment $.? aspense 18,000 16,306 35,434 32,000 /3, '1 Other 54,923 51,717 106,445 102,077 m, A Q ~ 1btal Muninterest Fwp=== 178,109 170,975 351,876 331,073 s Income hfore in~=> t ' tunes 63,915 52,438 123,128 102,281 f.g Jpp1trahia income temas 12,145 5,509 21,606 12,016 g-(b ht facous $51,670 $46,929 6101,522 490,265 M;;Q,1 W 7 ht laccus hr famon Sinres f':[Ng-N, 4 8 send on primary ,#s intetad mersen ohnres .'".^**i eutatanding 8 88 8 80 $1.73 $1.57 ip.f { tened on fully dilutad g valghted average sharts 3 outstanding J7 .78 1,71 1.53 4 x b htte 80 P!9 brW Mitted W h kAtMt. Ma p G I yl h f/ 4 C .:fm

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~ 1 q e ,3' a, w nya - '.M.. t Notes to Combined Condensed Income Statement 4t'a (Una udit ed) ,,$.,. p Note a p g 6ch' Earnings per share have been computed based on the combined historical income of SFC 5^ M and Commerce Union, and on the historical combined weighted average common shares j outstanding, adjusted for the Commerce Union two-for-one stock split in the form of a 100% L l '3 ici stock dividend ef f ective May 1.1966, and the issuance of shares expected to be issaed to ,yj,,,,,,,, ef fect the Commerce Union Me rger as of the beginning of the earliest period presented. { J The following table sets forth amounts, adjusted for the ef fect of common stock kb equivalents, used to compute primary and fully diluted per share data in the proforma ^g(E combined condensed income statement (dollars in thousands): ap W /p'i. .:/ Three Months Ended Six Monthe Ended iQ ^ June 30, June 30 M 1986 1987 1986 l [ Frimary earnings per shares l Weighted average shares j outstanding 58,834,574 58,771,222 58,606.672 57.490,539 [. f Net income $51,598 $46,820 $101,374 5 90,031

• x 'l r

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4. de Weighted everage shares

,4 5 ^M@) outstanding 59,538,537 60,307,195 59,500,740 59.179.5o8

>y.

Net income $51,618 $47,039 $101,616 8 90,572 h g }N;, y

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U.S Treeuwy.... 364.831 217.136 446 212 r g,,ansp4. @7. Federal opencaos. 1M 480 $7.731 87331 ' 1,[k a $ nase anc muruciosi F8.097 296.954 322.353 f ' g'?f r- 'f 8 nf Other....... .......... ~.............. Totsi(mastet weiuos 4778.H4. $o04.009 arid 221.977).. h ess 5 24e 4 919 _a [j~ k 7ad,0'r 8 679 3ii 6 i t.3 55 g M..(

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• h'D.4 Tredire accouru seewams.....

420 23 34 ernerosa.caanno bana asocons. 178.743 2$1710 200.266 '.7 @N m.# Omer se Jet. term eweeimems. 23.019 25.0s7 23.006 .W U 5ecersi twids ootd. 119.900 48 061 21 925

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To n on,=. . ~ S.640.014 3.439.603 3.267,130 c.h one du.tal e,amsmg ammets., ., s.#q t,,,w-i en.2u av.m 2a.a7 yerQ-Preatuses saa ee4pment.. 47.20e e6 ke 62 A66 y qW gL g interest recewscae................ 44.788 4 t.961 44302 f.,,. J .T, Q g s

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Due trom customers en accepiences.. 44.187 63.350 47A43 . ' d. g. Forecetmed and repossessed property. 6.ua 6470 6266 4 ?' e r $ %h-r4-Omer namis........ 27.30s 29 707 27.754 y j+. M: p-Totaf Assete. ..yue 413 t19s,3,u? sa Wi . r'd- ' ~ f. unb'lities and Stockho6ders' Lquhy: k7y e uewiles: .ch a < r3 ti. Deposts .M't

t. J..gAQ comand...........

,.s ss7. set s e6s ees s soe pse 6mreal on cemenang soc.us 403.sas sie.63 .a x r.p, Q'7.. Govmg8............. 339.9 TF 216.021 146 2 73

• M

2..,g - J 64aney fund eccounts....................

378.440 e41.aB1 432.7 t 2 SNj , i,, ' 4. Eman dernommanon certtricales and other tens. . 1.230.734 1.164 498 1.2 t i.60 7

• q

'u l',-.;+ J Large Genomenaison certdicales. SH.640 371.368 376 529 .? Fore.gn -. isi,n? e0 2rr . euse j.. ,.c ..r-a stal depeelta.................. . 3,603.764 3.361the 3.171.133 j ,. 1/ &acwttee sold unoer egreements to repurctissa W > W',T. Peossal tJacs ourchase.c and Omar shorHerm borrowed tunes......... 104.962 99 080 89 6$7 J 60.169 90.574 76 628 g Decomurse-aw% ou 1999 (now 0). H.3 64 16 860 19769 'O!

' v* *.

Other tartterm osos Coe 8). .. _ 10 157 15 2e6 17,i32 l. .s M, Total depoons and borrowed ketos. . 3.777.418 4.676 753 3.374.2i9 c u ta;,4, l' Accrued Mie'est. lases and other expenses 27,261 38.660 37.384 ,e t'y DMdunds payabe. 3.192 2.494 t.826 2 Bank acceptances outstanstng ' @j p

j. '

Other 6apetes..... 44.187 s3.2$0 47.843 i. s 9.64.,5 7 474 6 113 .-d'. Total habilities...... ..lu2,263 3 6T7 635 3 468 485 1 L-canwnon maahomew f (,'. '. $ ' ',h. Common StocA$e.' tr$8ue % por ghere-7 j f.... .p L .p-6/30r87 12 f31188

• 6f3PB6' g

4 Chares sJlhortred . 30 000 000 N 000.000 30 000 000 'L e 6 hares assued. 17.732.E37 17,104 A11 14.888 637 190.218 114.030 t12.691

' ' '

j.'M*

,[.I Capaal surpsus.... 60.231 49.701 49 137 / s. y ftstasned cemeigs. ..,,,,,,12 0,101 _ 112 621 95 764 I .d L iq. se. e es so w e,sion en.n. .'Q, *1 a;. 5;} Totas common eteethoidov eeuery... .. en;60 276 2s2 257 ea2 g :..,. Tm u.m=s.no smu e+ wer. .,u,2.,= pm3_u2 pm x2 ,q + s.e>,0.s. n.usied.na, .mem. - 4 )., sJ y $' n ** 4 Q+- l U.W e 4.., t 3 ne ' -( I f .%h$ p[:m. a '4% yp &.M ? e -a x e, w am..g my T';t k, e1 n% w w y~ 4,rs q; a..gg;g q g, v "5x n v - s - ? 2,

p

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' ~% 2 $ _$ i, $ [s 5 N S k k $ s s$ ? $ $ $ k N na av ma ~ MNh

a 1 ";p, " a fw y ^ ' f *f*f w.., $a f s q% 4 l k m. . f 'l-l -f /' ~ 22 l [%M. Commerce Union Corporation f M4 consonasted statement of 6ncome _ z u

am paa-o in 0o0 e en a p. eneroi

,4 '.iTJ ' Three umme se uorwns /# WW l fnnent June 30 fnoso June 30 h O*k.y j in, isr ,u, w N hN kulervet reve.nu.ees on earning seeets: k ~~ e from e herest en ene. ...a ws sunt et n i.3 e,2, u: m ( :,:M),.' l hersel and 6wulenSe on sweet /norit securites k '.221 h*' U S Treasury... 4 4272 0.250 4 $01 e .3 h7 } 7ederse egency..... 9,128 2.113 3.311 4A26 j ^ $44se Md muntglel. 4.19e 6.054 10,736 12.169 rlr s Ouner, 22e 100 412 3ts

• J I,/

11,875 _12 644 22.704 nSot h eneerest on peong asoww seeirtues it 3 13 7 Y'

G herest on be*e osoomis...

3,406 4J14 7,811 S.7D0 . R e ek >4 herest on omer anon.ierm investments 336 302 870 M3 3

• • e/

.,{l,1 inserest on lederal funds soed.. _ 621 621 1.114 1M9 (;Nt 1ste: horest revenue. . 83.114 83 0tr$ st2J00 166 666 -? 61 ,,,orest e- - 2 .y enserest on cepoe#te.. 40.325 44.190 79.760 00233 (' '? .gjM herest on short te<m Dorrowed funds........... 3,444 8.141 6.765 0 642 y. r A 1.gf herest on ammated and cieer georve sect. 493 824 1.205 _ 2 140 hy TosatH. nievenu. . u.n2 de tss uno _ u oss _g h.. test bilerest tevenue............ . 34.832 34.940 78.919 88.640 N ,(. Provisaan lor toen losset (nose 3). 3.791 3 440 8,814 8 443 . M ej l c\\ 96et eaming eneet sentittwthan. . 38.040 31Jaco 49,406 80.007

• Mt '

_ / ^, g. *.M peorHnserest revenue (note 4). . 11,727 to 562 33 495 20 724 g ' f..td. i .;r ;T &let eperating rovenue. 44.787 41.862 JE 60 829 i,# h-E leorkeneerest overhead egenee i D *S l N< baiarse.......... 14.641 12.919 28.727 25 499 $d.. Personnet tienefits...... 2.831 2130 6 ?44 6.359 N# gnc &#et os.cupancy expense........ 2,832 2 455 4,934 4.868 ? $ h' g' d. Furneture end scuoment esponse . 1.244 2226 4.410 4eM is,j r 9 p Olhor opersing empense. ..j03H 10.314 20,334 20 065 jgg g. Tant norWmeros peorhead egense. 12A47 30 443 64.3M _ ec 295 yey j .._ Nf.5 kiceme be. fore.i.nco.me lanes.. .. iv _$23 ut tu2 + ..r. . 14.120 11.419 28.609 20 626 e .3 incomei. en e inoie >. .e M j, ..yf ' M.M42 S SJ W [,193 4 g o.p Per Commen Shore, p* f

• Q

, Avp J Aworage outs;aren0 and equnenent erwes (m thousands). . 17.647 17.16 t 17,760 16 450 [- 3 h.

. p

f teet enseme.

.S .M .50 $ t.29 5 1 16 , ' j '.' f. k$N Aporoge aulatendm0 and equhrsteni shares, esaurmn0 two dilutaan (in ptsumartss) 18.471 18 464 18.470 17.644 '; N. [ { j Deet oisome. .6 .43 .66 8 1.28 8 t 09 pdy creusass podered P., cunmon share .is .ss .33 as y$$p g h,q a.e 2 e 4 Pq% a yp

• See Decae 0 to connatdeied fanencasi etsiements y.d'y, 4

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1. %g%p a

.J IN 6 '.., ::+ &..g. s,..:. & . n.,p. c,e ,q.11&. h "x..f v -y A p y. Q g ' &n%.,e:Q y,..s y,Q.,Q n @:Q.. , %u. :. b,4'"..$*OLd Duf.M[m.y wyXw n -. :y ;. 4 a, 3c o 2 t T[g g: 'g' g.e r b,_ hN 4 3dW.%'il,'i%) f.7 h'y ? !f .CN t a g -, m ,e e

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• ?.

l e s N.i i l 5,. I Commerce Union Corporttien Cortool6detod Statement of Changes Irt Commort $ stockholders' Eculty For the Sa Monthe Ended June 20. tee 6 and 1987 w 6.' g) easts > 000's) _.. Common teac* Cesner festamed 6aeres Amoune .sureus t em.ngs _iaw_ = Smenes et Janumq 1. sees. as prowleue8y resorted..... 7.330.18e 8 es.e2e &37.62e S t 14.773 8206.230 ?-- m teor encounses ear es a poonng.offserests pions el. ...t........, 225 821 1 SO4 Jg _ 3 32e _f t1.130 ,e e ee0 Seaante et Jemaery 1. tese. as smotesed. 7AS4.700 60.432 as.4Se 122 102 4 Q.r' Dest moome lot ma monete. 'w> elece ageens enercaed.... 10.004 to.0s4 108 661 724 240 er3 leeuence et eneres car este conversen..... 346.000 2.307 476 2.783 Cash evesonne ascarad on osmmon esocac .h Commesse Urunn Corporenen Susesmary enor e accusseon..,.. p.303) (3.303) Common ensies seed......... 07e) (37e) 2 0.000 4.s00 32A41 27,edi Purehese of Ireasury chares by e *.==*ary prme....... to encasseen.................................., Deercor<ene since opm eNected in the torm of 8 evidend. 8A44A57 41A43 141.643) (1st gis)

• • f. s Ellect of once essit on encummons (note 6)

_2.022.730 13 485 . (13 de$) 7 Smenee n.nme n. sem.. gang s n2 set M,E US.1w $75' e02 j Sedense el kanuary 1. fee?, es previously reponed..... 14A53,271 S t11.022 8 30.070 $106.477 42es.578 J;'$ ad-aa'io m 1987 accounsed apr se a pochnpW.anierests tnoes 9)........,...... 4,,, 140 4 h4 e 874 87,104,611 _ 3 00s... (37e) _112.511 _176.212 M

• Selenos si January 1. te87, se rests;sd..

164.030 es.701 d Osel vicome for ein monthe. since ostens esercised....

22. sos 22.soe 7.325 40 13 42

• f4c; leeuence of shares act aset cornermon.....

gICADt

4. tan 617 4A64 1

3.q, s Casa envidenas esclared on common ee3cet ki Corf.im.e.rce Urtson C.orporenso,rt. p@ g,*) ,y pno, to ~po.ma SM 5.es0) a. pay 9ey Sesense el June 30. $e87.. ..4., 17.732 637 81to 218 8 60231 8129 701 g60 W Quartet'ly Comparisotte (See Note 9) .g ,..g e, am,e,,.eo,de,nes Pnce av since gne,e,

pue, tem mes Bone w uee sa.o pl.

Des 4 heeme pne e oogle ed a tese 1000 si Per snared M,7 (000's)* Por Shers" 3 Lour Outsienerg Deused h 'y [.% > Fest Ouerter.... .. $ 4 010 8.53 17.226 S t3 S27% S2'Ud $14 96 81e 29 Second Quener. . 10.074 A6 14.e64 .16 30 % 26 1527 14 to 44Fl, ,,p fourd Quarter.. 10.787 .6e te 433 .16 32% 27% tl 86 18 to eM -vs Fourn Quener. . it c7e et te.445 15 to 25 % to is 16 67 j . war. ...gg g 18.146 g $32% Stig 814 15 81567 test % ~?.s pess ousner.... .. 811.3a7 s.e2 is see 8 15 330 % See sie av ste30 h rv f Y Second Quener. . 11.642 43 14.471 .18 30 % as% to et 16 64 $( y-e i,h Amorege Percent of W Eersione Asesto N. Eemme het Loan Non-Nor> 'f'. Assett I y n teos ._tsooos) me. mere.st Less >tserest bearest d in Not ono a Prowmen me,_ nue Espense te come ee " income "s ,..'E' FWel ouerter..... .. 83.165.434 6.32 % Ai% 1.29 % 3 Fete

t. cow t tote Gecond Quener.

. 3.230 660 5 32 At 1.30 3 75 t 17 1 24 %./P e ines Owener.. . 3.321.244 8 30 .5e 1.e4 3 64 121 1 30 hp Fourth Chesner. ....... 2.383.949 8 25 .30 1J6 3 74 1 17 13i V, ,] ' her... ............ 83.f ?S.e01 6 20 % A0% tJ6% 3 73 % 1 16 % 126% g! L ?.I tes7 [. g. Pest Juaner... . 83 440.64e 5 07% f f .32% 1 37 % 3m% 1 06 % 1 37 % .my r.t..L. Geoend Quener. 3.551.324 6.03 .43 1.32 3.es 44 1 30 j g D 3.. see sees a _ _' asenaar seweene,se N . ^. te the teres unge e comouse seeano so.imussar Ferne one t le?.3 Fem.a W.'6 L< [ j,' as usemeae = see ones e i r$ e new e m i.nes me no ease. ftei.metreef #eweave te e sortsassge el are age esmeag eneste emas is. i ea s e,w an en se swee ena u2se en se omrw .7 '*'=3I N. patene +A

• esses on,Ji#te to tee 7.

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P a' 4 f. s -- M. s. e 'I SE e e'. - fu 't s_ Commerce Union Corporation Coneoudsted Statement 4 et Changes in Fenenenei Position

y7 t

gnaere m 000's; ,k' 7hree Wenme $a unne Enned.bne 30 Enned we 30 ff* ' "tes t tees ~ teo r sees' C F7 sensees se Amme; - ~ F#om operellons

4. -_

d((* 'u susencome........................................ 8 11.H2 8 10.074 8 St.ase 8 te.004 o T-P' mcieese idecreens) vom soms nei currenity seearm0 caen Prousen hr coprocasuon and emortgeuon. 3.N S 2.017 4.017 3 tes Peupneen ser e est 1403) (1.031) (Sul .g '. Procean tar e sserved asses. y en teases. Ines tem aporomans . 3.?ot 3 eso . 8.6t4 e 443 i,p

14. ort 16.32.

St.400 30.eae 4 tusenes m: ( Osonens............ 302.000 106.0 7 343.?se 44218 7' Seeweise acid under agreemerite to recurchsee 6.066

6. ell

== WA Feeerei tunes purchased and stret chonearm borrowed lunds. M d'/2 = 1 f.W Senk acceptances cuisiencing 7377 ( = Decreene an; d h, r. ownsiment escurses......... ..I SJt? 9.000 Interesiesenno bere decosns.. St.e83 73.4 7 V Tradia0 occoune secumes.... 43 M Ciner shon term sweeimenes. -167 t.Me m - 3 000 ?, Federal hanas said...... 3 483 83 560 i Casn one suo from banks. M.644 11.042 j Due k 4.7e7 -e.117 e.163 -me 2 l oine, om cu.eiomers on acceptances &.m. nessi. b, i.e in eso e73 y m uenc.ee mmon,. u.n,d.o,ame,io.n 3-is.nc, common.ne es. x,,- 4.eu ame 4.m. un r or,ie m se. mi.or n. .g 4 = a-.a com,m.on.n.no..... ..i rr.ui u aco d in cou .n.......... mi r ,.,g wwusuon remern mereen owe in eoeumann...g. ..g g Sees see g 'pt { m 1staf Changeo in Sources of Funda. gg N I can.ee r. unde: p use. 3 . eno..oc,ed. e 3.330 s 2.$40 e s.7n s 3.m , b. escrones m' teens. noi........ et.?e5 02371 72.436 1 0.ee1 4 '. :

• wesimons acuni.m....

te2.eer - 23 420 -S.CoS i tes.7s4 "Y*.', Tradvig account securties... 322 enerostbearin0 bent coponns.. 31.647 Oiher snonierm swesimonia.. 6,460 Fooeral sunas sold..... ee.ete 71.81. 7 ..-w r. Due trom cus1omers on eccepiences. 7.877 s:-'A l Cam end o.se trom anims. 30.e64 12.105 g j r = e Other saaets.. .....I St0 2.812 3.1e2 w ..... I, y_ l Premmes and equemoni t,230 3.730 4.71 8.426 .f 7 u. 4./f. t Daevesse an: e.814 ! rf 10A0. a Securnes said imper o0 g% Feores tuni's purensseo'eemenis to repurchase 33.232 f t.408 40.378 e e and cTer enort. norm Isorrowed hands. senn acw.ance auimadao. 4.7o 7 e.ur e.1u ie ; J, *.k.a Lentierm ceDr.. 9.te 7 7el 3.e06 17.015 M. Other baDdales... 1.344 erl

6. ele 16A20 a

M n.orewm osos cananed io common moca. 4.eu e aos a.ese r7u -p-D.s e Pwchase of treasury shares te outpeadery pner to aceutamen. .J te t 7 j%g, 1eias chenees in unee et Funes. e3 s ais o go3 sass su g 7

• M~

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• See leone e to coneohdated enencial eteisments i

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• -~-

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• • a E.n*M-.i.er, s. c, un.,e,u, em., e,s e

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• L"t:","J'".fs..

m. ..mm ..s. m ew. } Cesvnersaaf. 4 700 SJfe AWhde AWWL d 1.' a ftsas osa emaa.am............ 351 aut e and me sov. 3Js4 tm GJ Biasimas Ceuthistens un Sepumas 22.1986 AAC amaned caeaf tami hansmo hr.s Pompi, as Hl4 o,,TO assessy namme m Ferman. Temummes. ersch sensa Wemmmen Casey g and Ptuem Sara eta insfL t m ase-euna c esme emu-o.me e,cueuns man.sw as. Genemoraaf. 1.423 Gr1 , _ __,r . lo ermamrness se eweasmon CuC maman '4 heaf sessne e esmsun aus. Cows has suunsaars amaswup i ve87 ar.3 tes J4i sees Deneamere.... -. -. 44 48 24 424 es s CLC anew y remy. end pedi am11 am,mun tu each ring a G.ees Ems gr'wsyi Das sepas ee,nyme a pee E s as mas mm. e means mann = m ctC nas esen massa.o e w ian uas ar3 asuico, eis ano oou sit aarnoo sw w 47s coo an e..sas se.a., 'a ors Onesense 31. sue 6 tees tasa e ein 1Est sessemassy.as eef a se man,. OE 0888 #8F9*8A. 0 007 4 480 ?.?r @h suuss swamusen peer vaanup er we aams semperme ppuma has hamn suusassa tapesas k enhahan saneae. tA07 3 see ey 53 080D00. 67Ae620. 81.eB1.800. 62.064.000,are ti.Feehop Phe.Amma.rv.e.r t a.se.s.e,d,a.n.m. . = m ist e u 6et 2"o amms 1987, Cu.C asemed Peu Immonal tempe elI=====. *, es F1dpi E g Ages 17 es. o n . v.a. messes a rear.orm.m,m . e.e _ y,s _r . is - e. g,s.g n ww eenne, a e s ma e amme. as of .a si2 .u.rs.i. a===wi cuc. setns. a,.s e a a reme,nemm sera.i i. pumma benee massi .e.e en nen g seecucse ame. J enemaso cia. e m

l.,

Deus snerg>se eu. m anw so ..........iJA. sJma imm everem 'r,, s s a puresru er gems. set of emaamse e el cuc nas meri tuseness ey 56 eseAin to 642.1E0 06 ees a00 Os273mn. we u esF Ano en supues. 4he Mb See veert enen0 Densmear 31.105 teBS 1984. *es3 ane 1982. samme>verv [ g .t a seems ma manumms _ ' seus summe er fu essa sessaceae seruman aj,*g gg g g 8the mien mpenses my 3673JB3). WJNn Sem.Em. SSE RR) and 8637.tBE) E .h. 4sg ,,,,3. onins, e ierre.o. -a m tauma ca e..m ms ocm pense a one a.nm

• M ","

!E"*."r'm**'.%"7 "."a"' y '.*""c"ue.'7.ame.Y...a '.E*a*s"su" E .g se7 nas e. w,: u e.e. ms.m.r......... .m nu in s .m .im as summers a cuc ens enen e.s s.. mass e, sima um e e..,est euw g se. i. .-"".* Lm sums,. N,N sem>we eram messes are -- $ 436 lait a3e ear Chrier sen.samt aannsig tuas,............ 2J17 3eM sissy unwed biensus maeunpus gisse eman seemse e fuents to taress y tummaes Denna0 isse Omsunmur 31 IW Iem pusene W pas emme pense essasses $212Jgs As peso ( g t. j a w-aj i

,. era anMarq taen,

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m CONTEN. -.. TS- -.... - -. - -....... - - l r _ Financial Highbghts-1 ToOurShareholden -2 3 ~ yanagernent'* Diwuu. inn and Analvsin-410. ~5: I Financial Stair.menb and hen...l l.17- / Conwobdated Ascrage Balanec Sheet-1819

• 4k e

? Quarterly Earnings Summary-20 Interest Sensitivity Analpin-20 Selected Statibhinformation-21 l f[e Sovranlocations-22 23 Direcion.and Officers-24 Shareholder information-Inside Back Cmer h4 3J)., Common Sim k Data-Inside Back Coser N' / f-f $q. 5 A'M N f

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i 1 1 l Financial HighUghts -1Q Se ran i m.noal Carpuraam and Nim dar.es h-A N' .M _Ni.? Three hub F.nded Ni Wnib f.aded hi June 30. Jane an. s c$ g lorremac la res., h,, g 1987 1986 iDecre<.,5 1987 Iwri iDece,,i te F.e th, e,,,od

f. -

(la thou andet A.' M mronw $ 40.128 8 36.855 89% $ 78.013 8 71.181 to4% ?.,.. 7 VA M mierew income 142.394 131. % I !.9 277.330 2 % 725 8.0 ~@ iP~ M uncree encoine on e iv0 saiable equaaks ham 161.385 161.203 .I 316.810 313.661 10 D. Canh dnwienda decland a common work I4.413 13.684 5.3 28.756 24.327 18.2 QA' seghard average shares 42.483 43.153

1. 16) 42.443 42.528 4.2i h

1%e Common share y> '. k moome .94 8 .85 10.6% l.83 8 1.67 10.8% Cash dmdende declared .34 .32 6.3 .68 .64 6.3 Book =alue 21.63 19 45 11.3 21.65 19 45 15.3 d,. Daancial Raun. Y-l My Heiurn en an.eu 1.03% l.08 % l.05 % l.07 % ..'j ~ Return en equai 17.89 17.68 17.76 17.70 y. M uncrew mar, n 4.60 5.26 4.71 5.28 A*> !) ails 4sersac. J,7, (Dolle m mdhnnu V' [ Aaseu $ 15.541.8 813.649 7 139% $ 14.992.7 813.265.2 130% ^ $.-. Earn ns a.ci. 14.079.9 I;.302.2 14.5 13.3*,3.8 11.970.4 13.2 'f Loans nei of uncamed mrome 10.004.5 9.218 4 8.5 9.800.3 8.937.4 47 Imesmeni nerurnica 2.478.1 2.155 6 15.0 2.369.1 2.105.4 12.5 'f i Depo.* 12.214.8 10.20$ 6 19.7 11.655.5 9.872.6 18.1 1 Q,Q.(M. j Tuial sharrkiders' equdi 897.1 833.4 7.6 883 3 8n4.4 10 I '$ni y ,b l M pee,mt.Enj h}w (Doum m edhonn) N ec '. A cu $ 16.443.1 814.234 8 15.5 % Q-Earnma ancia 14.867.7 12.537.2 l8.6 vT

N ban net of unearned mnime 10.208.1 9,332 9 9.3 M

tmesmerv occurme. 2.593.3 2.109 9 23 I M.* Depone 12.988.4 10.647.6 22.0 1 ya bal shareholder ' eque 919.3 824.9 11.5 g,' Common. hare 61 der ** equns 917.4 822.3 II 6

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To Our Shareholders ovran 'inancial Corpora 6on completed an eventful higher levels oflosses experienced in consumer lending. 5 Sand the signing of a third interstate merger a second quarter, highhghted by increased earnings. As a percent of a erage totalloans, annualized net charge. continued execuent asset quality. strong profitabibry offs were.42% for the 1987 seennd quaner and.41% for the 1987 first half, compared mith.35% and.30% ^ EARNINGS GRO%TH f r the same ptriods in 1986. N..et mecm of $40.1 mibn for the second quarter The allowance for loan losses increased to 8118.9 mil. of 1987 rose 8.9% from the 836.9 mEon carned in lion, or 1.17% ofloans, on June 30,1987 from 8108.9 the same quaner last year. Net meome per common mEon. or 1.17% of loans, at the end of the second share was 8.94 for the 1987 second quarter,10.6% quarter of 1986. Sowan's allowance for loan losses was higher than the 8.85 earned last year. 3.3 times nonperforming assets on June 30,1987. For the first six months of 1987, net income of $78.6' PROFITABILITY mibn incres.ed 10.4% from the $71.2 mEon earned Annualized return on average assets (ROAl of 1.03% dq i in the first half of 1986. Net income per common share for the second quarter of 1987 declined from 1.08% Jd was $1.85 for the six month period ended June 30,1987, last year. Howewr, anttualized return on awrage share. '14 10.8% higher than the $1.67 earned in the same period holders' equity (ROEl of 17.89% for the 1987 second ?! last year. quarter improved over last year's second quarter ROE 1 Factors contributing to earnings growth in the second of 17.68%. quaner and first six mor& were: .h MERCER ACTIVITY UPDATE

• GeneraDy higher lewin of earning aucts. particularly reflecting the growth in money. market investments.

Early in the second quarter, the Board of Directors

• Increased noninterest income, which benefited from 8PProwd a definidw agnement to merge wnh Com.

j lg a gains on the sale of mortgage senicing rights and cer. mnce Uni n Corporanon, a Nashville, Tennessee bank j 4i tain other assets, as weU as additicnal senice charge holding company, with anets of $4.2 bEon on June 30, y and fee income from increased business activity. 1987. The transaction, which as subject to the,pproval e

• Reductions in tarious expense categories, which ICommerce Uruon s shareholders and federal and 1

rnuhed in noninterest expense growth of only 3.6% stam ngulatory authorida, is expected to be consum. A,. yj for the second quaner and 6.2% for the first six rr onths mated in the fourth quarter of 1987. Baser! upon 1986 of 1987. Gnancial resuha, the combined company would haw g l l y 7 l. ASSET QUALITY ranked among the 30 largest United Stain bank hold. A ing companies, ^ Sovran's nuet quality remained high during the second % 3 %N quarier. with nonperforming assets totaling $35.6 mibn. NEW OFFICES or.22% of total assets on June 30,1987. These figures During the second quarter of 1987, several Sovran E t 44, compare favorably with nonperforming assets of $36.7

• !Illiale8 Opened new offices. Sovran Bank. N.A. opened g

i 4l g-mibn, or.26% of total assets. at the end of the second two fuB.senke banug omen m \\irgima, one m e a g g quarter of 1986. WEamsburg and the other in Hanisonburg, as weu as 7 w Net charged offloans were $10.5 mibn and $20.3 a Private Financial Center in Mclean, Virginia. Addi.

t. ?

mibn for the second quarter and first six months of ti naDy, Sonan Equity Mongage Corporadon opened y7 ~ j 1987, resnectiwly, compared with $8.0 mEon and t.ee nd mortgage loan offices in Charleston. South ~ y-i .".y inenase in net charge-offs primarily was a result of leasing Corporation also opened two nm offices, g. 413.2 mil' ion far the respectiw prior year periods. The Carolina and in Winston. Salem, Nonh Carohna. Sovran Q p%+ 4 'm%.6 c 2 t s i. 3 L Ifl T; j q n 3. g,ey. y n 4 c .Wk.h er.u 4 W A O

p. 3 .3. + - %i pre q. h; Rv P .*f L i )! . one in Adanta. Georgia and the other in NashsiUe. August 28. 1987. The Board alw declared a reptar /- '._. Tennessee. Sovran Mongage Corporation opened a quarterly dividend of S.5925 per share on the Companyi

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residentialloan office ir, Winston-Salem. North Carolina. Series A $2.J7 Cumuladse Convertible Prefened Stxk. NOTE 15Sl'E payable September 1.1987 to shareholders of record on J On June 17.1987, Smran financial Corporation Tei a x months of 1987 have been financiaus p. issued 8100 m&n of 9%% subordinated capital notes due June 15.1999. The notes, mhich are non. callable, rewarding for Scsran. and me are pleased that our I were pnced at 99.582% to yield 9.81% and quahfy as shanholdeni connnue to share in irnprmed earning through priraary capital under regulatory guidehnes.. Net p* increased dW.dends. We look forward m1th op6mism to the ceeds from the sale of the debt securities will be taed second half of th? year. for general corporate purposca t COMMON STOCK DIVIDEND INCREASE 4-m a 3 As its July rnecting. the Board of Directors declared a [ gh "g g [ f 5.9% increase in the cash dhidend declared on the Company's common stock, from $.34 per share to $.36 C. Coleman McGehee C. A.Cutchm. III ' j A s, [ - 3 per sham On an annualized basis, the new disidend is y;'f0 if Ofr r p $1.44 per share. The mereased dhidend mill be pay-ng ofrrer e di able on October 1,1987 to shareholders of record on July 17.1987 g' ? qu.ne+ t.,mnp h,o m.mnsa, 6 qu.r 4 % on Eqw y .t h l -.y - sm an $w sm m RQ. iQ n~

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Management's Discussion and Analysis of y Financial Condition and Resuhs of Operations y EARNINGS SDI.11ARY q 'i ceand quarter 1987 net income of $40.128 rnillion W return on awrage asacts (ROAhas 1.03% and 1.05% 5 M increased 8.9% owr the second quarter of 1986. On for the second quarter and fast six months of 1987. respee. 1 / a per share bask net income d 8.94 for the 1987 owly. l mmparison. R0A was 1.08% and 1.07% for the / ~ second quarte'r compared with 8.85 earned in the semnd same respeone penods in 1986. Second quarter 1987 return quarter of 1986. For the fue sh months of 1987. net inmme on everage equay (ROEi was 17.89%. up from the 17.68% ..d ~ incremed 10.4% to $78.613 millon. Set mcome ner mmmonreported for the same quarter las year. ROE for the six month

• gh,,

share d 81.85 for the six months ended June 30.1987 was ended June 30.1987 of 17.76% compared with 17.70% for e up over the 81.67 eamed for the same period lam wear. b the same period las vear. Refer su the table below for an higher levels d net inmme mere pnmanly a resuh dincreases analysis d fl0E and ROA. i in net innerem income and noninierest income, as well as lower e F gmwth in noninteres expense, ,j 1 Anal 6 c(Retum on Aucts and Equity 3 4 5.even raientist Carpersuan and Nbaniane. Three Mouhe Ended 5is Month. I.aded June 30. June 30. Q *,. } yr. 1987 191m 1987 im 4.64s % SJ6% 4.71 % 528% a'I f

4..,ee,em.r mera,e e.,

em. Funk maabne nei sucrew inn.me k equhairm edp. emes ge ]- f';*/'? (.54 p ( 95) (.59) t% 7 ,. g Pes. e 6.# ben b e. 5,.. 4.45) 1.36) 4.34) 1.33i .[_ hei merhemi eipense y ,',J C2.30) (2.61) (2.34) (2.60s g Tante 4.17) t141 024# ties gf' . y.y Retura a meente earnes annem 1.34 1.20 1.16 1.19 +" Aversee ensnent maces e eerste soial meet. 90.59 90 13 90,44 90.24 1.03% l.08% 2.05 % l.07% g ( '. _ Raiurs an merage seem l 5 R" ( i j r Awware em b eerase eque

1. l# I I7.32%

16.37% 16.94 X 16 Jo\\ ' fr\\ ' l '. 4 c, Return en merage eque 9g g% g% {rm.

.e s

a '-l O r-f T g ., y t ~ Ib p R s , n.w1 Q l 2 ,;4 . "*m [w. = $o b r y% a v m@ t a IMx.s s, w' i. s s., ^ . #gr 1 Y 3 t ~ [g 5-E -4 tpri k ]: .4j 'l 44 1 3 n ~ x A y ff:: g-o.. ,,A s '.k,iw: i [g,;3 gf,. j, M i yf l

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w .m h F h i Comperwrve Operstmg Daia ~), - 5.e rmennel corporuion sad $vb.=han F.B hadr Equnahm 11 f (D Ban a shou.4ndu ) Three Wale. Laded lareesar ?'ei Momia Ended larrea.e u jun, 30. arscreceiri June 30. ihocera.es ,gr 1987 Ivm. 4numm Percens 1987 19d6 Anmum Per em .p. y iner,w ev m, $344.a 72 8344.573 8 299 .1% $667.810 8Mt2 85A Sil5.64Mi 42 2 A. k.,.. 6meves cere e 183.487 381370 g .I 351.000 369 19' eia.le7: 14 9i J g ,,7i k ser,,a mee.ne 161.345 168.203 182 .I 316J10 313.668 3.l49 10 ~ P,.nima ise Wa W e. 15.867 10 '8W1 4.959 45.5 25.702 20.477 5.225 25 5 geg-s M aservre mesme alter ,r pervsm ise kien b.c. 145.518 15o.295 84.7771 0.a _291.108 293.184 (2.0761 ( 7s T bnnews sassw. earludes 81V i accuren sene arul liuiares 67.548 57.735 9.853 17 1 134.180 112.364 15.816 lo l 5ccurum sano end ilomesi. g y' 3.122 2.763 t1.641 (59 41 1.296 3.921 11.6251 641.4a ,1 V. hennervev eipen e 145.542 140.532 5.010 3.6 287.477 270.778 16.699 6.2 y 6,a 1ereme b,4mv isie. 64.686 70.261 st.575 (2.21 134.107 138.691 54.5846 13.36 t' Cvevem d 4+md asie. 9.567 4.164 5.403 200.0 + 16,014 10.574 5.440 Si.4 A Ten equanire adre.smem- { I.eann 7.946 12.220 14.2741 c5 0i 15.654 23.183 (7.5491 0 2.66 Q(" Imemmes servrait. 10.% t 16.930 t5.9h9) 0 5.31 23,652 33.588 19.9364 (29.6i 2g' 4. Trwing mom ercerner. 43 72 (2 91 (40.31 Se 122 06) (29 St AM NO+

• p,.y Other sisary.eierba wwwmeme 48 20 J 100.0,

los 43 65 100.0 + f '! ' .p, het erome 8 6o.128 8 an A55 83.273 89% $ 78.613 $ 7i.181 8 7.432 10 4 % r Yh A .\\ET INTERE.<T l\\C0\\lE gs,$Q ^(- ! d$ d-- Second quaner 1987 net interen income on a fuDy taxable Also asceting fuDy taxable equhslent net inscrest income for equhsled basis was $161.385 million. slightly aime that the nemnd quarter and first six months of 1987 was the de. $d %y earned in the wcond quaner of 1986. The decline in market crease in the stauton federal tax rate resuhing imm the Tax. I - %.* inierest raies between the second quarters d 1986 and 1987 Reform Act of 1986. The decrease in the corporase tax raie jt'.; eas F I .?% had a sign 2 cant impad on net interest inmme. While higher resuhed in an alproximac $5.5 million reduction in the ta ? sverage wlumes generated ina awd income and experde, equhalent adjustment for the wcond quaner of 1987 and an b,, ~ ~~f m.% lower irserest rates reduced the effect of the elume genermed approximate $11.3 mibn reduaion for the first six months increancs. As a resuh. net interest inmme on 8 fully taxah'c d 1987. p.Q equhslem basis remained relativeh stable for the weend h net interest margin for the second quaner d 1987 N 3-[ ... w

• ?

quaner d 1987 as compared with the same period las year. declined to 4.60% from 5.26% for the sa:nc period tax year. ha. I For the six months ended June 30.1987, fully taxable For the firw six months d 1987, the net interest margin decimed equrvales net interen income was also impacted by declining to 4.71% fmm 5.28% for the same period in 1986. The decline ..y#,#k , irserett raes. Earning asset elume increases were note than in the margin was principally 8 resuh of the combined efied of 3T ly, < offset by the effect of her yields, thereby producing a declineincreased wh:nes at her rates. Additonall3. the her ta b3M i r. i g$ in fJy taxable equhstent interesi income for the first six months equhalent adp :nent resuhd in an approximate 15 basi-t7,. of 1987. At the urne time. ber raes paid on interest bearing point decline in the net inserest margin for both the second .g liabaities reduced interest expense rnore than the effed of in. quaner and fot six months of 1987. .~s' g ceased expense froa higher mlumes dinieres bearing liabihties. P fr* ^ 't;- m& /. -g V:] 4,. M,' l w ,? a. y.y Nr.. g [, w ,h '~ .fj c;... a+.n. pm

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.A wg g m a c n ys .f' ;g s .w. - s m- ? ~ ge g.-liW(%}98ll R d g h{ R[f 2% k l Pd r .~ ,t r e:: $Q y %% j n 4 g a %v s m. g @w & m n d i g n,)e @w "?hih ~

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Ek* P'et fracrant lneome Analvis' 5. rmaond c.r, .mt v + T idi Tauhie EqvnWem Ba I' dhillan a rh anil.a ,3. K,Q. p ^ seeend Quervt 19R7 Onopared 5 sh N Moesh. Es. Sed Jw 30.1987 Comia,ted

• iceoed Quear, Iwo t d N EmL tod d lime 30.19er>

T hy ' [_ ince, e d*enani 1=esew stars era.ee f3th ) b e (3ian,e. In y th.r a Chan,* In p y 4.ce.se 4.e,a,e inrew 4.<eare A.eswe i=*a.e N ys b,6eir Rm h w* beluair Rae 83,e*w s i losan net alwararned er w: C memal $ 12.014 8 66.299: 8 5.785 823.4tdl 8117.555e 6 5.913 n, deem amusivetwa (1.229 OD97: G.3261 2.092 .797: GJOSI .fpg ged ar amn,ap 3.'70 64.284p (5141 7.038 0.339 001: ) s. r-5 4.280 48.5931 (4.313s 8.956 0 6.324) 0.3686 84d rard 905 0.1891 0 841 1713 Q,24% 464 e g. .a If e fmanreg 647 0.385) M87 1.076 11.8911 1815 K~ F ep 397 0491 248 419 (5131 (948 4 ( g-kware O.644 QJ54 0 5486 (2.39%

1. 6.1121 48.511 g'h W 6an.

21.329 d7.489i 86.160) 47.250 s63 66?: 0 6.417 ,7 lss ime.t.ca.cruran. I"' N. b Leerd har. Tree n 43J69: 0.9e96 162381 45.032) 14.317) 0 1.349

• yi' Federal senew.

7.916 0871 7.529 IIA 69 4865) 11.004 Sune. sad poktorsl aubdn ,n. Q.672) 45.238: 48.9101 46.03tet 18372) d 4.808 ly, Other 3.335 0 76 3.159 6.449 14551 6.014 m v-final enemmem erunise. 8 421 II2 88 t t i4 460, 14.037 (23226i

1. 9.1396 jM4

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,[._ Eeigap hian. licht foe,e ir 488 4467) 21 1.410 0.304) 106 T,.d, an,mm.ervr ,r. 01: i4oi 60 040 con H7ti pJ,Jyd g*, Fedrval famia enlif emi servrur. puerhaml a% imder a,nemeno io re.ril 2.465 230 2.695 6.573 H.207 5.3n. J4 l 25:' w r, i d.- r,e. 6,.n,,, eu

co3o, uS8 ems a.992i us3 a%.eg ou e, i

2.u2 24 2.466 2.03 c29i 1.848 - y',, + I wi ,i,.e 46 uo w,ine fo9 si 006 m 0 ui n5 nw % ';p, s a.- 1* **br-=,6e== g*n Ineries rh,rLm, 2.896 6468) 2.428 5.996 19981 4.99R 'Pl .'n -4 u ,..-6,i w 34 0

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M* O A.':i me,,an 1 906 o.467, 129 5.442 u.790, 3.652 QM l 3* '.* Caneverr eevil. sw. C.le9) 0 0.032 H 2.172i 11.1666 0 9.2561 (20.42b g p"8E j Camfrase. el depa.s. 8100.000 er moec 17.904 (3.472 14.432 20.027 (9.1411 10.88ti g l' l 1 r, s35 09i si6 sn iS4 79:n Fir,S [. 2 w cuw benes depa.m. 27 497 r2u st,i 3 75l 46.696 s50.or>4i i3w,. M 2 Fed rd fund.pwehaned and.ervran h/[ 4 w +r.,-. e, a, .ue2,

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1. 9ei n.lto 2.<n i4.079, on2 9'

i r. m,. too .6n un .ui im, uSe y Win >,re f spew 24 697 (24 580i 117 42 462 160.659

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182 $38 995 4135 84to 8 3844 w.W '7i.6.p. 6,,.6 ,..nem,i.6,e..n 4 .,6 6., c.,,,,i, m_.,.....___._w.__.....,,.,,... .r,.6,.6,,, a m - 4.,a siw)(; .t., n . nc i ,-M.J.* 1 Wif e, s i .e mn.:$

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1. 9564 f.718 762 2.521 11.164:

1.357 1.045 (1.593. (544 5 64281 (395: 1823 176 214 390 ~ * ' ^ 359 145 %e 45.W 492 444p 12 660 (2 915 9 745 11.068

1. 452:

11.520i 5.159 4181: 4.978 (120s i1.536i (2.0566 716 (4616 255 .?;.1 51.61 13 904. 1 651 48 7) 696 609 il ll it.017s 1.239 242 5.208 770 5.978 h 3.581 111 3.692 29 002 t!.fwe 293 e c-s. 654 (351 6tv 246 4336 (90 ~ 737 t663a

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j (1.918) 853 el oras 364 it!36 266 16.445 44?li 15 9?4

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$u Mwho Laded ) ear Ended ,1 Te jw 30 June 34 Den emhe,.s i. 19a7 19 2 1987 twin evnei Fee er pw6ed ended:

i. 4 M charpfle as a prem wf e.evese luaan

.42% .35 % .41% .3r'% .39% V im ame.resse' 6.12% 6 164 5.a21 14a 4.644 i .d, Pweed*=d I { 4 han.,6. ben k.m a a pews et kan net aluacatard mrame 1.17% 1.l?% 1.18% P henperbummg anseis e a prem si. Laean mes st onearned erone and eher semi c.ime .35 .39 .So hal m.= .22 .26 19 8 Pwesi mrome enrimbas a. ewe,. v.aure pk. pr wen i.e han kom heed he are enars -en. I %u8 Q-g o, k, PROVIS10.N FOR 1 DAN LDSSES M d;p The prmision for loan loses d $15.867 miDion for the lo preide for posenoal losses asociased with lending utmoes. second quarter of 1987 represented a 45.5% increase owr Sovran's curnnt aHowance position has enabled the Company e+g the same quarter las year. During 1987, the Company ex. e speci6caDy aDocase a portion dis allowance for its minimal i Wh. bd higher inels of charge.oEs relmed to the consumer foreign expose. At June 30.1987 and 1986, the allowance j y [ e g' nding area, which contnbuted to a signifrant increase in the for loan losses as a penent ofloans net of unearned incom [, a& pnnision for loan ben. Net charged og loans for the wrond was 1.17%, or thne times the lewl d nonperforming aucts at quarter of 1987 wie $10.528 million, or.42% d average the end of both periods g bans on an annualized basis. This compares with net charge. b'a oEs of $7.978 m&n or.35% of awrage loans for the second NONINTERESTINCOME r quarter d 1986. For the Grm six months of 1987, net charp. Second quaner 1987 noninterest income increased 13.6% h oEs were $20.272 m&n. representing.41% of awrige loans, mee the same quarter last year. As shown in the table. in. .N up imm $13.191 million, or.30% for the prior year period. creenes in serme charps on deposit amts and other ser. g'., d? s The aDonnce for loan losses, which in funded thmugh the vice charges, income and fees were the primary contributors to .1 prmision for loan losses, has been mamtamed at a inel necessary this incream Cremer busanen actniry, fee revisions, and gains ,e . a gf.y. Noninterrs Income v mee 6r.n 4.nn.1 c.rp.,mma.nd Nb.nh.,n g' A (Dnaan e ihmmand,e ' - I M These Meenha Ended inrieme Su Leahn Ended inewane k Jh June 3n. (Drewsws jw 3o. (Deewave qf E.4;. 1 ;* 1987 19 % Aamurs Peps 19a7 19H6 4mmum h.h em [ Tnsm arsaw $ 9.672 4 8.742 4 93o 1o.6% $ 19.505 8 16.459 8 3.o46 18.5% DM N' Smav ekaques on depons arc unu 16.149 14.o23 2.t26 15.2 31,793 27.158 4A37 17.1 Tftgr odwr ems, charges mir,mr and M g ,jC Bank eerd ire. 14,884 15.439 (5511 43 61 38.027 29313 ti.486 45 o N s pl Meapace sermas 6v. 6.644 5.977 67 1.1 12J01 11.906 295 2.5 >.g/., W1

othe, 10.369 12.496 7.878 63.1 34497 23A51 II.o46 46.7 se g,. j-Treeng memme prete sad rummw.m 466 8.o63 d597 456.21 1.955 3.677 41.722) 446 8 4

'T 67.58a 57.735 9.853 17.1 128,100 112.364 15.816 14 I 4 rwewsws game and 41 mlen. M ,'-j Dris eerwvn I.tM6 2.815 11.749i

1. 62.1) 1.888 3.749 (1.8611 649 6*

r9.//- Egewy erewan 56 15 2i 108 100 e + 4o8 172 236 loo n + g-Q;;g , eb.* ; Pg, e s6a g g 13.6% 8:3o.476 s ne. ras J g 12.2 s g..' y h .O. 'en

• r 2"

?:;

+

e T. 8 h . :q: -M,' s; E M ~ (a,. ]w pp + f .h 1 .c u .w,, t '9 g 7 .M ' W 9-e,, . i e.. ' x,. (,' ~ .J u [ h W.. t _ t *-M g .pg. <,e $ *W, n. ww . egg t &h -er d wp ?

1. ~ e. %Au, +.

m s, .~+. ,_ ~ q g &, m .fhs i ~ j e, s

i i i I I 1 i'. relating to the sale of amets resuhed in higher lescl> of irumme Occupann expene increawd for the second quaner of I g h for the second quarter of 1987. Nonrecurring gains irnm the 1987, primarsh as a resuh of higher net rental espenv. m hile M. hf.3 sale of aucts aggregated $6.8 mibn dunng the necond quanerfumsrure and equipmeni npene ma up due to gnwer depn. e d 1987. At the sarne tune, decrease

• mere experienced m nanon npenne. The increaw in the other categon of non.

1 bank card fees. trad ng account profit > and commiworm and interest expenw mas pnncipalh a resuh of npen,es in 1987 M semitn gains and loues re!aird to increawd buwss aakirs and a promenal camp,ugn. Qt 4 Noninterest income for the six montha ended June 30.1987Soninterce apenw mas up 6.2% for the first six months of 4 + increawd 12.2% compared with the same perard last 3 car. 1937. The increase in malanes and empimee bendits apenw &[' Changes occuryd dunna tha perad pr:manh for the recon. mas affected bi the nonn.curnng nema in both the 1987 and stated lor the quarter. Addmonalk trust iruume maa up for ihe 1986 penoda. Additannalh. adwrtung expene increa,rd dur. 1 A. firm half of 1987 an a result of increaws in the Wume and ing the period due io campaigns designed to promuie the Q Q market wlue of asut, under management. Comparn's image and to increaw is customer baw. As in the f 3-NOM \\TEREST EXPEME quann unpamon. greatn buwnes. y contnbd b { 4y Total noninteresi expeme increavd 3.6% for the quarier the increase in roninterest expense fur the ax mornha ended June 30.1987. I ended June 30.1987 compared miih the same quarter las par. Man 3 rategories of noninterest expense declined as INC0\\lE TWE5 Tl.% shown in the tabic. During the neennd quarter of both 1987 income tax npeme increased signiGeand) for the 1987 second lk Sh* and 1986. nonrecurring expenses were incurred w hich affected giarter and firs six months While the statuton federal ta 5:.1 J/. 3 salaries and empimee benefits expense. Thew nonrecurnns nec dechned in 1987. tV Compam's income subject to ta. M 'Q transretions included items whict reduced expenoes related to ation was higher for the 1987 perinds as a resuh ofincreavd 6:$ g h bene 6L plans in 1987 and increased 1986 expense due b income and reductions in the amount of tax.csempt income. In N" e earh retirements and resignations under emplement con-addition. the benefa derhed from tax credits ma. lower in tracts. The effect of these nonrecurring items mas to decrea* 1987 than in 1986. E@ 1987 expenic b) $3.6 mibn and increase 1986 expene tw p $5.5 milhnn, for a net change of $9.1 mibn. i2 y ) Q.

• f9R

.e% ~k honinterne Essen e

y.. ^y 4

Y Man Fmanmi(Lepeman amt Nimiliser. y.# ' i g( ) ~. - ]Q tDullan m alw.u.and i

• 1. h Thr r %wein t.ndret f.nece m nl..mh.4.artrd in. ve

'[w y,,pai 'g June M ilherws es June Jo. illema-o 1987 Mu. 4m um fvnem te47 diseth Amaum ava-u y j .g Salare. 5 65.640 s 63 *15 8 1.885 30% 8130.661 Sl20.9n3 8 9356 8 is g[: .a Impknee beneb 10.f f.4 13 337 63.076i 123 1s 23.646 24.387 47414 (3 ui bel ta&arer.aml empknee benr4 75E 77.n92 el.19ti

1. 1.Si 154.3o7 t 45.292 9 o15 62

.h E 9 An erevgnes cipen e 9.281 7.956 1.325 16 1 18.257 l5.976 2.259 14 i l , [ Fumeme and eqmpmem nprme 15.836 14 0 lit 1355 12.5 50.82! 27.516 3.308 12 n i L Ljh Adsene.w g 2.188 3 075 18874 428 th 6.lM 5,228 949 1 11. 2 bMu

• Amanuman ernmentele a et.

2.827 3.628 (7971 622 04 5.685 5.Rai (2h 64 n. ,%,yQ 8ani cani ngen.e. 6.303 6.42l littu s18# 14.978 12A4h itx& 45.1 Commmurmann 5.493 3.14h 297 93 6.996 6.8M lut 28 h j l [K Pumare end.hippmg 3.485 3.462 23 .7 7.087 6.994 l3 /J g 4h P' 3.088 3.117 (2 96 t9 5.371 SJHF e417s i? 2 "y* - kenm and emppin 3.118 3.893 47751 (19 9 6.097 6.948 aft 5ts i!22, vA 4 Oihre 20.020 14 h13 5 4c7 37.0 34.Ta8 31332 3 n56 9o a.. 8145.542, l l 40.5.l2 85g 36% $2a!.477 82M 3 lh.m 62N ~t k / w&=)x. c. II am e %h% g ; ty,[p4 *1 g .m / d.

N.M.s

~ sq9 - b w" u j 3 p ~ y qq)..e.

• C a,

,y .s

1 e I Ht. maasemed. D,,,,, . 1 Anal ~ d rin,. wi Gedu.n and R,sult. d gere 6 ,h a ; -.e l ^$; ITNANCIAL CONDITION 'T6 At June 30.1987. wal as cts mere $16.443 bhn. com. C'" B"'d" 0"'"'"d'"8' ' &[. mafonry d the increaw was expenenced in moneumarket in. ) pand mith $14.235 billion on the same date in 1986. h [*,,',""[',',"'~'""*""**'** )s g

1. ~

witments, loans and imesment wcunties Total depsit3 m s .d. N June 30,1987 increased 22.0% to $12.988 bhn. Slost 1 _ l l a,g emegones d depuis expenenced gn=th, with certdicar,. d s esa e 2,o s <nt I p, T's ; depouts $100.000 or more, as well as intereni and monew w ,,i,,,,,,,3,,. m. m::

22 l

market checkir'g producing the largesi increa+s. While short. m so.s uo 24r Z

1. W irrm borrowinp declined mer las year, k,ngaerm burrowings

.?g. sue. smo sma iy increased. L iuuann of $100 million 9h% subordinated " 47 / ?, g ' capital notes on June 17.1987 cam ed the increase in long. oo,,,,,,a,,,, p.,,,,, QN N.- 2Ja im .s4% nerm bormings Qh Changes in the Company's Gnancial position between V December 31,1986 and June 30,1987 are shown in the Comolidsed Stacment of Change in fin.ncialikition on SHAREHOLDERS. EQl.lT). ,;._g t a p.,e 13, Totalequiry capitalincreased 11.5% to $919.5 mhn at nt J NONPERFORillNG ASSETE June 30,1987. The primary sources d capital gmth haie @U,-$ been the n tention d income and the iuuance d stock in con. Al June 30.1987. nong rforming asets of $35.6 mhn nection with the dhidend reimestmem and emplosee benc6: N$E j repruented.22% d ual assets. This compares with $36.7 plans. N Compam's strong capital position is reflected in its jM A million, or.26% dual aucts. at the end of the second ? pnmary and total capital raion of 7.33% and 8.22%. ropec. V@ f g&[ quarter last year. For addmonalinformacon penaining to tnelv m June 30.1987. N June 1987 rue inuance in. %[S" s"" p nonperforming asta refer to the table. creased bah capital raios. Additionalinformation regarding W" the Compam's capital is prnented in the Consolidated State. 3 i' E rners d Changes in Shareholdeni Equity on page 14. h knperfonning Aw.t. and loan. Contractual.s Paw Due AlERCER ACTIVITY c 'a' h,),[N I,*, n.'. On April 27,1987, the Company entered into a dc6nithe iM p aperment to acquire bs merger Commerce l'nion Corporation ga &d. (Commerce l'nionh a Tennewee bank holding compam. 4 W f "I June 30.1987, Commerte l'nion reponed assets of $4.2 f T*",,.";",,8 **** s 6.2 so bi!! ion. b transaction is subject to the appnaal of regulalon ' P'- l [ .- lr(g. s rrn I 26.o

4 soi,,,i,

,5 authonties and Commerce i non: shareholders. For addi. M J tional information. refer io Nue j on page 17. @J.;tIl j R,urwtw,d 3.4

.0 k

""*'""'..o,. sa,s,,6 g;;,; ,1 g c.-- a u ' m so. u kN iriieenai casismenennwn N19 %,. w, w, u.,,,. o, ., w., u. t. a,.a w ra f. ~,.m,i==. -N~iis-MA g! , g. ..*,.. a. a. w.,n

1. y%

J,an J 3a 199 l ion: im ion: iw, m I g CROSSBORDER 0l BTANDi\\CS g,,,,,,,, $,ve,e A n. 4.0W im 1.0W I C. y Cd Total crou-border outstanding at June 30.1987 were \\ _y i p* $416.6 mhn, or 2.53% of wal assets Ahhough the,,e out. Y,*[, ,i l .,3n n, n a,a m,,,g standinp were up significantly cier year.cnd 1986, ual ev d$ __ posure to less dewloped countries remained stable a onh %,,,m,,,,,,, i. ,g m 3.,.a i o,. s ~M 1 $46.7 mhn. or.28% of total aucts at June 30.1987. & L,., -o 61*ns 6:sa 6trw e 3 j increase in -bonie,-amunp occu, ed principati> in i-,-n.c.c, --. as in:n a s tiy p g-interest bearing deposits with wher banks. . b...h y, iW dM - l W N% 10 .. d .f. ' @k. $'N,,

• l, pl

,~ [,y* 'y 3 w.. ,;M.m 4 g4g ,p 4 4. r A. e F ,9 y'W, 5%j,y i es* # (' L 5 ' Y'. ,. f . ~ l' i ^ ' r.r ' 4r f lt g d ; -4 "W ^ 'b i _.g., f 'kp i

w 1..r. :

f. x, A

g.g.. g. m: w%Mg . 1s C g.g.f.x .g s ,, d[abTdhi.a si; . gy 7.- E.AJ M, y; m 6. ( s es s p. ~.

}y, -...si ~ ' - "r- ' 21 i [ c \\ ConSoh' dated Balance Sheet Sman Dnancial Corporation and Subsidiaries (Unaudited)

(D 6 in emu nA ar

Tradmg accouni profia and commmion. 465 1.063 1.955 3.677 .e - - Securitici pains and thw.) 1.122 2.163 2.296 3.921 A.- Toial Soninterest income 68.710 60.498 130.476 116.285 .a honmeere.t Espen e f alann and empknee benefits 75.901 77.092 154.307 145.292 "g, e ss! Net occupanct empenw 9.281 7.056 18,237 15.978 e. Furmiure and equipment capenw 15.836 14.081 30.824 27.516 e Other 44.524 41.403 84,109 81.992 3 Total Noninterew Espen c 145.542 140.532 287.477. 270.77H W. Net Inconw laceme Before locome kn 49.695 41.019 94,627 81.755 'a ~ r;. Apphrabic income sau -%c G 9.567 4.164 16.014 10.574 Net tneome 8 40.128 8 a==.855 8 78.613 8 71.lHi .,'C " 36

ars Per Share Net income per common share-Note 11 8.94 3.85 81.85 81.67 qe teigheed as raer sharn 42.485 43.155 42.445 42.521 5

$n _. in,

r. e,e den.,marw n r.

i 12 1 a e, t- /%4 iip / g. d i e l ~ .., @%p%g! ~ .%M% 3.g w-r. Consolidated Statement of Changes in Financial Pos; tion Smran financial Corporation and Subsdaries j inaudite d) sp a.m mih l. i h Enih. Ended June 30 1987 1986 w Fund. Pamided opersimna; (Apphedt Neimcome $ 78.613 8 71.181 Non ca.h chargen: 1 Prmiiion for loan km.c. 25.702 20.47; I Depreciasmn and amonnaiinn. deferwd tasca and other 36.281 28.100 Loans charged off net of reemern (20.272) 113.191 > Cash dnidenda declared (28,904) 124.5611 91.420 82.006 1 Depo.its and Other Financmg Adiuirs: Liabiblica acquired through acqu6stion 427.644 honinscrru bearing depoi. iia (304.666) 187.7S2 lawre.i beanng depo.na 1.682.516 318.562 Shon term bornmino (35.952) 58.315 " ' long acrm bornming. 97.972 120.980 Purtha>ed and acquired common niock (f.298) 665.717 Innuance ofcommon niuck for DC.%B 69.030 Other L.uarwei of common iack 12.770 11.912 Cash in beu of fractional sha en (109 N 1.445.342 1.128.349 S' Other Anisitie : Other, net acquired throcgh acquisition (44.0371 Cash and due from twnk. 1664 47 (168.300 >;g PremLes and equipment

1. 36.119)

(21.921e .:sc Other. net (29.960; 45.7916 g 100.308 1320.04vi y i La! Fund Prm ided t e pnhedi 61.637.070 .$ 84o.3rw. .4 Fund. Applied Change.n Earning Anwom k IProsidedi Earmng an. cts acquired thmc3 acqui.iske $ 413.946 8 h Mone).marke t imensments 719.151 (116.1561 [7 l Slortgage kana held for rce. ale (54.213) 45.374 g Tradmg scenuni ccuntie. (31.402) 1.686 4 inve.ime t ccuniic. 47,3.9I (21.146i -1 i n leam net of unearned mcon.c 550.533 566.6u2 Q ToialFund ApphediProsidedi $1.637.070 8 890.3 % j he, mm p.m m, mae. m. e.c% i rm.ncial unemeni b .M Y l 13 'l 2 o ff& h ~ g ~ s 'g n - mer ~ am w_. em ..-j 7. Y} TIN . = "'*f,. (* v O - ~} " sh s. T-S www,. 5f

e. s'. " mg.eg c

n..r -~ g i 4 j ?- .y . - - aw' g h ^ - -__.ew,- ( 7, Consolidated Statement of Changes in Shareholders' Equity wan rmncia cymr.non na sub6;ai.rr. wuuaa u. u,,,.i Pndeed Seerk Caes.se si ch fressee, heech heres Amount ham Ameses Serpius ime %sm ( sa Teest ( 986r 1 Belence s temang et.n 212.4 13 8 3.718 42.096.824 8 fl04&4 8 4376 6 561.711 1614.5961 8 07.664i 8 763.125 e upme at ahar e he anuen 1:1986 6614 $* 0.0736 414.5916 614 396 17.664 a.ri 64 p, ih., C4.3??e (24.327 U A86.5006 48.433) (55 Jilt 164 6 e, men 435J466 (1946 11.7791 0.4731 "-~'.'=",1f" eps.n plans 4563 72 2.28.3 9J29 11.912 preferred 6 168.9761 0.2061 136.130 681 525 YIe,C2 "sa 't, t, a Balan,, e nul es ce.d g7 g _42.276 650 8 211.383 8 2 635 8 one 331 8 . 8 824 na o EA J E 947: a bepnaeng el a ISOlle $2J77 42.191.929 8210.960 824.840 8626 - 8 6864.3 68 see lwe 4 8,7566 G8.7566 4"'"l:Li'"" '" '"" o n. 00, ~2, .i u, d.n'; C ""*'.r.'."#'"' ..i=> 6, o n, .0il

• ~ ~d ';":L"

.....-i stame plan

• 342.169 l.Sil 10.959 12.770 g

,.,&c.d 2 9_98,

afi, n as 69 54

'l Balaarv a rad w eer==I 123.112 82.154 42.370.321 821 t.852 829.543 4675.967 8 Set 93t6 I, 5e.===pung

r. = cend.,4 tu

.I s.,m,= t. 1 e 1 i p k:- . l4 E k y

q f

p %g; a u ~ ' v.a =. W;;. y Notes to financial Statements (l'naudited) N(TTE A-BA$15 0F PRESENTATION The accounting and repsrting puhre of Sm ran Finaricial necessart k>r a fair presentation of the remuti of tie interim f Grporaten and 5ubsidianes(the "Compam"I follow generath renoda hair been made. The noien inciuded herem *hould accepied amounting pnrriple, and pracures m it hin the fmancud be read in cor.suncimn with the noten su the fmancial ataie. eenice. indt.stry. AD ugnficant intertompan) acrovnts and menta meluded in ene Compan3's 1986 Annual Report to trennanmns haic leen chmm.ned in conwlsai.i n. Shareholders. The inforrr. anon contained m the fmancial taicments i. Certun preiina*h reponed amounts hoc been reclanifed Q unaudaicd. In the opmmn of management, all adju=imeno-to n>nform to current presentain,ri. i l N(TTE B-INVESTMENT SECCHITIES T Imesment scrurities are summarized as k,llow. tin thousandsk .I Juw 30 beim al. 1987 19h6 19m ' 'c M ta:ue Wrkn talue tiima talue tierk,i talo, M talue usiksi taher j* ins 41w.bsers 4 648.643 8 648.091 8 818 123 8 830.8*6 8 748.299 8 762.484 i 'T i fes val erem er. 622.756 60s.646 120.424 120.!*2 249.550 25J.361 s)*. k *f kan ami pdus el auhu.. ann.n. 980.379 1.007.124 1.13 4.3t4 l.143.159 L.064M7 1131.6M

• b?U*

'W Oihre 343.346 333.62* RTl3 $7 til 82.742 82.2.14 ~.3 '4 ; s 2.5es. 34. s 2.597.asa s 2 ion u4 ssasi m 8 2 i45 498 s 2.22n a '4.Q -J~ r&,. j tn MTIE C-LOANS NET OF UNEARNED INCO31E Tsaalloons net of unearned income are nummarized an follow fin thousandsk %.,,1 N-}. = luar 30 bel e 31. 'y; # (" g 198" Ivm avm G, y +4 Inuw, Lamrersal y1 8 3.399.662 83.052.970 83.202.41* Real ers-nmauunem i y 9*7.583 1.023.483 4.ons.642 .gg 4 W n fireleenser-sumgar 1.718.504 1.508.ordi 1.4t2.928 Ga umer +. 2.372.*31 2.214 94R 2.328.3d 1@'e# Bank eerd .'O* A 611.323 593.239 651.712 trear (mam mp 246.064 227 ett 247.weib y b.ciamis 622.062 683 006 661 At t ,5 /.l,. M.d'

• k

%saldumnem hier> 10.148.931 9.303 633 9.623.105 .'7 Fawien E _ 55.216 29.298 . 20 018 j 'j I $ 10.204.14 7 f v u2 414 84 6A2.t"1 F f .~t. s 9 e g; '}i,, q m;.fy +w ). O' #Ilf h -l F ,,y*q;:e j 11 QQ g. 4,,* .re t k ; f x l ' 5 M0 -o j 5 t L., r/ }, Rhs i ii MQis?d:' ~ ag ^ M c.q,. f' ./5pmyjW h b ,e h

1. f EMl N$

u h NE Am M W g'e. s sh. + 1, '*? e s

p..{

%Ien to Isnannal $uermetd> (Conimurdi g NOTE D-ALLOWANCE ft)R LDAN W5SES Transedsons in the allowance for loan lu.=c are summarued as foliuma 6n thousands): The blanrb I.eded Ni %emb taii d Jue 30. June 3n 1987 1986 1987

I4He, 6eimw, a bepanmg el perad

$ 113.603 8105.954 8 t 13.512 8 97.714 Alkmew ed puerh.,d lenn a dme siegu sn.n 3aL4 l'ar.ma iuskan k e. 15.867 10,9t2 23.702 2n 477 lo .in,ryM edf 413.345 i4 W5s (25.733 it ?.022e -( Inermeres en kaan. 2.817 2.017 5.463 3 831 'g twis cherpe.mi. e 40.328s si.978, 20.272: i J s9h 4'- l'arvo eiprorene mer aM ehupe<i6. &,339 2.930 5.430 7.2Mo 8elmw, m end er pr.nud s818.942 siuM ax4 8 18.942 sinn aa4 I .y, N&rE E-DEPO 5rm Depassis are summarized sa fohs Un thousandsl: 7 Jon, 30. Dramber St. ) ' 1987 1986 19at. bausnew beenn, 4 2.650.547 4 2.603.262 8 2.955.233 p lanrew beenne J,' : l rechrLmg 941.044 720.486 917.041 i M.ea.ms,6,i we u. 1.30 587 2.087.262 2.304.738

• jR u4 itepdw amme.

1.149.008 922.978 1.0%6.027 .1, ') Cea.mnet eeri.ra m. 2.837.259 2.992.329 2 959.914 p> Censfemro ed depuus.8100.000 er m ee 3.069.557 IJ1228 1.409.638 e imeyn 18.427 8.441 2t8.988 4 L3 h( Tasaluerees bearmg 10.337.882 8.044.354 8.655.3 site T g-A.. d + $ 12.988.449 810 647.616 S i l.610.hw j y p*M

m g,$;;. 'e i

.,a:Q ~ 4% NOTE F-DORHOWINGS 44 Short4crm borrwing are summarized as fobWin thousands): 4 3 g June 30. D nel.re 31. (

?)ry,

] p'" l987 1986 198. ,s- . ge 7 l'ederei fund. pueriaeJ $ 494.648 8 776.541 8 396.135 r forwen, sold under asween m> eepinha c 736.717 621.637 632.663 '.'(1, V, 1eru bderalli.ed.punhand 83.821 287.552 244.133 ~. Mmerr ame. }., s -f 307.031 283.t 50 323.096 , $5. 'c : 8 .. al peper i7,098 35.391 85.2"5 .y Drmand n a.ihe t A Tera un 139.511 164.326 251.969 d g a. J?: Oihre

• ^

~ 4.839 10.or>3 6.348 ?g. g 8:i $ 1.903.669 82.198 fmo 81 939.621 T.( - on J.m 17. i987. Se c.mp.m rd Sion m ii a 9 w ws,.d.nmed C.pa.: %, por 1999 h a u y NUTE G-INCO)!E TAXE8 Vi'

• t

'gi Income tax expen.c for financial reporting purpw.s differs due to tax-exernps income frw rcriain loans and imestment kr. 4, from the amount computed b applying the statutory tax raic to securities, amortizanon of defer ed imcatment tax credits. c/ ~g, ew f? income briore inmme taxes. The.c differences primarily are and non deductible merger.relased expenses. E E. ..kw;.r w w +"K

y. '

. gg .).^ Q M N. b Sy '. kI A..e., w.a$ et Y ). .. I6 . 9 6. i d4./. .. y_ y, ->v ~ ' ' w mv % 3 -g. e gs. g S .4 q ~ kk!ffh!!hhdt-w-ea h q, i e h0TE H-COMMON S10CK AND EARNINGS PER SHARE Punuant so a change in Virginia 1. effcoiw Januan 1.1986. treasurv sham are no longr deemed to exit a wordingh. Net income per rammon share ia ba,ed upnn the escrage F sham held nr December 31.1985 hair tren redawfed n3 r.umter d sham of common storL ouwandmg dunns em h a redudion ofissued common slurL. AD acqueutionn dsham rrriod and common stock equiolena of dJunw erL opimn. of the Compans'. common mock sirre January 1.1986 are and rights. W following table sets fonh the number of sharr. i, tressed as decreases ist common nurk ismurd, and the net irumme uwd to determine carnings per share for S I the applicable permd* lin thousands rWpt pr. Sharc dJiat 49-( There Wash.f.eded Na hh. Iaded [, j June 30. Joe N 4 tis 7 19hh 1987 t9em aw:eer skam - 'me ( Darre ale munen ad opeans and ryhir 42.SSO 42.825 42278 42.2nv 155 327 16; 312 Awrapr eheres a,maandmg appksble w earnmp per aber-g g g twi er ne $44.128 (36M5 $ 74.613 871.1A1

t. d,ms.

p,ser 4 ma n2 now

4si

. 224i M armer apple abir = <armnp per akene 84o.0$6 s M.746 878.461 87o.M1 ta,m.p,r.,.am .h-g sy sy s ej 4 NUTE l-COMMITMEN"f5 AND CONTINGENCIES 3 In the normal courne of busincu. there are outnianding inchided in d financial usements. Al June 30.1987, the variou* commitments and contingent habihties, such a com. Compen had standin lettern of credit and guaranien to imue mitments so niend credn futures contreta letters of credit. puaraniers, indemnifraion speementa, cic.. w hich are no standby leum of credit of $1.055.9 milbon. j ~ i NUTE J-PROPOSED MERGER 'ih On April 27.1987.Smran FinancialCorporation enscredinto N foDoming presents selected proforma fmancal data ' a4 m - -- ? a definitne agreement to acquire tw merger Commerce t'nion of the Compan,s as of June 30.1987 as if the merger had Corpurmion (Commme Uniunt. a bank hokhng compam based occuned on this daic bn mdimnsh in hadwdle. Tennenwe. The trannadon. mhich in capcoed so s, D be consummmed in lac 1987 an a puohng of.intemb trarwuton, is subjed so ratifration bi Commerre i nion's shareholder, s20.603 w S t,,, and reguisory apprmal. 12.829 Depi-a. Under the terms of the agreement. hnklers dCommern L'nion

• ^=*'%a 16.sa:

M 13is 9 k ar e i fa n7th I hai d The fouoming presents seleoed proforma results of opera. Commern Union common mock held on the effedive due of a ns of the Company as if dw nwrger had occuned on the transaction. Commerce Union granied the Compans an anuary 1.1986h prdonna rnuhs am not nenmar option to purchane approximach 5.9 mium....narn ofits kPmentatie of the actual resuhs that would hase occurre@d r i c v. 6 uninsued common stock upon the occurrence of certain esents or may occur in the future if the transacton had been m efico on the due indicated (in thousands. cwpt per share datah t There bei. Ended $m bat. Ended Joar 3n .y June an. 1987 lean les; ivan

• c' larwa areme M arms merome 6408.993 839a.42f.

8791.e39 8792.3 t 7 M mwome 181.226 166.9ul 313.249 323.2h5 Earene pe,comman ease: 51.6*0 46.929 101.522 90.263 E{#*d Praare z Fuh ddiard .28 .au 1.?3 1.&? .8 ? is I.fi tM f 3 3 3 aJk [ i [g.

• A W

%n ~ i ,. y n. 3 r c ,,on,, e 1 Consolidated Average Balance Sheet l9 somn nnann81 corpu8 tion and subsidiane. 1 Three M milm faded June 30 Three niumb i nded Jusw 31' [f 1987 Uf# 198e>

• r' lnern.es Asersee imewe Aicragi-1 g
• /

d Averase inroene' irWw 4mase incomes bekt. o.4 -

Belmw, boen e' Rar.3 B..m.,

luen.e' Rm-30 A. AS W (.mmeer 8 3.571.3 8 76.573 8 60% 3 3027.5 8 70.858 9 W-9 Real case,narure,m 945 6 23.865 10.12 993 3 26.191 in 5x d "f" eT" """" l$U$ i" llN is! 'Eis lid y '@* 7.b .:f i. liene (menrog 249.5 6.0M 9.75 226 4 6.804 12.05 Bank red 610.3 23.298 15.31 58; 2 23.582 16 11 ~li? ', N' T a 8'ernen 48.3 935 7.73 28 8 687 9 56 y+ l> tanciempi 623.7 18.167 !! A8 678 2 22.115 1 3.06l =9 bal bie. 10.004.5 256.031 10.26 9.218 4 262.191 l 1.41 ~ ' meed ..n 6 78.0 11.325 7A8 829.9 19.563 9.43 ,./ { Federal s,enen 548J 10448 7.7% 142.5 3.1 t2 8.76 P ' Sean sad reimral subdam.on. 1.0044 28428 Il.43 1.121.4 37,538 13 43 { Othev 246.7 4.423 7.19 61.8 4.2h4 8.28 g r hal enemmen eerurun 2.474.1 57.087 9.23 2.155 4 61.477 11.44 m Merigape luem bekt for re ale 222.1 7.544 1345 208.2 7.537 14.52 0 fredag==m ,rvraar. 10J 226 8.92 10 6 277 10.50 e Fedeesl fund. wkl and uvveme. puerhoed under aswenemm en ee.c0 435.9 7438 7.03 294 7 4,943 633 I Due 6em banh-weeres beenna M3.7 l1.560 6.99 2f.30 5.772 8 18 4'.

Ghe, 265.4 4.842 7.32 131.5 2.376 7.21 y

bal ennung anare 14.079.9 344,872 9.82 12.302.2 344.573 11 23 .M a due b 7 Olwr as ee 648.5 653 2 a

• fy g r(

bel A.sem &15.541.4 813h49.7 IJA81LJTID A%D MLARLHOLDER5* EQt TT) Iner*s bearma depo e ".h las** rherkers 8 928 4 11.324 4 89 8 6*2.7 8.896 5 15 g [ i l' anes marka evownb 2.310.4 29.940 5.20 2.449.6 32.832 6 4., n.y j f B'aular es.mg. l.117.7 13.818 4.96 891.2 12.379 ST7

..weW

] Cse.uan remin m*. 5 2J 75.5 58.716 7.21 2.978 2 63.888 8 ed. ~~ g., y 4 Cendwan ei depo.4. 8100 000 er more 2.278.3 39.845 7.01 1.273.7 25.413 8 av. 41.5 M9 6.47 84 153 7;x g,.M F**evn .w My7 64. bel meme bearms depn e. 9.552.0 147.312 6.19 7J93.8 143.561 7.2's W. Iederal funde puerha.ed and servrar. ' NI . 5'# .'d a ,m maki mader erwenwnes ni epuerha.c 1.177.1 18431 6.36 1.447.4 23.383 6 4f. y 0 ^ "$ryg Other h batroama. 723.2 11.218 6.22

• 32 9 12.142 6 !i

' va#,N g... lampera boem-mg. 268.9 6.306 9.41 163 6 4.084 to 01

• p bal emme bearme liahalan 11.721.2 183.48; 6.24 10.237.7 183.370 7.1x j

i bra'eries beerma depn 2.M2A 2.3ll 8

• jf Oihet babdan 260.7 2tih.3 h

Sharebidm os kI i 3' a w an r. . is.Su8 33 497 .e[ n m =. lasma apread ? 'k ^, N .y 3.54 % 4ny

w. - -m m

s.i6i.383 46% . i6i.2o3 u,,. g ,$p, 3 bal depa.* $ 12.2 3 4.8 s10.205 4 !g.) Y 'larbedre eu equnales adpsonwies el $18.991, 8;t9.242. 839.480. 456.936. and 820.489.se perinch i w 's - gg ev y t 4 g@M

DW f.

%,M, .. se Q, eQ. Q &. % ag ^ ~ y ja 7 g g w c + E' ig: g Wj+ y.q-y ca p N ~. n.} i Y L

.'*2O hp,, 2. %..

w Aa, q pln

Sra, u.m. 8 3.

m. s:n, p = [.? e 4 I Sin 66eeths laded Jene 30. % weh f:nded June 30. Three Wmh. i.neleel Wrib 31. 1987

19Me, 1987 lancers Aierase imems 4**ase inereret Awisse gg Awture larwnet i wida/

A*e rsa, imisme/ b-W 4.erage Im ame' i ced.

Salanr, F.isen.e -

Ra,. ' Ma. e Fineaw+ es %ne, f.veaw' Rer t 7, 8 3.3964 8 I44.999 8.61 % 8 2.8745 81.19.086 9 76 % 8 3.2195 8 6A.426 8 62% 967.3 46.968 9 79 924 2 52.t 73 1l 43 9M9.2 23.103 9 47 1.51*.5 83.l

• l 10.63 1.45u 0 8.1.472 18 63 1.535 0 40.907 10.81 2.321.5 130.274 11.32 2.173 4 137.642 12 77 2.30h 6 65.411 11.50 H 74 47.419 15.48 SM3 l 46.955 16 24 623 0 24.121 15'.5 346.4 11.142 941 225 9 12.557 II 21 243.3 5.676 9 46 884 1.846 7.13 28 8 1.460 10.23 28.7 431 6.08 l

5 635.8 36.378 18.55 672 5 44.88 9 13 46 646.5 1f.211 11 42 p 9 Ace.3 502.387 10.34 8.937.4 518.734 11.70 9.593.8 240.286 10.41 8'~ 707.8 28.170 8.03 821.0 39.519 9 71 737.9 14.845 8.16 488.2 16.304 7.86 116.5 5.300 9 18 286.1 5.663 8 03 ), 3.614.7 59.312 11.79 1.109 9 74.120 13.47 1.024 9 30.684 12.14 328.4 8.591 7.58 58.0 2.577 8 96 210.0 4.168 8 05 g# ' 2.369.1 112.377 9.57 2.105 4 121.516 18 64 2.258 9 55.360 9 94 ^ 2234 14.507 13.08 202 8 14.401 14.32 225 2 6.949 12 52 10.0 441 8.91 13.1 612 9.38 98 215 8.90 468.5 15.034 6.47 267l 9u.8 7.30 501 4 7.3% 5.98 ~ 584.4 17.142 6.72 334 6 13.779 8.30 363.5 5.582 6.23 167.9 5.992 1.20 110 0 4.148 7.60 69.3 1.150 6 73 4, l 13.553.8 667.810 9.94 11.9'0 4 682.8*ws 11.50 13.021.9 322.93a 10.06 I f 1884.01 s104 4+ lil2.86 n=**' 908.8 k 777.2 887 4 644.8 622 0 640 9 I. $ i 4.992.7 813.2h's 2 814.437.4 4 8 906 4 22.029 4.90 8 661 9 17h31 5 10 $ Ah4 4 suf05 4 91 J 2.303.9 59.970 %.25 f.929 3 63.247 6 66 2.297.2 30.030 5 3u ) d 2.906.5 106.660 7.40 2.933 8 127.0M2 8 74 29380 54.944 7 58 %[M)d 1.0914 27.562 5.09 880 5 23 910 5 4A l.N52 13.744 5.23 i .-e P-3, 1.822.8 63 185 6.99 1.278.5 52.2w 8 29 1.360 8 23.340 6 96 Q,.. 57.2 1.133 6.14 88 33A 7 74 32 9 464 512 'L D d,- ek.. 9.047.9 380.539 6.24 7.6A5 6 283.907 7 45 8.578.5 133.227 6.30 y i l.139.3 34.600 6.13 1.456 5 52 142 7 22 1.101.1 15.958 54ll 1 I 789.0 23.508 6 01 715 2 25.153 7 04 855 5 12.2R3 5.82 f I 261.8 12.358 9.54 159 9 7.995 10 0R 254 6 6.045 9 63 f 18.258.0 358.000 6.29 10.067 2 3t'9 897 ' 43 103893 167.513 6.30 2.5874 2.687 0 2.511.5 -) 261.i 256.6 262 5 j 4.! 0 7.4 12.460.8 s4.56 0 ~ ~ ~ 885.3 804 4 873 4 5-if 844.992.1 813.265 2 814.437 4 A, f b' .' i. "f,, g{ 365% 4 07% 3 16% $ 316.810 438% $ 31.1661 5.2H% 8 155.425 4 84 % i 'EE $ Il.655.5 8 9.8726 8 Il.090 0 l-1 g n ;l} Rinnt -f ..,5 m .n M8 w p C. h .} a*,y,k es.. P T i'%. a W da w f'. pgs; C Y b g% e-Q, ~ i y34 ,f.4l&f fl h' g. ,'th My }f.3 } Y p.; 's. g Y ~t .:n e. %;rg,sem$. - e p s. t-s, w 3-e rc Mr t _.><.e e. O,. ' ' Q. #r. W -Q _ ~ y &%q - ' itQ w,.% y',. hn -Q p ~ y i n+ yh

1. ,,.." @ l k

. k I $p[ a +MT. w +.,l.. h$. _TM.y.%,44 $$h 4 1, n k n$ m,k_ M,73. %_ Ls a, - r m Y$ "- '^ ^ i s Quarterly Earnings Summan-q Swan Financial Corporuion and Subsidiaries. ,1 Fully Taxable Eqsuni Bas a

n. w,,,,,,.h 4.

9"' I F. 1987 s wr. q 2,ul 8.e 4th 3rd 2ml K g %s*We %.*'er W Qu.el*r Querser j M lawns enme $344.872 5322.938 8332.350 8140.44dl 3A44.a7.6 4. l inwwa rspen.c 183.487 167.513 '74 614 IM 641 l A1370 $f-M eerweeuwme 161.383 155.425 157J36 159.7 " 161.2n1 Y '*a-l'n..m,a fue 6 n b e. 15.867 9AM I4 OW 13 103 to wel [ q L M enerwe s= =mrynee pn==ne kw li n 6.=,. 443J18 145,5w B L).6An 146.674 150.297, [ j %neserem art.n-c luding neurmer. pan..ad ska.co 67,388 60.542 68.8h 573to 573.15

'g herurer. gan..nd th eu 1.122 1.174 1.40H 2 957 2.763 basewe rspra.,

145.542 141.935 143.133 139 007 140.512 -{1, I( Inrone befon erreme mir. 64.646 65.428 70J77 68.334 70.2b8 WW I Apple.bir emne mice 9.567 6.447 7.736 2.%7 4.168 M l T.s egun lc.ad smens ,88.991 20.489 23.110 28.073 29.242 'g y g hi M ercer 8 40.128 9 38 481 8 M 481' 8 37.2 % $ 36 855 I M erane pre e.mmee ihm, 8.94 8.98 8.93 8 88 8 8"> n l Interest Sensitivity Analysis l Swan Financial Corporation and Subsidiaries c June 30.1987 ".. v:,r, irn,s.,. m mai.n.i .nsSC-

N i

u, h. , 2,W g g l .ar thw Owe ari ., L ishm ihnsoph thnn.gh eheough Toul be f} y'f., E.,.,4,w w mi

e. he h irer M,.a.w TI

.j 4 pp. .4 W *t f;f)? ~4; l tun. s 5.295 s34 s460 s 750 s 6.s99 s 3a05 s to.2m 1 ,{4 imeerarm enrursre $5 85 160 271 578 2.024 2.59; Ky:5 136 ,pg , Law.se he Irki Gir er Ir 69,

2fG,

203, D f. -

, m;w r,-..-. jg,- u._m u m, ,m. 539 _e a _3. iu i-g,, t lem s.959 y a e 9.33, 3.33 as..r .. r,-l 7 f, i,.re. 8,m t 6a,,,, ~. Depi=* 3.627 1.644 1.269 ( 64 7.144 3.104 10.318 M 'b 5h=aem n=r=mc 1.797 60 fl 23 1.901 3 1.wt y ~.;p ,g-y Langwe benn=ar 353 M4 '"DN fm Tai.l wered be.nns li. bide. 5.424 1304 1.290 h2* 9 045 3.iw 12.393 I ] J ' M beinwwa llestina lmbinen d, ' eM1 9,[5 t.r..m._. le I.653 1.ri33 r..N 'a ..s Dem.nd depa.m a coens nei f reh 0 M5 = = l .g l_.._.. p ,3, . 73, ,,87, , 782 . 4,,, cg p' c mut,pp a s3s sann s eu.

4w s 4%

y. 4.g, a.m.t rn..r - - mir i han-g y y g- _i osy M94 ?% Y ~ Oi ,,w: s h5 . h$h. .Nh l .am[h ~ -' CP7 g N '* 1 W b'%,:3 l .% rU$ % g. .. ;- e ' fk.f:,"#; ? ? _-__,,7 +

• 0 y

@hf p e l D 4 1 w ge

%.;ew'h

's* . 1 gp>r n a c f g# '{ .., ?" = p 4 %j 7 n 5 .'.,49.b eci,. } t h 4 4k -] I h, )

a

.ile. 7.D q t ]9g g DY% tw K Y,, n eyj x ~ ^ l \\ e s N Selected Statisticalinformation 'Q p Sovran Snancial Corporation and Subsidiaries l M j I.k A>j n. ~r - 1987 1986 8 %" m . Q((I ^ 2nd lei 4th 3rd 2nd las Quaner Quaner Quarter Quarter Quaner Quaner Qd r Earnings e-J- '.,Pr S-het income $40.128 $38.485 839.481 837.294 836.855 834.326 F

v Net income per common shar,

.94 .91 .93 .88 .85 .82 [M= ^ D f%rformance Ratiu. ~ 'y Return on assets 3.03% l.07% 1.10% l.06 % !.08% l.07% ,.Q 1-j a -u Return on eqmrv 17.89 17.63 18.71 18.28 17.68 17.72 s .n lmerest spread 3.54 3.76 3.72 3.86 4.05 4.10 ..# ~ g-Net imerest marpn 4.60 4.84 4.83 5.01 5.26 5.31 "h M(( ( loan ime Ratio. het charge-offs to awrsge loans .42% .41% .53% .43% .35% .24% A h-3 C;N ' All=ance to penod+nd loans 1.17 1.18 1.18 1.19 1.17 1.17 = .r* Allowance to nonperforming assets 3.34X 3.01X 3.93X 3.26X 2.97X 3.50X t '} toan loss cowrese 6.12 5.50 4.80 5.02 6.16 9.43 ( 1.j uidity and Capital Ratio. q M'.. Awrage shareholders' equity to: h'@27 herage sanct. 5.77% 6.05 % 5.89% 5.79% 6.!!% 6.02 % E -- d'[na-i Awrage luana 8.97 9.10 8.9) 8.74 9.05 8.95 L. r 1 Average depose. 7.34 7.88 7.70 7.67 - 8.17 8.12 0 M P.f Average loans to messe deposits and borrowed funda 69.55 72.13 71.52 71.79 73.46 72.99 'g[17 ' %; W Awrage long. term icrrowinp to 9 swrage long.scrm borrow mgn kl %g Q* \\' and wal shareholders' equay 23.06 22.57 23.07 24.01 16.40 16.78 tid + <.

• Capital adequacy:

a f . MA Pnmary 7.33 1.31 6,99 7.10 7.03 7.39 y [p r" g;{gs p ha! + 8.22 8.32 7.97 8.13 8.28 7.80 g g id hon. Financial Data p(Qf F.10f *R / Common and preferred shwholden 31.117 30.490 30.592 32.064 32.108 30.531 N @f% s [ @;~; Full time equiialent emphnees 11.534 11.325 10 961 10.883 10.972 10.680 Qf Dumesar bank ches 357 357 357 357 356 357 CE # -2 4: Bank.retmed chen 146 142 131 126 121 124 9h5 '; [ Automated ictler mach;nes 313 313 311 305 302 301 !.P;tWJ e,,- t wp Q2 l he 9 4 z.m e U

s. ;

E4 (.i t g g hh. II gs j ~ ' k. L .s ,..,, ~.

e, w-n.

_.. p w 3 ,,7 b'f f =,- tx t c' W% a, h n$rTi?f4 s &Y o,w rg s Q M.m; n-. h N e a . h gg y 1 f $ h.$$ $$,?$.- . EL e X 00% e / l ,r r m -=== = -a-=== = = = Sovran Financial Corporadon Banking locadons One Commecruil f%.e. Norfolk. %rprua 23510 180414414000 O f@ - RA R4% B4\\K. N 4 w 3-12th and Men 5tms Rachmond. % rprus 23219 58Dli 78&2tkl0 E Abingdon Chaham Fun %c, McLean Rural Retres I ADena Owsapeake Fraakhn Mernfekt bhrnanduah Alesandna Garkm & Frr. Medioiluan 5mnhfrid b Amphdm Bs.c.Lrde Creek bel =rn Calan Montpeler South hon j Annandair Gerw dir Cae Can bal Bene Norfolk $prugferuf Arbnpun Colorual Hechi. Gladr '9nrw Ne.pon News bnardm e e Ashland Gew Gordena dle " ackelm& Murnon Beh, Cio.arua$ Cnsei Grahon Norfolk 595 4 J' k. Bedford Daar Gn Hampun Norge Traundie f*y By I. Land Dah& Harnenbury Nonna Wtons .,'N'. 4 Big %nr Cap Dendie Hemdon Oaksun t rana J Boo kin. Ddbrvn Hdinu Oceans bal As Suuan baon ^ v . [V << bdnas Duffeld independence N Fynsagun Warnesboro Bnimil Drak, Branch HopewE Orange Vrprus Beach boa Vasa Du!W Iniemanonal Arpart lmnence die fitmburg bber Cay e-Burke Durnines imburg ibnsmouth 5ilkaanburg Ikskes& Ebon Imasa Pound 5 me 'y Cape Charh Farfan twhburg Pulaski bodhndse g-4 e Capron Farhwn Manman. Quanoco %odexk g, 4 Ji Cenerna Falk Church Manne Cory. Banc-Quanuco Remon Erihmile i E Ceram& Farn*dle Maruran& Rrhmond Nanase.& Bahamm

7. '

Owksw & Frklaic Mahens Roanoke Eas}ungion. DC. 3 5 g' e 3,4.. Qiane Gn FariEuma dg g a 4 ~ ' i.6 RWR4% B4%k 'Dr \\4 Tim 41 %el 1801 F kreet. $ E.. l' nkuncon. D.C20006(2021955-8700 a S 4 ' *c- ,j s y \\ "d NA R A\\ B4\\k T141014%D 1 ,,; k 6610 Rocklrege Drm, tinhenda. Manland 20817 (3016 2745000 ,,J 1 ',I.7h Annapoh. Colema Greenbek iden& Siher Spnns { +d Bahimoer G&ge Park Hageruim n Mours Ranier S Charh i "fl B kadle Columb Harverk OI,rs bland T. K Q.y Bethesda Cnrol Ha H& rem HegW oman HJ Takoma Park 4 f, ,9 Bonw Eam Rr-edale Hsansdie Paesnlle Nnnois ,g L sM CampSpnng Foressdk tmeper Ptawnac boon i %w[.- jfhn 1.andmer,a Casende Fredenck Hilk Randallmemn l'pper Marlixwn M e o.,, Cs.- ced.v.bu,, L.,w u& .au h.;. g Guson Germarm=n lau,el sem 1%auus 5 hemon p 1 j' hk M.y RA R A\\ B4\\k DI.l 4114kl [$ k i Mr 800 Siber lake himard. Dmer. Dels are 19901 (3026 7M4800 J' W Lw y W h$ c.4: f, T r..,yfj p %. j<

sk

= 8a ~l k y.b ; !.', I. k y z pg e wg - E, f[$ n .m

m. <.,

~ j$, 1 MQ y_ h (%,t Q h' ~ "#6 \\ P; i $;;k W;m w$yf%g g l%rw .m;;f QP f p ^ w.p m, :

e. g ' e. e & a.a. WE..

4 a g. 6 n..m r.% I NI %;2-w %w u. #gh war 3% E e s., s.... L >.a.. p. /. 5mse ,q,%, m.,o e.m wn-mn q=- 4 s L A. Ua 3, ,. w. ,sr w --. t p L9 m Sovran Rnancial Corporation Financial Senices Affdiates Onr Comunenisl Place. Norfolk. % apnia 23510

1. 8041441 4000

'I 5(A H 4% CREDIT CONPOR 4TIO\\ 410 Eam ha kmt. Chambeth Cary. hwih Carolma 27909 M A H u E'A IT) \\f 0ftTGW.I CORP 0H 4Tl0% (9191335 0546 3600 tra Hruad Nmi. huw 452. Hrhmond. Vrpnia 13230 6844 353 5544 y% P6ese Carehua Lum Olne Varsinia Virymda Nr4da Charkar Edenu,a Murfreeaburo Charkswe dle Annandale Jarkwma Creensbore Q Ehaabeeh Cir, \\ew 8cen Hampun Charlorwedle Tampe Ralrigh 7 Farempe Oslont Harnwnburg Dam die l'enrr Park 5 mannSalem Q4 Goldsbuse benone Rapda M.dlaihan raw (.a ..V' Gen. die Rock, M ,a Purtamoush IaMNech M h b' f He. 4er Enhancon b mund Hampon Aslama %mb Hih Nm l'dl.ammon Spnnafwid Ne purs %ew, Dreme M ws C Ml Dnd HJi. 5'daan Sunutk horfolk gas,yland Someh Carehne Kanska Zebulon Vasmm Brach Ahmond F,eder.rk Chwiemun + D Roanche Rackvdle Cen dle SMR u ft'\\DISG CORPOR 4Tl0% -We 5nna. Park PO Ben 600. hwielk Yrgaus 23501 h""', g,g j.[ N '43# Chamanooga E naburg Tmeon 50\\'R A\\ FtTl RE.4 CORPOR 4T10% ( PO Ben 600. %wfulk, Vapn.a 23501 W 4% Mt.R OCE.4CENC). l\\C. 4804) 44 6 3711 m Ba 600. W rrguus 23501 4 (804)6244070 Y 5 hE 3 ng on . Rork.dic. Marti.nd 20850 SOVR4 \\ IWEST\\lE\\T CORPOR 4T10% (30h 2513579 g 12th and Main Streets, khmond. % rpasa 23219 (804)78& 2952 hr$r 50VR4 % IJFE l%M'H ut.E C0\\f P4W YW PQ Bra 600. \\wfolk. Vr/s..is 23501 Arlincon MW

• d 180416244070 wedie u 2 c" hwielk 75 50% R 6 \\f0RTG4CE CORP 0H tflo\\

Mrhenund banoke 1512 5 di. b n Dn, hhnwnd. Vrpma 23230 g 6804:289 0 00 Virynela Roanoke Gaithersburg 1510 Ollow lawn Drm. hhmond, Virgima 23230 50\\ H 4\\ l EA51\\G CORPOR ATIO\\ A Alcundna Soudh Busan Greenbek 4804) 2C2M22 s 4 erth Ar n m[ arbe . i..i hh-d X Roodbnds,s furha{ Virgma Beach r, d en m Dann die { ',A Falla Chun-b Bahmore Tm De Rai h Bethe.da halndle 4 I f 1 dmmgton Onnon Salem T N.'* Luu hburg Ceerpa Prane3hania C4'H ilDR. l\\C. Mannam Mama 8 h II ' 8"r' Buddmg 6 Marien=iDe Cariip HiB T' G'omercial Place. %rfolk. Virpnm 23510 he,po,, w Mar 7tand Rw ncm, Bethe de tem (.he.wr W'U 44I-4 339 ,~ 1.h Pu W umbia p a l~.d a in Fl\\4%CI 4L l\\TEHsT4TE l\\M'R GCE C0\\lP4%) 800 sher av B m D_ D+.a,e im b 50% R u (.4 PIT 41. \\1 O W.I.\\lETT 4.OKPtiN ATION - 1302:7344800 1111 Eam Nam kreet. Hahmond, Virgmes 23261 -f ' 4804}788 3103 5t Bt RRO C4 PIT 41. COMPUH ATIO\\ 6610 h hirdre Drve. Bethesda. Manland 20817 r 430h 493 2803 K'. G .. M Q& .g. u T {1 r?

1. 3%

.t > s n. h, L-v 4y,s ( ) v ~ N' .~ g( ,h P g I D b p' A 4 s e, l Board of Directors / Saran Financial Corporation YyJ JohnB.Bernhardt J. Henn Ho. kin.on Robert J. Mulliaan Wallace Stettiniu. i ? % Gaman of the brd Prnse imestor M Gaman and Chief Chairman of the brd .p-Pruident and Gief Esecutne Herbert V. Kell, Administratiw O&cr Cadmus Communicanoru i Otrar, Sovran Services Anornn.m.1,,, - bod ard & loihrop. Inc. Corporaion f Wihm W. Berr) Jones. Blechman. %ha & 0'Panment St<w Ga.n Pruuers 4 Gaman dthe Board and KrD).Pf. Peter E 0'Maucy % mas R. Tomm i GiciEmuine O&er Harry Marten Jr. ^" '**l'w and Managmg {Lruversalleaf Tobacco ice s'hamen

• ==.

7 ;. Dominion Penobrees. Inc-Chef Eaeeutne 0&e, Panner. 0'Malley. Miles. Pidlic Un!tyHoldag Gmpa"7 The Manens Cc,mpar.ies McCanhy & Herren Companv. Inc. O Edward J. Camphen Resad kuomobde Sales and Geocre C. Palmer. II Tobano Pmduas F Pmides and Chief Executive blEuau Dewtopment Chaman ol'the Board Jame. & Watkinson O&er. Newport News I aadelph W. MeElroy Piedaus Tractor Company. Inc. Presides ShipbuGding & Dry Duck C' b Chairman of the Board Raad fiirni EquMula Monon C. Whisna. Inc. "Fm;and Repair Pmident and Gief Enceutne Stanley E Pauley Realen C. A. Catchina. III Ot7icer. Sovran Bank h.A. Gainnan dthe brd Robert C. Wibnia C. Chaman of the krd and C. Coleman McGehe, E. R. Carpemer Company. Inc. Preddem arJ Gief Operming i' Gief Enceuttw Offrer Pmides and Chief Opiruing Mangaawer ofCon/on Ofrar, James Rher, 1 Joehse P. Darden. Jr. O&er Ciuhwrung Pmduas Grporzion d%nia S Pmidem Gairman of the Board. John B. Rogan Manfaawer o/SpecialtyIbpers Darden Propenses. Inc. Smran kk. N.A. Presides and Gnn4cally Treaud ? hlEuate and Aaomobile Sales Arnold B. HeKinnon br's Head Enterprises % Febs .X Joseph B. Cudenhorn Oairman dthe brd and Noel R. W. Wiltshire President Chief Executive O&cr John Safer Gainnan dik Board and f JBG Real Esime Associmes. Inc. Norfolk Southern Corpormion Chaman of the Board Pmidem. Home Beneficial 'T klEuaw Dewlopment Holding Gmpany dth Radmad Sovran BanklDC Nsional C 'P*li*" *"0 H***' Frank Hirsch 3bsiduina e brance y,y t g,,,,, y,, g Anorney.m.lew Anorney.m law ,[, WiDeca & Savage, PC. q 9 g Management Committee Bnant T. Raird. Jr. C. 4. Cutehina. Ill Rav H. Lion Robert P. Pincue '*W Prnidem.5mran Mongage Omirman ofihr Board and Corpornie Eventive Obr Preudes and Ourf Enecutise ~ Corporauon Quel Execuove Obr Human Resources 0br. 5mran BanLDC hul ?. 2^ John B. Scenhardi Donald R. Fhher. Jr. Dele E. Han T. Eens %n l , af' Preudem and Gef Ewcuine Chef Accounimg cbr and Senior Eiccuene iice Presides Corporse Eircuine Obr

p Obr. Saran Senm Treasurer and Ouef FinancalOfrar Ma keung y.

John C. Bmington Albert IL Cornia je, jeme. E. Jani. John J. Spon.kl h me Escenne Obr Senmr Execuine b Prendem Corporme Cencral Audnor Corporme Execuine Obr I

• • • a Man *6eN8 Dennie R. Han.ca bdelrh W. McElrm Opna m The G. Conn. Jr.

Corporsae Eueuine Obr P endem and Chief Executiw John IL Tectier M Corporse Eweutne Ohr bin Afrdimes Offrer. 5m ran Bank. N.A. Senor Eweutne b Preudeni jy( Tmeial Produns and Imemwns' L Ralph Hick Jr. C. Coleman McGehee i Pese ik Crenford Preudem and Gnf Eveuine Prendem and Chief Operams y Corporme Cencral Coun cl Obr. Sm ran BanUManland 0&cr { 'd 5? w -S ,/- bt M u ' %y-l ~ n m 1 s ,c g g i s N.: ,T ']f ' 4 i f, i L. n s' k, r.' 7 M,, F. ga

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. a, y y f [ y v. A.- e SharehoWer Information l STDCK L15 TING: HEQL Em FWI INfoR\\1 A'llON: Traded Oser.The Counier Analrin. imewors and oil en, ceking (mancial informaimn are requeued to conta<t: NASDAQ h minls: ja. men A. krkparra L. Director of Imewar Relaimn. Common Newk-50VN Na ran financial Corporaicen 82.37 Cumulavise One Commernal Place Comertibic brfolk. brgima 23510 Pirierred putL-M)VNP 1804)441 4705. / 4 TRANSFER AGENT: DIVIDE \\D REINVESTMENT AND STOCK PL'RCH ASE PL AN: Senran llank. N 4. Naran fmancial Ger}m,raimn pnnide. hareholJen ofits comnum neock mwh a wn. Corporate Tna Deranment senieni methad of punki.ing addisbn.J mharra of she Compam** commen niock. The Eighih and Mam Buildmg major ediantage.of the Companis Dnid nd Heimewment and Stock Purchase Plan are: PG Bon 26904 Rm hmond. Virginia 23261

• Automadic reimesment of dhiderids at a 5% discount from marLet prite (804)788 2148
• Op3mriunits au imew up to $5.000 per quarter a' 100% of market prim:
• % brukerage commWon* or record keeping fees on stimeMed disidends or canh imesments For nore informanon or a Pmapnsus describing the Plan. call I,r-sor Relations (804 4414703 or wriac Imcator Relaimns Depanment. ioiran financi>l Corporation.

Sin ran Crnter. One Comm n ial Place. brfolk. Virpnia 23510. Ah Common Stock Data Staran fmancial Corporation ar.d Subsidir. ries 4 , id,.4 1987 1986 y * [ ~~ 2nd 1g 4th 3rd 2nd let 7 Quaner Quaner Quaner Quaner ../ D.g.- Per share: --Quaner Quaner y Ca h dolend de. lated $.34 s.34 $.38 8.34 s 32 s.32 'M i .M k b.k salue 21.65 21 02 20.43 19i;4 19.45 19.38 j .e WrLet prn r: ) {r ILgh 41,63 43 09 36.75 42.63 44.50 36.25 M*9 'j. la,. 31.30 33 63 32.63 33 M) 34.75 32.25 j. j-} Prnnd.crul 33.30 41.50 33.75 35.38 41.88 34.75 3 Rg.f. f,, g Share. ma.i.nulmy dxhu. e.s.I. Perawl.cnd 42.370 12.2*9 42.192 42.147 42.27-42.962 %ciphinj aseras. 42.485 42.404 42.365 42.382 43.155 41.8*5 N p." - Tradmg solume Hooi 9.340 6.325 5.783 5.227 7.51b 5.984 5harch.,lder, 30.*69 30.128 ?O.220 31.683 31.715 30.084 g. 1 L Martei rapiol,ui m im.9 81.504 s1.755 s l.424 s1.491 s l.771 s l.4m

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. P T. Whrple 9.70% R62\\ 9.70\\ 10.45\\ 13.30N 11.36\\ c! - 'ydj&* e m,t,4 m.t 163.97. i"!. u - i65 20 - 178.33', 2 5.32 - 179.a is 724 8 h r.f V a.r ~ END??i

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