-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D9xTyN24b2krXZC3icVLEO3GdhFEgq9gg9tGbRYyMZU8Z6Uy5Y/aWocZLGDigYmh sgFXz1iUM+fbNCysBDgOhQ== 0001047469-99-000665.txt : 19990112 0001047469-99-000665.hdr.sgml : 19990112 ACCESSION NUMBER: 0001047469-99-000665 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL CORP CENTRAL INDEX KEY: 0001011659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941234979 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67581 FILM NUMBER: 99503735 BUSINESS ADDRESS: STREET 1: 350 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 BUSINESS PHONE: 4157652969 MAIL ADDRESS: STREET 1: 400 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL FINANCE TRUST I CENTRAL INDEX KEY: 0001073957 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67581-01 FILM NUMBER: 99503736 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157650400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL FINANCE TRUST II CENTRAL INDEX KEY: 0001073958 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67581-02 FILM NUMBER: 99503737 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157650400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL FINANCE TRUST III CENTRAL INDEX KEY: 0001073959 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67581-03 FILM NUMBER: 99503738 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157650400 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL FINANCE TRUST IV CENTRAL INDEX KEY: 0001073960 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-67581-04 FILM NUMBER: 99503739 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157650400 S-3/A 1 FORM S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999 REGISTRATION NOS. 333-67581, 333-67581-01, 333-67581-02, 333-67581-03, 333-67581-04 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ UNIONBANCAL CORPORATION CALIFORNIA 94-1234979 UNIONBANCAL FINANCE TRUST I DELAWARE 94-3313816 UNIONBANCAL FINANCE TRUST II DELAWARE 94-3313838 UNIONBANCAL FINANCE TRUST III DELAWARE 94-3313845 UNIONBANCAL FINANCE TRUST IV DELAWARE 94-3313846 (Exact name of Registrant as (State or other jurisdiction (I.R.S. Employer specified in its charter) of incorporation or Identification organization) No.)
------------------------ 350 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104 415-765-2969 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------ JOHN H. MCGUCKIN, JR. EXECUTIVE VICE PRESIDENT UNIONBANCAL CORPORATION 400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104 415-765-2969 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agents for Service) Copy to: GREGG A. NOEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 300 SOUTH GRAND AVENUE LOS ANGELES, CALIFORNIA 90071 (213) 687-5000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: /X/ ------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS SUPPLEMENT ISSUED JANUARY 11, 1999 (SUBJECT TO COMPLETION) (TO PROSPECTUS DATED , 1999) THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER TO SELL IS NOT PERMITTED. $-00,000,000 UNIONBANCAL FINANCE TRUST I % CAPITAL SECURITIES (LIQUIDATION AMOUNT $25 PER CAPITAL SECURITY) GUARANTEED BY UNIONBANCAL CORPORATION -------- UNIONBANCAL FINANCE TRUST I IS OFFERING CAPITAL SECURITIES GUARANTEED, TO THE EXTENT DESCRIBED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, BY UNIONBANCAL CORPORATION. ------------------- FOR A MORE DETAILED DESCRIPTION OF THE CAPITAL SECURITIES, SEE "DESCRIPTION OF THE CAPITAL SECURITIES" BEGINNING ON PAGE S-78. UNIONBANCAL FINANCE TRUST I HAS APPLIED TO LIST THE CAPITAL SECURITIES ON THE NEW YORK STOCK EXCHANGE UNDER THE TRADING SYMBOL "-". ------------------- INVESTING IN THE CAPITAL SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-13. -------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS TRUST --------------------- --------------------- --------------------- PER CAPITAL SECURITY...................... $25 SEE BELOW $25 TOTAL..................................... $ SEE BELOW $
UNIONBANCAL FINANCE TRUST I WILL NOT PAY ANY UNDERWRITING COMMISSIONS. UNIONBANCAL CORPORATION WILL PAY UNDERWRITING COMMISSIONS OF $ PER CAPITAL SECURITY. ANY ACCUMULATED DISTRIBUTIONS FROM , 1999 SHOULD BE ADDED TO THE PRICE TO PUBLIC. THESE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. UNIONBANCAL FINANCE TRUST I HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL CAPITAL SECURITIES TO COVER OVER-ALLOTMENTS. THE ACTIVITIES OF THE UNDERWRITERS ARE LED JOINTLY IN THIS TRANSACTION BY MORGAN STANLEY & CO. INCORPORATED AND SALOMON SMITH BARNEY INC. MORGAN STANLEY & CO. INCORPORATED IS ACTING AS THE BOOKRUNNER FOR THE OFFERING OF THE CAPITAL SECURITIES. THE UNDERWRITERS EXPECT TO DELIVER THE CAPITAL SECURITIES TO PURCHASERS ON OR ABOUT , 1999. ------------------- MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY , 1999 ABOUT THIS PROSPECTUS SUPPLEMENT You should read this prospectus supplement along with the prospectus that follows. You should rely only on the information provided or incorporated by reference in this prospectus supplement and the prospectus. We have not authorized anyone else to provide you with different information. We are not making an offer of the capital securities in any state where the offer is not permitted. You should not assume that the information in this prospectus supplement or the prospectus is accurate as of any date other than the dates on the front of these documents. ------------------------ TABLE OF CONTENTS ------------------------
PROSPECTUS SUPPLEMENT PAGE ---- Prospectus Supplement Summary.................. S-3 Risk Factors................................... S-13 UnionBanCal Finance Trust I.................... S-17 The Transactions............................... S-18 Use of Proceeds................................ S-19 Capitalization................................. S-20 Selected Consolidated Financial and Operating Data......................................... S-21 Managements Discussion and Analysis of Financial Condition and Results of Operations................................... S-25 Business....................................... S-67 Accounting Treatment........................... S-78 Description of the Capital Securities.......... S-78 Description of the Junior Subordinated Debentures................................... S-92 Description of the Guarantee................... S-98 Effect of Obligations Under the Junior Subordinated Debentures and the Guarantee.... S-102 Certain United States Federal Income Tax Consequences................................. S-103 Certain ERISA Considerations................... S-105 Underwriters................................... S-108 Legal Matters.................................. S-109 Index to Financial Statements.................. F-1 PROSPECTUS PAGE ---- About This Prospectus.......................... 2 Special Note Regarding Forward-Looking Statements................................... 2 UnionBanCal Corporation........................ Risk Factors................................... 4 The Trusts..................................... 8 Use of Proceeds................................ 9 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.................... 9 Description of Securities...................... 10 Description of Capital Stock................. 10 Description of Depositary Shares............. 11 Description of the Trust Preferred Securities................................. 13 Description of Debt Securities............... 19 Description of the Trust Preferred Securities Guarantees................................. 28 Relationship Among the Trust Preferred Securities, the Trust Preferred Securities Guarantee and the Debt Securities Held by Each Trust................................... 31 Plan of Distribution........................... 31 Legal Opinion.................................. 32 Experts........................................ 32 Where You Can Find More Information............ 33
S-2 PROSPECTUS SUPPLEMENT SUMMARY YOU SHOULD READ THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT CONCERNING UNIONBANCAL CORPORATION, OR "UNBC," "WE" OR "US," UNIONBANCAL FINANCE TRUST I, OR "FINANCE TRUST I," THE % CAPITAL SECURITIES TO BE ISSUED BY FINANCE TRUST I, THE GUARANTEE TO BE ISSUED BY US WITH RESPECT TO FINANCE TRUST I AND THE % JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES TO BE ISSUED BY US, WITH THE INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS. UNIONBANCAL CORPORATION UNBC is a California-based commercial bank holding company. Its principal subsidiary is Union Bank of California, N.A. Union Bank of California is the third largest commercial bank in California, based on both total assets and total deposits in California, and is among the 30 largest in the United States. Having roots as far back as 1864, we are among the oldest banks on the West Coast. At September 30, 1998, we had 244 full-service branches in California, six full-service branches in Oregon and Washington, two facilities in Texas and New York and 18 offices abroad. Most of our customers are located in California, the nation's most populous state with over 32 million residents. Our bank was formed through the combination of Union Bank and BanCal Tri-State Corporation in 1996. We are presently approximately 82% owned by The Bank of Tokyo-Mitsubishi, Ltd. We provide a wide range of financial products and services to retail customers, small businesses, middle-market companies and major corporations. These products and services include a variety of personal and commercial financial services, including: - consumer and small-business lending, - corporate and international lending, - corporate and international cash management, - treasury, - trust services, and - investment advisory services. As of September 30, 1998, we had total assets of $31.4 billion, total deposits of $23.7 billion and total shareholders' equity of $3.0 billion. We had net income for the nine months ended September 30, 1998 of $352.4 million, and net income per diluted share of $2.01 after giving effect to the December 1998 3-for-1 stock split described below. THE STRATEGIC REPOSITIONING THE TRANSACTIONS. We are seeking to repurchase shares of our common stock from two of our existing shareholders. We expect to repurchase $250 million in shares of our common stock from The Bank of Tokyo-Mitsubishi, concurrently with the closing of a $750 million offering of our common stock by The Bank of Tokyo-Mitsubishi. We expect to repurchase the shares at the public offering price in the common stock offering, less the underwriting discounts and commissions. In addition, we are currently negotiating with another foreign institutional shareholder regarding the repurchase of approximately 2.1 million shares of our common stock. Two other foreign institutional shareholders decided not to participate in the repurchase. We intend to use the net proceeds of this offering of capital securities to finance both of the repurchases. This offering, the repurchases and the common stock offering are referred to in this prospectus as the "Transactions." We anticipate that this offering and the common stock offering will close in the first quarter of 1999. From UNBC's point of view, the Transactions are principally designed to improve our return on average common equity and earnings per share and to increase our public float. In addition, the sale of common stock by The Bank of Tokyo-Mitsubishi to the public will raise proceeds for, and enhance the capital base of, The Bank of Tokyo-Mitsubishi. S-3 The repurchase of the common stock from The Bank of Tokyo-Mitsubishi and the issuance of the capital securities would, on a pro forma basis: - increase UNBC's return on average common equity from 16.87% to % at September 30, 1998; and - increase UNBC's diluted earnings per share for the year ended December 31, 1997 and nine months ended September 30, 1998 from $2.30 up to $ , and from $2.01 up to $ , respectively, representing an approximate % increase and an approximate % increase, respectively. The sale of the common stock by The Bank of Tokyo-Mitsubishi to the public will also substantially increase the percentage of UNBC's common stock held by public investors. This increase in public shareholders will increase our common stock's float. The Bank of Tokyo-Mitsubishi currently owns 81.6% of our common stock and will own % after the Transactions. We believe the Transactions will provide UNBC with additional benefits. The Transactions should increase our market visibility as a result of more research coverage and should make our common stock a more attractive acquisition currency. The Transactions will not result in a material change to our Tier 1 risk-based capital ratio, our total risk-based capital ratio or our leverage ratio. DIVIDEND POLICY AND STOCK SPLIT. On November 19, 1998, we announced a 3-for-1 common stock split, which became effective in December 1998, and a 36% increase in our quarterly common stock dividend for the fourth quarter of 1998 from $0.14 per share to $0.19 per share after giving effect to the stock split. BANKING SERVICES UNBC's operations are divided into four primary segments: THE COMMUNITY BANKING GROUP. This group provides its customers with a full line of checking and savings, investment, loan and fee-based banking products. It has 244 branches in California, as well as six branches in Oregon and Washington. It also has the fifth largest branch network among depository institutions in California. It competes with larger banks by providing service quality superior to that of its major competitors and is recognized as among the highest rated banks in California for customer service quality. For the nine months ended September 30, 1998, average assets in this group were $10.3 billion, and average deposits were $12.3 billion. THE COMMERCIAL FINANCIAL SERVICES GROUP. This group offers a variety of commercial financial services, including commercial and project loans, real estate financing, asset-based and leveraged commercial financing, trade finance and letters of credit, lease financing, customized cash management services and selected capital markets products. The group's customers include middle-market companies, large corporations, real estate companies and other more specialized industry customers. This group competes with other banks primarily on the basis of its reputation as a "business bank," the quality of its relationship managers, and the delivery of superior customer service. For the nine months ended September 30, 1998, average assets in this group were $12.0 billion, and average deposits were $5.8 billion. THE TRUST & PRIVATE FINANCIAL SERVICES GROUP. This group offers investment management and administration services for a broad range of individuals and institutions. It services individual client needs through its trust and private banking, investment management and brokerage products and services. It services institutional client needs through traditional employee benefit and 401(k) programs, global and domestic securities custody, securities lending and corporate trust products. The group also provides investment management services for both individual and institutional clients through HighMark Capital Management, Inc. and its family of proprietary HighMark mutual funds. As of September 30, 1998, this group had over $90 billion in assets under administration. S-4 THE INTERNATIONAL BANKING GROUP. This group primarily provides correspondent banking and trade finance-related products and services to financial institutions worldwide, including Brazil, Hong Kong, Japan, Korea and Taiwan. It also serves selected foreign firms and U.S. corporate clients in selected countries worldwide, particularly in Asia. This group has a long and stable history of providing correspondent and trade-related services to international financial institutions. In light of recent volatility in global markets, we have reduced our credit exposure and the average maturity of this portfolio. UNBC reduced cross border outstandings to Japan, Korea, Malaysia, Thailand, Vietnam, Singapore, Indonesia, the Philippines, China and Hong Kong by $1 billion to $1.6 billion at September 30, 1998 compared to $2.6 billion at December 31, 1997. A large part of the outstandings are related to this group. For the nine months ended September 30, 1998, average assets in this group were $2.1 billion, and average deposits were $864 million, in each case excluding inter-company placements and overnight inter-bank loans, consisting primarily of export/import related short-term trade transactions. OPERATING STRATEGY We focus our strategy on the following: - CAPITALIZE ON STRONG POSITION IN CORE CALIFORNIA MARKET. California is the largest state in the United States, with over 32 million residents and nearly $1 trillion in gross state product. Based on both total assets and total deposits in California, we are the third largest commercial bank in California, and we are among the oldest banks on the West Coast. - STRENGTHEN CONSUMER BANKING FRANCHISE. We offer a distinctive combination of traditional community bank service with a large branch network and a broad array of products. We are seeking to increase the number of consumer households we serve, and we are simultaneously broadening the range of financial products and services we provide to existing customers. - FOCUS COMMERCIAL BANKING EFFORTS ON SPECIFIC INDUSTRIES AND COMPANIES. We target our commercial banking activities on industries and companies for which we can reasonably expect to be one of a customer's principal banks. Our emphasis is on relationship management and meeting a large part of our targeted customers' credit and depository needs. - DIVERSIFY REVENUE SOURCES AND EXPAND FEE-BASED BUSINESS. We are seeking to diversify our revenue sources by expanding our fee-based businesses, with a particular emphasis on our trust and asset management businesses. - EMPHASIZE QUALITY CUSTOMER SERVICE. We seek to continue to provide highly responsive customer service to create and maintain long-term relationships with clients who are often underserved by larger banks. - MAINTAIN HIGH LENDING STANDARDS AND STRONG ASSET QUALITY PROFILE. We strive to maintain strong asset quality through our underwriting standards, credit policies and ongoing credit reviews of our existing loan portfolio. At September 30, 1998, our ratio of non-performing assets to total assets was 0.26%, or the seventh lowest of the 30 largest commercial banks in the United States. - IDENTIFY STRATEGIC BUSINESSES AND CONSIDER POTENTIAL ACQUISITIONS OR DIVESTITURES. We view selective acquisitions and divestitures, as well as internal growth, as the primary means to increase and enhance our core businesses. - IMPROVE OPERATING EFFICIENCY. - ATTAIN NEW FINANCIAL PERFORMANCE TARGETS. ------------------------ Our principal executive offices are located at 350 California Street, San Francisco, California, 94104, and our telephone number is (415) 765-2969. S-5 UNIONBANCAL FINANCE TRUST I Finance Trust I is a Delaware business trust. Finance Trust I will exist solely to: - issue and sell its common securities to us; - issue and sell its capital securities to the public; - use the proceeds from the sale of its common securities and capital securities to purchase the junior subordinated debentures from us; and - engage in other activities that are necessary or incidental to these purposes. Five trustees will manage Finance Trust I. Three of the trustees, all of which are regular trustees, are our officers. The First National Bank of Chicago will act as the property trustee of Finance Trust I and First Chicago Delaware Inc. will act as the Delaware trustee of Finance Trust I. The principal offices and telephone number of Finance Trust I are the same as ours. THE OFFERING Finance Trust I is offering its capital securities at a price of $25 for each security. Finance Trust I will use all of the proceeds from the sale of its capital securities and its common securities to purchase the junior subordinated debentures from us. Our junior subordinated debentures will be the only assets of Finance Trust I. We will guarantee the obligations of Finance Trust I under the capital securities and the common securities to the extent described in this prospectus supplement. THE CAPITAL SECURITIES If you purchase capital securities, you will be entitled to receive cumulative cash distributions at an annual rate of % of the liquidation amount of $25 per capital security. Distributions will accumulate from the date Finance Trust I issues its capital securities. Finance Trust I will pay the distributions quarterly in arrears on , , and of each year, beginning , 1999, although these distributions may be deferred as described in this prospectus supplement. Finance Trust I will only pay distributions when it has funds available for payment. If you purchase the capital securities, you will have limited voting rights. You will be entitled to vote only with respect to two matters: certain modifications to the terms of the capital securities and the exercise of Finance Trust I's rights as holder of our junior subordinated debentures. THE COMMON SECURITIES We will acquire all of the common securities of Finance Trust I. The common securities will have an aggregate liquidation amount equal to approximately 3% of the total capital of Finance Trust I. The common securities will generally rank on par with the capital securities in priority of payment. In the case of certain defaults, however, the common securities will rank junior to the capital securities with respect to distributions, redemption and liquidation. Except in certain limited circumstances, the common securities will have sole voting power with respect to matters to be voted upon by Finance Trust I's security holders. THE JUNIOR SUBORDINATED DEBENTURES Finance Trust I will purchase the junior subordinated debentures from us with the proceeds from the sale of its capital securities and its common securities. The junior subordinated debentures will be issued under an indenture between us and The First National Bank of Chicago, as trustee. The junior subordinated debentures will: - be unsecured and subordinate to all of our senior indebtedness, including debt we incur after the date you purchase the capital securities; S-6 - have an aggregate principal amount equal to the aggregate liquidation amount of the capital securities plus the capital contributed by us for the common securities; - bear interest at a rate of % per annum; and - mature on , 20 - , although they may be redeemed earlier. GUARANTEE OF THE CAPITAL SECURITIES We will guarantee the capital securities pursuant to the terms of a guarantee. The guarantee requires us to pay accrued and unpaid distributions on the capital securities only to the extent that we have made a payment of interest or principal on the junior subordinated debentures. It does not, however, require us to make payments on behalf of Finance Trust I if Finance Trust I does not have sufficient funds to make payments on the capital securities because we have not made payments on the junior subordinated debentures. Our obligations under the guarantee are subordinate to our obligations to make payments on all of our other liabilities (except our obligations under similar guarantees). RANKING Finance Trust I's capital securities will generally rank on par with its common securities in priority of payment. Finance Trust I will make payments on the capital securities and the common securities on a PRO RATA basis, except in certain circumstances (described on page S- - ). The junior subordinated debentures will be unsecured and will rank subordinate and junior in right of payment to all of our current and future senior indebtedness. The junior subordinated debentures will rank on a par with any other junior subordinated debentures that we may issue. The guarantee will rank on par with any other guarantees that we may issue with respect to capital securities issued by trusts similar to Finance Trust I. The guarantee will be unsecured and will rank subordinate and junior in right of payment to all of our other liabilities. The junior subordinated debentures and the guarantee will be effectively subordinated to all existing and future liabilities of our subsidiaries and affiliates. DEFERRAL OF DISTRIBUTIONS We can defer interest payments on the junior subordinated debentures during a period of up to 20 consecutive quarters (but not beyond the maturity date) unless we are in default in the payment of interest on the junior subordinated debentures. After we make all interest payments that we have deferred, including accrued interest on the deferred payments, we can again defer interest payments during new periods of up to 20 consecutive quarters as long we adhere to the same requirements. If we defer interest payments on the junior subordinated debentures, Finance Trust I will defer distributions on the capital securities. During any deferral period, distributions will continue to accumulate on the capital securities at an annual rate of % of the liquidation amount of $25 per capital security. Also, the deferred distributions will accrue interest at an annual rate of %. During any period in which we defer interest payments on the junior subordinated debentures, we will generally not be permitted to: - pay dividends or make any other distributions on our capital stock; - redeem, purchase or make liquidation payments on any of our capital stock; or - make an interest, principal or premium payment, or repurchase or redeem, any of our debt securities that rank equal with or junior to the junior subordinated debentures or the guarantee, including any other similar junior subordinated debentures and guarantees issued by us. S-7 If we defer payments of interest on the junior subordinated debentures, the capital securities would at that time be treated as being issued with original issue discount for United States federal income tax purposes. This means that you would be required to recognize interest income with respect to deferred distributions and include such amounts in your gross income for United States federal income tax purposes before you receive any cash distributions. This is more fully explained in "Certain United States Federal Income Tax Consequences" beginning on page S- - . REDEMPTION OF CAPITAL SECURITIES Finance Trust I will redeem all of the outstanding capital securities when we redeem the junior subordinated debentures at maturity on , 20 - . In addition, if we redeem any junior subordinated debentures before their maturity, Finance Trust I will use the cash it receives on the redemption of the junior subordinated debentures to redeem an equal amount of the capital securities and common securities on a PRO RATA basis. We can redeem some or all of the junior subordinated debentures before their maturity at 100% of their principal amount: - on one or more occasions any time on or after , 2004; and - before , 2004, if certain changes in tax, investment company or bank regulatory law occur (as more fully described on page S- - ). In either case, we will pay accrued interest to the date of redemption. DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES We have the right to dissolve Finance Trust I at any time. If we decide to exercise our right to dissolve Finance Trust I, Finance Trust I will redeem the capital securities by distributing the junior subordinated debentures to holders of the capital securities and the common securities on a PRO RATA basis. If the junior subordinated debentures are distributed, we will use our best efforts to list the junior subordinated debentures on the New York Stock Exchange (or any other exchange on which the capital securities are then listed) in place of the capital securities. For a discussion of our ability to distribute the junior subordinated debentures, see "Description of the Capital Securities--Liquidation Distribution Upon Dissolution" below. CONDITIONAL RIGHT TO SHORTEN MATURITY If certain changes in tax law occur, we will have the right prior to the dissolution of Finance Trust I to shorten the maturity of the junior subordinated debentures. We may only shorten the maturity to the extent necessary so that the interest paid on the junior subordinated debentures will continue to be tax deductible. The shortened term of the junior subordinated debentures may not be less than 15 years from the date of their original issuance. USE OF PROCEEDS Finance Trust I will invest all of the proceeds from the sale of the capital securities in the junior subordinated debentures. We intend to use the net proceeds from the sale of the junior subordinated debentures to repurchase $250 million of our common stock from our majority shareholder, The Bank of Tokyo-Mitsubishi, Ltd., and 2.1 million shares of our common stock from another foreign institutional shareholder. Pending such use, we will invest the net proceeds temporarily in - . S-8 LISTING OF THE CAPITAL SECURITIES Finance Trust I has applied to have the capital securities listed on the New York Stock Exchange under the symbol " - ". You should be aware that the listing of the capital securities will not necessarily ensure that a liquid trading market will be available for the capital securities. RISK FACTORS Your investment in the capital securities will involve certain risks. You should carefully consider the following discussion of risks, and the other information in this prospectus supplement and the accompanying prospectus, before deciding whether an investment in the capital securities is suitable for you. FORM OF CAPITAL SECURITIES The capital securities will be represented by one or more global securities that will be deposited with and registered in the name of The Depository Trust Company or its nominee. This means that you will not receive a certificate for your capital securities and that your broker will maintain your position in the capital securities. S-9 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The summary financial and other data as of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997 are derived from our audited consolidated financial statements included in this prospectus. The summary financial and other data as of December 31, 1995 is derived from our audited consolidated financial statements that are not included in this prospectus. The summary financial and other data as of September 30, 1997 and 1998 and for the nine-month periods ended September 30, 1997 and 1998 are derived from our unaudited consolidated financial statements included in this prospectus, which, in the opinion of our management, include all adjustments necessary for a fair presentation of our financial position at such date and the results of operations for such interim period. The results for the nine-month period ended September 30, 1998 are not necessarily indicative of the results to be expected of the full fiscal year. You should read the following data with the more detailed information contained in "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to the consolidated financial statements, each included in this prospectus. S-10
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Net interest income(1).................... $ 1,152,777 $ 1,175,302 $ 1,237,010 $ 917,408 $ 983,056 Provision for credit losses............... 53,250 40,000 -- -- 45,000 Noninterest income........................ 395,319 418,676 463,001 342,627 399,949 Noninterest expense(2).................... 978,101 1,134,904 1,044,665 762,208 836,178 ----------- ----------- ----------- ----------- ----------- Income before income taxes(1)............. 516,745 419,074 655,346 497,827 501,827 Taxable-equivalent adjustment............. 10,444 6,724 5,328 4,107 3,417 Income tax expense........................ 193,359 162,892 238,722 174,869 146,045 ----------- ----------- ----------- ----------- ----------- Net income................................ $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK....... $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER COMMON SHARE:(3) Net income -- basic(4).................... $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01 Net income -- diluted(4).................. 1.73 1.36 2.30 1.78 2.01 Pro forma earnings -- basic, excluding after tax merger and integration expense and cumulative effect of accounting change(2)............................... 1.74 1.78 2.33 1.80 2.01 Pro forma earnings -- diluted, excluding after tax merger and integration expense and cumulative effect of accounting change(2)............................... 1.73 1.77 2.32 1.80 2.01 Dividends(5).............................. 0.47 0.47 0.51 0.37 0.42 Book value (end of period)(6)............. 13.49 13.53 15.32 14.96 17.04 Common shares outstanding (end of period)................................... 174,180,493 174,457,603 174,917,674 174,848,461 175,208,037 Weighted average common shares outstanding -- basic................................ 173,806,300 174,391,048 174,683,338 174,614,764 175,090,890 Weighted average common shares outstanding -- diluted.............................. 174,099,241 174,783,565 175,189,078 175,071,292 175,728,849 BALANCE SHEET DATA (END OF PERIOD): Total assets.............................. $27,546,859 $29,234,059 $30,585,265 $30,982,479 $31,407,318 Total loans............................... 20,431,683 21,049,787 22,741,408 22,297,724 23,497,845 Nonperforming assets...................... 246,871 156,784 129,809 132,974 81,399 Total deposits............................ 19,655,043 21,532,960 23,296,374 22,974,188 23,663,129 Common equity............................. 2,349,092 2,359,933 2,679,299 2,615,327 2,984,950 BALANCE SHEET DATA (PERIOD AVERAGE): Total assets.............................. $25,564,843 $27,899,734 $29,692,992 $29,451,728 $30,130,893 Total loans............................... 18,974,540 20,727,577 21,855,911 21,693,329 22,916,992 Earning assets............................ 22,849,129 24,717,326 26,291,822 26,066,274 27,002,879 Total deposits............................ 17,969,972 20,101,544 22,067,155 21,823,524 22,386,160 Common equity............................. 2,197,476 2,325,437 2,514,610 2,469,521 2,792,727 OTHER DATA: Return on average assets(7)............... 1.22% 0.89% 1.39% 1.45% 1.56% Pro forma return on average assets, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(7)....... 1.22 1.15 1.40 1.46 1.56 Return on average common equity, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(8)............................ 13.73 10.24 16.05 16.85 16.87 Pro forma return on average common equity(2)(8)............................ 13.73 13.33 16.20 17.04 16.87 Efficiency ratio(9)....................... 63.39 71.02 61.53 60.55 60.51 Pro forma efficiency ratio, excluding merger and integration expense(2)(9).... 63.39 63.65 61.17 60.07 60.51 Net interest margin(10)................... 5.05 4.75 4.70 4.70 4.86 Tier 1 risk-based capital ratio(11)....... 9.35 9.08 8.96 8.92 9.53 Total risk-based capital ratio(12)........ 11.70 11.17 11.05 11.02 11.51
- -------------------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Merger and integration expense was $117 million and $6 million for December 31, 1996 and 1997, respectively, and after-tax merger and integration expense was $72 million and $4 million for December 31, 1996 and 1997, respectively. Merger and integration expense was $6 million ($4 million after-tax) for the nine-months ended September 30, 1997. See page S-44 "Year Ended December 31, 1997 compared to Year Ended December 31, 1996" for a description of merger accounting and pro forma presentations. S-11 (3) Amounts have been restated to give retroactive effect to the December 1998 3-for-1 stock split. (4) Basic and diluted earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the dilutive effects of outstanding stock options. (5) Dividends per share reflect dividends declared on UNBC's common stock outstanding as of the declaration date. Amounts prior to the merger on April 1, 1996 are based on Union Bank only and do not include the dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (6) Book value per share is computed by dividing the common equity at the end of the period by the number of common shares outstanding at the end of the period. (7) Return on average assets is computed by dividing net income by the average assets for the period. Net income for the nine months ended September 30, 1997 and 1998 has been annualized. (8) Return on average common equity is computed by dividing net income applicable to common stock by average common equity for the period. Net income for the nine months ended September 30, 1997 and 1998 has been annualized. (9) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(3.2) million, $2.9 million and $(1.3) million for the years ended 1995 through 1997, respectively. For the nine months ended September 30, 1997 and 1998, foreclosed asset expense (income) was $(0.7) million in each period. (10) The net interest margin is computed by dividing net interest income (taxable-equivalent) by average earning assets for the period. Net interest income (taxable-equivalent) for the nine months ended September 30, 1997 and 1998 has been annualized. (11) The Tier 1 risk-based capital ratio is computed by dividing Tier 1 capital (common and preferred equity, less certain intangible assets) by risk weighted period-end assets. (12) The total risk-based capital ratio was computed by dividing total capital (Tier 1 capital, subordinated debt, and a limited amount of the allowance for credit losses) by risk-weighted period-end assets (excluding certain intangible assets). S-12 RISK FACTORS AN INVESTMENT IN THE CAPITAL SECURITIES INVOLVES A NUMBER OF RISKS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS THAT ARE INCORPORATED BY REFERENCE IN THE PROSPECTUS, ABOUT RISKS CONCERNING THE CAPITAL SECURITIES, BEFORE BUYING ANY CAPITAL SECURITIES. BECAUSE FINANCE TRUST I WILL RELY ON THE PAYMENTS IT RECEIVES ON THE JUNIOR SUBORDINATED DEBENTURES TO FUND ALL PAYMENTS ON THE CAPITAL SECURITIES, AND BECAUSE FINANCE TRUST I MAY DISTRIBUTE THE JUNIOR SUBORDINATED DEBENTURES IN EXCHANGE FOR THE CAPITAL SECURITIES, YOU ARE MAKING AN INVESTMENT DECISION WITH REGARD TO THE JUNIOR SUBORDINATED DEBENTURES AS WELL AS THE CAPITAL SECURITIES. YOU SHOULD CAREFULLY REVIEW THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ABOUT BOTH OF THESE SECURITIES AND THE GUARANTEE. UNBC'S OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES WILL BE SUBORDINATED UNBC's obligations under the guarantee are unsecured and rank (1) subordinate and junior in right of payment to all of its other liabilities (unless such liabilities are made equal to the guarantee expressly by their terms) and (2) equal to the most senior preferred or preference stock that it may issue. UNBC's obligations under the junior subordinated debentures are unsecured and rank subordinate and junior in right of payment to all of its present and future senior indebtedness and rank equal to UNBC's obligations to other junior debt securities. As of September 30, 1998, UNBC had approximately $ - million of senior indebtedness. The junior subordinated debentures also will be effectively subordinated to all obligations of UNBC's subsidiaries. Nothing in the capital securities, the junior subordinated debentures or the guarantee limits UNBC's ability to incur additional indebtedness, including indebtedness that ranks senior to the junior subordinated debentures and the guarantee. See "Description of the Guarantee" and "Description of the Junior Subordinated Debentures--Subordination" below. RIGHTS UNDER THE GUARANTEE; DIRECT ACTION The ability of Finance Trust I to timely pay amounts due on the capital securities is solely dependent upon UNBC making the related payments on the junior subordinated debentures when due. If UNBC defaults on its obligations to pay principal of or interest on the junior subordinated debentures, Finance Trust I will not have sufficient funds to pay distributions on or the liquidation amount of the capital securities. As a result, you will not be able to rely upon the guarantee for payment of these amounts. Instead, you or the property trustee will need to enforce the rights of Finance Trust I under the junior subordinated debentures directly against UNBC. See "Effect of Obligations under the Junior Subordinated Debentures and the Guarantee" below. The holders of not less than a majority in aggregate liquidation amount of the capital securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee under the guarantee or to direct the exercise of any trust power that the trustee has under the guarantee. Any holder of the capital securities may institute a legal proceeding against UNBC, as the issuer of the guarantee, to enforce its rights under the guarantee without first instituting a legal proceeding against UNBC as issuer of the junior subordinated debentures or against any other person or entity. As described in the preceding paragraph, if UNBC were in default of its obligation to make payments under the junior subordinated debentures, Finance Trust I would not have funds to make payments on the capital securities and you would not be able to rely on the guarantee for payment. Instead, if UNBC were in such a default, holders of capital securities or the property trustee could institute a legal proceeding directly against UNBC for enforcement of payment to such holders of capital securities of the payments on the junior subordinated debentures having a principal amount equal to the aggregate liquidation amount of the capital securities held by such holders. Except as noted, holders of capital securities will not be able to exercise directly any other remedy available to the holders of the junior subordinated debentures or assert S-13 directly any other rights in respect of the junior subordinated debentures. See "Description of the Capital Securities--Voting Rights," "Description of Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of Capital Securities" and "Effect of Obligations under the Junior Subordinated Debentures and the Guarantee" below. DISTRIBUTIONS ON THE CAPITAL SECURITIES COULD BE DEFERRED FOR UP TO FIVE YEARS, BUT HOLDERS WOULD STILL RECOGNIZE INCOME FOR TAX PURPOSES As long as UNBC is not in default on the payment of interest on the junior subordinated debentures, UNBC has the right under the indenture to defer interest payments on the junior subordinated debentures for any period up to 20 consecutive quarters, but not beyond the stated maturity of the junior subordinated debentures. During each such extension period, Finance Trust I will defer payments of distributions on the capital securities in a corresponding amount. There is no limit on the number of extension periods that may begin, as long as UNBC is not in default in the payment of interest on the junior subordinated debentures. See "Description of the Capital Securities--Distributions" and "Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period" below. If an extension period occurs, each holder of capital securities (even if it uses the cash method of tax accounting) will be required to accrue income (in the form of original issue discount) for United States federal income tax purposes with respect to its proportionate share of the deferred interest on the junior subordinated debentures. As a result, you would be required to include such income in gross income for United States federal income tax purposes before you actually received any cash attributable to that income. In addition, you would not receive the cash related to such income from Finance Trust I if you disposed of your capital securities prior to the record date for any distribution date on which such deferred distribution is paid, even if you held the capital securities on the date that the payments would normally be made. Although UNBC has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the junior subordinated debentures, the market price of the capital securities may be adversely affected if UNBC exercises this right in the future. See "--General Market Conditions and Deferral Rights Could Adversely Affect Market Prices," "Certain United States Federal Income Tax Consequences--Potential Extension of Interest Payment Period and Original Issue Discount" and "--Sale of Capital Securities" below. THE CAPITAL SECURITIES MAY BE REDEEMED IF CERTAIN TAX OR REGULATORY EVENTS OCCUR If certain changes in tax, investment company or bank regulatory law occur and are continuing, and certain other conditions are satisfied, UNBC has the right to redeem the junior subordinated debentures in whole (but not in part) within 90 days following the occurrence of such event. If the junior subordinated debentures are redeemed, the capital securities must be redeemed. Thus, it is possible that the capital securities could be redeemed before , 2004. Any redemption will be at a redemption price equal to 100% of the liquidation amount of the capital securities plus accumulated and unpaid distributions to the redemption date. Under current United States federal income tax law, such a redemption of the capital securities would be a taxable event to the holders. See "Description of the Capital Securities-- Redemption" and "Certain United States Federal Income Tax Consequences--Sale of Capital Securities" below. UNBC will not exercise its right of redemption unless it has received prior approval of the Board of Governors of the Federal Reserve System to do so, if such approval is then required by applicable guidelines or policies of the Board of Governors of the Federal Reserve System. THE JUNIOR SUBORDINATED DEBENTURES MAY BE DISTRIBUTED TO THE HOLDERS OF THE CAPITAL SECURITIES Finance Trust I may be dissolved prior to its expiration, either as a result of the occurrence of certain events or at UNBC's option. Before exercising this right, UNBC must receive the prior approval of the S-14 Board of Governors of the Federal Reserve System if such approval is then required under the applicable capital guidelines or policies of the Board of Governors of the Federal Reserve System. In such event, and subject to the terms of the Amended and Restated Declaration of Trust of Finance Trust I, the junior subordinated debentures will be distributed to the holders of the capital securities and the common securities in liquidation of Finance Trust I. Although UNBC has agreed to use its best efforts to list the junior subordinated debentures on the New York Stock Exchange (or any other exchange on which the capital securities are then listed) if this occurs, there can be no assurance that the junior subordinated debentures will be approved for listing or that a trading market will exist for the junior subordinated debentures. UNBC cannot predict the market prices for the junior subordinated debentures that may be distributed. Accordingly, the junior subordinated debentures that you receive upon a distribution, or the capital securities you hold pending such a distribution, may trade at a discount to the price you paid to purchase the capital securities. Under current United States federal income tax law, a distribution of junior subordinated debentures upon dissolution of Finance Trust I would generally not be a taxable event to holders of the capital securities. If, however, Finance Trust I is characterized, for United States federal income tax purposes, as an association taxable as a corporation at the time of the liquidation, the distribution of the junior subordinated debentures would constitute a taxable event to the holders of the capital securities. UNBC MAY SHORTEN MATURITY OF JUNIOR SUBORDINATED DEBENTURES Upon the occurrence and continuation of certain Tax Events (as defined in "Description of the Capital Securities--Redemption" below), in lieu of redeeming the junior subordinated debentures, UNBC will have the right under certain circumstances to shorten the stated maturity of the junior subordinated debentures to, and therefore change the mandatory redemption date for the capital securities to be, as early as , 2014. See "Description of the Junior Subordinated Debentures--Option to Accelerate Maturity Date" below. UNBC will only exercise this right upon receiving prior approval of the Board of Governors of the Federal Reserve System, if then required under applicable capital guidelines or policies of the Board of Governors of the Federal Reserve System. GENERAL MARKET CONDITIONS AND DEFERRAL RIGHTS COULD ADVERSELY AFFECT MARKET PRICES There can be no assurance about the market prices for the capital securities or for the junior subordinated debentures that may be distributed in exchange for the capital securities if Finance Trust I is dissolved. In addition, because of UNBC's right to defer interest payments on the junior subordinated debentures, the market price of the capital securities may be more volatile than the market prices of similar securities that are not subject to this right. Moreover, any exercise of this right may adversely affect the market price of the capital securities. Accordingly, the capital securities that you purchase, whether in this offering or in the secondary market, or the junior subordinated debentures that you may receive on liquidation of Finance Trust I, may trade at a discount to the price that you paid for the capital securities. Furthermore, if you dispose of any capital securities or junior subordinated debentures during an extension period, when trading prices may be adversely affected by the deferral, you might not receive the same return on your investment as a holder that holds its capital securities until the extension period ends. THE MARKET PRICES OF THE CAPITAL SECURITIES MAY NOT FULLY REFLECT ACCRUED INTEREST The capital securities may trade at prices that do not fully reflect the value of accrued but unpaid interest with respect to the underlying junior subordinated debentures. A holder of capital securities that disposes of its capital securities between record dates for any distribution payments will nevertheless be required to include as ordinary income for United States federal income tax purposes an amount equal to S-15 the accrued but unpaid interest on its proportionate interest in the junior subordinated debentures through the date of disposition. Such holder will recognize a capital loss to the extent the selling price (which may not fully reflect the value of accrued but unpaid interest) is less than its adjusted tax basis. Except in certain limited circumstances, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "Certain United States Federal Income Tax Consequences--Sale of Capital Securities" below. LIMITED VOTING RIGHTS In general, holders of capital securities will have limited voting rights relating only to the modification of Finance Trust I's Amended and Restated Declaration of Trust (which establishes the terms and conditions of the capital securities) and the exercise of Finance Trust I's rights as the holder of the junior subordinated debentures. Holders of capital securities will not be entitled to vote to appoint, remove or replace the trustees of Finance Trust I, which voting rights are vested exclusively in UNBC as the holder of the common securities of Finance Trust I. The Regular Trustees (as defined in "UnionBanCal Finance Trust I" below), who are officers of UNBC, and UNBC may amend the Amended and Restated Declaration of Trust without the consent of holders of capital securities to ensure that (1) Finance Trust I will be classified for United States federal income tax purposes as a grantor trust, (2) the junior subordinated debentures will be treated for United States federal income tax purposes as indebtedness of UNBC and (3) Finance Trust I will not be required to register as an "investment company" under the Investment Company Act of 1940. See "Description of the Capital Securities--Voting Rights" below. NO PRIOR MARKET FOR THE CAPITAL SECURITIES The capital securities constitute a new issue of securities with no established trading market. Although the capital securities will be listed on the New York Stock Exchange, a listing does not guarantee that a trading market for the capital securities will develop or, if a trading market for the capital securities does develop, the depth of that market and the ability of holders to sell their capital securities easily. FAILURE TO COMPLETE TRANSACTIONS Although UNBC and The Bank of Tokyo-Mitsubishi, Ltd. intend to complete all of the transactions described in "Use of Proceeds" below during the first quarter of 1999, the transactions may not occur. The common stock offering and the repurchases are dependent upon each other. Accordingly, if the common stock offering does not occur, then the parties to the repurchases are not required to complete the repurchases. Similarly, if the repurchases do not occur, then the parties to the common stock offering are not required to complete that offering. The proceeds from this offering will be used to purchase junior subordinated debentures of UNBC. UNBC intends to use the proceeds from the sale of the junior subordinated debentures to repurchase the shares of common stock in the repurchases. Therefore, if this offering does not occur, UNBC may not have sufficient funds to complete the repurchases, which could cause the common stock offering to be terminated. If this offering is completed but the repurchases are not, UNBC may have excess unused proceeds from the sale of the junior subordinated debentures. If any of the transactions does not occur, UNBC would not recognize certain of the anticipated benefits of the transactions as a whole. S-16 UNIONBANCAL FINANCE TRUST I Finance Trust I is a statutory business trust formed under Delaware law pursuant to (1) a declaration of trust executed by UNBC, as sponsor, and the trustees of Finance Trust I (the "Finance Trustees") and (2) the filing of a certificate of trust with the Secretary of State of the State of Delaware. The declaration will be amended and restated in its entirety (as so amended and restated, the "Trust Declaration") substantially in the form filed as an exhibit to the Registration Statement of which the accompanying prospectus forms a part (the "Shelf Registration Statement"). The Trust Declaration will be qualified as an indenture under the Trust Indenture Act. The % Capital Securities of Finance Trust I (the "Capital Securities") offered hereby will constitute all of the capital securities of Finance Trust I, and UNBC will acquire all of the common securities of Finance Trust I (the "Common Securities"), which have an aggregate liquidation amount equal to approximately 3% of the total capital of Finance Trust I. Finance Trust I exists for the exclusive purposes of: - issuing the Common Securities and the Capital Securities (collectively, the "Trust Securities"), representing undivided beneficial interests in the assets of Finance Trust I; - investing the gross proceeds of the Trust Securities in the % Junior Subordinated Deferrable Interest Debentures of UNBC (the "Junior Subordinated Debentures"); and - engaging in only those other activities necessary or incidental to these purposes. The number of Finance Trustees will initially be five. Three of the Finance Trustees (the "Regular Trustees") will be persons who are employees or officers of or who are affiliated with UNBC. The fourth trustee will be a financial institution that is unaffiliated with UNBC, which trustee will serve as property trustee under the Trust Declaration and as indenture trustee for the purposes of the Trust Indenture Act (the "Property Trustee"). The Property Trustee will be the only trustee of Finance Trust I who will be a trustee for purposes of the Trust Indenture Act and is the only entity that will perform the functions of a trustee under such Act. The initial Property Trustee of Finance Trust I is The First National Bank of Chicago. The fifth trustee will be a financial institution that maintains its principal place of business in the State of Delaware (the "Delaware Trustee"). First Chicago Delaware Inc. is the initial Delaware Trustee. UNBC, as the holder of all of the Common Securities, will be entitled to appoint, remove or replace any of, or increase or reduce the number of, the Finance Trustees of Finance Trust I. The First National Bank of Chicago will also act as indenture trustee (the "Guarantee Trustee") under the guarantee to be issued by UNBC (the "Guarantee"). See "Description of the Guarantee" below. The Property Trustee will hold title to the Junior Subordinated Debentures for the benefit of the holders of the Trust Securities, and the Property Trustee will have the power to exercise all rights, powers and privileges under the Indenture as the holder of the Junior Subordinated Debentures. In addition, the Property Trustee will maintain exclusive control of a segregated non-interest bearing bank account (the "Property Account") to hold all payments made in respect of the Junior Subordinated Debentures for the benefit of the holders of the Trust Securities. The Property Trustee will make payments of distributions and payments on liquidation, redemption and otherwise to the holders of the Trust Securities out of funds from the Property Account. The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Capital Securities. UNBC, as the holder of all the Common Securities, will have the right to appoint, remove or replace any Finance Trustee and to increase or decrease the number of Finance Trustees. UNBC will pay all fees and expenses related to Finance Trust I and the offering of the Trust Securities. See "Description of the Junior Subordinated Debentures--Miscellaneous" below. The Common Securities will rank PARI PASSU, and payments will be made thereon PRO RATA, with the Capital Securities, except that upon the occurrence and continuance of an event of default under the Trust Declaration resulting from an Event of Default under the Indenture, the rights of the holders of the Common Securities to payment in respect of distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of holders of the Capital Securities. S-17 The rights of the holders of the Capital Securities, including economic rights, rights to information and voting rights, are set forth in the Trust Declaration, the Delaware Business Trust Act (the "Business Trust Act") and the Trust Indenture Act. See "Description of the Capital Securities" below. It is expected that at the time the Shelf Registration Statement becomes effective, the Trust Declaration, the Indenture and the Guarantee will be qualified under the Trust Indenture Act. THE TRANSACTIONS UNBC is seeking to repurchase shares of its common stock from two of its existing shareholders. We expect to repurchase $250 million in shares of our common stock from The Bank of Tokyo-Mitsubishi, concurrently with the closing of a $750 million offering of our common stock by The Bank of Tokyo Mitsubishi. We expect to repurchase the shares at the public offering price in the common stock offering, less the underwriting discounts and commissions. In addition, we are currently negotiating with another foreign institutional shareholder regarding the repurchase of approximately 2.1 million shares of our common stock. Two other foreign institutional shareholders decided not to participate in the repurchase. We intend to use the net proceeds of this offering of Capital Securities to finance both of the repurchases. This offering, the repurchases and the common stock offering are referred to in this prospectus as the "Transactions." We anticipate that this offering and the common stock offering will close in the first quarter of 1999. From UNBC's point of view the Transactions are principally designed to improve our return on average common equity and earnings per share and to increase our public float. In addition, the sale of common stock by The Bank of Tokyo-Mitsubishi to the public will raise proceeds for, and enhance the capital base of, The Bank of Tokyo-Mitsubishi. The repurchase of the common stock from The Bank of Tokyo-Mitsubishi and the issuance of the capital securities would, on a pro forma basis: - increase UNBC's return on average common equity from 16.87% to % at September 30, 1998; and - increase UNBC's diluted earnings per share for the year ended December 31, 1997 and nine months ended September 30, 1998 from $2.30 up to $ , and from $2.01 up to $ , respectively, representing an approximate % increase and an approximate % increase, respectively. The sale of the common stock by The Bank of Tokyo-Mitsubishi to the public will also substantially increase the percentage of UNBC's common stock held by public investors. This increase in public shareholders will increase our common stock's float. The Bank of Tokyo-Mitsubishi currently owns 81.6% of our common stock and will own % after the Transactions. We believe the Transactions will provide UNBC with additional benefits. The Transactions should increase our market visibility as a result of more research coverage and should make our common stock a more attractive acquisition currency. The Transactions will not result in a material change to our Tier 1 risk-based capital ratio, our total risk-based capital ratio or our leverage ratio. S-18 USE OF PROCEEDS Finance Trust I will use all of the proceeds received from the sale of the Capital Securities to purchase Junior Subordinated Debentures from UNBC. UNBC will use the net proceeds to be received from the sale of the Junior Subordinated Debentures, after deducting estimated expenses of $ and underwriting discounts and commissions in respect of the sale of the Capital Securities, to repurchase $250 million of its common stock from its majority shareholder, The Bank of Tokyo-Mitsubishi, Ltd., and 2.1 million shares of common stock from another foreign institutional shareholder. Pending such use, UNBC will temporarily invest the net proceeds in - . [Add additional use of proceeds if repurchases do not occur] UNBC is required by the Board of Governors of the Federal Reserve System (the "Federal Reserve") to maintain certain levels of capital for bank regulatory purposes. On October 21, 1996, the Federal Reserve announced that long-term cumulative capital securities having the characteristics of the Capital Securities could be included as Tier 1 capital for bank holding companies. Such Tier 1 capital treatment, together with UNBC's ability to deduct, for United States federal income tax purposes, interest payable on the Junior Subordinated Debentures, will provide UNBC with a more cost-effective means of obtaining capital for regulatory purposes than other Tier 1 capital alternatives currently available to it. S-19 CAPITALIZATION The following table presents the short-term debt and total capitalization of UNBC on a consolidated basis at September 30, 1998. The "As Adjusted for The Transactions" column presents our capitalization at September 30, 1998, after giving effect to this offering, the offering of the common stock by The Bank of Tokyo-Mitsubishi and the repurchase of shares of our common stock from The Bank of Tokyo-Mitsubishi and a foreign institutional shareholder.
SEPTEMBER 30, 1998 ------------------------------- AS ADJUSTED FOR ACTUAL THE TRANSACTIONS ------------- ---------------- (UNAUDITED) (IN THOUSANDS) Short-term debt: Federal funds purchased and securities sold under repurchase agreements........ $ 1,574,163 $ Commercial paper............................................................... 1,417,077 Other borrowed funds........................................................... 339,340 ------------- ---------------- Total short-term debt...................................................... $ 3,330,580 $ ------------- ---------------- ------------- ---------------- Long-term debt: UNBC-obligated mandatorily redeemable preferred securities of subsidiary grantor trust whose sole assets are junior subordinated debentures of UNBC(1)...................................................................... $ -- $ Subordinated capital notes..................................................... 298,000 ------------- ---------------- Total long-term debt....................................................... 298,000 ------------- ---------------- Shareholders' equity: Preferred stock, 5,000,000 shares authorized, none outstanding................. -- -- Common stock, 300,000,000 shares authorized, 175,208,037 shares outstanding(2)............................................................... 292,013 Additional paid-in capital..................................................... 1,430,539 Retained earnings.............................................................. 1,233,068 Accumulated other comprehensive income......................................... 29,330 ------------- ---------------- Total shareholders' equity................................................. 2,984,950 ------------- ---------------- Total capitalization..................................................... $ 3,282,950 $ ------------- ---------------- ------------- ---------------- Tier 1 risk-based capital ratio.................................................. 9.53% Total risk-based capital ratio................................................... 11.51 Return on average common equity ratio............................................ 16.87
- ------------------------ (1) The sole asset of the subsidiary trust is the $ aggregate principal amount of the % Junior Subordinated Debentures due of UNBC. (2) On November 18, 1998, our Board of Directors approved a 3-for-1 common stock split and a corresponding increase in the number of authorized shares of our common stock to 300,000,000, which became effective on December 7, 1998. S-20 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The selected financial and other data as of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997 are derived from our audited consolidated financial statements included in this prospectus. The selected financial and other data for the year ending December 31, 1994 and as of December 31, 1995 are derived from our audited consolidated financial statements that are not included in this prospectus. The selected financial and other data as of December 31, 1993 and 1994 and for the year ended December 31, 1993 are derived from the combined historical financial information of Union Bank and BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A. Such combined historical information was, in turn, derived from the separate audited consolidated financial statements of Union Bank and BanCal Tri-State for those periods that are not included in this prospectus. The selected financial and other data as of September 30, 1997 and 1998 and for the nine-month periods ended September 30, 1997 and 1998 are derived from our unaudited consolidated financial statements included in this prospectus, which, in the opinion of our management, include all adjustments necessary for a fair presentation of our financial position at such date and the results of operations for such interim period. The results for the nine-month period ended September 30, 1998 are not necessarily indicative of the results to be expected of the full fiscal year. We have restated all historical financial information as if the combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., which occurred on April 1, 1996, had been in effect for all periods presented. You should read the following data with the more detailed information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to the consolidated financial statements, each included in this prospectus. S-21
NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30 ------------------------------------------------------------------ ----------- 1993 1994 1995 1996 1997 1997 -------------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Net interest income(1)............... $ 986,411 $ 1,007,789 $ 1,152,777 $ 1,175,302 $ 1,237,010 $ 917,408 Provision for credit losses.......... 151,000 73,000 53,250 40,000 -- -- Noninterest income................... 405,965 359,831 395,319 418,676 463,001 342,627 Noninterest expense(2)............... 1,055,020 1,036,349 978,101 1,134,904 1,044,665 762,208 -------------- ----------- ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of accounting change(1)............................ 186,356 258,271 516,745 419,074 655,346 497,827 Taxable-equivalent adjustment........ 14,734 12,566 10,444 6,724 5,328 4,107 Income tax expense................... 63,966 120,356 193,359 162,892 238,722 174,869 -------------- ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change 107,656 125,349 312,942 249,458 411,296 318,851 Cumulative effect of accounting change(3) 192,793 -- -- -- -- -- -------------- ----------- ----------- ----------- ----------- ----------- Net income........................... $ 300,449 $ 125,349 $ 312,942 $ 249,458 $ 411,296 $ 318,851 -------------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK.. $ 289,174 $ 114,045 $ 301,637 $ 238,152 $ 403,696 $ 311,251 -------------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- PER COMMON SHARE:(4) Net income -- basic(5)............... $ 1.73 $ 0.67 $ 1.74 $ 1.37 $ 2.31 $ 1.78 Net income -- diluted(5)............. 1.73 0.67 1.73 1.36 2.30 1.78 Pro forma earnings -- basic, excluding after tax merger and integration expense and cumulative effect of accounting change(2)..... 0.58 0.67 1.74 1.78 2.33 1.80 Pro forma earnings -- diluted, excluding after tax merger and integration expense and cumulative effect of accounting change(2)..... 0.58 0.67 1.73 1.77 2.32 1.80 Dividends(6)......................... 0.47 0.47 0.47 0.47 0.51 0.37 Book value (end of period)(7)........ 11.64 11.88 13.49 13.53 15.32 14.96 Common shares outstanding (end of period)............................ 169,989,829 172,043,617 174,180,493 174,457,603 174,917,674 174,848,461 Weighted average common shares outstanding -- basic............... 166,857,166 171,089,311 173,806,300 174,391,048 174,683,338 174,614,764 Weighted average common shares outstanding -- diluted............. 166,917,256 171,149,731 174,099,241 174,783,565 175,189,078 175,071,292 BALANCE SHEET DATA (END OF PERIOD): Total assets......................... $ 24,005,530 $24,569,042 $27,546,859 $29,234,059 $30,585,265 $30,982,479 Total loans.......................... 17,759,181 18,065,650 20,431,683 21,049,787 22,741,408 22,297,724 Nonperforming assets................. 1,193,450 421,227 246,871 156,784 129,809 132,974 Total deposits....................... 16,978,347 17,409,737 19,655,043 21,532,960 23,296,374 22,974,188 Subordinated capital notes........... 725,859 655,859 501,369 382,000 348,000 382,000 Preferred Stock...................... 135,000 135,000 135,000 135,000 -- -- Common equity........................ 1,978,455 2,044,202 2,349,092 2,359,933 2,679,299 2,615,327 BALANCE SHEET DATA (PERIOD AVERAGE): Total assets......................... $ 23,926,924 $23,692,560 $25,564,843 $27,899,734 $29,692,992 $29,451,728 Total loans.......................... 18,219,288 17,616,002 18,974,540 20,727,577 21,855,911 21,693,329 Earning assets....................... 21,176,396 21,046,600 22,849,129 24,717,326 26,291,822 26,066,274 Total deposits....................... 17,160,129 16,826,443 17,969,972 20,101,544 22,067,155 21,823,524 Common equity........................ 1,917,530 1,980,577 2,197,476 2,325,437 2,514,610 2,469,521 OTHER DATA: Return on average assets(8).......... 1.26% 0.53% 1.22% 0.89% 1.39% 1.45% Pro forma return on average assets, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(8)....................... 0.45 0.53 1.22 1.15 1.40 1.46 Return on average common equity(9)... 15.08 5.76 13.73 10.24 16.05 16.85 Pro forma return on average common equity, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(9)....................... 5.03 5.76 13.73 13.33 16.20 17.04 Efficiency ratio(10)................. 66.92 70.39 63.39 71.02 61.53 60.55 Pro forma efficiency ratio, excluding merger and integration expense(2)(10)..................... 66.92 70.39 63.39 63.65 61.17 60.07 1998 ----------- RESULTS OF OPERATIONS: Net interest income(1)............... $ 983,056 Provision for credit losses.......... 45,000 Noninterest income................... 399,949 Noninterest expense(2)............... 836,178 ----------- Income before income taxes and cumulative effect of accounting change(1)............................ 501,827 Taxable-equivalent adjustment........ 3,417 Income tax expense................... 146,045 ----------- Income before cumulative effect of accounting change 352,365 Cumulative effect of accounting change(3) -- ----------- Net income........................... $ 352,365 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK.. $ 352,365 ----------- ----------- PER COMMON SHARE:(4) Net income -- basic(5)............... $ 2.01 Net income -- diluted(5)............. 2.01 Pro forma earnings -- basic, excluding after tax merger and integration expense and cumulative effect of accounting change(2)..... 2.01 Pro forma earnings -- diluted, excluding after tax merger and integration expense and cumulative effect of accounting change(2)..... 2.01 Dividends(6)......................... 0.42 Book value (end of period)(7)........ 17.04 Common shares outstanding (end of period)............................ 175,208,037 Weighted average common shares outstanding -- basic............... 175,090,890 Weighted average common shares outstanding -- diluted............. 175,728,849 BALANCE SHEET DATA (END OF PERIOD): Total assets......................... $31,407,318 Total loans.......................... 23,497,845 Nonperforming assets................. 81,399 Total deposits....................... 23,663,129 Subordinated capital notes........... 298,000 Preferred Stock...................... -- Common equity........................ 2,984,950 BALANCE SHEET DATA (PERIOD AVERAGE): Total assets......................... $30,130,893 Total loans.......................... 22,916,992 Earning assets....................... 27,002,879 Total deposits....................... 22,386,160 Common equity........................ 2,792,727 OTHER DATA: Return on average assets(8).......... 1.56% Pro forma return on average assets, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(8)....................... 1.56 Return on average common equity(9)... 16.87 Pro forma return on average common equity, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(9)....................... 16.87 Efficiency ratio(10)................. 60.51 Pro forma efficiency ratio, excluding merger and integration expense(2)(10)..................... 60.51
S-22 Net interest margin(11).............. 4.66 4.79 5.05 4.75 4.70 4.70 Dividend payout ratio(12)............ 27.17 70.15 27.01 34.31 22.08 20.79 Tier 1 risk-based capital ratio(13)............................ 8.88 9.24 9.35 9.08 8.96 8.92 Total risk-based capital ratio(14)... 12.07 12.03 11.70 11.17 11.05 11.02 Leverage ratio(15)................... 8.26 8.67 8.70 8.41 8.53 8.39 Allowances for credit losses to total loans(16).......................... 3.90 3.12 2.72 2.49 1.99 2.15 Allowance for credit losses to nonaccrual loans(17)............... 84.82 161.08 266.56 408.48 413.12 435.92 Net loans charged off to average total loans(18).................... 1.37 1.15 0.32 0.34 0.33 0.28 Nonperforming assets to total loans and foreclosed assets(19).......... 6.58 2.32 1.21 0.74 0.57 0.60 Nonperforming assets to total assets(20)........................... 4.97 1.71 0.90 0.54 0.42 0.43
Net interest margin(11).............. 4.86 Dividend payout ratio(12)............ 20.90 Tier 1 risk-based capital ratio(13)............................ 9.53 Total risk-based capital ratio(14)... 11.51 Leverage ratio(15)................... 9.37 Allowances for credit losses to total loans(16).......................... 2.02 Allowance for credit losses to nonaccrual loans(17)............... 697.19 Net loans charged off to average total loans(18).................... 0.12 Nonperforming assets to total loans and foreclosed assets(19).......... 0.35 Nonperforming assets to total assets(20)........................... 0.26
- ------------------------ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Merger and integration expense was $117 million and $6 million for 1996 and 1997, respectively, and after-tax merger and integration expense was $72 million and $4 million for 1996 and 1997, respectively. Merger and integration expense was $6 million ($4 million after-tax) for the nine months ended September 30, 1997. See page S-44 "Year Ended December 31, 1997 compared to Year Ended December 31, 1996" for a description of merger accounting and pro forma presentations. (3) 1993 net income includes the cumulative effect of the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." (4) Amounts have been restated to give retroactive effect to the December 1998 3-for-1 stock split. (5) Basic and diluted earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the dilutive effects of outstanding stock options. (6) Dividends per share reflect dividends declared on UNBC's common stock outstanding as of the declaration date. Amounts prior to the merger on April 1, 1996 are based on Union Bank only and do not include the dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (7) Book value per share is computed by dividing the common equity at the end of the period by the number of common shares outstanding at the end of the period. (8) Return on average assets is computed by dividing net income by the average assets for the period. Net income for the nine months ended September 30, 1997 and 1998 has been annualized. (9) Return on average common equity is computed by dividing net income applicable to common stock by average common equity for the period. Net income for the nine months ended September 30, 1997 and 1998 has been annualized. (10) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $123.3 million, $73.7 million, $(3.2) million, $2.9 million and $(1.3) million for the years ended 1993 through 1997, respectively. For the nine months ended September 30, 1997 and 1998, foreclosed asset expense (income) was $(0.7) million in each period. (11) The net interest margin is computed by dividing net interest income (taxable-equivalent) by average earning assets for the period. Net interest income (taxable-equivalent) for the nine months ended September 30, 1997 and 1998 has been annualized. (12) The dividend payout ratio is computed by dividing dividends applicable to common shareholders for the period by net income available to common shareholders for the period. (13) The Tier 1 risk-based capital ratio is computed by dividing Tier 1 capital (common and preferred equity, less certain intangible assets) by risk weighted period-end assets. S-23 (14) The total risk-based capital ratio was computed by dividing total capital (Tier 1 capital, subordinated debt, and a limited amount of the allowance for credit losses) by risk weighted period-end assets (excluding certain intangible assets). (15) The leverage ratio is computed by dividing Tier 1 capital by quarterly average assets (excluding certain intangible assets). (16) The allowance for credit losses to total loans is computed by dividing the allowance for credit losses at the end of the period by total loans at the end of the period. (17) The allowance for credit losses to nonaccrual loans is computed by dividing the allowance for credit losses at the end of the period by nonaccrual loans at the end of the period. (18) Net loans charged off to average total loans is computed by dividing the net loans charged off for the period by average total loans for the period. Net loans charged off for the nine months ended September 30, 1997 and 1998 has been annualized. (19) Nonperforming assets to total loans and foreclosed assets is computed by dividing nonperforming assets at the end of the period by total loans and foreclosed assets at the end of the period. (20) Nonperforming assets to total assets is computed by dividing nonperforming assets at the end of the period by total assets at the end of the period. S-24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND THE RESULTS OF OUR OPERATIONS TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS. CERTAIN AMOUNTS FOR PRIOR PERIODS HAVE BEEN RECLASSIFIED TO CONFORM TO CURRENT FINANCIAL STATEMENT PRESENTATION. INTRODUCTION UnionBanCal Corporation, or "UNBC," is a California-based commercial bank holding company with consolidated assets of $31.4 billion at September 30, 1998. Based on total assets, UNBC, together with its consolidated subsidiaries, was the third largest bank holding company in California and among the 30 largest in the United States. At September 30, 1998, we operated 244 full-service branches in California, six banking offices in Oregon and Washington, and 18 overseas facilities. The combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., was completed on April 1, 1996 (the "Merger"), resulting in UnionBanCal Corporation and its banking subsidiary, Union Bank of California, N.A. The combination was accounted for as a reorganization of entities under common control (similar to a pooling of interests). Accordingly, all historical financial information has been restated as if the combination had been in effect for all periods presented. On August 10, 1998, UNBC and its consolidated subsidiaries exchanged 10.2 million shares of its common stock for the 7.2 million shares of the common stock of Union Bank of California, N.A. owned directly by The Bank of Tokyo-Mitsubishi, Ltd. This share exchange provided UNBC with a 100 percent ownership interest in Union Bank of California, N.A. In addition, it increased The Bank of Tokyo-Mitsubishi's ownership percentage of UNBC to 82 percent from 81 percent. The exchange of shares was accounted for as a reorganization of entities under common control. Accordingly, amounts previously reported as "Parent Direct Interest in Bank Subsidiary," including the proportionate share of net income, dividends, and other comprehensive income, have been reclassified to combine them with the corresponding amounts attributable to our common shareholders for all periods presented. On November 18, 1998, our Board of Directors approved the declaration of a 3-for-1 stock split effective for shareholders of record on December 7, 1998. Accordingly, all historical financial information has been restated as if the stock split had been in effect for all periods presented. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 SUMMARY Net income for the first nine months of 1998 was $352.4 million, compared to $318.9 million for the first nine months of 1997. Net income applicable to common stock was $352.4 million, or $2.01 per diluted common share, for the first nine months of 1998, compared with $311.3 million, or $1.78 per diluted common share, for the first nine months of 1997. Excluding the tax benefit of $52.4 million, net of federal tax, recorded in the first nine months of 1998, net income applicable to common stock was $299.9 million, or $1.71 per diluted common share. Excluding the $24.7 million tax refund for the first nine months of 1997, net income applicable to common stock was $286.6 million, or $1.64 per diluted common share. Other highlights of the first nine months of 1998 include: - Net interest income, on a taxable-equivalent basis, was $983.1 million for the first nine months of 1998, a $65.6 million, or 7 percent, increase from the comparable period one year earlier. The increase in net interest income was primarily due to a 16 basis point increase in the net interest S-25 margin and a $936.6 million, or 4 percent, increase in average earning assets, resulting primarily from a $1.2 billion, or 6 percent, increase in average loans, largely funded by a $1.1 billion, or 15 percent, increase in average noninterest bearing deposits. - A provision for credit losses of $45.0 million was recorded for the first nine months of 1998, compared with no provision in 1997. Net charge-offs for the nine months ended September 30, 1998 were $21.0 million. This resulted from management's regular quarterly assessments of overall credit quality, loan growth and economic conditions in relation to the level of the allowance for credit losses. - Noninterest income was $399.9 million, an increase of $57.3 million, or 17 percent, over the first nine months of 1997. This increase includes the $17.1 million gain from the sale of the credit card portfolio in the second quarter of 1998. Service charges on deposit accounts grew $16.6 million, or 20 percent, reflecting growth in average deposits; trust and investment management fees increased $12.1 million, or 16 percent, on growth in assets under management; international commissions and fees increased $4.9 million; and securities gains, net increased $3.5 million, primarily from the sale of securities available for sale. - Noninterest expense was $836.2 million for the first nine months of 1998, compared with $762.2 million for the first nine months of 1997, an increase of $74.0 million, or 10 percent. Personnel-related expense increased $40.6 million, or 10 percent, primarily due to increases in salaries, a portion of which relates to increases in staffing, performance-based incentive compensation as well as a decline in the fair value of assets underlying postretirement benefit plans, caused by the downturn in the financial markets. Professional fees increased $6.1 million, or 32 percent, primarily due to additional costs related to the year 2000 effort. Other noninterest expense increased $24.4 million, or 22 percent, primarily attributable to additional expenses incurred to support higher deposit volumes. - The effective tax rate for the first nine months of 1998 was 29 percent, compared with 35 percent for the first nine months of 1997. The lower effective tax rate for the first nine months of 1998 was the result of a total reduction of $52.4 million, net of federal tax, in state income tax liabilities. Excluding this state tax reduction, the effective tax rate for the first nine months of 1998 was 40 percent. Excluding the $24.7 million after-tax refund from the State of California Franchise Tax Board, the effective tax rate for the first nine months of 1997 was 40 percent. - The return on average assets for the first nine months of 1998 increased to 1.56 percent, compared to 1.45 percent for the first nine months of 1997. The return on average common equity increased slightly to 16.87 percent for the first nine months of 1998, compared to 16.85 percent for the first nine months of 1997. - Total loans at September 30, 1998 increased $756.4 million, or 3 percent, over December 31, 1997, primarily due to growth in the commercial, financial and industrial portfolio. - Our Tier 1 and total risk-based capital ratios were 9.53 percent and 11.51 percent at September 30, 1998, compared with 8.96 percent and 11.05 percent at December 31, 1997. Our September 30, 1998 leverage ratio was 9.37 percent, compared with 8.53 percent at December 31, 1997. S-26 NET INTEREST INCOME
FOR THE NINE MONTHS ENDED ------------------------------------------------------------------------------ SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 -------------------------------------- -------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ------------ ----------- ----------- ------------ ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS: Loans:(2) Domestic............................ $ 20,218,298 $ 1,245,658 8.23% $ 21,569,891 $ 1,297,483 8.04% Foreign(3).......................... 1,475,031 66,578 6.03 1,347,101 68,380 6.79 Securities -- taxable(4).............. 2,476,970 116,715 6.29 2,949,151 139,720 6.32 Securities -- tax-exempt(4)........... 126,634 9,567 10.07 106,783 8,348 10.42 Interest bearing deposits in banks.... 996,710 43,404 5.82 279,938 14,187 6.78 Federal funds sold and securities purchased under resale agreements... 450,603 18,727 5.56 281,565 11,784 5.60 Trading account assets................ 322,028 13,389 5.56 468,450 20,137 5.75 ------------ ----------- ------------ ----------- Total earning assets.............. 26,066,274 1,514,038 7.76 27,002,879 1,560,039 7.72 ------------ ----------- ------------ ----------- Allowance for credit losses........... (514,043) (471,384) Cash and due from banks............... 2,005,177 1,903,155 Premises and equipment, net........... 413,024 402,197 Other assets.......................... 1,481,296 1,294,046 ------------ ------------ Total assets...................... $ 29,451,728 $ 30,130,893 ------------ ------------ ------------ ------------ LIABILITIES: Domestic deposits: Interest bearing.................... $ 5,274,137 $ 111,457 2.83 $ 5,447,712 $ 115,626 2.84 Savings and consumer time........... 2,956,493 83,695 3.78 3,176,898 90,713 3.82 Large time............................ 4,691,506 191,547 5.46 3,606,182 146,945 5.45 Foreign deposits(3)................... 1,560,149 55,156 4.73 1,723,282 66,454 5.16 ------------ ----------- ------------ ----------- Total interest bearing deposits... 14,482,285 441,855 4.08 13,954,074 419,738 4.02 ------------ ----------- ------------ ----------- Federal funds purchased and securities sold under repurchase agreements.... 1,106,180 44,053 5.32 1,481,809 59,667 5.38 Subordinated capital notes............ 353,429 17,180 6.50 335,179 15,883 6.34 Commercial paper...................... 1,631,056 66,543 5.45 1,641,425 67,720 5.52 Other borrowed funds.................. 673,359 26,999 5.36 323,082 13,975 5.78 ------------ ----------- ------------ ----------- Total borrowed funds.............. 3,764,024 154,775 5.50 3,781,495 157,245 5.56 ------------ ----------- ------------ ----------- Total interest bearing liabilities..................... 18,246,309 596,630 4.37 17,735,569 576,983 4.35 ----------- ----------- Noninterest bearing deposits.......... 7,341,239 8,432,086 Other liabilities..................... 1,274,000 1,170,511 ------------ ------------ Total liabilities................. 26,861,548 27,338,166 ------------ ------------ ------------ ------------ SHAREHOLDERS' EQUITY Preferred stock....................... 120,659 -- Common equity......................... 2,469,521 2,792,727 ------------ ------------ Total shareholders' equity........ 2,590,180 2,792,727 ------------ ------------ Total liabilities and shareholders' equity............ $ 29,451,728 $ 30,130,893 ------------ ------------ ------------ ------------ Net interest income/margin (taxable- equivalent basis)................... 917,408 4.70% 983,056 4.86% Less: taxable-equivalent adjustment... 4,107 3,417 ----------- ----------- Net interest income............... $ 913,301 $ 979,639 ----------- ----------- ----------- -----------
- -------------------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches. (4) Yields on securities available for sale are based on fair value. The difference between these yields and those based on amortized cost was not significant. S-27 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. For the first nine months of 1998, net interest income, on a taxable equivalent basis, was $983.1 million, compared with $917.4 million in the comparable period one year earlier. The increase of $65.6 million, or 7 percent, was primarily attributable to a $936.6 million, or 4 percent, increase in average earning assets largely funded by a $1.1 billion, or 15 percent, increase in average noninterest bearing deposits. In addition, the net interest margin increased 16 basis points to 4.86 percent. Although the differential between the decrease in the yield on average earning assets and the decrease in the rate of average interest bearing liabilities was a negative 2 basis points, the negative impact on the net interest margin of these two factors was more than offset by the increase in the proportion of funding provided by average noninterest bearing deposits. Average earning assets were $26.1 billion and $27.0 billion, for the nine months ended September 30, 1997 and 1998, respectively. Most of this increase was attributable to growth in average loans, which increased $1.2 billion, or 6 percent, and average securities, which were $452.3 million, or 17 percent, higher. This increase was partially offset by a $716.8 million decrease in average interest bearing deposits in banks. The growth in average loans outstanding was attributable to the increase in average commercial, financial and industrial loans of $1.5 billion, partly offset by the decrease in average consumer loans of $337.4 million, which was primarily related to the sale of the credit card portfolio. See "Loans" on page S-31 for additional commentary on growth in the loan portfolio. The increase in primarily fixed rate securities reflected interest rate risk management actions to reduce our exposure to declines in interest rates. NONINTEREST INCOME
FOR THE NINE MONTHS ENDED --------------------------------------- SEPTEMBER 30, SEPTEMBER 30, PERCENT 1997 1998 CHANGE ------------- ------------- --------- (DOLLARS IN THOUSANDS) Service charges on deposit accounts....................................... $ 84,699 $ 101,288 19.59% Trust and investment management fees...................................... 76,737 88,806 15.73 International commissions and fees........................................ 49,593 54,516 9.93 Merchant transaction processing fees...................................... 42,653 42,988 0.79 Merchant banking fees..................................................... 19,899 24,083 21.03 Brokerage commissions and fees............................................ 11,529 14,188 23.06 Foreign exchange trading gains, net....................................... 11,249 14,159 25.87 Securities gains, net..................................................... 2,098 5,579 165.92 Gain on sale of credit card portfolio..................................... -- 17,056 nm Other..................................................................... 44,170 37,286 (15.59) ------------- ------------- Total noninterest income................................................ $ 342,627 $ 399,949 16.73% ------------- ------------- ------------- -------------
- ------------------------ nm = not meaningful For the first nine months of 1997, noninterest income was $342.6 million, compared with $399.9 million for the same period in 1998. This increase of $57.3 million, or 17 percent, includes the second quarter 1998 gain of $17.1 million from the sale of the credit card portfolio, a $16.6 million increase in service charges on deposit accounts, reflecting a 3 percent increase in average deposits coupled with the expansion of several products and services, a $12.1 million increase in trust and investment management S-28 fees, largely due to growth of assets under management, a $4.9 million increase in international commissions and fees, a $3.5 million increase in securities gains, net, and a $6.8 million increase related to brokerage commissions and merchant banking fees. In contrast, other noninterest income decreased $6.9 million, or 16 percent, due to a $7.7 million nonrecurring gain recognized in 1997 related to a real estate joint venture and the $2.9 million trading loss in 1998, partially offset by the $4.8 million gain recognized in the second quarter of 1998 from the sale of commercial real estate loans. NONINTEREST EXPENSE
FOR THE NINE MONTHS ENDED ----------------------------------------- SEPTEMBER 30, SEPTEMBER 30, PERCENT 1997 1998 CHANGE ------------- ------------- ----------- (DOLLARS IN THOUSANDS) Salaries and other compensation........................................... $ 337,401 $ 369,715 9.58% Employee benefits......................................................... 81,569 89,877 10.19 ------------- ------------- Personnel-related expense............................................... 418,970 459,592 9.70 Net occupancy............................................................. 64,133 67,294 4.93 Equipment................................................................. 41,206 41,842 1.54 Merchant transaction processing........................................... 31,269 33,008 5.56 Communications............................................................ 31,135 31,515 1.22 Professional services..................................................... 19,062 25,186 32.13 Advertising and public relations.......................................... 20,759 22,419 8.00 Data processing........................................................... 19,115 20,462 7.05 Printing and office supplies.............................................. 17,646 19,112 8.31 Software.................................................................. 12,358 14,536 17.62 Travel.................................................................... 11,321 13,041 15.19 Intangible asset amortization............................................. 10,014 10,069 0.55 Armored car............................................................... 9,160 8,989 (1.87) Foreclosed asset expense (income)......................................... (696) (746) nm Merger and integration expense............................................ 6,037 -- nm Other..................................................................... 50,719 69,859 37.74 ------------- ------------- Total noninterest expense............................................... $ 762,208 $ 836,178 9.70% ------------- ------------- ------------- -------------
- ------------------------ nm = not meaningful Noninterest expense was $762.2 million for the first nine months of 1997, compared with $836.2 million for the first nine months of 1998, an increase of $74.0 million, or 10 percent. Personnel-related expense increased $40.6 million, or 10 percent, primarily due to a $16.7 million increase in performance-based incentive compensation, a 4 percent increase in the workforce, to support increased revenue growth, and a $4.8 million increase in benefits expense arising from a loss in the fair value of assets underlying postretirement benefit plans. Professional services increased $6.1 million, or 32 percent, due to additional costs related to the year 2000 effort. In addition, other noninterest expense increased $19.1 million, primarily attributable to additional expenses incurred to support higher deposit volumes. We continue to make preparations for the year 2000. (For a detailed discussion of our year 2000 program see page S-63). The total cost of our year 2000 project is estimated to be approximately $50 million, of which $10 million relates to capital expenditures which we will capitalize and depreciate over their useful lives. The remaining $40 million will be included in noninterest expense in the period incurred. As of September 30, 1998, we had spent $19 million on our year 2000 project, $2 million and $17 million in 1997 and 1998, respectively. Of the $19 million spent as of September 30, 1998, $6 million relates to capital expenditures, $1 million and $5 million in 1997 and 1998, respectively. Of the estimated $31 million S-29 remaining to be spent, an estimated $4 million is for capital expenditures. The cost of the year 2000 project is being funded by normal operating cash and staffed by external resources as well as internal staff re-deployed from less time-sensitive assignments. Estimated total cost could change further as analysis continues. The combination of Union Bank and BanCal Tri-State Corporation on April 1, 1996 resulted in the recording of a total of $123.5 million in merger and integration expense. The remaining liability balance at September 30, 1998 was $10.6 million. The balance includes amounts primarily for lease payments that are continuing over the expected term of the leases. Merger and integration expense of $6.0 million was recorded for the first nine months of 1997, compared with none for the first nine months of 1998. INCOME TAX EXPENSE The effective tax rate for the nine months ended September 30, 1997 was reduced as a result of an after-tax refund from the State of California Franchise Tax Board of $24.7 million in settlement of litigation, administration and audit disputes covering the years 1975-1987. The effective tax rate for the nine months ended September 30, 1997 was 35 percent. The effective tax rate for the nine months ended September 30, 1998 was 29 percent. The decrease in the effective tax rate for 1998 was the result of a reduction of California franchise taxes for 1997 and 1998 from our ability to file California franchise tax returns on a worldwide unitary basis, which incorporates the financial results of The Bank of Tokyo-Mitsubishi and its worldwide affiliates. The total reduction of $52.4 million, net of federal tax, was reflected in the third quarter of 1998. Of this amount, $29 million related to the reversal of previously accrued 1997 state income tax liabilities and $23.4 million related to a lower state tax provision in 1998. Excluding these reductions, the effective tax rates for all periods would have been 40 percent. At this time, we anticipate that we will continue to file our California franchise tax return on the worldwide basis for 1999. Our anticipated 1999 tax rate will be dependent on our proportionate share of The Bank of Tokyo-Mitsubishi financial results for that year, and is expected to be within the range of 35 to 40 percent. S-30 LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO SEPTEMBER 30, 1998 FROM: --------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1998 1997 1997 ------------- ------------- ------------- ------------- ------------ (DOLLARS IN THOUSANDS) Domestic: Commercial, financial and industrial........................ $ 10,405,299 $ 10,747,179 $ 12,151,210 16.78% 13.06% Construction........................ 312,318 293,333 420,267 34.56 43.27 Mortgage: Residential....................... 2,966,326 2,961,233 2,742,451 (7.55) (7.39) Commercial........................ 2,851,838 2,951,807 2,980,371 4.51 0.97 ------------- ------------- ------------- Total mortgage.................. 5,818,164 5,913,040 5,722,822 (1.64) (3.22) Consumer: Installment....................... 2,075,065 2,090,752 2,026,441 (2.34) (3.08) Home equity....................... 1,027,147 992,916 844,256 (17.81) (14.97) Credit card and other lines of credit.......................... 275,258 270,097 -- nm nm ------------- ------------- ------------- Total consumer.................. 3,377,470 3,353,765 2,870,697 (15.00) (14.40) Lease financing..................... 863,745 874,860 1,013,772 17.37 15.88 ------------- ------------- ------------- Total loans in domestic offices....................... 20,776,996 21,182,177 22,178,768 6.75 4.70 Loans originated in foreign branches............................ 1,520,728 1,559,231 1,319,077 (13.26) (15.40) ------------- ------------- ------------- Total loans..................... $ 22,297,724 $ 22,741,408 $ 23,497,845 5.38% 3.33% ------------- ------------- ------------- ------------- ------------- -------------
- ------------------------ nm = not meaningful Our lending activities are predominantly domestic, with such loans and leases comprising 94 percent of the portfolio at September 30, 1998. Total loans at September 30, 1998 were $23.5 billion, an increase of $756.4 million, or 3 percent, from December 31, 1997. The increase was primarily attributable to growth in the commercial, financial and industrial loan portfolio, which increased $1.4 billion from December 31, 1997, partly offset by the consumer loan portfolio, which decreased $483.1 million. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to major corporations, middle market businesses, and small businesses, with no industry concentration exceeding 10 percent of total commercial, financial and industrial loans. At year-end 1997 and September 30, 1998, the commercial, financial and industrial loan portfolio was $10.7 billion, or 47 percent of total loans, and $12.2 billion, or 52 percent of total loans, respectively. The increase of $1.4 billion, or 13 percent, from year-end 1997 was primarily attributable to continued growth in loans extended to large corporations. The construction loan portfolio totaled $293.3 million, or 1 percent of total loans, at December 31, 1997, compared with $420.3 million, or 2 percent of total loans, at September 30, 1998. This growth is primarily attributable to the favorable California real estate market coupled with the continuing improvement in the West Coast economy. Mortgage loans were $5.9 billion, or 26 percent of total loans, at December 31, 1997, compared with $5.7 billion, or 24 percent of total loans, at September 30, 1998. The mortgage loan portfolio consists of S-31 loans on commercial and industrial projects and loans secured by one to four family residential properties, primarily in California. Despite the sale of $123.0 million in commercial real estate mortgages during the second quarter of 1998, commercial mortgage loans increased $28.6 million from December 31, 1997, primarily attributable to the favorable California real estate market coupled with the continuing improvement in the West Coast economy. Residential mortgage loans decreased $218.8 million due to prepayments arising from the favorable interest rate environment and to sales in the secondary market. Consumer loans totaled $3.4 billion, or 15 percent of total loans, at December 31, 1997, compared with $2.9 billion, or 12 percent of total loans, at September 30, 1998. The decrease of $483.1 million was attributable to the sale of the $253.0 million credit card loan portfolio in April 1998, and to a reduction in home equity loans as customers refinanced to take advantage of favorable long-term, fixed rate mortgages. Lease financing totaled $874.9 million, or 4 percent of total loans, at December 31, 1997, compared with $1 billion, or 4 percent of total loans, at September 30, 1998. Loans originated in foreign branches totaled $1.6 billion, or 7 percent of total loans, at December 31, 1997 and $1.3 billion, or 6 percent of total loans, at September 30, 1998. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of September 30, 1997, December 31, 1997, and September 30, 1998 for each country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency outstandings. We do not have significant local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS ------------- ----------- --------------- ------------- (DOLLARS IN MILLIONS) September 30, 1997 Japan....................................................... $ 939 $ -- $ 403 $ 1,342 Korea....................................................... 691 36 293 1,020 December 31, 1997 Japan....................................................... 401 -- 438 839 Korea....................................................... 561 10 257 828 Thailand.................................................... 320 -- -- 320 September 30, 1998 Japan....................................................... 115 -- 469 584 Korea....................................................... 376 -- 139 515
The economic condition and the ability of some countries, to which we have cross-border exposure, to manage their external debt obligations have been impacted by the Asian economic crisis which began in the second half of 1997. The impact of the Asian crisis appears to be spreading to other global markets. Our exposure in all affected countries continues to be short-term in nature and substantially related to the finance of trade. Although the extent of risk will vary from country to country, and institution to institution, these short-term exposures are characterized by management to be in the low to moderate range. S-32 Cross-border exposures, other than those referred to in the table above, include total outstandings as of September 30, 1998 of $133 million in Brazil. Since Japan is the second largest trading nation in the world, its political, economic and financial markets situation is being closely monitored. The situation in Japan is worsening and the depressed conditions in that country are impacting other areas which are highly dependent on trade relations with it. There is considerable concern that the United States is not immune to the effects of the depressed economic conditions in Japan and to the Asian crisis. Management is monitoring our portfolio accordingly. Although management cannot predict the ultimate impact of the global financial crisis on our financial position and results of operations since much depends on the effect of the stabilizing activities already under way, management believes that the continuation of internal supervision, monitoring and portfolio risk management practices will be effective in minimizing the impact over and above that already identified. Increases in nonaccrual loans, together with some related increases in charge-off activity, may occur as events unfold. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of risk in the credit and lease portfolio, including commitments to provide financing. The allowance is increased by the provision for credit losses, which is charged against current period operating results, and is decreased by the amount of net loans charged off during the period. In evaluating the adequacy of the allowance for credit losses, management incorporates such factors as collateral value, portfolio composition and concentration, and trends in local, national, and international economic conditions and the related impact on the financial strength of our borrowers. While the allowance is segmented by broad portfolio categories to analyze its adequacy, the allowance is general in nature and is available for the portfolio in its entirety. Although management believes that the allowance for credit losses is adequate as of September 30, 1998, future provisions will be subject to continuing evaluation of risk in the credit and lease portfolio. S-33 The table below sets forth a reconciliation of changes in the allowance for credit losses.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1997 1998 ---------- ---------- (DOLLARS IN THOUSANDS) Balance, beginning of period............................................................ $ 523,946 $ 451,692 Loans charged off: Commercial, financial and industrial.................................................. 40,618 21,966 Construction.......................................................................... 120 3 Mortgage.............................................................................. 4,481 4,992 Consumer.............................................................................. 38,864 24,206 Lease financing....................................................................... 2,502 1,971 ---------- ---------- Total loans charged off............................................................. 86,585 53,138 Recoveries of loans previously charged off: Commercial, financial and industrial.................................................. 18,473 17,788 Construction.......................................................................... 9,054 3 Mortgage.............................................................................. 2,833 2,705 Consumer.............................................................................. 10,575 11,389 Lease financing....................................................................... 284 273 ---------- ---------- Total recoveries of loans previously charged off.................................... 41,219 32,158 ---------- ---------- Net loans charged off............................................................. 45,366 20,980 Provision for credit losses............................................................. -- 45,000 Transfer of reserve for trading account assets.......................................... -- (1,911) Foreign translation adjustment and other net additions (deductions)..................... (126) (84) ---------- ---------- Balance, end of period.................................................................. $ 478,454 $ 473,717 ---------- ---------- ---------- ---------- Allowance for credit losses to total loans.............................................. 2.15% 2.02% Provision for credit losses to net loans charged off.................................... nm 214.49 Net loans charged off to average loans outstanding for the period(1).................... 0.28 0.12
- ------------------------ (1) Annualized. nm = not meaningful At September 30, 1997, our allowance for credit losses was $478.5 million, or 2.15 percent of total loans, and 435.9 percent of total nonaccrual loans, compared with an allowance for credit losses at September 30, 1998 of $473.7 million, or 2.02 percent of total loans, and 697.2 percent of total nonaccrual loans. For the nine months ended September 30, 1997, we recorded no provision for credit losses, compared with a $45.0 million provision for the nine months ended September 30, 1998. Management considers a range of estimated credit losses inherent in the portfolio when evaluating the adequacy of the allowance for credit losses. Central to this process is the required reserve, an amount calculated by applying historical loss factors to credit exposures. These factors are based on loss experience, adjusted for significant factors that affect the collectibility of the portfolio as of the evaluation date. Additional amounts, which are unallocated, provide a margin of error for the required reserve calculation. At September 30, 1998, the unallocated reserve is also available to cover specific credit risks which are more difficult to quantify. These risks, such as the weak economic indicators in the global markets, the decline in oil prices, the potentially adverse impact on agriculture from "El Nino," and the volatility in the debt and equity markets, add to the uncertainty in estimating credit losses. When determining the need for a credit provision, these factors, as well as the likelihood of loan charge-offs, are used. S-34 Net loans charged-off were $45.4 million and $21.0 million for the nine months ended September 30, 1997 and 1998, respectively. Loans charged-off in 1998 decreased by $33.4 million primarily due to a $18.7 million decrease in commercial, financial and industrial loans charged-off as portfolio quality improved, and a $14.7 million decrease in consumer loans charged-off primarily due to the sale of the credit card portfolio in April of 1998. Recoveries of loans previously charged-off decreased by $9.1 million, and the percentage of net loans charged-off to average loans decreased from 0.28 to 0.12 percent for the nine months ended September 30, 1997 and 1998, respectively. In the third quarter 1998, we reclassified a $1.9 million previously established reserve for credit losses related to interest rate derivatives and foreign exchange contracts from the unallocated portion of the allowance for credit losses. The reserve for derivative and foreign exchange contracts is presented as an offset to trading account assets. Future changes in the reserve as a result of changes in the positive replacement cost of those contracts will be provided as an offset to trading gains and losses. We evaluate our loan portfolio for impairment as defined by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended. At December 31, 1997, total impaired loans were $108.4 million and the associated impairment allowance was $9.4 million, compared with total impaired loans of $67.9 million and an associated impairment allowance of $7.5 million at September 30, 1998. NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1997 1997 1998 ------------- ------------ ------------- (DOLLARS IN THOUSANDS) Commercial, financial and industrial................................. $ 54,087 $ 46,392 $ 55,407 Construction......................................................... 4,579 4,071 4,377 Mortgage: Residential........................................................ 1,133 954 -- Commercial......................................................... 49,959 57,921 8,163 ------------- ------------ ------------- Total mortgage................................................... 51,092 58,875 8,163 ------------- ------------ ------------- Total nonaccrual loans........................................... 109,758 109,338 67,947 Foreclosed assets.................................................... 23,216 20,471 13,452 ------------- ------------ ------------- Total nonperforming assets....................................... $ 132,974 $ 129,809 $ 81,399 ------------- ------------ ------------- ------------- ------------ ------------- Allowance for credit losses.......................................... $ 478,454 $ 451,692 $ 473,717 ------------- ------------ ------------- ------------- ------------ ------------- Nonaccrual loans to total loans...................................... 0.49% 0.48% 0.29% Allowance for credit losses to nonaccrual loans...................... 435.92 413.12 697.19 Nonperforming assets to total loans and foreclosed assets............ 0.60 0.57 0.35 Nonperforming assets to total assets................................. 0.43 0.42 0.26
At September 30, 1998, nonperforming assets totaled $81.4 million, a decrease of $48.4 million, or 37 percent, from December 31, 1997. The decrease was primarily the result of reductions of $49.8 million in nonaccrual commercial mortgage loans due to a combination of note sales, repayments and restorations to accrual and $7.0 million in foreclosed assets due to sales of individual assets. Nonaccrual loans as a percentage of total loans were 0.48 percent at December 31, 1997, compared with 0.29 percent at September 30, 1998. Nonperforming assets as a percentage of total loans and foreclosed assets were 0.57 percent at December 31, 1997, compared with 0.35 percent at September 30, 1998. S-35 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1997 1997 1998 ------------- ------------ ------------- (DOLLARS IN THOUSANDS) Commercial, financial and industrial................................. $ 3,682 $ 450 $ 1,403 Mortgage: Residential........................................................ 9,606 10,170 9,223 Commercial......................................................... 2,284 1,660 370 ------------- ------------ ------------- Total mortgage................................................... 11,890 11,830 9,593 Consumer and other................................................... 10,010 7,712 4,299 ------------- ------------ ------------- Total loans 90 days or more past due and still accruing............ $ 25,582 $ 19,992 $ 15,295 ------------- ------------ ------------- ------------- ------------ -------------
REGULATORY CAPITAL The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
MINIMUM SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY 1997 1997 1998 REQUIREMENT ------------- ------------- ------------- ----------------- (DOLLARS IN THOUSANDS) CAPITAL COMPONENTS: Tier 1 capital...................................... $ 2,520,589 $ 2,587,071 $ 2,876,605 Tier 2 capital...................................... 593,865 601,102 598,027 ------------- ------------- ------------- Total risk-based capital.......................... $ 3,114,454 $ 3,188,173 $ 3,474,632 ------------- ------------- ------------- Risk-weighted assets................................ $ 28,249,379 $ 28,862,340 $ 30,176,967 ------------- ------------- ------------- ------------- ------------- ------------- Quarterly average assets............................ $ 30,037,626 $ 30,334,507 $ 30,696,414 ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL RATIOS: Total risk-based capital............................ 11.02% 11.05% 11.51% 8.0% Tier 1 risk-based capital........................... 8.92 8.96 9.53 4.0 Leverage ratio(1)................................... 8.39 8.53 9.37 4.0
- ------------------------ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets). UNBC and its bank are subject to various regulations issued by Federal banking agencies, including minimum capital requirements. UNBC and its bank are required to maintain minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (the leverage ratio). Compared with December 31, 1997, our Tier 1 risk-based capital ratio at September 30, 1998 increased 57 basis points to 9.53 percent, the total risk-based capital ratio increased 46 basis points to 11.51 percent, and the leverage ratio increased 84 basis points to 9.37 percent. The increase in the capital ratios was primarily attributable to retained earnings growing faster than both risk-weighted assets and average assets, partly offset by the reduction of $50.0 million in subordinated capital notes. As of September 30, 1998, management believes the capital ratios of our bank met all regulatory minimums of a "well-capitalized" institution. S-36 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 To facilitate the discussion of the results of operations, the Summary Consolidated Financial and Operating Data table on page S-11 and the Selected Consolidated Financial and Operating Data table on page S-22 include certain pro forma earnings disclosures and ratios. These presentations supplement the Consolidated Statements of Income on page F-2 (which are prepared in accordance with generally accepted accounting principles), primarily with respect to the treatment of merger and integration expense. We believe that it is meaningful to understand the operating results and trends excluding these expenses and, therefore, have included information in the tables referred to above and in the MD&A which follows, that presents income before merger and integration expense and income taxes and related pro forma ratio and per share calculations. SUMMARY Net income in 1997 was $411 million, including $4 million (after-tax) of merger and integration related expense. Net income in 1996 was $249 million, including $72 million (after-tax) of merger and integration related expense. Net income applicable to common stock was $404 million, or $2.30 per diluted common share, in 1997 compared with $238 million, or $1.36 per diluted common share, in 1996. Excluding after-tax merger and integration expense, pro forma earnings for 1997 were $415 million, an increase of 29 percent from $321 million a year earlier. Pro forma earnings applicable to common stock were $407 million, or $2.32 per diluted common share, in 1997 compared with $310 million, or $1.77 per diluted common share, in 1996. This increase of 31 percent over the comparable figures for 1996 was due to a 5 percent increase in net interest income, an 11 percent increase in noninterest income, a decrease in the effective income tax rate, and a $40 million reduction in the provision for credit losses, partially offset by a 2 percent increase in noninterest expense (excluding merger and integration expense). Other highlights for 1997 include: - Net interest income, on a taxable-equivalent basis, was $1,237 million in 1997, an increase of $62 million, or 5 percent, over 1996 primarily due to a $1.6 billion, or 6 percent, increase in average earning assets, resulting primarily from a $1.1 billion, or 5 percent, increase in average loans and largely funded by an $851 million, or 13 percent, increase in average demand deposits. Partially offsetting the positive impact of the growth in earning assets and demand deposits on net interest income was a 5 basis point decline in the net interest margin to 4.70%. The decline in net interest margin was primarily due to a 14 basis point decrease in the spread between the average yield on earning assets and the average rate paid on interest bearing liabilities. - No provision for credit losses was recorded in 1997 compared with $40 million in 1996, reflecting improvement in the quality of our loan portfolio and a reduction in nonaccrual loans. Nonperforming assets declined $27 million, or 17 percent, from December 31, 1996 to $130 million at December 31, 1997. Nonperforming assets as a percent of total assets declined to 0.42% at December 31, 1997 compared with 0.54% a year earlier. Total nonaccrual loans were $109 million at December 31, 1997 compared with $128 million at year-end 1996, resulting in a reduction in the ratio of nonaccrual and renegotiated loans to total loans from 0.61% at December 31, 1996 to 0.48% at year-end 1997. The allowance for credit losses was $452 million, or 413% of total nonaccrual loans, at December 31, 1997 compared with $524 million, or 408% of total nonaccrual loans, at December 31, 1996. - Noninterest income was $463 million in 1997, an increase of $44 million, or 11 percent, over 1996. Service charges on deposit accounts grew $13 million, or 12 percent, reflecting growth in deposit balances while trust and investment management fees increased $14 million, or 15 percent, on growth in trust accounts and assets under management. - Excluding merger and integration expense, noninterest expense was $1,039 million in 1997, an increase of $21 million, or 2 percent, over 1996. This increase was primarily attributable to an S-37 increase of $14 million, or 3 percent, in personnel-related expense, a significant portion of which was due to severance payments related to realignment of departments and to higher performance-related incentive compensation, and an increase of $14 million, or 25 percent, in other expenses. These increases were partially offset by a decline of $18 million in net occupancy expense, reflecting a $12 million charge recorded in 1996 related to former banking facilities, as well as merger efficiencies realized in 1997. Excluding the $12 million charge in 1996 and merger and integration expense, noninterest expense increased $33 million over 1996. - The effective tax rate for 1997 was 37% compared with 40% for 1996. Excluding the $25 million after-tax refund from the State of California Franchise Tax Board, the effective tax rate in 1997 was 41%. Excluding a $5 million after-tax benefit from the settlement of a unitary tax issue with the State of California Franchise Tax Board, the effective tax rate in 1996 was also 41%. - The return on average assets for 1997 increased to 1.39% compared to 0.89% for 1996. Excluding the after-tax effect of merger and integration expense, the pro forma return on average assets was 1.40% for 1997 compared to 1.15% for 1996. The return on average common equity for 1997 was 16.05% compared to 10.24% for 1996. Excluding the after-tax effect of merger and integration expense, the pro forma return on average common equity was 16.20% for 1997 compared to 13.33% for 1996. - Total loans at December 31, 1997 were $22.7 billion, an increase of $1.7 billion, or 8 percent, over year-end 1996, primarily from growth in the commercial, financial and industrial loan portfolio. - At December 31, 1997, our Tier 1 risk-based capital ratio was 8.96% and the total risk-based capital ratio was 11.05%, exceeding the minimum regulatory guidelines for bank holding companies of 4% and 8%, respectively. The Tier 1 and total risk-based capital ratios for our bank at December 31, 1997 exceeded the regulatory guidelines for "well-capitalized" banks. Our leverage ratio was 8.53% at December 31, 1997, exceeding the minimum regulatory guideline for bank holding companies. S-38 NET INTEREST INCOME The table below shows the major components of net interest income and net interest margin.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1995 1996 1997 ------------------------------------ ------------------------------------ ---------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) BALANCE ---------- ----------- ----------- ---------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Loans: (2) Domestic..................... $17,783,993 $1,540,694 8.66% $19,328,752 $1,604,799 8.30% $20,332,494 Foreign(3)................... 1,190,547 76,723 6.44 1,398,825 84,693 6.05 1,523,417 Securities -- taxable(4)....... 2,055,504 120,210 5.85 2,138,282 133,170 6.23 2,521,339 Securities -- tax-exempt(4).... 185,934 18,984 10.21 151,970 15,451 10.17 124,174 Interest bearing deposits in banks........................ 930,999 58,201 6.25 911,575 52,709 5.78 968,966 Federal funds sold and securities purchased under resale agreements............ 368,684 22,247 6.03 547,547 30,246 5.52 466,321 Trading account assets......... 333,468 20,578 6.17 240,375 12,960 5.39 355,111 ---------- ----------- ---------- ----------- ---------- Total earning assets....... 22,849,129 1,857,637 8.13 24,717,326 1,934,028 7.82 26,291,822 ----------- ----------- Allowance for credit losses.... (573,648) (544,806) (503,126) Cash and due from banks........ 1,617,715 1,926,050 2,006,038 Premises and equipment, net.... 411,794 425,943 411,302 Other assets................... 1,259,853 1,375,221 1,486,956 ---------- ---------- ---------- Total assets............... $25,564,843 $27,899,734 $29,692,992 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES: Domestic deposits: Interest bearing............. $4,955,750 129,860 2.62 $5,001,060 135,821 2.72 $5,340,661 Savings and consumer time.... 2,738,588 99,215 3.62 2,837,198 105,350 3.71 2,970,370 Large time................... 2,474,685 128,974 5.21 4,095,222 218,959 5.35 4,652,293 Foreign deposits(3)............ 1,806,820 96,109 5.32 1,504,067 71,437 4.75 1,589,303 ---------- ----------- ---------- ----------- ---------- Total interest bearing deposits................. 11,975,843 454,158 3.79 13,437,547 531,567 3.96 14,552,627 ---------- ----------- ---------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements........ 1,384,762 78,908 5.70 933,433 47,095 5.05 1,097,707 Subordinated capital notes..... 615,868 42,538 6.91 458,966 30,104 6.56 354,575 Commercial paper............... 1,448,739 86,695 5.98 1,620,087 87,411 5.40 1,637,070 Other borrowed funds........... 731,759 42,561 5.82 1,119,051 62,549 5.59 635,900 ---------- ----------- ---------- ----------- ---------- Total borrowed funds....... 4,181,128 250,702 6.00 4,131,537 227,159 5.50 3,725,252 ---------- ----------- ---------- ----------- ---------- Total interest bearing liabilities.............. 16,156,971 704,860 4.36 17,569,084 758,726 4.32 18,277,879 ----------- ----------- Demand deposits................ 5,994,129 6,663,997 7,514,528 Other liabilities.............. 1,081,267 1,206,216 1,295,728 ---------- ---------- ---------- Total liabilities.......... 23,232,367 25,439,297 27,088,135 SHAREHOLDER'S EQUITY: Preferred stock................ 135,000 135,000 90,247 Common equity(5)............... 2,197,476 2,325,437 2,514,610 ---------- ---------- ---------- Total shareholders' equity................... 2,332,476 2,460,437 2,604,857 ---------- ---------- ---------- Total liabilities and shareholders' equity..... $25,564,843 $27,899,734 $29,692,992 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income/margin (taxable-equivalent basis)..... 1,152,777 5.05% 1,175,302 4.75% Less: taxable-equivalent adjustment..................... 10,444 6,724 ----------- ----------- Net interest income.............. $1,142,333 $1,168,578 ----------- ----------- ----------- ----------- INTEREST AVERAGE INCOME/ YIELD/ EXPENSE(1) RATE(1) ----------- ----------- ASSETS: Loans: (2) Domestic..................... $1,672,006 8.22% Foreign(3)................... 92,420 6.07 Securities -- taxable(4)....... 158,950 6.30 Securities -- tax-exempt(4).... 12,669 10.20 Interest bearing deposits in banks........................ 56,748 5.86 Federal funds sold and securities purchased under resale agreements............ 26,079 5.59 Trading account assets......... 19,917 5.61 ----------- Total earning assets....... 2,038,789 7.75 ----------- Allowance for credit losses.... Cash and due from banks........ Premises and equipment, net.... Other assets................... Total assets............... LIABILITIES: Domestic deposits: Interest bearing............. 151,768 2.84 Savings and consumer time.... 112,808 3.80 Large time................... 256,007 5.50 Foreign deposits(3)............ 75,398 4.74 ----------- Total interest bearing deposits................. 595,981 4.10 ----------- Federal funds purchased and securities sold under repurchase agreements........ 58,544 5.33 Subordinated capital notes..... 22,850 6.44 Commercial paper............... 89,912 5.49 Other borrowed funds........... 34,492 5.42 ----------- Total borrowed funds....... 205,798 5.52 ----------- Total interest bearing liabilities.............. 801,779 4.39 ----------- Demand deposits................ Other liabilities.............. Total liabilities.......... SHAREHOLDER'S EQUITY: Preferred stock................ Common equity(5)............... Total shareholders' equity................... Total liabilities and shareholders' equity..... Net interest income/margin (taxable-equivalent basis)..... 1,237,010 4.70% Less: taxable-equivalent adjustment..................... 5,328 ----------- Net interest income.............. $1,231,682 ----------- -----------
- ---------------------------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches. (4) Yields on securities available for sale were based on fair value. The difference between these yields and those based on amortized cost was not significant. (5) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying Notes to Consolidated Financial Statements. S-39 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. Excluding the provision for credit losses, net interest income on a taxable-equivalent basis was $1,175 million in 1996, compared with $1,237 million in 1997. The increase of $62 million, or 5 percent, was primarily attributable to a $1.6 billion, or 6 percent, increase in average earning assets largely funded by an $851 million, or 13 percent, increase in average demand deposits. Partially offsetting the positive impact of the growth in earning assets and demand deposits on net interest income was a 5 basis point decline in the net interest margin to 4.70%, primarily as a result of both a 14 basis point increase in the cost of interest bearing deposits due to a 25 basis point increase in the Federal Funds rate in March 1997, and a decrease in the average yield on domestic loans of 8 basis points. Average earning assets were $24.7 billion in 1996 compared with $26.3 billion in 1997. This growth was primarily attributable to a $1.1 billion, or 5 percent, increase in average loans and a $355 million, or 16 percent, increase in average securities. Average commercial, financial and industrial loans, which increased $582 million, and average commercial mortgage loans, which increased $437 million, contributed most of the loan growth. See "Loans" at page S-46 for additional commentary on loan portfolio growth. The increase in primarily fixed rate securities reflected interest rate risk management actions to reduce our exposure to declines in interest rates. The $1.6 billion, or 6 percent, increase in average earning assets over 1996 was primarily funded by increases in average demand deposits and average interest bearing core deposits. Increases in these categories were: demand deposits $851 million, or 13 percent; interest bearing domestic deposits $340 million, or 7 percent; and savings and consumer time deposits $133 million, or 5 percent. The increase in demand deposits in 1997 was partially due to an influx of new customer relationships, arising from the recent merger and acquisition activities of other financial institutions in the California market during the year. S-40 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows the changes in the components of net interest income on a taxable-equivalent basis. The changes in net interest income between periods have been reflected as attributable either to volume or rate changes. For purposes of this table, changes which are not solely due to volume or rate changes are allocated to rate.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 VERSUS 1995 1997 VERSUS 1996 ---------------------------------- ---------------------------------- INCREASE (DECREASE) DUE TO CHANGE INCREASE (DECREASE) DUE TO IN CHANGE IN ---------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE NET VOLUME RATE NET CHANGE VOLUME RATE CHANGE ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CHANGES IN INTEREST INCOME: Loans: Domestic...................................... $ 133,776 $ (69,671) $ 64,105 $ 83,311 $ (16,104) $ 67,207 Foreign(1).................................... 13,413 (5,443) 7,970 7,538 189 7,727 Securities -- taxable........................... 4,843 8,117 12,960 23,856 1,924 25,780 Securities -- tax-exempt........................ (3,468) (65) (3,533) (2,826) 44 (2,782) Interest bearing deposits in banks.............. (1,214) (4,278) (5,492) 3,317 722 4,039 Federal funds sold and securities purchased under resale agreements....................... 10,785 (2,786) 7,999 (4,484) 317 (4,167) Trading account assets.......................... (5,744) (1,874) (7,618) 6,184 773 6,957 ---------- ---------- ---------- ---------- ---------- ---------- Total earning assets........................ 152,391 (76,000) 76,391 116,896 (12,135) 104,761 ---------- ---------- ---------- ---------- ---------- ---------- CHANGES IN INTEREST EXPENSE: Domestic deposits: Interest bearing.............................. 1,187 4,774 5,961 9,237 6,710 15,947 Savings and consumer time..................... 3,572 2,563 6,135 4,941 2,517 7,458 Large time.................................... 84,458 5,527 89,985 29,803 7,245 37,048 Foreign deposits(1)............................. (16,104) (8,568) (24,672) 4,049 (88) 3,961 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing deposits............. 73,113 4,296 77,409 48,030 16,384 64,414 ---------- ---------- ---------- ---------- ---------- ---------- Federal funds purchased and securities sold under repurchase agreements................... (25,718) (6,095) (31,813) 8,296 3,153 11,449 Subordinated capital notes...................... (10,837) (1,597) (12,434) (6,848) (406) (7,254) Commercial paper................................ 10,254 (9,538) 716 916 1,585 2,501 Other borrowed funds............................ 22,526 (2,538) 19,988 (27,006) (1,051) (28,057) ---------- ---------- ---------- ---------- ---------- ---------- Total borrowed funds........................ (3,775) (19,768) (23,543) (24,642) 3,281 (21,361) ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities.......... 69,338 (15,472) 53,866 23,388 19,665 43,053 ---------- ---------- ---------- ---------- ---------- ---------- Changes in net interest income.............. $ 83,053 $ (60,528) $ 22,525 $ 93,508 $ (31,800) $ 61,708 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) Foreign loans and deposits are those loans and deposits originated in foreign branches. Interest income on a taxable-equivalent basis increased $105 million in 1997, primarily due to growth in interest income from domestic loans and securities, which reflected higher average balances outstanding, partially offset by a lower average yield primarily on domestic loans. Interest expense increased $43 million in 1997 due to higher interest expense on interest bearing deposits, primarily reflecting higher average deposit balances and higher average rates. Interest expense on S-41 borrowed funds declined $21 million in 1997, reflecting lower volumes, offset by a 2 basis point increase in the average rate paid. NONINTEREST INCOME
INCREASE (DECREASE) ---------------------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------------------- YEARS ENDED DECEMBER 31, 1996 VERSUS 1995 1997 VERSUS 1996 ---------------------------------- ---------------------- ---------------------- 1995 1996 1997 AMOUNT PERCENT AMOUNT PERCENT ---------- ---------- ---------- --------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Service charges on deposit accounts.......................... $ 95,177 $ 101,975 $ 114,647 $ 6,798 7% $ 12,672 12% Trust and investment management fees.............................. 87,743 93,479 107,527 5,736 7 14,048 15 International commissions and fees.............................. 68,621 66,108 66,122 (2,513) (4) 14 -- Credit card merchant fees........... 45,767 49,778 57,128 4,011 9 7,350 15 Merchant banking fees............... 24,483 23,929 24,924 (554) (2) 995 4 Foreign exchange trading gains, net............................... 19,043 13,255 16,268 (5,788) (30) 3,013 23 Brokerage commissions and fees...... 9,270 12,932 15,569 3,662 40 2,637 20 Securities gains (losses), net...... (702) 4,502 2,711 5,204 nm (1,791) (40) Other............................... 45,917 52,718 58,105 6,801 15 5,387 10 ---------- ---------- ---------- --------- --------- Total noninterest income........ $ 395,319 $ 418,676 $ 463,001 $ 23,357 6% $ 44,325 11% ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- ---------
- ------------------------ nm = not meaningful Noninterest income in 1997 was $463 million, an increase of $44 million, or 11 percent, over 1996. This included a $13 million increase in revenue from service charges on deposit accounts, a $14 million increase in trust and investment management fees, a $7 million increase in credit card merchant fees, a $3 million increase in foreign exchange trading gains, net, a $3 million increase in brokerage commissions and fees, and a $5 million increase in other noninterest income, partially offset by a $2 million decrease in securities gains, net. Revenue from service charges on deposit accounts was $115 million in 1997, an increase of 12 percent over 1996. The increase was primarily attributable to an increase in the volume of non-credit services provided. Trust and investment management fees were $108 million in 1997, 15 percent higher than in 1996, primarily due to an increase in assets under management, which resulted in higher mutual fund management fees and personal trust fees. Credit card merchant fees were $57 million in 1997, an increase of 15 percent over 1996. The increase was primarily due to an increase in the volume of credit card drafts deposited by merchants. Foreign exchange trading gains, net increased $3 million, or 23 percent, in 1997, primarily due to more volatility in the foreign exchange markets in 1997. Brokerage commissions and fees were $16 million in 1997, an increase of 20 percent over 1996. The increase was primarily attributable to brokerage commissions on non-proprietary mutual fund sales. Other noninterest income in 1997 was $5 million, or 10 percent, higher than in 1996. Included in other noninterest income in 1997 was an $8 million gain related to a real estate joint venture, compared with S-42 gains of $2 million related to a real estate joint venture and $2 million related to a non-recurring insurance refund recognized in 1996. NONINTEREST EXPENSE
INCREASE (DECREASE) ------------------------------------------------- YEARS ENDED DECEMBER 31, ------------------------------------------------- YEARS ENDED DECEMBER 31, 1996/1995 1997/1996 -------------------------------------- ----------------------- ------------------------ 1995 1996 1997 AMOUNT PERCENT AMOUNT PERCENT ---------- ------------ ------------ ---------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Salaries and other compensation.................. $ 432,581 $ 448,793 $ 461,915 $ 16,212 4% $ 13,122 3% Employee benefits............... 104,090 108,454 109,729 4,364 4 1,275 1 ---------- ------------ ------------ ---------- ----------- Personnel-related expense..... 536,671 557,247 571,644 20,576 4 14,397 3 Net occupancy................... 92,863 103,335 85,630 10,472 11 (17,705) (17) Equipment....................... 55,056 55,942 56,137 886 2 195 -- Communications.................. 35,806 40,133 42,372 4,327 12 2,239 6 Credit card processing.......... 31,288 37,091 42,274 5,803 19 5,183 14 Advertising and public relations..................... 20,911 28,788 28,664 7,877 38 (124) -- Professional services........... 26,197 24,342 28,075 (1,855) (7) 3,733 15 Data processing................. 18,557 22,140 25,973 3,583 19 3,833 17 Printing and office supplies.... 22,626 27,085 24,098 4,459 20 (2,987) (11) Software........................ 13,839 15,895 16,562 2,056 15 667 4 Travel.......................... 12,183 14,936 15,763 2,753 23 827 6 Intangible asset amortization.................. 13,353 13,335 13,352 (18) -- 17 -- Armored car..................... 13,792 13,296 12,209 (496) (4) (1,087) (8) Regulatory authority assessments................... 23,431 4,048 5,778 (19,383) (83) 1,730 43 Foreclosed asset expense (income)...................... (3,213) 2,889 (1,268) 6,102 nm (4,157) nm Other........................... 64,741 56,938 71,365 (7,803) (12) 14,427 25 ---------- ------------ ------------ ---------- ----------- Noninterest expense, excluding merger and integration expense..................... 978,101 1,017,440 1,038,628 39,339 4 21,188 2 Merger and integration expense....................... -- 117,464 6,037 117,464 nm (111,427) (95) ---------- ------------ ------------ ---------- ----------- Total noninterest expense... $ 978,101 $ 1,134,904 $ 1,044,665 $ 156,803 16 % $ (90,239) (8)% ---------- ------------ ------------ ---------- ----------- ---------- ------------ ------------ ---------- -----------
- ------------------------ nm = not meaningful Noninterest expense, excluding merger and integration expense, was $1,039 million in 1997, an increase of $21 million, or 2 percent, over 1996. This included a $14 million increase in personnel-related expense, a $5 million increase in credit card processing expense, a $4 million increase in data processing expense, and a $14 million increase in other noninterest expense, partially offset by an $18 million decrease in net occupancy expense and a $4 million decrease in foreclosed asset expense. S-43 Personnel-related expense was $572 million in 1997, an increase of $14 million, or 3 percent, compared to 1996. This increase was primarily due to the increase in salaries and other compensation expense, a significant portion of which was due to severance payments related to realignment of departments and to higher performance-related incentive compensation. Credit card processing expense was $42 million in 1997, an increase of $5 million, or 14 percent, over 1996 due to higher merchant volumes. Data processing expense was $26 million in 1997, an increase of $4 million, or 17 percent, over 1996 due to increased activity in data processing systems supporting the growth in deposits. Other noninterest expense increased $14 million in 1997. Of the total increase, $7.5 million reflected additional expenses incurred to support higher deposit volumes. Net occupancy expense was $86 million in 1997, $18 million, or 17 percent, lower than the previous year. The decrease in net occupancy expense was primarily due to a $12 million charge related to former banking facilities in 1996. Excluding this charge, net occupancy expense in 1997 declined 6 percent due to merger-related efficiencies realized in 1997. Foreclosed asset expense decreased $4 million in 1997. The decrease was primarily due to lower writedowns and maintenance and selling expenses, reflecting a 28 percent reduction in the portfolio of foreclosed assets. MERGER AND INTEGRATION EXPENSE Merger and integration expense of $124 million in total was recorded in 1996 and 1997 to cover $38 million of personnel expense for severance, retention and other employee related costs, $54 million for facilities expense related to redundant banking facilities and $32 million in professional services and other expense as a result of the combination of Union Bank and BanCal Tri-State Corporation. The following table presents merger and integration expense provisions in 1996 and 1997, the cash and noncash utilization of those expense provisions during the periods, and the resulting liability balances as of December 31, 1996 and 1997.
YEARS ENDED DECEMBER 31, --------------------- 1996 1997 ---------- --------- (DOLLARS IN THOUSANDS) Balance, accrued merger and integration expense, beginning of period....................... $ -- $ 54,344 Provision for merger and integration costs................................................. 117,464 6,037 Utilization for the period: Cash..................................................................................... 40,155 35,809 Noncash.................................................................................. 22,965 1,642 ---------- --------- Total utilization...................................................................... 63,120 37,451 ---------- --------- Balance, accrued merger and integration expense, end of period............................. $ 54,344 $ 22,930 ---------- --------- ---------- ---------
At December 31, 1997, the liability balance included amounts primarily for severance payments that are being paid on a periodic basis and for lease payments that are continuing over the expected term of the leases. S-44 INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Income before income taxes................................................... $ 506,301 $ 412,350 $ 650,018 Income tax expense........................................................... 193,359 162,892 238,722 Effective tax rate........................................................... 38% 40% 37%
Our effective tax rate in 1996 was 40% compared with 37% in 1997. Excluding a $5 million after-tax benefit recognized in 1996 from a settlement with the State of California Franchise Tax Board for 1985 and 1986, the effective tax rate in 1996 was 41%. The lower 1997 effective tax rate was the result of an after-tax refund from the State of California Franchise Tax Board of approximately $25 million to settle litigation, administration, and audit disputes covering the years 1975-1987. Excluding the State of California Franchise Tax Board refund, the effective tax rate for 1997 was also 41%. CREDIT RISK MANAGEMENT Our principal business activity is the extension of credit in the form of loans or other credit substitutes to individuals and businesses. Our policies and applicable laws and regulations governing the extension of credit require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limit constraints, credit review and approval policies, and extensive internal monitoring. We manage and control credit risk through diversification of the portfolio by type of loan, industry concentration, dollar limits on multiple loans to the same borrower, geographic distribution and type of borrower. Geographic diversification of loans originated through our branch network is generally within California, Oregon and Washington, which we consider to be our principal markets. In addition, we will continue to originate and participate in lending activities outside these states, as well as internationally. In analyzing our existing loan portfolios, we apply specific monitoring policies and procedures which vary according to the relative risk profile and other characteristics of the loans within the various portfolios. Our residential and consumer loans are relatively homogeneous and no single loan is individually significant in terms of its size or potential risk of loss. Therefore, we review our residential and consumer portfolios by analyzing their performance as a pool of loans. In contrast, our monitoring process for the commercial, financial and industrial; construction; commercial mortgage; and foreign loan portfolios includes a periodic review of individual loans. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. We review these loans to assess the ability of the borrowing entity to continue to service all of its interest and principal obligations and as a result may adjust the risk grade accordingly. In the event that we believe that full collection of principal and interest is not reasonably assured, the loan will be appropriately downgraded and, if warranted, placed on nonaccrual status, even though the loan may be current as to principal and interest payments. We have a Credit Policy Forum, composed of the Chief Credit Officer, senior credit officers, and appropriate line officers who establish policy, credit quality criteria, portfolio guidelines and other controls. Credit Administration together with a series of loan committees, have the responsibility for administering the credit approval process, as well as the implementation and administration of our credit policies and lending practices and procedures. These policies require an extensive evaluation of credit requests and continuing review of existing credits in order to promptly identify, monitor and quantify evidence of deterioration of asset credit quality or potential loss. As another part of the control process, an independent internal credit review and examination function provides quality assurance that loans and commitments are made and maintained as prescribed by S-45 our credit policies and that the assets are appropriately and timely risk graded. This includes a review of compliance with our underwriting policies when the loan is initially extended and subsequent on-site examinations to ensure continued compliance. LOANS The following table shows loans outstanding at year-end by loan type. Loans outstanding by loan type as a percentage of total loans is shown for 1993 through 1997.
DECEMBER 31, ------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------------------- -------------------- -------------------- -------------------- --------- (DOLLARS IN MILLIONS) Domestic: Commercial, financial and industrial................. $ 8,135 46% $ 8,547 47% $ 9,684 47% $ 9,496 45% $ 10,747 Construction................. 877 5 464 3 370 2 358 2 293 Mortgage: Residential................ 1,964 11 2,253 12 2,642 13 2,961 14 2,961 Commercial................. 2,088 12 1,778 10 2,143 10 2,598 12 2,952 --------- --- --------- --- --------- --- --------- --- --------- Total mortgage........... 4,052 23 4,031 22 4,785 23 5,559 26 5,913 Consumer: Installment................ 1,351 8 1,644 9 1,812 9 2,063 10 2,091 Home equity................ 1,302 7 1,222 7 1,222 6 1,113 5 993 Credit card and other lines of credit.......... 207 1 219 1 309 2 303 1 270 --------- --- --------- --- --------- --- --------- --- --------- Total consumer........... 2,860 16 3,085 17 3,343 17 3,479 16 3,354 Lease financing.............. 831 4 829 5 845 4 800 4 875 --------- --- --------- --- --------- --- --------- --- --------- Total loans in domestic offices................ 16,755 94 16,956 94 19,027 93 19,692 93 21,182 --------- --------- --------- --------- --------- Loans originated in foreign branches..................... 1,004 6 1,110 6 1,405 7 1,358 7 1,559 --------- --- --------- --- --------- --- --------- --- --------- Total loans.............. $ 17,759 100% $ 18,066 100% $ 20,432 100% $ 21,050 100% $ 22,741 --------- --- --------- --- --------- --- --------- --- --------- --------- --- --------- --- --------- --- --------- --- --------- Domestic: Commercial, financial and industrial................. 47% Construction................. 1 Mortgage: Residential................ 13 Commercial................. 13 --- Total mortgage........... 26 Consumer: Installment................ 9 Home equity................ 5 Credit card and other lines of credit.......... 1 --- Total consumer........... 15 Lease financing.............. 4 --- Total loans in domestic offices................ 93 Loans originated in foreign branches..................... 7 --- Total loans.............. 100% --- ---
Our lending activities are predominantly domestic, with such loans comprising approximately 93 percent of the portfolio at December 31, 1997. Total loans at December 31, 1997 were $22.7 billion, an increase of $1,691 million, or 8 percent, from one year earlier. The increase was primarily attributable to growth in the commercial, financial and industrial loan portfolio, which increased $1,251 million from 1996, and to growth in the commercial mortgage loan portfolio, which increased $354 million. COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to major corporations, middle market businesses, and small businesses, with no industry concentration exceeding ten percent of total commercial, financial and industrial loans. Our commercial market lending originates primarily through its banking office network. These offices, which rely extensively on relationship oriented banking, provide many services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a wide variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer's specific industry. Presently, we are active in the communications and media, energy related services, retailing and financial services industries. At December 31, 1997, the commercial, financial and industrial loan portfolio was $10,747 million, or 47 percent, of the total loan portfolio. The increase of $1,251 million, or 13 percent, from the previous S-46 year-end was primarily attributable to loans extended to large corporations in industries where our bank has specialized lending expertise. CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS. We engage in nonresidential real estate lending which includes commercial mortgage loans and construction loans secured by deeds of trust. Construction loans are made primarily to residential builders and to commercial property developers. At December 31, 1997, construction loans were $293 million, $65 million lower than at the end of the previous year. Commercial mortgage loans were $2,952 million, an increase of $354 million, or 14 percent, from a year earlier. This increase was primarily attributable to a strong recovery in the California real estate market reflecting the continuing improvement in the West Coast economy, particularly in the real estate sector. RESIDENTIAL MORTGAGE LOANS. We originate residential loans through its branch network in California, Oregon, and Washington, and periodically purchases loans in its market area. At December 31, 1997, residential loans were $2,961 million, unchanged from the prior year. CONSUMER LOANS. Through our branch network, we originate consumer loans, such as vehicle-secured installment loans, home equity lines where advances are generally secured by second deeds of trust on residential real estate, and credit card loans. At December 31, 1996, consumer loans were $3,479 million, or 16 percent of total loans, compared with $3,354 million, or 15 percent of total loans, at year-end 1997. LEASE FINANCING. We enter into direct financing and leveraged leases through an agreement with a subsidiary of The Bank of Tokyo-Mitsubishi. In addition, we originate auto leases. At December 31, 1997, lease financing outstandings were $875 million, an increase of $75 million from the end of 1996. LOANS ORIGINATED IN FOREIGN BRANCHES. Our loans originated in foreign branches consist primarily of short-term credit extensions to financial institutions located primarily in Asia and short-term commercial and industrial loans to major Japanese, Korean, and Taiwanese corporations. At December 31, 1996, loans originated in foreign branches totaled $1,358 million, or 7 percent of the total loan portfolio, compared with $1,559 million, or 7 percent of total loans, at December 31, 1997. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of December 31, 1995, 1996 and 1997 for each country where such outstandings exceeded one percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading securities, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency S-47 outstandings. We do not have significant local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS ----------- ----------- --------------- ------------- (DOLLARS IN MILLIONS) December 31, 1995 Japan....................................................... $ 1,111 $ -- $ 567 $ 1,678 Korea....................................................... 641 -- 269 910 December 31, 1996 Japan....................................................... 1,373 -- 452 1,825 Korea....................................................... 574 8 330 912 December 31, 1997 Japan....................................................... 401 -- 438 839 Korea....................................................... 561 10 257 828 Thailand.................................................... 320 -- -- 320
The economic condition and the ability of some countries, to which we have cross-border exposure, to manage their external debt obligations have been impacted by the Asian economic crisis beginning in the second half of 1997. The events leading to the crisis included currency devaluations, business failures, principally caused by excessive debt levels and overcapacity, and some loss of confidence in the banking system in the affected countries, resulting mainly from past lending practices and the associated impact of internal and external economic conditions. The crisis resulted in a substantial erosion of international confidence, rapid declines in stock market valuations, steep increases in interest rates and further pressure on the debt structures of the corporate and financial market participants. International Monetary Fund programs have been established or are in the process of being established which, in cooperation with steps being taken by the local governments and other global institutions, are designed to restore confidence. The success of these programs is still being evaluated. We are managing our exposures in these and other impacted countries very cautiously with a view to minimizing risk and supporting its long term and viable customer relationships. High risk situations are being identified and reduced where possible, and additional reserves against potential credit losses have been identified and allocated, as determined by management at year end. None of our cross-border exposure has been subject to the recently announced debt restructuring program with South Korea. Although management cannot predict the ultimate impact of the crisis on our financial position and results of operations since much depends on the effect of the stabilizing activities already under way, management believes that the continuation of internal supervision, monitoring and portfolio risk management practices will be effective in minimizing the impact over and above that already identified. Increases in non-accrual loans, together with some related increases in charge-off activity, may occur as events unfold. Management, in accordance with its established risk management practices, will also continue to review the impact of the crisis on the stability of other countries and the potential impact on domestic business activities, particularly in our core West Coast markets. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the credit and lease portfolio, including commitments to provide financing. The allowance is increased by the provision for credit losses, which is charged against current period operating results, and is decreased by the amount of net loans charged off during the period. In evaluating the adequacy of the allowance for credit losses, management incorporates S-48 such factors as collateral value, portfolio composition and concentration, and trends in local and national economic conditions and the related impact on the financial strength of our borrowers. While the allowance is segmented by broad portfolio categories to analyze its adequacy, the allowance is general in nature and is available for the portfolio in its entirety. Although management believes that the allowance for possible credit losses is adequate, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio. Based on the process of evaluation described above, we did not provide for credit losses during 1997. The following table sets forth the allocation of the allowance for credit losses. The percentages reflect the allowance allocated to each respective loan category at period end, as a percentage of the total period end balance of that loan category, as set forth in the "Loans" table at page S-46.
DECEMBER 31, ------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------------------- -------------------- -------------------- -------------------- --------- (DOLLARS IN THOUSANDS) Domestic: Commercial, financial and industrial............. $ 205,398 2.52% $ 146,784 1.72% $ 174,146 1.80% $ 166,100 1.75% $ 123,610 Construction............. 106,398 12.13 69,787 15.04 24,752 6.69 5,700 1.59 3,221 Mortgage: Residential............ 31,409 1.60 23,581 1.05 5,466 0.21 4,000 0.14 2,700 Commercial............. 139,303 6.67 70,130 3.94 59,931 2.80 39,000 1.50 60,680 --------- --------- --------- --------- --------- Total mortgage....... 170,712 4.21 93,711 2.32 65,397 1.37 43,000 0.77 63,380 Consumer: Installment............ 13,100 0.97 12,500 0.76 13,200 0.73 10,400 0.50 11,400 Home equity............ 6,062 0.47 7,143 0.58 5,532 0.45 4,900 0.44 3,600 Credit card and other lines of credit...... 15,171 7.33 17,101 7.81 32,799 10.61 34,000 11.22 30,500 --------- --------- --------- --------- --------- Total consumer....... 34,333 1.20 36,744 1.19 51,531 1.54 49,300 1.42 45,500 Lease financing.......... 12,500 1.50 10,000 1.21 1,300 0.15 5,300 0.66 4,862 --------- --------- --------- --------- --------- Total domestic allowance.......... 529,341 3.16 357,026 2.11 317,126 1.67 269,400 1.37 240,573 Foreign allowance.......... 14,293 1.42 15,330 1.38 13,968 0.99 9,394 0.69 39,313 Unallocated................ 148,950 190,786 224,055 245,152 171,806 --------- --------- --------- --------- --------- Total allowance for credit losses...... $ 692,584 3.90% $ 563,142 3.12% $ 555,149 2.72% $ 523,946 2.49% $ 451,692 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Domestic: Commercial, financial and industrial............. 1.15% Construction............. 1.10 Mortgage: Residential............ 0.09 Commercial............. 2.06 Total mortgage....... 1.07 Consumer: Installment............ 0.55 Home equity............ 0.36 Credit card and other lines of credit...... 11.30 Total consumer....... 1.36 Lease financing.......... 0.56 Total domestic allowance.......... 1.14 Foreign allowance.......... 2.52 Unallocated................ Total allowance for credit losses...... 1.99%
At December 31, 1997, we reallocated a portion of the allowance for credit losses to foreign exposures which include off-balance sheet instruments. The increase from $9 million at December 31, 1996 to $39 million at December 31, 1997 was primarily precautionary in nature, in light of the recent volatility in the Asian financial markets. As is the case with the allowance in general, amounts may be reallocated as circumstances change. S-49 The following table sets forth a reconciliation of changes in our allowance for credit losses.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Balance, beginning of year........................... $ 790,479 $ 692,584 $ 563,142 $ 555,149 $ 523,946 Loans charged off: Commercial, financial and industrial............... 99,280 105,774 47,524 42,134 58,664 Construction....................................... 58,835 32,151 9,401 3,249 120 Mortgage........................................... 113,791 100,613 29,330 13,483 5,058 Consumer........................................... 39,576 31,806 44,627 56,361 55,336 Lease financing.................................... 11,432 2,940 2,422 2,623 3,601 Foreign(1)......................................... 201 533 295 1,250 -- ---------- ---------- ---------- ---------- ---------- Total loans charged off.......................... 323,115 273,817 133,599 119,100 122,779 Recoveries of loans previously charged off: Commercial, financial and industrial............... 41,552 39,177 39,178 22,341 23,371 Construction....................................... 2,955 5,868 3,195 132 9,054 Mortgage........................................... 6,201 16,228 18,500 12,277 3,292 Consumer........................................... 8,872 8,915 10,924 12,906 14,946 Lease financing.................................... 3,353 435 311 368 351 Foreign(1)......................................... 11,229 627 295 -- -- ---------- ---------- ---------- ---------- ---------- Total recoveries of loans previously charged off............................................ 74,162 71,250 72,403 48,024 51,014 ---------- ---------- ---------- ---------- ---------- Net loans charged off.......................... 248,953 202,567 61,196 71,076 71,765 Provision for credit losses.......................... 151,000 73,000 53,250 40,000 -- Foreign translation adjustment and other net additions (deductions)............................. 58 125 (47) (127) (489) ---------- ---------- ---------- ---------- ---------- Balance, end of year................................. $ 692,584 $ 563,142 $ 555,149 $ 523,946 $ 451,692 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance for credit losses to total loans........... 3.90% 3.12% 2.72% 2.49% 1.99% Provision for credit losses to net loans charged off................................................ 60.65 36.04 87.02 56.28 -- Recoveries of loans to loans charged off in the previous year...................................... 24.38 22.05 26.44 35.95 42.83 Net loans charged off to average loans outstanding... 1.37 1.15 0.32 0.34 0.33 Allowance for credit losses to nonaccrual loans.............................................. 84.82 161.08 266.56 408.48 413.12
- ------------------------ (1) Foreign loans are those loans originated in foreign branches. At December 31, 1996, our allowance for credit losses was $524 million, or 2.49% of the total loan portfolio, and 408% of total nonaccrual loans. This compares with an allowance for credit losses of $452 million, or 1.99% of the total loan portfolio, and 413% of total nonaccrual loans at December 31, 1997. At year-end 1996, the unallocated portion of the allowance for credit losses was $245 million compared with $172 million at the end of 1997. During 1997, we recorded no provision for credit losses, a decrease of $40 million from 1996. The decline in the provision for credit losses reflected the improvement in the quality of our loan portfolio, including a 15 percent reduction in nonaccrual loans. S-50 During 1996, we had net loans charged off of $71 million compared to net loans charged off of $72 million in 1997. Recoveries of loans previously charged off increased by $3 million, and the percentage of current year recoveries to loans charged off in the previous year increased from 35.95% in 1996 to 42.83% in 1997. Loans charged off in 1997 increased by $4 million primarily due to a $17 million increase in commercial, financial and industrial loans charged off, partially offset by a $8 million decrease in mortgage loans charged off. NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual loans, renegotiated loans, and foreclosed assets. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our Consolidated Financial Statements. Renegotiated loans are those accruing loans for which, for reasons related to the borrower's financial difficulties, we have amended the terms of the original loan agreement and the borrower is performing according to the renegotiated terms. Foreclosed assets includes property where we acquired title through foreclosure or "deed in lieu" of foreclosure. On an ongoing basis, foreclosed asset values are reviewed and any decline in value is recognized as noninterest expense in the current period. The following table sets forth an analysis of nonperforming assets.
DECEMBER 31, ------------------------------------------------------------ 1993 1994 1995 1996 1997 ------------ ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial, financial and industrial............... $ 145,907 $ 106,447 $ 84,336 $ 56,864 $ 46,392 Construction....................................... 231,148 73,643 40,026 7,349 4,071 Mortgage: Residential...................................... 61,809 17,020 19,220 11,214 954 Commercial....................................... 367,072 145,207 63,836 52,593 57,921 ------------ ---------- ---------- ---------- ---------- Total mortgage................................. 428,881 162,227 83,056 63,807 58,875 Other.............................................. 7,288 7,285 849 247 -- Foreign(1)......................................... 3,331 -- -- -- -- ------------ ---------- ---------- ---------- ---------- Total nonaccrual loans......................... 816,555 349,602 208,267 128,267 109,338 Renegotiated loans................................. 4,617 14,843 1,612 -- -- Nonperforming real estate ventures................. 23,256 -- -- -- -- Foreclosed assets.................................. 349,022 56,782 36,992 28,517 20,471 ------------ ---------- ---------- ---------- ---------- Total nonperforming assets..................... $ 1,193,450 $ 421,227 $ 246,871 $ 156,784 $ 129,809 ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Allowance for credit losses........................ $ 692,584 $ 563,142 $ 555,149 $ 523,946 $ 451,692 ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Nonaccrual and renegotiated loans to total loans... 4.62% 2.02% 1.03% 0.61% 0.48% Nonaccrual loans to allowance for credit losses.... 117.90 62.08 37.52 24.48 24.21 Nonperforming assets to total loans, real estate ventures and foreclosed assets................... 6.58 2.32 1.21 0.74 0.57 Nonperforming assets to total assets............... 4.97 1.71 0.90 0.54 0.42
- ------------------------ (1) Foreign loans are those loans originated in foreign branches. S-51 The following table sets forth an analysis of loans contractually past due 90 days or more as to interest or principal, but not included in nonaccrual loans above.
DECEMBER 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Commercial, financial and industrial....................... $ 12,116 $ 3,690 $ 3,752 $ 4,527 $ 450 Construction............................................... 10,711 5,735 1,063 -- -- Mortgage: Residential.............................................. 14,602 2,123 8,479 8,969 10,170 Commercial............................................... 35,071 -- 3,592 168 1,660 --------- --------- --------- --------- --------- Total mortgage......................................... 49,673 2,123 12,071 9,137 11,830 Consumer and other......................................... 8,481 8,573 8,854 10,028 7,712 --------- --------- --------- --------- --------- Total loans 90 days or more past due and still accruing............................................. $ 80,981 $ 20,121 $ 25,740 $ 23,692 $ 19,992 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
At December 31, 1997, nonaccrual loans totaled $109 million, a decrease of $19 million, or 15 percent, from year-end 1996. The decline was primarily attributable to a $10 million reduction in nonaccrual commercial, financial and industrial loans and a $10 million reduction in nonaccrual residential mortgage loans. Foreclosed assets, primarily other real estate owned, decreased by $8 million due to sales of individual assets. Nonaccrual and renegotiated loans as a percentage of total loans were 0.61% at December 31, 1996 compared with 0.48% at December 31, 1997. Nonperforming assets as a percentage of total loans, real estate ventures and foreclosed assets improved from 0.74% at December 31, 1996 to 0.57% at year-end 1997. At December 31, 1997, approximately 58 percent of nonaccrual loans were real estate related. Total loans 90 days or more past due and still accruing were $24 million at December 31, 1996 compared with $20 million at December 31, 1997. At December 31, 1996, impaired loans were $114 million and the associated impairment allowance was $21 million compared with $108 million and $9 million, respectively, at December 31, 1997. INTEREST FOREGONE Interest foregone during 1996 and 1997 for loans that were on nonaccrual status at December 31, 1996 and 1997 was $9 million and $6 million, respectively. We recognized interest income during 1996 and 1997 for loans that were on nonaccrual status at December 31, 1996 and 1997 of $5 million and $3 million, respectively. S-52 SECURITIES The following tables summarize the composition of the securities portfolio and the gross unrealized gains and losses within the portfolio. SECURITIES AVAILABLE FOR SALE.
DECEMBER 31, --------------------------------------------------------------------------------------------------------- 1996 1997 1995 ---------------------------------------------- ---------------------------------------------- --------- GROSS GROSS GROSS GROSS FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR VALUE COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury..... $ 994,492 $1,137,992 $ 4,993 $ 1,933 $1,141,052 $ 987,374 $ 10,793 $ 170 $ 997,997 Other U.S. government...... 364,584 687,717 4,993 779 691,931 709,536 6,005 67 715,474 Mortgage-backed securities...... 448,173 193,531 400 274 193,657 679,692 3,331 265 682,758 State and municipal....... 132,698 101,006 13,749 -- 114,755 90,937 13,236 -- 104,173 Corporate debt securities...... -- -- -- -- -- 2,698 311 1 3,008 Equity securities...... 16,539 19,041 2,553 -- 21,594 28,881 1,596 672 29,805 Foreign securities...... 4,065 1,136 72 -- 1,208 5,132 39 -- 5,171 --------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- Total securities available for sale.......... $1,960,551 $2,140,423 $ 26,760 $ 2,986 $2,164,197 $2,504,250 $ 35,311 $ 1,175 $2,538,386 --------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
SECURITIES HELD TO MATURITY.
DECEMBER 31, ---------------------------------------------------------------------------------------------------- 1996 1997 1995 ------------------------------------------------ ------------------------------------- ----------- GROSS GROSS GROSS GROSS AMORTIZED AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED COST COST GAINS LOSSES VALUE COST GAINS LOSSES ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury........ $ 51,125 $ 50,109 $ 1,735 $ -- $ 51,844 $ 40,092 $ 1,333 $ -- Other U.S. government......... 138,816 139,188 4,412 -- 143,600 99,520 2,568 -- Mortgage-backed securities......... 124,375 41,985 2,019 68 43,936 24,477 1,745 14 State and municipal.......... 48,971 36,914 310 2,199 35,025 24,686 75 1,367 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Total securities held to maturity......... $ 363,287 $ 268,196 $ 8,476 $ 2,267 $ 274,405 $ 188,775 $ 5,721 $ 1,381 ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- FAIR VALUE --------- U.S. Treasury........ $ 41,425 Other U.S. government......... 102,088 Mortgage-backed securities......... 26,208 State and municipal.......... 23,394 --------- Total securities held to maturity......... $ 193,115 --------- ---------
Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality and liquidity. At December 31, 1997, approximately 98 percent of total securities were investment grade. During the quarter ended December 31, 1995, in accordance with guidance issued by the Financial Accounting Standards Board, we reclassified from securities held to maturity to securities available for sale approximately $285 million at amortized cost of U.S. Treasury Notes (fair value $285 million) and $64 million at amortized cost of municipal bonds (fair value $72 million). S-53 ANALYSIS OF SECURITIES PORTFOLIO The following tables show the remaining contractual maturities and expected yields of the securities portfolio. SECURITIES AVAILABLE FOR SALE.
DECEMBER 31, 1997 ------------------------------------------------------------------------------------- MATURITY ------------------------------------------------------------------------------------- AFTER ONE YEAR AND AFTER FIVE YEARS AND WITHIN WITHIN WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ---------------------- ---------------------- ------------------------ ----------- AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT --------- ----------- --------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------- U.S. Treasury........................ $ 150,048 6.22% $ 837,326 6.31% $ -- -- % $ -- Other U.S. government................ 99,940 6.49 609,596 6.38 -- -- -- Mortgage-backed securities(1)........ 53,108 6.82 626,584 6.41 -- -- -- State and municipal(2)............... 14,944 10.49 26,409 9.90 12,971 11.09 36,613 Corporate debt securities............ -- -- 1,432 17.31 1,266 12.42 -- Equity securities(3)................. -- -- -- -- -- -- -- Foreign securities................... 3,419 14.30 -- -- 1,713 6.29 -- --------- --------- ----------- ----------- Total securities available for sale........................... $ 321,459 6.69% $2,101,347 6.41% $ 15,950 10.68% $ 36,613 --------- --------- ----------- ----------- --------- --------- ----------- ----------- TOTAL AMORTIZED ---------------------- YIELD(4) AMOUNT YIELD(4) ----------- --------- ----------- U.S. Treasury........................ -- % $ 987,374 6.30% Other U.S. government................ -- 709,536 6.40 Mortgage-backed securities(1)........ -- 679,692 6.44 State and municipal(2)............... 11.33 90,937 10.74 Corporate debt securities............ -- 2,698 15.02 Equity securities(3)................. -- 28,881 -- Foreign securities................... -- 5,132 11.63 --------- Total securities available for sale........................... 11.33% $2,504,250 6.48% --------- ---------
SECURITIES HELD TO MATURITY.
DECEMBER 31, 1997 --------------------------------------------------------------------------------------- MATURITY --------------------------------------------------------------------------------------- AFTER ONE YEAR AND AFTER FIVE YEARS AND WITHIN WITHIN WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ------------------------ ---------------------- ------------------------ ----------- AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT ----------- ----------- --------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury.......................... $ -- -- % $ 40,092 7.56% $ -- -- % $ -- Other U.S. government.................. 10,000 8.00 89,520 7.72 -- -- -- Mortgage-backed securities(1).......... 3,622 4.88 20,855 9.03 -- -- -- State and municipal(2)................. 9,077 9.19 -- -- 2,596 6.35 13,013 ----------- --------- ----------- ----------- Total securities held to maturity.... $ 22,699 7.98% $ 150,467 7.86% $ 2,596 6.35% $ 13,013 ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- TOTAL AMORTIZED ---------------------- YIELD(4) AMOUNT YIELD(4) ----------- --------- ----------- U.S. Treasury.......................... -- % $ 40,092 7.56% Other U.S. government.................. -- 99,520 7.75 Mortgage-backed securities(1).......... -- 24,477 8.42 State and municipal(2)................. 5.77 24,686 7.09 --------- Total securities held to maturity.... 5.77% $ 188,775 7.71% --------- ---------
- ------------------------------ (1) Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations, with or without call or prepayment penalties. (2) Yields on tax-exempt municipal securities are presented on a taxable-equivalent basis using the current federal statutory rate of 35 percent. (3) Equity securities do not have a stated maturity and are included in the total column only. (4) Yields are based on amortized cost. S-54 LOAN MATURITIES The following table presents our loans by maturity.
DECEMBER 31, 1997 -------------------------------------------------------- AFTER ONE YEAR WITHIN AND WITHIN AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL ------------- ------------ ------------ ------------- (DOLLARS IN THOUSANDS) Domestic: Commercial, financial and industrial................. $ 4,102,910 $ 4,477,317 $ 2,166,952 $ 10,747,179 Construction......................................... 173,504 119,829 -- 293,333 Mortgage: Residential........................................ 4,230 32,000 2,925,003 2,961,233 Commercial......................................... 228,955 1,085,913 1,636,939 2,951,807 ------------- ------------ ------------ ------------- Total mortgage................................... 233,185 1,117,913 4,561,942 5,913,040 Consumer: Installment........................................ 136,264 1,801,620 152,868 2,090,752 Home equity........................................ 2,816 38,570 951,530 992,916 Credit card and other lines of credit.............. 270,045 52 -- 270,097 ------------- ------------ ------------ ------------- Total consumer................................... 409,125 1,840,242 1,104,398 3,353,765 Lease financing...................................... 83,478 606,904 184,478 874,860 ------------- ------------ ------------ ------------- Total loans in domestic offices.................. 5,002,202 8,162,205 8,017,770 21,182,177 Loans originated in foreign branches................... 1,515,844 25,627 17,760 1,559,231 ------------- ------------ ------------ ------------- Total loans...................................... $ 6,518,046 $ 8,187,832 $ 8,035,530 22,741,408 ------------- ------------ ------------ ------------- ------------ ------------ Allowance for credit losses.................... 451,692 ------------- Loans, net....................................... $ 22,289,716 ------------- ------------- Total fixed rate loans due after one year.............. $ 5,353,709 Total variable rate loans due after one year........... 10,869,653 ------------- Total loans due after one year................... $ 16,223,362 ------------- -------------
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER The following table presents domestic certificates of deposit of $100,000 and over by maturity.
DECEMBER 31, 1997 -------------------- (DOLLARS IN THOUSANDS) Three months or less........................................................................ $ 2,684,438 Over three months through six months........................................................ 1,163,014 Over six months through twelve months....................................................... 261,739 Over twelve months.......................................................................... 154,948 ----------- Total domestic certificates of deposit of $100,000 and over............................. $ 4,264,139 ----------- -----------
We offer certificates of deposit of $100,000 and over at market rates of interest. Many of these certificates are issued to customers, both public and private, who have done business with us for an extended period. We expect that as these deposits come due, the majority will continue to be renewed at market rates of interest. Substantially all of our deposits in foreign branches are certificates of deposit of $100,000 and over and mature in less than one year. S-55 BORROWED FUNDS The following table presents information on our borrowed funds, excluding subordinated capital notes.
DECEMBER 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 4.96%, 5.09% and 5.38% at December 31, 1995, 1996 and 1997, respectively........................ $ 1,195,058 $ 1,322,654 $ 1,335,884 Commercial paper, with weighted average interest rates of 5.75%, 5.34% and 5.64% at December 31, 1995, 1996 and 1997, respectively........... 1,389,870 1,495,463 966,575 Other borrowed funds, with weighted average interest rates of 5.78%, 5.66% and 6.23% at December 31, 1995, 1996 and 1997, respectively..... 1,064,472 749,422 476,010 ------------ ------------ ------------ Total borrowed funds................................................ $ 3,649,400 $ 3,567,539 $ 2,778,469 ------------ ------------ ------------ ------------ ------------ ------------ Federal funds purchased and securities sold under repurchase agreements: Maximum outstanding at any month end.................................. $ 1,517,999 $ 1,322,654 $ 1,575,930 Average balance during the year....................................... 1,384,762 933,433 1,097,707 Weighted average interest rate during the year........................ 5.70% 5.05% 5.33% Commercial paper: Maximum outstanding at any month end.................................. $ 1,591,712 $ 1,854,576 $ 1,876,135 Average balance during the year....................................... 1,448,739 1,620,087 1,637,070 Weighted average interest rate during the year........................ 5.98% 5.40% 5.49% Other borrowed funds: Maximum outstanding at any month end.................................. $ 1,319,444 $ 1,697,236 $ 851,694 Average balance during the year....................................... 731,759 1,119,051 635,900 Weighted average interest rate during the year........................ 5.82% 5.59% 5.42%
CAPITAL ADEQUACY AND DIVIDENDS Our principal capital objectives are to support future growth, to protect depositors, to absorb any unanticipated losses and to comply with various regulatory requirements. Management believes that we have retained our capital at a level which supports our risk structure, as well as providing for anticipated growth of current business activities and strategic expansion. Total shareholders' equity was $2,679 million at December 31, 1997, an increase of $184 million from year-end 1996. This change was primarily a result of $411 million of net income for 1997, offset by the redemption of $135 million in preferred stock and dividends on common and preferred stock of $97 million. We offer a dividend reinvestment plan that allows shareholders to reinvest dividends in our common stock at 5 percent below the market price. At December 31, 1997, The Bank of Tokyo-Mitsubishi was not a participant in the plan. Capital adequacy depends on a variety of factors including asset quality and risk profile, liquidity, stability of earnings, competitive and economic conditions, and management. We believe that the current S-56 level of profitability, coupled with a prudent dividend policy, is adequate to support normal growth in operations while meeting regulatory capital guidelines. The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
DECEMBER 31, MINIMUM ------------------------------------------------------------------------- REGULATORY 1993 1994 1995 1996 1997 REQUIREMENT ------------- ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) CAPITAL COMPONENTS: Tier 1 capital................. $ 1,952,045 $ 2,070,554 $ 2,355,057 $ 2,395,580 $ 2,587,071 Tier 2 capital................. 702,652 626,903 591,266 551,074 601,102 ------------- ------------- ------------- ------------- ------------- Total risk-based capital..... $ 2,654,697 $ 2,697,457 $ 2,946,323 $ 2,946,654 $ 3,188,173 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Risk-weighted assets........... $ 21,992,647 $ 22,419,516 $ 25,179,489 $ 26,390,288 $ 28,862,340 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Quarterly average assets....... $ 23,624,622 $ 23,868,729 $ 27,073,158 $ 28,496,355 $ 30,334,507 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL RATIOS: Total risk-based capital....... 12.07% 12.03% 11.70% 11.17% 11.05% 8.0% Tier 1 risk-based capital...... 8.88 9.24 9.35 9.08 8.96 4.0 Leverage ratio(1).............. 8.26 8.67 8.70 8.41 8.53 4.0
- ------------------------ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets). For regulatory purposes, our capital computations are based on risk-adjusted Tier 1 and total capital. Our Tier 1 and total risk-based capital ratios were 9.08% and 11.17%, respectively, at December 31, 1996 compared to 8.96% and 11.05%, respectively, at December 31, 1997. The decrease in the capital ratios was attributable to the redemption of $135 million of preferred stock in the third quarter of 1997, partly offset by retained earnings growing faster than both risk-weighted assets and average assets. As of December 31, 1997, management believes the capital ratios of our bank met all regulatory minimums of a "well-capitalized" institution. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net income in 1996 was $249 million compared with $313 million in 1995. Excluding the effects of the $72 million after-tax charge for merger-integration expense, net income improved as a result of higher net interest income, higher noninterest income, and lower credit loss provision expense than in 1995. Net income applicable to common stock was $238 million, or $1.36 per diluted common share, in 1996 compared with $302 million, or $1.73 per diluted common share, in 1995. The return on average assets was 0.89% in 1996 versus 1.22% in 1995. The return on average common equity was 10.24% in 1996 compared with 13.73% in 1995. Net interest income on a taxable-equivalent basis increased by $23 million, or 2 percent, over 1995. Average loans increased $1,753 million, or 9 percent, and the net interest margin decreased 30 basis points to 4.75%. Noninterest income increased by $23 million, or 6 percent, over 1995. Service charges on deposits, trust and investment management fees, credit card merchant fees, brokerage commissions and fees, securities gains, and other revenue collectively grew 11 percent and accounted for $32 million of the growth in noninterest income. This increase was partially offset by a $6 million decrease in foreign exchange trading gains. S-57 The provision for credit losses was $40 million in 1996, $13 million, or 25 percent, lower than in 1995, reflecting the improved quality of the loan portfolio. Noninterest expense, excluding merger and integration expense, increased by $39 million, or 4 percent, from 1995. Personnel-related expense increased $21 million, or 4 percent, due partially to increased contract labor used to augment staffing requirements as a residual effect of the merger. Net occupancy expense increased $10 million, or 11 percent, due to a $12 million one-time charge in 1996 related to former banking facilities. This was offset by a 2 percent decrease in net occupancy expense due to the closure of 20 branches late in the third quarter of 1996. Credit card processing expense increased $6 million, or 19 percent, in 1996 due to higher merchant volumes. Advertising and public relations expense increased $8 million, or 38 percent, over 1995 due primarily to expanded activities in 1996 to increase awareness of our bank, following the April 1, 1996 combination of Union Bank and BanCal Tri-State Corporation and its subsidiary. In 1996, regulatory authority assessments expense declined $19 million, or 83 percent, primarily because the Federal Deposit Insurance Corporation decided to eliminate insurance assessments for all of 1996. Merger and integration expense was $117 million in 1996. Income tax expense was $30 million lower in 1996 than in 1995, primarily due to lower taxable income. The effective rate increased from 38% in 1995 to 40% in 1996 primarily due to a $3 million after-tax benefit recognized in 1995 from a favorable settlement of an Internal Revenue Service examination of 1989 and 1990. Total loans at December 31, 1996 were $21.0 billion, an increase of $0.6 billion, or 3 percent, over year-end 1995. Commercial, financial and industrial loans declined $188 million, or 2 percent, from the previous year, primarily due to planned reductions from a portfolio overlap arising from the merger and a reduction in certain low margin lending. At year-end 1996, construction loans decreased $12 million, or 3 percent, while commercial mortgages increased $455 million, or 21 percent, from 1995. This increase in commercial mortgages reflected the continuing improvement in the West Coast economy, particularly the real estate sector. It was primarily attributable to new originations of mini-perm loans, ranging in size from $1 million to $10 million, resulting from a vigorous marketing program. At December 31, 1996 residential loans were $319 million, or 12 percent, higher than the previous year as the favorable interest rate environment and a stronger housing market continued to generate significant opportunities for residential mortgage lenders. Consumer loans increased $136 million, or 4 percent, from 1995 due primarily to increases in direct and indirect auto loans for used vehicles, partially offset by a decrease in home equity balances. Total nonperforming assets were $157 million at December 31, 1996, $90 million, or 36 percent, lower than one year earlier. The decline was primarily attributable to a $27 million, or 33 percent, reduction in nonaccrual commercial, financial and industrial loans and a $33 million, or 82 percent, reduction in nonaccrual construction loans, due to a combination of note sales, payoffs, and upgrades. Foreclosed assets, primarily other real estate owned, decreased by $8 million, or 23 percent, from 1995, due to sales of individual assets. Net loan charge-offs in 1996 were $71 million compared to net loans charged off of $61 million in 1995. Recoveries of loans previously charged off decreased by $24 million, despite an increase in the percentage of recoveries in 1996 to loans charged off in the previous year from 26.44% in 1995 to 35.95% in 1996. Loans charged off in 1996 decreased by $14 million due to a reduction in new nonperforming assets in 1996 and a reduction in nonaccrual and underperforming loans, partly offset by a $12 million increase in consumer loans charged off, primarily attributable to credit card loans. At December 31, 1996, the Tier 1 risk-based capital ratio was 9.08% and the total risk-based capital ratio was 11.17% compared with ratios of 9.35% and 11.70%, respectively, at December 31, 1995. S-58 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, borrowings, as well as derivative instruments. Our exposure to market risk is a function of its asset and liability management activities, its trading activities for its own account, and its role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of our earnings and equity to loss and to reduce the volatility inherent in certain financial instruments. The management of market risk is governed by policies reviewed and approved annually by our Board of Directors. Our Board of Directors delegates responsibility for market risk management to the Asset & Liability Management Committee (the "A&L Management Committee"), who reports quarterly to our Board of Directors on activities related to the management of market risk. As part of the management of our market risk, the A&L Management Committee may direct changes in the mix of assets and liabilities and the use of derivative instruments such as interest rate swaps, caps and floors. The A&L Management Committee also reviews and approves all major funding, market risk-management programs, and market risk limits. The Chief Financial Officer, as chairman of the A&L Management Committee, is responsible for companywide management of market risk. The Treasurer is responsible for implementing funding, investment, and hedging strategies designed to manage this risk. On a day-to-day basis, the oversight of market risk management takes place at a centralized level within the Risk Monitoring Unit. The Risk Monitoring Unit is responsible for measuring risks to ensure compliance with all market risk limits and guidelines incorporated within the policies and procedures established by the A&L Management Committee. The Risk Monitoring Unit reports monthly to the A&L Management Committee on the effectiveness of our hedging activities, on trading risk exposures, and on compliance with policy limits. In addition, periodic reviews by internal audit, regulators and independent accountants provide further evaluation of controls over the risk management process. We have separate and distinct methods for managing the market risk associated with our trading activities and our asset and liability management activities, as described below. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) We engage in asset and liability management activities with the objective of reducing adverse changes in earnings as a result of changes in interest rates. The management of interest rate risk relates to the timing and magnitude of the repricing of assets compared to liabilities and has, as its objective, the control of risks associated with movements in interest rates. The Asset & Liability Management Policy approved by our Board of Directors requires monthly monitoring of interest rate risk by the A&L Management Committee. As part of the management of our interest rate risk, the A&L Management Committee may direct changes in the composition of the balance sheet and the extent to which we utilize off-balance sheet derivative instruments such as interest rate swaps, floors, and caps. Our balance sheet is "asset-sensitive", which means that assets generally reprice more quickly than liabilities. An asset-sensitive balance sheet tends to reduce net interest income when interest rates decline and to increase net interest income when interest rates rise. One method of measuring interest rate risk is by measuring the interest rate sensitivity gap, which is the difference between earning assets and liabilities maturing or repricing within specified periods. The table on page 59 presents such an analysis, which reflects certain assumptions as to the rate sensitivity of S-59 deposits without contractual maturities or repricing dates. These include demand deposits, money market demand accounts, and savings deposits. Additional assumptions such as prepayment estimates for residential mortgages and mortgage-backed securities are made to reflect the probable behavior of those assets. The section of the table on page S-62 entitled Interest Rate Risk Management Positions presents the effects of the securities portfolio and of derivatives used for hedging, such as interest rate swaps and floors, in reducing the interest rate sensitivity gap primarily for LIBOR-based loans. The table on page S-62 shows that our assets that are rate sensitive within one year exceeded liabilities within that same period by $4.9 billion at December 31, 1997. Adjusted for the effects of the securities portfolio and derivatives used for hedging, this cumulative gap was reduced to $2.5 billion. Gap analysis has significant limitations as a method for measuring interest rate risk since changes in interest rates do not affect all categories of assets and liabilities in the same way. To address these limitations, we use a simulation model to quantify the impact of changing interest rates on net interest income. A frequency distribution of simulated 12-month net interest income outcomes based on rate scenarios produced through a Monte Carlo rate generation process is prepared monthly to determine statistically the mean net interest income. The amount of Earnings at Risk, defined as the potential negative change in net interest income, is measured at a 97.5 percent confidence level and is managed within the limit established in our Board of Director's Asset & Liability Policy at 5 percent of mean net interest income. Based on the December 31, 1997 balance sheet, the Earnings at Risk was $23.0 million or 1.80% of mean net interest income. An additional limit established by our Board of Director's Asset & Liability Policy is that the negative change in simulated net interest income for 12 months under single interest rate shock scenarios, up or down 200 basis points, must be no more than 8 percent of the mean net interest income. Based on the December 31, 1997 balance sheet, the negative change for a downward shock of 200 basis points was $51.8 million or 4.05% of mean net interest income. TRADING ACTIVITIES We enter into trading account activities primarily as a financial intermediary for customers, and, to a lesser extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a wide range of products from the securities, foreign exchange, and derivatives markets. In acting for our own account, we may take positions in some of these instruments with the objective of generating trading profits. These activities expose us to two primary types of market risk: interest rate and foreign currency exchange risk. In order to manage interest rate and foreign currency exchange risk associated with our trading activities, we use a variety of non-statistical methods including: position limits for each trading activity, daily marking of all positions to market, daily profit and loss statements, position reports, and independent verification of all inventory pricing. Additionally, the Risk Management Unit reports positions and profits and losses daily to the Treasurer and trading managers and weekly to the Chief Financial Officer. The A&L Management Committee is provided reports on a monthly basis. We believe that these procedures, which stress timely communication between the Risk Management Unit and senior management, are the most important elements of the risk management process. We use a form of Value at Risk methodology to measure the overall market risk inherent in our trading account activities. Under this methodology, management statistically calculates, with 97.5 percent confidence, the potential loss in fair value that we might experience if an adverse shift in market prices were to occur within a period of 5 business days. The amount of Value at Risk is managed within limits well below the maximum limit established by Board policy at 0.5% of shareholders' equity. The Value at Risk model incorporates a number of key assumptions, including assumed holding period and historical volatility based on 3 years of historical market data updated quarterly. S-60 During 1997 our foreign exchange trading Value at Risk averaged $73 thousand and peaked at $147 thousand. The low Value at Risk was $32 thousand. Correspondingly, our securities trading Value at Risk averaged $558 thousand and peaked at $717 thousand. The low Value at Risk was $439 thousand. Our interest rate derivatives contracts include $2.4 billion of derivative contracts entered into as an accommodation for customers. We act as an intermediary and we match these contracts at a profit with contracts with The Bank of Tokyo-Mitsubishi or other dealers, thus neutralizing the related market risk. We maintain responsibility for the credit risk associated with these contracts. LIQUIDITY RISK Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The Asset & Liability Management Policy approved by our Board of Directors requires quarterly reviews of our liquidity by the A&L Management Committee, which is composed of bank senior executives. Our liquidity draws upon the strength of our extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through the funding and investment functions of the Treasury Division. Core deposits provide us with a sizable source of relatively stable and low-cost funds. In the third quarter of 1998, lower cost sources of funds, which include noninterest bearing deposits and interest bearing core deposits, funded 63 percent of average earning assets. Most of the remaining funding was provided by short-term borrowing in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, and other borrowings. In the third quarter 1998, we increased our Commercial Paper program by $100 million. Our average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, combined with average common shareholder's equity, funded 61 percent of average total assets of $29.7 billion for the year ended December 31, 1997. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $1.8 billion during 1997. Additional liquidity may be provided by investment securities available for sale which amounted to $2.5 billion at December 31, 1997, and by loan maturities. At December 31, 1997, $6.5 billion of loans were scheduled to mature within one year. S-61 The following table summarizes our interest rate sensitivity based on expected repricings in the time frames indicated for the balance sheet and interest rate derivatives as of December 31, 1997.
DECEMBER 31, 1997 ---------------------------------------------------------- AMOUNTS MATURING OR REPRICING IN ---------------------------------------------------------- 0-12 MONTHS 1-5 YEARS AFTER 5 YEARS TOTAL ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) ASSETS: Federal funds sold and securities purchased under resale agreements................................ $ 24,335 $ -- $ -- $ 24,335 Interest bearing deposits in banks................. 633,421 -- -- 633,421 Trading account assets............................. 394,313 -- -- 394,313 Loans.............................................. 17,320,010 3,926,152 1,495,246 22,741,408 Other assets(1)(2)................................. 1,217,060 1,111,518 1,736,049 4,064,627 ------------- ------------- ------------- ------------- Total assets (except securities)............... 19,589,139 5,037,670 3,231,295 27,858,104 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits: Interest bearing checking(1)(3).................. 180,074 1,260,520 -- 1,440,594 Money market demand accounts(1)(3)............... 1,353,636 2,671,392 -- 4,025,028 Savings(1)(3).................................... 166,562 1,165,932 -- 1,332,494 Other time deposits(1)........................... 7,208,342 434,309 6,063 7,648,714 Federal funds purchased and securities sold under repurchase agreements............................ 1,335,884 -- -- 1,335,884 Other borrowed funds............................... 1,442,585 -- -- 1,442,585 Subordinated capital notes......................... 348,000 -- -- 348,000 Demand deposit accounts(1)(4)...................... 2,654,863 6,194,681 -- 8,849,544 Other liabilities(1)(2)............................ -- -- 1,483,123 1,483,123 Shareholders' equity(2)............................ -- -- 2,679,299 2,679,299 ------------- ------------- ------------- ------------- Total liabilities and shareholders' equity..... $ 14,689,946 $ 11,726,834 $ 4,168,485 $ 30,585,265 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Gap before risk management positions............... $ 4,899,193 $ (6,689,164) $ (937,190) $ (2,727,161) Cumulative gap before risk management positions.... $ 4,899,193 $ (1,789,971) $ (2,727,161) INTEREST RATE RISK MANAGEMENT POSITIONS: Securities(1)...................................... 366,467 2,214,199 146,495 2,727,161 Interest rate swaps................................ (425,000) 425,000 -- -- Interest rate floors(5)............................ (2,350,000) 2,350,000 -- -- ------------- ------------- ------------- ------------- Gap adjusted for risk management positions......... $ 2,490,660 $ (1,699,965) $ (790,695) $ -- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Cumulative gap adjusted for risk management positions........................................ $ 2,490,660 $ 790,695 $ -- $ -- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
- ------------------------ (1) Certain balance sheet classifications used for interest rate sensitivity analysis do not conform to the Consolidated Balance Sheets on F-3. (2) Items that neither reprice nor mature are included in the "After 5 Years" column. (3) Interest rate sensitivity of non-maturity deposit accounts are based on assumptions for a declining interest rate scenario since our balance sheet is asset-sensitive. (4) 70 percent of the demand deposit account balance is assumed to be "core" deposits, which are not sensitive to interest rate changes. (5) Floors purchased affect interest rate sensitivity in a declining interest rate scenario. S-62 YEAR 2000 The year 2000 problem exists because many computer programs use only the last two digits to refer to a year. This convention could affect date-sensitive calculations that treat "00" as the year 1900, rather than 2000. Another issue is that the year 2000 is a leap year and some programs may not properly provide for February 29, 2000. The following discussion of the implications of the year 2000 problem for us contains numerous forward-looking statements based on inherently uncertain information. The cost of the project and the date on which we plan to complete the internal year 2000 modifications are based on management's best estimates, which were derived utilizing a number of assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. (See details with respect to costs for year 2000 on page S-29). However, there can be no guarantee that these estimates will be achieved and actual results could differ. Moreover, although we believe we will be able to make the necessary modifications in advance, there can be no guarantee that failure to modify the systems would not have a material adverse effect on us. In addition, we place a high degree of reliance on computer systems of third parties, such as customers, vendors, and other financial and governmental institutions. Although we are assessing the readiness of these third parties and preparing contingency plans, there can be no guarantee that the failure of these third parties to modify their systems in advance of December 31, 1999, would not have a material adverse effect on us. READINESS PREPARATION Many of our critical operations are not presently ready to operate normally in the year 2000 and beyond, although preparations are underway to correct this. In 1997, we alerted our business customers of the year 2000 problem and are now assessing the readiness preparations of our major customers and suppliers. Resolution of the year 2000 problem is among our highest priorities, and a comprehensive program has been established to address its many aspects. We are preparing for the century change with an enterprise-wide year 2000 program. As part of the program, we have identified all of the major application and processing systems, and sought external and internal resources to replace and test the systems. Purchased software, internally developed systems and systems supported by external parties are being tested as part of the program. Customers and vendors which have significant relationships with us are being evaluated to determine whether they are adequately preparing for the year 2000. In addition, contingency plans are being developed to reduce the impact of some potential events that may occur. However, there can be no guarantee that the systems of vendors or customers with whom we do business will be year 2000 compliant on a timely basis, or that contingency plans will shield operations from failures that may occur. Our year 2000 program is comprised of numerous individual projects which address the following broad areas: data processing systems, telecommunications and data networks, building facilities and security systems, vendor risk, customer risk, contingency planning, and communications. There are over 2,000 individual projects identified. The projects vary in size, importance and materiality: from large undertakings, such as remediating complicated data systems and organizing the process of assessing the readiness of customers, to smaller, but still important, projects such as installing compliant computer utility systems or assuring that processor-controlled systems in individual buildings will perform properly. The program continues to evolve as new projects are identified to keep up with increased understanding of year 2000 implications and evolving external requirements. Virtually all of the projects currently identified have begun, while more than a third have been completed. Projects are assigned a priority indicating the importance of the function to our continuing operation. This prioritization facilitates reporting on projects based on their relative importance. We have prioritized S-63 projects as Critical and Non-Critical. Critical projects are further prioritized as Mission Critical and Other Critical. Mission Critical projects are defined as: - systems vital to the continuance of a broad core business activity; - functions, the interruption of which for longer than 3 days would threaten the viability of UNBC; - functions that provide the environment and infrastructure necessary to continue the broad core business activities. Other Critical projects are defined as: - other customer and accounting systems; - functions supporting delivery of information and service to customers; - administrative systems, the interruption of which for longer than 2 weeks would cause severe business impact; - functions that provide the environment and infrastructure necessary for delivery of the above systems and functions. We plan to complete all projects currently identified prior to the year 2000, with special emphasis placed on those prioritized as Mission Critical or Other Critical. Failure to complete an Other Critical project would not necessarily have a material adverse effect on UNBC. The most important projects are the Mission Critical application systems upon which we rely for our principal business functions. Most of these systems have been renovated. We expect to have all of these systems renovated by December 31, 1998, and tested by March 30, 1999. In addition to testing individual systems, we also plan to conduct integrated contingency testing of our Mission Critical and many other systems during 1999 in a separate computer environment where machine dates will be set forward in order to identify and correct problems which might not otherwise become evident until the actual end of the century. We do not significantly rely on embedded technology in our critical processes. Embedded technology does control some building security and operations such as power management, ventilation, and elevator control. All building facilities are presently being evaluated, and we expect for all systems using embedded technology to be confirmed as year 2000 ready by June 1999. We are reliant on vendors and customers, and year 2000 issues with both groups are being addressed. Over 300 vendors, upon whom there is significant reliance, have been identified and inquiries have been made regarding their year 2000 readiness plans and status. Written risk assessments are being completed on each and appropriate measures to minimize risk will be undertaken with those vendors that appear to pose a significant risk. Risk assessments of the critical vendors are scheduled to be completed by December 1998, and replacements effected where necessary by June 1999. We, however, have no viable alternatives for some suppliers, such as power distribution and local telephone companies. These companies are still being evaluated and the results will be used as information for contingency planning. As with all financial institutions, we place a high degree of reliance on the systems of other institutions, including governmental agencies, to settle transactions. Principal settlement methods associated with major payment systems will be tested as part of their associated system projects. We are also reliant on our customers to make necessary preparations for the year 2000 so that their business operations will not be interrupted, thus threatening their ability to honor their financial commitments. Over 2,500 borrowers, capital market counterparties, funding sources, and large depositors (collectively referred to as "customers") have been identified as having financial volumes sufficiently large to warrant inquiry and assessment of their year 2000 preparation. The financial volumes included, among other components, loans and unused commitments, collected deposit balances, Automated Clearing S-64 House, foreign exchange, and derivatives. At September 30, 1998, inquiries and initial written assessments had been completed for 90% of the identified financial volumes. Assessments for the remaining 10% continue. In the initial assessments, customers were classified as representing low, medium and high risks. Approximately 80% were classified as low risk, 18% as medium risk and 2% as high risk. High risk customers include those which failed to respond to the inquiry or which appear to pose a high degree of risk of not being ready for year 2000. The population of customers with loans and unused commitments outstanding ("borrowers") pose the highest level of concern for any lender. As of September 30, 1998, the assessment of these borrowers resulted in the following assignments of risk: 79% low risk, 19% medium risk and 2% high risk. Ongoing assessments will be made for all levels of risk. Customers with low risk will be reassessed semi-annually, while customers with medium and high risk will be reassessed quarterly. Risk mitigation plans will be developed for customers with high risk. The risk mitigation plan will evaluate whether year 2000 issues will materially affect the customer's cash flow, asset account values related to its balance sheet, and/or collateral pledged to us. The risk mitigation plan utilizes the normal credit process that we employ to manage credit risk and requires the concurrence of a credit administrator. RISKS The principal risks associated with the year 2000 problem can be grouped into three categories. The first is the risk that the we do not successfully ready our operations for the next century. The second is the risk of disruption of our operations due to operational failures of third parties. The third is the risk of business interruption among fund providers and obligors such that expected funding and repayment does not take place. The only risk largely under our control is preparing our internal operations for the year 2000. We, like other financial institutions, are heavily dependent on our computer systems. The complexity of these systems and their interdependence make it impractical to convert to alternative systems without interruptions in the event necessary modifications are not completed on schedule. Management believes it will be able to make the necessary modifications on schedule. Failure of third parties may jeopardize our operations, but how seriously depends on the nature and duration of such failures. The most serious impact on our operations from vendors would result if basic services such as telecommunications, electric power suppliers, and services provided by other financial institutions and governmental agencies were disrupted. Significant public disclosure of the state of readiness among basic infrastructure and other suppliers has not generally been available. Although our inquiries are underway, we do not yet have the information to estimate the likelihood of significant disruptions among our suppliers. Operational failures among our sources of major funding, larger borrowers and capital market counterparties could affect their ability to continue to provide funding or meet obligations when due. Similar to the situation outlined above with suppliers, public information has been scant. Although our inquiries are underway, we do not yet have the information to estimate the likelihood of significant disruptions among our funding sources and obligors. PROGRAM ASSESSMENT The Internal Audit Division and the National Bank Examiners regularly assess our year 2000 preparations. In addition, a leading information technology consulting and services firm was engaged to conduct a third party review of the our year 2000 program. We are considering the recommendations provided by the firm to further enhance the year 2000 program. S-65 CONTINGENCY PLANS We are developing year 2000 remediation contingency plans and business resumption contingency plans specific to the year 2000. Remediation contingency plans address the actions to be taken if the current approach to remediating a system is falling behind schedule or otherwise appears in jeopardy of failing to deliver a year 2000-ready system when needed. Business resumption contingency plans address the actions that would be taken if critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Our contingency planning strategy is a four-phase process: Organizational Planning Guidelines, Business Impact Analysis, Plan Development for Individual Operating Units and Validation of Plans. The first two phases have been completed. We identified the following system-wide areas of concern, assigned to each a level of potential risk and a probability of occurrence and determined whether a contingency plan was warranted. The areas of concern are as follows: - Global telecommunications and network - Enterprise information systems - Operational disruptions - Vendors and service providers The level of potential risk was rated as high, moderate or low and the probability of occurrence was rated as high, moderate or low. Those areas with a low or moderate level of potential risk and a low probability of occurrence do not require a contingency plan. For any other combination, the development of a contingency plan is required. The development and validation of the plans are expected to be completed by June 1999. OTHER RELATED DISCLOSURES Certain of our subsidiaries are registered investment advisers or broker-dealers that make publicly available separate year 2000 reports. Additional year 2000 information may be found in those reports. EURO CONVERSION On January 1, 1999, 11 European countries who joined the Economic and Monetary Union transitioned into a single currency (the "Euro") and a single central bank -- the European Central Bank. On that date, the exchange rates of the national currencies of the 11 countries were fixed and all financial transactions will be settled in Euros. We have completed our analysis of the bank-wide impact and have implemented a project plan in anticipation of the Euro conversion. We are now fully operational to settle transactions in the Euro. S-66 BUSINESS UnionBanCal Corporation, or "UNBC," is a California-based bank holding company. Its principal subsidiary is Union Bank of California, N.A. Union Bank of California is the third largest commercial bank in California, based on both total assets and total deposits in California, and is among the 30 largest in the United States. Having roots as far back as 1864, we are among the oldest banks on the West Coast. At September 30, 1998, we had 244 full-service branches in California, six full-service branches in Oregon and Washington, two facilities in Texas and New York and 18 offices abroad. Our bank was formed through the combination of Union Bank and BanCal Tri-State Corporation in 1996. We are presently approximately 82% owned by The Bank of Tokyo-Mitsubishi. We provide a wide range of financial products and services to retail customers, small businesses, middle-market companies and major corporations. These products and services include a variety of personal and commercial financial services, including: - consumer and small-business lending, - corporate and international lending and cash management, - treasury, - trust, - investment advisory services. Most of our customers are located in California, the nation's most populous state with over 32 million residents. As of September 30, 1998, we had total assets of $31.4 billion, total deposits of $23.7 billion and total shareholders' equity of $3.0 billion. We had net income for the nine months ended September 30, 1998 of $352.4 million, and net income per diluted share of $2.01 after giving effect to the December 1998 3-for-1 stock split. BANKING SERVICES UNBC's operations are divided into four primary segments: the Community Banking Group; the Commercial Financial Services Group; the Trust and Private Financial Services Group; and the International Banking Group. S-67 COMMUNITY BANKING GROUP The following table sets forth the historical results of operations for the Community Banking Group:
COMMUNITY BANKING GROUP ---------------------------------------------- AS OF AND FOR THE AS OF AND FOR THE YEARS ENDED DECEMBER PERIODS ENDED 31, SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- RESULTS OF OPERATIONS: (IN THOUSANDS) Revenues Net interest income...................................... $ 658,144 $ 682,782 $ 511,212 $ 504,709 Noninterest income....................................... 133,559 142,944 105,991 136,101 ---------- ---------- ---------- ---------- Total.................................................... 791,703 825,726 617,203 640,810 Noninterest expense...................................... 577,655 568,031 419,050 439,927 Credit expense (income).................................. 35,644 57,870 40,975 (3,059) Performance center earnings(1)........................... 7,688 10,040 6,558 6,403 Income before income taxes............................... 186,092 209,865 163,736 210,345 BALANCE SHEET DATA (PERIOD AVERAGE): (IN MILLIONS) Total loans before performance centers(2)................ $ 9,877 $ 9,672 $ 9,691 $ 9,389 Total assets............................................. 10,991 10,626 10,632 10,329 Total deposits before performance centers(2)............. 11,131 11,757 11,646 12,322 FINANCIAL RATIOS......................................... Return on average assets............................... 1.02% 1.17% 1.23% 1.63% Efficiency ratio....................................... 73.00% 68.80% 67.90% 68.70%
- ------------------------ (1) Performance center earnings represent the allocation of net interest income, noninterest income and noninterest expense between the business segments for products and services originated in one segment but managed by another. (2) Represents loans and deposits for each business segment before allocation between the segments of loans and deposits originated in one segment but managed by another. The Community Banking Group provides its customers with a full line of checking and savings, investment, loan and fee-based banking products. For the nine months ended September 30, 1998, average assets in this group were $10.3 billion, and average deposits were $12.3 billion. The group focuses on four major markets: consumers, businesses with sales under $3 million, businesses with sales between $3 million and $20 million, and middle market companies, including agricultural firms in central California and in selected parts of Oregon and Washington. It serves over one million consumer households and businesses through its 244 branches in California, six branches in Oregon and Washington and its network of over 380 proprietary ATMs. Customers may also access our services 24 hours a day by telephone or personal computer. In addition, Community Banking offers automated teller and point-of-sale debit services through our founding membership in the Star System, the largest shared ATM network in the Western United States. The group is organized by service delivery method, by markets and by geography. The primary sub-units of the group are: - community banking branches, which serve consumers, businesses and, in certain locations, affluent individuals; - business banking centers, which serve businesses with sales between $3 million and $20 million; - in-store branches, which also serve consumers and businesses; S-68 - middle market and agricultural lending offices; and - the Consumer Asset Management division, which is responsible for indirect auto finance, auto leasing, and residential real estate lending. Through alliances with other financial institutions, the group offers additional products and services, such as credit cards, small-ticket leasing and asset-based finance. Community Banking competes with larger banks by providing service quality superior to that of its major competitors. We are recognized as among the highest rated banks in California for customer service quality and satisfaction. The group's primary means of competing with community banks include its large and convenient branch network and its reputation for innovative use of technology to deliver banking services. We have the fifth largest branch network among depository institutions in California. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week. Community Banking continues to enhance its customer service through the innovative use of technology. We were among the first banks to team with Intuit and Microsoft in the launches of their personal financial management software products, Quicken-Registered Trademark- and Money-Registered Trademark- for on-line banking. In 1996, we joined America Online's Banking Center as a charter member. We also worked with Sony to develop the first interactive video banking application of its kind on the West Coast. In December 1998, we jointly announced with IBM the first of its kind comprehensive on-line banking system using Lotus Notes-Registered Trademark- and Domino-Registered Trademark-. These services and enhancements have enabled UNBC to increase its share of the consumer and small business markets. From June 30, 1994 to June 30, 1998, UNBC's share of the California deposit market increased from 4.0% to 5.1%, representing an annual growth rate of 6.3%. Similarly, since April 1996, Community Banking has increased the number of households it serves by approximately 5% annually. The group's strategies include continuing to build upon the more than one million households and businesses it serves and broadening the range of financial products and services it provides to existing customers. The group uses direct mail marketing methods targeted at specific consumers to supplement its traditional mass media advertising. We are also introducing a new computer-driven sales system designed to foster cross-selling of our products. The new system uses improved software to prompt sales staff to offer customers additional products and services, based on a customer profile. We have installed the new system in 40 of our branches, and we anticipate full implementation within 18 months. The group will continue to use varied pricing strategies to encourage customers to use lower-cost methods of delivery to receive our products and services. Community Banking is emphasizing further development of existing lower-cost product and service delivery methods, such as the Internet, video kiosks and loans-by-phone, and is expanding its Direct Banking Center, which offers products, services and technical support for home banking via the telephone and computer. Community Banking competes with a number of commercial banks, savings associations and credit unions, as well as more specialized financial services providers, such as investment brokerage companies, consumer finance companies, and residential real estate lenders. The group's primary competitors are other major depository institutions such as Bank of America, California Federal, Washington Mutual and Wells Fargo, as well as smaller community banks in the markets in which we operate. S-69 COMMERCIAL FINANCIAL SERVICES GROUP The following table sets forth the historical results of operations for the Commercial Financial Services Group:
COMMERCIAL FINANCIAL SERVICES GROUP ---------------------------------------------- AS OF AND FOR THE AS OF AND FOR THE YEARS ENDED DECEMBER PERIODS ENDED 31, SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- RESULTS OF OPERATIONS: (IN THOUSANDS) Revenues Net interest income...................................... $ 401,912 $ 440,804 $ 321,600 $ 360,625 Noninterest income....................................... 78,238 100,316 75,450 82,638 ---------- ---------- ---------- ---------- Total.................................................... 480,150 541,120 397,050 443,263 Noninterest expense...................................... 201,870 231,906 166,305 188,328 Credit expense (income).................................. 14,362 18,872 15,065 15,963 Performance center earnings(1)........................... 4,141 3,926 2,968 2,037 Income before income taxes............................... 268,059 294,268 218,648 241,009 BALANCE SHEET DATA (PERIOD AVERAGE): (IN MILLIONS) Total loans before performance centers(2)................ $ 8,286 $ 9,329 $ 9,178 $ 10,783 Total assets............................................. 9,287 10,513 10,344 12,005 Total deposits before performance centers(2)............. 3,959 4,875 4,684 5,844 FINANCIAL RATIOS......................................... Return on average assets............................... 1.72% 1.65% 1.69% 1.63% Efficiency ratio....................................... 42.00% 42.90% 41.90% 42.50%
- ------------------------ (1) Performance center earnings represent the allocation of net interest income, noninterest income and noninterest expense between the business segments for products and services originated in one segment but managed by another. (2) Represents loans and deposits for each business segment before allocation between the segments of loans and deposits originated in one segment but managed by another. The Commercial Financial Services Group offers a variety of commercial financial services, including commercial and project loans, real estate financing, asset-based and leveraged commercial financing, trade finance and letters of credit, lease financing, customized cash management services and selected capital markets products. The group's customers provide a significant source of opportunities for us to sell products and services of other units of the bank, including treasury, trust, and retail banking services. For the nine months ended September 30, 1998, average assets in this group were $12.0 billion, and average deposits were $5.8 billion. Commercial Financial Services is divided into the following business units, which serve specific markets and industries: - The Commercial Banking Group, which serves California middle-market companies and larger companies most often headquartered in the Western United States; - The Real Estate Industries Group, which serves real estate developers and real estate investment trusts; - The Specialized Lending Group, which serves companies operating in various industries, including oil and gas, utilities, media, communications, healthcare, finance and retailing; and S-70 - The Institutional and Deposit Markets Group, which serves title and escrow companies, retailers, bankruptcy trustees and other customers with large pools of deposits. The Commercial Customer Service Unit supports these business units by providing centralized customer service support. The group competes with other banks primarily on the basis of its reputation as a "business bank," the quality of its relationship managers, and the delivery of superior customer service. We are recognized in California as having a superior "business banking" reputation relative to other large banks. We are also rated among the highest for our cash management services and systems. Commercial Financial Services relationship managers are among the most experienced in the industries that we target, and are trained to be consultative advisers to our customers. The group's main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer's primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers' credit and depository needs. One result of this strategy is increased loan syndication activity. The group has successfully increased non-interest revenue by expanding its loan syndication activities, and it plans to continue to emphasize its operations in this area. Loan syndication revenues increased by $6.2 million to $12.6 million through the first nine months of 1998 compared to $6.4 million in 1996. This increase is largely a result of our acting more frequently as agent and/or underwriter in syndicated loans to middle market, real estate, and Specialized Lending Group customers. We believe that an additional source of increased non-interest income will come from our expanded participation in capital market transactions. As of September 30, 1998, UNBC had approximately $58 million committed to a private capital investment program, with plans to expand our investments in 1999. Commercial Financial Services generally makes investments in funds and companies with proven operating histories and in industries in which the group specializes. We will seek to earn more fee income from loan securitizations, particularly from commercial mortgages. As the group increasingly allocates its resources to those industries and companies that fit its strategy, it will simultaneously de-emphasize efforts to build banking relationships with companies outside of its target markets. We expect to move away from junior syndicate roles in the market for large corporate credits and toward the purchase of selected credits from the secondary market for bank loans. In addition, Commercial Financial Services intends to use improved technology to enhance the efficiency of its operations and the productivity of its bankers and support staff. Among its planned system improvements are enhancements to loan automation technology, improved software to measure customer profitability, and enhanced information and contact management systems for relationship officers. The group competes with a variety of other financial services companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies. S-71 TRUST & PRIVATE FINANCIAL SERVICES GROUP The following table sets forth the historical results of operations for the Trust & Private Financial Services Group:
TRUST AND PRIVATE FINANCIAL SERVICES GROUP ---------------------------------------------- AS OF AND FOR THE AS OF AND FOR THE YEARS ENDED DECEMBER PERIODS ENDED 31, SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- RESULTS OF OPERATIONS: (IN THOUSANDS) Revenues Net interest income...................................... $ 11,539 $ 20,995 $ 14,332 $ 16,770 Noninterest income....................................... 110,182 128,100 91,951 106,843 ---------- ---------- ---------- ---------- Total.................................................... 121,721 149,095 106,283 123,613 Noninterest expense...................................... 108,495 123,102 89,581 96,897 Credit expense (income).................................. 927 155 102 249 Performance center earnings(1)........................... (674) (1,472) (929) 105 Income before income taxes............................... 11,625 24,366 15,671 26,572 BALANCE SHEET DATA (PERIOD AVERAGE): (IN MILLIONS) Total loans before performance centers(2)................ $ 62 $ 229 $ 236 $ 245 Total assets............................................. 94 303 322 297 Total deposits before performance centers(2)............. 425 708 625 679 FINANCIAL RATIOS......................................... Return on average assets............................... 7.36% 4.74% 3.90% 7.34% Efficiency ratio....................................... 89.10% 82.60% 84.30% 78.40%
- ------------------------ (1) Performance center earnings represent the allocation of net interest income, noninterest income and noninterest expense between the business segments for products and services originated in one segment but managed by another. (2) Represents loans and deposits for each business segment before allocation between the segments of loans and deposits originated in one segment but managed by another. The Trust & Private Financial Services Group offers investment management and administration services for a broad range of individuals and institutions. The group services individual client needs through its trust and private banking, investment management and brokerage products and services. It services institutional client needs through traditional employee benefit and 401(k) programs, global and domestic securities custody programs, securities lending programs and corporate trust products. Trust & Private Financial Services also provides investment management services for both individual and institutional clients through HighMark Capital Management, Inc. and its family of proprietary HighMark mutual funds. As of September 30, 1998, the group had over $90 billion in assets under administration. The group is organized into five business divisions: - The Private Bank division focuses primarily on delivering integrated and customized financial services to high-net worth individuals with sophisticated financial needs. Specific products and services include trust and estate services, investment account management services, offshore trust services and customized deposit and credit products. The Private Bank's strategy is to expand its business by increasing its geographic market coverage and the breadth of its products and services. To support that strategy, The Private Bank expanded from nine offices to 15 during 1998. In S-72 addition, it has shifted sales staff training efforts toward increased cross-selling of all of the bank's available products and services. - HighMark Capital Management, Inc. is a registered investment advisor that manages UNBC's proprietary HighMark family of mutual funds. It also provides investment management services to institutions, pension plans and individuals, including to clients of other divisions. HighMark Capital Management's strategy is to expand distribution of its mutual funds by targeting its marketing efforts at registered investment advisors and regional broker/dealers. In addition, HighMark is working with The Bank of Tokyo-Mitsubishi to distribute HighMark mutual funds offshore and to serve as a sub-advisor for funds managed by The Bank of Tokyo-Mitsubishi in Japan. - The Business Trust division provides businesses, government agencies, unions and non-profit organizations with trustee services, investment management and 401(k) valuation and record keeping services. Business Trust's strategy is to expand its third-party distribution network to include insurance companies, investment managers, brokers and mutual funds. - The Investment Services division consists of UBOC Investment Services, Inc., a registered broker/ dealer offering a full line of investment products to individuals and institutional clients, and UBOC Insurance Services. The division's primary strategy is to further penetrate UNBC's existing client base. - The Securities Services division is engaged in domestic and global securities custody, safekeeping, mutual fund accounting, securities lending and corporate trust services. Its client base includes financial institutions, businesses, government agencies, unions, investment managers and non-profit organizations. Securities Services is the only West Coast based provider of a full range of institutional financial services. S-73 INTERNATIONAL BANKING GROUP The following table sets forth the historical results of operations for the International Banking Group:
INTERNATIONAL BANKING GROUP ---------------------------------------------- AS OF AND FOR THE AS OF AND FOR THE YEARS ENDED DECEMBER PERIODS ENDED 31, SEPTEMBER 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- RESULTS OF OPERATIONS: (IN THOUSANDS) Revenues Net interest income...................................... $ 48,175 $ 49,405 $ 35,990 $ 42,487 Noninterest income....................................... 62,373 62,238 46,887 49,758 ---------- ---------- ---------- ---------- Total.................................................... 110,548 111,643 82,877 92,245 Noninterest expense...................................... 72,719 64,874 48,942 48,765 Credit expense (income).................................. (4,361) 234 216 2,915 Performance center earnings(1)........................... (6,917) (3,759) (3,171) (2,394) Income before income taxes............................... 35,273 42,776 30,548 38,171 BALANCE SHEET DATA (PERIOD AVERAGE): (IN MILLIONS) Total loans before performance centers(2)................ $ 1,245 $ 1,483 $ 1,423 $ 1,385 Total assets............................................. 2,210 2,631 2,563 2,123 Total deposits before performance centers(2)............. 1,080 959 980 864 FINANCIAL RATIOS......................................... Return on average assets............................... 0.95% 0.96% 0.96% 1.45% Efficiency ratio....................................... 65.80% 58.10% 59.10% 52.90%
- ------------------------ (1) Performance center earnings represent the allocation of net interest income, noninterest income and noninterest expense between the business segments for products and services originated in one segment but managed by another. (2) Represents loans and deposits for each business segment before allocation between the segments of loans and deposits originated in one segment but managed by another. The International Banking Group primarily provides correspondent banking and trade finance-related products and services to financial institutions worldwide, including Brazil, Hong Kong, Japan, Korea and Taiwan. It also serves selected foreign firms and U.S. corporate clients in selected countries worldwide, particularly in Asia. In the United States, International Banking serves subsidiaries and affiliates of non-Japanese Asian companies and U.S. branches and agencies of foreign banks. It also provides international services to domestic corporate clients along the West Coast. For the nine months ended September 30, 1998, average assets in this group were $2.1 billion and average deposits were $864 million, in each case excluding inter-company placements and overnight inter-bank loans, consisting primarily of export/import related short-term trade transactions. This group has a long and stable history of providing correspondent and trade-related services to international financial institutions. We believe that we have achieved a leading market position and strong customer loyalty in the Asian/Pacific correspondent banking market because we provide high quality, customized products and services at competitive prices. The group maintains branches in Tokyo, Taipei, Seoul and Hong Kong, representative offices in other parts of Asia and Latin America, and an international banking subsidiary in New York. One of International Banking's primary services is international trade finance. Trade finance is typically short term, which means it generally has a lower credit risk. Despite this relatively lower credit S-74 risk compared to some other forms of commercial credit, we have reduced our credit exposure and the average maturity of this portfolio in response to recent instability in global markets. UNBC has substantially reduced its cross-border outstandings. We reduced outstandings to Japan, Korea, Malaysia, Thailand, Vietnam, Singapore, Indonesia, the Philippines, China and Hong Kong by $1 billion to $1.6 billion at September 30, 1998 compared to $2.6 billion at December 31, 1997. A substantial portion of the outstandings are related to the International Banking Group. Management continues to closely monitor its credit exposure in international markets. International Banking's strategy is to improve its global operations by reducing costs and improving productivity. It competes with both U.S. and foreign banks. Approximately 25 U.S. banks compete with the group to provide correspondent banking and trade-related services to Asian banks. The group's primary competitors include First Union, Bank of New York, Chase Manhattan, Citibank, Bank of America, and Bank of Hawaii. OTHER BUSINESS ACTIVITIES UNBC also conducts business activities with certain customers through other organizational units of the bank. The Pacific Rim Corporate Group specializes in providing a range of credit, deposit, and investment management products and services to companies in the United States that are affiliated with companies headquartered outside the United States, mostly in Japan. Average assets of this group for the nine months ended September 1998 were $811 million. The Global Markets Group conducts business activities primarily to support the previously described business groups and their customers. This group offers a broad range of risk management products, such as foreign exchange, interest rate swaps, caps and floors. Additionally, it originates debt instruments for bank eligible issuers, places debt securities, as well as the bank's own liabilities, with institutional investors and trades debt instruments in the secondary market. This group also manages the market-related risks of UNBC as part of its responsibilities for asset/liability management. It is also responsible for maintaining the bank's investment securities portfolio. OPERATING STRATEGY We focus our strategy on the following: - CAPITALIZE ON STRONG POSITION IN CORE CALIFORNIA MARKET. We believe that one of our primary strategic strengths is our established position in the attractive California bank market. California is the largest state in the United States, with over 32 million residents and nearly $1 trillion in gross state product. Based on both total assets and total deposits in California, we are the third largest commercial bank in California, and we are among the oldest banks on the West Coast. We serve approximately one million households and small businesses, with 244 full-service branches in California. - STRENGTHEN CONSUMER BANKING FRANCHISE. We offer a distinctive combination of traditional community bank service with a large branch network and a broad array of products. We are seeking to increase the number of consumer households we serve, and we are simultaneously broadening the range of financial products and services we provide to existing customers. We are also adding to the number of households we serve by offering product and service delivery alternatives, including online banking, video kiosks and telephone-based services. We are also obtaining new customers with the successful use of targeted direct mail promotions. In an effort to offer our customers more loan and deposit products to meet their financial services needs, we have installed a new computer-driven sales system designed to foster cross-selling. The new system has been installed in 40 of our branches, and we anticipate full implementation within 18 months. We are seeking to increase the S-75 efficiency of our consumer banking business by implementing pricing that encourages our custom- ers to use alternative delivery systems. We also plan to expand the franchise through new branch openings and the possible acquisition of community banks in targeted markets. - FOCUS COMMERCIAL BANKING EFFORTS ON SPECIFIC INDUSTRIES AND COMPANIES. We are targeting our commercial banking activities on industries and companies for which we can reasonably expect to be one of a customers' principal banks. Our emphasis is on relationship management and meeting a large part of our targeted customers' credit and depository needs. Our commercial banking activities include certain industry specialties, such as communications, media and energy. We have been successful in increasing our role as agent and/or underwriter in syndicated loans to these specialized industry customers. We intend to broaden our syndication efforts to include other markets we serve, such as real estate finance and middle market companies. We also operate in certain niche markets for providing depository and cash management services. These niche markets include title and escrow companies, financial institutions, retailers and bankruptcy trustees. - DIVERSIFY REVENUE SOURCES AND EXPAND FEE-BASED BUSINESS. We are seeking to diversify our revenue sources by expanding our fee-based businesses, with a particular emphasis on our trust and asset management businesses. We are working with The Bank of Tokyo-Mitsubishi to distribute our proprietary HighMark mutual funds offshore and to serve as a sub-advisor for funds managed by them in Japan. We intend to expand the activities of our brokerage and insurance businesses by further penetrating our existing client base. We expanded our private banking business in 1998 to include 15 offices, and we intend to expand our third-party distribution network, which provides 401(k) valuation and record-keeping services, to insurance companies, investment managers, brokers and mutual funds. Our non-interest income, net of gain on the sale of our credit card portfolio, has increased from 26% of total revenue in 1995 to 28% of total revenue for the nine-month period ended September 30, 1998. For the nine-month period ended September 30, 1997 to the nine-month period ended September 30, 1998, non-interest income, net of gain on the sale of our credit card portfolio, increased from $342.6 million to $389.9 million. - EMPHASIZE QUALITY CUSTOMER SERVICE. We seek to continue to provide highly responsive customer service to create and maintain long-term relationships with clients who are often underserved by larger banks. We intend to continue to capitalize on the high quality of our customer service, taking advantage of any changes in service levels caused by recent increases in bank merger activity in the California market. - MAINTAIN HIGH LENDING STANDARDS AND STRONG ASSET QUALITY PROFILE. We strive to maintain strong asset quality through our underwriting standards, credit policies and ongoing credit reviews of our existing loan portfolio. These criteria, along with the recent strength of the California economy, have resulted in our current high quality portfolio. At September 30, 1998, our ratio of non-performing assets to total assets was 0.26%, or the seventh lowest of the 30 largest commercial banks in the United States. In addition, as of September 30, 1998, our ratio of reserves to total loans was 2.02%, or the eighth highest of the 30 largest commercial banks in the United States. At September 30, 1998, no industry concentration exceeded 10% of our total commercial, financial and industrial loans. Additionally, at September 30, 1998, we had a limited number of borrowers with larger loans. We had only 10 borrowers with total outstanding balances of over $50 million, and only one borrower with a total outstanding balance of over $75 million. - IDENTIFY STRATEGIC BUSINESSES AND CONSIDER POTENTIAL ACQUISITIONS OR DIVESTITURES. We view selective acquisitions and divestitures, as well as internal growth, as the primary means to increase and enhance our core businesses. We will consider acquisitions of banks and other financial service businesses that will increase our presence in existing markets or allow us to expand into contiguous markets. We will also consider acquisitions in other complementary financial service businesses in which we believe there exists superior growth potential. In addition, we will consider exiting S-76 businesses that do not meet our core business criteria. Our strategic business evaluation process focuses on historical financial performance, the competitive environment, future growth potential and regulatory considerations. - IMPROVE OPERATING EFFICIENCY. - ATTAIN NEW FINANCIAL PERFORMANCE TARGETS. S-77 ACCOUNTING TREATMENT For financial reporting purposes, Finance Trust I will be treated as a subsidiary of UNBC, and, accordingly, the accounts of Finance Trust I will be included in the consolidated financial statements of UNBC. The Capital Securities will be included in the consolidated balance sheets of UNBC, and appropriate disclosures about the Capital Securities, the Guarantee and the Junior Subordinated Debentures will be included in the notes to UNBC's consolidated financial statements. For financial reporting purposes, distributions on the Capital Securities will be recorded in the consolidated statements of income of UNBC. DESCRIPTION OF THE CAPITAL SECURITIES THE FOLLOWING DESCRIPTION OF THE CAPITAL SECURITIES IS NOT COMPLETE. YOU SHOULD ALSO READ THE TRUST DECLARATION, THE BUSINESS TRUST ACT AND THE TRUST INDENTURE ACT. WE WILL FILE THE TRUST DECLARATION AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THE ACCOMPANYING PROSPECTUS FORMS A PART. The Capital Securities will be issued pursuant to the terms of the Trust Declaration. It is expected that at the time the Shelf Registration Statement becomes effective, the Trust Declaration will be qualified as an indenture under the Trust Indenture Act, and The First National Bank of Chicago, as the Property Trustee, will act as the indenture trustee for purposes of compliance with the provisions of the Trust Indenture Act. The terms of the Capital Securities will include those stated in the Trust Declaration and the Business Trust Act and those made part of the Trust Declaration by the Trust Indenture Act. GENERAL The Capital Securities will be limited to $ - aggregate liquidation amount at any one time outstanding. The Capital Securities will rank PARI PASSU with, and payments will be made thereon PRO RATA with, the Common Securities, except as described under "--Subordination of Common Securities." The Trust Declaration does not permit the issuance by Finance Trust I of any securities other than the Trust Securities or the incurrence by it of any indebtedness. The Junior Subordinated Debentures will be registered in the name of Finance Trust I and held by the Property Trustee in trust for the benefit of the holders of the Capital Securities and the Common Securities. The Guarantee will be a guarantee on a subordinated basis with respect to the Capital Securities but will not guarantee payment of distributions or amounts payable on redemption or liquidation of the Capital Securities when Finance Trust I does not have funds on hand available to make such payments. In such an event, the remedy of a holder of the Capital Securities is to direct the Property Trustee to enforce the Property Trustee's rights under the Trust Declaration or the Junior Subordinated Debentures and, if the Property Trustee fails to enforce such rights, to institute a proceeding directly against UNBC. See "--Voting Rights" and "Description of the Guarantee" below. DISTRIBUTIONS Distributions on the Capital Securities will be fixed at a rate per annum of % of the stated liquidation amount of $25 per Capital Security. Distributions to which holders of the Capital Securities are entitled and which are in arrears for more than one quarter will accumulate additional distributions at the rate per annum of % thereof, compounded quarterly. The term "Distribution" includes any such additional distributions payable unless otherwise stated. The amount of Distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months, and, for any period other than a full quarter, on the basis of the actual number of days elapsed per 30-day month. Distributions on the Capital Securities will be cumulative, will accumulate from , 1999, the date of initial issuance thereof, and will be payable quarterly in arrears on , , and of each year, commencing , 1999, when, as and if available and determined to be so payable by the Property Trustee, except as otherwise described below. S-78 Distributions on the Capital Securities will be payable to the holders thereof as they appear on the books and records of Finance Trust I on the relevant record dates, which, as long as the Capital Securities remain in book-entry only form, will be one Business Day prior to the relevant payment dates. Such Distributions will be paid through the Property Trustee, which will hold amounts received in respect of the Junior Subordinated Debentures in the Property Account for the benefit of the holders of the Trust Securities. Subject to any applicable laws and regulations and the provisions of the Trust Declaration, each such payment will be made as described under "--Book-Entry Only Issuance--The Depository Trust Company" below. In the event that the Capital Securities do not continue to remain in book-entry only form, the record dates shall be 15 calendar days (whether or not a Business Day) prior to the relevant payment dates. In the event that any date on which Distributions are to be made on the Capital Securities is not a Business Day, then payment of the Distributions payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such payment date. A "Business Day" shall mean any day other than Saturday, Sunday, any other day on which banking institutions in the City of New York (in the State of New York) are permitted or required by any applicable law to close or a day on which the corporate trust office of the Property Trustee or the Indenture Trustee is closed for business. As long as UNBC is not in default on the payment of interest on the Junior Subordinated Debentures, UNBC has the right to defer payments of interest on the Junior Subordinated Debentures from time to time by extending the interest payment period on the Junior Subordinated Debentures for a period (an "Extension Period") not exceeding 20 consecutive quarters with respect to each Extension Period; PROVIDED that no Extension Period may extend beyond the maturity of the Junior Subordinated Debentures. As a consequence of any such deferral, quarterly Distributions on the Capital Securities by Finance Trust I will be deferred, but will continue to accumulate with interest thereon (to the extent permitted by applicable law), at the rate of - % per annum, compounded quarterly, during any such Extension Period. In the event that UNBC exercises this right, then during such Extension Period: - UNBC may not declare or pay dividends on, make distributions with respect to, redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock; and - UNBC may not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by UNBC (including other junior subordinated deferrable debentures) that rank PARI PASSU with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to the foregoing; PROVIDED, HOWEVER, that, the foregoing restrictions do not apply to: - repurchases, redemptions or other acquisitions of shares of capital stock of UNBC in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or shareholder stock purchase plan or (3) the issuance of capital stock of UNBC (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to such Extension Period; - an exchange, redemption or conversion of any class or series of UNBC's capital stock (or any capital stock of a subsidiary of UNBC) for any class or series of UNBC's capital stock or of any class or series of UNBC's indebtedness for any class or series of UNBC's capital stock; - the purchase of fractional interests in shares of UNBC's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; S-79 - any declaration of a dividend in connection with any shareholder's rights plan, or the issuance of rights, stock or other property under any shareholder's rights plan, or the redemption or repurchase of rights pursuant thereto; - any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks PARI PASSU with or junior to such stock; or - payments by UNBC under the Guarantee or under any similar guarantee by UNBC with respect to any trust common or trust preferred securities of its subsidiaries. Prior to the termination of any Extension Period, UNBC may further defer the payment of interest; PROVIDED that the Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarters or extend beyond the maturity of the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, UNBC may select a new Extension Period, subject to the above requirements. See "Description of the Junior Subordinated Debentures--Interest" and "--Option to Extend Interest Payment Period" below. If Distributions are deferred, the deferred Distributions, including accumulated additional Distributions thereon, shall be paid to holders of record of the Capital Securities as they appear on the books and records of Finance Trust I on the record date following the termination of such Extension Period. UNBC has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. Finance Trust I's funds available for distribution to the holders of the Capital Securities will be limited to payments received from UNBC on the Junior Subordinated Debentures. See "Description of the Junior Subordinated Debentures" below. The payment of Distributions out of moneys held by Finance Trust I is guaranteed by UNBC to the extent set forth under "Description of the Guarantee" below. REDEMPTION Upon the repayment or redemption, in whole or in part, of the Junior Subordinated Debentures, whether at maturity or upon earlier redemption as provided in the Indenture, the proceeds from such repayment or redemption shall be applied by the Property Trustee to redeem a Like Amount (as defined below) of the Trust Securities at a redemption price (the "Redemption Price") equal to 100% of the aggregate Liquidation Amount (as defined below) of such Trust Securities, plus accumulated and unpaid Distributions thereon to the date of redemption (the "Redemption Date"). See "--Redemption Procedures." If less than all the Junior Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then the proceeds from such repayment or redemption shall be allocated to the redemption PRO RATA of the Trust Securities. UNBC will have the right, subject to receipt of prior approval by the Federal Reserve if such approval is then required under applicable capital guidelines or policies, to redeem the Junior Subordinated Debentures (1) on or after , 2004, in whole at any time or in part from time to time or (2) prior to , 2004 in whole (but not in part) at any time within 90 days following the occurrence and continuation of a Tax Event, an Investment Company Event or a Regulatory Capital Event (each as defined below). See "Description of the Junior Subordinated Debentures-- Optional Redemption" below. A redemption of the Junior Subordinated Debentures would cause a mandatory redemption of the Trust Securities. "Like Amount" means (1) with respect to a redemption of Trust Securities, Trust Securities having an aggregate Liquidation Amount equal to that portion of the principal amount of Junior Subordinated Debentures to be contemporaneously redeemed in accordance with the Indenture, allocated to the Common Securities and to the Capital Securities based upon the relative Liquidation Amounts of such classes and (2) with respect to a distribution of Junior Subordinated Debentures to holders of Trust Securities in connection with a dissolution or liquidation of Finance Trust I, Junior Subordinated Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Trust S-80 Securities of the holder to whom such Junior Subordinated Debentures are distributed. "Liquidation Amount" means the stated amount of $25 per Trust Security. "Tax Event" means that the Regular Trustees (or, if Finance Trust I has been dissolved at such time, an appropriate representative of the holders of the Junior Subordinated Debentures) shall have received an opinion of nationally recognized independent tax counsel experienced in such matters to the effect that on or after , , as a result of - any amendment to, clarification of, or change (including any announced prospective change) in the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation; - any judicial decision, official administrative pronouncement, ruling, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations (an "Administrative Action"); or - any amendment to, clarification of, or change in the official position or the interpretation of such Administrative Action or judicial decision that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification, change or Administrative Action is made known, which amendment, clarification, change or Administrative Action is effective or such pronounce-ment or decision is announced, in each case, on or after , , there is more than an insubstantial risk that (1) Finance Trust I is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Junior Subordinated Debentures, (2) Finance Trust I is, or will be within 90 days of the date thereof, subject to more than a DE MINIMIS amount of taxes (other than withholding taxes), duties or other governmental charges or (3) interest paid in cash by UNBC to Finance Trust I on the Junior Subordinated Debentures is not, or within 90 days of the date thereof will not be, deductible, in whole or in part, by UNBC for United States federal income tax purposes. Notwithstanding the foregoing, a Tax Event shall not include any change in tax law that requires UNBC to defer taking a deduction for any original issue discount ("OID") that accrues with respect to the Junior Subordinated Debentures until the interest payment related to such OID is paid by UNBC in cash; PROVIDED THAT such change in tax law does not create more than an insubstantial risk that UNBC will be prevented from taking a deduction for OID accruing with respect to the Junior Subordinated Debentures at a date that is no later than the date the interest payment related to such OID is actually paid by UNBC in cash. If an event described in clause (1) or (2) of the definition of "Tax Event" above has occurred and is continuing and Finance Trust I is the holder of all the Junior Subordinated Debentures, UNBC will pay Additional Interest (as defined in "Description of the Junior Subordinated Debentures" below), if any, on the Junior Subordinated Debentures. "Investment Company Event" means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel to UNBC experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority on or after the date of this prospectus supplement, there is more than an insubstantial risk that Finance Trust I is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940. "Regulatory Capital Event" means that UNBC shall have received an opinion of nationally recognized independent counsel experienced in such matters that, as a result of (1) any amendment to, clarification of or change in applicable laws or regulations or official interpretations thereof or policies with respect thereto or (2) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment, clarification, change, pronouncement or decision is S-81 announced or is effective after the date of this prospectus supplement, there is more than an insubstantial risk that the Capital Securities will no longer constitute Tier 1 capital of UNBC for purposes of the capital adequacy guidelines or policies of the Federal Reserve or its successor as UNBC's primary federal banking regulator. REDEMPTION PROCEDURES Finance Trust I may not redeem fewer than all of the outstanding Capital Securities unless all accumulated and unpaid Distributions have been paid on all Capital Securities for all quarterly distribution periods terminating on or prior to the Redemption Date. Capital Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the applicable proceeds from the contemporaneous redemption of Junior Subordinated Debentures. Redemptions of the Capital Securities shall be made, and the Redemption Price shall be payable, on each Redemption Date only to the extent that Finance Trust I has funds then on hand and legally available for the payment of such Redemption Price. See also "--Subordination of Common Securities." Notice of redemption of the Trust Securities shall be given not less than 30 or more than 60 days prior to the date fixed for redemption. If Finance Trust I gives a notice of redemption in respect of the Capital Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to the extent funds are available, in the case of Capital Securities held in book-entry form, the Property Trustee will deposit irrevocably with The Depository Trust Company ("DTC") funds sufficient to pay the applicable Redemption Price and will give DTC irrevocable instructions and authority to pay the Redemption Price to the holders of the Capital Securities. With respect to Capital Securities not held in book-entry form, the Property Trustee to the extent funds are available, will irrevocably deposit with the paying agent for the Capital Securities funds sufficient to pay the applicable Redemption Price and will give such paying agent irrevocable instructions and authority to pay the Redemption Price to the holders thereof upon surrender of their certificates evidencing the Capital Securities. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Capital Securities called for redemption shall be payable to the holders of the Capital Securities on the relevant record dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit all rights of the holders of such Capital Securities so called for redemption will cease, except the right of the holders of such Capital Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Capital Securities will cease to be outstanding. If any date fixed for redemption of Capital Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. In the event that payment of the Redemption Price in respect of Capital Securities called for redemption is improperly withheld or refused and not paid either by Finance Trust I or by UNBC pursuant to the Guarantee, Distributions on such Capital Securities will continue to accumulate at the then applicable rate, from the Redemption Date originally established by Finance Trust I for such Capital Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. Subject to applicable law (including, without limitation, United States federal securities laws), UNBC or its affiliates may at any time and from time to time purchase outstanding Capital Securities, by tender, in the open market or by private agreement, and may resell such securities. If less than all the Capital Securities and Common Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of such Capital Securities and Common Securities to be redeemed shall be allocated PRO RATA to the Capital Securities and the Common Securities based upon the S-82 relative Liquidation Amounts of such classes. The particular Capital Securities to be redeemed shall be selected on a PRO RATA basis not more than 60 days prior to the Redemption Date from the outstanding Capital Securities not previously called for redemption, by such method as the Property Trustee shall deem fair and appropriate, or if the Capital Securities are then held in book-entry form, in accordance with DTC's customary procedures. The Property Trustee shall promptly notify the securities registrar for the Trust Securities in writing of the Capital Securities selected for redemption. For all purposes of the Trust Declaration, unless the context otherwise requires, all provisions relating to the redemption of Capital Securities shall relate, in the case of any Capital Securities redeemed or to be redeemed only in part, to the portion of the aggregate Liquidation Amount of Capital Securities which has been or is to be redeemed. Notice of any redemption of the Trust Securities will be mailed at least 30 days but not more than 60 days before the Redemption Date to each registered holder of Capital Securities to be redeemed at its address appearing on the securities register for the Trust Securities. Unless UNBC defaults in payment of the Redemption Price on the Junior Subordinated Debentures, on and after the Redemption Date interest will cease to accrue on the Junior Subordinated Debentures or portions thereof called for redemption and, unless payment of the Redemption Price in respect of the Capital Securities is withheld or refused and not paid either by Finance Trust I or UNBC pursuant to the Guarantee, Distributions will cease to accumulate on the Capital Securities or portions thereof called for redemption. SUBORDINATION OF COMMON SECURITIES Payment of Distributions on, and the Redemption Price of, the Capital Securities and Common Securities, as applicable, will be made PRO RATA based on the Liquidation Amount of such Capital Securities and Common Securities. However, if on any date on which a Distribution is to be made, or any Redemption Date, an event of default under the Indenture (an "Indenture Event of Default") has occurred and is continuing, no payment of any Distribution on, or Redemption Price of, any of the Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of such Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all the outstanding Capital Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all the outstanding Capital Securities then called for redemption, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions on, or the Redemption Price of, the Capital Securities then due and payable. In the case of any event of default under the Trust Declaration (a "Declaration Event of Default") resulting from an Indenture Event of Default, the holders of the Common Securities will be deemed to have waived any right to act with respect to any such Declaration Event of Default until the effects of all Declaration Events of Default with respect to such Capital Securities have been cured, waived or otherwise eliminated. See "-- Declaration Events of Default" and "Description of the Junior Subordinated Debentures--Indenture Events of Default" below. Until all Declaration Events of Default with respect to the Capital Securities have been so cured, waived or otherwise eliminated, the Property Trustee will act solely on behalf of the holders of the Capital Securities and not on behalf of the holders of the Common Securities, and only the holders of the Capital Securities will have the right to direct the Property Trustee to act on their behalf. LIQUIDATION DISTRIBUTION UPON DISSOLUTION The amount payable on the Capital Securities in the event of any liquidation of Finance Trust I is $25 per Capital Security, which may, subject to certain exceptions, be in the form of a distribution of such amount in Junior Subordinated Debentures, plus accumulated and unpaid Distributions. The holders of all the outstanding Common Securities have the right at any time to dissolve Finance Trust I and, after satisfaction of liabilities to creditors of Finance Trust I as provided by applicable law, to cause the Junior Subordinated Debentures to be distributed to the holders of the Capital Securities and Common Securities in liquidation of Finance Trust I. Pursuant to the Trust Declaration, Finance Trust I will automatically dissolve upon expiration of its term on , or, if earlier, on the first to occur of: S-83 (1) certain events of bankruptcy, dissolution or liquidation of UNBC or the holder of the Common Securities; (2) the distribution of a Like Amount of the Junior Subordinated Debentures to the holders of the Trust Securities, if the holders of Common Securities have given written direction to the Property Trustee to dissolve Finance Trust I (which direction, subject to the foregoing restrictions, is optional and wholly within the discretion of the holders of Common Securities); (3) the repayment of all the Capital Securities in connection with the redemption of all the Trust Securities as described under "--Redemption"; and (4) the entry of an order for the dissolution of Finance Trust I by a court of competent jurisdiction. If dissolution of Finance Trust I occurs as described in clause (1), (2) or (4) above, Finance Trust I will be liquidated by the Property Trustee as expeditiously as the Property Trustee determines to be possible by distributing, after satisfaction of liabilities to creditors of Finance Trust I as provided by applicable law, to the holders of such Trust Securities a Like Amount of the Junior Subordinated Debentures, unless such distribution is not practical, in which event such holders will be entitled to receive out of the assets of Finance Trust I available for distribution to holders, after satisfaction of liabilities to creditors of Finance Trust I as provided by applicable law, an amount equal to, in the case of holders of Capital Securities, the aggregate of the Liquidation Amount plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If such Liquidation Distribution can be paid only in part because Finance Trust I has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by Finance Trust I on its Capital Securities shall be paid on a PRO RATA basis. The holders of the Common Securities will be entitled to receive distributions upon any such liquidation PRO RATA with the holders of the Capital Securities, except that if an Indenture Event of Default has occurred and is continuing, the Capital Securities shall have a priority over the Common Securities. See "--Subordination of Common Securities." After the liquidation date is fixed for any distribution of Junior Subordinated Debentures: - the Capital Securities will no longer be deemed to be outstanding; - DTC or its nominee, as the registered holder of the Capital Securities, will receive a registered global certificate or certificates representing the Junior Subordinated Debentures to be delivered upon such distribution with respect to Capital Securities held by DTC or its nominee and - any certificates representing the Capital Securities not held by DTC or its nominee will be deemed to represent the Junior Subordinated Debentures having a principal amount equal to the stated Liquidation Amount of the Capital Securities and bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributions on the Capital Securities until such certificates are presented to the security registrar for the Preferred Securities for transfer or reissuance. If UNBC does not redeem the Junior Subordinated Debentures prior to maturity and Finance Trust I is not liquidated and the Junior Subordinated Debentures are not distributed to holders of the Capital Securities, the Capital Securities will remain outstanding until the repayment of the Junior Subordinated Debentures and the distribution of the Liquidation Distribution to the holders of the Capital Securities. There can be no assurance as to the market prices for the Capital Securities or the Junior Subordinated Debentures that may be distributed in exchange for Capital Securities if a dissolution and liquidation of Finance Trust I were to occur. Accordingly, the Capital Securities that an investor may purchase, or the Junior Subordinated Debentures that the investor may receive on dissolution and liquidation of Finance Trust I, may trade at a discount to the price that the investor paid to purchase the Capital Securities offered hereby. S-84 DECLARATION EVENTS OF DEFAULT An Indenture Event of Default constitutes a Declaration Event of Default; PROVIDED that, pursuant to the Trust Declaration, the holder of the Common Securities will be deemed to have waived any Declaration Event of Default with respect to the Common Securities until all Declaration Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated. Until all Declaration Events of Default with respect to the Capital Securities have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Capital Securities, and only the holders of the Capital Securities will have the right to direct the Property Trustee with respect to certain matters under the Trust Declaration and, therefore, the Indenture. Upon the occurrence of a Declaration Event of Default, the Property Trustee as the sole holder of the Junior Subordinated Debentures will have the right under the Indenture to declare the principal of and interest on the Junior Subordinated Debentures to be immediately due and payable. UNBC and Finance Trust I are each required to file annually with the Property Trustee an officer's certificate as to its compliance with all conditions and covenants under the Trust Declaration. VOTING RIGHTS Except as described in this section, under the Business Trust Act and the Trust Indenture Act, under "Description of the Guarantee--Modification of the Guarantee; Assignment" below and as otherwise required by law and the Trust Declaration, the holders of the Capital Securities will have no voting rights. Subject to the requirement that the Property Trustee obtain a tax opinion in certain circumstances set forth in the last sentence of the next paragraph, the holders of a majority in aggregate Liquidation Amount of the Capital Securities have the right to: (1) direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or direct the exercise of any trust or power conferred upon the Property Trustee under the Trust Declaration, including the right to direct the Property Trustee, as holder of the Junior Subordinated Debentures, to exercise the remedies available under the Indenture with respect to the Junior Subordinated Debentures; (2) waive any past Indenture Event of Default that is waivable under the Indenture; (3) exercise any right to rescind or annul a declaration that the principal of all the Junior Subordinated Debentures shall be due and payable; or (4) consent to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures where such consent shall be required; PROVIDED, HOWEVER, that if an Indenture Event of Default has occurred and is continuing, the holders of 25% of the aggregate liquidation amount of the Capital Securities then outstanding may direct the Property Trustee to declare the principal of and interest on the Junior Subordinated Debentures immediately due and payable; PROVIDED, FURTHER, that, where a consent or action under the Indenture would require the consent or action of holders of more than a majority in principal amount of the Junior Subordinated Debentures then outstanding (a "Super-Majority") affected thereby, only the holders of at least such Super-Majority in aggregate liquidation amount of the Capital Securities then outstanding may direct the Property Trustee to give such consent or take such action. If the Property Trustee fails to enforce its rights under the Junior Subordinated Debentures, any holder of Capital Securities may institute a legal proceeding against UNBC to enforce the Property Trustee's rights under the Junior Subordinated Debentures. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing and such event is attributable to the failure of UNBC to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, the Redemption Date), then a holder of Capital Securities may directly institute a proceeding S-85 for enforcement of payment to such holder of the principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder (a "Direct Action") on or after the respective due dates specified in the Junior Subordinated Debentures. In connection with such Direct Action, the rights of UNBC, as the holder of the Common Securities, will be subrogated to the rights of such holders of Capital Securities under the Declaration to the extent of any payment made by UNBC, as the issuer of the Junior Subordinated Debentures, to such holder of Capital Securities in such Direct Action that otherwise would have been made to the holders of the Common Securities if the Common Securities had not been subordinated to the Capital Securities in such event. The holders of the Capital Securities will not be able to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures. The Property Trustee shall notify all holders of the Capital Securities of any notice of default received from the Indenture Trustee with respect to the Junior Subordinated Debentures. Such notice shall state that such Indenture Event of Default also constitutes a Declaration Event of Default. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Property Trustee shall not take any of the actions described in clauses (1), (2), (3) or (4) in the first sentence of the preceding paragraph unless the Property Trustee has obtained an opinion of counsel from a nationally recognized independent law firm experienced in such matters to the effect that, as a result of such action, Finance Trust I will not fail to be classified as a grantor trust for United States federal income tax purposes. In the event the consent of the Property Trustee, as the holder of the Junior Subordinated Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures, the Property Trustee shall request the direction of the holders of the Trust Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a majority in Liquidation Amount of the Trust Securities voting together as a single class; PROVIDED, HOWEVER, that where a consent under the Indenture would require the consent of a Super-Majority, the Property Trustee may only give such consent at the direction of holders of at least the proportion in liquidation amount of the Trust Securities then outstanding which the relevant Super-Majority represents of the aggregate principal amount of the Junior Subordinated Debentures then outstanding. The Property Trustee shall be under no obligation to take any such action in accordance with the directions of the holders of the Trust Securities unless the Property Trustee has obtained an opinion of counsel from a nationally recognized independent law firm experienced in such matters to the effect that, as a result of such action, Finance Trust I will not fail to be classified as a grantor trust for United States federal income tax purposes. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Declaration Event of Default. Any required approval or direction of holders of Capital Securities may be given at a separate meeting of holders of Capital Securities convened for such purpose, at a meeting of all of the holders of Trust Securities or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which holders of Capital Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be mailed to each holder of record of Capital Securities. Each such notice will include a statement setting forth the following information: (1) the date of such meeting or the date by which such action is to be taken, (2) a description of any resolution proposed for adoption at such meeting on which such holders are entitled to vote or of such matter upon which written consent is sought and (3) instructions for the delivery of proxies or consents. No vote or consent of the holders of Capital Securities will be required for Finance Trust I to redeem and cancel Capital Securities or distribute Junior Subordinated Debentures in accordance with the Trust Declaration. Notwithstanding that holders of Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned at such time by UNBC or any entity directly or indirectly controlling or controlled by, or under direct or indirect common control with, S-86 UNBC shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding. The procedures by which holders of Capital Securities may exercise their voting rights are described under "--Book-Entry Only Issuance--The Depository Trust Company" below. Holders of the Capital Securities will have no rights to appoint or remove the Regular Trustees, who may be appointed, removed or replaced solely by UNBC as the holder of all of the Common Securities. MODIFICATION OF THE TRUST DECLARATION The Trust Declaration may be modified and amended if approved by a majority of the Regular Trustees (and in certain circumstances the Property Trustee); PROVIDED that, if any proposed amendment provides for, or the Regular Trustees otherwise propose to effect, (1) any action that would adversely affect the powers, preferences or special rights of the Trust Securities, whether by way of amendment to the Trust Declaration or otherwise, or (2) the dissolution, winding-up or termination of Finance Trust I other than pursuant to the terms of the Trust Declaration, then the holders of the Trust Securities voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of at least a majority in Liquidation Amount of the Trust Securities affected thereby; PROVIDED that if any amendment or proposal referred to in clause (1) above would adversely affect only the Capital Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of at least a majority in Liquidation Amount of such class of Trust Securities. Notwithstanding the foregoing, no amendment or modification may be made to the Trust Declaration if such amendment or modification would (1) cause Finance Trust I to be classified for purposes of United States federal income taxation as other than a grantor trust, (2) affect the powers, rights, duties, obligations or immunities of the Property Trustee (unless such amendment is consented to by the Property Trustee) or (3) cause Finance Trust I to be deemed an "investment company" which is required to be registered under the Investment Company Act of 1940. MERGERS, CONSOLIDATIONS OR AMALGAMATIONS Finance Trust I may not consolidate, amalgamate or merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other body, except as described below. Finance Trust I may, with the consent of a majority of the Regular Trustees and without the consent of the holders of the Trust Securities or the Property Trustee or the Delaware Trustee, consolidate, amalgamate or merge with or into, or be replaced by, a trust organized as such under the laws of any state; provided that: (1) such successor entity either - expressly assumes all of the obligations of Finance Trust I under the Trust Securities; or - substitutes for the Trust Securities other securities (the "Successor Securities"), so long as the Successor Securities rank the same as the Trust Securities with respect to distributions and payments upon liquidation, redemption and otherwise; (2) UNBC expressly acknowledges a trustee of such successor entity possessing the same powers and duties as the Property Trustee, as the holder of the Junior Subordinated Debentures; (3) the Capital Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed; S-87 (4) such merger, consolidation, amalgamation or replacement does not cause the Capital Securities or any Successor Securities to be downgraded by any nationally recognized statistical rating organization; (5) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities or any Successor Securities in any material respect under the documents governing the Trust Securities or the Successor Securities (other than with respect to any dilution of the holders' interest in the new entity); (6) such successor entity has a purpose substantially identical to that of Finance Trust I; (7) prior to such merger, consolidation, amalgamation or replacement, UNBC has received an opinion of a nationally recognized independent counsel to Finance Trust I experienced in such matters to the effect that: - such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities or any Successor Securities in any material respect under the documents governing the Trust Securities or the Successor Securities (other than with respect to any dilution of the holders' interest in the new entity); and - following such merger, consolidation, amalgamation or replacement, neither Finance Trust I nor such successor entity will be required to register as an investment company under the Investment Company Act of 1940; and (8) UNBC guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, Finance Trust I shall not, except with the consent of holders of 100% in Liquidation Amount of the Trust Securities, consolidate, amalgamate or merge with or into, or be replaced by, any other entity or permit any other entity to consolidate, amalgamate or merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause Finance Trust I or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. There are no provisions which afford the holders of the Capital Securities protection in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving UNBC. There are also no provisions which require the repurchase of the Capital Securities upon a change in control of UNBC. BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY DTC will act as securities depositary for the Capital Securities. The Capital Securities will be issued only as fully-registered securities registered in the name of Cede & Co. (DTC's nominee). One or more fully registered global Capital Securities certificates, representing the total aggregate number of Capital Securities, will be issued and will be deposited with DTC or a custodian appointed by DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its participants deposit with DTC. DTC also facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the S-88 DTC system is also available to others, such as securities brokers and dealers, banks and trust companies, that clear transactions through or maintain a direct or indirect custodial relationship with a Direct Participant ("Indirect Participants"). The rules applicable to DTC and its participants are on file with the Securities and Exchange Commission. Purchases of Capital Securities within the DTC system must be made by or through a Direct Participant, which will receive a credit for the Capital Securities on DTC's records. The ownership interest of each actual purchaser of a Capital Security (a "beneficial owner") will be recorded on the Direct and Indirect Participants' records. Beneficial owners will not receive written confirmation from DTC of their purchases, but beneficial owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the beneficial owners purchase Capital Securities. Transfers of ownership interests in the Capital Securities will be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the Capital Securities, except in the event that use of the book-entry system for the Capital Securities is discontinued. The laws of some states may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in the global certificate representing the Capital Securities. To facilitate subsequent transfers, all the Capital Securities deposited by participants with DTC will be registered in the name of DTC's nominee, Cede & Co. The deposit of Capital Securities with DTC and their registration in the name of Cede & Co. will effect no change in beneficial ownership. DTC will have no knowledge of the actual beneficial owners of the Capital Securities. DTC's records reflect only the identity of the Direct Participants to whose accounts such Capital Securities will be credited, which may or may not be the beneficial owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements that may be in effect from time to time. Redemption notices shall be sent to Cede & Co. If less than all of the Capital Securities are being redeemed, DTC will reduce each Direct Participant's holdings of Capital Securities in accordance with its procedures. Although voting with respect to the Capital Securities is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to Capital Securities. Under its usual procedures, DTC would mail an omnibus proxy to Finance Trust I as soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Capital Securities are credited on the record date (identified in a listing attached to the omnibus proxy). UNBC and Finance Trust I believe that the arrangements among DTC, Direct and Indirect Participants, and beneficial owners will enable the beneficial owners to exercise rights equivalent in substance to the rights that can be directly exercised by a holder of a beneficial interest in Finance Trust I. Distribution payments on the Capital Securities will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date. Payments by participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name," and such payments will be the responsibility of such participant and not of DTC, Finance Trust I or UNBC, subject to any statutory or regulatory requirements to the contrary that may be in effect from time to time. Payment of Distributions to DTC is the responsibility of Finance Trust S-89 I, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the beneficial owners is the responsibility of Direct and Indirect Participants. Except as provided in "Description of the Junior Subordinated Debentures--Discontinuance of the Depositary's Services" below, a beneficial owner in a global Capital Security certificate will not be entitled to receive physical delivery of Capital Securities. Accordingly, each beneficial owner must rely on the procedures of DTC to exercise any rights under the Capital Securities. DTC may discontinue providing its services as securities depositary with respect to the Capital Securities at any time by giving reasonable notice to Finance Trust I. Under such circumstances, in the event that a successor securities depositary is not obtained, Capital Securities certificates are required to be printed and delivered. Additionally, the Regular Trustees (with the consent of UNBC) may decide to discontinue use of the system of book-entry transfers through DTC (or any successor depositary) with respect to the Capital Securities. In that event, certificates for the Capital Securities will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that UNBC and Finance Trust I believe to be reliable, but neither UNBC nor Finance Trust I takes responsibility for the accuracy thereof. INFORMATION CONCERNING THE PROPERTY TRUSTEE The Property Trustee, other than during the occurrence of a default with respect to the Trust Securities, undertakes to perform only such duties as are specifically set forth in the Trust Declaration and, after such a default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provisions, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Trust Declaration at the request of any holder of Capital Securities, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The holders of Capital Securities will not be required to offer such indemnity in the event such holders, by exercising their voting rights, direct the Property Trustee to take any action following a Declaration Event of Default. PAYING AGENT In the event that the Capital Securities do not remain in book-entry only form, the following provisions would apply: The Property Trustee will act as paying agent and may designate an additional or substitute paying agent at any time. Registration of transfers of Capital Securities will be effected without charge by or on behalf of Finance Trust I, but upon payment (with the giving of such indemnity as Finance Trust I or UNBC may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Finance Trust I will not be required to register or cause to be registered the transfer of Capital Securities after such Capital Securities have been called for redemption. GOVERNING LAW The Trust Declaration and the Capital Securities will be governed by, and construed in accordance with, the internal laws of the State of Delaware. S-90 MISCELLANEOUS The Regular Trustees are authorized and directed to operate Finance Trust I in such a way so that Finance Trust I will not be (1) required to register as an "investment company" under the Investment Company Act of 1940 or (2) characterized as other than a grantor trust for United States federal income tax purposes. UNBC is authorized and directed to conduct its affairs so that the Junior Subordinated Debentures will be treated as indebtedness of UNBC for United States federal income tax purposes. In this connection, UNBC and the Regular Trustees are authorized to take any action, not inconsistent with applicable law, the certificate of trust of Finance Trust I or the articles of incorporation of UNBC, that each of UNBC and the Regular Trustees determines in its discretion to be necessary or desirable to achieve such end, as long as such action does not materially adversely affect the interests of the holders of the Capital Securities. Holders of the Capital Securities have no preemptive rights. S-91 DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES THE FOLLOWING DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES, IN WHICH FINANCE TRUST I WILL INVEST THE PROCEEDS FROM THE ISSUANCE AND SALE OF THE TRUST SECURITIES, IS NOT COMPLETE. YOU SHOULD ALSO READ THE DESCRIPTION OF THE GENERAL TERMS AND PROVISIONS OF THE JUNIOR SUBORDINATED DEBT SECURITIES IN THE ACCOMPANYING PROSPECTUS UNDER THE CAPTION "DESCRIPTION OF DEBT SECURITIES," THE INDENTURE DATED AS OF , 1999 (THE "INDENTURE") BETWEEN UNBC AND THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE (THE "INDENTURE TRUSTEE"), AND AN OFFICER'S CERTIFICATE OF AN EXECUTIVE OFFICER OF UNBC DATED , 1999 (THE "OFFICER'S CERTIFICATE") SUPPLEMENTING THE INDENTURE. WE WILL FILE THE INDENTURE AND THE OFFICER'S CERTIFICATE AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THE ACCOMPANYING PROSPECTUS FORMS A PART. CERTAIN CAPITALIZED TERMS USED IN THIS SECTION ARE DEFINED IN THE INDENTURE OR THE OFFICER'S CERTIFICATE. Under certain circumstances involving the dissolution of Finance Trust I, the Junior Subordinated Debentures may be distributed to the holders of the Trust Securities in liquidation of Finance Trust I. See "Description of the Capital Securities--Liquidation Distribution upon Dissolution" above. If the Junior Subordinated Debentures are distributed to the holders of the Capital Securities, UNBC will use its best efforts to have the Junior Subordinated Debentures listed on the New York Stock Exchange or with another organization on which the Capital Securities are then listed. GENERAL The Junior Subordinated Debentures will be issued as unsecured debt under the Indenture. The Junior Subordinated Debentures will be limited in aggregate principal amount to $ - , such amount being the sum of the aggregate stated Liquidation Amount of the Capital Securities and the capital contributed by UNBC in exchange for the Common Securities. The Junior Subordinated Debentures are not subject to a sinking fund provision. The entire principal amount of the Junior Subordinated Debentures will mature and become due and payable, together with any accrued and unpaid interest thereon including Compound Interest (as defined in "Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period" below) and Additional Interest, if any, on , 20 - . If Junior Subordinated Debentures are distributed to holders of Capital Securities in liquidation of such holders' interests in Finance Trust I, such Junior Subordinated Debentures will initially be issued as a Global Security. As described in "Description of the Junior Subordinated Debentures--Discontinuance of the Depositary's Services" below, under certain limited circumstances, Junior Subordinated Debentures may be issued in certificated form in exchange for a Global Security. See "--Book-Entry and Settlement" below and "Description of Debt Securities--Registered Global Securities" in the accompanying prospectus. In the event that Junior Subordinated Debentures are issued in certificated form, such Junior Subordinated Debentures will be in denominations of $25 and integral multiples thereof and may be transferred or exchanged at the offices described below. Payments on Junior Subordinated Debentures issued as a Global Security will be made to DTC, a successor depositary or, in the event that no depositary is used, a paying agent for the Junior Subordinated Debentures. In the event Junior Subordinated Debentures are issued in certificated form, principal and interest will be payable, the transfer of the Junior Subordinated Debentures will be registrable and Junior Subordinated Debentures will be exchangeable for Junior Subordinated Debentures of other denominations of a like aggregate principal amount at the corporate trust office of the Indenture Trustee in New York, New York; PROVIDED that, at the option of UNBC, payment of interest may be made by check mailed to the address of the persons entitled thereto. The Indenture does not contain provisions that afford holders of the Junior Subordinated Debentures protection in the event of a highly leveraged transaction involving UNBC that would adversely affect such holders. S-92 SUBORDINATION The Indenture provides that the Junior Subordinated Debentures are subordinated and junior in right of payment to all Senior Indebtedness of UNBC. No payment of principal (including redemption payments) or interest on the Junior Subordinated Debentures may be made (1) if any Senior Indebtedness of UNBC is not paid when due and if any applicable grace period with respect to such default has ended and such default has not been cured or waived or ceased to exist or (2) if the maturity of any Senior Indebtedness of UNBC has been accelerated because of a default and such acceleration has not been rescinded. Upon any distribution of assets of UNBC to creditors upon any dissolution, winding-up, liquidation or reorganization, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any, and interest due or to become due on all Senior Indebtedness of UNBC must be paid in full before the holders of Junior Subordinated Debentures are entitled to receive or retain any payment. In such event, any payment or distribution on the Junior Subordinated Debentures (other than certain payments in property) that would otherwise be payable in respect of the Junior Subordinated Debentures (but for the subordination provision) shall be paid or delivered directly to the holders of Senior Indebtedness in accordance with the priorities then existing among such holders until all Senior Indebtedness shall have been paid in full. If any payment or distribution on account of the Junior Subordinated Debentures (other than certain payments in property) is received by the Indenture Trustee or any holder of any Junior Subordinated Debentures in contravention of any of the terms hereof and before all Senior Indebtedness shall have been paid in full, such payment or distribution shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Indebtedness at the time outstanding in accordance with the priorities then existing among such holders and creditors for application to the payment of all Senior Indebtedness then outstanding. The rights of the holders of the Junior Subordinated Debentures will be subrogated to the rights of the holders of Senior Indebtedness to the extent of any payment made by UNBC to such holders of Senior Indebtedness that otherwise would have been made to the holders of the Junior Subordinated Debentures but for the subordination provisions. The term "Senior Indebtedness" means: (1) the principal, premium, if any, and interest in respect of: - indebtedness of UNBC for money borrowed; and - indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by UNBC; (2) all capital lease obligations of UNBC; (3) all obligations of UNBC issued or assumed as the deferred purchase price of property, all conditional sale obligations of UNBC and all obligations of UNBC under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (4) all obligations of UNBC for reimbursement on any letter of credit, banker's acceptance, security purchase facility or similar credit transaction; (5) all obligations of the type referred to in clauses (1) through (4) above of other persons for the payment of which UNBC is responsible or liable as obligor, guarantor or otherwise; and (6) all obligations of the type referred to in clauses (1) through (5) above of other persons secured by any lien on any property or asset of UNBC (whether or not such obligation is assumed by UNBC); except for: (a) any such indebtedness that is by its terms subordinated to or PARI PASSU with the Junior Subordinated Debentures; and S-93 (b) any indebtedness between or among such obligor or its affiliates, including all other debt securities and guarantees in respect of those debt securities, to (x) any other Trust (as defined in the accompanying prospectus), or a trustee of such Trust, and (y) any other trust, or a trustee of such trust, partnership or other entity affiliated with UNBC that is a financing vehicle of UNBC (a "financing entity") in connection with the issuance by such financing entity of Capital Securities or other securities that rank PARI PASSU with, or junior to, the Capital Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. The Indenture does not limit the aggregate amount of Senior Indebtedness that may be issued by UNBC. As of September 30, 1998, Senior Indebtedness of UNBC aggregated approximately $ - million. In addition, the Junior Subordinated Debentures also will be effectively subordinated to all obligations of UNBC's subsidiaries. INTEREST Each Subordinated Debenture will bear interest at the rate of % per annum from the original date of issuance until the principal becomes due and payable, and on any overdue principal and on any overdue installment of interest at the same rate, compounded and payable quarterly in arrears on , , and of each year (each, an "Interest Payment Date"), commencing , 1999, to the person in whose name such Subordinated Debenture is registered at the close of business on the Business Day preceding such Interest Payment Date. In the event the Junior Subordinated Debentures do not remain in book-entry only form, the record dates will be 15 calendar days (whether or not a Business Day) prior to the Interest Payment Date. It is anticipated that Finance Trust I will be the sole holder of the Junior Subordinated Debentures. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months, and, for any period shorter than a quarter, on the basis of the actual number of days elapsed per 30-day month. The amount of interest payable for any period shorter than a full quarter for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Junior Subordinated Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next calendar year, then such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. OPTION TO EXTEND INTEREST PAYMENT PERIOD As long as UNBC is not in default on the payment of interest on the Junior Subordinated Debentures, UNBC shall have the right at any time, and from time to time, during the term of the Junior Subordinated Debentures to defer payments of interest by extending the interest payment period for a period not exceeding 20 consecutive quarters (but not beyond the maturity date of the Junior Subordinated Debentures), at the end of which Extension Period UNBC shall pay all interest then accrued and unpaid, together with interest thereon compounded quarterly at the rate specified for the Junior Subordinated Debentures to the extent permitted by applicable law ("Compound Interest") plus any Additional Interest. During any Extension Period: - UNBC may not declare or pay any dividends on, make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock; and - UNBC may not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by UNBC that rank PARI PASSU with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to the foregoing; S-94 PROVIDED, HOWEVER, that, the foregoing restrictions do not apply to - repurchases, redemptions or other acquisitions of shares of capital stock of UNBC in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or shareholder stock purchase plan or (3) the issuance of capital stock of UNBC (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to such Extension Period; - an exchange, redemption or conversion of any class or series of UNBC's capital stock (or any capital stock of a subsidiary of UNBC) for any class or series of UNBC's capital stock or of any class or series of UNBC's indebtedness for any class or series of UNBC's capital stock; - the purchase of fractional interests in shares of UNBC's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; - any declaration of a dividend in connection with any shareholder's rights plan, or the issuance of rights, stock or other property under any shareholder's rights plan, or the redemption or repurchase of rights pursuant thereto; - any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks PARI PASSU with or junior to such stock; or - payments by UNBC under the Guarantee or under any similar guarantee by UNBC with respect to any trust common or trust preferred securities of its subsidiaries. Prior to the termination of any Extension Period, UNBC may further defer payments of interest by extending the interest payment period; PROVIDED that the Extension Period, including all such previous and further extensions, may not exceed 20 consecutive quarters or extend beyond the maturity date of the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, UNBC may commence a new Extension Period, subject to the above requirements. If the Property Trustee is the sole holder of the Junior Subordinated Debentures, UNBC shall give the Regular Trustees and the Property Trustee notice of its selection of an Extension Period one Business Day prior to the earlier of (1) the next date Distributions on the Capital Securities are payable or (2) the date the Regular Trustees are required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to the holders of record of the Capital Securities. The Regular Trustees shall give notice of UNBC's selection of such Extension Period to the holders of the Capital Securities. If the Property Trustee is not the sole holder of the Junior Subordinated Debentures, UNBC shall give the holders of the Junior Subordinated Debentures notice of its selection of an Extension Period ten Business Days prior to the earlier of (1) the next interest payment date or (2) the date upon which UNBC is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Junior Subordinated Debentures of the record or payment date of such related interest payment. UNBC has no present intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. ADDITIONAL INTEREST If at any time while the Property Trustee is the holder of the Junior Subordinated Debentures, Finance Trust I shall be required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States or any other taxing authority, then, in any such case, UNBC will pay as additional interest on the Junior Subordinated Debentures such additional amounts ("Additional Interest") as shall be required so that the net amounts received and retained by Finance Trust I after paying any such taxes, duties, assessments or other governmental charges S-95 will be not less than the amounts Finance Trust I would have received had no such taxes, duties, assessments or other governmental charges been imposed. OPTIONAL REDEMPTION UNBC shall have the right, subject to receipt of prior approval by the Federal Reserve if such approval is then required under applicable capital guidelines or policies, to redeem the Junior Subordinated Debentures (1) on or after , 2004 in whole at any time or in part from time to time or (2) before , 2004, in whole (but not in part) at any time within 90 days following the occurrence and continuation of a Tax Event, an Investment Company Event or a Regulatory Capital Event as described under "Description of the Capital Securities--Redemption" above, upon not less than 30 or more than 60 days' notice, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, including any Compounded Interest and Additional Interest, if any, to the redemption date. UNBC's right to redeem the Junior Subordinated Debentures under part (2) of the preceding paragraph shall be subject to the condition that if at the time there is available to UNBC or Finance Trust I the opportunity to eliminate, within the notice period, the Tax Event, Investment Company Event or Regulatory Capital Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure that will have no adverse effect on UNBC, Finance Trust I or the holders of the Trust Securities and will involve no material cost, UNBC shall pursue such measures in lieu of redemption. UNBC shall not have the right to redeem the Junior Subordinated Debentures while Finance Trust I is pursuing any Ministerial Action pursuant to the Trust Declaration. If a partial redemption of the Capital Securities resulting from a partial redemption of the Junior Subordinated Debentures would result in the delisting of the Capital Securities, UNBC may only redeem the Junior Subordinated Debentures in whole. UNBC may not redeem fewer than all of the Junior Subordinated Debentures unless all accrued and unpaid interest has been paid on all Junior Subordinated Debentures for all quarterly interest payment periods terminating on or prior to the date of redemption. OPTION TO ACCELERATE MATURITY DATE If a Tax Event described in clause (3) of the definition of "Tax Event" occurs, UNBC will have the right, prior to a dissolution of Finance Trust I, to accelerate the stated maturity of the Junior Subordinated Debentures to the minimum extent required so that interest on the Junior Subordinated Debentures will be deductible for United States federal income tax purposes, but in no event may the resulting maturity of the Junior Subordinated Debentures be less than 15 years from the date of original issuance. The stated maturity may be accelerated only if UNBC shall have received an opinion of nationally recognized independent counsel experienced in such matters to the effect that: - following such acceleration, interest paid on the Junior Subordinated Debentures will be deductible for United States federal income tax purposes; - the holders of Capital Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of such acceleration, and will be subject to United States federal income tax in the same amount, in the manner and at the same times as would have been the case if such acceleration had not occurred; and - such acceleration will not cause Finance Trust I to be classified as other than a grantor trust for United States federal income tax purposes. S-96 INDENTURE EVENTS OF DEFAULT If any Indenture Event of Default shall occur and be continuing, the Property Trustee, as the holder of the Junior Subordinated Debentures, will have the right to declare the principal of and the interest on the Junior Subordinated Debentures (including any Compound Interest and Additional Interest, if any) and any other amounts payable under the Indenture to be forthwith due and payable and to enforce its other rights as a creditor with respect to the Junior Subordinated Debentures. See "Description of Debt Securities--Events of Default" in the accompanying prospectus for a description of the events of default. An Indenture Event of Default also constitutes a Declaration Event of Default. The holders of Capital Securities in certain circumstances have the right to direct the Property Trustee to exercise its rights as the holder of the Junior Subordinated Debentures. See "Description of the Capital Securities--Declaration Events of Default" and "--Voting Rights" above. ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES The holders of a majority in aggregate Liquidation Amount of the Capital Securities will have the right to (1) direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or to direct the exercise of any trust or power conferred upon the Property Trustee under the Trust Declaration, (2) waive any past default or (3) exercise any right to rescind or annul a declaration that the principal of all the Junior Subordinated Debentures shall be due and payable; PROVIDED, HOWEVER, that where a consent under the Indenture requires the consent of all holders of the Junior Subordinated Debentures affected thereby, the Property Trustee may only give such consent at the direction of all holders of the Capital Securities. If the Property Trustee fails to enforce its rights under the Junior Subordinated Debentures, to the fullest extent permitted by law, a holder of Capital Securities may, after such holder's written request to the Property Trustee to enforce such rights, institute a legal proceeding directly against UNBC to enforce the Property Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Property Trustee or any other person or entity. BOOK-ENTRY AND SETTLEMENT If distributed to holders of Capital Securities in connection with the involuntary or voluntary dissolution, winding-up or liquidation of Finance Trust I, the Junior Subordinated Debentures will be issued in the form of one or more global certificates (each, a "Global Security") registered in the name of a depositary or its nominee. Except under the limited circumstances described below, Junior Subordinated Debentures represented by a Global Security will not be exchangeable for, and will not otherwise be issuable as, Junior Subordinated Debentures in definitive form. See "--Discontinuance of the Depositary's Services." Global Securities may not be transferred except by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary or to a successor depositary or its nominee. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in such Global Securities. Except as provided below, owners of beneficial interests in a Global Security will not be entitled to receive physical delivery of Junior Subordinated Debentures in definitive form and will not be considered the holders thereof for any purpose under the Indenture, and no Global Security representing Junior Subordinated Debentures will be exchangeable, except for another Global Security of like denomination and tenor to be registered in the name of the depositary or its nominee or to a successor depositary or its nominee. Accordingly, each beneficial owner must rely on the procedures of the depositary or, if such person is not a participant, on the procedures of the participant through which such person owns its interest to exercise any rights of a holder under the Indenture. S-97 THE DEPOSITARY If Junior Subordinated Debentures are distributed to holders of Capital Securities in liquidation of such holders' interests in Finance Trust I, DTC will act as securities depositary for the Junior Subordinated Debentures. For a description of DTC and the specific terms of the depositary arrangements, see "Description of the Capital Securities--Book-Entry Only Issuance--The Depository Trust Company" above. As of the date of this prospectus supplement, that description of DTC's book-entry system and DTC's practices as they relate to purchases, transfers, notices and payments with respect to the Capital Securities apply in all material respects to any debt obligations represented by one or more Global Securities held by DTC. UNBC may appoint a successor to DTC or any successor depositary in the event DTC or such successor depositary is unable or unwilling to continue as a depositary for the Global Securities. None of UNBC, Finance Trust I, the Indenture Trustee, any paying agent and any other agent of UNBC or the Indenture Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Security for such Junior Subordinated Debentures or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. DISCONTINUANCE OF THE DEPOSITARY'S SERVICES A Global Security shall be exchangeable for Junior Subordinated Debentures registered in the names of persons other than the depositary or its nominee only if (1) the depositary notifies UNBC that it is unwilling or unable to continue as a depositary for such Global Security and no successor depositary shall have been appointed, (2) the depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934 at a time the depositary is required to be so registered to act as such depositary and no successor depositary shall have been appointed, (3) UNBC, in its sole discretion, determines that such Global Security shall be so exchangeable or (4) there shall have occurred an Indenture Event of Default. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for Junior Subordinated Debentures registered in such names as the depositary shall direct. It is expected that such instructions will be based upon directions received by the depositary from its participants with respect to ownership of beneficial interests in such Global Security. MISCELLANEOUS The Indenture provides that UNBC will pay all fees and expenses related to (1) the offering of the Trust Securities and the Junior Subordinated Debentures, (2) the organization, maintenance and dissolution of Finance Trust I, (3) the retention of the Finance Trustees and (4) the enforcement by the Property Trustee of the rights of the holders of the Capital Securities. DESCRIPTION OF THE GUARANTEE THE FOLLOWING DESCRIPTION OF THE GUARANTEE IS NOT COMPLETE. YOU SHOULD ALSO READ THE DESCRIPTION OF THE GENERAL TERMS AND PROVISIONS OF THE TRUST PREFERRED SECURITIES GUARANTEES IN THE ACCOMPANYING PROSPECTUS UNDER THE CAPTION "DESCRIPTION OF THE TRUST PREFERRED SECURITIES GUARANTEES" AND THE GUARANTEE. WE WILL FILE THE GUARANTEE AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THE ACCOMPANYING PROSPECTUS FORMS A PART. GENERAL Pursuant to the Guarantee, UNBC will irrevocably and unconditionally agree, to the extent set forth therein, to pay in full to the holders of the Capital Securities issued by Finance Trust I, the Guarantee Payments (as defined below), as and when due, regardless of any defense, right of set-off or counterclaim which Finance Trust I may have or assert. The following payments with respect to the Capital Securities S-98 (the "Guarantee Payments"), to the extent not paid by Finance Trust I, will be subject to the Guarantee (without duplication): (1) any accumulated and unpaid Distributions that are required to be paid on the Capital Securities, to the extent UNBC has made a payment of interest or principal on the Junior Subordinated Debentures; (2) the Redemption Price, to the extent UNBC has made a payment of interest or principal on the Junior Subordinated Debentures, with respect to any Capital Securities called for redemption; and (3) upon a voluntary or involuntary dissolution, winding-up or termination of Finance Trust I (other than in connection with the distribution of Junior Subordinated Debentures to the holders of the Capital Securities or the redemption of all of the Capital Securities upon the maturity or redemption of the Junior Subordinated Debentures), the lesser of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid Distributions on the Capital Securities to the date of payment to the extent Finance Trust I has funds legally available therefor and (b) the amount of assets of Finance Trust I remaining available for distribution to holders of the Capital Securities in liquidation of Finance Trust I. UNBC's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by UNBC to the holders of the Capital Securities or by causing Finance Trust I to pay such amounts to such holders. The Guarantee will be a full and unconditional guarantee with respect to the Capital Securities from the time of issuance of the Capital Securities but will not apply to any payment of Distributions due to the extent Finance Trust I lacks funds legally available therefor as a result of a failure by UNBC to make payments of interest or principal on the Junior Subordinated Debentures. If UNBC does not make interest payments on the Junior Subordinated Debentures, Finance Trust I will not pay Distributions on the Capital Securities and will not have funds legally available therefor, and, in such event, holders of the Capital Securities would not be able to rely upon the Guarantee for payment of such amounts. Instead, a holder of the Capital Securities would be required to rely on the enforcement (1) by the Property Trustee of its rights, as registered holder of the Junior Subordinated Debentures, against UNBC pursuant to the terms of the Junior Subordinated Debentures or (2) by such holder of Capital Securities of its rights against UNBC to enforce payments on the Junior Subordinated Debentures in certain circumstances. See "Description of the Capital Securities--Distributions" above. STATUS OF THE GUARANTEE The Guarantee will constitute an unsecured obligation of UNBC and will rank: - subordinate and junior in right of payment to all other liabilities of UNBC (except those obligations made equal or junior to its obligations under the Guarantee); - equal with the most senior preferred or preference stock now or hereafter issued by UNBC and with any Guarantee now or hereafter entered into by UNBC in respect of any preferred or preference stock of any affiliate of UNBC; and - senior to UNBC's Common Stock. The Guarantee will constitute a guarantee of payment and not of collection (that is, a holder of Capital Securities may institute a legal proceeding directly against UNBC to enforce its rights under the Guarantee without first instituting a legal proceeding against any other person or entity). The terms of the Capital Securities provide that each holder of Capital Securities by acceptance thereof agrees to the subordination provisions and other terms of the Guarantee. CERTAIN COVENANTS OF UNBC UNBC has covenanted in the Guarantee that, so long as any Capital Securities remain outstanding, if (1) UNBC has exercised its option to defer interest payments on the Junior Subordinated Debentures by extending the interest payment period and such extension period, or any extension thereof, shall be S-99 continuing, (2) UNBC shall be in default with respect to its payment or other obligations under the Guarantee or (3) there shall have occurred and be continuing a Declaration Event of Default or any event that, with the giving of notice or lapse of time or both, would constitute a Declaration Event of Default, then: - UNBC may not declare or pay dividends on, make distributions with respect to, redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock; and - UNBC may not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by UNBC (including other junior subordinated deferrable debentures) that rank PARI PASSU with or junior to the Junior Subordinated Debentures or make any guarantee payments with respect to the foregoing; PROVIDED, HOWEVER, that, the foregoing restrictions do not apply to: - repurchases, redemptions or other acquisitions of shares of capital stock of UNBC in connection with (1) any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, (2) a dividend reinvestment or shareholder stock purchase plan or (3) the issuance of capital stock of UNBC (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to such Extension Period; - an exchange, redemption or conversion of any class or series of UNBC's capital stock (or any capital stock of a subsidiary of UNBC) for any class or series of UNBC's capital stock or of any class or series of UNBC's indebtedness for any class or series of UNBC's capital stock; - the purchase of fractional interests in shares of UNBC's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged; - any declaration of a dividend in connection with any shareholder's rights plan, or the issuance of rights, stock or other property under any shareholder's rights plan, or the redemption or repurchase of rights pursuant thereto; - any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks PARI PASSU with or junior to such stock; or - payments by UNBC under the Guarantee or under any similar guarantee by UNBC with respect to any trust common or trust preferred securities of its subsidiaries. MODIFICATION OF THE GUARANTEE; ASSIGNMENT Except with respect to any changes that do not adversely affect the rights of holders of the Capital Securities in any material respect (in which case no vote will be required), the Guarantee may be amended only with the prior approval of the holders of not less than a majority in Liquidation Amount of the outstanding Capital Securities. All guarantees and agreements contained in the Guarantee will bind the successors, assignees, receivers, trustees and representatives of UNBC and will inure to the benefit of the holders of the Capital Securities then outstanding. EVENTS OF DEFAULT An "Event of Default" under the Guarantee will occur upon the failure of UNBC to make any of its payments or to perform other obligations thereunder. The holders of a majority in Liquidation Amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. S-100 If the Guarantee Trustee fails to enforce the Guarantee, any holder of Capital Securities may, after such holder's written request to the Guarantee Trustee to enforce the Guarantee, institute a legal proceeding directly against UNBC to enforce the Guarantee Trustee's rights under the Guarantee without first instituting a legal proceeding against Finance Trust I, the Guarantee Trustee, or any other person or entity. Notwithstanding the foregoing, if UNBC has failed to make a guarantee payment, a holder of Capital Securities may directly institute a proceeding against UNBC for enforcement of the Guarantee for such payment. UNBC is required to file annually with the Guarantee Trustee an officer's certificate as to UNBC's compliance with all conditions under the Guarantee. INFORMATION CONCERNING THE GUARANTEE TRUSTEE The Guarantee Trustee, prior to the occurrence of a default under the Guarantee, undertakes to perform only such duties as are specifically set forth in the Guarantee and, after default with respect to the Guarantee, will exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provision, the Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Guarantee at the request of any holder of the Capital Securities unless it is offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. GOVERNING LAW The Guarantee will be governed by, and construed in accordance with, the internal laws of the State of New York. S-101 EFFECT OF OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE As set forth in the Trust Declaration, the sole purpose of Finance Trust I is to issue the Trust Securities evidencing undivided beneficial interests in the assets of Finance Trust I and to invest the proceeds from such issuance in the Junior Subordinated Debentures. As long as payments of interest and other payments are made when due on the Junior Subordinated Debentures, such payments will be sufficient to cover Distributions and payments due on the Trust Securities because of the following factors: (1) the aggregate principal amount of the Junior Subordinated Debentures will be equal to the sum of the aggregate stated Liquidation Amount of the Trust Securities; (2) the interest rate and the interest and other payment dates on the Junior Subordinated Debentures will match the distribution rate and distribution and other payment dates for the Capital Securities; (3) UNBC will pay all costs and expenses of the Trust to the extent not satisfied out of the Trust's assets; and (4) the Finance Trustees are prohibited from causing or permitting Finance Trust I to engage in any activity that is not consistent with the purposes of Finance Trust I. Payments of Distributions and other payments due on the Capital Securities (in each case, to the extent funds therefor are legally available) are guaranteed by UNBC as and to the extent set forth under "Description of the Guarantee" above. If UNBC does not make interest payments on the Junior Subordinated Debentures purchased by Finance Trust I, Finance Trust I will not have sufficient funds to pay Distributions on the Capital Securities. The Guarantee is a full and unconditional guarantee from the time of its issuance but does not apply to any payment of Distributions unless and until Finance Trust I has sufficient funds legally available for the payment of such Distributions. If UNBC fails to make interest or other payments on the Junior Subordinated Debentures when due (taking account of any Extension Period), the Trust Declaration provides a mechanism whereby the holders of the Capital Securities, using the procedures described in "Description of the Capital Securities--Book- Entry Only Issuance--The Depository Trust Company" and "--Voting Rights" above, may direct the Property Trustee to enforce its rights under the Junior Subordinated Debentures. If the Property Trustee fails to enforce its rights under the Junior Subordinated Debentures, to the fullest extent permitted by law, a holder of Capital Securities may, after such holder's written request to the Property Trustee to enforce such rights, institute a legal proceeding directly against UNBC to enforce the Property Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Property Trustee or any other person. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing and such event is attributable to the failure of UNBC to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, the Redemption Date), then a holder of Capital Securities may institute a Direct Action on or after the respective due dates specified in the Junior Subordinated Debentures. UNBC, under the Guarantee, acknowledges that the Guarantee Trustee shall enforce the Guarantee on behalf of the holders of the Capital Securities. If UNBC fails to make payments under the Guarantee, the Guarantee provides a mechanism whereby the holders of the Capital Securities may direct the Guarantee Trustee to enforce its rights thereunder. If the Guarantee Trustee fails to enforce the Guarantee, any holder of Capital Securities may, after such holder's written request to the Guarantee Trustee to enforce the Guarantee, institute a legal proceeding directly against UNBC to enforce the Guarantee Trustee's rights under the Guarantee without first instituting a legal proceeding against Finance Trust I, the Guarantee Trustee or any other person. Notwithstanding the foregoing, if UNBC has failed to make a guarantee payment, a holder of Capital Securities may directly institute a proceeding against UNBC for enforcement of the Guarantee for such payment. UNBC and Finance Trust I believe that the rights of the holders of the Capital Securities and the obligations of UNBC under the Trust Declaration, the Guarantee, the Capital Securities, the Common S-102 Securities, the Indenture and the Junior Subordinated Debentures collectively provide the substantial equivalent of a full and unconditional guarantee by UNBC of payments due on the Capital Securities. See "Description of the Guarantee--General" above. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES GENERAL The following is a summary of certain United States federal income tax consequences of the purchase, ownership, and disposition of Capital Securities. Unless otherwise stated, this summary only deals with Capital Securities held as capital assets (generally, assets held for investment) by holders who purchase the Capital Securities upon original issuance. The tax treatment of a holder of Capital Securities may vary depending on his particular situation. This summary does not address all of the tax consequences that may be relevant to holders who may be subject to special tax treatment such as, for example, financial institutions, insurance companies, broker-dealers, tax-exempt organizations or, except to the extent described below, non-U.S. Holders (as defined below). This summary does not address the tax consequences to persons that have a functional currency other than the United States dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of Capital Securities. In addition, this summary does not address any aspects of state, local or foreign tax laws. This summary is based on the United States federal income tax law in effect as of the date hereof, which is subject to change, possibly on a retroactive basis. Each investor is urged to consult his tax advisor as to the particular tax consequences of purchasing, owning, and disposing of the Capital Securities, including the application and effect of United States federal, state, local, foreign and other tax laws. For purposes of this discussion, a "U.S. Holder" means (1) a citizen or resident of the United States, (2) a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, (3) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source or (4) a trust the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust. CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES UNBC will treat the Junior Subordinated Debentures as indebtedness of UNBC for United States federal income tax purposes and, by accepting the Capital Securities, a holder agrees to treat the Junior Subordinated Debentures as indebtedness for United States federal income tax purposes and to treat the Capital Securities as evidence of an indirect beneficial ownership interest in the Junior Subordinated Debentures. The remainder of this discussion assumes that the Junior Subordinated Debentures will be classified as indebtedness of UNBC for United States federal income tax purposes. CLASSIFICATION OF THE TRUST In connection with the issuance of the Capital Securities, Skadden, Arps, Slate, Meagher & Flom LLP, special tax counsel to UNBC and Finance Trust I ("Tax Counsel"), will render an opinion generally to the effect that, under current law and assuming full compliance with the terms of the Trust Declaration, the Indenture and certain other documents, and based on certain facts and assumptions contained in such opinion, Finance Trust I will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Accordingly, for United States federal income tax purposes, each holder of Capital Securities will generally be treated as the owner of an undivided interest in the Junior Subordinated Debentures, and as further discussed below, each holder will be required to include in ordinary income his allocable share of interest (or OID, if any) paid or accrued on the Junior Subordinated Debentures. S-103 POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT In general, a debt instrument will be deemed to be issued with OID if there is more than a "remote" contingency that periodic stated interest payments due on the instrument will not be timely paid. Because the exercise by UNBC of its option to defer the payment of stated interest on the Junior Subordinated Debentures would prevent UNBC from declaring dividends on any class of equity, UNBC believes that the likelihood of its exercising the option is "remote" within the meaning of the applicable Treasury Regulations ("Regulations"). As a result, UNBC intends to take the position, based on the advice of Tax Counsel, that the Junior Subordinated Debentures will not be deemed to be issued with OID. Accordingly, based on this position, stated interest payments on the Junior Subordinated Debentures will be includible in the ordinary income of a holder at the time that such payments are paid or accrued in accordance with the holder's regular method of accounting. Because the Regulations have not yet been addressed in any published rulings or other published interpretations issued by the Internal Revenue Service, it is possible that the Internal Revenue Service could take a position contrary to the position taken by UNBC. EXERCISE OF DEFERRAL OPTION. If UNBC were to exercise its option to defer the payment of stated interest on the Junior Subordinated Debentures, the Junior Subordinated Debentures would be treated, solely for purpose of the OID rules, as being "re-issued" at such time with OID. Under these rules, a holder of the Capital Securities or the Junior Subordinated Debentures would be required to include OID in ordinary income, on a current basis, over the period that the instrument is held even though UNBC would not be making any actual cash payments during the extended interest payment period. The amount of interest income includible in the taxable income of a holder of the Junior Subordinated Debentures would be determined on the basis of a constant yield method over the remaining term of the instrument and the actual receipt of future payments of stated interest on the Junior Subordinated Debentures would no longer be separately reported as taxable income. The amount of OID that would accrue, in the aggregate, during the extended interest payment period would be approximately equal to the amount of the cash payment due at the end of such period. Any OID included in income would increase the holder's adjusted tax basis in the Capital Securities or the Junior Subordinated Debentures, as the case may be, and the holder's actual receipt of interest payments would reduce such basis. Because income on the Capital Securities will constitute interest income for United States federal income tax purposes, corporate holders of Capital Securities will not be entitled to claim a dividends received deduction in respect of such income. RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE FINANCE TRUST I If UNBC exercises its right to liquidate Finance Trust I and causes the Junior Subordinated Debentures to be distributed on a PRO RATA basis to the holders of the Capital Securities, such distribution would be treated as a nontaxable event to the holders. In such event, each holder of Capital Securities would have an adjusted tax basis in the Junior Subordinated Debentures received in the liquidation equal to the adjusted tax basis in his Capital Securities surrendered therefor and the holding period of the Junior Subordinated Debentures would include the period during which the holder held the Capital Securities. If, however, Finance Trust I is characterized, for United States federal income tax purposes, as an association taxable as a corporation at the time of such liquidation, the distribution of the Junior Subordinated Debentures would constitute a taxable event to the holders of Capital Securities. If the Junior Subordinated Debentures are redeemed for cash and the proceeds of such redemption are distributed to holders in redemption of their Capital Securities, the redemption would be treated as a sale of the Capital Securities in which gain or loss would be recognized as described immediately below. SALE OF CAPITAL SECURITIES Upon the sale of Capital Securities, a holder will recognize gain or loss in an amount equal to the difference between his adjusted tax basis in the Capital Securities and the amount realized in the sale S-104 (except to the extent any amount received in respect of accrued but unpaid interest not previously included in income). Such gain or loss will be capital gain or loss and will be long term capital gain or loss if the Capital Securities have been held for more than one year. The Capital Securities may trade at a price that does not accurately reflect the value of accrued but unpaid interest (or OID if the Junior Subordinated Debentures are treated as having been issued, or reissued, with OID) with respect to the underlying Junior Subordinated Debentures. A holder who disposes of his Capital Securities will be required to include in ordinary income (1) any portion of the amount realized that is attributable to such accrued but unpaid interest to the extent not previously included in income or (2) any amount of OID that has accrued on his PRO RATA share of the underlying Junior Subordinated Debentures during the taxable year of sale through the date of disposition. Any such income inclusion will increase the holder's adjusted tax basis in his Capital Securities disposed of. To the extent that the amount realized in the sale is less than the holder's adjusted tax basis, a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. NON-U.S. HOLDERS Payments made to a holder of Capital Securities who is a non-U.S. Holder will not be subject to withholding of United States federal income tax, provided that (a) the beneficial owner of the Capital Securities does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of UNBC entitled to vote, (b) the beneficial owner of the Capital Securities is not a controlled foreign corporation that is related to UNBC through stock ownership, and (c) either (A) the beneficial owner of the Capital Securities certifies to Finance Trust I or its agent, under penalties of perjury, that it is not a United States holder and provides his name and address or (B) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution"), and holds the Capital Securities in such capacity, certifies to Finance Trust I or its agent, under penalties of perjury, that such statement has been received from the beneficial owner by it or by a Financial Institution between it and the beneficial owner and furnishes Finance Trust I or its agent with a copy thereof. In addition, a non-U.S. Holder of Capital Securities will not be subject to withholding of United States federal income tax on any gain realized upon the sale or other disposition of a Capital Security. INFORMATION REPORTING AND BACKUP WITHHOLDING Generally, income on the Capital Securities will be reported to holders on Forms 1099, which forms should be mailed to holders of Capital Securities by January 31 following each calendar year. Payments on, and proceeds from the disposition of, Capital Securities may be subject to a backup withholding tax of 31% unless the holder complies with certain certification requirements. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the holder's United States federal income tax liability, provided the required information is filed with the Internal Revenue Service. CERTAIN ERISA CONSIDERATIONS Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the context of the Plan's particular circumstances before authorizing an investment in the Capital Securities. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the Plan. S-105 Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit Plans, as well as individual retirement accounts and Keogh plans subject to Section 4975 of the Internal Revenue Code (also "Plans"), from engaging in certain transactions involving "plan assets" with persons who are "parties in interest" under ERISA or "disqualified persons" under the Internal Revenue Code ("Parties in Interest") with respect to such Plan. A violation of those "prohibited transaction" rules may result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Internal Revenue Code for such persons, unless exemptive relief is available under an applicable statutory or administrative exemption. Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and foreign plans (as described in Section 4(b)(5) of ERISA) are not subject to the requirements of ERISA or Section 4975 of the Internal Revenue Code. Under a regulation (the "Plan Assets Regulation") issued by the U.S. Department of Labor, the assets of Finance Trust I would be deemed to be "plan assets" of a Plan for purposes of ERISA and Section 4975 of the Internal Revenue Code if a Plan makes an "equity" investment in the Trust and no exception were applicable under the Plan Assets Regulation. An "equity interest" is defined under the Plan Assets Regulation as any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features and specifically includes a beneficial interest in a trust. If the assets of Finance Trust I were deemed to be "plan assets," the persons providing services with respect to the assets of the trust may become Parties in Interest or Disqualified Persons with respect to an investing Plan and may be subject to the fiduciary responsibility provisions of Title I of ERISA and the prohibited transaction provisions of ERISA and section 4975 of the Internal Revenue Code with respect to transactions involving such assets. In this regard, if the person or persons with discretionary responsibilities with respect to the Junior Subordinated Debentures or the Guarantee were affiliated with UNBC, any such discretionary actions taken with respect to such assets could be deemed to constitute a prohibited transaction under ERISA or the Internal Revenue Code (e.g., the use of such fiduciary authority or responsibility in circumstances under which such person or persons have interests that may conflict with the interests of the investing Plans and affect the exercise of their best judgement as fiduciaries). Pursuant to an exception contained in the Plan Assets Regulation, the assets of Finance Trust I would not be deemed to be "plan assets" of investing Plans if the Capital Securities are "publicly-offered securities"--that is, they are (1) widely held (I.E., owned by more than 100 investors independent of Finance Trust I and of each other), (2) freely transferable and (3) sold to a Plan as part of an offering pursuant to an effective registration statement under the Securities Act of 1933, and then timely registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934. It is expected that the Capital Securities will meet the criteria of "publicly-offered securities" above, although no assurance can be given in this regard. The underwriters expect that the Capital Securities will be held by at least 100 independent investors at the conclusion of the offering and that the Capital Securities will be freely transferable. The Capital Securities will be sold as part of an offering pursuant to an effective registration statement under the Securities Act of 1933, and then will be timely registered under the Securities Exchange Act of 1934. All of the Common Securities will be purchased and held by UNBC. Even if the assets of Finance Trust I are not deemed to be "Plan Assets" or Plans investing in Finance Trust I, certain transactions involving the Finance Trust I could be deemed to constitute direct or indirect prohibited transactions under ERISA and Section 4975 of the Internal Revenue Code with respect to an investing Plan. For example, if UNBC is a Party in Interest with respect to an Investing Plan (either directly or by reason of the activities of one or more of its affiliates), extensions of credit between UNBC and Finance Trust I (as represented by the Junior Subordinated Debentures and the Guarantee) would likely be prohibited by Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Internal Revenue Code, unless exemptive relief were available under an applicable administrative exemption (see below). S-106 The U.S. Department of Labor has issued five prohibited transaction class exemptions ("PTCEs") that may provide exemptive relief for direct or indirect prohibited transactions resulting from the purchase or holding of the Capital Securities. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers). PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts), and PTCE 84-14 (for certain transactions determined by independent qualified professional asset managers). The Capital Securities may not be purchased or held by any Plan, any entity whose underlying assets include "plan assets" by reason of any Plan's investment in the entity (a "Plan Asset Entity") or any person investing "plan assets" of any Plan, unless such purchaser or holder is eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. Any purchaser or holder of the Capital Securities or any interest therein will be deemed to have represented by its purchase and holding thereof that it either (a) is not a Plan or a Plan Asset Entity and is not purchasing such securities on behalf of or with "plan assets" of any Plan or (b) is eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such purchase or holding. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing the Capital Securities on behalf of or with "plan assets" of any Plan consult with their counsel regarding the potential consequences if the assets of Finance Trust I were deemed to be "plan assets" and the availability of exemptive relief under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. S-107 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date of this prospectus supplement, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc. and are acting as representatives (the "Representatives"), have severally agreed to purchase, and Finance Trust I has agreed to sell to them, the respective number of Capital Securities set forth opposite the name of each such underwriter. The activities of the underwriters are led jointly in this transaction by Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. Morgan Stanley & Co. Incorporated is acting as the bookrunner for the offering of the Capital Securities.
NUMBER OF CAPITAL NAME SECURITIES - ------------------------------------------------------------------------------- ------------- Morgan Stanley & Co. Incorporated.............................................. Salomon Smith Barney Inc....................................................... ------------- Total...................................................................... ------------- -------------
The underwriters are offering the Capital Securities subject to their acceptance of the securities from Finance Trust I and subject to prior sale. The Underwriting Agreement provides that the obligations of the several underwriters to pay for and accept delivery of the Capital Securities are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all the Capital Securities if any are taken. The underwriters initially propose to offer part of the Capital Securities directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ per Capital Security. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ per Capital Security to other underwriters or to certain dealers. After the initial offering of the Capital Securities, the offering price and other selling terms may from time to time be varied by the Representatives. Finance Trust I has granted the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase up to additional Capital Securities at the public offering price set forth on the cover page hereof. The underwriters may exercise such options solely for the purpose of covering over-allotments, if any, incurred in the sale of the Capital Securities offered hereby. If the underwriters' option is exercised in full, the total price to the public for this offering would be $ , the total underwriting discounts and commissions would be $ and the total proceeds to Finance Trust I would be $ . Because the proceeds of the sale of the Capital Securities will ultimately be used to purchase the Junior Subordinated Debentures of UNBC, the Underwriting Agreement provides that UNBC will pay to the underwriters as compensation for their services $ per Capital Security (or $ in the aggregate; PROVIDED that such compensation will be $ per Capital Security sold to certain institutions or $ in the aggregate if the underwriters' option to purchase additional Capital Securities is exercised in full). UNBC and Finance Trust I have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters, they will not, during the period beginning on the S-108 date of the Underwriting Agreement and continuing to and including the closing under the Underwriting Agreement: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any securities that are substantially similar to the Capital Securities or securities convertible into or exercisable or exchangeable for such securities; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described above is to be settled by such securities, in cash or otherwise, except in the offering. Prior to this offering, there has been no public market for the Capital Securities. Application has been made to list the Capital Securities on the New York Stock Exchange. Listing will be contingent upon meeting the requirements of the New York Stock Exchange, including those relating to distribution. If listing is approved, trading of the Capital Securities on the New York Stock Exchange is expected to commence within a 30-day period after the date of this prospectus supplement. The Representatives have advised Finance Trust I that they presently intend to make a market in the Capital Securities prior to the commencement of trading on the New York Stock Exchange. The Representatives will have no obligation to make a market in the Capital Securities, however, and may cease market making activities, if commenced, at any time. There can be no assurance as to the liquidity of any trading market for the Capital Securities. In order to meet one of the requirements for listing the Capital Securities on the New York Stock Exchange, the underwriters intend to sell Capital Securities to a minimum of 400 beneficial holders in lots of 100 or more. Finance Trust I, UNBC and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. In order to facilitate the offering of the Capital Securities, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Capital Securities. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the Capital Securities for their own account. In addition, to cover over-allotments or to stabilize the price of the Capital Securities, the underwriters may bid for, and purchase, Capital Securities in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Capital Securities in the offering, if the syndicate repurchases previously distributed Capital Securities in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Capital Securities above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. From time to time, certain underwriters and their affiliates have engaged in, and may in the future engage in commercial banking and investment banking transactions with UNBC and its affiliates. LEGAL MATTERS The validity of the Junior Subordinated Debentures and the Guarantee offered hereby will be passed upon for UNBC by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Certain legal matters will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. Certain matters of Delaware law relating to the validity of the Capital Securities, the enforce ability of the Trust Declaration and the creation of Finance Trust I will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. S-109 UNIONBANCAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 and for the Nine Months Ended September 30, 1997 (unaudited) and 1998 (unaudited)....................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited).......... F-3 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 and for the Nine Months Ended September 30, 1998 (unaudited).................................. F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for the Nine Months Ended September 30, 1997 (unaudited) and 1998 (unaudited).................................. F-5 Notes to Consolidated Financial Statements............................................................... F-6 Independent Auditors' Reports............................................................................ F-50
F-1 UNIONBANCAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------- ---------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 1997 1998 - ----------------------------------------------------------- --------- --------- --------- ----------- --------- (UNAUDITED) INTEREST INCOME Loans...................................................... $1,613,376 $1,687,977 $1,763,277 $1,311,337 $1,365,285 Securities................................................. 132,802 143,412 167,440 123,075 145,390 Interest bearing deposits in banks......................... 58,201 52,709 56,748 43,404 14,187 Federal funds sold and securities purchased under resale agreements............................................... 22,247 30,246 26,079 18,727 11,784 Trading account assets..................................... 20,567 12,960 19,917 13,388 19,976 --------- --------- --------- ----------- --------- Total interest income.................................. 1,847,193 1,927,304 2,033,461 1,509,931 1,556,622 --------- --------- --------- ----------- --------- INTEREST EXPENSE Domestic deposits.......................................... 358,049 460,130 520,583 386,699 353,283 Foreign deposits........................................... 96,109 71,437 75,398 55,156 66,455 Federal funds purchased and securities sold under repurchase agreements.................................... 78,908 47,095 58,544 44,053 59,667 Commercial paper........................................... 86,695 87,411 89,912 66,543 67,719 Subordinated capital notes................................. 42,538 30,104 22,850 17,180 15,883 Other borrowed funds....................................... 42,561 62,549 34,492 26,999 13,976 --------- --------- --------- ----------- --------- Total interest expense................................. 704,860 758,726 801,779 596,630 576,983 --------- --------- --------- ----------- --------- NET INTEREST INCOME........................................ 1,142,333 1,168,578 1,231,682 913,301 979,639 Provision for credit losses................................ 53,250 40,000 -- -- 45,000 --------- --------- --------- ----------- --------- Net interest income after provision for credit losses................................................ 1,089,083 1,128,578 1,231,682 913,301 934,639 --------- --------- --------- ----------- --------- NONINTEREST INCOME Service charges on deposit accounts........................ 95,177 101,975 114,647 84,699 101,288 Trust and investment management fees....................... 87,743 93,479 107,527 76,737 88,806 International commissions and fees......................... 68,621 66,108 66,122 49,593 54,516 Merchant transaction processing fees....................... 45,767 49,778 57,128 42,653 42,988 Merchant banking fees...................................... 24,483 23,929 24,924 19,899 24,083 Securities gains (losses), net............................. (702) 4,502 2,711 2,098 5,579 Other...................................................... 74,230 78,905 89,942 66,948 82,689 --------- --------- --------- ----------- --------- Total noninterest income............................... 395,319 418,676 463,001 342,627 399,949 --------- --------- --------- ----------- --------- NONINTEREST EXPENSE Salaries and employee benefits............................. 536,671 557,247 571,644 418,970 459,592 Net occupancy.............................................. 92,863 103,335 85,630 64,133 67,294 Equipment.................................................. 55,056 55,942 56,137 41,206 41,842 Foreclosed asset expense (income).......................... (3,213) 2,889 (1,268) (696) (746) Merger and integration..................................... -- 117,464 6,037 6,037 -- Other...................................................... 296,724 298,027 326,485 232,558 268,196 --------- --------- --------- ----------- --------- Total noninterest expense.............................. 978,101 1,134,904 1,044,665 762,208 836,178 --------- --------- --------- ----------- --------- Income before income taxes................................. 506,301 412,350 650,018 493,720 498,410 Income tax expense......................................... 193,359 162,892 238,722 174,869 146,045 --------- --------- --------- ----------- --------- NET INCOME................................................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- NET INCOME APPLICABLE TO COMMON STOCK...................... $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- NET INCOME PER COMMON SHARE -- BASIC(1).................... $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- NET INCOME PER COMMON SHARE -- DILUTED(1).................. $ 1.73 $ 1.36 $ 2.30 $ 1.78 $ 2.01 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC(1)..... 173,806 174,391 174,683 174,615 175,091 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- DILUTED(1)... 174,099 174,784 175,189 175,071 175,729 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- ---------
- ------------------------------ (1) Amounts restated to give retroactive effect to the stock split referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. See accompanying notes to consolidated financial statements. F-2 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1996 1997 - ------------------------------------------------------------------------- ---------- ---------- SEPTEMBER 30, 1998 ------------- (UNAUDITED) ASSETS Cash and due from banks.................................................. $2,268,771 $2,541,699 $ 2,211,595 Interest bearing deposits in banks....................................... 1,131,216 633,421 133,165 Federal funds sold and securities purchased under resale agreements...... 537,710 24,335 629,784 ---------- ---------- ------------- Total cash and cash equivalents...................................... 3,937,697 3,199,455 2,974,544 Trading account assets................................................... 465,782 394,313 357,515 Securities available for sale............................................ 2,164,197 2,538,386 3,200,376 Securities held to maturity (fair value: December 31, 1996, $274,405; December 31, 1997, $193,115; September 30, 1998, $165,807 (unaudited))........................................................... 268,196 188,775 162,018 Loans (net of allowance for credit losses: December 31, 1996, $523,946; December 31, 1997, $451,692; September 30, 1998, $473,717 (unaudited))........................................................... 20,525,841 22,289,716 23,024,128 Due from customers on acceptances........................................ 778,378 773,339 464,581 Premises and equipment, net.............................................. 410,621 406,299 407,863 Other assets............................................................. 683,347 794,982 816,293 ---------- ---------- ------------- Total assets......................................................... $29,234,059 $30,585,265 $31,407,318 ---------- ---------- ------------- ---------- ---------- ------------- LIABILITIES Domestic deposits: Noninterest bearing.................................................... $7,381,078 $8,574,515 $ 9,427,080 Interest bearing....................................................... 12,607,691 12,666,458 12,379,167 Foreign deposits: Noninterest bearing.................................................... 274,031 275,029 247,038 Interest bearing....................................................... 1,270,160 1,780,372 1,609,844 ---------- ---------- ------------- Total deposits....................................................... 21,532,960 23,296,374 23,663,129 Federal funds purchased and securities sold under repurchase agreements............................................................. 1,322,654 1,335,884 1,574,163 Commercial paper......................................................... 1,495,463 966,575 1,417,077 Other borrowed funds..................................................... 749,422 476,010 339,340 Acceptances outstanding.................................................. 778,378 773,339 464,581 Other liabilities........................................................ 478,249 709,784 666,078 Subordinated capital notes............................................... 382,000 348,000 298,000 ---------- ---------- ------------- Total liabilities.................................................... 26,739,126 27,905,966 28,422,368 ---------- ---------- ------------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares 8 3/8% Noncumulative, Series A, issued 1,350,000 shares in 1996............................................ 135,000 -- -- Common stock(1)--$5 stated value: Authorized 300,000,000 shares, issued 174,457,602 shares as of December 31, 1996, 174,917,673 shares as of December 31, 1997 and 175,208,037 shares as of September 30, 1998 (unaudited)............. 290,762 291,529 292,013 Additional paid-in capital............................................. 1,413,076 1,422,680 1,430,539 Retained earnings...................................................... 645,214 957,662 1,233,068 Accumulated other comprehensive income................................. 10,881 7,428 29,330 ---------- ---------- ------------- Total shareholders' equity........................................... 2,494,933 2,679,299 2,984,950 ---------- ---------- ------------- Total liabilities and shareholders' equity........................... $29,234,059 $30,585,265 $31,407,318 ---------- ---------- ------------- ---------- ---------- -------------
- ------------------------------ (1) Amounts restated to give retroactive effect to the stock split referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. See accompanying notes to consolidated financial statements. F-3 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, ------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - --------------------------------------------------------------- --------- --------- --------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------- (UNAUDITED) PREFERRED STOCK Balance, beginning of period................................... $ 135,000 $ 135,000 $ 135,000 $ -- Redemption of preferred stock.................................. -- -- (135,000) -- --------- --------- --------- ------------- Balance, end of period....................................... $ 135,000 $ 135,000 $ -- $ -- --------- --------- --------- ------------- COMMON STOCK Balance, beginning of period................................... $ 286,739 $ 290,300 $ 290,762 $ 291,529 Dividend reinvestment plan..................................... 3,103 121 6 6 Deferred compensation -- restricted stock awards............... 379 207 279 281 Stock options exercised........................................ 79 134 482 197 --------- --------- --------- ------------- Balance, end of period....................................... $ 290,300 $ 290,762 $ 291,529 $ 292,013 --------- --------- --------- ------------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period................................... $1,390,925 $1,408,960 $1,413,076 $ 1,422,680 Dividend reinvestment plan..................................... 15,238 1,041 (43) 10 Deferred compensation -- restricted stock awards............... 2,268 2,148 3,478 5,217 Stock options exercised........................................ 529 927 6,169 2,632 --------- --------- --------- ------------- Balance, end of period....................................... $1,408,960 $1,413,076 $1,422,680 $ 1,430,539 --------- --------- --------- ------------- RETAINED EARNINGS Balance, beginning of period................................... $ 376,468 $ 626,172 $ 645,214 $ 957,662 Net income(1).................................................. 312,942 249,458 411,296 352,365 Dividends on common stock(2)(3)................................ (50,989) (73,932) (89,848) (73,632) Dividends on preferred stock................................... (11,305) (11,306) (7,600) -- Dividend to MBL................................................ -- (144,890) -- -- Deferred compensation -- restricted stock awards............... (944) (288) (1,400) (3,327) --------- --------- --------- ------------- Balance, end of period......................................... $ 626,172 $ 645,214 $ 957,662 $ 1,233,068 --------- --------- --------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period................................... $ (9,930) $ 23,660 $ 10,881 $ 7,428 --------- --------- --------- ------------- Net income(1).................................................. 312,942 249,458 411,296 352,365 Other comprehensive income..................................... 33,590 (12,779) (3,453) 21,902 --------- --------- --------- ------------- Total comprehensive income..................................... 346,532 236,679 407,843 374,267 Less: net income included in retained earnings................. (312,942) (249,458) (411,296) (352,365) --------- --------- --------- ------------- Balance, end of period....................................... $ 23,660 $ 10,881 $ 7,428 $ 29,330 --------- --------- --------- ------------- TOTAL SHAREHOLDERS' EQUITY................................. $2,484,092 $2,494,933 $2,679,299 $ 2,984,950 --------- --------- --------- ------------- --------- --------- --------- -------------
- ------------------------------ (1) Includes dividends applicable to preferred shareholders of $11.3 million for the years ended December 31, 1995 and 1996, respectively, and $7.6 million for the year ended December 31, 1997. (2) Dividends per share in 1996 were based on historical Union Bank common cash dividends declared and did not include the $145 million dividend paid to The Mitsubishi Bank, Limited (MBL) in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (3) Dividends per share, after giving effect to the stock split referred to in Note 1 of the accompanying notes to Consolidated Financial Statements, were $0.47 in 1995 and 1996, respectively, $0.51 in 1997, and $0.42 for the nine months ended September 30, 1998, (unaudited) and are based on the Company's shares outstanding as of the declaration date. See accompanying notes to consolidated financial statements. F-4 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, --------------------------------- ----------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998 - -------------------------------------------------------------- ---------- --------- ---------- ----------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses............................... 53,250 40,000 -- -- 45,000 Depreciation, amortization and accretion.................. 61,767 65,092 65,469 49,285 50,528 Provision for deferred income taxes....................... 50,841 50,658 59,814 38,734 16,018 (Gain) loss on sales of securities available for sale..... 801 (4,502) (2,711) (2,098) (5,579) Merger and integration costs in excess of (less than) cash utilized................................................. -- 54,344 (31,414) (27,200) (12,350) Net (increase) decrease in trading account assets......... 82,541 (359,234) 52,743 (37,045) 36,798 Other, net................................................ 157,244 52,101 173,706 92,393 (33,448) ---------- --------- ---------- ----------- ---------- Total adjustments......................................... 406,444 (101,541) 317,607 114,069 96,967 ---------- --------- ---------- ----------- ---------- Net cash provided by operating activities................... 719,386 147,917 728,903 432,920 449,332 ---------- --------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale........ 240,731 19,536 171,629 3,920 418,456 Proceeds from matured and called securities available for sale....................................................... 764,853 757,463 587,034 326,833 196,358 Purchase of securities available for sale................... (1,452,339) (995,479) (1,112,080) (777,281) (1,253,529) Proceeds from matured and called securities held to maturity................................................... 213,337 95,829 79,828 36,121 26,960 Purchase of securities held to maturity..................... (123,886) -- -- -- -- Net increase in loans....................................... (2,478,608) (741,335) (1,788,179) (1,315,578) (797,343) Other, net.................................................. (34,902) (54,120) (56,584) (19,986) (42,032) ---------- --------- ---------- ----------- ---------- Net cash used by investing activities..................... (2,870,814) (918,106) (2,118,352) (1,745,971) (1,451,130) ---------- --------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits.................................... 2,245,306 1,877,917 1,763,414 1,441,228 366,755 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements................ (287,387) 127,596 13,230 (27,711) 238,279 Net increase (decrease) in commercial paper and other borrowed funds............................................. 623,612 (201,214) (797,464) 94,601 313,832 Maturity and redemption of subordinated debt................ (154,490) (119,369) (234,000) (200,000) (50,000) Proceeds from issuance of subordinated debt................. -- -- 200,000 200,000 -- Payments of cash dividends.................................. (62,044) (222,533) (93,303) (68,787) (73,631) Redemption of preferred stock............................... -- -- (135,000) (135,000) -- Repayment of borrowing to support corporate owned life insurance.................................................. (10,638) (95,475) -- -- -- Other, net.................................................. 485 (882) (2,661) 2,642 2,471 ---------- --------- ---------- ----------- ---------- Net cash provided by financing activities................. 2,354,844 1,366,040 714,216 1,306,973 797,706 ---------- --------- ---------- ----------- ---------- Net increase (decrease) in cash and cash equivalents.......... 203,416 595,851 (675,233) (6,078) (204,092) Cash and cash equivalents at beginning of period.............. 3,153,713 3,352,423 3,937,697 3,937,697 3,199,455 Effect of exchange rate changes on cash and cash equivalents................................................. (4,706) (10,577) (63,009) (16,910) (20,819) ---------- --------- ---------- ----------- ---------- Cash and cash equivalents at end of period.................... $3,352,423 $3,937,697 $3,199,455 $3,914,709 $2,974,544 ---------- --------- ---------- ----------- ---------- ---------- --------- ---------- ----------- ---------- CASH PAID DURING THE PERIOD FOR: Interest.................................................... $ 739,300 $ 764,327 $ 820,355 $ 611,347 $ 588,487 Income taxes................................................ 91,717 172,451 113,588 47,359 189,411 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed assets (OREO)............... $ 48,397 $ 44,557 $ 23,114 $ 19,033 $ 13,882 Securities transferred from held to maturity to available for sale................................................... 348,717 -- -- -- -- Dividends declared but unpaid............................... 12,788 20,383 24,528 24,518 24,529
See accompanying notes to consolidated financial statements. F-5 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS UnionBanCal Corporation (a commercial bank holding company and subsidiaries) (the Company) is 82 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and 18 percent owned by other shareholders. On April 1, 1996, the Company was created by the combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A. The combination was accounted for as a reorganization of entities under common control (similar to a business combination under the pooling of interests method). Accordingly, all historical financial information has been restated as if the combination had been in effect for all periods presented. The merger was effected by the issuance of 54,402,081 shares of Union Bank common stock in exchange for all the outstanding common shares of BanCal Tri-State Corporation. Information pretaining to merger and intergration expense is presented in Note 7. On August 10, 1998, the Company exchanged 10.2 million shares of its common stock for 7.2 million shares of Union Bank of California, N.A. (the Bank) common stock owned directly by BTM. This share exchange provided the Company with a 100 percent ownership interest in the Bank. In addition, it increased BTM's ownership percentage of the Company to 82 percent from 81 percent. The exchange of shares was accounted for as a reorganization of entities under common control. Accordingly, amounts previously reported as Parent Direct Interest in Bank Subsidiary, including the proportionate share of net income, dividends, and other comprehensive income have been reclassified to combine them with the corresponding amounts attributable to the Company's common shareholders for all periods presented. On November 18, 1998, the Board of Directors approved the declaration of a 3-for-1 stock split effective for shareholders of record on December 7, 1998. Accordingly, all historical financial information has been restated as if the stock split had been in effect for all periods presented. The Company provides a wide range of financial services to consumers, small businesses, middle market companies and major corporations, primarily in California, Oregon and Washington, but also nationally and internationally. BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) and general practice within the banking industry. Those policies that materially affect the determination of financial position, results of operations, and cash flows are summarized below. The Consolidated Financial Statements include the accounts of the Company. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior periods have been reclassified to conform with current financial statement presentation. F-6 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) The unaudited consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) as of September 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial reporting. However, they do not include all of the disclosures necessary for annual financial statements in conformity with GAAP. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest bearing deposits in banks and federal funds sold and securities purchased under resale agreements, substantially all of which have maturities less than 90 days. TRADING ACCOUNT ASSETS Trading account assets are those financial instruments that management acquires with the intent to hold for short periods of time in order to take advantage of anticipated changes in market values. Substantially all of these assets are securities with a high degree of liquidity and a readily determinable market value. Interest earned, paid, or accrued on trading account assets is included in interest income using a method that generally produces a level yield. Realized gains and losses from the close out of trading account positions and unrealized market value adjustments are recognized in noninterest income. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY The Company's securities portfolios consist of debt and equity securities that are classified either as securities available for sale or securities held to maturity. Debt securities for which the Company has the positive intent and ability to hold until maturity are classified as securities held to maturity and carried at amortized cost. Debt securities and equity securities with readily determinable market values that are not classified as either held to maturity securities or trading account assets are classified as securities available for sale and carried at fair value, with the unrealized gains or losses reported net of taxes as a separate component of shareholders' equity until realized. Realized gains and losses arising from the sale of securities are based upon the specific identification method and included in noninterest income as securities gains (losses), net. Interest income on debt securities includes the amortization of premiums and the accretion of discounts using the effective interest method and is included in interest income on securities. Dividend income on equity securities is included in noninterest income. LOANS Loans are reported at the principal amounts outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over F-7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) the loan term using a method that generally produces a level yield on the unpaid loan balance. Nonrefundable fees and direct loan origination costs related to loans held for sale are deferred and recognized as a component of the gain or loss on sale. Interest income is accrued principally on a simple interest basis. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. Interest accruals are continued for certain small business loans that are processed centrally, consumer loans, credit cards, and one-to-four family residential real estate loans. These loans are charged off or written down to their net realizable value based on delinquency time frames that range from 120 to 270 days, depending on the type of credit that has been extended. Interest accruals are also continued for loans that are both well-secured and in the process of collection. For this purpose, loans are considered well-secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered "in the process of collection" if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status. When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current period operating results. All subsequent payments received are first applied to unpaid principal and then to uncollected interest. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loans are considered to be fully collectible. However, Company policy also allows management to continue the recognition of interest income on certain loans designated as nonaccrual. This portion of the nonaccrual portfolio is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans that are well secured and in management's judgment are considered to be fully collectible. Although the accrual of interest is suspended, any payments received may be applied to the loan according to its contractual terms and interest income recognized when cash is received. Loans are considered impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer and residential mortgage loans. Renegotiated loans are those in which the Company has formally restructured a significant portion of the loan. The remaining portion is normally charged off, with a concession either in the form of below market rate financing, or debt forgiveness on the charged off portion. Loans that have been renegotiated and F-8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) have not met specific performance standards for payment are classified as renegotiated loans within the classification of nonperforming assets. Upon payment performance, such loans may be transferred from nonperforming status to accrual status. The Company offers primarily two types of leases to customers: 1) direct financing leases where the assets leased are acquired without additional financing from other sources, and 2) leveraged leases where a substantial portion of the financing is provided by debt with no recourse to the Company. Direct financing leases are carried net of unearned income, unamortized nonrefundable fees and related direct costs associated with the origination or purchase of leases. Leveraged leases are carried net of nonrecourse debt. ALLOWANCE FOR CREDIT LOSSES The Company's allowance for credit losses is maintained at a level considered by management to be adequate to absorb estimated credit losses and other credit-related charges. The allowance for credit losses is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of credit losses, net of recoveries. Losses are fully or partially charged against the allowance for credit losses when, in management's judgment, the uncollectible portion of a loan's principal balance is determined. While management has segmented the allowance to various credit-related products, the allowance is general in nature and is available for all extension of credits, including off-balance sheet instruments. In evaluating the adequacy of the allowance for credit losses, management estimates the amount of the potential risk of loss for each loan that has been identified as having more than standard credit risk. Those estimates give consideration to general economic conditions and their effects on the borrower's industry, financial and management abilities and to current valuations of collateral where appropriate. An estimate for potential credit loss content is calculated for all loans not so identified based upon the risk characteristics of particular categories of loans and historical loss experience in the portfolio, adjusted, as appropriate, for the estimated effects of current economic conditions. Further consideration for the allocation is based on credit risk concentrations in the portfolio and commitments and contingent obligations under off-balance sheet commercial and standby letters of credit. For analytical purposes only, management attributes portions of the allowance for credit losses to individual loans or groups of loans. Although the allowance for credit losses is allocated to various portfolio segments, it is general in nature and is available for the loan portfolio in its entirety. Although management believes that the allowance for possible credit losses is adequate, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio and other credit exposures. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest, net deferred loan fees or cost and unamortized premium or discount) and the estimated present F-9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. An impairment is recognized by adjusting an allocation of the existing allowance for credit losses. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of each asset. Lives of premises range from ten to forty years; lives of furniture and equipment range from three to eight years. Leasehold improvements are amortized over the term of the respective lease or 10 years, whichever is shorter. OTHER ASSETS Goodwill represents the excess of purchase price over the fair value of identifiable net assets of acquired companies and is reported as intangible assets. Goodwill is amortized using the straight-line method, generally over 15 years. Other real estate owned (OREO) represents the collateral acquired through foreclosure in full or partial satisfaction of the related loan. OREO is recorded at the lower of the loan's unpaid principal balance or its fair value as established by a current appraisal, adjusted for disposition costs. Any write-down at the date of transfer is charged to the allowance for credit losses. On an ongoing basis, OREO values, recorded in other assets, are reviewed annually and any decline in value is recognized as foreclosed asset expense in the current period. The net operating results from these assets are included in the current period in noninterest expense as foreclosed asset expense (income). DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION The Company enters into a variety of interest rate derivative contracts, primarily swaps and options and foreign exchange contracts, which include spot, futures, forward, swap and option positions either for trading purposes, based on management's intent at inception, or as an accommodation to customers. Derivatives held or issued for trading or customer accommodation are carried at fair value, with realized and unrealized changes in fair values on contracts included in noninterest income in the period in which the changes occur. Unrealized gains and losses are reported gross and included in trading account assets and other liabilities, respectively. Cash flows are reported net as operating activities. DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into a variety of derivative contracts as a means of reducing the Company's interest rate and foreign exchange exposures. At inception these contracts are evaluated in order to determine if they qualify for hedge accounting treatment and are accounted for either on a deferral, accrual or market value basis, depending on the nature of the Company's hedge strategy and the method used to F-10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) account for the hedged item. Hedge criteria include demonstrating the manner in which the hedge will reduce risk, identifying the specific asset, liability or firm commitment being hedged, and citing the time horizon being hedged. A monthly evaluation is performed to ensure that continuing correlation exists between the hedge and the item being hedged. Net interest settlements on interest rate swap, cap and floor agreements are recognized on an accrual basis as interest income or expense of the related asset or liability over the lives of the agreements. Premiums paid or received for interest rate caps and floors are amortized either to interest income or to expense of the related asset or liability over the lives of the agreements. If an agreement is terminated early, any resulting gain or loss is deferred and amortized as interest income or expense of the related asset or liability over the remaining life of the original agreement. Net settlement amounts are reported gross as other assets and other liabilities. Cash flows are reported net as operating activities. FOREIGN CURRENCY TRANSLATION Assets, liabilities and results of operations for foreign branches are recorded based on the functional currency of each branch. Since the functional currency of the branches is the local currency, the net assets are re-measured into U.S. dollars using a combination of current and historical exchange rates. The resulting gains or losses are included in shareholders' equity, on a net of tax basis. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES On January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement establishes standards for when transfers of financial assets, including those with continuing involvement by the transferor, should be considered a sale. SFAS No. 125 also establishes standards for when a liability should be considered extinguished. This Statement is effective for transfers of assets and extinguishments of liabilities occurring after December 31, 1996 and has been applied prospectively. Certain provisions of SFAS No. 125 have been postponed under SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No. 127 deferred for one year the effective date of implementation for transactions related to repurchase agreements, dollar-roll repurchase agreements, securities lending and similar transactions. Management determined that the effect of adoption of SFAS No. 127 on the Company's financial statements was not material. INCOME TAXES The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting F-11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws. NET INCOME PER COMMON SHARE Basic earnings per share (EPS) is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options (see Note 12) are a common stock equivalent. The Company adopted the provisions of SFAS No. 128, "Earnings per Share", for the year ended December 31, 1997. As required by the provisions of the Statement, all prior period and interim period EPS data presented have been restated. This Statement simplifies the standards for computing EPS and makes them comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, all entities with complex capital structures are required to provide a dual disclosure of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Also see Note 17. COMPREHENSIVE INCOME The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive Income", which requires that an enterprise report and display, by major components and as a single total, the change in its net assets during the period from non-owner sources. The adoption of this Statement resulted in a change in the financial statement presentation, but did not have an impact on the Company's consolidated financial position, results of operations or cash flows. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS The Company provides a variety of benefit and incentive compensation plans for eligible employees and retirees. Provisions for the costs of these employee benefit and incentive plans and postretirement benefit plans are accrued and charged to expense when the benefit is earned. STOCK-BASED COMPENSATION The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", on January 1, 1996. SFAS No. 123 establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based compensation plans. As allowed under the provisions of SFAS No. 123, the Company has chosen to continue to recognize compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related F-12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) Interpretations. Under the intrinsic value-based method, compensation cost is measured as the amount by which the quoted market price of the Company's stock at the date of grant exceeds the stock option exercise price. Compensation cost associated with the Company's unvested restricted stock issued under the management stock plan is measured based on the market price of the stock at the grant date and is expensed over the vesting period. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of this Statement will not impact the Company's consolidated financial position, results of operations, or cash flows, and any effect will be limited to the form and content of its disclosures. The Statement is effective with the year-end 1998 financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The Standard revises the disclosure requirements for pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. Adoption of this Statement will not impact the consolidated financial position, results of operations, or cash flows, and any effect is limited to the form and content of its disclosures. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically to assets, liabilities, firm commitments or anticipated transactions and measured as effective and ineffective when hedging changes in fair value or cash flows. Derivative instruments that do not qualify as either a fair value or cash flow hedge will be valued at fair value with the resultant gain or loss recognized in current earnings. Changes in the effective portion of fair value hedges will be recognized in current earnings along with the change in fair value of the hedged item. Changes in the effective portion of the fair value of cash flow hedges will be recognized in other comprehensive income until realization of the cash flows of the hedged item through current earnings. Any ineffective portion of hedges will be recognized in current earnings. Management believes that, depending upon the accumulated net gain or loss of the effective portion of cash flow hedges at the date of adoption, the impact of SFAS No. 133 could have a material impact on other comprehensive income. However, Management believes that any ineffective portion of cash flow hedges or any other hedges will not have a material impact on the Company's financial position or results of operations. This Statement is effective for fiscal years beginning after June 15, 1999, with earlier application encouraged. The Company expects to adopt SFAS No. 133 as of January 1, 2000. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This Statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities", which established F-13 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) accounting and reporting standards for certain activities of mortgage banking and other similar enterprises. After securitization of mortgage loans held for sale, SFAS No. 134 requires an entity to classify the resulting mortgage-backed securities or other retained interests, based on its ability or intent to sell or hold those investments. Management believes that the adoption of SFAS No. 134 will have no impact on the Company's financial position or results of operations. This Statement is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company expects to adopt SFAS No. 134 on January 1, 1999. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the capitalization of eligible costs of specified activities related to computer software developed or obtained for internal use. Management believes that the adoption of SOP 98-1 will not have a material effect on the Company's financial position or results of operations. The Statement is effective for fiscal years beginning after December 15, 1998, with earlier adoption encouraged. The Company expects to adopt SOP 98-1 on January 1, 1999. In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that entities expense start-up costs and organization costs as they are incurred. Management believes that the adoption of SOP 98-5 will not have a material effect on the Company's financial position or results of operations. The Statement is effective for fiscal years beginning after December 15, 1998, with earlier adoption encouraged. The Company expects to adopt SOP 98-5 on January 1, 1999. NOTE 2 -- SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below. SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1996 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ------------------------------------------------------------- ------------ ----------- ----------- ------------ U.S. Treasury................................................ $ 1,137,992 $ 4,993 $ 1,933 $ 1,141,052 Other U.S. government........................................ 687,717 4,993 779 691,931 Mortgage-backed securities................................... 193,531 400 274 193,657 State and municipal.......................................... 101,006 13,749 -- 114,755 Corporate debt securities.................................... -- -- -- -- Equity securities............................................ 19,041 2,553 -- 21,594 Foreign securities........................................... 1,136 72 -- 1,208 ------------ ----------- ----------- ------------ Total securities available for sale...................... $ 2,140,423 $ 26,760 $ 2,986 $ 2,164,197 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
F-14 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 2 -- SECURITIES (CONTINUED)
DECEMBER 31, 1997 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ------------------------------------------------------------- ------------ ----------- ----------- ------------ U.S. Treasury................................................ $ 987,374 $ 10,793 $ 170 $ 997,997 Other U.S. government........................................ 709,536 6,005 67 715,474 Mortgage-backed securities................................... 679,692 3,331 265 682,758 State and municipal.......................................... 90,937 13,236 -- 104,173 Corporate debt securities.................................... 2,698 311 1 3,008 Equity securities............................................ 28,881 1,596 672 29,805 Foreign securities........................................... 5,132 39 -- 5,171 ------------ ----------- ----------- ------------ Total securities available for sale...................... $ 2,504,250 $ 35,311 $ 1,175 $ 2,538,386 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
SECURITIES HELD TO MATURITY
DECEMBER 31, 1996 ------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ----------------------------------------------------------------- ---------- ----------- ----------- ---------- U.S. Treasury.................................................... $ 50,109 $ 1,735 $ -- $ 51,844 Other U.S. government............................................ 139,188 4,412 -- 143,600 Mortgage-backed securities....................................... 41,985 2,019 68 43,936 State and municipal.............................................. 36,914 310 2,199 35,025 ---------- ----------- ----------- ---------- Total securities held to maturity............................ $ 268,196 $ 8,476 $ 2,267 $ 274,405 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- DECEMBER 31, 1997 ------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - ----------------------------------------------------------------- ---------- ----------- ----------- ---------- U.S. Treasury.................................................... $ 40,092 $ 1,333 $ -- $ 41,425 Other U.S. government............................................ 99,520 2,568 -- 102,088 Mortgage-backed securities....................................... 24,477 1,745 14 26,208 State and municipal.............................................. 24,686 75 1,367 23,394 ---------- ----------- ----------- ---------- Total securities held to maturity............................ $ 188,775 $ 5,721 $ 1,381 $ 193,115 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
The amortized cost and fair value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. F-15 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 2 -- SECURITIES (CONTINUED) MATURITY SCHEDULE OF SECURITIES
SECURITIES SECURITIES AVAILABLE FOR SALE HELD TO MATURITY -------------------------- ---------------------- DECEMBER 31, 1997 DECEMBER 31, 1997 -------------------------- ---------------------- AMORTIZED FAIR AMORTIZED FAIR (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - ------------------------------------------------------------- ------------ ------------ ---------- ---------- Due in one year or less...................................... $ 321,459 $ 322,592 $ 22,699 $ 22,801 Due after one year through five years........................ 2,101,347 2,122,154 150,467 156,069 Due after five years through ten years....................... 15,950 18,508 2,596 2,536 Due after ten years.......................................... 36,613 45,327 13,013 11,709 Equity securities............................................ 28,881 29,805 -- -- ------------ ------------ ---------- ---------- Total securities........................................... $ 2,504,250 $ 2,538,386 $ 188,775 $ 193,115 ------------ ------------ ---------- ---------- ------------ ------------ ---------- ----------
During the quarter ended December 31, 1995, in accordance with guidance issued by the FASB, the Company reclassified from securities held to maturity to securities available for sale approximately $285 million at amortized cost of U.S. Treasury Notes (fair value $285 million) and $64 million at amortized cost of municipal bonds (fair value $72 million). During the years ended December 31, 1996 and 1997, there were no sales or transfers from the securities held to maturity portfolio. In 1995, proceeds from sales of securities available for sale were $241 million with gross realized gains of $2 million and gross realized losses of $3 million. In 1996, proceeds from sales of securities available for sale were $20 million with gross realized gains of $5 million and no gross realized losses. In 1997, proceeds from sales of securities available for sale were $172 million with gross realized gains of $3 million and no gross realized losses. F-16 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES A summary of loans net of unearned interest and fees of $150 million and $128 million at December 31, 1996 and 1997, respectively, is as follows:
DECEMBER 31, ---------------------------- (DOLLARS IN THOUSANDS) 1996 1997 - ----------------------------------------------------------------------------------- ------------- ------------- Domestic: Commercial, financial and industrial............................................. $ 9,495,592 $ 10,747,179 Construction..................................................................... 357,817 293,333 Mortgage: Residential.................................................................... 2,960,908 2,961,233 Commercial..................................................................... 2,597,616 2,951,807 ------------- ------------- Total mortgage............................................................... 5,558,524 5,913,040 Consumer: Installment.................................................................... 2,063,434 2,090,752 Home equity.................................................................... 1,113,269 992,916 Credit card and other lines of credit.......................................... 303,235 270,097 ------------- ------------- Total consumer............................................................... 3,479,938 3,353,765 Lease financing.................................................................. 800,048 874,860 ------------- ------------- Total loans in domestic offices.............................................. 19,691,919 21,182,177 Loans originated in foreign branches............................................... 1,357,868 1,559,231 ------------- ------------- Total loans.................................................................. 21,049,787 22,741,408 Allowance for credit losses................................................ 523,946 451,692 ------------- ------------- Loans, net................................................................... $ 20,525,841 $ 22,289,716 ------------- ------------- ------------- -------------
Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - --------------------------------------------------------------------------- ----------- ----------- ----------- Balance, beginning of year................................................. $ 563,142 $ 555,149 $ 523,946 Loans charged off.......................................................... (133,599) (119,100) (122,779) Loan loss recoveries....................................................... 72,403 48,024 51,014 ----------- ----------- ----------- Total net loans charged off............................................ (61,196) (71,076) (71,765) Provision for credit losses................................................ 53,250 40,000 -- Transfer of reserve for trading account assets............................. -- -- -- Foreign translation adjustment and other net deductions.................... (47) (127) (489) ----------- ----------- ----------- Balance, end of year....................................................... $ 555,149 $ 523,946 $ 451,692 ----------- ----------- ----------- ----------- ----------- -----------
F-17 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) Nonaccrual loans totaled $128 million and $109 million at December 31, 1996 and 1997, respectively. A significant portion of these loans were real estate related. There were no renegotiated loans at December 31, 1996 and 1997. Interest foregone on loans designated as nonaccrual at December 31, 1995, 1996 and 1997 was $18 million, $9 million and $6 million, respectively. LOAN IMPAIRMENT Impaired loans of the Company include commercial, financial and industrial, construction and commercial mortgage loans designated as nonaccrual. When the value of an impaired loan is less than the recorded investment in the loan, a portion of the Company's allowance for credit losses is allocated as an impairment allowance. Effective January 1, 1995, the Company's policy for recognition of interest income, charge-offs of loans, and application of payments on impaired loans is the same as the policy applied to nonaccrual loans. The following table sets forth information about the Company's impaired loans at the dates indicated.
DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ----------------------------------------------------------------------------- ---------- ---------- ---------- Impaired loans with an allowance............................................. $ 58,584 $ 69,886 $ 59,351 Impaired loans without an allowance(1)....................................... 114,611 43,962 49,033 ---------- ---------- ---------- Total impaired loans(2).................................................. $ 173,195 $ 113,848 $ 108,384 ---------- ---------- ---------- ---------- ---------- ---------- Allowance for impaired loans................................................. $ 15,837 $ 21,260 $ 9,418 Average balance of impaired loans during the year............................ $ 277,955 $ 145,351 $ 120,096
- ------------------------ (1) These loans do not require an allowance for credit losses since the fair values of the impaired loans equal or exceed the recorded investments in the loans. (2) This amount was evaluated for impairment using three measurement methods as follows: $64 million, $38 million, and $27 million was evaluated using the present value of the expected future cash flows at December 31, 1995, 1996 and 1997, respectively; $95 million, $45 million, and $53 million was evaluated using the fair value of the collateral at December 31, 1995, 1996 and 1997, respectively; $14 million, $31 million, and $28 million was evaluated using historical loss factors at December 31, 1995, 1996 and 1997, respectively. Interest income recognized on nonaccrual loans was $11 million, $5 million and $3 million for the years ended December 31, 1995, 1996 and 1997, respectively. RELATED PARTY LOANS The Company in some cases makes loans to related parties including its directors, executive officers and their affiliated companies. At December 31, 1996, related party loans outstanding to individuals who served as directors or executive officers at anytime during the year totaled $79 million as compared to $38 million at December 31, 1997. In the opinion of management, these related party loans were made on substantially the F-18 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) same terms, including interest rates and collateral requirements, as those terms prevailing at the date these loans were made. During 1996 and 1997, there were no loans to related parties which were charged off. Additionally, at December 31, 1996 and 1997, there were no loans to related parties which were nonperforming. NOTE 4 -- PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. As of December 31, 1996 and 1997, the amounts were:
DECEMBER 31, -------------------------------------------------------------------------- 1996 1997 ------------------------------------ ------------------------------------ ACCUMULATED ACCUMULATED DEPRECIATION DEPRECIATION AND NET BOOK AND NET BOOK (DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE - --------------------------------------------------- --------- ------------ ----------- --------- ------------ ----------- Land............................................... $ 73,309 $ -- $ 73,309 $ 69,290 $ -- $ 69,290 Premises........................................... 264,545 98,785 165,760 253,752 101,997 151,755 Leasehold improvements............................. 124,065 75,264 48,801 135,609 80,019 55,590 Furniture, fixtures and equipment.................. 362,063 239,312 122,751 400,774 271,110 129,664 --------- ------------ ----------- --------- ------------ ----------- Total............................................ $ 823,982 $ 413,361 $ 410,621 $ 859,425 $ 453,126 $ 406,299 --------- ------------ ----------- --------- ------------ ----------- --------- ------------ ----------- --------- ------------ -----------
Rental, depreciation and amortization expense were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - --------------------------------------------------------------------------------- --------- --------- --------- Rental expense of premises....................................................... $ 53,493 $ 66,189 $ 46,556 Less: rental income.............................................................. 11,050 11,904 11,049 --------- --------- --------- Net rental expense............................................................. $ 42,443 $ 54,285 $ 35,507 --------- --------- --------- --------- --------- --------- Other net rental expense (income), primarily for equipment....................... $ 2,705 $ 2,218 $ 298 --------- --------- --------- --------- --------- --------- Depreciation and amortization of premises and equipment.......................... $ 49,036 $ 51,821 $ 53,652 --------- --------- --------- --------- --------- ---------
F-19 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED) Future minimum operating lease payments are as follows.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------- ----------------- Years ending December 31, 1998......................................................................................... $ 48,156 1999......................................................................................... 46,564 2000......................................................................................... 38,078 2001......................................................................................... 33,793 2002......................................................................................... 23,654 Later years.................................................................................. 127,654 -------- Total minimum operating lease payments......................................................... $ 317,899 -------- -------- Minimum rental income due in the future under noncancellable subleases......................... $ 36,349 -------- --------
Included in other liabilities in the accompanying December 31, 1997 Consolidated Balance Sheet is $13 million of future operating lease payments accrued in connection with the Merger (also see Note 7). A majority of the leases provide for the payment of taxes, maintenance, insurance and certain other expenses applicable to the leased premises. Many of the leases contain extension provisions, escalation clauses and purchase options. There are no restrictions on paying dividends, incurring additional debt or negotiating additional leases under the terms of the present lease agreements. NOTE 5 -- DEPOSITS At December 31, 1997, the Company had $155 million in domestic interest bearing time deposits exceeding $100,000 with a remaining term of greater than one year. Maturity information for those deposits is summarized below.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------- ----------------- Due after one year through two years........................................................... $ 82,707 Due after two years through three years........................................................ 30,064 Due after three years through four years....................................................... 21,854 Due after four years through five years........................................................ 17,642 Due after five years........................................................................... 2,681 -------- Total...................................................................................... $ 154,948 -------- --------
Substantially all of the foreign interest bearing time deposits exceeding $100,000 mature in less than one year. F-20 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS RETIREMENT PLANS Between April 1, 1996 and December 31, 1996, the Company maintained two retirement plans, one covering former Union Bank employees and the other covering former BanCal Tri-State Corporation employees. Effective January 1, 1997, the Union Bank Retirement Plan was amended and renamed the Union Bank of California, N.A. Retirement Plan (the Plan). In addition, the plan covering former BanCal Tri-State Corporation employees was terminated and all account balances became fully vested. Employees of the former BanCal Tri-State Corporation entered the Plan on January 1, 1997. The Plan is a noncontributory defined benefit plan that provides retirement benefits based on years of credited service and the final average compensation amount, as defined in the Plan. Employees become eligible for this plan after one year of service and become fully vested after five years of service. Prior Bank of California participants received credited service from date of hire for vesting, eligibility and early retirement purposes, but only received service from January 1, 1997 for benefit purposes. The Company's funding policy is to make contributions equal to the maximum deductible amount as allowed by the Internal Revenue Code. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. Plan assets are invested in U.S. government securities, corporate bonds, and commingled investment funds. The following sets forth the funded status of the Plan and the amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and 1997.
DECEMBER 31, ------------------------ (DOLLARS IN THOUSANDS) 1996 1997 - ------------------------------------------------------------------------------ ----------- ----------- Accumulated benefit obligation: Actuarial present value of benefits for services rendered to date: Vested.................................................................... $ (241,188) $ (297,646) Non-vested................................................................ (27,821) (30,858) ----------- ----------- Total................................................................... $ (269,009) $ (328,504) ----------- ----------- ----------- ----------- Projected benefit obligation.................................................. $ (323,646) $ (400,958) Fair value of plan assets..................................................... 381,194 460,501 ----------- ----------- Projected benefit obligation less than plan assets.......................... 57,548 59,543 Prior service cost not yet recognized in net periodic pension cost............ 5,165 12,915 Unrecognized net gain due to change of assumptions and experience different from assumptions made........................................................ (29,660) (37,717) Unrecognized transition asset at January 1, 1986, being recognized over 13.4 years........................................................................ (359) (210) ----------- ----------- Prepaid pension costs included in other assets.......................... $ 32,694 $ 34,531 ----------- ----------- ----------- -----------
F-21 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following items are components of net pension expense.
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - -------------------------------------------------------------------- ---------- ---------- ---------- Service cost -- present value of benefits earned.................... $ 10,516 $ 12,651 $ 20,667 Interest cost on projected benefit obligation....................... 19,637 22,043 25,049 Less return on plan assets: Actual gain....................................................... (63,304) (44,210) (66,819) Gains in excess of expected return on plan assets................. 42,286 20,333 39,700 ---------- ---------- ---------- Expected return on plan assets.................................. (21,018) (23,877) (27,119) Amortization of prior service cost.................................. 2,108 2,108 3,175 Amortization of transition asset.................................... (149) (149) (149) ---------- ---------- ---------- Net pension expense............................................. $ 11,094 $ 12,776 $ 21,623 ---------- ---------- ---------- ---------- ---------- ----------
The following summarizes the assumptions used in computing the present value of the accumulated benefit obligation, the present value of the projected benefit obligation and the net pension expense.
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Discount rate in determining expense.......................................... 7.50% 7.50% 7.50% Discount rate in determining benefit obligations at year end.................. 7.50 7.50 7.00 Rate of increase in future compensation levels for determining expense........ 5.50 5.50 5.50 Rate of increase in future compensation levels for determining benefit obligations at year end...................................................... 5.50 5.50 5.00 Expected return on plan assets................................................ 8.25 8.25 8.25
The former BanCal Tri-State Corporation retirement plan, which was terminated effective January 1, 1997, was a defined contribution plan. The Company's expense for pension contributions for the years ended December 31, 1995 and 1996 was $6 million and $5 million, respectively. EXECUTIVE SUPPLEMENTAL BENEFIT PLANS The Company has several Executive Supplemental Benefit Plans (ESBP) which provide eligible employees with supplemental retirement benefits. The plans are unfunded. The accrued liability for ESBP's included in other liabilities in the Consolidated Balance Sheets was $35 million at December 31, 1996 and $39 million at December 31, 1997. The Company's expense relating to the ESBP's was $3 million for the year ended December 31, 1995 and $4 million for each of the years ended December 31, 1996 and 1997. F-22 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) SECTION 401(K) SAVINGS PLANS The Company has a defined contribution plan authorized under Section 401(k) of the Internal Revenue Code. All benefits-eligible employees with at least one year of service are eligible to participate in the plan. Employees may contribute up to 16 percent of their pre-tax covered compensation or up to 10 percent of their after-tax covered compensation through salary deductions. The Company contributes 50 percent of every pre-tax dollar an employee contributes up to the first 6 percent of the employee's pre-tax covered compensation. Effective January 1, 1997, employees are fully vested in the employer's contributions immediately. In addition, the Company may make a discretionary annual profit-sharing contribution up to 2.5 percent of an employee's pay. This profit-sharing contribution is for all eligible employees, regardless of whether an employee is participating in the 401(k) plan, and depends on the Bank's annual financial performance. All employer contributions are tax deductible by the Company. The Company's combined matching contribution expense was $9 million, $9 million and $13 million for the years ended December 31, 1995, 1996 and 1997, respectively. OTHER POSTRETIREMENT BENEFITS The Company provides certain health care and life insurance benefits for its retired employees. The health care cost is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's intent to maintain a level of cost-sharing at approximately 25 percent. Assets set aside to cover such obligations are primarily invested in mutual funds. The following table sets forth the plan's combined funded status recognized.
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1996 1997 - --------------------------------------------------------------------------- ------------ ------------ Accumulated postretirement benefit obligation: Retirees................................................................. $ (48,747) $ (48,519) Fully eligible plan participants......................................... (11,876) (12,208) Other active plan participants........................................... (19,651) (18,581) ------------ ------------ Accumulated postretirement obligation.................................. (80,274) (79,308) Fair value of plan assets.................................................. 21,703 31,136 ------------ ------------ Accumulated postretirement obligation in excess of plan assets........... (58,571) (48,172) Unrecognized net gain due to change in assumption and experience different from assumptions made..................................................... (14,829) (21,119) Unrecognized transition obligation......................................... 63,800 59,813 ------------ ------------ Accrued postretirement benefit cost.................................... $ (9,600) $ (9,478) ------------ ------------ ------------ ------------
F-23 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following table sets forth the components of postretirement benefit expense.
YEARS ENDED DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ------------------------------------------------------------ ------------ ------------ ------------ Service cost................................................ $ 1,792 $ 1,741 $ 3,123 Interest cost............................................... 6,091 5,581 5,150 Actual return on plan assets................................ (3,337) (2,590) (4,445) Net amortization and deferral............................... 5,559 4,397 4,826 ------------ ------------ ------------ Net periodic postretirement benefit cost.................. $ 10,105 $ 9,129 $ 8,654 ------------ ------------ ------------ ------------ ------------ ------------ Postretirement benefit claims paid for the year............. $ 5,309 $ 3,808 $ 3,787 ------------ ------------ ------------ ------------ ------------ ------------
The unrecognized transition obligation recorded on January 1, 1993 is being amortized over 20 years. For 1995, the former Union Bank assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the HMO plan. For future periods the assumed rate for the indemnity plan gradually decreased from 9 percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate of change on the HMO plan increased for the remainder of the decade, then gradually decreased to 5.5 percent in the year 2007 and thereafter. For 1995, former BanCal Tri-State Corporation assumed an 11.5 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan. For future periods, the assumed rate for the indemnity plan gradually decreased from 11.5 percent to 5.5 percent in 2003 and remained level thereafter. For 1996, the Company assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the HMO plan. For future periods the assumed rate for the indemnity plan gradually decreased from 9 percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate of change on the HMO plan increased to 7 percent in 1997 and then gradually decreased to 5.5 percent in the year 2007 and thereafter. For 1997, the Company assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the health maintenance organization (HMO) plan. For future periods, the rate for the indemnity plan was expected to gradually decrease from 9 percent to 5.5 percent in 2007 and remain at that level thereafter. The rate for the HMO plan was expected to increase after one year of being at a low rate and then gradually decrease to 5.5 percent in the year 2007 and thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would F-24 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) increase the accumulated postretirement benefit obligation as of December 31, 1997 by $11 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $1 million. The discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.50% as of December 31, 1995 and 1996 and 7.00% as of December 31, 1997. The estimated rate of return on plan assets was 8.00% as of December 31, 1995, 1996 and 1997. NOTE 7 -- OTHER EXPENSES The detail of other expenses is as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ----------------------------------------------------------------------------- ---------- ---------- ---------- Merchant transaction processing fees......................................... $ 31,288 $ 37,091 $ 42,274 Communications............................................................... 35,806 40,133 42,372 Professional services........................................................ 26,197 24,342 28,075 Advertising and public relations............................................. 20,911 28,788 28,664 Data processing.............................................................. 18,557 22,140 25,973 Printing and office supplies................................................. 22,626 27,085 24,098 Regulatory assessments....................................................... 23,431 4,048 5,778 Other........................................................................ 117,908 114,400 129,251 ---------- ---------- ---------- Total other expenses..................................................... $ 296,724 $ 298,027 $ 326,485 ---------- ---------- ---------- ---------- ---------- ----------
In connection with the Merger, the Company incurred merger and integration expense of $117 million and $6 million for the years ended 1996 and 1997, respectively, as summarized in the following table.
YEARS ENDED DECEMBER 31, --------------------- (DOLLARS IN THOUSANDS) 1996 1997 - ------------------------------------------------------------------------------------------- ---------- --------- Balance, accrued merger and integration expense, beginning of year......................... $ -- $ 54,344 Provision for merger and integration costs................................................. 117,464 6,037 Utilization: Cash..................................................................................... 40,155 35,809 Noncash.................................................................................. 22,965 1,642 ---------- --------- Total utilization...................................................................... 63,120 37,451 ---------- --------- Balance, accrued merger and integration expense, end of year............................... $ 54,344 $ 22,930 ---------- --------- ---------- ---------
Total merger and integration expense of $124 million was recorded to cover $38 million of personnel expense for severance, retention and other employee related costs, $54 million for facilities expense related F-25 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 7 -- OTHER EXPENSES (CONTINUED) to redundant banking facilities, and $32 million in professional services and other expense. At December 31, 1997, the liability balance included amounts primarily for severance payments that are being paid on a periodic basis and for operating lease payments related to redundant banking facilities which are continuing over the expected term of the leases. NOTE 8 -- INCOME TAXES The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ----------------------------------------------------------------------------- ---------- ---------- ---------- Taxes currently payable: Federal.................................................................... $ 96,732 $ 86,159 $ 168,375 State...................................................................... 42,356 23,180 8,441 Foreign.................................................................... 3,430 2,895 2,092 ---------- ---------- ---------- Total currently payable.................................................. 142,518 112,234 178,908 ---------- ---------- ---------- Taxes deferred: Federal.................................................................... 34,839 47,575 49,437 State...................................................................... 16,005 3,455 10,499 Foreign.................................................................... (3) (372) (122) ---------- ---------- ---------- Total deferred........................................................... 50,841 50,658 59,814 ---------- ---------- ---------- Total income tax expense................................................. $ 193,359 $ 162,892 $ 238,722 ---------- ---------- ---------- ---------- ---------- ----------
F-26 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 8 -- INCOME TAXES (CONTINUED) The components of the net deferred tax balances of the Company were as follows:
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1996 1997 - ------------------------------------------------------------------------------------------ ---------- ---------- Deferred tax assets: Allowance for credit losses............................................................. $ 195,128 $ 169,769 Accrued income & expense................................................................ 31,964 21,987 Accrued merger expense.................................................................. 22,051 15,641 Deferred state taxes.................................................................... 13,572 21,063 Other................................................................................... 2,567 7,585 ---------- ---------- Total deferred tax assets............................................................. 265,282 236,045 ---------- ---------- Deferred tax liabilities: Leasing................................................................................. 276,922 297,891 Depreciation............................................................................ 13,809 17,192 Unrealized gain on securities available for sale........................................ 9,711 13,536 ---------- ---------- Total deferred tax liabilities........................................................ 300,442 328,619 ---------- ---------- Net deferred tax liability.......................................................... $ 35,160 $ 92,574 ---------- ---------- ---------- ----------
The following table is an analysis of the effective tax rate.
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 ----- ----- ----- Federal income tax rate................................................................ 35% 35% 35% Net tax effects of: State income taxes, net of federal income tax benefit................................ 5 4 2 Tax-exempt interest income........................................................... (1) (1) (1) Amortization of intangibles.......................................................... 1 1 1 Other................................................................................ (2) 1 -- -- -- -- Effective tax rate................................................................. 38% 40% 37% -- -- -- -- -- --
During 1997, the Company received a refund from the State of California Franchise Tax Board of approximately $25 million (net of federal taxes of $17 million) in settlement of litigation, administration and audit disputes covering the years 1975-1987. The refund was recorded as a reduction to state income tax expense. During the nine months ended September 30, 1998, a reduction in state income tax liabilities of $52.4 million, net of federal tax, was recorded. Of the $52.4 million reduction, $29 million related to the reversal of previously accrued 1997 state income tax liabilities and $23.4 million related to a lower tax F-27 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 8 -- INCOME TAXES (CONTINUED) provision in 1998. The decrease in the effective tax rate in 1998 resulted from the Company's ability to file California franchise tax returns on a worldwide unitary basis, which incorporates the financial results of BTM and its worldwide affiliates. Federal and state tax returns for several years are under or subject to examination by the respective taxing authorities. Although the ultimate outcome of such examinations cannot be determined at this time, management believes that the resolution of issues that have been or may be raised will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 9 -- BORROWED FUNDS The following is a summary of the major categories of borrowed funds.
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1996 1997 - -------------------------------------------------------------------------------------- ------------ ------------ Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 5.09% and 5.38% at December 31, 1996 and 1997, respectively........................................................................ $ 1,322,654 $ 1,335,884 Commercial paper with weighted average interest rates of 5.34% and 5.64% at December 31, 1996 and 1997, respectively..................................................... 1,495,463 966,575 Other borrowed funds with weighted average interest rates of 5.66% and 6.23% at December 31, 1996 and 1997, respectively............................................ 749,422 476,010 ------------ ------------ Total borrowed funds.............................................................. $ 3,567,539 $ 2,778,469 ------------ ------------ ------------ ------------ Federal funds purchased and securities sold under repurchase agreements: Maximum outstanding at any month end................................................ $ 1,322,654 $ 1,575,930 Average balance during the year..................................................... 933,433 1,097,707 Weighted average interest rate during the year...................................... 5.05% 5.33% Commercial paper: Maximum outstanding at any month end................................................ $ 1,854,576 $ 1,876,135 Average balance during the year..................................................... 1,620,087 1,637,070 Weighted average interest rate during the year...................................... 5.40% 5.49% *Other borrowed funds: Maximum outstanding at any month end................................................ $ 1,697,236 $ 851,694 Average balance during the year..................................................... 1,119,051 635,900 Weighted average interest rate during the year...................................... 5.59% 5.42%
F-28 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK The following is a summary of capital notes which are subordinated to other obligations of the Company.
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1996 1997 - ------------------------------------------------------------------------------------------ ---------- ---------- Floating rate notes due June 2007. These notes bear interest at 0.325% above 3-month London Interbank Offered Rate (LIBOR) and are payable to the holder of the note (BTM at December 31, 1997)...................................................................... $ -- $ 200,000 Floating rate notes due July 2000. These notes bear interest at 0.30% above 3-month LIBOR................................................................................... 98,000 98,000 Floating rate notes due July 1997 and July 1998. These notes bear interest at 0.25% above 3-month LIBOR and are payable to BTM.................................................... 100,000 50,000 8.00% fixed rate notes due February 2002. The notes were called at par on February 25, 1997.................................................................................... 100,000 -- 6.67% fixed rate notes due August 2002. The notes were called at par on August 20, 1997... 50,000 -- Fixed rate and floating rate notes matured in October 1997, with $23,000 bearing interest at fixed rates of 10.05% to 10.14% and notes totaling $11,000 bearing interest at 0.375% above 3-month LIBOR..................................................................... 34,000 -- ---------- ---------- Total subordinated capital notes...................................................... $ 382,000 $ 348,000 ---------- ---------- ---------- ----------
All of the above notes qualify as Tier 2 risk-based capital under the Federal Reserve guidelines for assessing regulatory capital. For the total risk-based capital ratio, the amount of notes which qualify as capital is reduced as the notes approach maturity. At December 31, 1996 and 1997, $219 million and $239 million, respectively, of the notes qualified as risk-based capital. Provisions of several of the notes restrict the use of the Company's property as security for borrowings, and place limitations on leases, indebtedness, distributions to shareholders, mergers, sales of certain assets, transactions with affiliates and changes in majority stock ownership of the Company. The following table presents the maturities of subordinated capital notes.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - --------------------------------------------------------------------------- ----------------- Years ending December 31, 1998..................................................................... $ 50,000 2000..................................................................... 98,000 Years after 2002......................................................... 200,000 -------- Total.................................................................. $ 348,000 -------- --------
At December 31, 1996, the Company had outstanding 1,350,000 shares (or 5,400,000 depositary shares) of 8 3/8% Noncumulative Preferred Stock, Series A (Preferred Stock) totaling $135 million. On September 3, 1997, the Company redeemed all 1,350,000 outstanding shares of its Preferred Stock, reducing shareholders' F-29 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED) equity by $135 million. The redemption price was equal to the stated value of $100 per share of Preferred Stock (equivalent to $25 per depositary share), plus $2 million in accrued and unpaid dividends to the redemption date. The redemption was funded by proceeds from the issuance of $200 million in subordinated capital notes in June 1997. NOTE 11 -- DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company has a dividend reinvestment and stock purchase plan for shareholders. The plan allows shareholders to automatically reinvest all or part of their dividends in additional shares of the Company's common stock at a cost of 5 percent below the market price. Participating shareholders also have the option of purchasing additional shares at full market price with cash payments of $25 to $3,000 per quarter. The Company obtains shares required for reinvestment through open market purchases or by the issuance of new shares from its authorized but unissued stock. During the years ended December 31, 1995, 1996, and 1997, 1,862,034; 155,724; and, 131,127 shares, respectively, were required for dividend reinvestment purposes, of which 1,862,034; 71,706; and, 3,897 shares were considered new issuances during 1995, 1996 and 1997, respectively. BTM discontinued its participation in the plan after the quarter ended March 31, 1995 and did not participate in the plan as of December 31, 1997. NOTE 12 -- MANAGEMENT STOCK PLAN The Company has a management stock plan (the Stock Plan) which has 6,600,000 shares of the Company's common stock authorized to be awarded to key employees and outside directors of the Company and its subsidiaries at the discretion of the Executive Compensation and Benefits Committee of the Board of Directors (the Committee). The combined number of shares that are granted under the Stock Plan cannot exceed 6,600,000 shares of the Company's common stock. Committee members and employees on rotational assignment from BTM are not eligible for stock awards. The Committee determines the term of each stock option grant, up to a maximum of ten years from the date of grant. The exercise price of the options issued under the Stock Plan shall not be less than the fair market value on the date the option is granted. Unvested restricted stock issued under the Stock Plan is shown as a reduction to retained earnings. The value of the restricted shares at the date of grant is amortized to compensation expense over its vesting period. All cancelled or forfeited options and restricted stock become available for future grants. In 1995, 1996 and 1997, the Company granted options to various key employees, including principal officers, under the Stock Plan. The stock options vest pro rata on each anniversary of the grant date and become fully exercisable three years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, or retires under certain grant, age and service conditions. F-30 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The following is a summary of stock option transactions under the Stock Plan.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 1995 1996 1997 ----------------------------- ----------------------------- ----------------------------- NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- ----------------- ---------- ----------------- ---------- ----------------- Options outstanding, beginning of year... 740,502 $ 9.94 1,082,106 $ 10.42 1,263,807 $ 12.13 Granted............ 389,100 11.25 277,200 18.29 441,900 22.13 Exercised.......... (47,496) 9.83 (80,496) 10.69 (289,029) 10.84 Forfeited.......... -- -- (15,003) -- (19,500) 22.13 ---------- ---------- ---------- Options outstanding, end of year......... 1,082,106 $ 10.42 1,263,807 $ 12.13 1,397,178 $ 15.41 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable, end of year......... 407,466 $ 9.78 686,145 $ 10.38 712,107 $ 11.50 ---------- ---------- ---------- ---------- ---------- ----------
The weighted-average fair value of options granted was $3.13 during 1995, $6.00 during 1996, and $6.94 during 1997. The following table summarizes information about stock options outstanding.
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 OPTIONS EXERCISABLE AT ------------------------------------------------ DECEMBER 31, 1997 WEIGHTED-AVERAGE ------------------------------ RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------- ----------- ---------------- ----------------- ----------- ----------------- $6.66 - 9.08 267,408 5.0 years $ 8.34 267,408 $ 8.34 11.25 - 12.83 456,114 6.2 11.76 348,867 11.92 18.29 251,256 7.7 18.29 83,832 18.29 22.13 422,400 9.1 22.13 12,000 22.13 ----------- ----------- 1,397,178 712,107 ----------- ----------- ----------- -----------
In 1995, 1996 and 1997, the Company also granted 231,210; 133,440; and, 178,320 shares, respectively, of restricted stock to key officers, including executive officers, under the Stock Plan. The awards of restricted stock vest pro rata on each anniversary of the grant date and become fully vested four years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, or retires under certain grant, age and service conditions. Restricted shareholders have the right to vote their restricted shares and receive dividends. F-31 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The following is a summary of restricted stock transactions under the Stock Plan.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 1995 1996 1997 ----------------------------- ----------------------------- ----------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE ---------- ----------------- ---------- ----------------- ---------- ----------------- Restricted stock awards outstanding, beginning of year... 817,608 $ 8.25 1,044,951 $ 8.99 1,166,820 $ 10.04 Granted............ 231,210 11.61 133,440 18.29 178,320 22.18 Cancelled.......... (3,867) 9.72 (11,571) 10.78 (7,923) 20.08 ---------- ---------- ---------- Restricted stock awards outstanding, end of year......... 1,044,951 $ 8.99 1,166,820 $ 10.04 1,337,217 $ 11.59 ---------- ---------- ---------- ---------- ---------- ---------- Restricted stock awards vested, end of year............. 568,449 $ 7.81 764,670 $ 8.35 942,738 $ 9.17 ---------- ---------- ---------- ---------- ---------- ----------
At December 31, 1995, 1996 and 1997, 1,342,449; 958,383; and, 3,365,586 shares, respectively, were available for future grants as either stock options or restricted stock under the Stock Plan. The Company follows the intrinsic value based method in accounting for its employee stock-based compensation plan. Accordingly, no compensation cost has been recognized for its stock option grants. Had compensation cost for the Company's stock-based plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have decreased to the pro forma amounts indicated in the following table. Options that were granted prior to January 1, 1995 with vesting periods in 1995 and later are excluded from the pro forma results indicated for 1995 and 1996 in the following table.
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 - ------------------------------------------------------------------------- ---------- ---------- ---------- Net income............................................... As reported $ 312,942 $ 249,458 $ 411,296 Pro forma 312,691 248,874 410,068 Net income applicable to common stock.................... As reported $ 301,637 $ 238,152 $ 403,696 Pro forma 301,386 237,568 402,468 Net income per common share -- basic..................... As reported $ 1.74 $ 1.37 $ 2.31 Pro forma 1.73 1.36 2.30 Net income per common share -- diluted................... As reported $ 1.73 $ 1.36 $ 2.30 Pro forma 1.73 1.36 2.30
F-32 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants made in the years ended 1995, 1996 and 1997: risk-free interest rates of 7.1%, 6.3% and 6.6% in the years ended 1995, 1996 and 1997, respectively; expected volatility of 28%, 28% and 26% in the years ended 1995, 1996 and 1997, respectively; expected lives of 7 years for the years ended 1995 and 1996, respectively, and 6 years for the year ended 1997; and expected dividend yields of 4.2%, 2.6% and 2.1% in the years ended 1995, 1996 and 1997. Effective January 1, 1997, the Company established a Performance Share Plan. Eligible participants may earn performance share awards to be redeemed in cash three years after the date of grant. Performance shares are linked to shareholder value in two ways: (1) the market price of the Company's common stock, and (2) return on assets, a performance measure closely linked to value creation. Eligible participants generally receive grants of performance shares annually. The total number of performance shares granted under the plan cannot exceed 600,000 and the Company granted 14,400 shares in the year ended 1997. The value of a performance share is equal to the market price of the Company's common stock. All cancelled or forfeited performance shares become available for future grants. NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. All of the fair values presented below have been made under this definition of fair value unless otherwise disclosed. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of December 31, 1996 and 1997, as more fully described below. It should be noted that the operations of the Company are managed on a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of an institution's inherent value is its capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values which follow. F-33 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The table below presents the carrying value and fair value of the specified assets and liabilities held by the Company.
DECEMBER 31, ------------------------------------------------------------ 1996 1997 ----------------------------- ----------------------------- (DOLLARS IN THOUSANDS) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE - --------------------------------------------------- -------------- ------------- -------------- ------------- ASSETS Cash and cash equivalents.......................... $ 3,937,697 $ 3,937,697 $ 3,199,455 $ 3,199,455 Trading account assets............................. 465,782 465,782 394,313 394,313 Securities available for sale...................... 2,164,197 2,164,197 2,538,386 2,538,386 Securities held to maturity........................ 268,196 274,405 188,775 193,115 Loans, net of allowance for credit losses.......... 20,525,841 20,803,651 22,289,716 22,511,510 LIABILITIES Deposits: Noninterest bearing.............................. 7,655,109 7,655,109 8,849,544 8,849,544 Interest bearing................................. 13,877,851 13,885,504 14,446,830 14,453,029 -------------- ------------- -------------- ------------- Total deposits................................. 21,532,960 21,540,613 23,296,374 23,302,573 Borrowed funds..................................... 3,567,539 3,567,836 2,778,469 2,775,531 Subordinated capital notes......................... 382,000 388,388 348,000 348,000
The Company is also a party to financial instruments that are not reflected on the balance sheet but represent obligations of the Company in the normal course of business. For information regarding the fair value of off-balance sheet financial instruments, see Note 14. The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is considered a reasonable estimate of fair value. TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and valued at market based on quoted market prices or dealer quotes. If a quoted market price is not available, the recorded amounts are estimated using quoted market prices for similar securities. Thus, carrying value is considered a reasonable estimate of fair value for these financial instruments. SECURITIES: The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available for sale securities are carried at their aggregate fair value, while held to maturity securities are carried at amortized cost. LOANS: The fair value for performing fixed and non-reference rate loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities and where available, discount rates were based on current market rates. F-34 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair value of performing loans tied to the Company's reference rate with normal credit risk is assumed to approximate their book value. The fair value for these floating rate loans with increasing credit risk was estimated by calculating their present value using a yield the Company would currently require for loans with similar terms to borrowers with similar credit quality. Loans which are on nonaccrual status were not included in the loan valuation methods discussed previously. The fair value of these assets was estimated assuming these loans were sold on a liquidation basis. The fair value of performing mortgage loans was based on quoted market prices for loans with similar credit and interest rate risk characteristics. The fair value of performing credit card loans and credit lines is assumed to approximate their book value. The fair value was estimated for credit card loans and credit lines which were past due at December 31, 1996 and 1997 by segregating them according to their past due status and then discounting them based on the Company's historical probability of loss. NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date. The fair value of the demand deposit intangible has not been estimated. INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit was estimated using rates currently being offered on certificates with similar maturities. BORROWED FUNDS: The book values of federal funds purchased, securities sold under repurchase agreements and other short-term borrowings are assumed to approximate their fair value due to their limited duration characteristics. The fair value for commercial paper and term federal funds purchased was estimated using market quotes. SUBORDINATED CAPITAL NOTES: The fair value of fixed-rate subordinated capital notes was estimated using discounted cash flows based on market rates for A-rated bank borrowings. The book values for variable-rate subordinated capital notes are assumed to approximate fair market value. NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to certain derivative and other financial instruments that are not reflected on the balance sheet but represent obligations or assets of the Company in the normal course of business. These financial instruments are used for trading activities of the Company, to meet the needs of customers and to reduce the impact on the Company's operating results due to market fluctuations in currency or interest rates. These financial instruments involve, to varying degrees, elements of credit and market risk which are not recognized on the balance sheet. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract which exceeds the value of the existing collateral, if any. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable. F-35 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) DERIVATIVE INSTRUMENTS The fair value of the derivative financial instruments was calculated based on quoted market prices where available or if quoted market prices were not available, the Company used the estimated amount it would receive or pay to offset or terminate the agreements based upon the terms of such contracts relative to prevailing interest rates. TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS The following table reflects the Company's positions relating to trading activities in derivative instruments. Trading activities include both activities for the Company's own account and for customers. At December 31, 1996 and 1997, the majority of the Company's derivative transactions for customers are hedged with essentially offsetting contracts with other counterparties. The average fair value of derivatives held or written for trading purposes during the year is not significant. The notional amount of derivative instruments reflects the extent of the Company's involvement in these instruments. For interest rate swap, cap and floor agreements, notional amounts do not represent exposure to credit or market risk. Notional amounts are not exchanged, but serve as a point of reference for calculating payments. F-36 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) The following is a summary of derivative instruments held or written for trading purposes.
DECEMBER 31, --------------------------------------------------------- 1996 1997 --------------------------------- ---------------------- NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT (DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) - -------------------------------------------------------------------- --------- --------- ----------- ----------- --------- HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER ACCOMMODATIONS Foreign exchange forward contracts: Commitments to purchase........................................... $ 403,602 $ 2,813 $ (11,735) $ 531,330 $ 366 Commitments to sell............................................... 530,923 18,958 14,759 709,512 40,671 Foreign exchange OTC options: Options purchased................................................. -- -- -- 46,533 -- Options written................................................... -- -- -- 46,533 637 Currency swap agreements: Commitments to pay................................................ 64,817 4,821 3,193 55,725 -- Commitments to receive............................................ 38,417 1,628 1,595 55,725 5,971 Interest rate contracts: Caps purchased.................................................... 994,605 1,858 1,837 1,189,791 796 Floors purchased.................................................. 147,250 1,149 1,149 119,000 612 Caps written...................................................... 994,605 21 (1,838) 1,189,791 -- Floors written.................................................... 147,250 -- (1,149) 119,000 -- Swap contracts: Pay variable/receive variable..................................... 10,000 28 1 58,000 301 Pay fixed/receive variable........................................ 788,165 1,064 (17,592) 976,180 364 Pay variable/receive fixed........................................ 788,165 19,623 18,674 976,180 30,240 ESTIMATED (DOLLARS IN THOUSANDS) FAIR VALUE - -------------------------------------------------------------------- ----------- HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER ACCOMMODATIONS Foreign exchange forward contracts: Commitments to purchase........................................... $ (34,304) Commitments to sell............................................... 40,274 Foreign exchange OTC options: Options purchased................................................. (634) Options written................................................... 637 Currency swap agreements: Commitments to pay................................................ (5,971) Commitments to receive............................................ 5,971 Interest rate contracts: Caps purchased.................................................... 796 Floors purchased.................................................. 612 Caps written...................................................... (796) Floors written.................................................... (612) Swap contracts: Pay variable/receive variable..................................... -- Pay fixed/receive variable........................................ (29,579) Pay variable/receive fixed........................................ 29,926
- ------------------------------ (1) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS Derivative positions are integral components of the Company's designated asset and liability management activities. Therefore, the Company does not believe it is meaningful to separately analyze the derivatives component of its risk management activities in isolation from related positions. The Company uses interest rate derivative instruments as part of its management of asset and liability positions. Derivatives are used to manage interest rate risk relating to specified groups of assets and liabilities, including LIBOR based commercial loans, deposit liabilities and certain subordinated capital notes. The Company uses foreign currency forward contracts as a means of managing foreign exchange rate risk associated with assets or liabilities denominated in foreign currencies. The following table reflects summary information on derivative contracts used to hedge or modify the Company's risk as of December 31, 1996 and 1997. Amounts included in the fair value column do not include gains or losses from changes in the value of the underlying asset or liability being hedged. Notional amounts are not exchanged, but serve as a point of reference for calculating payments. For interest rate swap, cap and floor agreements, notional amounts do not represent exposure to credit or market risk. F-37 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
DECEMBER 31, ------------------------------------------------------------------------------------ 1996 1997 ------------------------------------------------------ ---------------------------- UNAMORTIZED UNAMORTIZED NOTIONAL PREMIUM PAID CREDIT ESTIMATED NOTIONAL PREMIUM PAID (DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE AMOUNTS (RECEIVED) - ------------------------------------ ----------- --------------- ----------- ----------- ----------- --------------- HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Foreign exchange forward contracts: Commitments to purchase........... $ 129,264 $ -- $ 1,628 $ (2,286) $ 341,298 $ -- Commitments to sell............... 4,142 -- 52 22 51,754 -- Currency swap agreements: Commitments to pay................ -- -- -- -- 26,400 -- Interest rate contracts: Caps purchased.................... 15,740 -- -- -- 15,420 -- Floors purchased.................. 2,050,000 6,309 9,750 9,750 3,550,000 11,730 Caps written...................... 250,000 (709) 509 509 250,000 (335) Floors written.................... 500,000 (1,016) 391 391 1,850,000 (534) Swap contracts: Pay fixed/receive variable........ 114,086 -- 241 (851) -- -- Pay variable/receive fixed........ 847,000 -- 3,775 2,398 575,000 -- CREDIT ESTIMATED (DOLLARS IN THOUSANDS) RISK(1) FAIR VALUE - ------------------------------------ ----------- ----------- HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Foreign exchange forward contracts: Commitments to purchase........... $ 862 $ (5,055) Commitments to sell............... 35 (822) Currency swap agreements: Commitments to pay................ 2,590 2,590 Interest rate contracts: Caps purchased.................... -- -- Floors purchased.................. 4,040 4,040 Caps written...................... 273 273 Floors written.................... -- (1,309) Swap contracts: Pay fixed/receive variable........ -- -- Pay variable/receive fixed........ 2,302 2,302
- ------------------------------ (1) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. F-38 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee or maintenance of compensatory balances. Such fees are deferred and, upon partial or full exercise of the commitment, amortized over the life of the loan or, if exercise is deemed remote, amortized over the commitment period. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. With respect to commitments to extend credit and letters of credit, the Company's exposure to credit risk in the event of nonperformance by customers is represented by the contractual amount of those instruments. Standby letters of credit are provided to customers to assure their performance to a third party, generally in the production of goods and services or under contractual commitments in the financial markets. Commercial letters of credit are issued to customers to facilitate foreign or domestic trade transactions. The Company charges fees for the issuance of standby and commercial letters of credit. The majority of these type of commitments have terms of one year or less and any fees charged are recognized as noninterest income upon extension of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers and is represented by the contractual amount of those instruments. When deemed necessary, the Company holds appropriate collateral supporting those commitments. Management does not anticipate any material losses as a result of these transactions. The Company uses the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance sheet instruments, by evaluating customers' credit-worthiness. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's evaluation of the customer. The nature of the collateral varies but may include deposits held in financial institutions, marketable securities, accounts receivable, inventory, property, equipment and real estate. The Company also provides for potential losses from either commitments to extend credit or standby letters of credit as a component of its evaluation in determination of the adequacy of its allowance for credit losses and resulting level of provision charged against current period earnings. The Company's pricing of these financial instruments is based on the credit quality and other covenants or requirements. Management believes that the current fees assessed on these off-balance sheet items represent market rates which would be charged for similar agreements. Based on this belief, the Company feels that the carrying amounts are reasonable estimates of the fair value of these financial instruments. At F-39 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) December 31, 1996 and 1997, fair value represents management's estimate of the unamortized fee income associated with these instruments. The following is a summary of other financial instruments with off-balance sheet risk.
DECEMBER 31, -------------------------------------------------- 1996 1997 ------------------------ ------------------------ CONTRACTUAL FAIR CONTRACTUAL FAIR (DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE - -------------------------------------------------------------- ------------- --------- ------------- --------- Commitments to extend credit.................................. $ 12,500,677 $ 6,185 $ 15,111,062 $ 27,571 Standby letters of credit..................................... 2,610,123 2,808 2,289,878 5,776 Other letters of credit....................................... 336,101 -- 314,594 --
The Company conducts securities lending transactions for institutional customers as a fully disclosed agent, and, at times, indemnifies its customers against counterparty default. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnification was $1,170 million and $1,268 million at December 31, 1996 and 1997, respectively. The market value of the associated collateral was $1,195 million and $1,294 million at December 31, 1996 and 1997, respectively. NOTE 15 -- RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND DIVIDENDS Federal Reserve Board regulations require the Bank to maintain reserve balances based on the types and amounts of deposits received. Average reserve balances were approximately $291 million and $339 million for the periods ended December 31, 1996 and 1997, respectively. As of December 31, 1996 and 1997, securities carried at $1.7 billion for each of the periods, and loans of $1.8 billion and $2.7 billion, respectively, were pledged as collateral for borrowings, to secure public and trust department deposits, and for repurchase agreements as required by contract or law. The Federal Reserve Act restricts the extension of credit by the Bank to BTM and affiliates and to UnionBanCal Corporation and its non-bank subsidiaries and requires that such loans be secured by certain types of collateral. At December 31, 1997, such extensions of credit were not material. The payment of dividends by the Bank to UnionBanCal Corporation is subject to the approval of the Office of the Comptroller of the Currency (OCC) if the total of all dividends declared in any calendar year exceeds certain calculated amounts. The payment of dividends is also limited by minimum capital requirements imposed on national banks by the OCC. At December 31, 1997, the Bank could have declared dividends aggregating $170 million without prior regulatory approval. NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies, including minimum capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's Consolidated Financial Statements. F-40 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED) Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and the Bank's prompt corrective action classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1996, and 1997, the most recent notification from the OCC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's capital amounts and ratios are presented in the following tables.
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ----------------- ------------------------------ (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO - ---------------------------------------- ---------- ----- ---------------------------------- ---------------------------- CAPITAL RATIOS FOR THE COMPANY: As of December 31, 1996: Total capital (to risk-weighted assets).............................. $2,946,654 11.17% greater than/equal to $2,111,223 greater than/equal to 8.0% Tier 1 capital (to risk-weighted assets).............................. 2,395,580 9.08 greater than/equal to 1,055,612 greater than/equal to 4.0 Tier 1 capital (to quarterly average assets)(1)........................... 2,395,580 8.41 greater than/equal to 1,139,855 greater than/equal to 4.0 As of December 31, 1997: Total capital (to risk-weighted assets).............................. $3,188,173 11.05% greater than/equal to $2,308,988 greater than/equal to 8.0% Tier 1 capital (to risk-weighted assets).............................. 2,587,071 8.96 greater than/equal to 1,154,494 greater than/equal to 4.0 Tier 1 capital (to quarterly average assets)(1)........................... 2,587,071 8.53 greater than/equal to 1,213,381 greater than/equal to 4.0
- ------------------------ (1) Excludes certain intangible assets. F-41 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ----------------- --------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO - ---------------------------------------- ---------- ----- --------------------------------- ------------------------------ CAPITAL RATIOS FOR THE BANK: As of December 31, 1996: Total capital (to risk-weighted assets)........... $2,746,285 10.51% greater than/equal to $2,090,910 greater than/equal to 8.0% Tier 1 capital (to risk-weighted assets)........... 2,208,392 8.45 greater than/equal to 1,045,455 greater than/equal to 4.0 Tier 1 capital (to quarterly average assets)(1).... 2,208,392 7.76 greater than/equal to 1,138,211 greater than/equal to 4.0 As of December 31, 1997: Total capital (to risk-weighted assets)........... $3,025,030 10.58% greater than/equal to $2,286,296 greater than/equal to 8.0% Tier 1 capital (to risk-weighted assets)........... 2,527,468 8.84 greater than/equal to 1,143,148 greater than/equal to 4.0 Tier 1 capital (to quarterly average assets)(1).... 2,527,468 8.35 greater than/equal to 1,210,898 greater than/equal to 4.0 TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS ---------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO - ---------------------------------------- --------------------------------- ------------------------------ CAPITAL RATIOS FOR THE BANK: As of December 31, 1996: Total capital (to risk-weighted assets)........... greater than/equal to $2,613,638 greater than/equal to 10.0% Tier 1 capital (to risk-weighted assets)........... greater than/equal to 1,568,183 greater than/equal to 6.0 Tier 1 capital (to quarterly average assets)(1).... greater than/equal to 1,422,764 greater than/equal to 5.0 As of December 31, 1997: Total capital (to risk-weighted assets)........... greater than/equal to $2,857,870 greater than/equal to 10.0% Tier 1 capital (to risk-weighted assets)........... greater than/equal to 1,714,722 greater than/equal to 6.0 Tier 1 capital (to quarterly average assets)(1).... greater than/equal to 1,513,622 greater than/equal to 5.0
- ------------------------ (1) Excludes certain intangible assets. NOTE 17 -- EARNINGS PER SHARE Basic EPS is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding adjusted for common stock equivalents, which include stock options. The following table presents a reconciliation of basic and diluted EPS for years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998 in accordance with SFAS No. 128: F-42 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 17 -- EARNINGS PER SHARE (CONTINUED)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1995 1996 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------- ---------------------- ---------------------- DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income.............................. $ 312,942 $ 312,942 $ 249,458 $ 249,458 $ 411,296 $ 411,296 Less: Preferred stock dividends............. (11,305) (11,305) (11,306) (11,306) (7,600) (7,600) ---------- ---------- ---------- ---------- ---------- ---------- Income available to common shareholders.......................... $ 301,637 $ 301,637 $ 238,152 $ 238,152 $ 403,696 $ 403,696 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding........................... 173,806 173,806 174,391 174,391 174,683 174,683 Additional shares due to: Assumed conversion of dilutive stock options.............................. -- 293 -- 393 -- 506 ---------- ---------- ---------- ---------- ---------- ---------- Adjusted weighted average common shares outstanding........................... 173,806 174,099 174,391 174,784 174,683 175,189 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share.................... $ 1.74 $ 1.73 $ 1.37 $ 1.36 $ 2.31 $ 2.30 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------- 1997 1998 ---------------------- ---------------------- (UNAUDITED) (UNAUDITED) ---------------------- ---------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED - ----------------------------------------------------------------- ---------- ---------- ---------- ---------- Net Income....................................................... $ 318,851 $ 318,851 $ 352,365 $ 352,365 Less: Preferred stock dividends...................................... (7,600) (7,600) -- -- ---------- ---------- ---------- ---------- Income available to common shareholders.......................... $ 311,251 $ 311,251 $ 352,365 $ 352,365 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding....................... 174,615 174,615 175,091 175,091 Additional shares due to: Assumed conversion of dilutive stock options................... -- 456 -- 638 ---------- ---------- ---------- ---------- Adjusted weighted average common shares outstanding.............. 174,615 175,071 175,091 175,729 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share............................................. $ 1.78 $ 1.78 $ 2.01 $ 2.01 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ Options to purchase 277,200 shares of common stock at $18 per share were outstanding but not included in the computation of diluted EPS in 1996 because the options were anti-dilutive. Options to purchase 422,400 shares of common stock at $22 per share and options to purchase 527,550 shares of common stock at $35 per share were outstanding but not included in the computation of diluted EPS for the nine months ended September 30, 1997 and 1998, respectively, because the options were anti-dilutive. F-43 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 18 -- COMPREHENSIVE INCOME The following is a summary of the components of accumulated other comprehensive income:
FOR THE NINE MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------------- ----------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998 - ----------------------------------------------------- ---------- ---------- ---------- ----------- ---------- (UNAUDITED) Net unrealized gain (loss) on securities available for sale, net of reclassification adjustment: Beginning balance.................................. $ (8,838) $ 24,900 $ 14,064 $ 14,064 $ 19,886 Net unrealized gain (loss) on securities available for sale during the period, before tax............................................. 53,890 (13,409) 11,908 10,626 41,378 Income tax (expense) benefit....................... (20,586) 5,297 (4,370) (4,229) (15,766) Less: reclassification adjustment for net realized (gain) loss on securities available for sale included in net income during the period, before tax............................................... 702 (4,502) (2,711) (2,098) (5,579) Plus: income tax expense (benefit)................. (268) 1,778 995 857 1,960 ---------- ---------- ---------- ----------- ---------- Net activity......................................... 33,738 (10,836) 5,822 5,156 21,993 ---------- ---------- ---------- ----------- ---------- Ending balance....................................... 24,900 14,064 19,886 19,220 41,879 ---------- ---------- ---------- ----------- ---------- Foreign currency translation adjustments: Beginning balance.................................. (1,092) (1,240) (3,183) (3,183) (12,458) Foreign currency translation adjustments during the period, before tax................................ (239) (3,212) (14,652) (2,785) (153) Income tax benefit................................. 91 1,269 5,377 1,128 62 ---------- ---------- ---------- ----------- ---------- Net activity......................................... (148) (1,943) (9,275) (1,657) (91) ---------- ---------- ---------- ----------- ---------- Ending balance....................................... (1,240) (3,183) (12,458) (4,840) (12,549) ---------- ---------- ---------- ----------- ---------- Other comprehensive income........................... $ 33,590 $ (12,779) $ (3,453) $ 3,499 $ 21,902 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- Accumulated other comprehensive income............... $ 23,660 $ 10,881 $ 7,428 $ 14,380 $ 29,330 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- ----------
NOTE 19 -- CONTINGENCIES The Company is subject to various pending and threatened legal actions which arise in the normal course of business. The Company maintains reserves for losses from legal actions which are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company's financial position or results of operations. F-44 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 20 -- TRANSACTIONS WITH AFFILIATES The Company has had, and expects to have in the future, banking transactions and other transactions in the ordinary course of business with BTM and with its affiliates and associates. During the years ended December 31, 1995, 1996 and 1997, such transactions included, but were not limited to, origination, participation, servicing and remarketing of loans and leases, purchase and sale of acceptances and interest rate derivatives, foreign exchange transactions, funds transfers, custodianships, electronic data processing, investment advice and management, deposits and credit examination, and trust services. In the opinion of management, such transactions were made at prevailing rates, terms and conditions and do not involve more than the normal risk of collectibility or present other unfavorable features. In addition, some compensation for services rendered to the Company is paid to the expatriate officers from BTM, and reimbursed by the Company to BTM under a services agreement. NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1996 1997 - -------------------------------------------------------------------------------------- ------------ ------------ ASSETS Cash and due from banks............................................................. $ 103,742 $ 66,872 Investment in and advances to subsidiaries.......................................... 2,503,706 2,879,898 Other assets........................................................................ 9,161 7,971 ------------ ------------ Total assets...................................................................... $ 2,616,609 $ 2,954,741 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper.................................................................... $ -- $ -- Subordinated capital notes.......................................................... 100,000 250,000 Other liabilities................................................................... 21,676 25,442 ------------ ------------ Total liabilities................................................................. 121,676 275,442 Shareholders' equity................................................................ 2,494,933 2,679,299 ------------ ------------ Total liabilities and shareholders' equity........................................ $ 2,616,609 $ 2,954,741 ------------ ------------ ------------ ------------
F-45 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ----------------------------------------------------------------------------- ---------- ---------- ---------- INCOME: Dividends from bank subsidiary............................................. $ 25,062 $ 270,662 $ 85,660 Dividends from nonbank subsidiaries........................................ 343 421 -- Interest income on advances to subsidiaries and deposits in bank........... 52,289 24,366 12,217 Other income............................................................... -- 959 1,040 ---------- ---------- ---------- Total income............................................................. 77,694 296,408 98,917 EXPENSE: Interest expense........................................................... 54,133 22,220 11,174 Other expense, net......................................................... (212) 1,072 1,583 ---------- ---------- ---------- Total expense.......................................................... 53,921 23,292 12,757 ---------- ---------- ---------- Income before income taxes and equity in undistributed net income of subsidiaries............................................................... 23,773 273,116 86,160 Income tax expense (benefit)................................................. (694) 889 204 ---------- ---------- ---------- Income before equity in undistributed net income of subsidiaries............. 24,467 272,227 85,956 Equity in undistributed net income (loss) of subsidiaries: Bank subsidiary(1)......................................................... 285,053 (32,894) 314,739 Nonbank subsidiaries....................................................... 3,422 10,125 10,601 ---------- ---------- ---------- NET INCOME................................................................... $ 312,942 $ 249,458 $ 411,296 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) In 1996 the amount represents dividends distributed by the Bank in excess of its 1996 net income. F-46 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1995 1996 1997 - ---------------------------------------------------------------------------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................ $ 312,942 $ 249,458 $ 411,296 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries............... (288,475) 22,769 (325,340) Other, net.............................................................. 2,800 (3,772) 1,059 ---------- ---------- ---------- Net cash provided by operating activities............................. 27,267 268,455 87,015 CASH FLOWS FROM INVESTING ACTIVITIES: Advances to subsidiaries.................................................. 33,590 (12,779) (130,805) Repayment of advances to subsidiaries..................................... 70,000 70,000 76,104 Sales and maturities of securities........................................ 11,650 322 -- ---------- ---------- ---------- Net cash provided (used) by investing activities...................... 115,240 57,543 (54,701) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short term borrowings.......................... 366 (632,296) -- Proceeds from reduction of investment in subsidiary equity................ -- 3,966 -- Maturity and redemption of subordinated capital notes and long term debt..................................................................... (70,000) (70,000) (50,000) Proceeds from issuance of subordinated capital notes...................... -- -- 200,000 Payments of cash dividends................................................ (62,044) (182,652) (93,303) Redemption of preferred stock............................................. -- -- (135,000) Other, net................................................................ 3,392 17,813 9,119 ---------- ---------- ---------- Net cash used by financing activities................................. (128,286) (863,169) (69,184) ---------- ---------- ---------- Net increase (decrease) in cash and due from banks........................ 14,221 (537,171) (36,870) Cash and due from banks at beginning of year.............................. 626,692 640,913 103,742 ---------- ---------- ---------- Cash and due from banks at end of year................................ $ 640,913 $ 103,742 $ 66,872 ---------- ---------- ---------- ---------- ---------- ---------- CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest.................................................................. $ 52,847 $ 25,785 $ 9,814 Income taxes.............................................................. (2,030) (198) 1,148 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Dividends declared but unpaid............................................. $ 12,788 $ 20,383 $ 24,528
F-47 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Certain amounts in the following unaudited quarterly financial information have been reclassified to conform with current presentation. In the opinion of management, all adjustments necessary to fairly present the results of operations have been made.
1996 QUARTERS ENDED --------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ------------------------------------------------------------ ---------- ---------- ------------- ------------ Interest income............................................. $ 483,068 $ 473,601 $ 481,315 $ 489,320 Interest expense............................................ 187,401 185,362 189,727 196,236 ---------- ---------- ------------- ------------ Net interest income......................................... 295,667 288,239 291,588 293,084 Provision for credit losses................................. 10,000 10,000 10,000 10,000 Noninterest income.......................................... 102,874 105,550 107,280 102,972 Noninterest expense......................................... 252,024 313,784 284,075 285,021 ---------- ---------- ------------- ------------ Income before income taxes.................................. 136,517 70,005 104,793 101,035 Income tax expense.......................................... 53,251 25,597 42,810 41,234 ---------- ---------- ------------- ------------ Net income.................................................. $ 83,266 $ 44,408 $ 61,983 $ 59,801 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income applicable to common stock....................... $ 80,440 $ 41,582 $ 59,156 $ 56,975 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income per common share -- basic........................ $ 0.46 $ 0.24 $ 0.34 $ 0.33 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income per common share -- diluted...................... $ 0.46 $ 0.24 $ 0.34 $ 0.33 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Dividends per common share(1)(2)............................ $ 0.12 $ 0.12 $ 0.12 $ 0.12 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------
F-48 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996, 1997, AND CONDENSED NOTES FOR SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED) NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
1997 QUARTERS ENDED --------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ------------------------------------------------------------ ---------- ---------- ------------- ------------ Interest income............................................. $ 485,031 $ 504,663 $ 520,237 $ 523,530 Interest expense............................................ 191,000 197,647 207,983 205,149 ---------- ---------- ------------- ------------ Net interest income......................................... 294,031 307,016 312,254 318,381 Provision for credit losses................................. -- -- -- -- Noninterest income.......................................... 114,786 111,021 116,820 120,374 Noninterest expense......................................... 253,138 255,753 253,317 282,457 ---------- ---------- ------------- ------------ Income before income taxes.................................. 155,679 162,284 175,757 156,298 Income tax expense.......................................... 63,177 65,739 45,953 63,853 ---------- ---------- ------------- ------------ Net income.................................................. $ 92,502 $ 96,545 $ 129,804 $ 92,445 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income applicable to common stock....................... $ 89,676 $ 93,718 $ 127,857 $ 92,445 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income per common share -- basic........................ $ 0.51 $ 0.54 $ 0.73 $ 0.53 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Net income per common share -- diluted...................... $ 0.51 $ 0.54 $ 0.73 $ 0.53 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------ Dividends per common share(1)............................... $ 0.12 $ 0.12 $ 0.14 $ 0.14 ---------- ---------- ------------- ------------ ---------- ---------- ------------- ------------
- ------------------------ (1) Dividends per share for 1996 and 1997 are based on the Company's common stock outstanding as of the declaration date. (2) Amounts prior to merger are based on Union Bank only and do not include the dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. F-49 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of UnionBanCal Corporation: We have audited the accompanying consolidated balance sheets of UnionBanCal Corporation and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of BanCal Tri-State Corporation and Union Bank on April 1, 1996, which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the consolidated statements of income, changes in shareholders' equity, and cash flows of Union Bank and subsidiaries for the year ended December 31, 1995, which statements reflect total net interest income and net income of $832 million and $207 million, respectively. These statements were audited by other auditors whose report has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Union Bank for 1995, is based solely upon the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UnionBanCal Corporation and its subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. [SIG] Deloitte & Touche LLP San Francisco, California January 30, 1998 (November 18, 1998 as to the exchange of common shares referred to in Note 1, paragraphs 3 and 4, and the adoption of SFAS No. 130, "Reporting Comprehensive Income", referred to in Notes 1 and 18, and December 7, 1998 as to the stock split referred to in Note 1, paragraph 5.) F-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Union Bank: We have audited the consolidated statement of income of Union Bank, a California state chartered bank and a 71% owned subsidiary of The Bank of Tokyo, Ltd., and subsidiaries ("the Bank") and the related consolidated statements of shareholders' equity and cash flows for the year ended December 31, 1995 (not presented herein). These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows for the year ended December 31, 1995, of Union Bank and subsidiaries, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Francisco, California January 24, 1996 F-51 SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JANUARY 11, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE COMPANY IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE SUCH OFFER OF SALE IS NOT PERMITTED. PROSPECTUS $750,000,000 UNIONBANCAL CORPORATION UNIONBANCAL FINANCE TRUST I UNIONBANCAL FINANCE TRUST II UNIONBANCAL FINANCE TRUST III UNIONBANCAL FINANCE TRUST IV COMMON STOCK, PREFERRED STOCK, DEPOSITARY SHARES TRUST PREFERRED SECURITIES GUARANTEED BY AND DEBT SECURITIES UNIONBANCAL CORPORATION
- -------------------------------------------------------------------------------- UNIONBANCAL CORPORATION - may sell common stock to the public; - may sell preferred stock to the public; - may sell depositary shares representing preferred stock to the public; - may sell debt securities to the public; and - will guarantee the payment by each trust of any trust preferred securities. THE TRUSTS UnionBanCal Finance Trust I, UnionBanCal Finance Trust II, UnionBanCal Finance Trust III and UnionBanCal Finance Trust IV are Delaware business trusts. Each trust may: - sell trust preferred securities to the public; - sell trust common securities to UnionBanCal Corporation; - use the proceeds from these sales to buy an equal amount of debt securities of UnionBanCal Corporation; and - distribute the cash payments it receives on the debt securities it owns to the holders of the trust preferred and trust common securities. WE URGE YOU TO READ CAREFULLY THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, WHICH WILL DESCRIBE THE SPECIFIC TERMS OF THE SECURITIES BEING OFFERED TO YOU, BEFORE YOU MAKE YOUR INVESTMENT DECISION. INVESTING IN THE SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4 - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- THIS PROSPECTUS MAY NOT BE USED TO SELL SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. The date of this prospectus is , 1999 TABLE OF CONTENTS
PAGE ----- About This Prospectus.......................... 2 Special Note Regarding Forward-Looking Statements................................... 2 UnionBanCal Corporation........................ 3 Risk Factors................................... 4 The Trusts..................................... 8 Use of Proceeds................................ 9 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.................... 9 Description of Securities...................... 10 Description of Capital Stock................. 10 Description of Depositary Shares............. 11 PAGE ----- Description of the Trust Preferred Securities................................. 13 Description of Debt Securities............... 19 Description of the Trust Preferred Securities Guarantees................................. 28 Relationship Among the Trust Preferred Securities, the Trust Preferred Securities Guarantee and the Debt Securities Held by Each Trust................................... 31 Plan of Distribution........................... 31 Legal Opinion.................................. 32 Experts........................................ 32 Where You Can Find More Information............ 33
ABOUT THIS PROSPECTUS This prospectus is part of a registration statement that we and the trusts filed with the Securities and Exchange Commission using a "shelf" registration process. Under this shelf process, we may sell any combination of the securities described in this prospectus in one or more offerings up to a total dollar amount of $750,000,000. This prospectus provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. You should read both this prospectus and any prospectus supplement together with additional information described under the heading "Where You Can Find More Information." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus or the information incorporated by reference herein includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act. Some of the forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or the negative of those words or other comparable terminology. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Some factors include fluctuations in interest rates, inflation, government regulations, and economic conditions and competition in the geographic and business areas in which we conduct our operations. For a discussion of factors that could cause actual results to differ, please see the discussion under "Risk Factors" contained in this prospectus generally, in any prospectus supplement related hereto, and in other information contained in our publicly available SEC filings and press releases. 2 UNIONBANCAL CORPORATION UnionBanCal Corporation, or "UNBC," is a California-based commercial bank holding company. Its principal subsidiary is Union Bank of California, N.A. Union Bank of California is the third largest commercial bank in California, based on both total assets and total deposits in California, and is among the 30 largest in the United States. Having roots as far back as 1864, we are among the oldest banks on the West Coast. At September 30, 1998, we had 244 full-service branches in California, six full-service branches in Oregon and Washington, two facilities in Texas and New York and 18 offices abroad. Most of our customers are located in California, the nation's most populous state with over 32 million residents. Our bank was formed through the combination of Union Bank and BanCal Tri-State Corporation in 1996. We are presently approximately 82% owned by The Bank of Tokyo-Mitsubishi, Ltd. We provide a wide range of financial products and services to retail customers, small businesses, middle-market companies and major corporations. These products and services include a variety of personal and commercial financial services, including: - consumer and small-business lending, - corporate and international lending, - corporate and international cash management, - treasury services, - trust services, and - investment advisory services. As of September 30, 1998, we had total assets of $31.4 billion, total deposits of $23.7 billion and total shareholders' equity of $3.0 billion. We had net income for the nine months ended September 30, 1998 of $352.4 million, and net income per diluted share of $2.01 after giving effect to the December 1998 3-for-1 stock split. 3 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AS WELL AS THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS BEFORE PURCHASING THE SECURITIES. ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets and deposits are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. In the early 1990s, the California economy experienced an economic recession that resulted in increases in the level of delinquencies and losses for us and many of the state's financial institutions. If California were to experience another recession, it is expected that our level of problem assets would increase accordingly. The current economic crisis in Asia is expected to continue to negatively impact the economic conditions in California, which could adversely affect our business. ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD HAVE AN ADVERSE EFFECT ON OUR CUSTOMERS AND THEIR ABILITY TO MAKE PAYMENTS TO US We are also subject to certain industry-specific economic factors. For example, a portion of our total loan portfolio is related to real estate obligations, and a portion of our recent growth has been fueled by the general real estate recovery in California. Accordingly, a downturn in the real estate industry in California could have an adverse effect on our operations. Similarly, a portion of our total loan portfolio is to borrowers in the agricultural industry. Last year's weather effects of "El Nino," combined with low commodity prices, may adversely affect the agricultural industry and, consequently, may impact our business negatively. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of loans. In addition, changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationships between different interest rate indices, could affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income. An increase in market interest rates also could adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in non-performing assets and charge-offs, which could adversely affect our business. SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD. The Bank of Tokyo-Mitsubishi owns a majority of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi can elect all of our directors and can control the vote on all matters, including determinations such as: - approval of mergers or other business combinations; - sales of all or substantially all of UNBC's assets; - any matters submitted to a vote of UNBC's shareholders; - issuance of any additional common stock or other equity securities; - incurrence of debt other than in the ordinary course of business; 4 - the selection and tenure of the Chief Executive Officer of UNBC; - payment of dividends with respect to common stock or other equity securities; and - matters that might be favorable to The Bank of Tokyo-Mitsubishi. The Bank of Tokyo-Mitsubishi's ability to prevent an unsolicited bid for UNBC or any other change in control could have an adverse effect on the market price for our common stock and other UNBC securities. A majority of UNBC's directors are not officers or employees of UNBC or any of its affiliates, including The Bank of Tokyo-Mitsubishi. However, because of The Bank of Tokyo-Mitsubishi's control over the election of our directors, The Bank of Tokyo-Mitsubishi could change the composition of our Board of Directors so that it would not have a majority of outside directors. THE BANK OF TOKYO-MITSUBISHI'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of The Bank of Tokyo-Mitsubishi and believe our business is not necessarily closely related to its business or outlook, its credit ratings may affect our credit ratings. The Bank of Tokyo-Mitsubishi's credit ratings were downgraded in October 1998 by Standard and Poor's Corporation and its credit ratings currently are on Moody's Investors Service, Inc.'s credit watch with negative implications. Any future downgrading of its credit rating could adversely affect our credit ratings. Therefore, as long as The Bank of Tokyo-Mitsubishi maintains a majority interest in UNBC, a deterioration in The Bank of Tokyo-Mitsubishi's financial condition could result in an increase in our borrowing costs and could impair our access to the public and private capital markets. The Bank of Tokyo-Mitsubishi is also subject to regulatory oversight and review. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system and The Bank of Tokyo-Mitsubishi. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US As part of The Bank of Tokyo-Mitsubishi's normal risk management processes, it manages its global credit exposures and concentrations on an aggregate basis, including UNBC. Therefore, at certain levels, our ability to approve certain credits and categories of customers is subject to concurrence by The Bank of Tokyo-Mitsubishi. We may wish to extend credit to the same customer as The Bank of Tokyo-Mitsubishi. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi's aggregate credit exposure and marketing policies. Our directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi's common stock or service as a director or officer or other employee of both UNBC and The Bank of Tokyo-Mitsubishi could create or appear to create potential conflicts of interest, especially since both of us compete in the United States banking industry. SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions and major foreign-affiliated or foreign banks, as well as many financial and nonfinancial firms that offer services similar to those offered by us. Some of our competitors are community banks that have strong local market positions. Other competitors include large financial institutions (such as Bank of America, California Federal, Washington Mutual, and Wells Fargo) that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than UNBC, which may adversely affect our ability to compete effectively. In addition, there have been a number of recent mergers involving financial institutions located in California. Some of the merged banks, such as Norwest/Wells Fargo, employ a strong community-based 5 banking model of doing business that may increase competition with our distinctive combination of traditional community bank service coupled with a large branch network. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTION COULD LIMIT AMOUNTS PAYABLE TO US A substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidates, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. If, however, we are a creditor of the subsidiary with recognized claims against it, we would be in the same position. ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations. Additionally, our international activities may be subject to the laws and regulations of the jurisdiction where business is being conducted. International laws, regulations and policies affecting us and our subsidiaries may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi's controlling ownership of UNBC, laws, regulations and policies adopted or enforced by the Government of Japan may adversely affect our activities and investments and those of our subsidiaries in the future. Under long-standing policy of the Board of Governors of the Federal Reserve System, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, UNBC may be required to commit financial and other resources to its subsidiary bank in circumstances where it might not otherwise do so. POSSIBLE DISRUPTION OF BUSINESS DUE TO THE YEAR 2000 PROBLEM The year 2000 problem results from an inability of computer systems to accurately recognize dates on and after the year 2000. The year 2000 problem is a broad business issue that extends beyond computer failures to possible failures of entire infrastructures, such as telecommunications and data networks, building facilities and security systems and systems of other institutions, including governmental agencies, to settle transactions. Many of our critical operations are not presently ready to operate normally in the year 2000 and beyond, although preparations are underway to correct this. We are preparing for the century change with an enterprise-wide year 2000 program. It has identified all of the major application and processing systems, and sought external and internal resources to replace and test the systems. We are testing purchased software, internally developed systems and systems supported by external parties as part of the program. We are evaluating customers and vendors that have significant relationships with UNBC to determine whether they are adequately preparing for the year 2000. In addition, we are developing contingency plans to reduce the impact of some potential events that may occur. However, we cannot guarantee that the systems of vendors or customers with which we do business will be completed on a timely basis, or that contingency plans will shield operations from failures that may occur. 6 The year 2000 problem poses the following principal risks to our business: - disruption of our business due to our failure to achieve year 2000 readiness; - disruption of our business due to failure of third parties to achieve year 2000 readiness; and - disruption in our funding and repayment operations due to failure of fund providers and obligors to achieve year 2000 readiness. We estimate that the total cost of the year 2000 project will be approximately $50 million. We are funding the cost of the year 2000 project by normal operating cash flow. We are staffing our year 2000 project with external people as well as internal staff re-deployed from less time-sensitive assignments. Our estimated total cost could change further as analysis continues. Because of the range of possible issues and the large number of variables involved, however, we cannot definitively quantify the potential costs. For example, our remediation efforts or the efforts of third parties may be unsuccessful. Any failure of such remediation efforts could result in a loss of business, damage to our reputation or legal liability. Consequently, such failures could have a material adverse effect on our business. POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK Although The Bank of Tokyo-Mitsubishi has announced its intention to maintain its majority ownership in UNBC, it may sell shares of our common stock in compliance with the federal securities laws. By virtue of its current control of UNBC, The Bank of Tokyo-Mitsubishi could sell large amounts of its shares of our common stock by causing us to file a registration statement that would allow them to sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi could sell its shares of our common stock without registration pursuant to Rule 144 under the Securities Act. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect market prices. If The Bank of Tokyo-Mitsubishi sells or transfers its shares of our common stock as a block, another person or entity could become the controlling shareholder of UNBC. 7 THE TRUSTS UNBC created four Delaware business trusts by executing, as sponsor, four Declarations of Trust with five appointed trustees for each trust. The trusts are named UnionBanCal Finance Trust I, UnionBanCal Finance Trust II, UnionBanCal Finance Trust III, and UnionBanCal Finance Trust IV (each, a "Trust"). Prior to the issuance of trust preferred securities, we will file an Amended and Restated Declaration of Trust (a "Declaration") for the Trust that will issue the trust preferred securities. The Declaration will state the terms and conditions for the Trust to issue and sell its preferred securities and its common securities. A form of Declaration is filed as an exhibit to the registration statement of which this prospectus is a part. Each Trust will exist solely to: - issue and sell its preferred and common securities; - use the proceeds from the sale of its preferred and common securities to purchase a series of UNBC's debt securities; and - engage in other activities that are necessary or incidental to these purposes. We will purchase all of the common securities of each Trust. Unless otherwise stated in the applicable prospectus supplement, the trust common securities will represent an aggregate liquidation amount equal to at least 3% of each Trust's total capitalization. The trust preferred securities will represent the remaining approximately 97% of such Trust's total capitalization. The trust common securities will have terms substantially identical to, and will rank equal in priority of payment with, the trust preferred securities. However, if an event of default under the related Declaration has occurred, then cash distributions and liquidation, redemption and other amounts payable on the trust common securities will be subordinate to the trust preferred securities in priority of payment. UNBC will guarantee the trust preferred securities as described later in this prospectus and the applicable prospectus supplement. We have appointed five trustees to conduct the Trusts' business and affairs: - The First National Bank of Chicago ("Property Trustee") - First Chicago Delaware Inc. ("Delaware Trustee") - Three officers of UNBC ("Regular Trustees") Only UNBC, as the only holder of the common securities of each Trust, can remove or replace the trustees. In addition, UNBC can increase or decrease the number of trustees. The majority of trustees, however, will always be Regular Trustees. UNBC will pay all fees and expenses related to each Trust and to each offering of the related preferred securities, except each Trust will pay for its obligations under the related preferred and common securities. The Trusts will not have separate financial statements. The statements would not be material to holders of the preferred securities because the Trusts will not have any independent operations. The Trusts exist solely for the reasons stated above. 8 USE OF PROCEEDS The net proceeds of the sale of the common and preferred securities issued by each Trust will be invested by such Trust in the related series of debt securities of the Company. Unless otherwise stated in the applicable prospectus supplement, the Company intends to use such proceeds, in addition to the net proceeds of any securities sold by the Company, for possible repurchases of the Company's outstanding securities and for general corporate purposes, including working capital, acquisitions and other business opportunities. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The following table presents the ratio of earnings to combined fixed charges and preferred stock dividends for the Company for the periods indicated.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on deposits.................. 1.33x 1.46x 1.68x 1.51x 1.78x 1.79x 1.85x Including interest on deposits.................. 1.20 1.29 1.42 1.30 1.45 1.46 1.49
For purposes of computing these ratios, earnings represent consolidated income before income taxes and cumulative effects of accounting changes plus consolidated fixed charges. Combined fixed charges represent interest expense, including interest on deposits where indicated, and such portion of rental expense deemed representative of the interest factor. The denominator is increased for preferred stock dividend requirements which represent the amount of pre-tax earnings required to cover such dividend requirements. 9 DESCRIPTION OF SECURITIES This prospectus contains a summary of our common stock, preferred stock, depositary shares, debt securities, preferred securities of the Trusts, and preferred securities guarantees of UNBC relating to each Trust. The securities issued by the Trusts will be identical with respect to each Trust, except as otherwise described in the prospectus supplement for such securities. These summaries are not meant to be a complete description of each security. However, this prospectus and the accompanying prospectus supplement contain the material terms and conditions for each security. DESCRIPTION OF CAPITAL STOCK The following descriptions of the capital stock of UNBC are not complete. You should also read our Amended and Restated Articles of Incorporation, our ByLaws and the California General Corporation Law ("CGCL"). We have filed copies of the Articles of Incorporation and the Bylaws with the SEC. These documents are incorporated by reference into the registration statement of which this prospectus is a part. UNBC has 305,000,000 shares of capital stock authorized, of which 300,000,000 shares are common stock and 5,000,000 shares are preferred stock. As of December 31, 1998, shares of our common stock were issued and outstanding, and no shares of our preferred stock were issued or outstanding. COMMON STOCK Each holder of our common stock is entitled to one vote for each share held on all matters to be voted upon by our shareholders. The holders of outstanding shares of our common stock are entitled to receive ratably such dividends out of assets legally available therefor as our Board of Directors may determine. Upon liquidation or dissolution of UNBC, the holders of our common stock will be entitled to share ratably in the assets of UNBC legally available for distribution to shareholders after payment of liabilities. If we have any preferred stock outstanding, holders of the preferred stock may be entitled to dividend and/ or liquidation preferences. In either such case, we must pay the applicable distribution to the holders of our preferred stock before we may pay them to the holders of our common stock. Holders of our common stock have no conversion, sinking fund, redemption, preemptive or subscription rights. In addition, our common stock does not have cumulative voting rights. Shares of our common stock are not subject to further calls or assessments by UNBC. PREFERRED STOCK We are authorized to issue 5,000,000 shares of preferred stock, none of which currently is issued or outstanding. Our Board has the authority to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of our preferred stock and to fix the number of shares, dividend rights, conversion or exchange rights, voting rights, redemption rights, liquidation preferences, and sinking funds of any series of our preferred stock. The authorized shares of our preferred stock will be available for issuance without further action by our shareholders, unless shareholder action is required by applicable law or by the rules of a stock exchange on which any series of our stock may be listed. The holders of our preferred stock will have the right to vote separately as a class on any proposal involving fundamental changes in the rights of holders of such preferred stock pursuant to the CGCL. This authority of our Board of Directors gives it the power to approve the issuance of a series of preferred stock that could, depending on its terms, either impede or facilitate the completion of a merger, tender offer or other takeover attempt. For example, the issuance of new shares might impede a business combination if the terms of those shares include voting rights that would enable a holder to block business combinations. Conversely, the issuance of new shares might facilitate a business combination if those shares have general voting rights sufficient to satisfy an applicable percentage vote requirement. 10 If applicable, the terms on which our preferred stock may be convertible into or exchangeable for our common stock or other securities of UNBC will be set forth in the applicable Certificate of Determination and prospectus supplement. The terms will include provisions as to whether conversion or exchange is mandatory, at the option of the holder, or at the option of UNBC, and may include provisions that adjust the number of shares of our common stock or other securities of ours that the holders of our preferred stock may receive. WRITTEN CONSENTS Our Bylaws provide that any shareholder action can be taken by written consent of the shareholders. As a result, The Bank of Tokyo-Mitsubishi, which owns a majority of shares of our common stock, can take action by written consent. DIRECTORS' LIABILITY Our Articles of Incorporation provide for indemnification of directors to the fullest extent authorized by California law. Section 317 of the CGCL contains provisions permitting, and in some situations, requiring California corporations to provide indemnification to their directors and officers for losses and litigation expenses incurred in connection with their service to the corporation in those capacities. TRANSFER AGENT AND REGISTRAR Harris Trust Company of California acts as transfer agent and registrar for our common stock. DESCRIPTION OF DEPOSITARY SHARES The following description of the depositary shares is not complete. You should also read the Deposit Agreement relating to the depositary shares and the depositary receipt relating to the preferred stock that is attached to the Deposit Agreement. We will file those documents with the SEC as an exhibit to the registration statement of which this prospectus is a part. GENERAL If we elect to offer fractional interests in shares of preferred stock, we will provide for the issuance by a depositary to the public of receipts for depositary shares. Each depositary share will represent fractional interests of preferred stock. We will deposit the shares of preferred stock underlying the depositary shares under a Deposit Agreement between us and a bank or trust company selected by us. The bank or trust company must have its principal office in the United States and a combined capital and surplus of at least $50 million. The depositary receipts will evidence the depositary shares issued under the Deposit Agreement. The Deposit Agreement will contain terms applicable to the holders of depositary shares in addition to the terms stated in the depositary receipts. Each owner of depositary shares will be entitled to all the rights and preferences of the preferred stock underlying the depositary shares in proportion to the applicable fractional interest in the underlying shares of preferred stock. The depositary will issue the depositary receipts to individuals purchasing the fractional interests in shares of the related preferred stock according to the terms of the offering described in a prospectus supplement. DIVIDENDS AND OTHER DISTRIBUTIONS The depositary will distribute all cash dividends or other cash distributions received for the preferred stock to the entitled record holders of depositary shares in proportion to the number of depositary shares that the holder owns on the relevant record date. The depositary will distribute only an amount that can be distributed without attributing to any holder of depositary shares a fraction of one cent. The depositary will 11 add the undistributed balance to and treat it as part of the next sum received by the depositary for distribution to holders of depositary shares. If there is a non-cash distribution, the depositary will distribute property received by it to the entitled record holders of depositary shares, in proportion, insofar as possible, to the number of depositary shares owned by the holders, unless the depositary determines, after consultation with us, that it is not feasible to make such distribution. If this occurs, the depositary may, with our approval, sell such property and distribute the net proceeds from the sale to the holders. The Deposit Agreement also will contain provisions relating to how any subscription or similar rights that we may offer to holders of the preferred stock will be available to the holders of the depositary shares. CONVERSION, EXCHANGE AND REDEMPTION If any series of preferred stock underlying the depositary shares is subject to conversion or exchange, each record holder of depositary receipts will have the right or obligation to convert or exchange the depositary shares represented by the depositary receipts. Whenever we redeem shares of preferred stock held by the depositary, the depositary will redeem, at the same time, the number of depositary shares representing the preferred stock. The depositary will redeem the depositary shares from the proceeds it receives from the corresponding redemption, in whole or in part, of the applicable series of preferred stock. The depositary will mail notice of redemption to the record holders of the depositary shares to be redeemed between 30 and 60 days before the date fixed for redemption. The redemption price per depositary share will be equal to the applicable fraction of the redemption price per share on the applicable series of preferred stock. If less than all the depositary shares are to be redeemed, the depositary will select which shares to be redeemed by lot, PRO RATA or any other method. After the date fixed for redemption, the depositary shares called for redemption will no longer be outstanding. When the depositary shares are no longer outstanding, all rights of the holders will end, except the right to receive money, securities or other property payable upon redemption. VOTING When the depositary receives notice of a meeting at which the holders of the preferred stock are entitled to vote, the depositary will mail the particulars of the meeting to the record holders of the depositary shares. Each record holder of depositary shares on the record date may instruct the depositary on how to vote the shares of preferred stock underlying the holder's depositary shares. The depositary will try, if practical, to vote the number of shares of preferred stock underlying the depositary shares according to the instructions. We will agree to take all reasonable action requested by the depositary to enable it to vote as instructed. AMENDMENTS We and the depositary may agree to amend the Deposit Agreement and the depositary receipt evidencing the depositary shares. Any amendment that (a) imposes or increases certain fees, taxes or other charges payable by the holders of the depositary shares as described in the Deposit Agreement or that (b) otherwise prejudices any substantial existing right of holders of depositary shares, will not take effect until 30 days after the depositary has mailed notice of the amendment to the record holders of depositary shares. Any holder of depositary shares that continues to hold its shares at the end of the 30-day period will be deemed to have agreed to the amendment. 12 TERMINATION UNBC may direct the depositary to terminate the Deposit Agreement by mailing a notice of termination to holders of depositary shares at least 30 days prior to termination. In addition, a Deposit Agreement will automatically terminate if: - the depositary has redeemed all related outstanding depositary shares, or - UNBC has liquidated, dissolved or wound up its business and the depositary has distributed the preferred stock of the relevant series to the holders of the related depositary shares. PAYMENT OF FEES AND EXPENSES We will pay all fees, charges and expenses of the depositary, including the initial deposit of the preferred stock and any redemption of the preferred stock. Holders of depositary shares will pay transfer and other taxes and governmental charges and any other charges as are stated in the Deposit Agreement for their accounts. RESIGNATION AND REMOVAL OF DEPOSITARY At any time, the depositary may resign by delivering notice to us, and we may remove the depositary. Resignations or removals will take effect upon the appointment of a successor depositary and its acceptance of the appointment. The successor depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $50 million. REPORTS The depositary will forward to the holders of depositary shares all reports and communications from us that are delivered to the depositary and that we are required by law, the rules of an applicable securities exchange or our Articles of Incorporation to furnish to the holders of the preferred stock. Neither we nor the depositary will be liable if the depositary is prevented or delayed by law or any circumstances beyond its control in performing its obligations under the Deposit Agreement. The Deposit Agreements limits our obligations and the depositary's obligations to performance in good faith of the duties stated in the Deposit Agreement. Neither we nor the depositary will be obligated to prosecute or defend any legal proceeding connected with any depositary shares or preferred stock unless the holders of depositary shares requesting us to do so furnish us with satisfactory indemnity. In performing our obligations, we and the depositary may rely upon the written advice of our counsel or accountants, on any information that competent people provide to us and on documents that we believe are genuine. DESCRIPTION OF THE TRUST PREFERRED SECURITIES The following descriptions of the trust preferred securities are not complete. You should also read the Declaration for each Trust, the indenture between UNBC and The First National Bank of Chicago, as trustee (the "Indenture"), relating to the issuance of the debt securities by UNBC and any supplement to the Indenture. We will file these documents with the SEC as an exhibit to the registration statement of which this prospectus is a part. GENERAL Each Declaration authorizes the Regular Trustees to issue on behalf of a Trust one series of preferred securities that will have the terms described in a prospectus supplement. A Trust will use the proceeds from the sale of its preferred and common securities to purchase a series of UNBC's debt securities. The Property Trustee will hold the debt securities in trust for the benefit of the holders of the preferred and common securities. 13 UNBC will guarantee the trust preferred securities under a Trust Preferred Securities Guarantee. UNBC will agree to make payments of distributions and payments on redemption or liquidation with respect to a Trust's preferred securities, but only to the extent the Trust has funds available to make those payments and has not done so. See "Description of the Trust Preferred Securities Guarantees." The assets of a Trust available for distribution to the holders of its preferred securities will be limited to payments from UNBC under the series of debt securities held by the Trust. If UNBC fails to make a payment on the related debt securities, the Trust will not have enough funds to make related payments, including distributions, on its preferred securities. Each Trust Preferred Securities Guarantee, when taken together with our obligations under the related series of debt securities and the Indenture and the related Declaration, will provide a full and unconditional guarantee of amounts due on the preferred securities issued by a Trust. Each Declaration will be qualified as an indenture under the Trust Indenture Act of 1939. Each Property Trustee will act as indenture trustee for the preferred securities to be issued by the applicable Trust, in order to comply with the provisions of the Trust Indenture Act. Each series of trust preferred securities will have the terms, including distributions, redemption, voting, liquidation rights and such other preferred, deferred or other special rights or restrictions as are described in the relevant Declaration or made part of the Declaration by the Trust Indenture Act or by the Delaware Business Trust Act. The terms of the preferred securities will mirror the terms of the debt securities held by the applicable Trust. The prospectus supplement relating to the preferred securities of a Trust will describe the specific terms of the preferred securities, including: - the name of the preferred securities; - the dollar amount and number of preferred securities issued; - the annual distribution rate(s), or method of determining the rate(s), the payment date(s) and the record dates used to determine the holders who are to receive distributions and the place(s) where distributions and other amounts payable will be paid; - any provision relating to deferral of distribution payments; - the date from which distributions shall be cumulative; - the optional redemption provisions, if any, including the prices, time periods and other terms and conditions for which preferred securities will be purchased or redeemed, in whole or in part; - the terms and conditions, if any, upon which the applicable series of debt securities may be distributed to holders of such preferred securities; - the voting rights, if any, of holders of the preferred securities; - any securities exchange on which the preferred securities will be listed; - whether such preferred securities are to be issued in book-entry form and represented by one or more global certificates, and if so, the depositary for such global certificates and the specific terms of the depositary arrangements; and - any other relevant rights, preferences, privileges, limitations or restrictions of such preferred securities. Each prospectus supplement will describe certain United States federal income tax considerations applicable to the purchase, holding and disposition of the series of trust preferred securities covered by the prospectus supplement. 14 LIQUIDATION DISTRIBUTION UPON DISSOLUTION Unless otherwise specified in the applicable prospectus supplement, each Declaration states that the related Trust shall be dissolved: - on the expiration of the term of such Trust; - upon the bankruptcy of UNBC; - upon the filing of a certificate of dissolution or its equivalent with respect to UNBC; - upon the filing of a certificate of cancellation with respect to such Trust after obtaining the consent of at least a majority in liquidation amount of the preferred and common securities of such Trust, voting together as a single class; - 90 days after the revocation of the charter of UNBC and the charter is not reinstated during that 90-day period; - upon the written direction from us and after the distribution of the related debt securities directly to the holders of the preferred and common securities of such Trust in exchange for such Securities; - upon the occurrence of certain tax or other specified events that cause the Trust to be dissolved and the distribution of the related debt securities directly to the holders of the preferred and common securities of the Trust; - before the issuance of any securities with the consent of all Regular Trustees and UNBC; - upon the redemption of all of the common and preferred securities of such Trust; or - upon entry of a court order for the dissolution of UNBC or such Trust. Unless otherwise specified in the applicable prospectus supplement, in the event of a dissolution, after the Trust pays all amounts owed to creditors, the holders of the preferred and common securities issued by the Trust will be entitled to receive: - cash equal to the aggregate liquidation amount of each preferred and common security specified in an accompanying prospectus supplement, plus accumulated and unpaid distributions to the date of payment; unless - debt securities in an aggregate principal amount equal to the aggregate liquidation amount of the preferred and common securities are distributed to the holders of the preferred and common securities. If the Trust cannot pay the full amount due on its preferred and common securities because it does not have enough assets for payment, then the amounts the Trust owes on its preferred and common securities will be paid pro rata. However, if an event of default under the related Declaration has occurred, the total amounts due on the preferred securities will be paid before any distribution on the common securities. DECLARATION EVENTS OF DEFAULT An event of default under the Indenture relating to a series of debt securities is an event of default under the Declaration of the Trust that owns those debt securities (a "Declaration Event of Default"). See "Description of Debt Securities--Events of Default." UNBC and the Regular Trustees of a Trust must file annually with the applicable Property Trustee a certificate stating whether or not UNBC is in compliance with all the applicable conditions and covenants under the related Declaration. Upon the happening of a Declaration Event of Default, the Property Trustee of the applicable Trust, as the sole holder of the debt securities held by such Trust, will have the right under the Indenture to 15 declare the principal of, premium, if any, and interest on such debt securities to be immediately due and payable. If a Property Trustee fails to enforce its rights under the related Declaration or the Indenture to the fullest extent permitted by law and subject to the terms of the Declaration and the Indenture, any holder of the preferred securities issued by the Trust may sue UNBC, or seek other remedies, to enforce the Property Trustee's rights under the Declaration or the Indenture without first instituting a legal proceeding against the Property Trustee or any other person. If we fail to pay principal, premium, if any, or interest on a series of debt securities when payable, then a holder of the related trust preferred securities may directly sue us or seek other remedies, to collect its pro rata share of payments owned. REMOVAL AND REPLACEMENT OF TRUSTEES Only UNBC, as the only holder of a Trust's common securities, has the right to remove or replace the trustees of such Trust. The resignation or removal of any trustee and the appointment of a successor trustee shall be effective only on the acceptance of appointment by the successor trustee in accordance with the provisions of the Declaration for such Trust. CONVERSION OR EXCHANGE RIGHTS The terms that govern whether trust preferred securities of any series are convertible into or exchangeable for our common stock or other securities of UNBC will be set forth in the prospectus supplement relating to the trust preferred securities. The terms will include provisions as to whether conversion or exchange is mandatory, at the option of the holder or at the option of UNBC, and may include provisions that adjust the number of shares of our common stock or other securities of ours that the holders of trust preferred securities may receive. MERGERS, CONSOLIDATIONS OR AMALGAMATIONS OF THE TRUSTS A Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any other corporation or other body ("Merger Event"), except as described below. A Trust may, with the consent of a majority of its Regular Trustees and without the consent of the holders of its preferred and common securities or the other Trustees, consolidate, amalgamate, merge with or into, or be replaced by another Trust, provided that: - the successor entity either (1) assumes all of the obligations of the Trust relating to its preferred and common securities or (2) substitutes for the Trust's preferred and common securities other securities substantially similar to the Trust's preferred and common securities ("successor securities"), so long as the successor securities rank the same as the preferred and common securities for distributions and payments upon liquidation, redemption and otherwise; - UNBC acknowledges a trustee of the successor entity who has the same powers and duties as the Property Trustee of the Trust as the holder of the particular series of debt securities; - the Merger Event does not adversely affect the rights, preferences and privileges of the holders of its trust preferred and trust common securities or successor securities in any material way, except with respect to any dilution of the holders' interest in the new entity; - the Merger Event does not cause the preferred securities or successor securities to be downgraded by any nationally recognized statistical rating organization; - the successor entity has a purpose identical to that of the Trust; 16 - prior to the Merger Event, UNBC has received an opinion of counsel from a nationally recognized law firm stating that (a) such Merger Event does not adversely effect the rights, preferences and privileges of the holders of the preferred securities, including any successor securities, in any material respect and (b) following the Merger Event, neither the Trust nor the successor entity will be required to register as an "investment company" under the Investment Company Act of 1940; and - UNBC guarantees the obligations of the successor entity under the successor securities in the same manner as in the applicable Trust Preferred Securities Guarantee and the guarantee of the common securities for the Trust, if any. In addition, unless all of the holders of the trust preferred and trust common securities approve otherwise, a Trust shall not consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such transaction would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. VOTING RIGHTS; AMENDMENT OF DECLARATIONS The holders of trust preferred securities have no voting rights except as discussed below and under "--Mergers, Consolidations or Amalgamations of the Trust" and "Description of the Trust Preferred Securities Guarantees--Amendments and Assignment," and as otherwise required by law and the Declaration for the applicable Trust. A Declaration may be amended if approved by a majority of the Regular Trustees of the applicable Trust. However, if any proposed amendment provides for, or the Regular Trustees otherwise propose to effect, (1) any action that would adversely affect the powers, preferences or special rights of the trust's preferred and common securities, whether by way of amendment to such Declaration or otherwise; or (2) the dissolution, winding-up or termination of the Trust other than pursuant to the terms of its Declaration, then the holders of the Trust's preferred and common securities voting together as a single class will be entitled to vote on the amendment or proposal. In that case, the amendment or proposal will only be effective if approved by at least a majority in liquidation amount of the trust preferred and trust common securities affected by the amendment or proposal. If any amendment or proposal referred to in clause (1) above would adversely affect only the preferred securities or only the common securities of a Trust, then only the affected class will be entitled to vote on the amendment or proposal and the amendment or proposal will only be effective with the approval of at least a majority in liquidation amount of the affected class. Notwithstanding the foregoing, certain specified provisions of the Declaration may not be amended without the consent of all holders of the trust's preferred and common securities. No amendment may be made to a Declaration if the amendment would: - cause the related Trust to be characterized as other than a grantor trust for United States federal income tax purposes; - reduce or otherwise adversely affect the powers of the related Property Trustee; or - cause the related Trust to be deemed to be an "investment company" which is required to be registered under the Investment Company Act. 17 The holders of a majority in aggregate liquidation amount of the preferred securities of each Trust have the right to: - direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee of the Trust; or - direct the exercise of any Trust or power conferred upon such Property Trustee under that Trust's Declaration, including the right to direct the Property Trustee, as the holder of a series of debt securities, to (1) exercise the remedies available under the Indenture with respect to the debt securities, (2) waive any event of default under the Indenture that is waivable, (3) cancel an acceleration of the principal of the debt securities, or (4) consent to any amendment, modification or termination of the Indenture where consent is required, but if an event of default under the Indenture has occurred and is continuing, then the holders of 25% of the aggregate liquidation amount of the trust preferred securities may direct the Property Trustee to declare the debt securities immediately due and payable. If, however, the Indenture requires the consent of the holders of more than a majority in aggregate principal amount of a series of debt securities (a "super-majority"), then the Property Trustee for the trust preferred securities related to that series of debt securities must get approval of the holders of the same super-majority in liquidation amount of the trust preferred securities. In addition, before taking any of the foregoing actions, except for directing the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, the Property Trustee must obtain an opinion of counsel from a nationally recognized law firm stating that the action would not cause the Trust to be classified as other than a grantor trust for United States federal income tax purposes. The Property Trustee of a Trust will notify all preferred securities holders of the Trust of any notice received from the Trustee with respect to the debt securities held by the Trust. As described in each Declaration, the Regular Trustee may hold a meeting to have trust preferred securities holders vote on a change or have them approve the change by written consent. If a vote of trust preferred securities holders is taken or a consent is obtained, any trust preferred securities that are owned by UNBC or any of our affiliates will, for purposes of the vote or consent, be treated as if they were not outstanding. This means that: - UNBC and any of our affiliates will not be able to vote on or consent to matters requiring the vote or consent of holders of trust preferred securities and - any trust preferred securities owned by us, the Regular Trustees or any of our respective affiliates will not be counted in determining whether the required percentage of votes or consents has been obtained. INFORMATION CONCERNING THE PROPERTY TRUSTEES The Property Trustees will be unaffiliated with UNBC and The Bank of Tokyo-Mitsubishi. For matters relating to compliance with the Trust Indenture Act, the Property Trustee of each Trust will have all of the duties and responsibilities of an indenture trustee under the Trust Indenture Act. Each Property Trustee, other than during the occurrence and continuance of a Declaration Event of Default under the applicable Trust, undertakes to perform only those duties that are specifically stated in the applicable Declaration and, upon a Declaration Event of Default, must use the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. In addition, a Property Trustee is under no 18 obligation to exercise any of the powers given it by the applicable Declaration at the request of any holder of trust preferred securities unless it is offered reasonable security or indemnity against the costs, expenses and liabilities that it might incur. However, the holders of the trust preferred securities will not be required to offer such an indemnity where the holders, by exercising their voting rights, direct the Property Trustee to take any action following a Declaration Event of Default. MISCELLANEOUS The Trustees of each Trust are authorized and directed to conduct the affairs of and to operate the Trust in such a way that - the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act; - the Trust will be classified as a grantor trust for United States federal income tax purposes; and - the debt securities held by the Trust will be treated as indebtedness of UNBC for United States federal income tax purposes. UNBC and the Trustees of a Trust are authorized to take any legal action that we and the Trustees of such Trust determine to be necessary or desirable for such purposes so long as the action does not violate the Trust's certificate of trust or its Declaration. Holders of trust preferred securities have no preemptive or similar rights. A Trust may not borrow money, issue debt, execute mortgages or pledge any of its assets. The Property Trustee will promptly make distributions to the holders of the Trust's preferred securities and common securities out of funds received by such Trust from holding our debt securities. GOVERNING LAW Each Declaration and the related trust preferred securities will be governed by and construed in accordance with the laws of the State of Delaware. DESCRIPTION OF DEBT SECURITIES The following descriptions of debt securities are not complete. You should also read the Indenture. We will file the Indenture with the SEC as an exhibit to the registration statement of which this prospectus is a part. All capitalized terms have the meanings specified in the Indenture. We may issue, from time to time, debt securities, in one or more series, that will consist of either our senior debt ("Senior Debt Securities"), our senior subordinated debt ("Senior Subordinated Debt Securities"), our subordinated debt ("Subordinated Debt Securities") or our junior subordinated debt ("Junior Subordinated Debt Securities" and, together with the Senior Subordinated Debt Securities and the Subordinated Debt Securities, the "Subordinated Securities"). The debt securities we offer will be issued under an Indenture between us and The First National Bank of Chicago, acting as trustee (the "Trustee"). Debt securities, whether senior, senior subordinated, subordinated or junior subordinated, may be issued as convertible debt securities or exchangeable debt securities. GENERAL TERMS OF THE INDENTURE The Indenture does not limit the amount of debt securities that we may issue. It provides that we may issue debt securities up to the principal amount that we may authorize and may be in any currency or currency unit that we may designate. Except for the limitations on consolidation, merger and sale of all or substantially all of our assets contained in the Indenture, the terms of the Indenture do not contain any covenants or other provisions designed to give holders of any debt securities protection with respect to our operations, financial condition or transactions involving us. 19 We may issue the debt securities issued under the Indenture as "discount securities," which means they may be sold at a discount below their stated principal amount. These debt securities, as well as certain other debt securities that are not issued at a discount, may, for United States federal income tax purposes, be treated as if they were issued with "original issue discount" ("OID") because of certain interest payment and other characteristics. Special United States federal income tax considerations applicable to debt securities issued with original issue discount will be described in more detail in any applicable Prospectus Supplement. The applicable prospectus supplement for a series of debt securities that we issue will describe, among other things, the following terms of the offered debt securities: - the title; - any limit on the aggregate principal amount; - whether issued in fully registered form without coupons or in a form registered as to principal only with coupons or in bearer form with coupons; - whether issued in the form of one or more global securities and whether all or a portion of the principal amount of the debt securities is represented thereby; - the price or prices at which the debt securities will be issued; - the date or dates on which principal is payable; - the place or places where and the manner in which principal, premium or interest will be payable and the place or places where the debt securities may be presented for transfer and, if applicable, conversion or exchange; - interest rates, and the dates from which interest, if any, will accrue, and the dates when interest is payable and the maturity; - the right, if any, to extend the interest payment periods and the duration of the extensions; - our rights or obligations to redeem or purchase the debt securities; - conversion or exchange provisions, if any, including conversion or exchange prices or rates and adjustments thereto; - the currency or currencies of payment of principal or interest; - the terms applicable to any debt securities issued at a discount from their stated principal amount; - the terms, if any, pursuant to which any debt securities will be subordinate to any of our other debt; - if the amount of payments of principal or interest is to be determined by reference to an index or formula, or based on a coin or currency other than that in which the debt securities are stated to be payable, the manner in which these amounts are determined and the calculation agent, if any, with respect thereto; - if other than the entire principal amount of the debt securities when issued, the portion of the principal amount payable upon acceleration of maturity as a result of a default on certain of our obligations; - if applicable, covenants affording holders of debt protection with respect to our operations, financial condition or transactions involving us; and - any other specific terms of any debt securities. 20 The applicable prospectus supplement will set forth certain United States federal income tax considerations for holders of any debt securities and the securities exchange or quotation system on which any debt securities are listed or quoted. SENIOR DEBT SECURITIES Payment of the principal of, premium, if any, and interest on Senior Debt Securities will rank on a parity with all of our other unsecured and unsubordinated debt. SENIOR SUBORDINATED DEBT SECURITIES Payment of the principal of, premium, if any, and interest on Senior Subordinated Debt Securities will be junior in right of payment to the prior payment in full of all of our unsubordinated debt, including Senior Debt Securities. We will state in the applicable prospectus supplement relating to any Senior Subordinated Debt Securities the subordination terms of the securities as well as the aggregate amount of outstanding debt, as of the most recent practicable date, that by its terms would be senior to the Senior Subordinated Debt Securities. We will also state in such prospectus supplement limitations, if any, on issuance of additional senior debt. SUBORDINATED DEBT SECURITIES Payment of the principal of, premium, if any, and interest on Subordinated Debt Securities will be subordinated and junior in right of payment to the prior payment in full of all of our senior debt, including our senior subordinated debt. We will state in the applicable prospectus supplement relating to any Subordinated Debt Securities the subordination terms of the securities as well as the aggregate amount of outstanding indebtedness, as of the most recent practicable date, that by its terms would be senior to the Subordinated Debt Securities. We will also state in such prospectus supplement limitations, if any, on issuance of additional senior indebtedness. JUNIOR SUBORDINATED DEBT SECURITIES Payment of the principal of, premium, if any, and interest on Junior Subordinated Debt Securities will be subordinated and junior in right of payment to the prior payment in full of all of our senior, senior subordinated and subordinated debt. We will state in the applicable prospectus supplement relating to any Junior Subordinated Debt Securities the subordination terms of the securities as well as the aggregate amount of outstanding debt, as of the most recent practicable date, that by its terms would be senior to the Junior Subordinated Debt Securities. We will also state in such prospectus supplement limitations, if any, on issuance of additional senior indebtedness. CONVERSION OR EXCHANGE RIGHTS Debt securities may be convertible into or exchangeable for shares of our equity securities. The terms and conditions of conversion or exchange will be stated in the applicable prospectus supplement. The terms will include, among others, the following: - the conversion or exchange price; - the conversion or exchange period; - provisions regarding the ability of us or the holder to convert or exchange the debt securities; - events requiring adjustment to the conversion or exchange price; and - provisions affecting conversion or exchange in the event of our redemption of the debt securities. 21 CONSOLIDATION, MERGER OR SALE We cannot consolidate or merge with or into, or transfer or lease all or substantially all of our assets to, any person unless (a) we will be the continuing corporation or (b) the successor corporation or person to which our assets are transferred or leased is a corporation organized under the laws of the United States, any state of the United States or the District of Columbia and it expressly assumes our obligations under the debt securities and the Indenture. In addition, we cannot complete such a transaction unless immediately after giving effect to the transaction, no event of default under the Indenture, and no event which, after notice or lapse of time or both, would become an event of default under the Indenture, shall have happened and be continuing. When the person to whom our assets are transferred or leased has assumed our obligations under the debt securities and the Indenture, we shall be discharged from all our obligations under the debt securities and the Indenture except in certain limited circumstances. This covenant would not apply to any recapitalization transaction, a change of control of UNBC or a highly leveraged transaction, unless the transaction or change of control were structured to include a merger or consolidation or transfer or lease of all or substantially all of our assets. EVENTS OF DEFAULT The term "Event of Default," when used in the Indenture, unless otherwise indicated, means any of the following: - failure to pay interest for 30 days after the date payment is due and payable; provided that if UNBC extends an interest payment period in accordance with the terms of the debt securities, the extension will not be a failure to pay interest; - failure to pay principal or premium, if any, on any debt security when due, either at maturity, upon any redemption, by declaration or otherwise; - failure to make sinking fund payments when due; - failure to perform certain other covenants for 90 days after notice that performance was required; - certain events in bankruptcy, insolvency or reorganization of UNBC; or - any other Event of Default provided in the applicable resolution of our Board or the supplemental indenture under which we issue a series of debt securities. An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the Indenture. IF AN EVENT OF DEFAULT RELATING TO THE PAYMENT OF INTEREST, PRINCIPAL OR ANY SINKING FUND INSTALLMENT WITH RESPECT TO ANY SERIES OF DEBT SECURITIES HAS OCCURRED AND IS CONTINUING, THE TRUSTEE OR THE HOLDERS OF NOT LESS THAN 25% IN AGGREGATE PRINCIPAL AMOUNT OF THE DEBT SECURITIES OF EACH AFFECTED SERIES MAY DECLARE THE ENTIRE PRINCIPAL OF ALL THE DEBT SECURITIES OF THAT SERIES TO BE DUE AND PAYABLE IMMEDIATELY. If an Event of Default relating to the performance of certain covenants occurs and is continuing for a period of 90 days after notice of such, or if any other Event of Default occurs and is continuing with respect to all of the series of Senior Debt Securities, or if an Event of Default relating to certain events in bankruptcy, insolvency or reorganization of UNBC occurs and is continuing, then the Trustee or the holders of not less than 25% in aggregate principal amount of all of the series of Senior Debt Securities may declare the entire principal amount of all of the series of Senior Debt Securities due and payable immediately. Similarly, if an Event of Default relating to the performance of certain covenants occurs and is continuing for a period of 90 days after notice of such, or if any other Event of Default occurs and is continuing with respect to all of the series of Subordinated Securities, or if an Event of Default relating to certain events in bankruptcy, insolvency or reorganization of UNBC occurs and is continuing, then the Trustee or the holders of not less than 25% in aggregate principal amount of all of the series of Subordinated Securities may declare the entire principal amount of all of the series of Subordinated Securities due and payable immediately. 22 If, however, the Event of Default relating to the performance of certain covenants or any other Event of Default that has occurred and is continuing is for less than all of the series of Senior Debt Securities or Subordinated Securities, as the case may be, then, the Trustee or the holders of not less than 25% in aggregate principal amount of each affected series of the Senior Debt Securities or the Subordinated Securities, as the case may be, may declare the entire principal amount of all debt securities of such affected series due and payable immediately. The holders of not less than a majority in aggregate principal amount of the debt securities of a series may, after satisfying certain conditions, rescind and annul any of the above-described declarations and consequences with respect to the series. The Indenture imposes limitations on suits brought by holders of debt securities against us. Except for actions for payment of overdue principal or interest, no holder of debt securities of any series may institute any action against us under the Indenture unless: - the holder has previously given to the Trustee written notice of default and continuance of such default, - the holders of at least 25% in principal amount of the outstanding debt securities of the affected series have requested that the Trustee institute the action, - the requesting holders have offered the Trustee reasonable indemnity for expenses and liabilities that may be incurred by bringing the action, - the Trustee has not instituted the action within 60 days of the request; and - the Trustee has not received inconsistent direction by the holders of a majority in principal amount of the outstanding debt securities of the series. We will be required to file annually with the Trustee a certificate, signed by an officer of UNBC, stating whether or not the officer knows of any default by us in the performance, observance or fulfillment of any condition or covenant of the Indenture. REGISTERED GLOBAL SECURITIES We may issue the debt securities of a series in whole or in part in the form of one or more fully registered global securities (a "Registered Global Security"). We will deposit any Registered Global Securities with a depositary or with a nominee for a depositary identified in the applicable prospectus supplement and registered in the name of such depositary or nominee. In such case, we will issue one or more Registered Global Securities denominated in an amount equal to the aggregate principal amount of all of the debt securities of the series to be issued and represented by such Registered Global Security or Securities. Unless and until it is exchanged in whole or in part for debt securities in definitive registered form, a Registered Global Security may not be transferred except as a whole: - by the depositary for such Registered Global Security to its nominee, - by a nominee of the depositary to the depositary or another nominee of the depositary, or - by the depositary or its nominee to a successor of the depositary or a nominee of the successor. The prospectus supplement relating to a series of debt securities will describe the specific terms of the depositary arrangement with respect to any portion of the series represented by a Registered Global Security. We anticipate that the following provisions will apply to all depositary arrangements for debt securities: - ownership of beneficial interests in a Registered Global Security will be limited to persons that have accounts with the depositary for such Registered Global Security, these persons being referred to as "participants," or persons that may hold interests through participants; 23 - upon the issuance of a Registered Global Security, the depositary for the Registered Global Security will credit, on its book-entry registration and transfer system, the participants' accounts with the respective principal amounts of the debt securities represented by the Registered Global Security beneficially owned by the participants; - any dealers, underwriters, or agents participating in the distribution of the debt securities will designate the accounts to be credited; and - ownership of beneficial interest in such Registered Global Security will be shown on, and the transfer of such ownership interest will be effected only through, records maintained by the depositary for such Registered Global Security for interests of participants, and on the records of participants for interests of persons holding through participants. The laws of some states may require that certain purchasers of securities take physical delivery of the securities in definitive form. These laws may limit the ability of certain persons to own, transfer or pledge beneficial interests in Registered Global Securities. So long as the depositary for a Registered Global Security, or its nominee, is the registered owner of such Registered Global Security, the depositary or such nominee, as the case may be, will be considered the sole owner or holder of the debt securities represented by the Registered Global Security for all purposes under the Indenture. Except as stated below, owners of beneficial interests in a Registered Global Security: - will not be entitled to have the debt securities represented by a Registered Global Security registered in their names, - will not receive or be entitled to receive physical delivery of the debt securities in the definitive form, - and will not be considered the owners or holders of the debt securities under the Indenture. Accordingly, each person owning a beneficial interest in a Registered Global Security must rely on the procedures of the depositary for the Registered Global Security and, if the person is not a participant, on the procedures of a participant through which the person owns its interest, to exercise any rights of a holder under the Indenture. We understand that under existing industry practices, if we request any action of holders or if an owner of a beneficial interest in a Registered Global Security desires to give or take any action that a holder is entitled to give or take under the Indenture, the depositary for the Registered Global Security would authorize the participants holding the relevant beneficial interests to give or take the action, and the participants would authorize beneficial owners owning through the participants to give or take the action or would otherwise act upon the instructions of beneficial owners holding through them. We will make payments of principal and premium, if any, and interest, if any, on debt securities represented by a Registered Global Security registered in the name of a depositary or its nominee to the depositary or its nominee, as the case may be, as the registered owners of the Registered Global Security. None of UNBC, the Trustee or any other agent of UNBC or the Trustee will be responsible or liable for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Registered Global Security or for maintaining, supervising or reviewing any records relating to the beneficial ownership interests. We expect that the depositary for any debt securities represented by a Registered Global Security, upon receipt of any payments of principal and premium, if any, and interest, if any, in respect of the Registered Global Security, will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the Registered Global Security as shown on the records of the depositary. We also expect that standing customer instructions and customary practices will 24 govern payments by participants to owners of beneficial interests in the Registered Global Security held through the participants, as is now the case with the securities held for the accounts of customers in bearer form or registered in "street name." We also expect that any of these payments will be the responsibility of the participants. If the depositary for any debt securities represented by a Registered Global Security is at any time unwilling or unable to continue as depositary or stops being a clearing agency registered under the Exchange Act, we will appoint an eligible successor depositary. If we fail to appoint an eligible successor depositary within 90 days, we will issue the debt securities in definitive form in exchange for the Registered Global Security. In addition, we may at any time and in our sole discretion decide not to have any of the debt securities of a series represented by one or more Registered Global Securities. In that event, we will issue debt securities of the series in a definitive form in exchange for all of the Registered Global Securities representing the debt securities. The Trustee will register any debt securities issued in definitive form in exchange for a Registered Global Security in the name or names as the depositary, based upon instructions from its participants, shall instruct the Trustee. We may also issue bearer debt securities of a series in the form of one or more global securities, referred to as "bearer global securities." We will deposit these securities with a common depositary for Euroclear System and Cedel Bank, SOCIETE ANONYME, or with a nominee for the depositary identified in the prospectus supplement relating to the series. The prospectus supplement relating to a series of debt securities represented by a bearer global security will describe the applicable terms and procedures. These will include the specific terms of the depositary arrangement and any specific procedures for the issuance of debt securities in definitive form in exchange for a bearer global security, with respect to the position of the series represented by a bearer global security. DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE We can discharge or decrease our obligations under the Indenture as stated below. We may discharge certain obligations to holders of any series of debt securities that have not already been delivered to the Trustee for cancellation and that have either become due and payable or are by their terms to become due and payable, or are scheduled for redemption, within one year. We may effect a discharge by irrevocably depositing with the Trustee cash or U.S. Government Obligations, as trust funds, in an amount certified to be enough to pay when due, whether at maturity, upon redemption or otherwise, the principal of, premium, if any, and interest on the debt securities and any mandatory sinking fund payments. Unless otherwise provided in the applicable prospectus supplement, we may also discharge any and all of our obligations to holders of any series of debt securities at any time ("defeasance"). We may also be released, with respect to any outstanding series of debt securities, from the obligations imposed by any covenants of the series of debt securities and certain provisions of the Indenture, and we may omit to comply with those covenants without creating an Event of Default ("covenant defeasance"). We may effect defeasance and covenant defeasance only if, among other things: - we irrevocably deposit with the Trustee cash or U.S. Government Obligations, as trust funds, in an amount certified to be enough to pay at maturity (or upon redemption) the principal, premium, if any, and interest on all outstanding debt securities of the series; - we deliver to the Trustee an opinion of counsel from a nationally recognized law firm to the effect that the holders of the series of debt securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the defeasance or covenant defeasance and that defeasance or covenant defeasance will not otherwise alter the holders' U.S. federal income tax treatment of principal, premium, if any, and interest payments on the series of debt securities; and 25 - in the case of subordinated debt securities, no event or condition shall exist that, pursuant to the subordination provisions applicable to the series, would prevent us from making payments of principal of, premium, if any, and interest on any of the applicable subordinated debt securities at the date of the irrevocable deposit referred to above or at any time during the period ending on the 91st day after the deposit date. In the case of a defeasance by us, the opinion we deliver must be based on a ruling of the Internal Revenue Service issued, or a change in U.S. federal income tax law occurring, after , 1998, since such a result would not occur under the U.S. federal income tax laws in effect on such date. Although we may discharge or decrease our obligations under the Indenture as described in the two preceding paragraphs, we may not avoid, among other things, our duty to register the transfer or exchange of any series of debt securities, to replace any temporary, mutilated, destroyed, lost or stolen series of debt securities or to maintain an office or agency in respect of any series of debt securities. MODIFICATION OF THE INDENTURE The Indenture provides that we and the Trustee may enter into supplemental indentures without the consent of the holders of debt securities to: - secure any debt securities, - evidence the assumption by a successor corporation of our obligations, - add covenants for the protection of the holders of debt securities, - cure any ambiguity or correct any inconsistency in the Indenture, - establish the forms or terms of debt securities of any series, and - evidence and provide for the acceptance of appointment by a successor trustee. The Indenture also provides that we and the Trustee may, with the consent of the holders of not less than a majority in aggregate principal amount of debt securities of all series of Senior Debt Securities or of Subordinated Securities, as the case may be, then outstanding and affected, voting as one class, add any provisions to, or change in any manner, eliminate or modify in any way the provisions of, the Indenture or modify in any manner the rights of the holders of the debt securities. We and the Trustee may not, however, without the consent of the holder of each outstanding debt security affected thereby: - extend the final maturity of any debt security; - reduce the principal amount or premium, if any; - reduce the rate or extend the time of payment of interest; - reduce any amount payable on redemption; - change the currency in which the principal, unless otherwise provided with respect to a series, premium, if any, or interest is payable; - reduce the amount of the principal of any debt security issued with an original issue discount that is payable upon acceleration or provable in bankruptcy; - alter certain provisions of the Indenture relating to the debt securities not denominated in U.S. dollars; - impair the right to institute suit for the enforcement of any payment on any debt security when due; or 26 - reduce the percentage of holders of debt securities of any series whose consent is required for any modification of the Indenture. CONCERNING THE TRUSTEE The Indenture provides that there may be more than one Trustee under the Indenture, each with respect to one or more series of debt securities. If there are different Trustees for different series of debt securities, each Trustee will be a Trustee of a Trust under the Indenture separate and apart from the Trust administered by any other Trustee under the Indenture. Except as otherwise indicated in this prospectus or any prospectus supplement, any action permitted to be taken by a Trustee may be taken by such Trustee only with respect to the one or more series of debt securities for which it is the Trustee under the Indenture. Any Trustee under the Indenture may resign or be removed with respect to one or more series of debt securities. All payments of principal of, premium, if any, and interest on, and all registration, transfer, exchange, authentication and delivery of, the debt securities of a series will be effected by the Trustee with respect to such series at an office designated by such Trustee in New York, New York. If the Trustee becomes a creditor of UNBC, the Indenture places certain limitations on the right of the Trustee to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee may engage in other transactions. If it acquires any conflicting interest relating to any duties with respect to the debt securities, however, it must eliminate the conflict or resign as Trustee. The holders of a majority in aggregate principal amount of any series of debt securities then outstanding will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee with respect to the applicable series of debt securities, provided that the direction: - would not conflict with any rule of law or with the Indenture, - would not be unduly prejudicial to the rights of another holder of the debt securities, and - would not involve any Trustee in personal liability. The Indenture provides that in case an Event of Default shall occur, not be cured and be known to any Trustee, the Trustee must use the same degree of care as a prudent person would use in the conduct of his or her own affairs in the exercise of the Trust's power. The Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of the debt securities, unless they shall have offered to the Trustee security and indemnity satisfactory to the Trustee. NO INDIVIDUAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS OR DIRECTORS The Indenture provides that no incorporator and no past, present or future shareholder, officer or director of UNBC or any successor corporation in their capacity as such shall have any individual liability for any of our obligations, covenants or agreements under the debt securities or the Indenture. GOVERNING LAW The Indenture and the debt securities will be governed by, and construed in accordance with, the laws of the state of New York. 27 DESCRIPTION OF THE TRUST PREFERRED SECURITIES GUARANTEES The following descriptions of the trust preferred securities guarantees are not complete. You should also read the Trust Preferred Securities Guarantees. We will file the Trust Preferred Securities Guarantees with the SEC as an exhibit to the registration statement of which this prospectus is a part. GENERAL UNBC will execute a Trust Preferred Securities Guarantee, which benefits the holders of trust preferred securities, at the time that a Trust issues those trust preferred securities. Each Trust Preferred Securities Guarantee will be qualified as an indenture under the Trust Indenture Act. Unless otherwise stated in a prospectus supplement, The First National Bank of Chicago will act as indenture trustee ("Trust Preferred Guarantee Trustee") under each Trust Preferred Securities Guarantee for the purposes of compliance with the Trust Indenture Act. The Trust Preferred Guarantee Trustee will hold each Trust Preferred Securities Guarantee for the benefit of the preferred securities holders of the applicable Trust. UNBC will agree, as described in each Trust Preferred Securities Guarantee, to pay in full to the holders of the trust preferred securities issued by the applicable Trust, the Trust Preferred Securities Guarantee Payments, when and as due, regardless of any defense, right of set-off or counterclaim which the Trust may have or assert. The following payments ("Trust Preferred Securities Guarantee Payments"), to the extent not previously paid by a Trust, will be covered by the applicable Trust Preferred Securities Guarantee: - any accrued and unpaid distributions required to be paid on the applicable trust preferred securities, to the extent that the Trust has funds available to make the payment; - the redemption price, to the extent that the Trust has funds available to make the payment; and - upon a voluntary or involuntary dissolution and liquidation of the Trust, other than in connection with a distribution of debt securities to holders of the applicable trust preferred securities or the redemption of all the trust preferred securities, the lesser of (1) the aggregate of the liquidation amount specified in the prospectus supplement for each trust preferred security plus all accrued and unpaid distributions on the trust preferred securities to the date of payment, to the extent the Trust has funds available to make the payment and (2) the amount of assets of the Trust remaining available for distribution to holders of its trust preferred securities upon a dissolution and liquidation of the Trust (either, a "Liquidation Payment"). Our obligation to make a Trust Preferred Securities Guarantee Payment may be satisfied by directly paying the required amounts to the holders of the trust preferred securities or by causing the Trust to pay the amounts to the holders. No single document executed by UNBC relating to the issuance of trust preferred securities will provide for its full, irrevocable and unconditional guarantee of the trust preferred securities. It is only the combined operation of our obligations under the Indenture and the applicable Trust Preferred Securities Guarantee and Declaration that has the effect of providing a full, irrevocable and unconditional guarantee of a Trust's obligations under its trust preferred securities. 28 STATUS OF THE TRUST PREFERRED SECURITIES GUARANTEES Each Trust Preferred Securities Guarantee will constitute an unsecured obligation of UNBC and will rank: - subordinate and junior in right of payment to all of our other liabilities, except those obligations made equal or junior to its obligations under a Trust Preferred Securities Guarantee; - equal with the most senior preferred or preference stock now or hereafter issued by us, and with any guarantee now or hereafter issued by us in respect of any preferred or preference stock of any of our affiliates; and - senior to our common stock. Each Declaration will require that the holder of trust preferred securities accept the subordination provisions and other terms of the Trust Preferred Securities Guarantee. Each Trust Preferred Securities Guarantee will constitute a guarantee of payment and not of collection. In other words, the holder of the guaranteed security may sue us, or seek other remedies, to enforce its rights under the Trust Preferred Securities Guarantee without first suing any other person or entity. A Trust Preferred Securities Guarantee will not be discharged except: - upon payment of the Trust Preferred Securities Guarantee Payments in full to the extent not previously paid, - upon distribution of the underlying securities to the holders of trust preferred securities upon any conversion or exchange of the holder's trust preferred securities into the designated securities, or - upon distribution to the applicable holders of trust preferred securities of the corresponding series of debt securities pursuant to the appropriate Declaration. AMENDMENTS AND ASSIGNMENT Changes to the Trust Preferred Securities Guarantee that do not adversely affect the rights of holders of trust preferred securities in any material respect may be made without the consent of those holders. Otherwise, a Trust Preferred Securities Guarantee may only be amended with the prior approval of the holders of at least a majority in aggregate liquidation amount of the affected trust preferred securities, excluding any affected trust preferred securities held by us or any of our affiliates. A description of the way to obtain any approval is described under "Description of the Trust Preferred Securities--Voting Rights; Amendment of Declarations." All guarantees and agreements contained in the Trust Preferred Securities Guarantee will be binding on our successors, assigns, receivers, trustees and representatives and are for the benefit of the holders of the applicable trust preferred securities. TRUST PREFERRED SECURITIES GUARANTEE EVENTS OF DEFAULT An event of default under a Trust Preferred Securities Guarantee occurs if: - we fail to make any of our required payments or perform our obligations under the Trust Preferred Securities Guarantee, or - we fail to deliver the designated securities upon an appropriate election by the holder of related trust preferred securities to convert or exchange the trust preferred securities into the designated securities, as applicable. The holders of at least a majority in aggregate liquidation amount of the trust preferred securities relating to each Trust Preferred Securities Guarantee, excluding any trust preferred securities held by us or any of our affiliates, will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trust Preferred Guarantee Trustee relating to such Trust Preferred 29 Securities Guarantee or to direct the exercise of any Trust or power given to the Trust Preferred Guarantee Trustee under such Trust Preferred Securities Guarantee. INFORMATION CONCERNING THE TRUST PREFERRED GUARANTEE TRUSTEE The Trust Preferred Guarantee Trustee under a Trust Preferred Securities Guarantee, other than during the occurrence and continuation of a default under such Trust Preferred Securities Guarantee, will only perform the duties that are specifically described in the Trust Preferred Securities Guarantee. Upon the occurrence of a default, the Trust Preferred Guarantee Trustee will exercise the same degree of care and skill as a prudent person would exercise or use in the conduct of his or her own affairs. A Trust Preferred Guarantee Trustee is under no obligation to exercise any of its powers as described in the applicable Trust Preferred Securities Guarantee at the request of any holder of covered trust preferred securities unless it is offered reasonable security and indemnity against the costs, expenses and liabilities that it might incur. TERMINATION OF THE TRUST PREFERRED SECURITIES GUARANTEE Each Trust Preferred Securities Guarantee will terminate once the applicable trust preferred securities are paid in full upon distribution of the underlying securities to the holders of trust preferred securities, upon any conversion or exchange of the holder's trust preferred securities into the designated securities, or upon distribution of the corresponding series of debt securities to the holders of the applicable trust preferred securities. Each Trust Preferred Securities Guarantee will continue to be effective or will be reinstated if at any time any holder of trust preferred securities issued by the applicable Trust must restore payment of any sums paid under such trust preferred securities or such Trust Preferred Securities Guarantee. GOVERNING LAW The Trust Preferred Securities Guarantees will be governed by and construed in accordance with the laws of the state of New York. 30 RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE TRUST PREFERRED SECURITIES GUARANTEE AND THE DEBT SECURITIES HELD BY EACH TRUST UNBC will guarantee payments of distributions and redemption and liquidation payments due on each series of the trust preferred securities, to the extent the applicable Trust has funds available for the payments, as described under "Description of the Trust Preferred Securities Guarantees." No single document executed by us in connection with the issuance of any series of the trust preferred securities will provide for its full, irrevocable and unconditional guarantee of any trust preferred securities. It is only the combined operation of our obligations under the applicable Trust Preferred Securities Guarantee, Declaration and the Indenture that has the effect of providing a full, irrevocable and unconditional guarantee of the Trust's obligations under its trust preferred securities. As long as we make payments of interest and other payments when due on the debt securities held by a Trust, those payments will be sufficient to cover the payment of distributions and redemption and liquidation payments due on the trust preferred securities issued by that Trust, primarily because: - the aggregate principal amount of the debt securities will be equal to the sum of the aggregate liquidation amount of the trust preferred and trust common securities; - the interest rate and interest and other payment dates on the debt securities will match the distribution rate and distribution and other payment dates for the trust preferred securities; - we will pay for any and all costs, expenses and liabilities of each Trust, except such Trust's obligations under its trust preferred securities; and - each Declaration provides that the related Trust will not engage in any activity that is not consistent with the limited purposes of the Trust. If and to the extent that we do not make payments on the debt securities, the applicable Trust will not have funds available to make payments of distributions or other amounts due on its trust preferred securities. In those circumstances, you will not be able to rely upon the Trust Preferred Securities Guarantee for payment of these amounts. Instead, you may directly sue us or seek other remedies to collect your pro rata share of payments owed. If you sue us to collect payment, then we will assume your rights as a holder of trust preferred securities under the Trust's Declaration to the extent we make a payment to you in any legal action. A holder of any trust preferred security may sue us, or seek other remedies, to enforce its rights under the Preferred Securities Guarantee without first suing the applicable Preferred Guarantee Trustee, the Trust that issued the preferred security or any other person or entity. PLAN OF DISTRIBUTION UNBC may sell common stock, preferred stock, depositary shares or any series of debt securities and a Trust may sell trust preferred securities in one or more of the following ways from time to time: - to underwriters or dealers for resale to the public or to institutional investors; - directly to institutional investors; or - through agents to the public or to institutional investors. The prospectus supplements will state the terms of the offering of the securities, including: - the name or names of any underwriters or agents, - the purchase price of the securities, - the proceeds to UNBC or the applicable Trust, as the case may be, from the sale, 31 - any underwriting discounts or agency fees and other items constituting underwriters' or agents' compensation, - any initial public offering price, - any discounts or concessions allowed or reallowed or paid to dealers, and - any securities exchanges on which such securities may be listed. If underwriters are used in the sale, the underwriters will acquire the securities for their own account and may resell them from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. If a dealer is used in the sale, UNBC and/or a Trust, as the case may be, will sell such securities to the dealer, as principal. The dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time for resale. Unless otherwise set forth in a prospectus supplement, there will be conditions to the underwriters' obligations to purchase any series of securities, and the underwriters will be obligated to purchase all of a series of securities, if any are purchased. Underwriters and agents may be entitled under agreements entered into with UNBC and/or a Trust to indemnification by UNBC and/or a Trust against certain civil liabilities, including liabilities under the Securities Act, or to contribution with respect to payments that the underwriters or agents may be required to make in respect thereof. Underwriters and agents may be customers of, engage in transactions with, or perform services for us and our affiliates in the ordinary course of business. Other than the common stock, which is listed on the Nasdaq National Market, each of the securities issued hereunder will be a new issue of securities and will have no prior trading market. Any common stock sold pursuant to a prospectus supplement will be quoted on the Nasdaq National Market, subject to official notice of issuance. Any underwriters to whom UNBC or a Trust sells securities for public offering and sale may make a market in the securities, but no underwriter will be obligated to do so and may discontinue any market making at any time without notice. The securities may or may not be listed on a national securities exchange. LEGAL OPINIONS The validity of the securities being offered hereby is being passed upon for UNBC and each Trust by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. EXPERTS The consolidated financial statements incorporated in this prospectus by reference from Form 8-K of UnionBanCal Corporation dated January 8, 1999, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report incorporated in this prospectus by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements give retroactive effect to the 1996 merger of BanCal Tri-State Corporation and Union Bank which has been accounted for as a pooling-of-interests. The consolidated statements of income, changes in shareholders' equity, and cash flows of Union Bank and subsidiaries for the year ended December 31, 1995 (not presented separately in Form 8-K) were audited by Arthur Andersen LLP, independent public accountants, as stated in their report also incorporated by reference herein, in reliance upon the authority of such firm as experts in giving said report. 32 WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements, and other information with the SEC. Such reports, proxy statements, and other information concerning UnionBanCal Corporation can be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including UnionBanCal Corporation. Our common stock is quoted on the Nasdaq Stock Market's National Market System. These reports, proxy statements and other information are also available for inspection at the offices of the National Association of Securities Dealers, Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. This prospectus is part of a registration statement filed with the SEC by us and the trusts. The full registration statement can be obtained from the SEC as indicated above, or from us. The SEC allows UnionBanCal Corporation to "incorporate by reference" the information we file with the SEC. This permits us to disclose important information to you by referring to these filed documents. Any information referred to in this way is considered part of this prospectus, and any information filed with the SEC by us after the date of this prospectus will automatically be deemed to update and supersede this information. We incorporate by reference the following documents that have been filed with the SEC: - Annual Report on Form 10-K for the year ended December 31, 1997 and all amendments thereto (except for Item 8, "Financial Statements and Supplementary Data," which has been updated and incorporated by reference in this prospectus; - Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 and all amendments thereto; - Current Report on Form 8-K dated August 10, 1998; - Current Report on Form 8-K dated December 7, 1998; and - Current Report on Form 8-K dated January 8, 1999. UnionBanCal Corporation also incorporates by reference any future filings made with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until we file a post-effective amendment which indicates the termination of the offering of the securities made by this prospectus. We will provide without charge upon written or oral request a copy of any or all of the documents that are incorporated by reference into this prospectus, other than exhibits which are specifically incorporated by reference into such documents. Requests should be directed to Investor Relations, UnionBanCal Corporation, 400 California Street, San Francisco, California 94104 (telephone 415-765-2969). There are no separate financial statements of the trusts in this prospectus. We do not believe such financial statements would be helpful because: - The trusts are subsidiaries of UnionBanCal Corporation, which files consolidated financial information under the Exchange Act. - The trusts do not have any independent operations other than issuing the preferred and common securities and purchasing the debt securities of UnionBanCal Corporation. - The trusts' only material assets will be the debt securities of UnionBanCal Corporation when issued. - The combined obligations of UnionBanCal Corporation under the debt securities, the trust preferred securities guarantees, the declarations and the indenture have the effect of providing a 33 full, irrevocable and unconditional guarantee of the trusts' obligations under their trust preferred securities. See "Description of Debt Securities," "Description of the Trust Preferred Securities Guarantees" and "Relationship Among the Trust Preferred Securities, the Trust Preferred Securities Guarantee and the Debt Securities Held by Each Trust." 34 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table presents the expenses to be borne by UNBC and The Bank of Tokyo-Mitsubishi in connection with the offerings described in this Registration Statement. UNBC and The Bank of Tokyo-Mitsubishi will each pay 50% of the registration-related expenses. All expenses listed, other than the Securities and Exchange Commission registration fee, are estimates. Securities and Exchange Commission Registration Fee............... $ 208,500 Transfer Agents, Trustees and Depositary's Fees and Expenses...... Printing and Engraving Fees and Expenses.......................... Accounting Fees and Expenses...................................... Blue Sky Fees and Expenses........................................ Legal Fees........................................................ Rating Agency Fees................................................ Miscellaneous (including Listing Fees, if applicable)............. --------- Total......................................................... $ --------- ---------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As authorized by Section 317 of the CGCL, each director and officer of UNBC may be indemnified by UNBC against expenses (including attorney's fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceedings in which such person is involved by reason of the fact that such person is or was a director or officer of UNBC if such person acted in good faith and in a manner that such person reasonably believed to be in the best interests of UNBC and, with respect to any criminal action or proceeding, if such person had no reasonable cause to believe that his conduct was unlawful. If the legal proceeding, however, is by or in the right of UNBC, the director or officer may not be indemnified in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to UNBC unless a court determines otherwise. In addition, we maintain a directors' and officers' liability policy. Article VII of the Articles of Incorporation and Section 55 of the Bylaws provide that, to the fullest extent permitted by law, directors of UNBC will not be liable for monetary damages to UNBC or its shareholders for breaches of their fiduciary duties. ITEM 16. EXHIBITS The following is a list of all exhibits filed as a part of this Registration Statement on Form S-3, including those incorporated herein by reference.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ -------------------------------------------------------------------------- 4.1 Specimen Certificate representing shares of Common Stock 4.2 Corrected Certificate of Trust of UnionBanCal Finance Trust I 4.3 Corrected Certificate of Trust of UnionBanCal Finance Trust II 4.4 Corrected Certificate of Trust of UnionBanCal Finance Trust III 4.5 Corrected Certificate of Trust of UnionBanCal Finance Trust IV
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ -------------------------------------------------------------------------- 4.6 Declaration of Trust of UnionBanCal Finance Trust I 4.7 Declaration of Trust of UnionBanCal Finance Trust II 4.8 Declaration of Trust of UnionBanCal Finance Trust III 4.9 Declaration of Trust of UnionBanCal Finance Trust IV 4.10* Form of Amended and Restated Declaration of Trust of UnionBanCal Finance Trust I 4.11* Form of Amended and Restated Declaration of Trust of UnionBanCal Finance Trust II (included in Exhibit 4.10) 4.12* Form of Amended and Restated Declaration of Trust of UnionBanCal Finance Trust III (included in Exhibit 4.10) 4.13* Form of Amended and Restated Declaration of Trust of UnionBanCal Finance Trust IV (included in Exhibit 4.10) 4.14* Form of Indenture 4.15* Form of Trust Preferred Security (included in Exhibit 4.10) 4.16* Form of Preferred Securities Guarantee Agreement with respect to Trust Preferred Securities to be issued by UnionBanCal Finance Trust I 4.17* Form of Preferred Securities Guarantee Agreement with respect to Trust Preferred Securities to be issued by UnionBanCal Finance Trust II (included in Exhibit 4.16) 4.18* Form of Preferred Securities Guarantee Agreement with respect to Trust Preferred Securities to be issued by UnionBanCal Finance Trust III (included in Exhibit 4.16) 4.19* Form of Preferred Securities Guarantee Agreement with respect to Trust Preferred Securities to be issued by UnionBanCal Finance Trust IV (included in Exhibit 4.16) 4.20* Form of Preferred Stock 4.21* Form of Deposit Agreement 4.22* Form of Depositary Share (included in Exhibit 4.21) 5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the legality of the Common Stock, Preferred Stock, Debt Securities; Trust Preferred Securities and Trust Preferred Securities Guarantee 12.1* Statement re: Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Stock Dividends of UNBC 23.1 Consent of Deloitte & Touche LLP, Independent Auditors 23.2 Consent of Arthur Andersen LLP, Independent Accountants 23.3* Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1) 24.1** Power of Attorney of certain officers and directors of UNBC 25.1* Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as amended, of The First National Bank of Chicago, as Trustee under the Indenture
- ------------------------ * To be filed by amendment or as an exhibit to a document to be incorporated or deemed to be incorporated by reference in the Registration Statement. ** Previously filed. II-2 ITEM 17. UNDERTAKINGS The undersigned registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percentage change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; PROVIDED, HOWEVER, that paragraphs (1)(i) and 1(ii) do not apply if the registration statement is on Form S-3 or Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrants pursuant to Section 13 or Section 15(d) of the Securities Exchange Act that are incorporated by reference in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of each of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of any of the registrants pursuant to the provisions set forth in Item 15, or otherwise, each of the registrants has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by one of the registrants of expenses incurred or paid by a director, officer or controlling registrant of expenses incurred or paid by a director, officer or controlling person of one of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, each of the registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 The undersigned registrants undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrants hereby undertake to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Act. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on this Form S-3 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on this 8th day of January, 1999. UNIONBANCAL CORPORATION By: /s/ TAKAHIRO MORIGUCHI ----------------------------------------- Takahiro Moriguchi PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities indicated on January 8, 1999.
SIGNATURES TITLE - ------------------------------------ ------------------------------------ /s/ TAKAHIRO MORIGUCHI President and Chief Executive - ------------------------------------ Officer and Director Takahiro Moriguchi (Principal Executive Officer) * - ------------------------------------ Deputy Chairman of the Board Yoshihiko Someya * Executive Vice President and Chief - ------------------------------------ Financial Officer David I. Matson (Principal Financial Officer) * - ------------------------------------ Senior Vice President and Controller David A. Anderson (Principal Accounting Officer) * - ------------------------------------ Chairman of the Board Kaoru Hayama * - ------------------------------------ Vice Chairman of the Board Richard C. Hartnack * - ------------------------------------ Vice Chairman of the Board Robert M. Walker
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SIGNATURES TITLE - ------------------------------------ ------------------------------------ * - ------------------------------------ Director Richard D. Farman * - ------------------------------------ Director Stanley F. Farrar * - ------------------------------------ Director Herman E. Gallegos * - ------------------------------------ Director Jack L. Hancock * - ------------------------------------ Director Harry W. Low * - ------------------------------------ Director Mary S. Metz * - ------------------------------------ Director Raymond E. Miles * - ------------------------------------ Director J. Fernando Niebla * - ------------------------------------ Director Sidney R. Petersen * - ------------------------------------ Director Carl W. Robertson * - ------------------------------------ Director Henry T. Swigert
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SIGNATURES TITLE - ------------------------------------ ------------------------------------ * - ------------------------------------ Director Tsuneo Wakai * - ------------------------------------ Director Hiroshi Watanabe - ------------------------------------ Director Blenda J. Wilson - ------------------------------------ Director Kenji Yoshizawa
*By: /s/ TAKAHIRO MORIGUCHI ------------------------- Takahiro Moriguchi ATTORNEY-IN-FACT
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, UnionBanCal Finance Trust I, UnionBanCal Finance Trust II, UnionBanCal Finance Trust III and UnionBanCal Finance Trust IV, each certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3, and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on January 8, 1999. UNIONBANCAL FINANCE TRUST I By: UnionBanCal Corporation, as Sponsor By: /s/ DAVID I. MATSON ----------------------------------------- Name: David I. Matson Title:Executive Vice President and Chief Financial Officer UNIONBANCAL FINANCE TRUST II By: UnionBanCal Corporation, as Sponsor By: /s/ DAVID I. MATSON ----------------------------------------- Name: David I. Matson Title:Executive Vice President and Chief Financial Officer UNIONBANCAL FINANCE TRUST III By: UnionBanCal Corporation, as Sponsor By: /s/ DAVID I. MATSON ----------------------------------------- Name: David I. Matson Title:Executive Vice President and Chief Financial Officer UNIONBANCAL FINANCE TRUST IV By: UnionBanCal Corporation, as Sponsor By: /s/ DAVID I. MATSON ----------------------------------------- Name: David I. Matson Title:Executive Vice President and Chief Financial Officer
II-8 EX-4.1 2 EXHIBIT 4.1 Exhibit 4.1 COMMON STOCK COMMON STOCK UB UNIONBANCAL CORPORATION INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING THE STATE OF CALIFORNIA TO RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS, IF ANY CUSIP 908906 10 0 THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF UnionBanCal Corporation CERTIFICATE OF STOCK transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: ----------------------- ----------------------------------------- CORPORATE SECRETARY [SEAL] PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED: HARRIS TRUST COMPANY OF CALIFORNIA TRANSFER AGENT AND REGISTRAR By AUTHORIZED SIGNATURE A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares and upon the holders thereof as established, from time to time, by the Articles of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon written request and without charge from the Secretary of the Corporation at its corporate headquarters. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian TEN ENT -- as tenants by the entireties ------------------ ------------------ JT TEN -- as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors in common Act ------------------------------------------- (State) UNIF TRF MIN ACT -- Custodian (until age ) -------------- ----------- (Cust) under Uniform Transfers ----------------------- (Minor) to Minors Act --------------------------------- (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, __________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ------------------------------------------------------------------------Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ------------------------ X ------------------------------------------------- X ------------------------------------------------- THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By -------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-4.2 3 EXHIBIT 4.2 Exhibit 4.2 CORRECTED CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST I -------------------------------------- Pursuant to Section 3810(e) of Title 12, Chapter 38 of the Delaware Code -------------------------------------- The name of the business trust is UnionBanCal Finance Trust I (the "Trust"). The Trust filed a Certificate of Trust on November 17, 1998 which erroneously omitted the signatures of three of the Trustees. The Certificate of Trust of the Trust is hereby corrected to read in its entirety as follows: CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST I The undersigned, the trustees of UnionBanCal Finance Trust I, desiring to form a business trust pursuant to Delaware Business Trust Act, 12 DEL. C. Section 3810 hereby certify as follows: 1. The name of the business trust being formed hereby is UnionBanCal Finance Trust I (the "Trust"). 2. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is as follows: First Chicago Delaware Inc. 300 King Street Wilmington, DE 19801 FIRST CHICAGO DELAWARE INC., as Delaware Trustee By: /s/ Lawrence Dillard ------------------------------------------------- Name: Lawrence Dillard Title: First Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Property Trustee By: /s/ Lawrence Dillard -------------------------------------------------- Name: Lawrence Dillard Title: First Vice President /s/ David I. Matson ----------------------------------------------------- Name: David I. Matson, as Regular Trustee /s/ David A. Anderson ----------------------------------------------------- Name: David A. Anderson, as Regular Trustee /s/ John H. McGuckin, Jr. ----------------------------------------------------- Name: John H. McGuckin, Jr., as Regular Trustee EX-4.3 4 EXHIBIT 4.3 Exhibit 4.3 CORRECTED CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST II -------------------------------------------- Pursuant to Section 3810(e) of Title 12, Chapter 38 of the Delaware Code -------------------------------------------- The name of the business trust is UnionBanCal Finance Trust II (the "Trust"). The Trust filed a Certificate of Trust on November 17, 1998. The Trust filed a Corrected Certificate of Trust on November 20, 1998. Each Certificate which was filed erroneously omitted the signatures of three of the Trustees. The Corrected Certificate of Trust of the Trust is hereby corrected to read in its entirety as follows: CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST II The undersigned, the trustees of UnionBanCal Finance Trust II, desiring to form a business trust pursuant to Delaware Business Trust Act, 12 DEL. C. Section 3810 hereby certify as follows: 1. The name of the business trust being formed hereby is UnionBanCal Finance Trust II (the "Trust"). 2. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is as follows: First Chicago Delaware Inc. 300 King Street Wilmington, DE 19801 FIRST CHICAGO DELAWARE INC., as Delaware Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Property Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President /s/ David I. Matson --------------------------------------------------- Name: David I. Matson, as Regular Trustee /s/ David A. Anderson --------------------------------------------------- Name: David A. Anderson, as Regular Trustee /s/ John H. McGuckin, Jr. --------------------------------------------------- Name: John H. McGuckin, Jr., as Regular Trustee EX-4.4 5 EXHIBIT 4.4 Exhibit 4.4 CORRECTED CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST III -------------------------------------------- Pursuant to Section 3810(e) of Title 12, Chapter 38 of the Delaware Code -------------------------------------------- The name of the business trust is UnionBanCal Finance Trust III (the "Trust"). The Trust filed a Certificate of Trust on November 17, 1998 which erroneously omitted the signatures of three of the Trustees. The Certificate of Trust of the Trust is hereby corrected to read in its entirety as follows: CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST III The undersigned, the trustees of UnionBanCal Finance Trust III, desiring to form a business trust pursuant to Delaware Business Trust Act, 12 DEL. C. Section 3810 hereby certify as follows: 1. The name of the business trust being formed hereby is UnionBanCal Finance Trust III (the "Trust"). 2. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is as follows: First Chicago Delaware Inc. 300 King Street Wilmington, DE 19801 FIRST CHICAGO DELAWARE INC., as Delaware Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Property Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President /s/ David I. Matson ------------------------------------------------------ Name: David I. Matson, as Regular Trustee /s/ David A. Anderson ------------------------------------------------------ Name: David A. Anderson, as Regular Trustee /s/ John H. McGuckin, Jr. ------------------------------------------------------ Name: John H. McGuckin, Jr., as Regular Trustee EX-4.5 6 EXHIBIT 4.5 Exhibit 4.5 CORRECTED CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST IV --------------------------------------------- Pursuant to Section 3810(e) of Title 12, Chapter 38 of the Delaware Code --------------------------------------------- The name of the business trust is UnionBanCal Finance Trust IV (the "Trust"). The Trust filed a Certificate of Trust on November 17, 1998 which erroneously omitted the signatures of three of the Trustees. The Certificate of Trust of the Trust is hereby corrected to read in its entirety as follows: CERTIFICATE OF TRUST OF UNIONBANCAL FINANCE TRUST IV The undersigned, the trustees of UnionBanCal Finance Trust IV, desiring to form a business trust pursuant to Delaware Business Trust Act, 12 DEL. C. Section 3810 hereby certify as follows: 1. The name of the business trust being formed hereby is UnionBanCal Finance Trust IV (the "Trust"). 2. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is as follows: First Chicago Delaware Inc. 300 King Street Wilmington, DE 19801 FIRST CHICAGO DELAWARE INC., as Delaware Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Property Trustee By: /s/ Lawrence Dillard --------------------------------------------------- Name: Lawrence Dillard Title: First Vice President /s/ David I. Matson ------------------------------------------------------ Name: David I. Matson, as Regular Trustee /s/ David A. Anderson ------------------------------------------------------ Name: David A. Anderson, as Regular Trustee /s/ John H. McGuckin, Jr. ------------------------------------------------------ Name: John H. McGuckin, Jr., as Regular Trustee EX-4.6 7 EXHIBIT 4.6 Exhibit 4.6 DECLARATION OF TRUST OF UNIONBANCAL FINANCE TRUST I DECLARATION OF TRUST, dated as of November 17, 1998, among UnionBanCal Corporation, a California corporation, as "Sponsor," and David I. Matson, David A. Anderson and John H. McGuckin, as "Regular Trustees," First Chicago Delaware Inc., a Delaware banking corporation, as "Delaware Trustee," and The First National Bank of Chicago, a national banking association, as "Property Trustee," not in their individual capacities but solely as trustees (the Regular Trustees, the Delaware Trustee and the Property Trustee collectively, the "Trustees"). The Sponsor and the Trustees hereby agree as follows: 1. The trust created hereby shall be known as "UnionBanCal Finance Trust I" (the "Trust") in which name the Trustees, or the Sponsor to the extent provided herein, may conduct the business of the Trust, make and execute contracts, and sue and be sued. 2. The Sponsor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10. The Trustees hereby acknowledge receipt of such amount in trust from the Sponsor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Sponsor. It is the intention of the parties hereto that the Trust created hereby constitutes a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 DEL. C. Section 3801 ET SEQ. (the "Business Trust Act"), and that this document constitutes the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the Business Trust Act. 3. The Sponsor and the Trustees will enter into an Amended and Restated Declaration of Trust, satisfactory to each such party and substantially in the form included as an exhibit to the 1933 Act Registration Statement referred to below, to provide for the contemplated operation of the Trust created hereby and the issuance of the preferred securities and common securities referred to therein. Prior to the execution and delivery of such Amended and Restated Declaration of Trust, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery any licenses, consents or approvals required by applicable law or otherwise. 4. The Sponsor and the Trustees hereby authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) a Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration under the Securities Act of 1933, as amended, of the preferred securities of the Trust (the "Preferred Securities") and (b) a Registration Statement on Form 8-A or other appropriate form (the "1934 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration of the Preferred Securities under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended; (ii) to file with The New York Stock Exchange, Inc. ("NYSE") or any other national stock exchange for listing, or quotation on an interdealer quotation system, and execute on behalf of the Trust, a listing application and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the NYSE or any other national stock exchange or quoted on an interdealer quotation system; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Sponsor, on behalf of the Trust, may deem necessary or desirable; (iv) to prepare and execute letters or documents to, or instruments with, The Depository Trust Company relating to the Preferred Securities; (v) to execute on behalf of the Trust an underwriting agreement among the Trust, the Sponsor and any underwriter, dealer or agent relating to the Preferred Securities and (vi) to incur expenses, execute documents and take any other actions as shall be necessary or desirable in offering the Preferred Securities. In the event that any filing referred to in clauses (i)-(iii) above is required by the rules and regulations of the Commission, the NYSE, any other national stock exchange or interdealer quotation system or state securities or Blue Sky laws, to be executed on behalf of the Trust by one or more of the Trustees, David I. Matson, David A. Anderson and John H. McGuckin in their capacities as Regular Trustees of the Trust, are each hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that First Chicago Delaware Inc. and The First National Bank of Chicago, in their capacities as Trustees of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the NYSE or state securities or blue sky laws. In connection with all of the foregoing, the Sponsor and each Trustee, solely in his or its, as the case may be, capacity as a Trustee of the Trust, hereby constitute and appoint David I. Matson, David A. Anderson and John H. McGuckin, and each of them, as his or its, as the case may be, true and lawful attorneys-in-fact, and agents, with full power of substitution and resubstitution, for the Sponsor or such Trustee or in the Sponsor's or such Trustee's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement, the 1934 Act Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the 2 Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Sponsor or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, shall do or cause to be done by virtue hereof. 5. This Declaration of Trust may be executed in one or more counterparts. 6. The number of Trustees initially shall be five (5) and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor which may increase or decrease the number of Trustees; provided, however, that the number of Trustees shall in no event be less than five (5); and provided, further that to the extent required by the Business Trust Act, one Trustee shall either be a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has as its principal place of business in the State of Delaware. Subject to the foregoing, the Sponsor is entitled to appoint or remove without cause any Trustee at any time, upon written notice delivered to the Trustee. Any of the Trustees may resign upon thirty days prior notice to the Sponsor. 7. The Trust may terminate without issuing any securities at the election of the Sponsor. 8. This Declaration shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws of principles). 3 IN WITNESS WHEREOF, the parties hereto have caused this Declaration of Trust to be duly executed as of the day and year first above written. UnionBanCal Corporation, as Sponsor First Chicago Delaware, Inc., not in its individual capacity but solely as Delaware Trustee By: /s/ John H. McGuckin, Jr. By: /s/ Lawrence Dillard --------------------------------- --------------------------------- Name: John H. McGuckin, Jr. Name: Lawrence Dillard Title: Executive Vice President Title: First Vice President and General Counsel The First National Bank of Chicago, not in its individual capacity but solely as Property Trustee By: /s/ Lawrence Dillard /s/ David I. Matson --------------------------------- ------------------------------------- Name: Lawrence Dillard Name: David I. Matson, not in Title: First Vice President his individual capacity but solely as Regular Trustee /s/ David A. Anderson /s/ John H. McGuckin - ------------------------------------- ------------------------------------- Name: David A. Anderson, not in Name: John H. McGuckin, not in his individual capacity his individual capacity but solely as Regular but solely as Regular Trustee Trustee EX-4.7 8 EXHIBIT 4.7 Exhibit 4.7 DECLARATION OF TRUST OF UNIONBANCAL FINANCE TRUST II DECLARATION OF TRUST, dated as of November 17, 1998, among UnionBanCal Corporation, a California corporation, as "Sponsor," and David I. Matson, David A. Anderson and John H. McGuckin, as "Regular Trustees," First Chicago Delaware Inc., a Delaware banking corporation, as "Delaware Trustee," and The First National Bank of Chicago, a national banking association, as "Property Trustee," not in their individual capacities but solely as trustees (the Regular Trustees, the Delaware Trustee and the Property Trustee collectively, the "Trustees"). The Sponsor and the Trustees hereby agree as follows: 1. The trust created hereby shall be known as "UnionBanCal Finance Trust II" (the "Trust") in which name the Trustees, or the Sponsor to the extent provided herein, may conduct the business of the Trust, make and execute contracts, and sue and be sued. 2. The Sponsor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10. The Trustees hereby acknowledge receipt of such amount in trust from the Sponsor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Sponsor. It is the intention of the parties hereto that the Trust created hereby constitutes a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 DEL. C. Section 3801 ET SEQ. (the "Business Trust Act"), and that this document constitutes the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the Business Trust Act. 3. The Sponsor and the Trustees will enter into an Amended and Restated Declaration of Trust, satisfactory to each such party and substantially in the form included as an exhibit to the 1933 Act Registration Statement referred to below, to provide for the contemplated operation of the Trust created hereby and the issuance of the preferred securities and common securities referred to therein. Prior to the execution and delivery of such Amended and Restated Declaration of Trust, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery any licenses, consents or approvals required by applicable law or otherwise. 4. The Sponsor and the Trustees hereby authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) a Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration under the Securities Act of 1933, as amended, of the preferred securities of the Trust (the "Preferred Securities") and (b) a Registration Statement on Form 8-A or other appropriate form (the "1934 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration of the Preferred Securities under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended; (ii) to file with The New York Stock Exchange, Inc. ("NYSE") or any other national stock exchange for listing, or quotation on an interdealer quotation system, and execute on behalf of the Trust, a listing application and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the NYSE or any other national stock exchange or quoted on an interdealer quotation system; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Sponsor, on behalf of the Trust, may deem necessary or desirable; (iv) to prepare and execute letters or documents to, or instruments with, The Depository Trust Company relating to the Preferred Securities; (v) to execute on behalf of the Trust an underwriting agreement among the Trust, the Sponsor and any underwriter, dealer or agent relating to the Preferred Securities and (vi) to incur expenses, execute documents and take any other actions as shall be necessary or desirable in offering the Preferred Securities. In the event that any filing referred to in clauses (i)-(iii) above is required by the rules and regulations of the Commission, the NYSE, any other national stock exchange or interdealer quotation system or state securities or Blue Sky laws, to be executed on behalf of the Trust by one or more of the Trustees, David I. Matson, David A. Anderson and John H. McGuckin in their capacities as Regular Trustees of the Trust, are each hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that First Chicago Delaware Inc. and The First National Bank of Chicago, in their capacities as Trustees of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the NYSE or state securities or blue sky laws. In connection with all of the foregoing, the Sponsor and each Trustee, solely in his or its, as the case may be, capacity as a Trustee of the Trust, hereby constitute and appoint David I. Matson, David A. Anderson and John H. McGuckin, and each of them, as his or its, as the case may be, true and lawful attorneys-in-fact, and agents, with full power of substitution and resubstitution, for the Sponsor or such Trustee or in the Sponsor's or such Trustee's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement, the 1934 Act Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the 2 Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Sponsor or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, shall do or cause to be done by virtue hereof. 5. This Declaration of Trust may be executed in one or more counterparts. 6. The number of Trustees initially shall be five (5) and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor which may increase or decrease the number of Trustees; provided, however, that the number of Trustees shall in no event be less than five (5); and provided, further that to the extent required by the Business Trust Act, one Trustee shall either be a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has as its principal place of business in the State of Delaware. Subject to the foregoing, the Sponsor is entitled to appoint or remove without cause any Trustee at any time, upon written notice delivered to the Trustee. Any of the Trustees may resign upon thirty days prior notice to the Sponsor. 7. The Trust may terminate without issuing any securities at the election of the Sponsor. 8. This Declaration shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws of principles). 3 IN WITNESS WHEREOF, the parties hereto have caused this Declaration of Trust to be duly executed as of the day and year first above written. UnionBanCal Corporation, as Sponsor First Chicago Delaware, Inc., not in its individual capacity but solely as Delaware Trustee By: /s/ John H. McGuckin, Jr. By: /s/ Lawrence Dillard --------------------------------- --------------------------------- Name: John H. McGuckin, Jr. Name: Lawrence Dillard Title: Executive Vice President Title: First Vice President and General Counsel The First National Bank of Chicago, not in its individual capacity but solely as Property Trustee By: /s/ Lawrence Dillard /s/ David I. Matson --------------------------------- ------------------------------------- Name: Lawrence Dillard Name: David I. Matson, not in Title: First Vice President his individual capacity but solely as Regular Trustee /s/ David A. Anderson /s/ John H. McGuckin - ------------------------------------- ------------------------------------- Name: David A. Anderson, not in Name: John H. McGuckin, not in his individual capacity his individual capacity but solely as Regular but solely as Regular Trustee Trustee EX-4.8 9 EXHIBIT 4.8 Exhibit 4.8 DECLARATION OF TRUST OF UNIONBANCAL FINANCE TRUST III DECLARATION OF TRUST, dated as of November 17, 1998, among UnionBanCal Corporation, a California corporation, as "Sponsor," and David I. Matson, David A. Anderson and John H. McGuckin, as "Regular Trustees," First Chicago Delaware Inc., a Delaware banking corporation, as "Delaware Trustee," and The First National Bank of Chicago, a national banking association, as "Property Trustee," not in their individual capacities but solely as trustees (the Regular Trustees, the Delaware Trustee and the Property Trustee collectively, the "Trustees"). The Sponsor and the Trustees hereby agree as follows: 1. The trust created hereby shall be known as "UnionBanCal Finance Trust III" (the "Trust") in which name the Trustees, or the Sponsor to the extent provided herein, may conduct the business of the Trust, make and execute contracts, and sue and be sued. 2. The Sponsor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10. The Trustees hereby acknowledge receipt of such amount in trust from the Sponsor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Sponsor. It is the intention of the parties hereto that the Trust created hereby constitutes a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 DEL. C. Section 3801 ET SEQ. (the "Business Trust Act"), and that this document constitutes the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the Business Trust Act. 3. The Sponsor and the Trustees will enter into an Amended and Restated Declaration of Trust, satisfactory to each such party and substantially in the form included as an exhibit to the 1933 Act Registration Statement referred to below, to provide for the contemplated operation of the Trust created hereby and the issuance of the preferred securities and common securities referred to therein. Prior to the execution and delivery of such Amended and Restated Declaration of Trust, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery any licenses, consents or approvals required by applicable law or otherwise. 4. The Sponsor and the Trustees hereby authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) a Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration under the Securities Act of 1933, as amended, of the preferred securities of the Trust (the "Preferred Securities") and (b) a Registration Statement on Form 8-A or other appropriate form (the "1934 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration of the Preferred Securities under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended; (ii) to file with The New York Stock Exchange, Inc. ("NYSE") or any other national stock exchange for listing, or quotation on an interdealer quotation system, and execute on behalf of the Trust, a listing application and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the NYSE or any other national stock exchange or quoted on an interdealer quotation system; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Sponsor, on behalf of the Trust, may deem necessary or desirable; (iv) to prepare and execute letters or documents to, or instruments with, The Depository Trust Company relating to the Preferred Securities; (v) to execute on behalf of the Trust an underwriting agreement among the Trust, the Sponsor and any underwriter, dealer or agent relating to the Preferred Securities and (vi) to incur expenses, execute documents and take any other actions as shall be necessary or desirable in offering the Preferred Securities. In the event that any filing referred to in clauses (i)-(iii) above is required by the rules and regulations of the Commission, the NYSE, any other national stock exchange or interdealer quotation system or state securities or Blue Sky laws, to be executed on behalf of the Trust by one or more of the Trustees, David I. Matson, David A. Anderson and John H. McGuckin in their capacities as Regular Trustees of the Trust, are each hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that First Chicago Delaware Inc. and The First National Bank of Chicago, in their capacities as Trustees of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the NYSE or state securities or blue sky laws. In connection with all of the foregoing, the Sponsor and each Trustee, solely in his or its, as the case may be, capacity as a Trustee of the Trust, hereby constitute and appoint David I. Matson, David A. Anderson and John H. McGuckin, and each of them, as his or its, as the case may be, true and lawful attorneys-in-fact, and agents, with full power of substitution and resubstitution, for the Sponsor or such Trustee or in the Sponsor's or such Trustee's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement, the 1934 Act Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the 2 Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Sponsor or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, shall do or cause to be done by virtue hereof. 5. This Declaration of Trust may be executed in one or more counterparts. 6. The number of Trustees initially shall be five (5) and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor which may increase or decrease the number of Trustees; provided, however, that the number of Trustees shall in no event be less than five (5); and provided, further that to the extent required by the Business Trust Act, one Trustee shall either be a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has as its principal place of business in the State of Delaware. Subject to the foregoing, the Sponsor is entitled to appoint or remove without cause any Trustee at any time, upon written notice delivered to the Trustee. Any of the Trustees may resign upon thirty days prior notice to the Sponsor. 7. The Trust may terminate without issuing any securities at the election of the Sponsor. 8. This Declaration shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws of principles). 3 IN WITNESS WHEREOF, the parties hereto have caused this Declaration of Trust to be duly executed as of the day and year first above written. UnionBanCal Corporation, as Sponsor First Chicago Delaware, Inc., not in its individual capacity but solely as Delaware Trustee By: /s/ John H. McGuckin, Jr. By: /s/ Lawrence Dillard --------------------------------- --------------------------------- Name: John H. McGuckin, Jr. Name: Lawrence Dillard Title: Executive Vice President Title: First Vice President and General Counsel The First National Bank of Chicago, not in its individual capacity but solely as Property Trustee By: /s/ Lawrence Dillard /s/ David I. Matson --------------------------------- ------------------------------------- Name: Lawrence Dillard Name: David I. Matson, not in Title: First Vice President his individual capacity but solely as Regular Trustee /s/ David A. Anderson /s/ John H. McGuckin - ------------------------------------- ------------------------------------- Name: David A. Anderson, not in Name: John H. McGuckin, not in his individual capacity his individual capacity but solely as Regular but solely as Regular Trustee Trustee EX-4.9 10 EXHIBIT 4.9 Exhibit 4.9 DECLARATION OF TRUST OF UNIONBANCAL FINANCE TRUST IV DECLARATION OF TRUST, dated as of November 17, 1998, among UnionBanCal Corporation, a California corporation, as "Sponsor," and David I. Matson, David A. Anderson and John H. McGuckin, as "Regular Trustees," First Chicago Delaware Inc., a Delaware banking corporation, as "Delaware Trustee," and The First National Bank of Chicago, a national banking association, as "Property Trustee," not in their individual capacities but solely as trustees (the Regular Trustees, the Delaware Trustee and the Property Trustee collectively, the "Trustees"). The Sponsor and the Trustees hereby agree as follows: 1. The trust created hereby shall be known as "UnionBanCal Finance Trust IV" (the "Trust") in which name the Trustees, or the Sponsor to the extent provided herein, may conduct the business of the Trust, make and execute contracts, and sue and be sued. 2. The Sponsor hereby assigns, transfers, conveys and sets over to the Trustees the sum of $10. The Trustees hereby acknowledge receipt of such amount in trust from the Sponsor, which amount shall constitute the initial trust estate. The Trustees hereby declare that they will hold the trust estate in trust for the Sponsor. It is the intention of the parties hereto that the Trust created hereby constitutes a business trust under Chapter 38 of Title 12 of the Delaware Code, 12 DEL. C. Section 3801 ET SEQ. (the "Business Trust Act"), and that this document constitutes the governing instrument of the Trust. The Trustees are hereby authorized and directed to execute and file a certificate of trust with the Delaware Secretary of State in accordance with the Business Trust Act. 3. The Sponsor and the Trustees will enter into an Amended and Restated Declaration of Trust, satisfactory to each such party and substantially in the form included as an exhibit to the 1933 Act Registration Statement referred to below, to provide for the contemplated operation of the Trust created hereby and the issuance of the preferred securities and common securities referred to therein. Prior to the execution and delivery of such Amended and Restated Declaration of Trust, the Trustees shall not have any duty or obligation hereunder or with respect to the trust estate, except as otherwise required by applicable law or as may be necessary to obtain prior to such execution and delivery any licenses, consents or approvals required by applicable law or otherwise. 4. The Sponsor and the Trustees hereby authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file with the Securities and Exchange Commission (the "Commission") and execute, in each case on behalf of the Trust, (a) a Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration under the Securities Act of 1933, as amended, of the preferred securities of the Trust (the "Preferred Securities") and (b) a Registration Statement on Form 8-A or other appropriate form (the "1934 Act Registration Statement"), including any pre-effective or post-effective amendments to such Registration Statement, relating to the registration of the Preferred Securities under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended; (ii) to file with The New York Stock Exchange, Inc. ("NYSE") or any other national stock exchange for listing, or quotation on an interdealer quotation system, and execute on behalf of the Trust, a listing application and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the NYSE or any other national stock exchange or quoted on an interdealer quotation system; (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such jurisdictions as the Sponsor, on behalf of the Trust, may deem necessary or desirable; (iv) to prepare and execute letters or documents to, or instruments with, The Depository Trust Company relating to the Preferred Securities; (v) to execute on behalf of the Trust an underwriting agreement among the Trust, the Sponsor and any underwriter, dealer or agent relating to the Preferred Securities and (vi) to incur expenses, execute documents and take any other actions as shall be necessary or desirable in offering the Preferred Securities. In the event that any filing referred to in clauses (i)-(iii) above is required by the rules and regulations of the Commission, the NYSE, any other national stock exchange or interdealer quotation system or state securities or Blue Sky laws, to be executed on behalf of the Trust by one or more of the Trustees, David I. Matson, David A. Anderson and John H. McGuckin in their capacities as Regular Trustees of the Trust, are each hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that First Chicago Delaware Inc. and The First National Bank of Chicago, in their capacities as Trustees of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the NYSE or state securities or blue sky laws. In connection with all of the foregoing, the Sponsor and each Trustee, solely in his or its, as the case may be, capacity as a Trustee of the Trust, hereby constitute and appoint David I. Matson, David A. Anderson and John H. McGuckin, and each of them, as his or its, as the case may be, true and lawful attorneys-in-fact, and agents, with full power of substitution and resubstitution, for the Sponsor or such Trustee or in the Sponsor's or such Trustee's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement, the 1934 Act Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the 2 Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Sponsor or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, shall do or cause to be done by virtue hereof. 5. This Declaration of Trust may be executed in one or more counterparts. 6. The number of Trustees initially shall be five (5) and thereafter the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by the Sponsor which may increase or decrease the number of Trustees; provided, however, that the number of Trustees shall in no event be less than five (5); and provided, further that to the extent required by the Business Trust Act, one Trustee shall either be a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has as its principal place of business in the State of Delaware. Subject to the foregoing, the Sponsor is entitled to appoint or remove without cause any Trustee at any time, upon written notice delivered to the Trustee. Any of the Trustees may resign upon thirty days prior notice to the Sponsor. 7. The Trust may terminate without issuing any securities at the election of the Sponsor. 8. This Declaration shall be governed by, and construed in accordance with, the laws of the State of Delaware (without regard to conflict of laws of principles). 3 IN WITNESS WHEREOF, the parties hereto have caused this Declaration of Trust to be duly executed as of the day and year first above written. UnionBanCal Corporation, as Sponsor First Chicago Delaware, Inc., not in its individual capacity but solely as Delaware Trustee By: /s/ John H. McGuckin, Jr. By: /s/ Lawrence Dillard --------------------------------- --------------------------------- Name: John H. McGuckin, Jr. Name: Lawrence Dillard Title: Executive Vice President Title: First Vice President and General Counsel The First National Bank of Chicago, not in its individual capacity but solely as Property Trustee By: /s/ Lawrence Dillard /s/ David I. Matson --------------------------------- ------------------------------------- Name: Lawrence Dillard Name: David I. Matson, not in Title: First Vice President his individual capacity but solely as Regular Trustee /s/ David A. Anderson /s/ John H. McGuckin - ------------------------------------- ------------------------------------- Name: David A. Anderson, not in Name: John H. McGuckin, not in his individual capacity his individual capacity but solely as Regular but solely as Regular Trustee Trustee EX-23.1 11 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Amendment No. 1 to Registration Statement Nos. 333-67581, 333-67581-01, 333-67581-02, 333-67581-03, and 333-67581-04 of UnionBanCal Corporation of our report dated January 30, 1998 (November 18, 1998 as to the exchange of common stock referred to in Note 1, paragraphs 3 and 4, and the adoption of SFAS No. 130, "Reporting Comprehensive Income," referred to in Notes 1 and 18, and December 7, 1998 as to the stock split referred to in Note 1, paragraph 5) appearing in Form 8-K of UnionBanCal Corporation to be dated January 8, 1999, and to the reference to us under the heading "Experts" in the Prospectus, which is a part of these Registration Statements. DELOITTE & TOUCHE LLP San Francisco, California January 7, 1999 EX-23.2 12 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 24, 1996 on the consolidated financial statements of Union Bank and subsidiaries for the year ended December 31, 1995 (not presented herein), included in Form 8-K of UnionBanCal Corporation and subsidiaries, in Amendment No. 1 to Form S-3 Registration Statements File Nos. 333-67581, 333-67581-01, 333-67581-02, 333-67581-03 and 333-67581-04. It should be noted that we have not audited any financial statements of Union Bank and subsidiaries subsequent to December 31, 1995 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP San Francisco, California January 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----